CECIL BANCORP INC - Quarter Report: 2010 September (Form 10-Q)

f10q_093010-0424.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________

FORM 10-Q

[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 0-24926

CECIL BANCORP, INC.

(Exact name of Registrant as specified in its charter)

Maryland		52-1883546
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)

127 North Street, Elkton, Maryland		21921
(Address of principal executive offices)		(Zip Code)

(410) 398-1650

(Registrant’s telephone number, including area code)

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).

[ ] YES [ ] NO

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.

	Large accelerated filer o		Accelerated filer o
	Non-accelerated filer o		Smaller reporting company x

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 November 11, 2010, there were 3,697,523 shares of common stock outstanding

CECIL BANCORP, INC. AND SUBSIDIARIES

CONTENTS

		PAGE
PART I - FINANCIAL INFORMATION

ITEM 1.	Financial Statements (unaudited)

	Consolidated Balance Sheets -	3
	September 30, 2010 and December 31, 2009

	Consolidated Statements of Operations and Comprehensive Income (Loss)	4-5
	for the Three and Nine Months Ended September 30, 2010 and 2009

	Consolidated Statements of Cash Flows	6
	for the Nine Months Ended September 30, 2010 and 2009

	Notes to Consolidated Financial Statements	7-13

ITEM 2.	Management’s Discussion and Analysis of Financial Condition	14-22
	and Results of Operations

ITEM 3.	Quantitative and Qualitative Disclosure About Market Risk	22

ITEM 4.	Controls and Procedures	22

PART II – OTHER INFORMATION		22-23

SIGNATURES		24

CERTIFICATIONS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CECIL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

	September 30			December 31,
	2010			2009
	(Unaudited)
ASSETS:
Cash and due from banks	$	17,180		$	8,897
Interest bearing deposits with banks		23,059			26,479
Federal funds sold		199			88
Total cash and cash equivalents		40,438			35,464
Investment securities:
Securities available-for-sale at fair value		1,783			1,714
Securities held-to-maturity (fair value of $7,193
in 2010 and $4,627 in 2009)		7,253			4,699
Restricted investment securities – at cost		4,385			4,396
Loans receivable		404,904			438,398
Less: allowance for loan losses		(13,449	)		(14,351	)
Net loans receivable		391,455			424,047
Other real estate owned		11,792			4,594
Premises and equipment, net		11,686			11,910
Accrued interest receivable		1,896			2,025
Other intangible assets		439			407
Bank owned life insurance		8,015			7,871
Deferred tax assets		8,869			8,899
Other assets		4,501			3,793
TOTAL ASSETS	$	492,512		$	509,819

LIABILITIES:
Deposits	$	363,029		$	382,338
Other liabilities		9,141			9,859
Junior subordinated debentures		17,000			17,000
Advances from Federal Home Loan Bank of Atlanta		63,571			63,643
Other borrowed funds		1,169			-
Total liabilities		453,910			472,840

STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value; authorized 1,000,000
shares, issued and outstanding 11,560 shares, liquidation
preference $1,000 per share, in 2010 and 2009		11,019			10,916
Common stock, $.01 par value; authorized 10,000,000
shares, issued and outstanding 3,697,523 shares in
2010 and 3,689,346 shares in 2009		37			37
Additional paid in capital		12,279			12,252
Retained earnings		15,238			13,791
Accumulated other comprehensive income (loss)		29			(17	)
Total stockholders’ equity		38,602			36,979
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	492,512		$	509,819

See accompanying notes to consolidated financial statements.

CECIL BANCORP, INC. AND SUBSIDIARIES

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

(dollars in thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
INTEREST INCOME:
Interest and fees on loans	$	6,903		$	7,685		$	21,043		$	22,588
Interest on investment securities		59			24			177			110
Dividends on FHLB and FRB stock		14			18			38			30
Other interest income		15			11			38			31
Total interest income		6,991			7,738			21,296			22,759

INTEREST EXPENSE:
Interest expense on deposits		1,580			2,191			5,279			6,815
Interest expense on junior subordinated debentures		290			282			849			838
Interest expense on federal funds purchased		-			-			-			1
Interest expense on advances from FHLB		621			622			1,844			1,848
Interest expense on other borrowed funds		15			-			28			-
Total interest expense		2,506			3,095			8,000			9,502

NET INTEREST INCOME		4,485			4,643			13,296			13,257

PROVISION FOR LOAN LOSSES		960			6,460			3,230			10,280

NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		3,525			(1,817	)		10,066			2,977

NONINTEREST INCOME:
Deposit account fees		149			186			457			497
ATM fees		112			103			326			299
Commission income		-			2			2			7
Gain on sale of loans		90			305			159			427
Gain on sale of other real estate owned		-			12			185			151
Income from bank owned life insurance		61			46			144			32
Other		82			63			247			171
Total noninterest income		494			717			1,520			1,584

NONINTEREST EXPENSE:
Salaries and employee benefits		1,360			1,463			4,179			4,667
Occupancy expense		176			161			570			527
Equipment and data processing expense		321			298			960			921
FDIC deposit insurance premiums		157			170			465			652
Other		942			523			2,168			1,507
Total noninterest expense		2,956			2,615			8,342			8,274

NET INCOME (LOSS) BEFORE INCOME TAXES		1,063			(3,715	)		3,244			(3,713	)

INCOME TAX (EXPENSE) BENEFIT		(408	)		1,496			(1,260	)		1,470

NET INCOME (LOSS)	$	655		$	(2,219	)	$	1,984		$	(2,243	)

CECIL BANCORP, INC. AND SUBSIDIARIES

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

(dollars in thousands, except per share data)

(Continued)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

NET INCOME (LOSS)	$	655		$	(2,219	)	$	1,984		$	(2,243	)

OTHER COMPREHENSIVE INCOME
Unrealized gains (losses) on
investment securities,
net of deferred taxes		22			38			46			(6	)

