CECIL BANCORP INC - Quarter Report: 2011 September (Form 10-Q)

f10q_093011-0424.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, 2011.

[ ] 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).

[ x ] 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 2, 2011, there were 7,419,496 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, 2011 and December 31, 2010

	Consolidated Statements of Operations and Comprehensive Income (Loss)	4-5
	for the Three and Nine Months Ended September 30, 2011 and 2010)

	Consolidated Statements of Cash Flows	6
	for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)

	Notes to Consolidated Financial Statements	7-21

ITEM 2.	Management’s Discussion and Analysis of Financial Condition	22-31
	and Results of Operations

ITEM 3.	Quantitative and Qualitative Disclosure About Market Risk	31

ITEM 4.	Controls and Procedures	31

PART II – OTHER INFORMATION		31-32

SIGNATURES		33

CERTIFICATIONS		34-37

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,
	2011			2010
	(Unaudited)
ASSETS
Cash and due from banks$17,934	$	17,934		$	27,603
Interest bearing deposits with banks		20,713			24,185
Federal funds sold		87			181
Total cash and cash equivalents		38,734			51,969
Investment securities:
Securities available-for-sale at fair value		9,733			2,159
Securities held-to-maturity (fair value of $15,023
in 2011 and $9,383 in 2010)		15,078			9,489
Restricted investment securities – at cost		4,329			4,382
Loans receivable		345,836			379,919
Less: allowance for loan losses		(13,724	)		(15,077	)
Net loans receivable		332,112			364,842
Other real estate owned		24,986			17,994
Premises and equipment, net		11,554			11,625
Accrued interest receivable		1,513			1,754
Other intangible assets		469			469
Bank owned life insurance		8,235			8,078
Deferred tax assets		10,308			10,270
Other assets		11,887			4,164
TOTAL ASSETS	$	468,938		$	487,195

LIABILITIES:
Deposits	$	342,737		$	358,138
Other liabilities		10,790			9,780
Junior subordinated debentures		17,000			17,000
Advances from Federal Home Loan Bank of Atlanta		63,500			63,500
Other borrowed funds		1,169			1,169
Total liabilities		435,196			449,587

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 2011 and 2010		11,164			11,053
Common stock, $.01 par value; authorized 10,000,000
shares, issued and outstanding 7,419,496 shares in
2011 and 3,699,096 shares in 2010		74			37
Additional paid in capital		12,298			12,277
Retained earnings		10,212			14,188
Accumulated other comprehensive (loss) income		(6	)		53
Total stockholders’ equity		33,742			37,608
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	468,938		$	487,195

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,
	2011			2010		2011			2010
INTEREST INCOME
Interest and fees on loans	$	5,130		$	6,903	$	16,321		$	21,043
Interest on investment securities		61			59		215			177
Dividends on FHLB and FRB stock		17			14		51			38
Other interest income		11			15		44			38
Total interest income		5,219			6,991		16,631			21,296

INTEREST EXPENSE:
Interest expense on deposits		1,076			1,580		3,462			5,279
Interest expense on junior subordinated debentures		176			290		652			849
Interest expense on advances from FHLB		620			621		1,841			1,844
Interest expense on other borrowed funds		20			15		44			28
Total interest expense		1,892			2,506		5,999			8,000

NET INTEREST INCOME		3,327			4,485		10,632			13,296

PROVISION FOR LOAN LOSSES		958			960		5,958			3,230

NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		2,369			3,525		4,674			10,066

NONINTEREST INCOME:
Deposit account fees		151			149		425			457
ATM fees		116			112		339			326
Commission income		-			-		1			2
Gain on sale of loans		44			90		131			159
(Loss) gain on sale of other real estate owned		(141	)		-		(286	)		185
Loss on investments		-			-		(50	)		-
Income from bank owned life insurance		55			61		157			144
Other		75			82		224			247
Total noninterest income		300			494		941			1,520

NONINTEREST EXPENSE:
Salaries and employee benefits		1,299			1,360		3,988			4,179
Occupancy expense		237			176		637			570
Equipment and data processing expense		331			321		957			960
FDIC deposit insurance premiums		52			157		876			465
Other real estate owned expense and valuation		298			550		1,639			615
Loan collection expense		823			17		1,337			179
Legal fees		482			156		808			369
Other		432			219		1,139			1,005
Total noninterest expense		3,954			2,956		11,381			8,342

NET (LOSS) INCOME BEFORE INCOME TAXES		(1,285	)		1,063		(5,766	)		3,244

INCOME TAX (BENEFIT) EXPENSE		(537	)		408		(2,370	)		1,260

NET (LOSS) INCOME (CARRIED FORWARD)	$	(748	)	$	655	$	(3,396	)	$	1,984

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,
	2011			2010			2011			2010

NET (LOSS) INCOME (BROUGHT FORWARD)	$	(748	)	$	655		$	(3,396	)	$	1,984

OTHER COMPREHENSIVE INCOME
Unrealized (losses) gains on
investment securities,
net of deferred taxes		(10	)		22			(59	)		46

TOTAL COMPREHENSIVE (LOSS) INCOME	$	(758	)	$	677		$	(3,455	)	$	2,030

NET (LOSS) INCOME	$	(748	)	$	655		$	(3,396	)	$	1,984

PREFERRED STOCK DIVIDENDS
AND DISCOUNT ACCRETION		(182	)		(179	)		(544	)		(537	)

NET (LOSS) INCOME AVAILABLE TO
COMMON STOCKHOLDERS	$	(930	)	$	476		$	(3,940	)	$	1,447


(Loss) earnings per common share - basic	$	(0.13	)	$	0.06		$	(0.53	)	$	0.20

(Loss) earnings per common share - diluted	$	(0.13	)	$	0.06		$	(0.53	)	$	0.20

Dividends declared per common share	$	0.00		$	0.00		$	0.00		$	0.00

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, 2011 AND 2010

(dollars in thousands)

	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(3,396	)	$	1,984
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization		651			472
Provision for loan losses		5,958			3,230
Gain on sale of loans		(131	)		(159	)
Loss (gain) on sale of other real estate owned		286			(185	)
Loss on investments		50			-
Loss on premises and equipment		22			-
Income from bank owned life insurance		(157	)		(144	)
Other real estate owned valuation		1,415			462
Restricted stock awards		-			5
Excess servicing rights		(69	)		(69	)
Origination of loans held for sale		(5,798	)		(10,130	)
Proceeds from sales of loans held for sale		5,872			10,272
Net change in:
Accrued interest receivable and other assets		(7,482	)		(580	)
Other liabilities		577			(1,152	)
Net cash (used in) provided by operating activities		(2,202	)		4,006
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale		(8,119	)		-
Purchases of investment securities held-to-maturity		(17,519	)		(5,492	)
Net redemption of restricted investment securities		53			11
Proceeds from sales, maturities, calls and principal payments of
investment securities available-for-sale		419			7
Proceeds from maturities, calls and principal payments of
investment securities held-to-maturity		11,697			2,866
Net decrease in loans		16,429			19,673
Proceeds from sale of other real estate owned		1,707			2,231
Proceeds from sale of premises and equipment		20			-
Purchases of premises and equipment - net		(340	)		(138	)
Net cash provided by investing activities		4,347			19,158
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits		(15,401	)		(19,310	)
Net decrease in advances from Federal Home Loan Bank of Atlanta		-			(71	)
Net increase in other borrowed funds		-			1,169
Proceeds from issuance of common stock		21			22
Net cash used in financing activities		(15,380	)		(18,190	)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(13,235	)		4,974
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		51,969			35,464
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	38,734		$	40,438

