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

f10q_033111-0424.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 March 31, 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).

[ ] 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 May 10, 2011, there were 3,706,081 shares of common stock outstanding

Page 1

CECIL BANCORP, INC. AND SUBSIDIARIES

CONTENTS

		PAGE
PART I - FINANCIAL INFORMATION

ITEM 1.	Financial Statements (unaudited)

	Consolidated Balance Sheets -	3
	March 31, 2011 and December 31, 2010

	Consolidated Statements of Operations and Comprehensive Income (Loss)	4-5
	for the Three Months Ended March 31, 2011 and 2010)

	Consolidated Statements of Cash Flows	6
	for the Three Months Ended March 31, 2011 and 2010 (Unaudited)

	Notes to Consolidated Financial Statements	7-19

ITEM 2.	Management’s Discussion and Analysis of Financial Condition	20-27
	and Results of Operations

ITEM 3.	Quantitative and Qualitative Disclosure About Market Risk	27

ITEM 4T.	Controls and Procedures	27

PART II – OTHER INFORMATION		28-29

SIGNATURES		30

CERTIFICATIONS		31-34

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PART I. Financial Information

ITEM 1. Financial Statements

CECIL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

ASSETS
	March 31,			December 31,
	2011			2010
	(unaudited)

Cash and due from banks	$	25,778		$	27,603
Interest bearing deposits with banks		28,418			24,185
Federal funds sold		133			181
Cash and cash equivalents		54,329			51,969
Investment securities:
Securities available-for-sale at fair value		2,166			2,159
Securities held-to-maturity (fair value of $12,819
in 2011 and $9,383 in 2010)		12,958			9,489
Restricted investment securities – at cost		4,382			4,382
Loans receivable		368,132			379,919
Less: Allowance for loan losses		(15,386	)		(15,077	)
Net loans receivable		352,746			364,842
Other real estate owned		19,483			17,994
Premises and equipment, net		11,652			11,625
Accrued interest receivable		1,538			1,754
Other intangible assets		484			469
Bank owned life insurance		8,124			8,078
Deferred tax assets		10,278			10,270
Other assets		4,231			4,164
TOTAL ASSETS	$	482,371		$	487,195


LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits	$	350,979		$	358,138
Other liabilities		12,175			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		444,823			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		11,090			11,053
Common stock, $.01 par value; authorized 10,000,000
shares, issued and outstanding 3,703,358 shares in
2011 and 3,699,096 shares in 2010		37			37
Additional paid in capital		12,288			12,277
Retained earnings		14,093			14,188
Accumulated other comprehensive income		40			53
Total stockholders’ equity		37,548			37,608
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	482,371		$	487,195

See accompanying notes to consolidated financial statements.

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CECIL BANCORP, INC. AND SUBSIDIARIES

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

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(dollars in thousands, except per share data)

	2011			2010

INTEREST INCOME:
Interest and fees on loans	$	5,826		$	6,954
Interest on investment securities		57			45
Dividends on FHLB and FRB stock		17			12
Other interest-earning assets		18			9

Total interest income		5,918			7,020

INTEREST EXPENSE:
Interest expense on deposits		1,261			1,934
Interest expense on junior subordinated debentures		297			278
Interest expense on advances from FHLB		607			608
Interest expense on other borrowed funds		15			-

Total interest expense		2,180			2,820

NET INTEREST INCOME		3,738			4,200

PROVISION FOR LOAN LOSSES		500			910

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		3,238			3,290

NONINTEREST INCOME:
Deposit account fees		134			147
ATM fees		106			98
Commission income		1			1
Gain on sale of loans		57			14
(Loss) gain on sale of other real estate owned		(5	)		48
Loss on investments		(50	)		-
Income from bank owned life insurance		46			28
Other

Total noninterest income		363			427

NONINTEREST EXPENSE:
Salaries and employee benefits		1,284			1,333
Occupancy expense		223			220
Equipment and data processing expense		298			318
FDIC deposit insurance premium		192			153
Other real estate owned expense and valuation		696			48
Other