TOTAL COMPREHENSIVE INCOME (LOSS)	$	677		$	(2,181	)	$	2,030		$	(2,249	)

NET INCOME (LOSS)	$	655		$	(2,219	)	$	1,984		$	(2,243	)

PREFERRED STOCK DIVIDENDS
AND DISCOUNT ACCRETION		(179	)		(177	)		(537	)		(614	)

NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS	$	476		$	(2,396	)	$	1,447		$	(2,857	)


Earnings (loss) per common share - basic	$	0.13		$	(0.65	)	$	0.39		$	(0.77	)

Earnings (loss) per common share - diluted	$	0.13		$	(0.65	)	$	0.39		$	(0.77	)

Dividends declared per common share	$	0.000		$	0.025		$	0.000		$	0.075

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, 2010 AND 2009

(dollars in thousands)

	2010			2009

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	1,984		$	(2,243	)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization		472			424
Provision for loan losses		3,230			10,280
Gain on sale of loans		(159	)		(427	)
Gain on sale of other real estate owned		(185	)		(151	)
Income from bank owned life insurance		(144	)		(32	)
Restricted stock awards		5			-
Excess servicing rights		(69	)		(166	)
Origination of loans held for sale		(10,130	)		(14,295	)
Proceeds from sales of loans held for sale		10,272			14,339
Net change in:
Accrued interest receivable and other assets		(118	)		(2,174	)
Other liabilities		(1,152	)		1,184
Net cash provided by operating activities		4,006			6,739

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities held-to-maturity		(5,492	)		(749	)
Net redemption (purchase) of restricted investment securities		11			(479	)
Proceeds from sales, maturities, calls and principal payments of
investment securities available-for-sale		7			10,007
Proceeds from maturities, calls and principal payments of
investment securities held-to-maturity		2,866			500
Net decrease (increase) in loans		19,673			(32,812	)
Proceeds from sale of other real estate owned		2,231			2,448
Purchases of premises and equipment - net		(138	)		(160	)
Net cash provided by (used in) investing activities		19,158			(21,245	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits		(19,310	)		6,671
Net decrease in advances from Federal Home Loan Bank of Atlanta		(71	)		(71	)
Net increase in other borrowed funds		1,169			-
Proceeds from issuance of common stock		22			17
Payments of cash dividends		-			(794	)
Net cash (used in) provided by financing activities		(18,190	)		5,823

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		4,974			(8,683	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		35,464			41,420
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	40,438		$	32,737

Supplemental disclosures of cash flows information:
Cash paid for income taxes	$	3,917		$	1,030
Cash paid for interest	$	7,202		$	9,755
Transfer of loans to other real estate owned	$	9,706		$	4,981

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, 2010 AND 2009

1. GENERAL

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, 2010 and the results of its operations and cash flows for the three and nine months ended September 30, 2010 and 2009. 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, 2009. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the full year or for any other period.

2. FINANCIAL STATEMENT PREPARATION

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.

3. RECENT ACCOUNTING PRONOUNCEMENTS

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 was effective on January 1, 2010 and did not have a material impact on our financial condition or results of operations.

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 was effective on January 1, 2010 and did not have a material impact on our financial condition or results of operations.

In January 2010, the FASB issued guidance to improve disclosures about fair value measurements. The guidance requires entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. It also requires a Level 3 reconciliation to be presented on a gross basis disclosing purchases, sales, issuances, and settlements separately. The guidance is effective for interim and annual periods beginning after December 15, 2009 except for gross basis presentation for the Level 3 reconciliation, which is effective for interim and annual periods beginning after December 15, 2010. The disclosure requirements effective for interim and annual periods beginning after December 15, 2009 have been adopted for the interim period beginning March 31, 2010 and did not have a material impact on our financial condition or results of operations.

In the second quarter 2010, additional guidance was issued under the Disclosures about the Credit Quality of Financing Receivables and the Allowance for Loan Losses. This standard requires additional disclosures related to the Allowance for Loan Losses with the objective of providing financial statement users with greater transparency about an entity’s loan loss reserves and overall credit quality. Additional disclosures include showing on a disaggregated basis the aging of receivables, credit quality indicators, and troubled debt restructurings with its effect on the Allowance for Loan Losses. The provisions of this standard are effective for interim and annual periods ending on or after December 15, 2010.

The adoption of this standard will not have a material impact on our financial condition or results of operations, but it will increase the amount of disclosures in the notes to the consolidated financial statements.

4. EARNINGS PER SHARE

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, 2010 and 2009, all options and warrants were excluded from the diluted earnings per share calculation because their effect was antidilutive.

	Three Months Ended						Nine Months Ended
	September 30						September 30,
	2010			2009			2010			2009
Basic:
Net income (loss)	$	655,000		$	(2,219,000	)	$	1,984,000		$	(2,243,000	)
Preferred stock dividends and discount		(179,000	)		(177,000	)		(537,000	)		(614,000	)
Net income (loss) available to common stockholders	$	476,000		$	(2,396,000	)	$	1,447,000		$	(2,857,000	)

Average common shares outstanding		3,695,109			3,689,346			3,691,298			3,688,968

Basic earnings (loss) per common share	$	0.13		$	(0.65	)	$	0.39		$	(0.77	)

Diluted:
Net income (loss)	$	655,000		$	(2,219,000	)	$	1,984,000		$	(2,243,000	)
Preferred stock dividends and discount		(179,000	)		(177,000	)		(537,000	)		(614,000	)
Net income (loss) available to common stockholders	$	476,000		$	(2,396,000	)	$	1,447,000		$	(2,857,000	)

Average common shares outstanding		3,695,109			3,689,346			3,691,298			3,688,968
Stock option adjustment		-			-			-			-

Average common shares outstanding – diluted		3,695,109			3,689,346			3,691,298			3,688,968