Supplemental disclosures of cash flows information:
Cash paid for income taxes	$	1,355		$	3,917
Cash paid for interest	$	5,342		$	7,202
Transfer of loans to other real estate owned	$	10,400		$	9,706

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, 2011 AND 2010

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, 2011 and the results of its operations and cash flows for the three and nine months ended September 30, 2011 and 2010. 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, 2010. The results of operations for the three and nine months ended September 30, 2011 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 April 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” ASU No. 2011-02 provides additional guidance and clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The provisions of ASU No. 2011-02 were effective for the Company’s reporting period ended September 30, 2011 and were applied retrospectively to January 1, 2011. As a result of the retrospective application, the Company may have identified loans that are newly considered impaired. The adoption of this ASU did not have a material impact on the Company’s statements of operations and financial condition.

In April, 2011, the FASB issued ASU No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” ASU No. 2011-03 affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments in ASU No. 2011-03 remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. ASU No. 2011-03 also eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The guidance is effective for the Company’s reporting period ended March 31, 2012. The guidance will be applied prospectively to transactions or modifications of existing transaction that occur on or after January 1, 2012. The adoption of this ASU is not expected to have a material impact on the Company’s statements of operations and financial condition.

In June, 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” ASU No. 2011-05 requires companies to present comprehensive income in a single statement below net income or in a separate statement of comprehensive income immediately following the income statement. The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This guidance does not change which items are reported in other comprehensive income or the requirement to report reclassifications of items from other comprehensive income to net income. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011 and will require retrospective application for all periods presented. The adoption of this ASU is not expected to have a material impact on the Company’s statements of operations and financial condition.

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, 2011 and 2010, all 523,076 options and warrants were excluded from the diluted earnings per share calculation because their effect was antidilutive. All earnings per share calculations have been adjusted to give retroactive effect to the 2-for-1 stock split, effected through a 100% stock dividend, declared by the Board of Directors in May 2011. The calculation of net (loss) income per common share for the three and nine months ended September 30, 2011 and 2010 is as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Basic and diluted:
Net (loss) income	$	(748,000	)	$	655,000		$	(3,396,000	)	$	1,984,000
Preferred stock dividends and discount accretion		(182,000	)		(179,000	)		(544,000	)		(537,000	)
Net (loss) income available to common stockholders	$	(930,000	)	$	476,000		$	(3,940,000	)	$	1,447,000

Average common shares outstanding		7,419,496			7,390,219			7,410,979			7,382,595

Basic and diluted (loss) income per common share	$	(0.13	)	$	0.06		$	(0.53	)	$	0.20

5. ACCOUNTING FOR STOCK BASED COMPENSATION PLANS

In November 2009, the Company approved the granting of 120,250 restricted stock awards with a fair market value of $2.00 per share. The awards vest over a period of five years. All restricted stock awards have been adjusted to give retroactive effect to the 2-for-1 stock split declared by the Board of Directors in May 2011. 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, 2011						December 31, 2010
				Weighted-						Weighted-
				Average						Average
	Shares			Exercise Price			Shares			Exercise Price

Un Unvested at beginning of period		116,288			$	2.00		120,250			$	2.00
For Forfeited		(918	)			2.00		(816	)			2.00
Aw Awarded		—				—		—				—
Re Released		—				—		(3,146	)			2.00
Un Unvested at end of period		115,370			$	2.00		116,288			$	2.00

6. ASSETS MEASURED AT FAIR VALUE

The Company applies guidance issued by FASB regarding fair value measurements, which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. The guidance applies only to fair value measurements required or permitted under current accounting pronouncements, but does not require any new fair value measurements. Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date. The guidance also expands disclosures about financial instruments that are measured at fair value and eliminates the use of large position discounts for financial instruments quoted in active markets. The disclosure’s emphasis is on the inputs used to measure fair value and the effect on the measurement on earnings for the period. The adoption of the guidance did not have any effect on the Company’s financial position or results of operations. For Level 1 assets, the Company uses quoted prices in active markets. 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,

2011 and December 31, 2010 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 Measurments 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, 2011
Investment securities available-for-sale
Mutual funds – mortgage securities	$	713	$	713	$	—	$	—
Mutual funds – U.S. Government
Securities		678		678		—		—
Equity Securities		288		288		—		—
SBA securitized loan pools		4,383		—		4,383		—
Other debt securities		1,253		—		1,253		—
Mortgage-backed securities		2,418		—		2,418		—

Total investment securities available-for-sale	$	9,733	$	1,679	$	8,054	$	—



December 31, 2010
Investment securities available-for-sale
Mutual funds – mortgage securities	$	714	$	714	$	—	$	—
Mutual funds – U.S. Government
Securities		676		676		—		—
Equity Securities		359		359		—		—
Mortgage-backed securities		410		—		410		—

Total investment securities available-for-sale	$	2,159	$	1,749	$	410	$	—

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, 2011, 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, 2011. There were no transfers between valuation levels for any assets during the quarter ended September 30, 2011.

	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	$	24,986	$	—	$	—	$	24,986
Impaired loans		38,767		—		—		38,767

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

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 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.

Junior Subordinated Debentures – The fair value was estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms.

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.

Other Borrowed Funds – The fair value was estimated by computing the discounted value of contractual cash flows 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, 2011 are as follows:

	Carrying		Fair
	Value		Value
Financial assets:
Cash and cash equivalents	$	38,734	$	38,734
Investment securities:
Available-for-sale		9,733		9,733
Held-to-maturity		15,078		15,023
Loans receivable		345,836		420,883
Restricted investment securities		4,329		4,329
Accrued interest receivable		1,513		1,513
Financial liabilities:
Deposits		342,737		324,485
Junior subordinated debentures		17,000		16,914
Advances from FHLB		63,500		63,740
Other borrowed funds		1,169		1,168

The estimated fair values of financial instruments (in thousands) at December 31, 2010 are as follows:

	Carrying		Fair
	Value		Value
Financial assets:
Cash and cash equivalents	$	51,969	$	51,969
Investment securities:
Available-for-sale		2,159		2,159
Held-to-maturity		9,489		9,383
Loans receivable		379,919		455,262
Restricted investment securities		4,382		4,382
Accrued interest receivable		1,754		1,754
Financial liabilities:
Deposits		358,138		328,870
Junior subordinated debentures		17,000		16,959
Advances from FHLB		63,500		63,788
Other borrowed funds		1,169		1,168

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, 2011 and December 31, 2010 are summarized in the following table (in thousands).