Total noninterest expense		3,474			2,641

NET INCOME BEFORE INCOME TAXES		127			1,076

INCOME TAX EXPENSE		41			425

NET INCOME (CARRIED FORWARD)	$	86		$	651

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CECIL BANCORP, INC. AND SUBSIDIARIES

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

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(dollars in thousands, except per share data)

	2011			2010

NET INCOME (BROUGHT FORWARD)	$	86		$	651

OTHER COMPREHENSIVE INCOME
Unrealized (losses) gains on
investment securities,
net of deferred taxes		(13	)		15

TOTAL COMPREHENSIVE INCOME	$	73		$	666


NET INCOME	$	86		$	651

PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION		(181	)		(179	)

NET (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	(95	)	$	472

(Loss) earnings per common share - basic	$	(0.03	)	$	0.13

(Loss) earnings per common share - diluted	$	(0.03	)	$	0.13

Dividends declared per common share	$	0.000		$	0.000

See accompanying notes to consolidated financial statements.

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CECIL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(dollars in thousands)

		2011			2010

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	86		$	651
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization		178			151
Provision for loan losses		500			910
Gain on sale of loans		(57	)		(14	)
Loss (gain) on sale of other real estate owned		5			(48	)
Loss on investments		50			-
Loss on premises and equipment		1			-
Increase in cash surrender value of bank owned life insurance		(46	)		(28	)
Restricted stock awards		-			1
Excess servicing rights		(33	)		(8	)
Origination of loans held for sale		(2,745	)		(744	)
Proceeds from sales of loans held for sale		2,776			751
Net change in:
Accrued interest receivable and other assets		963			240
Other liabilities		604			(1,872	)
Net cash provided by (used in) operating activities		2,282			(10	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale		(109	)		-
Purchases of investment securities held-to-maturity		(3,898	)		(3,950	)
Proceeds from sales, maturities, calls and principal payments of
investment securities available-for-sale		80			2
Proceeds from maturities, calls and principal payments of
investment securities held-to-maturity		1,987			848
Net decrease in loans		9,130			2,052
Proceeds from sale of other real estate owned		185			526
Proceeds from premises and equipment		9			-
Purchases of premises and equipment		(157	)		(69	)
Net cash provided by (used in) investing activities		7,227			(591	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits		(7,159	)		4,386
Net increase in other borrowed funds		-			1,169
Proceeds from issuance of common stock		10			-
Net cash (used in) provided by financing activities		(7,149	)		5,555

INCREASE IN CASH AND CASH EQUIVALENTS		2,360			4,954
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		51,969			35,464
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	54,329		$	40,418

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

Cash paid for income taxes	$	-		$	1,560
Cash paid for interest	$	1,888		$	2,566
Transfer from loans to other real estate owned	$	2,492		$	1,172

See accompanying notes to consolidated financial statements.

Page 6

CECIL BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

1. GENERAL

In the opinion of 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 March 31, 2011 and the results of its operations and cash flows for the three months ended March 31, 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 months ended March 31, 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 for 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 will be effective for the Company’s reporting period ended September 30, 2011 and will be applied retrospectively to January 1, 2011. As a result of the retrospective application, the Company may identify loans that are newly considered impaired. The adoption of this ASU is not expected to 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.

Page 7

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 quarter. Diluted earnings per share are computed by 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 months ended March 31, 2011 and 2010, all 261,538 options and warrants were excluded from the diluted earnings per share calculation because their effect was antidilutive. The calculation of net income per common share for the three months ended March 31, 2011 and 2010 is as follows:

	2011			2010
BASIC AND DILUTED:
Net income	$	86,000		$	651,000
Preferred stock dividends and discount accretion		(181,000	)		(179,000	)
Net (loss) income available to common stockholders	$	(95,000	)	$	472,000

Average common shares outstanding		3,700,220			3,689,346
Basic and diluted net (loss) income per share	$	(0.03	)	$	0.13