Diluted earnings (loss) per common share	$	0.13		$	(0.65	)	$	0.39		$	(0.77	)

5. ACCOUNTING FOR STOCK BASED COMPENSATION PLANS

There were no stock options outstanding as of September 30, 2010 or December 31, 2009. No options were granted or vested during the nine months ended September 30, 2010 and 2009. A summary of the Company’s stock based compensation activity, and related information for the periods indicated is as follows:

In November 2009, the Company approved the granting of 60,125 restricted stock awards with a fair market value of $4.00 per share. The awards vest over a period of five years. Total compensation expense of $33,000 relating to these awards will be recorded ratably over the vesting period. Compensation expense recognized in the nine months ended September 30, 2010 was $5,000. A summary of the Company’s activity and related information for restricted stock for the periods indicated is as follows:

	Nine Months Ended			Year Ended
	September 30, 2010			December 31, 2009
		Weighted-			Weighted-
		Average			Average
	Shares	Exercise Price		Shares	Exercise Price

Unvested at beginning of period	60,125	$	4.00	—	$	—
Forfeited	—		—	—		—
Awarded	—		—	60,125		4.00
Released	—		—	—		—
Unvested at end of period	60,125	$	4.00	60,125	$	4.00

6. ASSETS MEASURED AT FAIR VALUE

ASC Topic 820 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 Topic 820 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. Lastly, ASC Topic 820 requires additional disclosures for each interim and annual period separately for each major category of assets and liabilities. For Level 2 assets, the Company uses information from a third party pricing service, which is estimated using market prices of comparable instruments or other methods, such as the present value of future cash flows. The following table shows the value (in thousands) at September 30, 2010 and December 31, 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.

	Fair Value Measurements at Reporting Date Using
Description	Carrying Value		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

September 30, 2010
Investment securities
available-for-sale
Mutual funds – mortgage securities	$	721	$	721	$	—	$	—
Mutual funds – U.S. Government
Securities		687		687		—		—
Equity Securities		302		302		—		—
Mortgage-backed securities		73		—		73		—

Total investment securities available-for-sale	$	1,783	$	1,710	$	73	$	—

	Fair Value Measurements at Reporting Date Using
Description	Carrying Value		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

December 31, 2009
Investment securities
available-for-sale
Mutual funds – mortgage securities	$	719	$	719	$	—	$	—
Mutual funds – U.S. Government
Securities		687		687		—		—
Equity Securities		229		229		—		—
Mortgage-backed securities		79		—		79		—

Total investment securities
available-for-sale	$	1,714	$	1,635	$	79	$	—

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, 2010, 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. There have been no changes in valuation techniques for the quarter ended September 30, 2010. There were no transfers between valuation levels for any assets during the quarter ended September 30, 2010.

	Fair Value Measurements at Reporting Date Using
Description	Carrying Value		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Other real estate owned	$	11,792	$	—	$	—	$	11,792
Impaired loans		62,905		—		—		62,905

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC 820 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 Receivable - 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, 2010 are as follows:

	Carrying		Fair
	Value		Value
Financial assets:
Cash and cash equivalents	$	40,438	$	40,438
Investment securities:
Available-for-sale		1,783		1,783
Held-to-maturity		7,253		7,193
Loans receivable		404,904		505,579
Restricted investment securities		4,385		4,385
Accrued interest receivable		1,896		1,896
Financial liabilities:
Deposits		363,029		345,212
Junior subordinated debentures		17,000		16,959
Advances from FHLB		63,571		64,094
Other borrowed funds		1,169		1,168

The estimated fair values of financial instruments (in thousands) at December 31, 2009 are as follows:

	Carrying		Fair
	Value		Value
Financial assets:
Cash and cash equivalents	$	35,464	$	35,464
Investment securities:
Available-for-sale		1,714		1,714
Held-to-maturity		4,699		4,627
Loans receivable		438,398		461,041
Restricted investment securities		4,396		4,396
Accrued interest receivable		2,025		2,025
Financial liabilities:
Deposits		382,338		380,780
Junior subordinated debentures		17,000		16,959
Advances from FHLB		63,643		64,004

8. INVESTMENT SECURITIES

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, 2010 and December 31, 2009 are summarized in the following table (in thousands).

	September 30, 2010
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-sale
Mutual funds - mortgage securities	$	747	$	15	$	41	$	721
Mutual funds - U.S. Government securities		686		1		—		687
Equity securities		226		76		—		302
Mortgage-backed securities		76		—		3		73
	$	1,735	$	92	$	44	$	1,783

Held-to-Maturity:
Other	$	50	$	—	$	—	$	50
Mortgage-backed securities		6,204		—		60		6,144
U. S. Treasury securities and obligations		999		—		—		999
	$	7,253	$	—	$	60	$	7,193

	December 31, 2009
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-sale
Mutual funds - mortgage securities	$	747	$	—	$	28	$	719
Mutual funds - U.S. Government securities		686		1		—		687
Equity securities		226		3		—		229
Mortgage-backed securities		83		—		4		79
	$	1,742	$	4	$	32	$	1,714

Held-to-Maturity:
Other	$	50	$	—	$	—	$	50
Mortgage-backed securities		4,149		2		74		4,077
U. S. Treasury securities and obligations		500		—		—		500
	$	4,699	$	2	$	74	$	4,627

As of September 30, 2010, 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:

	Less than 12 Months				More than 12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Available-for-Sale:
Mutual funds - mortgage securities	$	—	$	—	$	135	$	41	$	135	$	41
Mortgage-backed securities						73		3		73		3
Held-to-Maturity:
Mortgage-backed securities		6,144		60		—		—		6,144		60
	$	6,144	$	60	$	208	$	44	$	6,352	$	104

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.

