CECIL BANCORP INC - Quarter Report: 2013 March (Form 10-Q)

f10q_033113-0424.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, 2013.

	o	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.

(Name of registrant as specified in its charter)

Maryland	52-1883546
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

127 North Street, P.O. Box 568 Elkton, Maryland	21921
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number, including area code: (410) 398-1650

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 [ ] Accelerated Filer [ ] Non-Accelerated Filer [ ] 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 April 30, 2013, there were 7,425,869 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 -
March 31, 2013 and December 31, 2012		3

Consolidated Statements of Operations and Comprehensive Loss
for the Three Months Ended March 31, 2013 and 2012		4-5

Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2013 and 2012		6

Notes to Consolidated Financial Statements		7-24


ITEM 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations		25-33

ITEM 3. Qantitative and Qualitative Disclosures About Market Risk		34

ITEM 4. Controls and Procedures		34

PART II. OTHER INFORMATION		34-36

SIGNATURES		37

CERTIFICATIONS		38-43

Page 2

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,
	2013			2012
	(unaudited)
ASSETS
Cash and due from banks	$	1,455		$	2,012
Interest bearing deposits with banks		46,477			39,188
Federal funds sold		299			606
Cash and cash equivalents		48,231			41,806
Investment securities:
Securities available-for-sale at fair value		36,022			33,504
Securities held-to-maturity (fair value of $3,246
in 2013 and $3,927 in 2012)		3,213			3,887
Restricted investment securities – at cost		3,977			4,204
Loans held for sale		39,086			-
Loans receivable		258,626			306,751
Less: Allowance for loan losses		(9,040	)		(10,297	)
Net loans receivable		249,586			296,454
Other real estate owned		30,098			33,871
Premises and equipment, net		8,612			9,679
Premises and equipment held for sale, net		986			-
Accrued interest receivable		1,394			1,323
Mortgage servicing rights		426			441
Bank owned life insurance		8,505			8,465
Income taxes receivable		3,770			3,770
Other assets		1,773			2,417
TOTAL ASSETS	$	435,679		$	439,821
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits	$	296,376		$	341,219
Deposits held for sale		41,760			-
Other liabilities		14,354			12,863
Junior subordinated debentures		17,000			17,000
Advances from Federal Home Loan Bank of Atlanta		53,500			53,500
Other borrowed funds		-			1,088
Total liabilities		422,990			425,670
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 2013 and 2012		11,398			11,356
Series B issued and outstanding 164,450 shares, liquidation
preference $17.20 per share, in 2013 and 164,575 in 2012		2,794			2,796
Common stock, $.01 par value; authorized 100,000,000
shares, issued and outstanding 7,425,869 shares in
2013 and 7,424,572 in 2012		75			75
Additional paid in capital		12,302			12,300
Accumulated deficit		(13,547	)		(12,556	)
Accumulated other comprehensive (loss) income		(333	)		180
Total stockholders’ equity		12,689			14,151
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	435,679		$	439,821

See accompanying notes to consolidated financial statements.

Page 3

CECIL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(dollars in thousands, except per share data)


	2013			2012

INTEREST INCOME:
Interest and fees on loans	$	4,174		$	4,339
Interest on investment securities		125			100
Dividends on FHLB and FRB stock		34			21
Other interest-earning assets		23			14

Total interest income		4,356			4,474

INTEREST EXPENSE:
Interest expense on deposits		844			969
Interest expense on junior subordinated debentures		88			162
Interest expense on advances from FHLB		482			613
Interest expense on other borrowed funds		-			15

Total interest expense		1,414			1,759

NET INTEREST INCOME		2,942			2,715

PROVISION FOR LOAN LOSSES		700			2,950

NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES		2,242			(235	)

NONINTEREST INCOME:
Deposit account fees		123			115
ATM fees		108			115
Gain on sale of loans		38			1,056
Loss on sale of other real estate owned		(30	)		(210	)
Gain on sale of investments		375			-
Income from bank owned life insurance		40			44
Othr		38			93

Total noninterest income		692			1,213

NONINTEREST EXPENSE:
Salaries and employee benefits		1,432			1,325
Occupancy expense		251			183
Equipment and data processing expense		339			322
FDIC deposit insurance premium		236			287
Other real estate owned expense and valuation adjustments		530			435
Professional fees		347			510
Loan collection expense		204			86
Other		365			349

Total noninterest expense		3,704			3,497

NET LOSS BEFORE INCOME TAXES		(770	)		(2,519	)
INCOME TAX BENEFIT		-			(1,004	)
NET LOSS (CARRIED FORWARD)	$	(770	)	$	(1,515	)

Page 4

CECIL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(dollars in thousands, except per share data)

	2013			2012

NET LOSS (BROUGHT FORWARD)	$	(770	)	$	(1,515	)

OTHER COMPREHENSIVE INCOME
Unrealized (losses) gains on
investment securities,
net of taxes of $0 and $3		(513	)		5

TOTAL COMPREHENSIVE LOSS	$	(1,283	)	$	(1,510	)


NET LOSS	$	(770	)	$	(1,515	)

PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION		(221	)		(184	)

NET LOSS AVAILABLE TO COMMON STOCKHOLDERS	$	(991	)	$	(1,699	)

Loss per common share - basic	$	(0.13	)	$	(0.23	)

Loss per common share - diluted	$	(0.13	)	$	(0.23	)

Dividends declared per common share	$	0.00		$	0.00

See accompanying notes to consolidated financial statements.