5. ACCOUNTING FOR STOCK BASED COMPENSATION PLANS

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. A summary of the Company’s activity and related information for the periods indicated is as follows:

	Three Months Ended			Year Ended
	March 31, 2011			December 31, 2010
	Shares	Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value

Unvested at beginning of year	58,144	$	4.00	60,125		$	4.00
Forfeited	—		—	(408	)		4.00
Awarded	—		—	—			—
Released	—		—	(1,573	)		4.00

Unvested at end of period	58,144	$	4.00	58,144		$	4.00

6. ASSETS MEASURED AT FAIR VALUE

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements”, included in the codification as ASC Topic 820. 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

Page 8

March 31, 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 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)
March 31, 2011
Investment securities
available-for-sale
Mutual funds – mortgage securities	$	711	$	711	$	—	$	—
Mutual funds – U.S. Government
Securities		675		675		—		—
Equity Securities		341		341		—		—
Mortgage-backed securities		439		—		439		—

Total investment securities available-for-sale	$	2,166	$	1,727	$	439	$	—

	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, 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 March 31, 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.

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Fair Value Measurements at Reporting Date Using

Quoted Prices

In Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Carrying

Assets

Inputs

Description

Value

(Level 1)

(Level 2)

(Level 3)

Other real estate owned

19,483

Impaired loans

54,239

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107 “Disclosure About Fair Value of Financial Instruments”, now included in the Codification as part of FASB ASC 825-10-50 requires that the Company disclose estimated fair values for both its on and off-balance-sheet financial instruments. The following methods and assumptions were used to estimate the fair value of the Company’s financial instruments. Changes in estimates and assumptions could have a significant impact on these fair values.

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

Investment Securities - The fair values of investment securities are based on quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices of comparable instruments.

Loans 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.

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Other Borrowed Funds – 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.

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 March 31, 2011 are as follows:

	Carrying		Fair
	Value		Value
Financial assets:
Cash and cash equivalents	$	54,329	$	54,329
Investment securities:
Available-for-sale		2,166		2,166
Held-to-maturity		12,958		12,819
Loans receivable		368,132		435,702
Restricted investment securities		4,382		4,382
Accrued interest receivable		1,538		1,538
Financial liabilities:
Deposits		350,979		322,546
Junior subordinated debentures		17,000		16,959
Advances from FHLB		63,500		63,722
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

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

	March 31, 2011
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-Sale:
Mutual funds - mortgage securities	$	747	$	7	$	43	$	711
Mutual funds - U.S. Government securities		686		—		11		675
Equity securities		226		115		—		341
Residential mortgage-backed securities		443		3		7		439
	$	2,102	$	125	$	61	$	2,166

Held-to-Maturity:
Residential mortgage-backed securities	$	7,139	$	3	$	127	$	7,015
SBA securitized loan pools		570		—		9		561
Other debt securities		4,500		—		7		4,493
U. S. Treasury securities and obligations		749		1		—		750
	$	12,958	$	4	$	143	$	12,819

	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

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As of March 31, 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	$	—	$	—	$	133	$	43	$	133	$	43
Mutual funds - U.S. Government securities		—		—		675		11		675		11
Residential ,mortgage-backed securities		40		6		266		1		306		7
Held-to-Maturity:
Residential mortgage-backed securities		3,548		76		3,000		51		6,548		127
SBA securitized loan pools		561		9		—		—		561		9
Other debt securities		2,493		7		—		—		2,493		7
	$	6,642	$	98	$	4,074	$	106	$	10,716	$	204

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

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 as of March 31, 2011 and December 31, 2010.