	September 30, 2011
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-sale
Mutual funds - mortgage securities	$	747	$	7	$	41	$	713
Mutual funds - U.S. Government securities		686		—		8		678
Equity securities		226		62		—		288
SBA securitized loan pools		4,400		14		31		4,383
Other debt securities		1,250		3		—		1,253
Residential mortgage-backed securities		2,434		5		21		2,418
	$	9,743	$	91	$	101	$	9,733

Held-to-Maturity:
Residential mortgage-backed securities	$	6,564	$	22	$	54	$	6,532
SBA securitized loan pools		2,329		—		37		2,292
Other debt securities		5,435		14		—		5,449
U. S. Treasury securities and obligations		750		—		—		750
	$	15,078	$	36	$	91	$	15,023

	December 31, 2010
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-Sale:
Mutual funds - mortgage securities	$	747	$	10	$	43	$	714
Mutual funds - U.S. Government securities		686		—		10		676
Equity securities		226		133		—		359
Residential mortgage-backed securities		414		—		4		410
	$	2,073	$	143	$	57	$	2,159

Held-to-Maturity:
Other	$	50	$	—		—	$	50
Residential mortgage-backed securities		8,689		8		114		8,583
U. S. Treasury securities and obligations		750		—		—		750
	$	9,489	$	8	$	114	$	9,383

As of September 30, 2011, 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
Mutual funds – U.S. Government securities		—		—		678		8		678		8
SBA securitized loan pools		3,280		31		—		—		3,280		31
Mortgage-backed securities		1,856		18		37		3		1,893		21
Held-to-Maturity:
Mortgage-backed securities		2,823		32		1,956		22		4,779		54
SBA securitized loan pools		2,292		37		—		—		2,292		37
	$	10,251	$	118	$	2,806	$	74	$	13,057	$	192

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, does not expect to realize losses on any of the investments, and it is more likely than not that we will not be required to sell. Therefore, management does not consider the declines in fair value to be other than temporary.

9. CREDIT QUALITY OF LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The Company has segregated its loan portfolio into seven segments, including construction, 1-4 family residential, multi-family residential, land, commercial real estate, commercial business, and consumer. The Company’s primary market area is in Northeastern Maryland in Cecil and Harford Counties, so exposure to credit risk is significantly affected by changes in these counties.

Construction lending primarily involves lending for construction of single family residences, although the Bank does lend funds for the construction of commercial properties and multi-family real estate. All loans for the construction of speculative sale homes have a loan-to-value ratio of not more than 80%. The Bank has financed the construction of non-residential properties on a case by case basis. Loan proceeds are disbursed during the construction phase according to a draw schedule based on the stage of completion. Construction projects are inspected by contracted inspectors or bank personnel. Construction loans are underwritten on the basis of the estimated value of the property as completed.

The Bank offers fixed and adjustable conventional mortgage loans on one-to-four family residential dwellings. Most loans are originated in amounts up to $350,000 on properties located in the Bank’s primary market area. These loans are generally for terms of 15, 20 and 30 years amortized on a monthly basis with interest and principal due each month. The Bank retains all adjustable rate mortgage loans it originates and sells the majority of fixed rate loans, primarily to FHLMC, with servicing retained by the Bank. The retention of adjustable rate loans helps reduce the Bank’s exposure to rising interest rates. However, it is possible that during periods of rising interest rates, the risk of default on adjustable rate mortgage loans may increase due to the upward adjustment of the interest cost to the borrower.

The Bank originates multi-family residential loans in its market area. These loans are generally larger and involve greater risks than one-to-four family residential loans. Because payments on these loans are often dependent on the successful operation or management of the property, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks in a variety of ways, including limiting the size and loan-to-value ratios. The loans typically have terms of 20 to 40 years, with rate adjustments every one, three, or five years. They generally have imbedded interest rate floors, with no interest rate ceilings, and have no interest rate change limitations.

The Bank originates loans secured by raw land, which are generally granted to individuals for terms of up to ten years, with interest rate adjustments every one, three, or five years. Land loans granted to developers have terms of up to three years. The substantial majority of land loans have a loan-to-value ratio not exceeding 75%. Land loans have a higher level of risk than loans for the purchase of existing homes since collateral values can only be estimated at the time the loan is approved. The Bank has sought to minimize this risk by offering such financing primarily to builders and developers to whom the Bank has loaned funds in the past and to persons who have previous experience in such projects.

The Bank originates commercial real estate loans in its market area. These loans are generally larger and involve greater risks that one-to-four family residential loans. Because payments on these loans are often dependent on the successful operation or management of the property, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks in a variety of ways, including limiting the size and loan-to-value ratios. The loans typically have terms of 20 to 40 years, with rate adjustments every one, three, or five years. They generally have imbedded interest rate floors, with no interest rate ceilings, and have no interest rate change limitations. The Bank’s commercial real estate loans are typically secured by retail or wholesale establishments, motels/hotels, service industries, and industrial or warehouse facilities.

The Bank offers secured and unsecured commercial business loans and lines of credit to businesses located in its primary market area. Most business loans have a one-year term, with lines of credit can remain open for longer periods. All owners, partners, and officers must sign the loan agreement. The security for a business loan depends on the amount borrowed, the business involved, and the strength of the borrower’s firm. Commercial business lending entails significant risk, as the payments on such loans may depend upon the successful operation or management of the business involved. Although the Bank attempts to limit its risk of loss on such loans by limiting the amount and the term, and by requiring personal guarantees of the principals of the business, the risk of loss on these loans is substantially greater than the risk of loss from residential real estate lending.

The Bank’s consumer loans consist of automobile loans, deposit account loans, home improvement loans, and other consumer loans. The loans are generally offered for terms of up to five years at fixed interest rates. Consumer loans are generally originated at higher interest rates than residential mortgage loans because of their higher risk. Repossessed collateral for a defaulted loan may not provide an adequate source of repayment as a result of damage, loss, or depreciation. In addition, collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy.

On an ongoing basis, the Bank assigns a grade to each of its loans. The internal grades are pass, special mention, substandard, doubtful, and loss. Loans graded pass are high quality loans where the borrower exhibits a strong balance sheet position and good earnings and cash flow history. Loans graded special mention show potential weaknesses that deserve the Bank’s close attention. If these potential weaknesses are not corrected, they may result in deterioration of the repayment prospects for the loan in the Bank’s credit position at some future date. Substandard loans are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well defined weakness that could jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the weaknesses are not corrected. Loans graded doubtful have all the weaknesses inherent in substandard loans with the added characteristic that the weaknesses make collection or liquidation in full highly improbable. Assets graded loss are considered uncollectible and of such little value that their continuance as an asset is not warranted. The classification does not mean the loan has absolutely no recovery value, but that it is not practical to defer charging off the loan even though partial recovery may be effected in the future.

In accordance with new standards issued under the Disclosures of Credit Quality of Financing Receivables and the Allowance for Loan Losses, the following tables show credit quality indicators, the aging of receivables, and disaggregated balances of loans receivable and the allowance for loan losses (in thousands) as of September 30, 2011 and December 31, 2010.