Page 5

CECIL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(dollars in thousands)

	2013			2012

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(770	)	$	(1,515	)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization		311			340
Provision for loan losses		700			2,950
Gain on sale of loans		(38	)		(1,056	)
Loss on sale of other real estate owned		30			210
Gain on sale of investments		(375	)		-
Loss on premises and equipment		-			6
Gain on assets held for sale		-			(18	)
Increase in cash surrender value of bank owned life insurance		(40	)		(44	)
Other real estate owned valuation		218			259
Excess servicing rights		(18	)		(30	)
Origination of loans held for sale		(1,626	)		(14,135	)
Proceeds from sales of loans held for sale		1,648			15,163
Net change in:
Accrued interest receivable and other assets		656			(825	)
Other liabilities		270			429
Net cash provided by operating activities		966			1,734

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale		(10,015	)		(6,780	)
Purchases of investment securities held-to-maturity		(250	)		(250	)
Proceeds from sales, maturities, calls and principal payments of
investment securities available-for-sale		8,257			3,506
Proceeds from maturities, calls and principal payments of
investment securities held-to-maturity		907			2,502
Net redemption (purchase) of restricted investment securities		226			(1	)
Net decrease (increase) in loans		6,694			(11,778	)
Proceeds from sale of other real estate owned		3,828			567
Proceeds from sale of premises and equipment		9			25
Purchases of premises and equipment		(45	)		(79	)
Proceeds from sale of assets held for sale		-			5,911
Net cash provided by (used in) investing activities		9,611			(6,377	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits		(3,083	)		11,055
Net decrease in other borrowed funds		(1,069	)		-
Proceeds from issuance of preferred stock		-			2,411
Net cash (used in) provided by financing activities		(4,152	)		13,466

INCREASE IN CASH AND CASH EQUIVALENTS		6,425			8,823
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		41,806			34,411
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	48,231		$	43,234

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest	$	1,328		$	1,578
Transfer from loans to other real estate owned	$	404		$	1,860
Transfer from loans to loans held for sale	$	39,086		$	-

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, 2013 AND 2012

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, 2013 and the results of its operations and comprehensive loss and cash flows for the three months ended March 31, 2013 and 2012. 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, 2012. The results of operations for the three months ended March 31, 2013 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. GOING CONCERN CONSIDERATION

Due to the elevated level of nonperforming assets and recurring operating losses, there is substantial doubt regarding our ability to continue as a going concern. Management is taking steps to improve our financial condition. The financial statements and the accompanying footnotes have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and does not include any adjustment to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of any extraordinary regulatory action, which could affect our ability to continue as a going concern.

4. BRANCH SALE

On March 28, 2013, the Bank entered into a definitive agreement to sell its Aberdeen, Maryland branch office to Howard Bank (“Howard”), Ellicott City, Maryland. As part of the transaction, subject to regulatory approval and customary closing conditions, Howard will acquire approximately $40.0 million in loans from Cecil Bank at their unpaid principal balance. At March 31, 2013, the pool of loans selected for sale had an unpaid principal balance of approximately $39.1 million. Under the agreement, Howard will pay a 5.0% premium on the balance of non-interest bearing deposits and 4.0% on all other transaction accounts assumed. Certificates of deposit will be assumed at the current balance on the closing date, with no premium or discount applied. At March 31, 2013, the deposits at the Aberdeen branch office totaled approximately $41.8 million. Howard will also purchase the branch premises and selected equipment at their book value, which totaled approximately $986,000 at March 31, 2013. The assets and liabilities held for sale are carried at the lower of cost or market on the consolidated balance sheet. The agreement requires a minimum of $38.0 million in loans and $37.9 million in deposits at closing.

Page 7

The following table shows the composition of the loans (in thousands) contemplated to be sold as part of the agreement. These loans are classified as loans held for sale on the consolidated balance sheet.

	March 31, 2013
Real estate loans:
Construction and land development	$	1,231
1-4 family residential and home equity		5,424
Multi-family residential		637
Commercial		30,263
Total real estate loans		37,555
Commercial business loans		1,531
Total loans held for sale	$	39,086

The following table shows the composition of the premises and equipment (in thousands) contemplated to be sold as part of the agreement. These balances are classified as premises and equipment held for sale on the consolidated balance sheet.

	March 31, 2013
Land	$	190
Building and improvements		943
Furniture, fixtures and equipment		101
		1,234
Less: accumulated depreciation		248
Total premises and equipment held for sale	$	986

The following table shows the composition of the deposits (in thousands) contemplated to be sold as part of the agreement. These deposits are classified as deposits held for sale on the consolidated balance sheet.

	March 31, 2013
Regular checking	$	1,605
NOW accounts		1,916
Passbook savings		3
Statement savings		183
Money market		2,480
Holiday club		1
Certificates of deposit		28,704
IRA certificates of deposit		4,635
Money market certificates		2,233
Total deposits held for sale	$	41,760

5. RECENT ACCOUNTING PRONOUNCEMENTS

FASB ASU 2013-02, “Comprehensive Income – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”

The objective of this ASU, issued in February 2013, is to improve the transparency of reporting reclassifications out of accumulated other comprehensive income (“OCI”) by requiring entities to present in one place information about significant amounts reclassifies and, in some cases, to provide cross references to related footnote disclosures. The amendments do not change the current requirements for reporting net income or OCI, nor do they require new information to be disclosed. The amendments were applied prospectively and were effective for public entities in both interim and annual reporting periods beginning after December 15, 2012.

Page 8

6. EARNINGS PER SHARE

Basic earnings per common share are computed by dividing net income (loss) 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, 2013 and 2012, all outstanding options and warrants were excluded from the diluted earnings per share calculation because their effect was antidilutive. The calculation of net loss per common share for the three months ended March 31, 2013 and 2012 is as follows:

	2013			2012
BASIC AND DILUTED:
Net loss	$	(770,000	)	$	(1,515,000	)
Preferred stock dividends and discount accretion		(221,000	)		(184,000	)
Net loss available to common stockholders	$	(991,000	)	$	(1,699,000	)

Average common shares outstanding		7,425,855			7,422,164
Basic and diluted net loss per share	$	(0.13	)	$	(0.23	)

7. ACCOUNTING FOR STOCK BASED COMPENSATION PLANS

In November 2009, the Company approved the granting of 120,250 restricted stock awards with a fair market value of $2.00 per share. The awards vest over a period of five years, with 2,408 shares vesting in November 2013 and 2,412 shares vesting in November 2014. The vesting of the remaining 103,686 shares is restricted due to the Company’s participation in the Department of the Treasury’s Troubled Asset Relief Program Capital Purchase Program. A summary of the Company’s activity and related information for the periods indicated is as follows:

	Three Months Ended			Year Ended
	March 31, 2013			December 31, 2012
	Shares	Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value

Unvested at beginning of year	108,506	$	2.00	111,694		$	2.00
Forfeited	—		—	(780	)		2.00
Awarded	—		—	—			—
Released	—		—	(2,408	)		2.00

Unvested at end of period	108,506	$	2.00	108,506		$	2.00

8. 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 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, 2013 and December 31, 2012 of each major category of assets measured on a recurring

Page 9

basis at fair value on the consolidated balance sheets, which consists of investment securities available-for-sale and loans held 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, 2013
Loans held for sale	$	39,086	$	39,086	$	—	$	—
Investment securities available-for-sale
Mutual funds – mortgage securities	$	705	$	705	$	—	$	—
Mutual funds – U.S. Government
securities		672		672		—		—
SBA securitized loan pools		4,161		—		4,161		—
Other debt securities		696		—		696		—
Residential mortgage-backed securities		29,788		—		29,788		—
Total investment securities available-for-sale	$	36,022	$	1,377	$	34,645	$	—

December 31, 2012
Investment securities available-for-sale
Mutual funds – mortgage securities	$	709	$	709	$	—	$	—
Mutual funds – U.S. Government
securities		673		673		—		—
Equity securities		482		482		—		—
SBA securitized loan pools		3,658		—		3,658		—
Other debt securities		732		—		732		—
Residential mortgage-backed securities		27,250		—		27,250		—
Total investment securities available-for-sale	$	33,504	$	1,864	$	31,640	$	—

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, 2013 and December 31, 2012, 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, 2013 and year ended December 31, 2012, there were no transfers between levels.

Page 10

	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, 2013
Other real estate owned:
Construction & Land Development	$	19,455	$	0	$	0	$	19,455
1-4 Family Residential		3,382		0		0		3,382
Commercial Real Estate		7,261		0		0		7,261
Total	$	30,098	$	0	$	0	$	30,098

Impaired loans:
Construction & Land Development	$	20,175	$	0	$	0	$	20,175
1-4 Family Residential		13,707		0		0		13,707
Commercial Real Estate		22,584		0		0		22,584
Commercial Business		91		0		0		91
Total	$	56,557	$	0	$	0	$	56,557

December 31, 2012
Other real estate owned:
Construction & Land Development	$	19,915	$	0	$	0	$	19,915
1-4 Family Residential		6,070		0		0		6,070
Commercial Real Estate		7,886		0		0		7,886
Total	$	33,871	$	0	$	0	$	33,871

Impaired loans:
Construction & Land Development	$	19,674	$	0	$	0	$	19,674
1-4 Family Residential		14,386		0		0		14,386
Commercial Real Estate		18,139		0		0		18,139
Commercial Business		6		0		0		6
Total	$	52,205	$	0	$	0	$	52,205

9. 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.

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Loans held for sale – The unpaid principal balance of loans held for sale approximates fair value, as Howard Bank has agreed to purchase the loans at par.

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.

The estimated fair values of financial instruments (in thousands) at March 31, 2013 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		$	36,022		$	36,022		$	1,377		$	34,645		$	—
Held-to-maturity			3,213			3,246			—			3,246			—
Loans held for sale			39,086			39,086			39,086			—			—
Loans receivable			258,626			294,934			—			—			294,934
Restricted investment securities			3,977			3,977			—			3,977			—
Financial liabilities:
Deposits			338,136			317,706			—			—			317,706
Junior subordinated debentures			17,000			17,000			—			17,000			—
Advances from FHLB			53,500			53,552			—			53,552			—

Page 12

The estimated fair values of financial instruments (in thousands) at December 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		$	33,504		$	33,504		$	1,864		$	31,640		$	—
Held-to-maturity			3,887			3,927			—			3,927			—
Loans receivable			306,751			337,044			—			—			337,044
Restricted investment securities			4,204			4,204			—			4,204			—
Financial liabilities:
Deposits			341,219			325,272			—			—			325,272
Junior subordinated debentures			17,000			17,000			—			17,000			—
Advances from FHLB			53,500			53,558			—			53,558			—
Other borrowed funds			1,088			1,088			—			1,088			—

10. 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, 2013 and December 31, 2012 are summarized in the following table (in thousands).

	2013
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Gains		Value

Available-for-Sale:
Mutual funds - mortgage securities	$	747	$	—	$	42	$	705
Mutual funds - U.S. Government securities		686		—		14		672
SBA securitized loan pools		4,165		11		15		4,161
Other debt securities		695		1		—		696
Residential mortgage-backed securities		29,945		67		224		29,788
	$	36,238	$	79	$	295	$	36,022

Held-to-Maturity:
SBA securitized loan pools	$	1,219	$	—	$	13	$	1,206
Other debt securities		500		7		—		507
Residential mortgage-backed securities		1,244		40		1		1,283
U. S. Treasury securities and obligations		250		—		—		250
	$	3,213	$	47	$	14	$	3,246

Page 13

	2012
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

Available-for-Sale:
Mutual funds - mortgage securities	$	747	$	2	$	40	$	709
Mutual funds - U.S. Government securities		686		—		13		673
Equity securities		226		256		—		482
SBA securitized loan pools		3,658		10		10		3,658
Other debt securities		732		—		—		732
Residential mortgage-backed securities		27,159		192		101		27,250
	$	33,208	$	460	$	164	$	33,504

Held-to-Maturity:
SBA securitized loan pools	$	1,389	$	—		17	$	1,372
Other debt securities		500		9		—		509
Residential mortgage-backed securities		1,748		51		3		1,796
U. S. Treasury securities and obligations		250		—		—		250
	$	3,887	$	60	$	20	$	3,927

