CECIL BANCORP INC - Quarter Report: 2012 March (Form 10-Q)

f10q_033112-0424.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, 2012.

[ ] 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 May 7, 2012, there were 7,422,164 shares of common stock outstanding

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CECIL BANCORP, INC. AND SUBSIDIARIES

CONTENTS

		PAGE
PART I - FINANCIAL INFORMATION

ITEM 1.	Financial Statements (unaudited)

	Consolidated Balance Sheets -	3
	March 31, 2012 and December 31, 2011

	Consolidated Statements of Operations and Comprehensive Income (Loss)	4-5
	for the Three Months Ended March 31, 2012 and 2011)

	Consolidated Statements of Cash Flows	6
	for the Three Months Ended March 31, 2012 and 2011 (Unaudited)

	Notes to Consolidated Financial Statements	7-23

ITEM 2.	Management’s Discussion and Analysis of Financial Condition	24-31
	and Results of Operations

ITEM 3.	Quantitative and Qualitative Disclosure About Market Risk	31

ITEM 4.	Controls and Procedures	31

PART II – OTHER INFORMATION		32-33

SIGNATURES		34

CERTIFICATIONS		35-38

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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)

	March 31,			December 31,
	2012			2011
	(unaudited)
ASSETS

Cash and due from banks	$	30,164		$	19,944
Interest bearing deposits with banks		12,534			13,908
Federal funds sold		536			559
Cash and cash equivalents		43,234			34,411
Investment securities:
Securities available-for-sale at fair value		27,665			23,656
Securities held-to-maturity (fair value of $7,448
in 2012 and $9,736 in 2011)		7,427			9,745
Restricted investment securities – at cost		4,297			4,296
Loans receivable		337,978			330,262
Less: Allowance for loan losses		(13,133	)		(12,412	)
Net loans receivable		324,845			317,850
Other real estate owned		31,740			30,966
Premises and equipment, net		9,962			10,041
Accrued interest receivable		1,483			1,523
Mortgage servicing rights		470			467
Bank owned life insurance		8,328			8,284
Deferred tax assets		9,315			9,318
Assets held for sale		-			5,903
Income taxes receivable		6,266			5,276
Other assets		1,871			1,935
TOTAL ASSETS	$	476,903		$	463,671

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits	$	350,129		$	339,075
Other liabilities		12,034			10,612
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		443,832			431,356
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value; authorized 1,000,000 shares
Series A issued and outstanding 11,560 shares, liquidation
preference $1,000 per share, in 2012 and 2011		11,239			11,200
Series B issued and outstanding 142,196 shares, liquidation
preference $17.20 per share, in 2012 and zero in 2011		2,411			-
Common stock, $.01 par value; authorized 10,000,000
shares, issued and outstanding 7,422,164 shares in
2012 and 2011		75			75
Additional paid in capital		12,299			12,299
Retained earnings		7,022			8,721
Accumulated other comprehensive income		25			20
Total stockholders’ equity		33,071			32,315
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	476,903		$	463,671

See accompanying notes to consolidated financial statements.

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CECIL BANCORP, INC. AND SUBSIDIARIES

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

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(dollars in thousands, except per share data)

	2012			2011

INTEREST INCOME:
Interest and fees on loans	$	4,339		$	5,826
Interest on investment securities		100			57
Dividends on FHLB and FRB stock		21			17
Other interest-earning assets		14			18

Total interest income		4,474			5,918

INTEREST EXPENSE:
Interest expense on deposits		969			1,261
Interest expense on junior subordinated debentures		162			297
Interest expense on advances from FHLB		613			607
Interest expense on other borrowed funds		15			15

Total interest expense		1,759			2,180

NET INTEREST INCOME		2,715			3,738

PROVISION FOR LOAN LOSSES		2,950			500

NET INTEREST (LOSS) INCOME AFTER PROVISION FOR LOAN LOSSES		(235	)		3,238

NONINTEREST INCOME:
Deposit account fees		115			134
ATM fees		115			106
Commission income		-			1
Gain on sale of loans		1,056			57
Loss on sale of other real estate owned		(210	)		(5	)
Loss on investments		-			(50	)
Income from bank owned life insurance		44			46
Other		93			74

Total noninterest income		1,213			363

NONINTEREST EXPENSE:
Salaries and employee benefits		1,325			1,284
Occupancy expense		183			223
Equipment and data processing expense		322			298
FDIC deposit insurance premium		287			192
Other real estate owned expense and valuation		435			696
Professional fees		510			167
Loan collection expense		86			315
Other		349			299

Total noninterest expense		3,497			3,474

NET (LOSS) INCOME BEFORE INCOME TAXES		(2,519	)		127
INCOME TAX (BENEFIT) EXPENSE		(1,004	)		41
NET (LOSS) INCOME (CARRIED FORWARD)	$	(1,515	)	$	86

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CECIL BANCORP, INC. AND SUBSIDIARIES

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

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(dollars in thousands, except per share data)

	2012			2011

NET (LOSS) INCOME (BROUGHT FORWARD)	$	(1,515	)	$	86


OTHER COMPREHENSIVE INCOME
Unrealized gains (losses) on
investment securities,
net of deferred taxes
		5			(13	)

TOTAL COMPREHENSIVE (LOSS) INCOME	$	(1,510	)	$	73



NET (LOSS) INCOME	$	(1,515	)	$	86


PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION		(184	)		(181	)

NET LOSS AVAILABLE TO COMMON STOCKHOLDERS	$	(1,699	)	$	(95	)


Loss per common share - basic	$	(0.23	)	$	(0.01	)

Loss per common share - diluted	$	(0.23	)	$	(0.01	)


Dividends declared per common share	$	0.00		$	0.00

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, 2012 AND 2011

(dollars in thousands)