Credit Quality Indicators
As of September 30, 2011

			1-4 Family		Multi-Family				Commercial		Commercial
	Construction		Residential		Residential		Land		Real Estate		Business		Consumer		Total

Credit risk profile by internally assigned grade:

Pass	$	24,729	$	88,122	$	4,489	$	2,136	$	121,563	$	6,979	$	3,000	$	251,018
Special mention		10,393		9,956		-		-		10,492		740		9		31,590
Substandard		29,096		13,305		-		-		16,146		4,521		160		63,228
Total	$	64,218	$	111,383	$	4,489	$	2,136	$	148,201	$	12,240	$	3,169	$	345,836

Credit risk profile based on payment activity:

Performing	$	39,307	$	98,475	$	4,489	$	2,136	$	133,317	$	12,079	$	3,009	$	292,812
Nonperforming		24,911		12,908		-		-		14,884		161		160		53,024
Total	$	64,218	$	111,383	$	4,489	$	2,136	$	148,201	$	12,240	$	3,169	$	345,836

Credit Quality Indicators
As of December 31, 2010

			1-4 Family		Multi-Family				Commercial		Commercial
	Construction		Residential		Residential		Land		Real Estate		Business		Consumer		Total

Credit risk profile by internally assigned grade:

Pass	$	44,036	$	99,084	$	5,123	$	4,156	$	110,880	$	12,305	$	3,628	$	279,212
Special mention		4,787		2,919		-		-		19,466		464		-		27,636
Substandard		28,619		15,090		-		-		28,453		744		165		73,071
Total	$	77,442	$	117,093	$	5,123	$	4,156	$	158,799	$	13,513	$	3,793	$	379,919

Credit risk profile based on payment activity:

Performing	$	51,484	$	103,447	$	4,832	$	4,156	$	131,671	$	12,994	$	3,632	$	312,216
Nonperforming		25,958		13,646		291		-		27,128		519		161		67,703
Total	$	77,442	$	117,093	$	5,123	$	4,156	$	158,799	$	13,513	$	3,793	$	379,919

Age Analysis of Past Due Loans Receivable
As of September 30, 2011

			1-4 Family		Multi-Family				Commercial		Commercial
	Construction		Residential		Residential		Land		Real Estate		Business		Consumer		Total

30-59 Days Past Due	$	955	$	4,069	$	-	$	-	$	4,418	$	161	$	160	$	9,763
60-89 Days Past Due		2,167		1,705		-		-		622		-		-		4,494
Greater Than 90 Days Past Due		21,789		7,134		-		-		9,844		-		-		38,767
Total Past Due		24,911		12,908		-		-		14,884		161		160		53,024
Current		39,307		98,475		4,489		2,136		133,317		12,079		3,009		292,812
Total Loans Receivable	$	64,218	$	111,383	$	4,489	$	2,136	$	148,201	$	12,240	$	3,169	$	345,836

Recorded Investment > 90 Days and Accruing		-		-		-		-		-		-		-		-

Age Analysis of Past Due Loans Receivable
As of December 31, 2010

			1-4 Family		Multi-Family				Commercial		Commercial
	Construction		Residential		Residential		Land		Real Estate		Business		Consumer		Total

30-59 Days Past Due	$	2,831	$	3,025	$	-	$	-	$	5,302	$	49	$	-	$	11,207
60-89 Days Past Due		-		1,203		-		-		6,405		444		-		8,052
Greater Than 90 Days Past Due		19,103		7,986		-		-		19,766		-		-		46,855
Total Past Due		21,934		12,214		-		-		31,473		493		-		66,114
Current		55,508		104,879		5,123		4,156		127,326		13,020		3,793		313,805
Total Loans Receivable	$	77,442	$	117,093	$	5,123	$	4,156	$	158,799	$	13,513	$	3,793	$	379,919

Recorded Investment > 90 Days and Accruing		-		-		-		-		-		-		-		-

Allowance for Loan Losses and Recorded Investment in Loans Receivable
For the Nine Months Ended September 30, 2011

				1-4 Family			Multi-Family					Commercial			Commercial
	Construction			Residential			Residential			Land		Real Estate			Business			Consumer			Unallocated		Total

Allowance for loan losses:

Beginning balance	$	7,268		$	1,480		$	51		$	-	$	4,455		$	637		$	174		$	1,012	$	15,077
Charge-offs		(2,038	)		(812	)		-			-		(3,396	)		(1,135	)		(28	)		-		(7,409	)
Recoveries		26			-			10			-		52			-			10			-		98
Provision		(27	)		1,073			(34	)		-		2,579			1,454			8			905		5,958
Ending balance	$	5,229		$	1,741		$	27		$	-	$	3,690		$	956		$	164		$	1,917	$	13,724

Ending balance individually evaluated for impairment	$	540		$	402		$	-		$	-	$	117		$	500		$	160		$	-	$	1,719

Ending balance collectively evaluated for impairment	$	4,689		$	1,339		$	27		$	-	$	3,573		$	456		$	4		$	1,917	$	12,005

Loans receivable:

Ending balance	$	64,218		$	111,383		$	4,489		$	2,136	$	148,201		$	12,240		$	3,169		$	-	$	345,836

Ending balance individually evaluated for impairment	$	29,097		$	13,305		$	-		$	-	$	16,146		$	4,521		$	160		$	-	$	63,229

Ending balance collectively evaluated for impairment	$	35,121		$	98,078		$	4,489		$	2,136	$	132,055		$	7,719		$	3,009		$	-	$	282,607

Allowance for Loan Losses and Recorded Investment in Loans Receivable
For the Year Ended December 31, 2010

				1-4 Family			Multi-Family				Commercial			Commercial
	Construction			Residential			Residential		Land		Real Estate			Business			Consumer			Unallocated			Total

Allowance for loan losses:

Beginning balance	$	6,360		$	2,168		$	45	$	-	$	3,079		$	357		$	52		$	2,290		$	14,351
Charge-offs		(2,431	)		(1,235	)		-		-		(866	)		(100	)		(94	)		-			(4,726	)
Recoveries		-			56			-		-		25			1			30			-			112
Provision		3,339			491			6		-		2,217			379			186			(1,278	)		5,340
Ending balance	$	7,268		$	1,480		$	51	$	-	$	4,455		$	637		$	174		$	1,012		$	15,077

Ending balance individually evaluated for impairment	$	1,926		$	515		$	-	$	-	$	3,116		$	540		$	161		$	-		$	6,258

Ending balance collectively evaluated for impairment	$	5,342		$	965		$	51	$	-	$	1,339		$	97		$	13		$	1,012		$	8,819

Loans receivable:

Ending balance	$	77,442		$	117,093		$	5,123	$	4,156	$	158,799		$	13,513		$	3,793		$	-		$	379,919

Ending balance individually evaluated for impairment	$	28,619		$	15,090		$	-	$	-	$	28,453		$	744		$	165		$	-		$	73,071

Ending balance collectively evaluated for impairment	$	48,823		$	102,003		$	5,123	$	4,156	$	130,346		$	12,769		$	3,628		$	-		$	306,848

Loans Receivable on Nonaccrual Status
As of September 30, 2011

			1-4 Family		Multi-Family				Commercial		Commercial
	Construction		Residential		Residential		Land		Real Estate		Business		Consumer		Total

Unpaid Principal Balance	$	21,789	$	7,134	$	-	$	-	$	9,844	$	-	$	-	$	38,767
Loans Receivable on Nonaccrual Status
As of December 31, 2010

			1-4 Family		Multi-Family				Commercial		Commercial
	Construction		Residential		Residential		Land		Real Estate		Business		Consumer		Total