As of March 31, 2013, 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	$	—	$	—	$	134	$	42	$	134	$	42
Mutual funds – US Govt securities		—		—		672		14		672		14
SBA securitized loan pools		862		4		452		11		1,314		15
Residential mortgage-backed securities		20,227		222		45		2		20,272		224
Held-to-Maturity:
SBA securitized loan pools		249		2		917		11		1,166		13
Residential mortgage-backed securities		—		—		173		1		173		1
	$	21,338	$	228	$	2,393	$	81	$	23,731	$	309

Page 14

As of December 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	$	—	$	—	$	136	$	40	$	136	$	40
Mutual funds – US Govt securities		—		—		673		13		673		13
SBA securitized loan pools		—		—		480		10		480		10
Residential mortgage-backed securities		13,554		98		95		3		13,649		101
Held-to-Maturity:
SBA securitized loan pools		275		2		1,017		15		1,292		17
Residential mortgage-backed securities		—		—		270		3		270		3
	$	13,829	$	100	$	2,671	$	84	$	16,500	$	184

Management has the intent to hold the securities classified as held-to-maturity in the table above until they mature, at which time the Company will receive full value for the securities. Furthermore, as of March 31, 2013 and December 31, 2012, management does not have the intent to sell any of the securities classified as available-for-sale in the table above and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. Management does not believe that any of the securities are impaired due to reasons of credit quality. Accordingly, as of March 31, 2013 and December 31, 2012, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Company’s consolidated income statement.

11. LOANS 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 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

Page 15

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 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.

Page 16

The following table shows the composition of the loan portfolio held for investment (in thousands) at March 31, 2013 and December 31, 2012.

	2013			2012
Real estate loans:
Construction and land development	$	53,007		$	57,731
1-4 family residential and home equity		82,960			90,406
Multi-family residential		4,676			5,306
Commercial		110,363			143,263
Total real estate loans		251,006			296,706
Commercial business loans		5,797			7,879
Consumer loans		1,823			2,166
Gross loans		258,626			306,751
Less allowance for loan losses		(9,040	)		(10,297	)
Net loans	$	249,586		$	296,454

In accordance with the 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, 2013 and December 31, 2012.

Credit Quality Indicators
As of March 31, 2013
	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	$	14,280	$	66,929	$	4,676	$	88,545	$	5,626	$	1,818	$	181,874
Special mention		17,763		3,322		-		15,344		65		5		36,499
Substandard		20,964		12,709		-		6,474		106		-		40,253
Total	$	53,007	$	82,960	$	4,676	$	110,363	$	5,797	$	1,823	$	258,626

Credit risk profile based on payment activity:

Current	$	40,917	$	72,582	$	4,676	$	105,220	$	5,797	$	1,823	$	231,015
Past Due		12,090		10,378		-		5,143		-		-		27,611
Total	$	53,007	$	82,960	$	4,676	$	110,363	$	5,797	$	1,823	$	258,626

Page 17

Credit Quality Indicators
As of December 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	$	17,592	$	75,875	$	5,306	$	117,948	$	4,449	$	2,161	$	223,331
Special mention		18,614		874		-		18,742		2,827		5		41,062
Substandard		21,525		13,657		-		6,573		603		-		42,358
Total	$	57,731	$	90,406	$	5,306	$	143,263	$	7,879	$	2,166	$	306,751

Credit risk profile based on payment activity:

Current	$	46,197	$	79,426	$	5,306	$	137,831	$	7,395	$	2,166	$	278,321
Past Due		11,534		10,980		-		5,432		484		-		28,430
Total	$	57,731	$	90,406	$	5,306	$	143,263	$	7,879	$	2,166	$	306,751

Age Analysis of Past Due Loans Receivable
As of March 31, 2013
	Construction
	& Land		1-4 Family		Multi-Family		Commercial		Commercial
	Development		Residential		Residential		Real Estate		Business		Consumer		Total

30-59 Days Past Due	$	48	$	3,991	$	-	$	2,307	$	-	$	-	$	6,346
60-89 Days Past Due		252		89		-		-		-		-		341
Greater Than 90 Days Past Due		11,790		6,298		-		2,836		-		-		20,924
Total Past Due		12,090		10,378		-		5,143		-		-		27,611
Current		40,917		72,582		4,676		105,220		5,797		1,823		231,015
Total Loans Receivable	$	53,007	$	82,960	$	4,676	$	110,363	$	5,797	$	1,823	$	258,626

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

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

30-59 Days Past Due	$	-	$	2,374	$	-	$	2,031	$	-	$	-	$	4,405
60-89 Days Past Due		-		1,629		-		1,962		484		-		4,075
Greater Than 90 Days Past Due		11,534		6,997		-		1,439		-		-		19,950
Total Past Due		11,534		10,980		-		5,432		484		-		28,430
Current		46,197		79,426		5,306		137,831		7,395		2,166		278,321
Total Loans Receivable	$	57,731	$	90,406	$	5,306	$	143,263	$	7,879	$	2,166	$	306,751

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

Page 18

Allowance for Loan Losses and Recorded Investment in Loans Receivable

For the Three Months Ended March 31, 2013

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

Allowance for loan losses:

Beginning balance	$	5,624		$	2,378		$	32		$	1,014		$	582		$	13		$	654		$	10,297
Charge-offs		(348	)		(868	)		-			(371	)		(494	)		(6	)		-			(2,087	)
Recoveries		-			102			-			25			-			3			-			130
Provision		(121	)		587			(3	)		-			277			32			(72	)		700
Ending balance	$	5,155		$	2,199		$	29		$	668		$	365		$	42		$	582		$	9,040

Ending balance individually evaluated for impairment	$	2,177		$	1,170		$	-		$	86		$	-		$	11		$	-		$	3,444

Ending balance collectively evaluated for impairment	$	2,978		$	1,029		$	29		$	582		$	365		$	31		$	582		$	5,596

Loans receivable:

Ending balance	$	53,007		$	82,960		$	4,676		$	110,363		$	5,797		$	1,823		$	-		$	258,626

Ending balance individually evaluated for impairment	$	22,352		$	14,877		$	-		$	22,670		$	91		$	11		$	-		$	60,001

Ending balance collectively evaluated for impairment	$	30,655		$	68,083		$	4,676		$	87,693		$	5,706		$	1,812		$	-		$	198,625