9. OTHER BORROWED FUNDS

In June 2009, the FASB issued guidance revising Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, effective on January 1, 2010 for companies reporting earnings on a calendar-year basis. This standard changed the requirements to achieve sales treatment of select loan participations. The Bank agreed to a first out participation in the first quarter, which does not qualify for sales treatment, and must be accounted for as a secured borrowing under the new standard. Other borrowed funds total $1.2 million at September 30, 2010 and the related interest expense is $28,000 for the nine months ended September 30, 2010.

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, 2010 AND 2009

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 System 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 Waterford Investor Services, Inc.

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. In order to conserve capital in the current uncertain economic environment, the Company’s Board of Directors determined that it was in the best interest of the Company and its stockholders to suspend the payment of dividends on the Series A Preferred Stock beginning with the dividend payable February 15, 2010. 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.

Effective June 29, 2010, the Company and the Bank entered into a written agreement with the Federal Reserve Bank of Richmond (the “Reserve Bank”) and the State of Maryland Commissioner of Financial Regulation (the “Commissioner”) pursuant to which the Company and the Bank have agreed to take various actions. Under the agreement, both the Company and

the Bank have agreed to refrain from declaring or paying dividends without prior regulatory approval. The Company has agreed that it will not take any other form of payment representing a reduction in the Bank’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior regulatory approval. The Company may not incur, increase, or guarantee any debt without prior regulatory approval and has agreed not to purchase or redeem any shares of its stock without prior regulatory approval.

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, 2010 and December 31, 2009

The Company’s assets decreased by $17.3 million, or 3.4%, to $492.5 million at September 30, 2010 from $509.8 million at December 31, 2009 primarily as a result of the paydown of loans receivable. This decrease enabled us to pay down higher rate certificates of deposit, increase our cash and cash equivalents, and invest in investment securities held-to-maturity.

Cash and cash equivalents increased by $5.0 million, or 14.0%, to $40.4 million at September 30, 2010 from $35.4 million at December 31, 2009 primarily due to the decrease in loans receivable, partially offset by the decline in deposits and the purchase of investment securities held-to-maturity. Investment securities held-to-maturity increased by $2.6 million, or 54.4%, to $7.3 million at September 30, 2010 from $4.7 million at December 31, 2009 primarily due to the cash obtained as a result of the decrease in loans receivable.

Gross loans receivable decreased by $33.5 million, or 7.6%, to $404.9 million at September 30, 2010 from $438.4 million at December 31, 2009. The decrease in loans receivable reflects both a tightening of the Bank’s lending standards and diminished loan demand. Management has also sought to shrink the loan portfolio in order to improve capital ratios. During the period, we realized a $17.8 million (17.7%) decrease in construction loans, a $10.3 million (7.9%) decrease in one-to-four family residential and home equity loans, a $3.8 million (19.6%) decrease in commercial business loans, a $1.1 million (0.6%) decrease in commercial real estate loans, and a $550,000 (12.0%) decrease in land loans. The allowance for loan losses decreased by $902,000, or 6.3%, to $13.4 million at September 30, 2010 from $14.4 million at December 31, 2009 (see “Analysis of Allowance for Loan Losses” below).

Other real estate owned increased by $7.2 million, or 156.7%, to $11.8 million at September 30, 2010 from $4.6 million at December 31, 2009 due to the acquisition of properties securing nonperforming loans receivable. The substantial majority of this increase is due to three construction loans totaling $6.2 million at the time of acquisition.

The Company’s liabilities decreased $18.9 million, or 4.0%, to $453.9 million at September 30, 2010 from $472.8 million at December 31, 2009. Deposits decreased $19.3 million, or 5.1%, to $363.0 million at September 30, 2010 from $382.3 million at December 31, 2009. Some of the cash received from the decline in loans receivable was used to pay down higher rate certificates of deposit. Decreases in certificates of deposit (down $27.0 million, or 9.8%) and money market certificates (down $2.9 million, or 51.3%) were partially offset by increases in IRA certificates (up $3.6 million, or 18.3%), money market accounts (up $2.9 million, or 40.8%), checking accounts (up $2.8 million, or 11.5%), statement savings accounts (up $590,000, or 6.3%), and NOW accounts (up $492,000, or 1.7%). Other liabilities decreased by $718,000, or 7.3%, to $9.1 million at September 30, 2010 from $9.9 million at December 31, 2009 primarily due to decreases in income taxes payable and the amount owed to MoneyGram Payment Systems for the official checks written on September 30, 2010, partially offset by increases in accrued interest on junior subordinated debentures and accrued dividends on the Series A Preferred Stock. Other borrowed funds increased to $1.2 million at September 30, 2010 from zero at December 31, 2009. In June 2009, the FASB issued guidance, effective on January 1, 2010 for companies reporting earnings on a calendar-year basis, changing the requirements to achieve

sales treatment of select loan participations. The Bank agreed to a first out participation in the first quarter 2010, which does not qualify for sales treatment, and must be accounted for as a secured borrowing under the new standard.

The Company’s stockholders’ equity increased by $1.6 million, or 4.4%, to $38.6 million at September 30, 2010 from $37.0 million at December 31, 2009. This increase is primarily the result of net income of $2.0 million, partially offset by $434,000 in preferred stock cash dividends accrued.

Comparison of Results of Operations for the Three Months Ended September 30, 2010 and 2009

Net income for the three month period ended September 30, 2010 was $655,000, an increase of $2.9 million, or 129.5%, from a net loss of $2.2 million during the same period in 2009. This increase was primarily the result of a decrease in the provision for loan losses, partially offset by decreases in net interest income and noninterest income and increases in noninterest expense and income tax expense. Net income available to common stockholders for the three-month period ended September 30, 2010 was $476,000 as compared to net loss available to common stockholders of $2.4 million for the same period in 2009. Net income/loss available to common stockholders for 2010 and 2009 period reflects net income or loss for the period, partially offset by dividend accruals and discount accretion on the Series A Preferred Stock of $179,000 and $177,000, respectively. Basic and diluted earnings per common share were both $0.13 for the third quarter of 2010 as compared to basic and diluted loss per common share of $0.65 for the third quarter of 2009. The annualized return on average assets and annualized return on average equity were 0.53% and 6.85%, respectively, for the three-month period ended September 30, 2010. This compares to an annualized return on average assets and annualized return on average equity of -1.71% and -22.18%, respectively, for the same period in 2009.