Unpaid Principal Balance	$	24,972	$	8,432	$	-	$	-	$	21,016	$	-	$	-	$	54,420

Loan Modifications
As of September 30, 2011

			1-4 Family		Multi-Family				Commercial		Commercial
	Construction		Residential		Residential		Land		Real Estate		Business		Consumer		Total

Troubled Debt Restructurings:

Number of Loans		-		32		1		-		8		-		1		42

Pre-Modification Principal Balance	$	-	$	7,013	$	290	$	-	$	17,679	$	-	$	162	$	25,144

Post-Modification Principal Balance	$	-	$	6,860	$	287	$	-	$	17,592	$	-	$	160	$	24,899

Troubled Debt Restructurings That Subsequently Defaulted:

Number of Loans		-		5		-		-		-		-		-		5

Current Principal Balance	$	-	$	1,668	$	-	$	-	$	-	$	-	$	-	$	1,668

Loan Modifications
As of December 31, 2010

			1-4 Family		Multi-Family				Commercial		Commercial
	Construction		Residential		Residential		Land		Real Estate		Business		Consumer		Total

Troubled Debt Restructurings:

Number of Loans		-		23		1		1		7		1		1		34

Pre-Modification Principal Balance	$	-	$	9,051	$	290	$	984	$	9,262	$	527	$	162	$	20,276

Post-Modification Principal Balance	$	-	$	8,118	$	291	$	986	$	9,071	$	519	$	161	$	19,146

Troubled Debt Restructurings That Subsequently Defaulted:

Number of Loans		-		6		-		-		2		-		-		8

Current Principal Balance	$	-	$	2,904	$	-	$	-	$	1,342	$	-	$	-	$	4,246

Impaired Loans
As of and For the Nine Months Ended September 30, 2011

			1-4 Family		Multi-Family				Commercial		Commercial
	Construction		Residential		Residential		Land		Real Estate		Business		Consumer		Total

Loans With a Valuation Allowance:

Unpaid Principal Balance	$	-	$	1,324	$	-	$	-	$	-	$	-	$	-	$	1,324

Related Allowance for Loan Losses	$	-	$	73	$	-	$	-	$	-	$	-	$	-	$	73

Average Recorded Investment	$	1,879	$	1,386	$	-	$	-	$	4,998	$	-	$	-	$	8,263

Interest Income Recognized	$	-	$	14	$	-	$	-	$	-	$	-	$	-	$	14

Loans Without a Valuation Allowance:

Unpaid Principal Balance	$	21,789	$	5,810	$	-	$	-	$	9,844	$	-	$	-	$	37,443

Related Allowance for Loan Losses	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Average Recorded Investment	$	20,918	$	6,397	$	-	$	-	$	10,433	$	-	$	-	$	37,748

Interest Income Recognized	$	187	$	137	$	-	$	-	$	48	$	-	$	-	$	372

Totals:

Unpaid Principal Balance	$	21,789	$	7,134	$	-	$	-	$	9,844	$	-	$	-	$	38,767

Related Allowance for Loan Losses	$	-	$	73	$	-	$	-	$	-	$	-	$	-	$	73

Average Recorded Investment	$	22,797	$	7,783	$	-	$	-	$	15,431	$	-	$	-	$	46,011

Interest Income Recognized	$	187	$	151	$	-	$	-	$	48	$	-	$	-	$	386

Impaired Loans
As of and For the Year Ended December 31, 2010

			1-4 Family		Multi-Family				Commercial		Commercial
	Construction		Residential		Residential		Land		Real Estate		Business		Consumer		Total

Loans With a Valuation Allowance:

Unpaid Principal Balance	$	3,758	$	1,448	$	-	$	-	$	9,995	$	-	$	-	$	15,201

Related Allowance for Loan Losses	$	1,749	$	258	$	-	$	-	$	2,284	$	-	$	-	$	4,291

Average Recorded Investment	$	3,725	$	1,100	$	-	$	-	$	6,842	$	-	$	-	$	11,667

Interest Income Recognized	$	2	$	19	$	-	$	-	$	377	$	-	$	-	$	398

Loans Without a Valuation Allowance:

Unpaid Principal Balance	$	21,214	$	6,984	$	-	$	-	$	11,021	$	-	$	-	$	39,219

Related Allowance for Loan Losses	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Average Recorded Investment	$	20,717	$	6,753	$	-	$	-	$	7,617	$	131	$	-	$	35,218

Interest Income Recognized	$	707	$	262	$	-	$	-	$	391	$	-	$	-	$	1,360

Totals:

Unpaid Principal Balance	$	24,972	$	8,432	$	-	$	-	$	21,016	$	-	$	-	$	54,420

Related Allowance for Loan Losses	$	1,749	$	258	$	-	$	-	$	2,284	$	-	$	-	$	4,291

Average Recorded Investment	$	24,442	$	7,853	$	-	$	-	$	14,459	$	131	$	-	$	46,885

Interest Income Recognized	$	709	$	281	$	-	$	-	$	768	$	-	$	-	$	1,758

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, 2011 AND 2010

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) improving 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.

On December 23, 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Company sold 11,560 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”), and a warrant to purchase 523,076 shares of the Company’s common stock (after adjustment for the 2-for-1 stock split approved by the Board of Directors in May 2011) to the United States Department of the Treasury for an aggregate purchase price of $11.560 million in cash, with $37,000 in offering costs, and net proceeds of $11.523 million. The Preferred Stock and the warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

The Series A Preferred Stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Department of Treasury may permit the Company to redeem the Series A Preferred Stock in whole or in part at any time after consultation with the appropriate federal banking agency. Any partial redemption must involve at least 25% of the Series A Preferred Stock issued. Upon redemption of the Series A Preferred Stock, the Company will have the right to repurchase the Warrant at its fair market value.

The warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $3.315 per share of common stock. The Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the warrant.

In the event of any liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, holders of the Series A Preferred Stock shall be entitled to receive for each share of the Series A Preferred Stock, out of the assets of the Company or proceeds thereof (whether capital or surplus) available for distribution to stockholders of the Company, subject to the rights of any creditors of the Company, before any distribution of such assets or proceeds is made to or set aside for the holders of common stock and any other stock of the Company ranking junior to the Series A Preferred Stock as to such distribution, payment in full in an amount equal to the sum of (i) the liquidation amount of $1,000 per share and (ii) the amount of any accrued and unpaid dividends, whether or not declared, to the date of payment.

In order to conserve cash 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 (“FHLMC”). Management has been monitoring the retention of fixed rate loans through its asset/liability management policy.

Comparison of Financial Condition at September 30, 2011 and December 31, 2010

The Company’s assets decreased by $18.3 million, or 3.8%, to $468.9 million at September 30, 2011 from $487.2 million at December 31, 2010 primarily as a result of a decrease in loans receivable, partially offset by increases in other real estate owned and other assets. The decrease in loans enabled us to invest in investment securities and not renew higher rate certificates of deposit.

Cash and cash equivalents decreased by $13.2 million, or 25.5%, to $38.7 million at September 30, 2011 from $52.0 million at December 31, 2010 primarily due to the purchase of investment securities. Investment securities available-for-sale increased by $7.6 million, or 350.8%, to $9.7 million at September 30, 2011 from $2.2 million at December 31, 2010. Investment securities held-to-maturity increased by $5.6 million, or 58.9%, to $15.1 million at September 30, 2011 from $9.5 million at December 31, 2010. The increase in securities is the result of excess funds obtained from the decline in loans receivable.