Page 19

Allowance for Loan Losses and Recorded Investment in Loans Receivable
For the Three Months Ended March 31, 2012
	Construction
	& Land			1-4 Family			Multi-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

Loans Receivable on Nonaccrual Status

As of March 31, 2013

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


Unpaid Principal Balance	$	15,802	$	12,386	$	-	$	3,248	$	5	$	-	$	31,441

Loans Receivable on Nonaccrual Status

As of December 31, 2012

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


Unpaid Principal Balance	$	17,645	$	12,984	$	-	$	3,418	$	5	$	490	$	34,537

Page 20

Troubled Debt Restructurings
For the Three Months Ended March 31, 2013
	Construction
	& Land		1-4 Family		Multi-Family		Commercial		Commercial
	Development		Residential		Residential		Real Estate		Business		Consumer		Total

Troubled Debt Restructurings:

Number of Loans		-		2		-		-		-		-		2

Pre-Modification Principal Balance	$	-	$	506	$	-	$	-	$	-	$	-	$	506

Post-Modification Principal Balance	$	-	$	426	$	-	$	-	$	-	$	-	$	426

Troubled Debt Restructurings That Subsequently Defaulted:

Number of Loans		-		-		-		-		-		-		-

Current Principal Balance	$	-	$	-	$	-	$	-	$	-	$	-	$	-

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

Page 21

Impaired Loans
As of and For the Three Months Ended March 31, 2013
	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	$	12,217	$	3,655	$	-	$	1,823	$	-	$	11	$	17,706

Related Allowance for Loan Losses	$	2,177	$	1,170	$	-	$	86	$	-	$	11	$	3,444

Average Recorded Investment	$	9,600	$	4,830	$	-	$	1,652	$	258	$	11	$	16,351

Interest Income Recognized	$	41	$	24	$	-	$	-	$	5	$	-	$	70

Loans Without a Valuation Allowance:

Unpaid Principal Balance	$	10,135	$	11,222	$	-	$	20,847	$	91	$	-	$	42,295

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

Average Recorded Investment	$	13,016	$	10,526	$	-	$	21,109	$	98	$	-	$	44,749

Interest Income Recognized	$	62	$	113	$	-	$	248	$	2	$	-	$	425

Totals:

Unpaid Principal Balance	$	22,352	$	14,877	$	-	$	22,670	$	91	$	11	$	60,001

Related Allowance for Loan Losses	$	2,177	$	1,170	$	-	$	86	$	-	$	11	$	3,444

Average Recorded Investment	$	22,616	$	15,356	$	-	$	22,761	$	356	$	11	$	61,100

Interest Income Recognized	$	103	$	137	$	-	$	248	$	7	$	-	$	495

Page 22

Impaired Loans
As of and For the Year Ended December 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	$	7,337	$	6,005	$	-	$	1,480	$	484	$	11	$	15,317

Related Allowance for Loan Losses	$	2,071	$	1,375	$	-	$	347	$	484	$	11	$	4,288

Average Recorded Investment	$	6,557	$	4,782	$	-	$	1,163	$	242	$	5	$	12,749

Interest Income Recognized	$	169	$	213	$	-	$	35	$	15	$	3	$	435

Loans Without a Valuation Allowance:

Unpaid Principal Balance	$	15,542	$	9,830	$	-	$	21,371	$	104	$	-	$	46,847

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

Average Recorded Investment	$	16,041	$	10,607	$	143	$	21,895	$	333	$	81	$	49,100

Interest Income Recognized	$	603	$	354	$	-	$	875	$	-	$	-	$	1,832

Totals:

Unpaid Principal Balance	$	22,879	$	15,835	$	-	$	22,851	$	588	$	11	$	62,164

Related Allowance for Loan Losses	$	2,071	$	1,375	$	-	$	347	$	484	$	11	$	4,288

Average Recorded Investment	$	22,598	$	15,389	$	143	$	23,058	$	575	$	86	$	61,849

Interest Income Recognized	$	772	$	567	$	-	$	910	$	15	$	3	$	2,267

Page 23

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

12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the changes in accumulated other comprehensive income (loss) (in thousands), consisting solely of unrealized gains and losses on available-for-sale securities, net of tax, for the three months ended March 31, 2013:

Balance at January 1, 2013	$	180
Amounts reclassified to gain on sale of investments		(375	)
Other comprehensive loss		(138	)
Balance at March 31, 2013	$	(333	)

Page 24

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

The Bank’s business strategy is to operate as an independent community-oriented commercial bank dedicated to real estate, commercial, and consumer lending, funded primarily by retail deposits. The Bank has sought to implement this strategy by (1) continuing to emphasize residential mortgage lending through the origination of adjustable-rate mortgage loans; (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.

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

Page 25

partial redemption must involve at least 25% of the Series A Preferred Stock issued. Upon redemption of the Series A Preferred Stock, the Company will have the right to repurchase the Warrant at its fair market value.

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

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

In order to conserve cash in the current uncertain economic environment, the Company’s Board of Directors determined that it was in the best interest of the Company and its stockholders to suspend the payment of dividends on the Series A Preferred Stock beginning with the dividend payable February 15, 2010. We may not declare or pay a dividend or other distribution on our common stock (other than dividends payable solely in common stock), and we generally may not directly or indirectly purchase, redeem or otherwise acquire any shares of common stock unless all accrued and unpaid dividends on the Series A Preferred Stock have been paid in full. Whenever six or more quarterly dividends, whether or not consecutive, have not been paid, the holders of the Series A Preferred Stock will have the right to elect two directors until all accrued but unpaid dividends have been paid in full.

Effective June 29, 2010, the Company and the Bank entered into a written agreement with the Federal Reserve Bank of Richmond (the “Reserve Bank”) and the State of Maryland Commissioner of Financial Regulation (the “Commissioner”) pursuant to which the Company and the Bank have agreed to take various actions. Under the agreement, both the Company and the Bank have agreed to refrain from declaring or paying dividends without prior regulatory approval. The Company has agreed that it will not take any other form of payment representing a reduction in the Bank’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior regulatory approval. The Company may not incur, increase, or guarantee any debt without prior regulatory approval and has agreed not to purchase or redeem any shares of its stock without prior regulatory approval.