	2012			2011

CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(1,515	)	$	86
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization		340			178
Provision for loan losses		2,950			500
Gain on sale of loans		(1,056	)		(57	)
Loss on sale of other real estate owned		210			5
Loss on investments		-			50
Loss on premises and equipment		6			1
Gain on assets held for sale		(18	)		-
Increase in cash surrender value of bank owned life insurance		(44	)		(46	)
Other real estate owned valuation		259			529
Excess servicing rights		(30	)		(33	)
Origination of loans held for sale		(14,135	)		(2,745	)
Proceeds from sales of loans held for sale		15,163			2,776
Net change in:
Accrued interest receivable and other assets		(825	)		434
Other liabilities		429			604
Net cash provided by operating activities		1,734			2,282

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale		(6,780	)		(109	)
Purchases of investment securities held-to-maturity		(250	)		(3,898	)
Proceeds from sales, maturities, calls and principal payments of
investment securities available-for-sale		3,506			80
Proceeds from maturities, calls and principal payments of
investment securities held-to-maturity		2,502			1,987
Net purchase of Federal Home Loan Bank of Atlanta stock		(1	)		-
Net (increase) decrease in loans		(11,778	)		9,130
Proceeds from sale of other real estate owned		567			185
Proceeds from sale of premises and equipment		25			9
Purchases of premises and equipment		(79	)		(157	)
Proceeds from sale of assets held for sale		5,911			-
Net cash (used in) provided by investing activities		(6,377	)		7,227

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		11,055			(7,159	)
Proceeds from issuance of preferred stock		2,411			-
Proceeds from issuance of common stock		-			10
Net cash provided by (used in) financing activities		13,466			(7,149	)

INCREASE IN CASH AND CASH EQUIVALENTS		8,823			2,360
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		34,411			51,969
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	43,234		$	54,329

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for income taxes	$	-		$	-
Cash paid for interest	$	1,578		$	1,888
Transfer from loans to other real estate owned	$	1,860		$	2,492

See accompanying notes to consolidated financial statements.

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CECIL BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

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, 2012 and the results of its operations and cash flows for the three months ended March 31, 2012 and 2011. 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, 2011. The results of operations for the three months ended March 31, 2012 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

FASB ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income”

This ASU increases the prominence of other comprehensive income (“OCI”) in financial statements and provides two options for presenting OCI. The ASU eliminates the current placement near the statement of shareholders’ equity or detailed in the Consolidated Statement of Changes in Shareholders’ Equity. The ASU provides for an OCI statement to be included with the net income statement, and together the two will make a statement of total comprehensive income. Alternatively, businesses can have an OCI statement separate from a net income statement, but the two statements will have to appear consecutively within a financial report. The ASU does not affect the calculation of OCI. The ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The adoption of ASU 2011-05 did not have a material impact on the Company’s financial condition or results of operations.

FASB ASU 2011-04, “Fair Value Measurement (Topic 820) –Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”

This ASU amends the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. The ASU clarifies the application of existing fair value measurement requirements and changes the principles or requirements for measuring fair value or for disclosing information about fair value measurements. The ASU will require new disclosures for any transfers between Levels 1 and 2 of the fair value hierarchy, not just significant transfers, and further expands focus on Level 3 measurements, including quantitative information about the significant unobservable inputs used for all Level 3 measurements, a qualitative discussion about the sensitivity of recurring Level 3 measurements to changes in the unobservable inputs disclosed, and a description of the valuation processes. The ASU is effective for reporting periods beginning on or after December 15, 2011. The adoption of ASU 2011-04 did not have a material impact on the Company’s financial condition or results of operations.

FASB ASU 2011-03, “Transfer and Servicing (Topic 860) –Reconsideration of Effective Control of Repurchase Agreements”

This ASU improves the accounting for repurchase agreements and other agreements that entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The ASU removes from the assessment of effective

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control: (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation related to that criterion. Other criteria applicable to the assessment of effective control are not changed by the amendments in this ASU. The ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The adoption of ASU 2011-03 did not have a material impact on the Company’s financial condition or results of operations.

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, 2012 and 2011, all 523,076 options and warrants were excluded from the diluted earnings per share calculation because their effect was antidilutive. Earnings per share calculations have been adjusted to give retroactive effect to the 2-for-1 stock split approved by the Board of Directors in May 2011. The calculation of net income per common share for the three months ended March 31, 2012 and 2011 is as follows:

	2012			2011
BASIC AND DILUTED:
Net (loss) income	$	(1,515,000	)	$	86,000
Preferred stock dividends and discount accretion		(184,000	)		(181,000	)
Net loss available to common stockholders	$	(1,699,000	)	$	(95,000	)

Average common shares outstanding		7,422,164			7,400,440
Basic and diluted net loss per share	$	(0.23	)	$	(0.01	)

5. ACCOUNTING FOR STOCK BASED COMPENSATION PLANS

In November 2009, the Company approved the granting of 120,250 restricted stock awards (after adjustment for the 2-for-1 stock split approved by the Board of Directors in May 2011) with a fair market value of $2.00 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, 2012			December 31, 2011
	Shares	Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value

Unvested at beginning of year	111,694	$	2.00	116,288		$	2.00
Forfeited	—		—	(1,926	)		2.00
Awarded	—		—	—			—
Released	—		—	(2,668	)		2.00

Unvested at end of period	111,694	$	2.00	111,694		$	2.00

6. ASSETS MEASURED AT FAIR VALUE

In September 2006, the Financial Accounting Standards Board (“FASB”) issued 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

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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 March 31, 2012 and December 31, 2011 of each major category of assets measured on a recurring basis 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, 2012
Investment securities available-for-sale
Mutual funds – mortgage securities	$	711	$	711	$	—	$	—
Mutual funds – U.S. Government
securities		676		676		—		—
Equity securities		374		374		—		—
SBA securitized loan pools		4,636		—		4,636		—
Other debt securities		1,383		—		1,383		—
Mortgage-backed securities		19,885		—		19,885		—

Total investment securities available-for-sale	$	27,665	$	1,761	$	25,904	$	—

	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, 2011
Investment securities available-for-sale
Mutual funds – mortgage securities	$	711	$	711	$	—	$	—
Mutual funds – U.S. Government
securities		674		674		—		—
Equity securities		362		362		—		—
SBA securitized loan pools		4,921		—		4,921		—
Other debt securities		3,167		—		3,167		—
Mortgage-backed securities		13,821		—		13,821		—

Total investment securities available-for-sale	$	23,656	$	1,747	$	21,909	$	—

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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, 2012 and December 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, net of estimated selling costs, as determined by a third party appraiser. During the three months ended March 31, 2012, there were no transfers between levels.