Net interest income, the Company’s primary source of income, decreased $158,000, or 3.4%, to $4.5 million for the three months ended September 30, 2010, from $4.6 million over the same period in 2009. The weighted average yield on interest earning assets decreased to 6.38% for the three months ended September 30, 2010 from 6.52% for the three months ended September 30, 2009. The weighted average rate paid on interest bearing liabilities decreased to 2.23% for the three months ended September 30, 2010 from 2.63% for the three months ended September 30, 2009. The interest rate spread and the net interest margin were 4.15% and 4.09%, respectively, for the quarter ended September 30, 2010, as compared to 3.88% and 3.91%, respectively, for the quarter ended September 30, 2009.

Interest and fees on loans receivable decreased by $782,000, or 10.2%, to $6.9 million for the three months ended September 30, 2010 from $7.7 million for the three months ended September 30, 2009. The decrease is attributable to decreases in the average balance outstanding and the weighted-average yield. The average balance outstanding decreased by $18.9 million to $403.0 million for the three months ended September 30, 2010 from $421.9 million for the three months ending September 30, 2009. The weighted-average yield decreased to 6.85% for the three months ended September 30, 2010 from 7.29% for the three months ended September 30, 2009.

Interest income on investment securities increased by $35,000, or 145.8%, to $59,000 for the three months ended September 30, 2010 from $24,000 for the three months ended September 30, 2009. The average balance outstanding increased $6.9 million to $8.9 million for the three months ended September 30, 2010 from $2.1 million for the three months ended September 30, 2009. The weighted-average yield decreased to 2.63% for the three months ended September 30, 2010 from 4.66% for the three months ended September 30, 2009.

Interest expense on deposits decreased $611,000, or 27.9%, to $1.6 million for the three months ended September 30, 2010 from $2.2 million for the three months ended September 30, 2009. The average balance outstanding decreased $21.3 million, or 5.5%, to $368.2 million for the three months ended September 30, 2010 from $389.5 million for the same period in 2009. The weighted-average rate decreased to 1.72% for the three months ended September 30, 2010 from 2.25% for the three months ended September 30, 2009.

Interest expense on junior subordinated debentures increased $8,000 to $290,000 for the three months ended September 30, 2010 from $282,000 for the three months ended September 30, 2009 due to additional expense incurred on previously accrued interest that has not yet been paid. Interest expense on FHLB advances was essentially even at $621,000 for the 2010 period compared to $622,000 for the 2009 period. Interest expense on other borrowed funds increased to $15,000 for the three months ended September 30, 2010 from zero for the three months ended September 30, 2009. The average balance outstanding was $1.2 million and the weighted average rate was 5.11% for the three months ended September 30, 2010.

The provision for loan losses decreased by $5.5 million to $960,000 for the three months ended September 30, 2010 from $6.5 million over the same period in 2009 (see “Analysis of Allowance for Loan Losses” below).

Noninterest income decreased 31.1%, or $223,000, to $494,000 for the three months ended September 30, 2010, from $717,000 over the same period in 2009. Deposit account fees decreased $37,000 to $149,000 for the three months ended September 30, 2010 from $186,000 for the same period in 2009. ATM fees increased $9,000, or 8.7%, to $112,000 for the three months ended September 30, 2010 from $103,000 for the three months ended September 30, 2009. Gain on sale of loans decreased by $215,000 to $90,000 for the third quarter of 2010 as compared to $305,000 during the three months ended September 30, 2009 primarily due to one loan that was sold for a gain of $250,000 in the third quarter 2009. Income from bank owned life insurance increased by $15,000, or 32.6%, to $61,000 for the three months ended September 30, 2010 from $46,000 for the three months ended September 30, 2009 due to an increase in the crediting rate paid by the carriers. Other noninterest income increased by $19,000, or 30.2%, to $82,000 for the three months ended September 30, 2010 from $63,000 for the three months ended September 30, 2009 primarily due to increases in interest income and income from our investment in Maryland Title Center LLC.

Noninterest expense increased $341,000, or 13.0%, to $3.0 million for the three months ended September 30, 2010, from $2.6 million over the same period in 2009. Salaries and employee benefits decreased $103,000, or 7.0%, to $1.4 million for the three months ended September 30, 2010 as compared to $1.5 million over the same period in 2009 primarily due to declines in supplemental executive retirement plan expense and profit sharing plan contribution expense, partially offset by a decline in the contra accounts for SFAS 91 deferred loan expenses. Occupancy expense increased by $15,000, or 9.3%, to $176,000 for the three months ended September 30, 2010 from $161,000 for the same period in 2009 primarily due an increase in rent expense associated with new lease extension agreements. Equipment and data processing expenses increased $23,000, or 7.7%, to $321,000 for the three months ended September 30, 2010 from $298,000 for the three months ended September 30, 2009 primarily due to an increase in fees for the Company’s data service provider, partially offset by a decline in depreciation expense on furniture and equipment. The FDIC insurance premium expense decreased by $13,000, or 7.7%, to $157,000 for the three months ended September 30, 2010 from $170,000 for the three months ended September 30, 2009 primarily due to the decrease in deposits over the period. Other expenses increased $419,000, or 80.1%, to $942,000 for the three months ended September 30, 2010 from $523,000 for the three months ended September 30, 2009, 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 and loan collection expense also increased as 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. These increases were partially offset by declines in advertising expense and appraisal expense.