Credit Quality Indicators
As of March 31, 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	$	30,022	$	96,490	$	5,311	$	3,864	$	106,456	$	10,872	$	3,468	$	256,483
Special mention		8,063		2,764		-		-		8,228		1,249		-		20,304
Substandard		34,896		16,397		-		-		38,690		1,201		161		91,345
Total	$	72,981	$	115,651	$	5,311	$	3,864	$	153,374	$	13,322	$	3,629	$	368,132

Credit risk profile based on payment activity:

Performing	$	48,335	$	99,282	$	5,311	$	3,864	$	130,285	$	12,856	$	3,625	$	303,558
Nonperforming		24,646		16,369		-		-		23,089		466		4		64,574
Total	$	72,981	$	115,651	$	5,311	$	3,864	$	153,374	$	13,322	$	3,629	$	368,132

Page 13

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 March 31, 2011

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

30-59 Days Past Due	$	-	$	7,218	$	-	$	-	$	757	$	3	$	4	$	7,982
60-89 Days Past Due		3,367		421		-		-		4,503		19		-		8,310
Greater Than 90 Days Past Due		21,279		8,730		-		-		17,829		444		-		48,282
Total Past Due		24,646		16,369		-		-		23,089		466		4		64,574
Current		48,335		99,282		5,311		3,864		130,285		12,856		3,625		303,558
Total Loans Receivable	$	72,981	$	115,651	$	5,311	$	3,864	$	153,374	$	13,322	$	3,629	$	368,132

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		-		-		-		-		-		-		-		-

Page 14

Allowance for Loan Losses and Recorded Investment in Loans Receivable
For the Three Months Ended March 31, 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		(125	)		(58	)		-			-		-			(10	)		(12	)		-		(205	)
Recoveries		-			8			-			-		-			-			6			-		14
Provision		41			514			(19	)		-		(597	)		445			6			110		500
Ending balance	$	7,184		$	1,944		$	32		$	-	$	3,858		$	1,072		$	174		$	1,122	$	15,386

Ending balance individually evaluated for impairment	$	1,950		$	620		$	-		$	-	$	2,900		$	984		$	160		$	-	$	6,614

Ending balance collectively evaluated for impairment	$	5,234		$	1,324		$	32		$	-	$	958		$	88		$	14		$	1,122	$	8,772

Loans receivable:

Ending balance	$	72,981		$	115,651		$	5,311		$	3,864	$	153,374		$	13,322		$	3,629		$	-	$	368,132

Ending balance individually evaluated for impairment	$	34,896		$	16,397		$	-		$	-	$	38,690		$	1,201		$	161		$	-	$	91,345

Ending balance collectively evaluated for impairment	$	38,085		$	99,254		$	5,311		$	3,864	$	114,684		$	12,121		$	3,468		$	-	$	276,787

Page 15

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 March 31, 2011

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

Unpaid Principal Balance	$	25,618	$	8,730	$	-	$	-	$	19,447	$	444	$	-	$	54,239
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

Page 16

Loan Modifications
As of March 31, 2011

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

Troubled Debt Restructurings:

Number of Loans		1		19		1		-		2		-		-		23

Pre-Modification Principal Balance	$	984	$	4,164	$	290	$	-	$	2,227	$	-	$	-	$	7,665

Post-Modification Principal Balance	$	984	$	4,125	$	290	$	-	$	2,166	$	-	$	-	$	7,565

Troubled Debt Restructurings That Subsequently Defaulted:

Number of Loans		-		6		-		-		2		-		-		8

Current Principal Balance	$	-	$	2,843	$	-	$	-	$	1,339	$	-	$	-	$	4,182

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

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Impaired Loans
As of and For the Three Months Ended March 31, 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	$	2,848	$	1,926	$	-	$	-	$	9,077	$	444	$	-	$	14,295

Related Allowance for Loan Losses	$	1,466	$	314	$	-	$	-	$	2,065	$	444	$	-	$	4,289

Average Recorded Investment	$	3,303	$	1,687	$	-	$	-	$	9,536	$	222	$	-	$	14,748

Interest Income Recognized	$	-	$	6	$	-	$	-	$	-	$	-	$	-	$	6

Loans Without a Valuation Allowance:

Unpaid Principal Balance	$	22,770	$	6,804	$	-	$	-	$	10,370	$	-	$	-	$	39,944

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

Average Recorded Investment	$	21,992	$	6,894	$	-	$	-	$	10,696	$	-	$	-	$	39,582

Interest Income Recognized	$	59	$	-	$	-	$	-	$	59	$	-	$	-	$	118

Totals:

Unpaid Principal Balance	$	25,618	$	8,730	$	-	$	-	$	19,447	$	444	$	-	$	54,239

Related Allowance for Loan Losses	$	1,466	$	314	$	-	$	-	$	2,065	$	444	$	-	$	4,289

Average Recorded Investment	$	25,295	$	8,581	$	-	$	-	$	20,232	$	222	$	-	$	54,330

Interest Income Recognized	$	59	$	6	$	-	$	-	$	59	$	-	$	-	$	124

Page 18

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

Page 19

CECIL BANCORP, INC. AND SUBSIDIARIES

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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 bank 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 it 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; (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.

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 261,538 shares of the Company’s common stock 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.

Page 20

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 $6.63 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. Management has been monitoring the retention of fixed rate loans through its asset/liability management policy.

Comparison of Financial Condition at March 31, 2011 and December 31, 2010

The Company’s assets decreased by $4.8 million, or 1.0%, to $482.4 million at March 31, 2011 from $487.2 million at December 31, 2010, primarily as a result of a decrease in loans, partially offset by increases in cash and cash equivalents, investment securities held-to-maturity, and other real estate owned. The decrease in loans also enabled us to not renew higher rate certificates of deposit.

Cash and cash equivalents increased by $2.4 million, or 4.5%, to $54.3 million at March 31, 2011 from $52.0 million at December 31, 2010 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

Page 21

increased by $3.5 million, or 36.6%, to $13.0 million at March 31, 2011 from $9.5 million at December 31, 2010 primarily due to the investment of excess funds obtained during the quarter.

The gross loans receivable portfolio decreased by $11.8 million, or 3.1%, to $368.1 million at March 31, 2011 from $379.9 million at December 31, 2010, primarily as a result of declines in commercial real estate loans (down $5.4 million, or 3.4%), construction loans (down $4.5 million, or 5.8%), one to four family residential and home equity loans (down $1.4 million, or 1.2%), and land loans (down $292,000, or 7.0%). 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. The allowance for loan losses increased by $309,000, or 2.1%, to $15.4 million at March 31, 2011 from $15.1 million at December 31, 2010 (see “analysis of allowance for loan losses” below).

Other real estate owned increased by $1.5 million, or 8.3%, to $19.5 million at March 31, 2011 from $18.0 million at December 31, 2010 due to the acquisition of additional properties in satisfaction of loans receivable.

The Company’s liabilities decreased $4.8 million, or 1.1%, to $444.8 million at March 31, 2011 from $449.6 million at December 31, 2010. The decrease in deposits of $7.2 million, or 2.0%, to $351.0 million at March 31, 2011 from $358.1 million at December 31, 2010, was mainly due to declines in certificates of deposit (down $8.9 million, or 3.7%) and regular checking accounts (down $2.8 million, or 10.4%), partially offset by increases in money market certificates (up $2.1 million, or 56.7%), NOW accounts (up $1.5 million, or 4.9%), statement savings accounts (up $504,000, or 5.0%), and IRA certificates of deposit (up $413,000, or 1.7%). Other liabilities increased $2.4 million, or 24.5%, to $12.2 million at March 31, 2011 from $9.8 million at December 31, 2010 primarily due to a $1.6 million accrual for investments traded but not yet settled, as well as increases in accrued interest payable on junior subordinated debentures, the amount owed to Money Gram Payment Systems for official checks written, and preferred stock dividend payable.

The Company’s stockholders’ equity decreased by $60,000, or 0.2%, to $37.5 million at March 31, 2011 from $37.6 million December 31, 2010. This decrease is primarily the result of $145,000 in preferred stock cash dividends accrued, partially offset by net income of $86,000.