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

March 31, 2012
Other real estate owned:
Construction & Land Development	$	15,670	$	0	$	0	$	15,670
1-4 Family Residential		6,441		0		0		6,441
Multi-Family Residential		0		0		0		0
Commercial Real Estate		9,629		0		0		9,629
Total	$	31,740	$	0	$	0	$	31,740

Impaired loans:
Construction & Land Development	$	19,687	$	0	$	0	$	19,687
1-4 Family Residential		12,873		0		0		12,873
Multi-Family Residential		0		0		0		0
Commercial Real Estate		22,951		0		0		22,951
Commercial Business		233		0		0		233
Consumer		5		0		0		5
Total	$	55,749	$	0	$	0	$	55,749

December 31, 2011
Other real estate owned:
Construction & Land Development	$	14,747	$	0	$	0	$	14,747
1-4 Family Residential		7,179		0		0		7,179
Multi-Family Residential		0		0		0		0
Commercial Real Estate		9,040		0		0		9,040
Total	$	30,966	$	0	$	0	$	30,966

Impaired loans:
Construction & Land Development	$	23,266	$	0	$	0	$	23,266
1-4 Family Residential		14,531		0		0		14,531
Multi-Family Residential		286		0		0		286
Commercial Real Estate		23,584		0		0		23,584
Commercial Business		661		0		0		661
Consumer		163		0		0		163
Total	$	62,491	$	0	$	0	$	62,491

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7. FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB ASC 825-10-50 “Disclosure About Fair Value of Financial Instruments” 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.

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.

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 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.

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The estimated fair values of financial instruments (in thousands) at March 31, 2012 are as follows:

							Fair Value Measurements at Reporting Date Using
							Quoted Prices
							In Active			Significant
							Markets for			Other			Significant
							Identical			Observable			Unobservable
	Carrying						Assets			Inputs			Inputs
	Value			Fair Value			(Level 1)			(Level 2)			(Level 3)
Financial assets:
Investment securities:
Available-for-sale		$	27,665		$	27,665		$	1,761		$	25,904		$	—
Held-to-maturity			7,427			7,448			—			7,448			—
Loans receivable			337,978			406,962			—			—			406,962
Restricted investment securities			4,297			4,297			—			4,297			—
Financial liabilities:
Deposits			350,129			329,576			—			—			329,576
Junior subordinated debentures			17,000			17,428			—			17,428			—
Advances from FHLB			63,500			63,571			—			63,571			—
Other borrowed funds			1,169			1,168			—			1,168			—

The estimated fair values of financial instruments (in thousands) at December 31, 2011 are as follows:

							Fair Value Measurements at Reporting Date Using
							Quoted Prices
							In Active			Significant
							Markets for			Other			Significant
							Identical			Observable			Unobservable
	Carrying						Assets			Inputs			Inputs
	Value			Fair Value			(Level 1)			(Level 2)			(Level 3)
Financial assets:
Investment securities:
Available-for-sale		$	23,656		$	23,656		$	1,747		$	21,909		$	—
Held-to-maturity			9,745			9,736			—			9,736			—
Loans receivable			330,262			401,098			—			—			401,098
Restricted investment securities			4,296			4,296			—			4,296			—
Financial liabilities:
Deposits			339,075			322,027			—			—			322,027
Junior subordinated debentures			17,000			14,711			—			14,711			—
Advances from FHLB			63,500			63,662			—			63,662			—
Other borrowed funds			1,169			1,168			—			1,168			—

Page 12

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, 2012 and December 31, 2011 are summarized in the following table (in thousands).

	2012
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-Sale:
Mutual funds - mortgage securities	$	747	$	5	$	41	$	711
Mutual funds - U.S. Government securities		686		—		10		676
Equity securities		226		148		—		374
SBA securitized loan pools		4,715		2		81		4,636
Other debt securities		1,413		2		32		1,383
Mortgage-backed securities		19,837		77		29		19,885
	$	27,624	$	234	$	193	$	27,665

Held-to-Maturity:
SBA securitized loan pools	$	1,829	$	—	$	21	$	1,808
Other debt securities		500		11		—		511
Mortgage-backed securities		4,348		50		19		4,379
U. S. Treasury securities and obligations		750		—		—		750
	$	7,427	$	61	$	40	$	7,448

	2011
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-Sale:
Mutual funds - mortgage securities	$	747	$	5	$	41	$	711
Mutual funds - U.S. Government securities		686		—		12		674
Equity securities		226		136		—		362
SBA securitized loan pools		4,947		9		35		4,921
Other debt securities		3,200		4		37		3,167
Mortgage-backed securities		13,817		49		45		13,821
	$	23,623	$	203	$	170	$	23,656

Held-to-Maturity:
SBA securitized loan pools	$	2,161	$	—		32	$	2,129
Other debt securities		1,500		12		—		1,512
Mortgage-backed securities		5,334		41		30		5,345
U. S. Treasury securities and obligations		750		—		—		750
	$	9,745	$	53	$	62	$	9,736

Page 13

As of March 31, 2012, 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 – US Govt securities		—		—		676		10		676		10
SBA securitized loan pools		2,131		72		1,487		9		3,618		81
Other debt securities		881		32		—		—		881		32
Mortgage-backed securities		6,650		26		130		3		6,780		29
Held-to-Maturity:
SBA securitized loan pools		354		2		1,454		19		1,808		21
Mortgage-backed securities		1,744		19		—		—		1,744		19
	$	11,760	$	151	$	3,882	$	82	$	15,642	$	233

As of December 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	$	—	$	—	$	135	$	41	$	135	$	41
Mutual funds – US Govt securities		—		—		674		12		674		12
SBA securitized loan pools		3,892		35		—		—		3,892		35
Other debt securities		913		37		—		—		913		37
Mortgage-backed securities		7,141		41		203		4		7,344		45
Held-to-Maturity:
SBA securitized loan pools		2,129		32		—		—		2,129		32
Mortgage-backed securities		1,799		30		—		—		1,799		30
	$	15,874	$	175	$	1,012	$	57	$	16,886	$	232

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 six segments, including construction and land development, 1-4 family residential, multi-family residential, 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 originates loans secured by raw land, which are generally 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

Page 14

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 offers fixed and adjustable rate 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 primarily 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. During 2011, the Bank began making loans under the Small Business Administration (“SBA”) Section 7(a) program, under which the SBA guarantees up to 75% of loans of up to $5 million for the purchase or expansion of small businesses. The Bank may sell the guaranteed portion of SBA loans into the secondary market and retain the unguaranteed portion in its portfolio.