Gross loans receivable decreased by $34.1 million, or 9.0%, to $345.8 million at September 30, 2011 from $379.9 million at December 31, 2010. 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 $13.2 million (17.1%) decrease in construction loans, a $10.6 million (6.7%) decrease in commercial real estate loans, a $5.7 million (4.9%) decrease in one-to-four family residential and home equity loans, a $2.0 million (48.6%) decrease in land loans, a $1.3 million (9.4%) decrease in commercial business loans, a $634,000 (12.4%) decrease in multi-family residential loans, and a $624,000 (19.6%) decrease in consumer loans. The allowance for loan losses decreased by $1.4 million, or 9.0%, to $13.7 million at September 30, 2011 from $15.1 million at December 31, 2010, but remained at 3.97% of loans receivable (see “Analysis of Allowance for Loan Losses” below).

Other real estate owned increased by $7.0 million, or 38.9%, to $25.0 million at September 30, 2011 from $18.0 million at December 31, 2010 due to the acquisition of properties in satisfaction of loans receivable. Other assets increased by $7.7 million, or 185.5%, to $11.9 million at September 30, 2011 from $4.2 million at December 31, 2010 primarily due to an increase in income taxes receivable and additional investments in Elkton Senior Apartments LLC.

The Company’s liabilities decreased $14.4 million, or 3.2%, to $435.2 million at September 30, 2011 from $449.6 million at December 31, 2010. Deposits decreased $15.4 million, or 4.3%, to $342.7 million at September 30, 2011 from $358.1 million at December 31, 2010. Some of the cash received from the decline in loans receivable was used to not renew higher rate certificates of deposit. Decreases in certificates of deposit (down $16.1 million, or 6.7%) and checking accounts (down $3.8 million, or 14.2%) were partially offset by increases in money market certificates (up $3.8 million, or 103.8%) and statement savings accounts (up $543,000, or 5.4%). Other liabilities increased by $1.0 million, or 10.3%, to $10.8 million at September 30, 2011 from $9.8 million at December 31, 2010 primarily due to increases in accrued interest on junior subordinated debentures and accrued dividends on the Series A Preferred Stock.

The Company’s stockholders’ equity decreased by $3.9 million, or 10.3%, to $33.7 million at September 30, 2011 from $37.6 million at December 31, 2010. This decrease is primarily the result of a net loss of $3.4 million and $434,000 in preferred stock dividends accrued.

Comparison of Results of Operations for the Three Months Ended September 30, 2011 and 2010

Net income for the three month period ended September 30, 2011 decreased $1.4 million to a loss of $748,000, as compared to net income of $655,000 during the same period in 2010. This decrease was primarily the result of decreases in net interest income and noninterest income, and an increase in noninterest expense, partially offset by a decrease in income tax expense. Net loss available to common stockholders for the three-month period ended September 30, 2011 was $930,000 as compared to net income available to common stockholders of $476,000 for the same period in 2010. Net income/loss available to common stockholders for 2011 and 2010 period reflects net income or loss for the period, as well as dividend accruals and discount accretion on the Series A Preferred Stock of $182,000 and $179,000, respectively. Basic and diluted loss per common share were both $0.13 for the third quarter of 2011 as compared to basic and diluted earnings per common share of $0.06 for the third quarter of 2010. Earnings per share have been adjusted to give retroactive effect to the 2-for-1 stock split approved by the Board of Directors in May 2011. The annualized return on average assets and annualized return on average equity were -0.64% and -8.64%, respectively, for the three-month period ended September 30, 2011. This compares to an annualized return on average assets and annualized return on average equity of 0.53% and 6.85%, respectively, for the same period in 2010.

Net interest income, the Company’s primary source of income, decreased $1.2 million, or 25.8%, to $3.3 million for the three months ended September 30, 2011, from $4.5 million over the same period in 2010. The weighted average yield on interest earning assets decreased to 5.40% for the three months ended September 30, 2011 from 6.38% for the three months ended September 30, 2010. The weighted average rate paid on interest bearing liabilities decreased to 1.78% for the three months ended September 30, 2011 from 2.23% for the three months ended September 30, 2010. The interest rate spread and the net interest margin were 3.62% and 3.44%, respectively, for the quarter ended September 30, 2011, as compared to 4.15% and 4.09%, respectively, for the quarter ended September 30, 2010.

Interest and fees on loans receivable decreased by $1.8 million, or 25.7%, to $5.1 million for the three months ended September 30, 2011 from $6.9 million for the three months ended September 30, 2010. The decrease is attributable to decreases in both the average balance outstanding and the weighted-average yield. The average balance outstanding decreased by $66.8 million, or 16.6%, to $336.3 million for the three months ended September 30, 2011 from $403.0 million for the three months

ending September 30, 2010. The weighted-average yield decreased to 6.10% for the three months ended September 30, 2011 from 6.85% for the three months ended September 30, 2010.

Interest expense on deposits decreased $504,000, or 31.9%, to $1.1 million for the three months ended September 30, 2011 from $1.6 million for the three months ended September 30, 2010. The average balance outstanding decreased $25.0 million, or 6.8%, to $343.1 million for the three months ended September 30, 2011 from $368.2 million for the same period in 2010. The weighted-average rate decreased to 1.25% for the three months ended September 30, 2011 from 1.72% for the three months ended September 30, 2010.

Interest expense on junior subordinated debentures decreased $114,000 to $176,000 for the three months ended September 30, 2011 from $290,000 for the three months ended September 30, 2010. The interest rate on $10.0 million of the junior subordinated debentures began to adjust quarterly on April 1, 2011 to 3-month LIBOR plus 1.38%. The average balance outstanding remained level at $17.0 million and the weighted average rate was 4.14% and 6.82%, respectively, for the three months ended September 30, 2011 and 2010.

Noninterest income decreased 39.3%, or $194,000, to $300,000 for the three months ended September 30, 2011, from $494,000 over the same period in 2010. Gain on sale of loans decreased by $46,000 to $44,000 for the third quarter of 2011 as compared to $90,000 during the three months ended September 30, 2010 due to a decline in the volume of refinanced fixed rate mortgages, which are sold to FHLMC. Gain on sale of other real estate owned decreased $141,000 to a loss of $141,000 for the three months ended September 30, 2011 from zero for the same period in 2010.

Noninterest expense increased $998,000, or 33.8%, to $4.0 million for the three months ended September 30, 2011, from $3.0 million over the same period in 2010. Salaries and employee benefits decreased $61,000, or 4.5%, to $1.3 million for the three months ended September 30, 2011 as compared to $1.4 million over the same period in 2010 primarily due to a decline in supplemental executive retirement plan expense, as well as Chairman Sposato’s retirement from the Bank. Occupancy expense increased by $61,000, or 34.7%, to $237,000 for the three months ended September 30, 2011 from $176,000 for the same period in 2010 primarily due to an increase in office building repairs and maintenance. The FDIC insurance premium expense decreased by $105,000, or 66.9%, to $52,000 for the three months ended September 30, 2011 from $157,000 for the three months ended September 30, 2010 due to FDIC changing the assessment base for calculating the premium from domestic deposits to average total assets less average tangible capital beginning April 1, 2011. Other real estate owned expense and valuation decreased by $252,000, or 45.8%, to $298,000 for the three months ended September 30, 2011 from $550,000 for the three months ended September 30, 2010 primarily due to two significant valuation adjustments during the third quarter 2010. Loan collection expense increased $806,000 to $823,000 for the three months ended September 30, 2011 from $17,000 for the same period in 2010. Legal fees increased $326,000 to $482,000 for the three months ended September 30, 2011 from $156,000 for the three months ended September 30, 2010. The increases in loan collection expense and legal fees 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. Other expenses increased $213,000, or 97.3%, to $432,000 for the three months ended September 30, 2011 from $219,000 for the three months ended September 30, 2010, primarily due to increases in insurance expenses, real estate and personal property taxes, and accounting and auditing fees.