Income tax expense for the three-month period ended September 30, 2010 was $408,000 as compared to income tax benefit of $1.5 million for the same period in 2009, which equates to effective rates of 38.4% and 40.3% respectively.

Comparison of Results of Operations for the Nine Months Ended September 30, 2010 and 2009

Net income for the nine month period ended September 30, 2010 was $2.0 million, an increase of $4.2 million, or 188.5%, as compared to net loss of $2.2 million for the same period in 2009. This increase was primarily the result of a decrease in the provision for loan losses and an increase in net interest income, partially offset by a decrease in noninterest income and increases in noninterest expense and income tax expense. Net income available to common stockholders for the nine-month period ended September 30, 2010 was $1.4 million as compared to net loss available to common stockholders for the same period in 2009 of $2.9 million. Net income or loss available to common stockholders reflects net income or loss for the period and dividends and discount accretion on the Series A Preferred Stock totaling $537,000 for the nine months ended September 30, 2010 and $614,000 for the same period in 2009. Basic and diluted earnings per common share were both $0.39 for the first nine months of 2010, an increase of $1.16, or 150.7%, from the basic and diluted loss per common share of $0.77 for the first nine months of 2009. The annualized return on average assets and annualized return on average equity were 0.52% and 7.00%, respectively, for the nine month period ended September 30, 2010. This compares to an annualized return on average assets and annualized return on average equity of -0.60% and -7.49%, respectively, for the same period in 2009.

Net interest income, the Company’s primary source of income, remained level at $13.3 million for the nine months ended September 30, 2010 and 2009. The weighted-average yield on interest earning assets decreased to 6.35% for the nine months ended September 30, 2010 from 6.65% for the nine months ended September 30, 2009. The weighted average rate paid on interest bearing liabilities decreased to 2.33% for the nine months ended September 30, 2010 from 2.81% for the nine months ended September 30, 2009. The interest rate spread and the net interest margin were 4.02% and 3.97%, respectively, for the nine-

month period ended September 30, 2010 as compared to 3.84% and 3.88%, respectively, for both ratios for the same period in 2009.

Interest and fees on loans receivable decreased by $1.5 million, or 6.8%, to $21.0 million for the nine months ended September 30, 2010 from $22.6 million for the nine months ended September 30, 2009. The average balance outstanding increased $661,000, or 0.2%, to $414.4 million for the nine months ended September 30, 2010 from $413.7 million for the nine months ended September 30, 2009. The weighted-average yield decreased to 6.77% for the nine months ended September 30, 2010 from 7.28% for the nine months ended September 30, 2009.

Interest income on investment securities increased $67,000, or 60.9%, to $177,000 for the nine months ended September 30, 2010 from $110,000 for the nine months ended September 30, 2009. The average balance outstanding increased $4.6 million, or 60.9%, to $8.8 million for the nine months ended September 30, 2010 from $4.2 million for the nine months ended September 30, 2009. The weighted-average yield decreased to 2.69% for the nine months ended September 30, 2010 from 3.49% for the nine months ended September 30, 2009.

Interest expense on deposits decreased $1.5 million, or 22.5%, to $5.3 million for the nine months ended September 30, 2010 from $6.8 million for the nine months ended September 30, 2009. The average balance outstanding increased $7.6 million, or 2.1%, to $376.8 million for the nine months ended September 30, 2010 from $369.2 million for the nine months ended September 30, 2009. The weighted-average rate decreased to 1.87% for the nine months ended September 30, 2010 from 2.46% for the nine months ended September 30, 2009.

Interest expense on junior subordinated debentures increased $11,000 to $849,000 for the nine months ended September 30, 2010 from $838,000 for the nine months ended September 30, 2009 due to additional expense incurred on previously accrued interest that has not yet been paid. Interest expense on FHLB advances was essentially even at $1.8 million for both periods. Interest expense on other borrowed funds increased to $28,000 for the nine months ended September 30, 2010 from zero for the nine months ended September 30, 2009. The average balance outstanding was $796,000 and the weighted average rate was 4.76% for the nine months ended September 30, 2010.

The provision for loan losses decreased by $7.1 million to $3.2 million for the nine months ended September 30, 2010 from $10.3 million over the same period in 2009 (see “Analysis of Allowance for Loan Losses” below).

Noninterest income decreased 4.0%, or $64,000, to $1.5 million for the nine months ended September 30, 2010, from $1.6 million over the same period in 2009. Deposit account fees decreased $40,000, or 8.1%, to $457,000 for the nine months ended September 30, 2010 from $497,000 for the same period in 2009. ATM fees increased $27,000, or 9.0%, to $326,000 for the nine months ended September 30, 2010 from $299,000 for the nine months ended September 30, 2009 due to an increase in fees from increased use of debit cards. Gain on sale of loans decreased $268,000, or 62.8%, to $159,000 for the nine months ended September 30, 2010 from $427,000 for the nine months ended September 30, 2009 primarily due to one loan that was sold in the third quarter 2009 for a gain of $250,000. Gain on sale of other real estate owned increased by $34,000 to $185,000 for the nine months ended September 30, 2010 as compared to $151,000 during the nine months ended September 30, 2009. Income from bank owned life insurance increased by $112,000, or 350.0%, to $144,000 for the nine months ended September 30, 2010 from $32,000 for the nine months ended September 30, 2009 due to surrender charges incurred during 2009 resulting from a change in insurance carriers. Other income increased $76,000 to $247,000 for the nine months ended September 30, 2010 from $171,000 for the nine months ended September 30, 2009 primarily due increases in rental income and income from the Company’s investment in Maryland Title Center LLC.