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, while 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 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

Page 15

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 March 31, 2012 and December 31, 2011.

Credit Quality Indicators
As of March 31, 2012
	Construction
	& Land		1-4 Family		Multi-Family		Commercial		Commercial
	Development		Residential		Residential		Real Estate		Business		Consumer		Total

Credit risk profile by internally assigned grade:

Pass	$	37,967	$	84,699	$	4,365	$	127,816	$	5,987	$	2,648	$	263,482
Special mention		8,071		6,373		-		4,657		2,172		5		21,278
Substandard		25,126		12,078		-		15,310		541		163		53,218
Total	$	71,164	$	103,150	$	4,365	$	147,783	$	8,700	$	2,816	$	337,978

Credit risk profile based on payment activity:

Performing	$	51,804	$	90,680	$	4,365	$	141,482	$	8,598	$	2,653	$	299,582
Nonperforming		19,360		12,470		-		6,301		102		163		38,396
Total	$	71,164	$	103,150	$	4,365	$	147,783	$	8,700	$	2,816	$	337,978

Credit Quality Indicators
As of December 31, 2011
	Construction
	& Land		1-4 Family		Multi-Family		Commercial		Commercial
	Development		Residential		Residential		Real Estate		Business		Consumer		Total

Credit risk profile by internally assigned grade:

Pass	$	28,194	$	86,467	$	4,458	$	118,723	$	6,359	$	2,734	$	246,485
Special mention		7,462		11,331		-		7,455		804		6		27,058
Substandard		27,342		12,823		-		15,710		686		158		56,719
Total	$	62,998	$	110,621	$	4,458	$	141,438	$	7,849	$	2,898	$	330,262

Credit risk profile based on payment activity:

Performing	$	36,437	$	94,759	$	4,458	$	132,508	$	7,681	$	2,892	$	278,735
Nonperforming		26,561		15,862		-		8,930		168		6		51,527
Total	$	62,998	$	110,621	$	4,458	$	141,438	$	7,849	$	2,898	$	330,262

Page 16

Age Analysis of Past Due Loans Receivable
As of March 31, 2012
	Construction
	& Land		1-4 Family		Multi-Family		Commercial		Commercial
	Development		Residential		Residential		Real Estate		Business		Consumer		Total

30-59 Days Past Due	$	1,031	$	5,380	$	-	$	3,105	$	37	$	-	$	9,553
60-89 Days Past Due		1,288		1,178		-		188		48		158		2,860
Greater Than 90 Days Past Due		17,041		5,912		-		3,008		17		5		25,983
Total Past Due		19,360		12,470		-		6,301		102		163		38,396
Current		51,804		90,680		4,365		141,482		8,598		2,653		299,582
Total Loans Receivable	$	71,164	$	103,150	$	4,365	$	147,783	$	8,700	$	2,816	$	337,978

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

Age Analysis of Past Due Loans Receivable
As of December 31, 2011
	Construction
	& Land		1-4 Family		Multi-Family		Commercial		Commercial
	Development		Residential		Residential		Real Estate		Business		Consumer		Total

30-59 Days Past Due	$	630	$	4,003	$	-	$	585	$	7	$	-	$	5,225
60-89 Days Past Due		1,117		4,335		-		2,389		-		1		7,842
Greater Than 90 Days Past Due		24,814		7,524		-		5,956		161		5		38,460
Total Past Due		26,561		15,862		-		8,930		168		6		51,527
Current		36,437		94,759		4,458		132,508		7,681		2,892		278,735
Total Loans Receivable	$	62,998	$	110,621	$	4,458	$	141,438	$	7,849	$	2,898	$	330,262

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

Page 17

	Allowance for Loan Losses and Recorded Investment in Loans Receivable
	For the Three Months Ended March 31, 2012
	Construction						Multi-
	& Land			1-4 Family			Family			Commercial			Commercial
	Development			Residential			Residential			Real Estate			Business			Consumer			Unallocated			Total

Allowance for loan losses:

Beginning balance	$	4,234		$	2,323		$	14		$	4,243		$	636		$	169		$	793		$	12,412
Charge-offs		(953	)		(714	)		-			(489	)		(144	)		(2	)		-			(2,302	)
Recoveries		-			5			-			62			3			3			-			73
Provision		593			1,302			(1	)		686			494			(6	)		(118	)		2,950
Ending balance	$	3,874		$	2,916		$	13		$	4,502		$	989		$	164		$	675		$	13,133

Ending balance individually evaluated for impairment	$	1,213		$	1,936		$	-		$	620		$	284		$	158		$	-		$	4,211

Ending balance collectively evaluated for impairment	$	2,661		$	980		$	13		$	3,882		$	705		$	6		$	675		$	8,922

Loans receivable:

Ending balance	$	71,164		$	103,150		$	4,365		$	147,783		$	8,700		$	2,816		$	-		$	337,978

Ending balance individually evaluated for impairment	$	25,126		$	12,078		$	-		$	15,310		$	541		$	163		$	-		$	53,218

Ending balance collectively evaluated for impairment	$	46,038		$	91,072		$	4,365		$	132,473		$	8,159		$	2,653		$	-		$	284,760