Comparison of Results of Operations for the Three Months Ended March 31, 2011 and 2010

Net income for the three-month period ended March 31, 2011 was $86,000, a decrease of $565,000 from $651,000 for 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 decreases in the provision for loan losses and income tax expense. Net loss available to common stockholders for the three months ended March 31, 2011 was $95,000 as compared to net income of $472,000 for the three months ended March 31, 2010. Net income available to common stockholders for the 2011 period reflects $181,000 in dividends and discount accretion on the Series A Preferred Stock compared to $179,000 in dividends and discount accretion during the 2010 period. Basic and diluted loss per common share were both $0.03 for the three months ended March 31, 2011 as compared to basic and diluted earnings per common share of $0.13 for the three-month period ended March 31, 2010. The annualized return on average assets and annualized return on average equity were 0.07% and 0.92%, respectively, for the three-month period ended March 31, 2011. This compares to an annualized return on average assets and annualized return on average equity of 0.51% and 6.99%, respectively, for the same period in 2010.

Net interest income, the Company’s primary source of income, decreased 11.0%, or $462,000, to $3.7 million for the three months ended March 31, 2011, from $4.2 million over the same period in 2010. The weighted average yield on interest earning assets decreased to 5.84% for the three months ended March 31, 2011 from 6.17% for the three months ended March 31, 2010. The weighted average rate paid on interest bearing liabilities decreased to 2.00% for the three months ended March 31, 2011 from 2.43% for the three months ended March 31, 2010. The net interest spread increased to 3.84% from 3.74% and the net interest margin remained level at 3.69% for the three months ended March 31, 2011 and 2010.

Interest and fees on loans decreased by $1.1 million, or 16.2%, to $5.8 million for the three months ended March 31, 2011 from $7.0 million for the three months ended March 31, 2010. The decrease is primarily attributable to a decrease in the average balance outstanding, as well as a decrease in the weighted-average yield. The average balance outstanding decreased by $62.0 million, or 14.7%, to $360.8 million for the three months ended March 31, 2011 from $422.8 million for the three months ended March 31, 2010. The weighted-average yield

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decreased to 6.46% for the three months ended March 31, 2011 from 6.58% for the three months ended March 31, 2010 due to a general decrease in market rates.

Interest on investment securities increased $12,000, or 26.7%, to $57,000 for the three months ended March 31, 2011 from $45,000 for the three months ended March 31, 2010. The average balance outstanding increased $4.2 million, or 51.8%, to $12.3 million for the three months ended March 31, 2011 from $8.1 million for the three months ended March 31, 2010. The weighted-average yield decreased to 1.86% for the three months ended March 31, 2011 from 2.21% for the three months ended March 31, 2010.

Interest on deposits decreased by $673,000, or 34.8%, to $1.3 million for the three months ended March 31, 2011 from $1.9 million for the three months ended March 31, 2010 due to decreases in the weighted-average rate and the average balance outstanding. The weighted-average rate paid on deposits decreased to 1.42% for the three months ended March 31, 2011 from 2.02% for the three months ended March 31, 2010, reflecting lower market rates. The average balance outstanding decreased $28.6 million, or 7.5%, to $355.3 million for the three months ended March 31, 2011 from $383.9 million for the same period in 2010.

Interest on junior subordinated debentures increased by $19,000, or 6.8%, to $297,000 for the three months ended March 31, 2011 from $278,000 for the three months ended March 31, 2010 due to an increase in the weighted-average rate resulting from additional expense incurred on previously accrued interest that has not yet been paid. The weighted-average rate paid increased to 6.99% for the three months ended March 31, 2011 from 6.54% for the three months ended March 31, 2010, while the average balance outstanding remained level at $17.0 million for both periods.

Interest on other borrowed funds increased by $15,000 to $15,000 for the three months ended March 31, 2011 from zero for the three months ended March 31, 2010. The weighted-average rate paid was 4.94% and the average balance outstanding was $1.2 million for the three months ended March 31, 2011. Other borrowed funds consist of a first out loan participation sold that was reclassified as a secured borrowing during the first quarter of 2010 in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”

The provision for loan losses decreased by $410,000, or 45.1%, to $500,000 for the three months ended March 31, 2011 from $910,000 over the same period in 2010 (see “analysis of allowance for loan losses” below).