Noninterest expense increased $68,000, or 0.8%, to remain level at $8.3 million for the nine month periods ended September 30, 2010 and 2009. Salaries and employee benefits decreased $488,000, or 10.5%, to $4.2 million for the nine months ended September 30, 2010 from $4.7 million over the same period in 2009 primarily due to declines in supplemental executive retirement plan expense, profit sharing plan contribution expense, and bonuses. Occupancy expense increased $43,000, or 8.2%, to $570,000 for the nine months ended September 30, 2010 from $527,000 over the same period in 2009 primarily due an increase in rent expense associated with new lease extension agreements, as well as an increase in office building repairs and maintenance. Equipment and data processing expenses increased $39,000, or 4.2%, to $960,000 for the nine months ended September 30, 2010 from $921,000 over the same period in 2009 primarily due to an increase in fees for the Company’s data service provider, partially offset by a decline in depreciation expense on furniture and equipment. The FDIC insurance premium expense decreased by $187,000, or 28.7%, to $465,000 for the nine months ended September 30, 2010 from $652,000 for the nine months ended September 30, 2009 primarily due to the special assessment imposed by FDIC 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 $661,000, or 43.9%, to $2.2 million for the nine months ended September 30, 2010 from $1.5 million for the nine months ended September 30, 2009, 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 and loan collection expense also increased as 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. These increases were partially offset by declines in advertising expense and audit and accounting fees.

Income tax expense for the nine month period ended September 30, 2010 was $1.3 million as compared to income tax benefit of $1.5 million for the same period in 2009, which equates to effective rates of 38.8% and 39.6% 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 (dollars in thousands) at the indicated dates.

	September 30,						December 31,
	2010						2009
	Amount			%			Amount			%
Type of Loan
Real estate loans:
Construction loans	$	82,682			20.42	%	$	100,509			22.93	%
One- to four-family residential and home equity		119,556			29.53			129,847			29.62
Multi-family residential		7,330			1.81			7,227			1.65
Land		4,034			1.00			4,584			1.04
Commercial		171,606			42.38			172,703			39.39
		385,208			95.14			414,870			94.63
Commercial business loans		15,505			3.83			19,290			4.40
Consumer loans		4,191			1.03			4,238			0.97
Gross loans		404,904			100.00	%		438,398			100.00	%
Less: allowance for loan losses		(13,449	)					(14,351	)
Net loans receivable	$	391,455					$	424,047

Nonperforming Assets

Management reviews and identifies loans and investments that require designation as nonperforming assets. Nonperforming assets are: loans accounted for on a nonaccrual basis, loans past due by 90 days or more but still accruing, restructured loans, and other real estate owned (assets acquired in settlement of loans). The increase in nonperforming assets is due to the continuing slow down in the real estate market. This slow down has resulted in the inability of investors to resell properties as originally anticipated, which has led to an increase in delinquencies. The Company continues to work with these customers, which has also led to an increase in restructured loans. The following table sets forth certain information with respect to nonperforming assets.

	September 30,			December 31,
(Dollars in thousands)	2010			2009
Nonaccrual loans and leases	$	48,881		$	32,694
Loans and leases 90 days or more past due still accruing interest		0			0
Restructured loans and leases		14,024			11,959
Total nonperforming loans and leases		62,905			44,653
Other real estate owned, net		11,792			4,594
Total nonperforming assets	$	74,697		$	49,247
Nonperforming loans and leases to total loans		15.54	%		10.19	%
Nonperforming assets to total assets		15.17			9.66
Allowance for loan losses to non-performing loans and leases		21.38			32.14

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 collectability 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 2010, 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. During regulatory examinations each year, examiners review the credit portfolio, establish credit risk ratings for loans, identify charge-offs, and perform their own calculation of the allowance for loan losses. Additionally, the Bank engages an independent third party to review a significant portion of our loan portfolio. These reviews are intended to provide a self-correcting mechanism to reduce differences between estimated and actual observed losses.

The unallocated allowance is based upon management’s evaluation of current economic conditions that may affect borrowers’ ability to pay that are not directly measured in the determination of the specific and formula allowances. Management has chosen to apply a factor derived from the Board of Governors of the Federal Reserve System’s Principal Economic Indicators, specifically the charge-off and delinquency rates on loans and leases at commercial banks. This statistical data tracks delinquency ratios on a national level. While management does not believe the region that the Bank is located has been hit as hard as others across the nation, this ratio provides a global perspective on delinquency trends. Management has identified land acquisition and development loans, as well as construction speculation loans, as higher risk due to current economic factors. These loans are reviewed individually on a quarterly basis for specific impairment.

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, 2010 was $13.4 million, (3.32% of total loans), a decrease of $902,000 (6.3%) from the $14.3 million allowance (3.27% of total loans) at December 31, 2009. Annualized net charge-offs for the first nine months of 2010 were 1.33% of average loans, as compared to net charge-offs of 0.63% of average loans for the year 2009. The provision for loan losses required for the first nine months of 2010 and 2009 was $3.2 million and $10.3 million, respectively.

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

	Nine Months Ended			Twelve Months Ended
	September 30, 2010			December 31, 2009
Balance at beginning of period	$	14,351		$	6,314
Loans charged off:
Real estate		(4,051	)		(3,068	)
Commercial		(100	)		(88	)
Consumer		(90	)		(72	)
Total charge-offs		(4,241	)		(3,228	)
Recoveries:
Real estate		81			609
Commercial		0			0
Consumer		28			16
Total recoveries		109			625
Net charge-offs		(4,132	)		(2,603	)
Provision for loan losses		3,230			10,640
Balance at end of period	$	13,449		$	14,351
Net charge-offs to average loans
outstanding during the period (annualized)		1.33	%		0.63	%
Allowance for loan losses to loans		3.32			3.27
Allowance for loan losses to nonperforming loans		21.38			32.14

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.