Page 18

Allowance for Loan Losses and Recorded Investment in Loans Receivable
For the Three Months Ended March 31, 2011
	Construction						Multi-
	& Land			1-4 Family			Family			Commercial			Commercial
	Development			Residential			Residential			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	$	76,845		$	115,651		$	5,311		$	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	$	41,949		$	99,254		$	5,311		$	114,684		$	12,121		$	3,468		$	-	$	276,787

Loans Receivable on Nonaccrual Status
As of March 31, 2012
	Construction
	& Land	1-4 Family	Multi-Family	Commercial	Commercial
	Development	Residential	Residential	Real Estate	Business	Consumer	Total

Unpaid Principal Balance	$20,023	$7,837	$-	$5,873	$17	$5	$33,755

Loans Receivable on Nonaccrual Status
As of December 31, 2011
	Construction
	& Land	1-4 Family	Multi-Family	Commercial	Commercial
	Development	Residential	Residential	Real Estate	Business	Consumer	Total

Unpaid Principal Balance	$23,670	$8,023	$-	$5,956	$161	$5	$37,815

Page 19

Troubled Debt Restructurings
For the Three Months Ended March 31, 2012
	Construction
	& Land		1-4 Family		Multi-Family		Commercial		Commercial
	Development		Residential		Residential		Real Estate		Business		Consumer		Total

Troubled Debt Restructurings:

Number of Loans		1		5		-		3		-		-		9

Pre-Modification Principal Balance	$	267	$	1,629	$	-	$	1,457	$	-	$	-	$	3,353

Post-Modification Principal Balance	$	267	$	1,588	$	-	$	1,455	$	-	$	-	$	3,310

Troubled Debt Restructurings That Subsequently Defaulted:

Number of Loans		1		2		-		2		-		-		5

Current Principal Balance	$	1,814	$	1,012	$	-	$	2,864	$	-	$	-	$	5,690

Troubled Debt Restructurings
For the Three Months Ended March 31, 2011
	Construction
	& Land		1-4 Family		Multi-Family		Commercial		Commercial
	Development		Residential		Residential		Real Estate		Business		Consumer		Total

Troubled Debt Restructurings:

Number of Loans		-		8		-		-		-		-		8

Pre-Modification Principal Balance	$	-	$	1,672	$	-	$	-	$	-	$	-	$	1,672

Post-Modification Principal Balance	$	-	$	1,672	$	-	$	-	$	-	$	-	$	1,672

Troubled Debt Restructurings That Subsequently Defaulted:

Number of Loans		-		1		-		2		-		-		3

Current Principal Balance	$	-	$	673	$	-	$	1,339	$	-	$	-	$	2,012

Page 20

Impaired Loans
As of and For the Three Months Ended March 31, 2012
	Construction
	& Land		1-4 Family		Multi-Family		Commercial		Commercial
	Development		Residential		Residential		Real Estate		Business		Consumer		Total

Loans With a Valuation Allowance:

Unpaid Principal Balance	$	3,784	$	2,571	$	-	$	1,187	$	517	$	158	$	8,217

Related Allowance for Loan Losses	$	603	$	591	$	-	$	591	$	284	$	158	$	2,227

Average Recorded Investment	$	1,261	$	214	$	-	$	297	$	258	$	158	$	2,188

Interest Income Recognized	$	-	$	20	$	-	$	6	$	5	$	-	$	31

Loans Without a Valuation Allowance:

Unpaid Principal Balance	$	16,506	$	10,893	$	-	$	22,355	$	-	$	5	$	49,759

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

Average Recorded Investment	$	1,032	$	214	$	-	$	1,597	$	-	$	5	$	2,848

Interest Income Recognized	$	1,220	$	117	$	-	$	289	$	-	$	-	$	1,626

Totals:

Unpaid Principal Balance	$	20,290	$	13,464	$	-	$	23,542	$	517	$	163	$	57,976

Related Allowance for Loan Losses	$	603	$	591	$	-	$	591	$	284	$	158	$	2,227

Average Recorded Investment	$	2,293	$	428	$	-	$	1,894	$	258	$	163	$	5,036

Interest Income Recognized	$	1,220	$	137	$	-	$	295	$	5	$	-	$	1,657

Page 21

Impaired Loans
As of and For the Year Ended December 31, 2011
	Construction
	& Land		1-4 Family		Multi-Family		Commercial		Commercial
	Development		Residential		Residential		Real Estate		Business		Consumer		Total

Loans With a Valuation Allowance:

Unpaid Principal Balance	$	6,214	$	3,658	$	-	$	1,013	$	-	$	-	$	10,885

Related Allowance for Loan Losses	$	405	$	560	$	-	$	130	$	-	$	-	$	1,095

Average Recorded Investment	$	4,986	$	2,963	$	-	$	7,168	$	260	$	80	$	15,457

Interest Income Recognized	$	116	$	179	$	-	$	50	$	-	$	-	$	345

Loans Without a Valuation Allowance:

Unpaid Principal Balance	$	17,457	$	11,433	$	286	$	22,701	$	661	$	163	$	52,701

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

Average Recorded Investment	$	19,828	$	11,627	$	288	$	19,061	$	330	$	81	$	51,215

Interest Income Recognized	$	293	$	551	$	24	$	1,112	$	39	$	6	$	2,025

Totals:

Unpaid Principal Balance	$	23,671	$	15,091	$	286	$	23,714	$	661	$	163	$	63,586

Related Allowance for Loan Losses	$	405	$	560	$	-	$	130	$	-	$	-	$	1,095

Average Recorded Investment	$	24,814	$	14,590	$	288	$	26,229	$	590	$	161	$	66,672

Interest Income Recognized	$	409	$	730	$	24	$	1,162	$	39	$	6	$	2,370

Page 22

	Impaired Loans
	As of and For the Three Months Ended March 31, 2011


	Construction
	& Land		1-4 Family		Multi-Family		Commercial		Commercial
	Development		Residential		Residential		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 23

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 523,076 shares (after adjustment for the 2-for-1 stock split approved by the Board of Directors in May 2011) 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.

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.

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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.