Noninterest income decreased 15.0%, or $64,000, to $363,000 for the three months ended March 31, 2011, from $427,000 over the same period in 2010 due to a loss on sale of other real estate owned and a loss on investments. Gain on sale of other real estate owned decreased by $53,000, or 110.4%, to $(5,000) for the three months ended March 31, 2011 from $48,000 for the three months ended March 31, 2010. A $50,000 loss on investments was recorded in the first quarter 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. Gain on sale of loans increased by $43,000, or 307.1%, to $57,000 for the three months ended March 31, 2011 from $14,000 for the same period in 2010 due to an increase in the volume of fixed rate mortgage loans originated and sold in the secondary market. Income from bank owned life insurance increased by $18,000, or 64.3%, to $46,000 for the three months ended March 31, 2011 from $28,000 for the same period in 2010 due to a decline in fees charged by the carriers. Other income decreased $17,000, or 18.7%, to $74,000 for the three months ended March 31, 2011 from $91,000 for the three months ended March 31, 2010 primarily due to a decrease in the Company’s share of income from its investment in Maryland Title Center LLC.

Noninterest expense increased 31.5%, or $833,000, to $3.5 million for the three months ended March 31, 2011, from $2.6 million over the same period in 2010 due to an increase in other real estate owned expense. Salaries and employee benefits decreased by $49,000, or 3.7%, to $1.3 million for the three months ended March 31, 2011 from $1.3 million for the same period in 2010 primarily due to a decline in supplemental executive retirement plan expense, partially offset by an increase in other employee benefits, primarily health insurance. Equipment and data processing expense decreased by $20,000, or 6.3%, to $298,000 for the three months ended March 31, 2011 from $318,000 for the three months ended March 31, 2010 primarily due to a decline in small equipment purchases and depreciation expense on furniture and equipment. FDIC deposit insurance premiums increased $39,000, or 25.5%, to $192,000 for the three months ended March 31, 2011 from $153,000 for the three months ended March 31, 2010. Other real estate owned expense and valuations increased by $648,000 to $696,000 for the quarter ended March 31, 2011 from $48,000 for the three months ended March 31, 2010 due to an increase in the number and

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balance of properties owned, as well as the continued decline in real estate market values. Other expenses increased $212,000, or 37.3%, to $781,000 for the three months ended March 31, 2011 from $569,000 during the same period in 2010. Increases in loan expense and legal fees relating to nonperforming loan resolution were the primary drivers of this increase.

Income tax expense for the three-month period ended March 31, 2011 was $41,000 as compared to $425,000 for the first quarter of 2010, which equates to effective tax rates of 32.3% and 39.5% respectively.

Loans Receivable

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

	March 31, 2011						December 31, 2010
	Amount			Percent			Amount			Percent
Type of Loan
Real estate loans:
Construction	$	72,981			19.82	%	$	77,442			20.38	%
1-4 family residential and home equity		115,651			31.42			117,093			30.82
Multi-family residential		5,311			1.44			5,123			1.35
Land		3,864			1.05			4,156			1.09
Commercial		153,374			41.66			158,799			41.80
Total real estate loans		351,181			95.39			362,613			95.44
Commercial business loans		13,322			3.62			13,513			3.56
Consumer loans		3,629			0.99			3,793			1.00
Gross loans		368,132			100.00	%		379,919			100.00	%
Less: allowance for loan losses		(15,386	)					(15,077	)
Net loans	$	352,746					$	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.

	March 31,			December 31,
(Dollars in thousands)	2011			2010

Nonaccrual loans	$	54,239		$	54,420
Loans 90 days or more past due and still accruing		0			0
Restructured loans		17,025			13,283
Total nonperforming loans		71,264			67,703
Other real estate owned, net		19,483			17,994
Total nonperforming assets	$	90,747		$	85,697
Nonperforming loans to total loans		19.36	%		17.82	%
Nonperforming assets to total assets		18.81			17.59
Allowance for loan losses to non-performing loans		21.59			22.27

The increase in nonperforming loans is due to the continuing slow down in the real estate market. This decline 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.