Income tax benefit for the three-month period ended September 30, 2011 was $537,000 as compared to income tax expense of $408,000 for the same period in 2010, which equates to effective rates of 41.8% and 38.4% respectively.

Comparison of Results of Operations for the Nine Months Ended September 30, 2011 and 2010

Net loss for the nine month period ended September 30, 2011 was $3.4 million as compared to net income of $2.0 million for the same period in 2010. This decrease was primarily the result of decreases in net interest income and noninterest income, and increases in the provision for loan losses and noninterest expense, partially offset by a decrease in income tax expense. Net loss available to common stockholders for the nine-month period ended September 30, 2011 was $3.9 million as compared to net income available to common stockholders for the same period in 2010 of $1.4 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 $544,000 for the nine months ended September 30, 2011 and $537,000 for the same period in 2010. Basic and diluted loss per common share were both $0.53 for the first nine months of 2011, a decrease of $0.73 from the basic and diluted earnings per common share of $0.20 for the first nine months of 2010. Earnings per share have been adjusted to give retroactive effect to the 2-for-1 stock split approved by the Board of Directors in May 2011. The annualized return on average assets and annualized return on average equity were -0.95% and -12.41%, respectively, for the nine month period ended

September 30, 2011. This compares to an annualized return on average assets and annualized return on average equity of 0.52% and 7.00%, respectively, for the same period in 2010.

Net interest income, the Company’s primary source of income, decreased by $2.7 million, or 20.0%, to $10.6 million for the nine months ended September 30, 2011 from $13.3 million for the same period in 2010. The weighted-average yield on interest earning assets decreased to 5.61% for the nine months ended September 30, 2011 from 6.35% for the nine months ended September 30, 2010. The weighted average rate paid on interest bearing liabilities decreased to 1.86% for the nine months ended September 30, 2011 from 2.33% for the nine months ended September 30, 2010. The interest rate spread and the net interest margin were 3.74% and 3.58%, respectively, for the nine-month period ended September 30, 2011 as compared to 4.02% and 3.97%, respectively, for both ratios for the same period in 2010.

Interest and fees on loans receivable decreased by $4.7 million, or 22.4%, to $16.3 million for the nine months ended September 30, 2011 from $21.0 million for the nine months ended September 30, 2010. The average balance outstanding decreased $66.0 million, or 5.9%, to $348.3 million for the nine months ended September 30, 2011 from $414.4 million for the nine months ended September 30, 2010. The weighted-average yield decreased to 6.25% for the nine months ended September 30, 2011 from 6.77% for the nine months ended September 30, 2010.

Interest income on investment securities increased $38,000, or 21.5%, to $215,000 for the nine months ended September 30, 2011 from $177,000 for the nine months ended September 30, 2010. The average balance outstanding increased $10.0 million, or 114.6%, to $18.8 million for the nine months ended September 30, 2011 from $8.8 million for the nine months ended September 30, 2010. The weighted-average yield decreased to 1.52% for the nine months ended September 30, 2011 from 2.69% for the nine months ended September 30, 2010.

Interest expense on deposits decreased $1.8 million, or 34.4%, to $3.5 million for the nine months ended September 30, 2011 from $5.3 million for the nine months ended September 30, 2010. The average balance outstanding decreased $28.7 million, or 7.6%, to $348.2 million for the nine months ended September 30, 2011 from $376.8 million for the nine months ended September 30, 2010. The weighted-average rate decreased to 1.33% for the nine months ended September 30, 2011 from 1.87% for the nine months ended September 30, 2010.

Interest expense on junior subordinated debentures decreased $197,000, or 23.2%, to $652,000 for the nine months ended September 30, 2011 from $849,000 for the nine months ended September 30, 2010. The average balance outstanding remained level at $17.0 million and the weighted-average rate decreased to 5.11% for the nine months ended September 30, 2011 from 6.82% for the same period in 2010. The interest rate on $10.0 million of the junior subordinated debentures began to adjust quarterly on April 1, 2011 to 3-month LIBOR plus 1.38%. Interest expense on other borrowed funds increased by $16,000, or 57.1%, to $44,000 for the nine months ended September 30, 2011 from $28,000 for the nine months ended September 30, 2010. The average balance outstanding was $1.2 million and $796,000, respectively, for the nine months ended September 30, 2011 and 2010. The weighted average rate was 5.06% and 4.76%, respectively, for the nine months ended September 30, 2011 and 2010.

The provision for loan losses increased by $2.7 million, or 84.5%, to $6.0 million for the nine months ended September 30, 2011 from $3.2 million over the same period in 2010 (see “Analysis of Allowance for Loan Losses” below).

Noninterest income decreased 38.1%, or $579,000, to $941,000 for the nine months ended September 30, 2011, from $1.5 million over the same period in 2010. Deposit account fees decreased $32,000, or 7.0%, to $425,000 for the nine months ended September 30, 2011 from $457,000 for the same period in 2010. ATM fees increased $13,000, or 4.0%, to $339,000 for the nine months ended September 30, 2011 from $326,000 for the nine months ended September 30, 2010 due to an increase in fees from increased use of debit cards. Gain on sale of loans decreased $28,000, or 17.6%, to $131,000 for the nine months ended September 30, 2011 from $159,000 for the nine months ended September 30, 2010 due to a decline in the volume of refinanced fixed rate mortgages, which are sold to FHLMC. Gain on sale of other real estate owned decreased by $471,000 to a loss of $286,000 for the nine months ended September 30, 2011 as compared to a gain of $185,000 during the nine months ended September 30, 2010. A $50,000 loss on investments was recorded in the first nine months of 2011 as compared to zero for the same period in 2010. We fully reserved against our investment in the debt issued by a private company after the investee began experiencing financial difficulties and it became probable that our investment would not be recovered. Income from bank owned life insurance increased by $13,000, or 9.0%, to $157,000 for the nine months ended September 30, 2011 from $144,000 for the nine months ended September 30, 2010 due to an increase in the crediting rate paid by the insurance carriers. Other income decreased $23,000 to $224,000 for the nine months ended September 30, 2011 from $247,000 for the nine months ended

September 30, 2010 primarily due to a decrease in income from the Company’s investment in Maryland Title Center LLC, partially offset by an increase in rental income.