On March 30, 2012, the Company completed the sale of 142,196 shares of Mandatory Convertible Cumulative Junior Preferred Stock, Series B (the “Series B Preferred Stock”) at $17.20 per share in cash for aggregate consideration of approximately $2.5 million, with offering costs of $35,000, and net proceeds of approximately $2.4 million. Upon shareholder approval of an amendment to the Company’s Articles of Incorporation to increase the authorized number of shares of common stock, each share of Series B Preferred Stock will become convertible into ten shares of common stock.

The Series B Preferred Stock will pay dividends, if, as and when authorized and declared by the Board of Directors, at a rate of 5% per annum, provided that if stockholders do not approve the amendment to increase the number of authorized shares of common stock within one year of the issue date, the dividend rate will increase to 9%. No dividends may be paid on the Series B Preferred Stock until all dividends have been paid on our Series A Preferred Stock. Unpaid dividends will accumulate.

In the event of any liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, holders of the Series B Preferred Stock shall be entitled to receive for each share of the Series B 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 and after payment of liquidation amounts due the holders of Series A Preferred Stock, 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 B Preferred Stock as to such distribution, payment in full in an amount equal to the $17.20 liquidation preference amount per share. To the extent the assets or proceeds available for distribution to stockholders are not sufficient to fully pay the liquidation payments owing to the holders of the Series B Preferred Stock and the holders of any other class or series of our stock ranking equally with the Series B Preferred Stock, the holders of the Series B Preferred Stock and such other stock will share ratably in the distribution.

Each share of the Series B Preferred Stock is convertible at the option of the holder into ten whole shares of common stock plus such number of whole shares that would be obtained by dividing the dollar amount of accrued but unpaid dividends by the conversion price of $1.72. The minimum conversion price will be adjusted proportionately for stock dividends, stock splits and other corporate actions. No fractional shares of common stock will be issued on the conversion of the Series B Preferred Stock. In lieu of fractional shares, holders receive the cash value of such fractional share based on the closing price of the common stock on the date preceding the conversion. Holders may exercise conversion rights by surrendering the

Page 25

certificates representing the shares of Series B Preferred Stock to be converted to the Company with a letter of transmittal specifying the number of shares of Series B Preferred Stock that the holder wishes to convert and the names and addresses in which the shares of common stock are to be issued.

On the earlier of five years from the date of issue or the effective date of a fundamental change in the Company, each share of the Series B Preferred Stock will be automatically converted into ten shares of common stock plus such number of whole shares of common stock that would be obtained by dividing the dollar amount of accrued but unpaid dividends by $1.72. In lieu of issuing fractional shares, the Company will pay holders cash in an amount equal to $1.72 per share.

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, 2012 and December 31, 2011

The Company’s assets increased by $13.2 million, or 2.9%, to $476.9 million at March 31, 2012 from $463.7 million at December 31, 2011, primarily as a result of increases in cash and cash equivalents, investment securities available-for-sale, and loans, partially offset by declines in investment securities held-to-maturity and assets held for sale. The increase in assets was funded primarily by an increase in deposits and the sale of Series B Preferred Stock.

Cash and cash equivalents increased by $8.8 million, or 25.6%, to $43.2 million at March 31, 2012 from $34.4 million at December 31, 2011 due to increases in deposits and the sale of preferred stock, and declines in investment securities held-to-maturity and assets held for sale, partially offset by increases in investment securities available-for-sale and loans. Investment securities available-for-sale increased by $4.0 million, or 17.0%, to $27.7 million at March 31, 2012 from $23.7 million at December 31, 2011 primarily due to the investment of excess funds obtained during the quarter. Investment securities held-to-maturity decreased by $2.3 million, or 23.8%, to $7.4 million at March 31, 2012 from $9.7 million at December 31, 2011 primarily due to proceeds from principal paydowns and called securities. The cash obtained was used to fund the purchase of investment securities available-for-sale and loans receivable.

The gross loans receivable portfolio increased by $7.7 million, or 2.3%, to $338.0 million at March 31, 2012 from $330.3 million at December 31, 2011, primarily as a result of increases in construction and land development loans (up $8.2 million, or 13.0%), commercial real estate loans (up $6.3 million, or 4.5%), and commercial business loans (up $851,000, or 10.8%), partially offset by a decline in one to four family residential and home equity loans (down $7.5 million, or 6.8%). The allowance for loan losses increased by $721,000, or 5.8%, to $13.1 million at March 31, 2012 from $12.4 million at December 31, 2011 (see “analysis of allowance for loan losses” below).

Other real estate owned increased by $774,000, or 2.5%, to $31.7 million at March 31, 2012 from $31.0 million at December 31, 2011 due to the acquisition of additional properties in satisfaction of loans receivable. Assets held for sale declined by $5.9 million to zero at March 31, 2012 from $5.9 million at December 31, 2011 due to the settlement on premises held for sale and our investment in Elkton Senior Apartments LLC. Income taxes receivable increased by $990,000, or 18.8%, to $6.3 million at March 31, 2012 from $5.3 million at December 31, 2011 primarily due to the income tax benefit recorded during the period.

The Company’s liabilities increased $12.5 million, or 2.9%, to $443.8 million at March 31, 2012 from $431.4 million at December 31, 2011. The increase in deposits of $11.1 million, or 3.3%, to $350.1 million at March 31, 2012 from $339.1 million at December 31, 2011, was mainly due to increases in certificates of deposit (up $2.9 million, or 1.3%) and regular checking accounts (up $2.0 million, or 8.5%), money market accounts (up $1.9 million, or 14.4%), passbook savings accounts (up $1.7 million, or 15.4%), statement savings accounts (up $1.0 million, or 9.7%), NOW accounts (up $869,000, or 2.9%), and IRA certificates of deposit (up $610,000, or 2.5%). Other liabilities increased $1.4 million, or 13.4%, to $12.0 million at March

Page 26

31, 2012 from $10.6 million at December 31, 2011 primarily due to a $800,000 accrual for investments traded but not yet settled, as well as increases in accrued FDIC premium, accrued interest payable on junior subordinated debentures, and preferred stock dividend payable.