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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 March 31, 2011 was $15.4 million, (4.18% of total loans), an increase of $309,000 from the $15.1 million allowance (3.97% of total loans) at December 31, 2010. Annualized net charge-offs for the first three months of 2011 were 0.21% of average loans, while net charge-offs were 1.14% of average loans for the year 2010. The provision for loan losses required for the first three months of 2011 and 2010 was $500,000 and $910,000, respectively.

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A summary of activity in the allowance is shown below.

	Three Months Ended			Year Ended
(Dollars in thousands)	March 31, 2011			December 31, 2010

Balance of allowance, beginning of period	$	15,077		$	14,351
Loan charge-offs:
Real estate		(183	)		(4,532	)
Commercial loans		(10	)		(100	)
Consumer		(12	)		(94	)
Total charge-offs		(205	)		(4,726	)
Loan recoveries:
Real estate		8			81
Commercial loans		0			1
Consumer		6			30
Total recoveries		14			112
Net charge-offs		(191	)		(4,614	)
Provision for loan losses		500			5,340
Balance of allowance, end of period	$	15,386		$	15,077

Net charge-offs to average loans		0.21	%		1.14	%
Allowance to total loans		4.18			3.97
Allowance to non-performing loans		21.59			22.27

Analysis of Deposits

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

	March 31, 2011					December 31, 2010
	Amount		Percent			Amount		Percent

Regular checking	$	23,852		6.80	%	$	26,614		7.43	%
NOW accounts		32,444		9.24			30,941		8.64
Passbook savings		11,194		3.19			11,346		3.17
Statement savings		10,619		3.02			10,115		2.82
Money market		11,993		3.42			11,851		3.31
Holiday club		143		0.04			76		0.02
Certificates of deposit		230,249		65.60			239,188		66.79
IRA certificates of deposit		24,777		7.06			24,364		6.80
Money market certificates		5,708		1.63			3,643		1.02
Total deposits	$	350,979		100.00	%	$	358,138		100.00	%

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Capital Adequacy

Capital adequacy refers to the level of capital required to sustain asset growth and to absorb losses. The Board of Governors of the Federal Reserve System (“Federal Reserve”), which is the Bank’s principal federal regulator, has established requirements for total and tier 1 (core) risk-based capital and tier 1 leverage capital. The following table sets forth applicable capital ratios of the Company and the Bank as of March 31, 2011 and December 31, 2010.

							Regulatory Minimum
	2011			2010			Well			Adequately
	Actual			Actual			Capitalized			Capitalized

Total risk-based capital ratio
Consolidated		15.23	%		14.47	%		10.00	%		8.00	%
The Bank		15.30			14.49	%		10.00			8.00

Tier 1 risk-based capital ratio
Consolidated		12.74	%		12.03	%		6.00	%		4.00	%
The Bank		10.65			9.93	%		6.00			4.00

Tier 1 leverage ratio
Consolidated		9.91	%		9.53	%		5.00	%		4.00	%
The Bank		8.288			7.87	%		5.00			4.00

As of March 31, 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.

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 controls over financial reporting (as defined in Rule 13a-15 under the Securities Exchange Act of 1934) during the quarter ended March 31, 2011, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Page

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PART II. Other Information:

Item 1. Legal Proceedings -

Not Applicable

Item 1A.Risk Factors -

Not Applicable

Item 2. Unregistered Sales 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 first quarter of 2011. As of March 31, 2011, unpaid cumulative dividends on the Fixed Rate Cumulative Perpetual Preferred Stock, Series A were $723,000.

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.

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Exhibit No.	Description	Incorporated by Reference to:
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

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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: May 13, 2011	By:	/s/ Mary B. Halsey
		Mary B. Halsey President and Chief Executive Officer (Duly Authorized Officer
Date: May 13, 2011	By:	/s/ Robert Lee Whitehead
		Robert Lee Whitehead Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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