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. In April 2012, an additional 22,379 shares were sold for aggregate consideration of approximately $385,000. Total gross proceeds of the offering were $2.8 million, with offering costs of $35,000, and net proceeds of approximately $2.8 million. Upon shareholder approval of an amendment to the Company’s Articles of Incorporation to increase the authorized number of shares of common stock at the 2012 annual meeting, each share of Series B Preferred Stock became 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

Page 26

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 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.

On March 28, 2013, the Bank entered into a definitive agreement to sell its Aberdeen, Maryland branch office to Howard Bank, Ellicott City, Maryland subject to regulatory approval and customary closing conditions. As part of the transaction, Howard Bank will acquire approximately $40.0 million in loans from Cecil Bank at their face amount. Under the agreement, Howard Bank will pay a 5.0% premium on the balance of noninterest-bearing deposits and 4.0% on all other transaction accounts assumed. At March 31, 2013, the deposits at the Aberdeen branch office totaled approximately $41.8 million. Howard Bank will also purchase the branch premises and selected furniture, fixtures, and equipment at their book value, which totaled approximately $986,000 at March 31, 2013. The agreement requires a minimum of $38.0 million in loans and $37.9 million in deposits at closing.

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, 2013 and December 31, 2012

The Company’s assets decreased by $4.1 million, or 0.9%, to $435.7 million at March 31, 2013 from $439.8 million at December 31, 2012, primarily as a result of decreases in loans receivable and other real estate owned. The funds received from the paydown of loans and the sale of other real estate owned enabled us to increase our cash and cash equivalents, invest in investment securities, not renew higher cost certificates of deposits, and pay off other borrowed funds.

Cash and cash equivalents increased by $6.4 million, or 15.4%, to $48.2 million at March 31, 2013 from $41.8 million at December 31, 2012 due to the paydown of loans and the sale of other real estate owned, partially offset by the purchase of investment securities and the decline in deposits and other borrowed funds. Investment securities available-for-sale increased by $2.5 million, or 7.5%, to $36.0 million at March 31, 2013 from $33.5 million at December 31, 2012 primarily due to the investment of excess funds obtained during the quarter. Investment securities held-to-maturity decreased by $674,000, or 17.3%, to $3.2 million at March 31, 2013 from $3.9 million at December 31, 2012 primarily due to proceeds from principal paydowns.

Loans held for sale increased by $39.1 million to $39.1 million at March 31, 2013 from zero at December 31, 2012 as a result of the agreement to sell the Aberdeen branch. The gross loans receivable portfolio held for investment decreased by $48.1 million, or 15.7%, to $258.6 million at March 31, 2013 from $306.8 million at December 31, 2012, primarily as a result

Page 27

of the transfer of $39.1 million to the held for sale category as noted above. In addition to this transfer, we recognized decreases in construction and land development loans (down $3.5 million, or 6.1%), one to four family residential and home equity loans (down $2.0 million, or 2.2%), commercial real estate loans (down $2.6 million, or 1.8%), and commercial business loans (down $551,000, or 7.0%), and consumer loans (down $343,000, or 15.8%). The allowance for loan losses decreased by $1.3 million, or 12.2%, to $9.0 million at March 31, 2013 from $10.3 million at December 31, 2012 (see “analysis of allowance for loan losses” below).

Other real estate owned decreased by $3.8 million, or 11.1%, to $30.1 million at March 31, 2013 from $33.9 million at December 31, 2012 primarily due to the sale of properties with a carrying value of approximately $3.9 million. Premises and equipment decreased by $1.1 million to $8.6 million at March 31, 2013 from $9.7 million at December 31, 2012 primarily as a result of the reclassification of $986,000 of premises and equipment as held for sale in connection with the agreement to sell the Aberdeen branch. Other assets decreased by $644,000, or 26.6%, to $1.8 million at March 31, 2013 from $2.4 million at December 31, 2012 primarily due to the decline in prepaid expenses, as well as the valuation allowance placed on amounts due from loan customers for property tax and insurance payments made by the Bank.

The Company’s liabilities decreased by $2.7 million, or 0.6%, to $423.0 million at March 31, 2013 from $425.7 million at December 31, 2012. Deposits held for sale increased by $41.8 million to $41.8 million at March 31, 2013 from zero at December 31, 2012 as a result of the agreement to sell the Aberdeen branch. The decrease in deposits held in portfolio of $44.8 million, or 13.1%, to $296.4 million at March 31, 2013 from $341.2 million at December 31, 2012, was primarily due to the transfer of $41.8 million to the held for sale category as noted above. In addition to this transfer, we recognized decreases in certificates of deposit (down $3.9 million, or 1.9%), money market accounts (down $674,000, or 3.7%), money market certificates (down $469,000, or 6.7%), and regular checking accounts (down $375,000, or 1.5%). These decreases were partially offset by increases in statement savings accounts (up $1.7 million, or 15.1%) and NOW accounts (up $630,000, or 1.9%). Other liabilities increased $1.5 million, or 11.6%, to $14.4 million at March 31, 2013 from $12.9 million at December 31, 2012 primarily due to a $1.0 million accrual for investments traded but not yet settled, as well as increases in accrued interest payable on junior subordinated debentures and preferred stock dividend payable. Other borrowed funds declined by $1.1 million, or 100%, to zero at March 31, 2013 from $1.1 million at December 31, 2012. This liability related to a first-out loan participation accounted for as a secured borrowing. The loan was transferred to other real estate owned in the fourth quarter 2012, and the property was subsequently sold, at which time the participant was paid in full with the sales proceeds.

The Company’s stockholders’ equity decreased by $1.5 million, or 10.3%, to $12.7 million at March 31, 2013 from $14.2 million December 31, 2012. This decrease is primarily the result of the net loss of $770,000, $513,000 in other comprehensive loss resulting from the change in fair value of investment securities available-for-sale, and $179,000 in preferred stock cash dividends accrued.