The Company’s stockholders’ equity increased by $756,000, or 2.3%, to $33.1 million at March 31, 2012 from $32.3 million December 31, 2011. This increase is primarily the result of $2.4 million in net proceeds from the issuance of Series B Preferred Stock, partially offset by the net loss of $1.5 million and $145,000 in preferred stock cash dividends accrued.

Comparison of Results of Operations for the Three Months Ended March 31, 2012 and 2011

Net loss for the three-month period ended March 31, 2012 was $1.5 million, a decrease of $1.6 million from net income of $86,000 for the same period in 2011. This decrease was primarily the result of a decrease in net interest income and an increase in the provision for loan losses, partially offset by an increase in noninterest income and a decrease in income tax expense. Net loss available to common stockholders for the three months ended March 31, 2012 was $1.7 million as compared to $95,000 for the three months ended March 31, 2011. Net loss available to common stockholders for the 2012 period reflects $184,000 in dividends and discount accretion on the Series A Preferred Stock compared to $181,000 in dividends and discount accretion during the 2011 period. Basic and diluted loss per common share were both $0.23 for the three months ended March 31, 2012 as compared to basic and diluted loss per common share of $0.01 for the three-month period ended March 31, 2011. Earnings per share calculations 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 -1.30% and -18.84%, respectively, for the three-month period ended March 31, 2012. This compares to an annualized return on average assets and annualized return on average equity of 0.07% and 0.92%, respectively, for the same period in 2011.

Net interest income, the Company’s primary source of income, decreased 27.4%, or $1.0 million, to $2.7 million for the three months ended March 31, 2012, from $3.7 million over the same period in 2011. The weighted average yield on interest earning assets decreased to 4.80% for the three months ended March 31, 2012 from 5.84% for the three months ended March 31, 2011. The weighted average rate paid on interest bearing liabilities decreased to 1.66% for the three months ended March 31, 2012 from 2.00% for the three months ended March 31, 2011. The net interest spread decreased to 3.14% from 3.84% and the net interest margin decreased to 2.91% from 3.69% for the three months ended March 31, 2012 and 2011.

Interest and fees on loans decreased by $1.5 million, or 25.5%, to $4.3 million for the three months ended March 31, 2012 from $5.8 million for the three months ended March 31, 2011. 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 $39.2 million, or 10.9%, to $321.6 million for the three months ended March 31, 2012 from $360.8 million for the three months ended March 31, 2011. The weighted-average yield decreased to 5.40% for the three months ended March 31, 2012 from 6.46% for the three months ended March 31, 2011 due to a general decrease in market rates.

Interest on investment securities increased $43,000, or 75.4%, to $100,000 for the three months ended March 31, 2012 from $57,000 for the three months ended March 31, 2011. The average balance outstanding increased $21.2 million, or 51.8%, to $33.5 million for the three months ended March 31, 2012 from $12.3 million for the three months ended March 31, 2011. The weighted-average yield decreased to 1.20% for the three months ended March 31, 2012 from 1.86% for the three months ended March 31, 2011.

Interest on deposits decreased by $292,000, or 23.2%, to $969,000 for the three months ended March 31, 2012 from $1.3 million for the three months ended March 31, 2011 due to decreases in the weighted-average rate and the average balance outstanding. The weighted-average rate paid on deposits decreased to 1.13% for the three months ended March 31, 2012 from 1.42% for the three months ended March 31, 2011, reflecting lower market rates. The average balance outstanding decreased $13.4 million, or 3.8%, to $341.9 million for the three months ended March 31, 2012 from $355.3 million for the same period in 2011.

Interest on junior subordinated debentures decreased by $135,000, or 45.5%, to $162,000 for the three months ended March 31, 2012 from $297,000 for the three months ended March 31, 2011 due to a decline in the weighted-average rate. The interest rate on $10.0 million of the junior subordinated debentures began to adjust quarterly on April 1, 2011 to 3-month LIBOR + 1.38%. The interest rate on the remaining $7.0 million began to adjust quarterly on March 7, 2012 to 3-month LIBOR + 1.68%. The weighted-average rate paid decreased to 3.81% for the three months ended March 31, 2012 from 6.99% for the three months ended March 31, 2011, while the average balance outstanding remained level at $17.0 million for both periods.

The provision for loan losses increased by $2.5 million to $3.0 million for the three months ended March 31, 2012 from $500,000 for the same period in 2011 (see “analysis of allowance for loan losses” below).

Page 27

Noninterest income increased 234.2%, or $850,000, to $1.2 million for the three months ended March 31, 2012, from $363,000 for the same period in 2011 primarily due to an increase in gain on sale of loans. Gain on sale of loans increased by $999,000 to $1.1 million for the three months ended March 31, 2012 from $57,000 for the same period in 2011 due to the Bank’s new Small Business Administration loan program, the guaranteed portion of which are sold in the secondary market. There were no gains on investments for the three months ended March 31, 2012, as compared to a $50,000 loss on investments in the first quarter 2011. In 2011, 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. These increases were partially offset by a $205,000 increase in the loss on sale of other real estate owned to $210,000 for the three months ended March 31, 2012 from $5,000 for the three months ended March 31, 2011.

Noninterest expense increased 0.7%, or $23,000, to $3.5 million for the three months ended March 31, 2012, from $3.5 million over the same period in 2011. Salaries and employee benefits increased by $41,000, or 3.2%, to $1.3 million for the three months ended March 31, 2012 from $1.3 million for the same period in 2011 primarily due to an increase in employee compensation and supplemental executive retirement plan expense. Occupancy expense declined by $40,000, or 17.9%, to $183,000 for the three months ended March 31, 2012 from $223,000 for the three months ended March 31, 2012 due to decreases in office building repairs and maintenance and utilities expense. Equipment and data processing expense increased by $24,000, or 8.1%, to $322,000 for the three months ended March 31, 2012 from $298,000 for the three months ended March 31, 2011 primarily due to increases in data processing expense and depreciation expense on software. FDIC deposit insurance premiums increased $95,000, or 49.5%, to $287,000 for the three months ended March 31, 2012 from $192,000 for the three months ended March 31, 2011. Other real estate owned expense and valuations decreased by $261,000 to $435,000 for the quarter ended March 31, 2012 from $696,000 for the three months ended March 31, 2011 due to decreased rate of decline in real estate values in our market area. Professional fees increased by $343,000, or 205.4%, to $510,000 for the three months ended March 31, 2012 from $167,000 for the same period in 2011 primarily due to legal fees relating to problem asset resolution. Loan collection expense decreased $229,000, or 72.7%, to $86,000 for the three months ended March 31, 2012 from $315,000 during the three months ended March 31, 2011. Other expenses increased $50,000, or 16.7%, to $349,000 for the three months ended March 31, 2012 from $299,000 during the same period in 2011 primarily due to an increase in insurance expense.