	Balance at				Balance at
	September 30,		%		December 31,		%
	2010		Deposits		2009		Deposits

Regular checking	$	27,574	7.60	%	$	24,725	6.47	%
NOW accounts		29,690	8.18			29,198	7.64
Passbook		11,295	3.11			11,329	2.96
Statement savings		9,956	2.74			9,366	2.45
Money market		10,085	2.78			7,165	1.87
Holiday club		251	0.07			78	0.02
Certificates of Deposit		247,852	68.27			274,898	71.90
IRA Certificates of Deposit		23,568	6.49			19,919	5.21
Money Market Certificates		2,758	0.76			5,600	1.48
Total Deposits	$	363,029	100.00	%	$	382,338	100.00	%

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. As of September 30, 2010, the Company is subject to the capital requirements on a consolidated basis since total assets exceeded $500 million as of June 30 of the prior year. The following table sets forth applicable capital ratios of the Bank as of September 30, 2010 and December 31, 2009 and the ratios of the consolidated Company as of September 30, 2010.

					Regulatory Minimum
	2010		2009		Well		Adequately
	Actual		Actual		Capitalized		Capitalized

Total risk-based capital ratio
Consolidated	14.54	%	N/A		10.00	%	8.00	%
The Bank	14.51		12.61	%	10.00		8.00

Tier 1 risk-based capital ratio
Consolidated	12.24	%	N/A		6.00	%	4.00	%
The Bank	10.11		8.36	%	6.00		4.00

Tier 1 leverage ratio
Consolidated	9.94	%	N/A		5.00	%	4.00	%
The Bank	8.19		7.06	%	5.00		4.00

As of September 30, 2010 and December 31, 2009, the Company and the Bank exceeded all applicable capital requirements to be classified as a well capitalized institution under the rules promulgated by the Federal Reserve. Designation as a well capitalized institution under these regulations does not constitute a recommendation or endorsement by the Bank’s regulators.

Item 3. Quantitative and Qualitative Disclosures about Market Risk -

Not Applicable

Item 4. Controls and Procedures

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 control over financial reporting (as defined in Rule 13a-15 under the Securities Exchange Act of 1934) during the quarter ended September 30, 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. Other Information:

Item 1. Legal Proceedings -

Not Applicable

Item 1A.Risk Factors -

Not Applicable

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds -

Not Applicable

Item 3. Defaults Upon Senior Securities -

The Registrant’s Board of Directors did not declare a dividend on the Registrant’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A for the third quarter of 2010. As of September 30, 2010, unpaid cumulative dividends on the Fixed Rate Cumulative Perpetual Preferred Stock, Series A were $434,000.

Item 4. [Reserved]

Item 5. Other Information -

Not Applicable

Item 6. Exhibits -

Exhibit No.	Description	Incorporated by Reference to:
3.1	Articles of Incorporation of Cecil Bancorp, Inc.	Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2008
3.2	Bylaws of Cecil Bancorp, Inc.	Exhibit 3.2 to Annual Report on Form 10-K for the year ended December 31, 2009, SEC File No. 0-24926.
3.3	Articles Supplementary for Fixed Rate Cumulative Perpetual Preferred Stock, Series A	Exhibit 3.1 to Current Report on Form 8-K filed December 23, 2008.
4.1	Form of Common Stock Certificate	Exhibit 4 to Registration Statement on Form S-1 (File No. 33-81374)
4.2	Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A	Exhibit 4.1 to Current Report on Form 8-K filed December 23, 2008.
4.3	Warrant for Purchase of Shares of Common Stock	Exhibit 4.2 to Current Report on Form 8-K filed December 23, 2008.
4.4	Amended and Restated Trust Agreement, dated as of March 23, 2006, among Cecil Bancorp, Inc., as depositor, Wilmington Trust Company, as property and Delaware Trustee, and Charles F. Sposato, Mary B. Halsey and Jennifer Carr, as administrative trustees.	Not filed in accordance with the provisions of Item 601(b)(4)(iii) of Regulation S-K. The Registrant agrees to provide a copy of this document to the Commission upon request.
4.5	Junior Subordinated Indenture, dated as of March 23, 2006 between Cecil Bancorp, Inc. and Wilmington Trust Company, as Trustee.	Not filed in accordance with the provisions of Item 601(b)(4)(iii) of Regulation S-K. The Registrant agrees to provide a copy of this document to the Commission upon request.
4.6	Guarantee Agreement, dated as of March 23, 2006, between Cecil Bancorp, Inc., as Guarantor, and Wilmington Trust Company, as Guarantee Trustee.	Not filed in accordance with the provisions of Item 601(b)(4)(iii) of Regulation S-K. The Registrant agrees to provide a copy of this document to the Commission upon request.
4.7	Amended and Restated Declaration of Trust, dated as of November 30, 2006 by and among Wilmington Trust Company, as Delaware and institutional trustee, Cecil Bancorp, Inc., as sponsor, and Charles F. Sposato, Mary B. Halsey and Jennifer Carr, as administrators.	Exhibit 10.3 to Current Report on Form 8-K filed December 4, 2006.
4.8	Indenture, dated as of November 30, 2006, between Cecil Bancorp, Inc. and Wilmington Trust Company, as trustee.	Exhibit 10.1 to Current Report on Form 8-K filed December 4, 2006.
4.9	Guarantee Agreement, dated as of November 30, 2006, between Cecil Bancorp, Inc., as Guarantor, and Wilmington Trust Company, as Guarantee Trustee.	Exhibit 10.4 to Current Report on Form 8-K filed December 4, 2006.
31(a)	Rule 13a-14(a)/15d-14(a) Certification - CEO
31(b)	Rule 13a-14(a)/15d-14(a) Certification - CFO
32(a)	18 U.S.C. Section 1350 Certification - CEO
32(b)	18 U.S.C. Section 1350 Certification - CFO

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.

	CECIL BANCORP, INC.
Date: November 12, 2010	By:	/s/ Mary B. Halsey
		Mary B. Halsey President and Chief Executive Officer (Duly Authorized Officer)
Date: November 12, 2010	By:	/s/ Robert Lee Whitehead
		Robert Lee Whitehead Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)