Comparison of Results of Operations for the Three Months Ended March 31, 2013 and 2012

Net loss for the three-month period ended March 31, 2013 was $770,000, a decrease of $845,000 from the net loss of $1.5 million for the same period in 2012. This decrease was primarily the result of a decrease in the provision for loan losses and an increase in net interest income, partially offset by a decrease in noninterest income and increases in noninterest expense and income tax expense. Net loss available to common stockholders for the three months ended March 31, 2013 was $991,000 as compared to $1.7 million for the three months ended March 31, 2012. Net loss available to common stockholders for the 2013 period reflects $221,000 in dividends and discount accretion on the Series A and Series B Preferred Stock compared to $184,000 in dividends and discount accretion on the Series A Preferred Stock during the 2012 period. Basic and diluted loss per common share were both $0.13 for the three months ended March 31, 2013 as compared to basic and diluted loss per common share of $0.23 for the three-month period ended March 31, 2012. The annualized return on average assets and annualized return on average equity were -0.70% and -21.84%, respectively, for the three-month period ended March 31, 2013. This compares to an annualized return on average assets and annualized return on average equity of -1.30% and -18.84%, respectively, for the same period in 2012.

Net interest income, the Company’s primary source of income, increased 8.4%, or $227,000, to $2.9 million for the three months ended March 31, 2013, from $2.7 million over the same period in 2012. The weighted average yield on interest earning assets decreased to 4.63% for the three months ended March 31, 2013 from 4.80% for the three months ended March 31, 2012. The weighted average rate paid on interest bearing liabilities decreased to 1.38% for the three months ended March 31, 2013 from 1.66% for the three months ended March 31, 2012. The net interest spread increased to 3.25% from 3.14% and the net interest margin increased to 3.13% from 2.91% for the three months ended March 31, 2013 and 2012.

Interest and fees on loans decreased by $165,000, or 3.8%, to $4.2 million for the three months ended March 31, 2013 from $4.3 million for the three months ended March 31, 2012. The decrease is primarily attributable to a decrease in the

Page 28

average balance outstanding, partially offset by an increase in the weighted-average yield. The average balance outstanding decreased by $27.9 million, or 8.7%, to $293.7 million for the three months ended March 31, 2013 from $321.6 million for the three months ended March 31, 2012. The average balance outstanding includes loans classified as held for sale on the consolidated balance sheet. The weighted-average yield increased to 5.68% for the three months ended March 31, 2013 from 5.40% for the three months ended March 31, 2012 due to a decline in nonaccrual loans.

Interest on investment securities increased $25,000, or 25.0%, to $125,000 for the three months ended March 31, 2013 from $100,000 for the three months ended March 31, 2012. The average balance outstanding increased $3.9 million, or 11.6%, to $37.4 million for the three months ended March 31, 2013 from $33.5 million for the three months ended March 31, 2012. The weighted-average yield increased to 1.34% for the three months ended March 31, 2013 from 1.20% for the three months ended March 31, 2012.

Interest on deposits decreased by $125,000, or 12.9%, to $844,000 for the three months ended March 31, 2013 from $969,000 for the three months ended March 31, 2012 due to decreases in the weighted-average rate and the average balance outstanding. The weighted-average rate paid on deposits decreased to 0.99% for the three months ended March 31, 2013 from 1.13% for the three months ended March 31, 2012, reflecting lower market rates. The average balance outstanding decreased $2.9 million, or 0.8%, to $339.0 million for the three months ended March 31, 2013 from $341.9 million for the same period in 2012. The average balance outstanding includes deposits classified as held for sale on the consolidated balance sheet.

Interest on junior subordinated debentures decreased by $74,000, or 45.7%, to $88,000 for the three months ended March 31, 2013 from $162,000 for the three months ended March 31, 2012 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 2.08% for the three months ended March 31, 2013 from 3.81% for the three months ended March 31, 2012, while the average balance outstanding remained level at $17.0 million for both periods.

Interest on advances from the Federal Home Loan Bank of Atlanta decreased by $131,000, or 21.4%, to $482,000 for the three months ended March 31, 2013 from $613,000 for the three months ended March 31, 2012 due to declines in the average balance outstanding and the weighted-average rate. The average balance outstanding decreased by $10.0 million, or 15.7%, to $53.5 million for the three months ended March 31, 2013 from $63.5 million for the same period in 2012. The weighted-average rate paid decreased to 3.60% for the three months ended March 31, 2013 from 3.86% for the three months ended March 31, 2012.

The provision for loan losses decreased by $2.3 million to $700,000 for the three months ended March 31, 2013 from $3.0 million for the same period in 2012 (see “analysis of allowance for loan losses” below).

Noninterest income decreased 43.0%, or $521,000, to $692,000 for the three months ended March 31, 2013, from $1.2 million for the same period in 2012 primarily due to a decrease in gain on sale of loans, partially offset by an increase in the gain on sale of investments and a decrease in the loss on sale of other real estate owned. Gain on sale of loans decreased by $1.0 million to $38,000 for the three months ended March 31, 2013 from $1.1 million for the same period in 2012 due to the Bank’s less active participation in the Small Business Administration (“SBA”) loan program, the guaranteed portion of which are sold in the secondary market. The Bank did not sell any SBA loans during the first quarter 2013. Loss on sale of other real estate owned decreased by $180,000, or 85.7%, to $30,000 for the three months ended March 31, 2013 from $210,000 for the three months ended March 31, 2012. Gain on sale of investments increased by $375,000 to $375,000 for the three months ended March 31, 2013 from zero for the three months ended March 31, 2012. During the first quarter 2013, the Bank sold 11 securities that were in an unrealized gain position and recorded the gains in income. The proceeds from the sales were reinvested in securities with similar characteristics as those sold. Other noninterest income declined by $55,000, or 59.1%, to $38,000 for the three months ended March 31, 2013 from $93,000 for the same period in 2012 primarily due to reductions in rental income from other real estate owned properties and income from our investment in Maryland Title Center, which was sold in the fourth quarter 2012.