Noninterest expense increased $3.0 million, or 36.4%, to $11.4 million for the nine month periods ended September 30, 2011 from $8.3 million over the same period in 2010. Salaries and employee benefits decreased $191,000, or 4.6%, to $4.0 million for the nine months ended September 30, 2011 from $4.2 million over the same period in 2010 primarily due to declines in supplemental executive retirement plan expense and officer salaries, partially offset by an increase in other employee benefits, primarily health insurance. Occupancy expense increased $67,000, or 11.8%, to $637,000 for the nine months ended September 30, 2011 from $570,000 over the same period in 2010 primarily due to an increase in office building repairs and maintenance, partially offset by a decline in utilities expense. The FDIC insurance premium expense increased by $411,000, or 88.4%, to $876,000 for the nine months ended September 30, 2011 from $465,000 for the nine months ended September 30, 2010 due to an increase in the assessment rate. Other real estate owned expense and valuation increased by $1.0 million, or 166.5%, to $1.6 million for the nine months ended September 30, 2011 from $615,000 for the nine months ended September 30, 2010 primarily due to an increase in the balance and number of properties owned, as well as the continued decline in real estate market values. Loan collection expense increased $1.2 million to $1.3 million for the nine months ended September 30, 2011 from $179,000 for the same period in 2010. Legal fees increased $439,000 to $808,000 for the nine months ended September 30, 2011 from $369,000 for the nine months ended September 30, 2010. The increases in loan collection expense and legal fees 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. Other expenses increased $134,000, or 13.3%, to $1.1 million for the nine months ended September 30, 2011 from $1.0 million for the nine months ended September 30, 2010, primarily due to increases in insurance expenses, real estate and personal property taxes, and accounting and auditing fees.

Income tax benefit for the nine month period ended September 30, 2011 was $2.4 million as compared to income tax expense of $1.3 million for the same period in 2010, which equates to effective rates of 41.1% and 38.8% 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 by dollar amount (in thousands) and percentage of the portfolio at the indicated dates.

	September 30, 2011						December 31, 2010
	Amount			Percent			Amount			Percent
Type of Loan
Real estate loans:
Construction	$	64,218			18.57	%	$	77,442			20.38	%
1-4 family residential and home equity		111,383			32.21			117,093			30.82
Multi-family residential		4,489			1.30			5,123			1.35
Land		2,136			0.62			4,156			1.09
Commercial		148,201			42.85			158,799			41.80
Total real estate loans		330,427			95.55			362,613			95.44
Commercial business loans		12,240			3.54			13,513			3.56
Consumer loans		3,169			0.91			3,793			1.00
Gross loans		345,836			100.00	%		379,919			100.00	%
Less: allowance for loan losses		(13,724	)					(15,077	)
Net loans	$	332,112					$	364,842

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

	September 30,			December 31,
(Dollars in thousands)	2011			2010
Nonaccrual loans	$	38,767		$	54,420
Loans 90 days or more past due and still accruing		0			0
Restructured loans		24,899			13,283
Total nonperforming loans		63,666			67,703
Other real estate owned, net		24,986			17,994
Total nonperforming assets	$	88,652		$	85,697
Nonperforming loans to total loans		18.41	%		17.82	%
Nonperforming assets to total assets		18.90			17.59
Allowance for loan losses to non-performing loans		21.56			22.27

Nonperforming assets increased due to increases in restructured loans and other real estate owned, which offset a decline in nonaccrual loans. The increase in other real estate owned reflects the resolution of certain nonaccrual loans, while restructured loans increased due to the Bank’s continuing efforts to work with borrowers. The decrease in nonaccrual loans also reflected the restoration of restructured loans to performing status after the loans had performed as agreed for at least six months.

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.

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 in 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, 2011 was $13.7 million, (3.97% of total loans), a decrease of $1.4 million (9.0%) from the $15.1 million allowance (3.97% of total loans) at December 31, 2010. Annualized net charge-offs for the first nine months of 2011 were 2.80% of average loans, as compared to net charge-offs of 1.14% of average loans for the year 2010. The provision for loan losses required for the first nine months of 2011 and 2010 was $6.0 million and $3.2 million, respectively.

A summary of activity in the allowance is shown below.

	Nine Months Ended			Year Ended
(Dollars in thousands)	September 30, 2011			December 31, 2010

Balance of allowance, beginning of period	$	15,077		$	14,351
Loan charge-offs:
Real estate		(6,246	)		(4,532	)
Commercial loans		(1,135	)		(100	)
Consumer		(28	)		(94	)
Total charge-offs		(7,409	)		(4,726	)
Loan recoveries:
Real estate		88			81
Commercial loans		0			1
Consumer		10			30
Total recoveries		98			112
Net charge-offs		(7,311	)		(4,614	)
Provision for loan losses		5,958			5,340
Balance of allowance, end of period	$	13,724		$	15,077

Net charge-offs to average loans		2.80	%		1.14	%
Allowance to total loans		3.97	%		3.97	%
Allowance to non-performing loans		21.56	%		22.27	%

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.

	September 30, 2011					December 31, 2010
	Amount		Percent			Amount		Percent

Regular checking	$	22,847		6.67	%	$	26,614		7.43	%
NOW accounts		30,676		8.95			30,941		8.64
Passbook savings		11,575		3.38			11,346		3.17
Statement savings		10,658		3.11			10,115		2.82
Money market		11,867		3.46			11,851		3.31
Holiday club		251		0.07			76		0.02
Certificates of deposit		223,068		65.08			239,188		66.79
IRA certificates of deposit		24,370		7.11			24,364		6.80
Money market certificates		7,425		2.17			3,643		1.02
Total deposits	$	342,737		100.00	%	$	358,138		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, 2011, the Company is no longer subject to the capital requirements on a consolidated basis since total assets have not exceeded $500 million for four consecutive quarters. The following table sets forth applicable capital ratios of the Bank as of September 30, 2011 and December 31, 2010 and the ratios of the consolidated Company as of December 31, 2010.

							Regulatory Minimum
	2011			2010			Well			Adequately
	Actual			Actual			Capitalized			Capitalized

Total risk-based capital ratio
Consolidated		N/A			14.47	%		10.00	%		8.00	%
The Bank		13.35	%		14.49			10.00			8.00

Tier 1 risk-based capital ratio
Consolidated		N/A			12.03	%		6.00	%		4.00	%
The Bank		8.81	%		9.93			6.00			4.00

Tier 1 leverage ratio
Consolidated		N/A			9.53	%		5.00	%		4.00	%
The Bank		6.99	%		7.87			5.00			4.00

As of September 30, 2011 and December 31, 2010, 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.

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 2011. As of September 30, 2011, unpaid cumulative dividends on the Fixed Rate Cumulative Perpetual Preferred Stock, Series A were $1.0 million.

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, 2011, 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 -

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.

Exhibit No.	Description	Incorporated by Reference to:
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	Rule 13a-14(a)/15d-14(a) Certifications
32	18 U.S.C. Section 1350 Certifications
101	Interactive Data Files *	* Pursuant to Regulation 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of Securities Act of 1933, as amended, or Section 18 of Securities Exchange Act of 1934, as amended, and are not otherwise subject to liability.

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 10, 2011	By:	/s/ Mary B. Halsey
		Mary B. Halsey President and Chief Executive Officer (Duly Authorized Officer
Date: November 10, 2011	By:	/s/ Robert Lee Whitehead
		Robert Lee Whitehead Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)