Income tax benefit for the three-month period ended March 31, 2012 was $1.0 million as compared to income tax expense of $41,000 for the first quarter of 2011, which equates to effective tax rates of (39.9)% and 32.3% 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, 2012						December 31, 2011
	Amount			Percent			Amount			Percent
Type of Loan
Real estate loans:
Construction and land development	$	71,164			21.06	%	$	62,998			19.08	%
1-4 family residential and home equity		103,150			30.52			110,621			33.49
Multi-family residential		4,365			1.29			4,458			1.35
Commercial		147,783			43.73			141,438			42.83
Total real estate loans		326,462			96.60			319,515			96.75
Commercial business loans		8,700			2.57			7,849			2.37
Consumer loans		2,816			0.83			2,898			0.88
Gross loans		337,978			100.00	%		330,262			100.00	%
Less: allowance for loan losses		(13,133	)					(12,412	)
Net loans	$	324,845					$	317,850

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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)	2012			2011

Nonaccrual loans	$	33,755		$	37,815
Loans 90 days or more past due and still accruing		0			0
Restructured loans		24,221			25,771
Total nonperforming loans		57,976			63,586
Other real estate owned, net		31,740			30,966
Total nonperforming assets	$	89,716		$	94,552
Nonperforming loans to total loans		17.16	%		19.25	%
Nonperforming assets to total assets		18.81			20.39
Allowance for loan losses to non-performing loans		22.64			19.52

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.

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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, 2012 was $13.1 million, (3.89% of total loans), an increase of $721,000 from the $12.4 million allowance (3.76% of total loans) at December 31, 2011. Annualized net charge-offs for the first three months of 2012 were 2.77% of average loans, while net charge-offs were 2.81% of average loans for the year 2011. The provision for loan losses required for the first three months of 2012 and 2011 was $3.0 million and $500,000, respectively.

A summary of activity in the allowance is shown below.

	Three Months Ended			Year Ended
(Dollars in thousands)	March 31, 2012			December 31, 2011

Balance of allowance, beginning of period	$	12,412		$	15,077
Loan charge-offs:
Real estate		(2,156	)		(9,439	)
Commercial loans		(144	)		(982	)
Consumer		(2	)		(40	)
Total charge-offs		(2,302	)		(10,461	)
Loan recoveries:
Real estate		67			825
Commercial loans		3			0
Consumer		3			13
Total recoveries		73			838
Net charge-offs		(2,229	)		(9,623	)
Provision for loan losses		2,950			6,958
Balance of allowance, end of period	$	13,133		$	12,412

Net charge-offs to average loans		2.77	%		2.81	%
Allowance to total loans		3.89			3.76
Allowance to non-performing loans		22.64			19.52

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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, 2012					December 31, 2011
	Amount		Percent			Amount		Percent

Regular checking	$	25,195		7.19	%	$	23,224		6.85	%
NOW accounts		31,057		8.87			30,188		8.90
Passbook savings		13,012		3.72			11,275		3.33
Statement savings		11,580		3.31			10,560		3.11
Money market		15,120		4.32			13,220		3.90
Holiday club		199		0.06			76		0.02
Certificates of deposit		222,331		63.50			219,411		64.71
IRA certificates of deposit		24,679		7.05			24,069		7.10
Money market certificates		6,956		1.98			7,052		2.08
Total deposits	$	350,129		100.00	%	$	339,075		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. The following table sets forth applicable capital ratios of the Bank as of March 31, 2012 and December 31, 2011.

							Regulatory Minimum
	2012			2011			Well			Adequately
	Actual			Actual			Capitalized			Capitalized


d Total risk-based capital ratio		13.14	%		13.93	%		10.00	%		8.00	%

Tier 1 risk-based capital ratio		8.94	%		9.12	%		6.00	%		4.00	%

Tier 1 leverage ratio		7.08	%		7.04	%		5.00	%		4.00	%

As of March 31, 2012 and December 31, 2011, 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, 2012, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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 2012. As of March 31, 2012, unpaid cumulative dividends on the Fixed Rate Cumulative Perpetual Preferred Stock, Series A were $1.3 million.

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information -

(a) The Registrant will hold its annual meeting of stockholders on August 1, 2012 and expects to mail its proxy materials mid-June. The deadline for submission of shareholder proposals will be May 16, 2012.

(b) 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 Current Report on Form 8-K filed November 18, 2011
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.
3.4	Articles Supplementary for Mandatory Convertible Cumulative Junior Preferred Stock, Series B	Exhibit 3.1 to Current Report on Form 8-K filed April 2, 2012
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,	Not filed in accordance with the provisions of Item 601(b)(4)(iii) of Regulation S-K.

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Exhibit No.	Description	Incorporated by Reference to:
	Inc., as depositor, Wilmington Trust Company, as property and Delaware Trustee, and Charles F. Sposato, Mary B. Halsey and Jennifer Carr, as administrative trustees.	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.
4.10	Form of Certificate for Mandatory Convertible Cumulative Junior Preferred Stock, Series B	Exhibit 4.1 to Current Report on Form 8-K filed April 2, 2012
31	Rule 13a-14(a)/15d-14(a) Certifications
32	18 U.S.C. Section 1350 Certifications
100	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

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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 15, 2012	By:	/s/ Mary B. Halsey
		Mary B. Halsey President and Chief Executive Officer (Duly Authorized Officer
Date: May 15, 2012	By:	/s/ Robert Lee Whitehead
		Robert Lee Whitehead Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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