Noninterest expense increased 5.9%, or $207,000, to $3.7 million for the three months ended March 31, 2013, from $3.5 million over the same period in 2012. Salaries and employee benefits increased by $107,000, or 8.1%, to $1.4 million for the three months ended March 31, 2013 from $1.3 million for the same period in 2012 primarily due to an increase in payroll taxes associated with the supplemental executive retirement plan. Occupancy expense increased by $68,000, or 37.2%, to $251,000 for the three months ended March 31, 2013 from $183,000 for the three months ended March 31, 2012 due to additional rent due upon renewal of the lease agreement for our Crossroads branch location. Equipment and data processing expense increased by $17,000, or 5.3%, to $339,000 for the three months ended March 31, 2013 from $322,000 for the three

Page 29

months ended March 31, 2012 primarily due to an increase in data processing expense. FDIC deposit insurance premiums decreased $51,000, or 17.8%, to $236,000 for the three months ended March 31, 2013 from $287,000 for the three months ended March 31, 2012 primarily due to a decline in the assessment base. Other real estate owned expense and valuations increased by $95,000 to $530,000 for the quarter ended March 31, 2013 from $435,000 for the three months ended March 31, 2012 due to an increase in operating costs, primarily taxes and insurance, to maintain the properties. Professional fees decreased by $163,000, or 32.0%, to $347,000 for the three months ended March 31, 2013 from $510,000 for the same period in 2012 primarily due to the settlement of a claim with a title insurance company, which agreed to pay the Bank $150,000 in legal fees previously incurred and paid by the Bank. Loan collection expense increased $118,000, or 137.2%, to $204,000 for the three months ended March 31, 2013 from $86,000 during the three months ended March 31, 2012 primarily due to the valuation allowance placed on amounts due from loan customers for property tax and insurance payments made by the Bank. Other expenses increased $16,000, or 4.6%, to $365,000 for the three months ended March 31, 2013 from $349,000 during the same period in 2012.

There was no income tax expense or benefit for the three-month period ended March 31, 2013 as compared to income tax benefit of $1.0 million for the first quarter of 2012, which equated to an effective tax rate of (39.9)%.

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, 2013						December 31, 2012
	Amount			Percent			Amount			Percent
Type of Loan
Real estate loans:
Construction and land development	$	53,007			20.49	%	$	57,731			18.82	%
1-4 family residential and home equity		82,960			32.08			90,406			29.47
Multi-family residential		4,676			1.81			5,306			1.73
Commercial		110,363			42.67			143,263			46.70
Total real estate loans		251,006			97.05			296,706			96.72
Commercial business loans		5,797			2.24			7,879			2.57
Consumer loans		1,823			0.71			2,166			0.71
Gross loans		258,626			100.00	%		306,751			100.00	%
Less: allowance for loan losses		(9,040	)					(10,297	)
Net loans	$	249,586					$	296,454

The following table shows the composition of loans held for sale (in thousands).

	March 31, 2013
Real estate loans:
Construction and land development	$	1,231
1-4 family residential and home equity		5,424
Multi-family residential		637
Commercial		30,263
Total real estate loans		37,555
Commercial business loans		1,531
Total loans held for sale	$	39,086

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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)	2013			2012

Nonaccrual loans	$	31,441		$	34,537
Loans 90 days or more past due and still accruing		0			0
Restructured loans		28,560			25,581
Total nonperforming loans		60,001			60,118
Other real estate owned, net		30,098			33,871
Total nonperforming assets	$	90,099		$	93,989
Nonperforming loans to total loans		23.20	%		19.60	%
Nonperforming assets to total assets		20.68			21.37
Allowance for loan losses to non-performing loans		15.07			17.13

Although the dollar volume of nonperforming loans declined, nonperforming loans as a percentage of total loans increased due to the reclassification of $39.0 million of loans as held for sale in connection with the agreement to sell the Aberdeen branch.

Analysis of Allowance for Loan Losses

The Bank records provisions for loan losses in amounts necessary to maintain the allowance for loan losses at the level deemed appropriate. The allowance for loan losses is provided through charges to income in an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based upon evaluations of the collectability of loans and prior loan loss experience. The allowance is based on careful, continuous review and evaluation of the credit portfolio and ongoing, quarterly assessments of the probable losses inherent in the loan portfolio. The Bank employs a systematic methodology for assessing the appropriateness of the allowance, which includes determination of a specific allowance, a formula allowance, and an unallocated allowance.

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

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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, 2013 was $9.0 million, (3.50% of total loans), a decrease of $1.3 million from the $10.3 million allowance (3.36% of total loans) at December 31, 2012. Annualized net charge-offs for the first three months of 2013 were 2.67% of average loans, while net charge-offs were 3.07% of average loans for the year 2012. The provision for loan losses required for the first three months of 2013 and 2012 was $700,000 and $3.0 million, respectively.

A summary of activity in the allowance is shown below.

	Three Months Ended			Year Ended
(Dollars in thousands)	March 31, 2013			December 31, 2012

Balance of allowance, beginning of period	$	10,297		$	12,412
Loan charge-offs:
Construction and land development		(348	)		(7,198	)
1-4 family residential		(868	)		(1,906	)
Multi-family residential		-			-
Commercial real estate		(371	)		(1,056	)
Commercial business loans		(494	)		(202	)
Consumer		(6	)		(209	)
Total charge-offs		(2,087	)		(10,571	)
Loan recoveries:
Construction and land development		-			20
1-4 family residential		102			26
Multi-family residential		-			-
Commercial real estate		25			768
Commercial business loans		-			121
Consumer		3			7
Total recoveries		130			942
Net charge-offs		(1,957	)		(9,629	)
Provision for loan losses		700			7,514
Balance of allowance, end of period	$	9,040		$	10,297

Net charge-offs to average loans		2.67	%		3.07	%
Allowance to total loans		3.50			3.36
Allowance to non-performing loans		15.07			17.13

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Analysis of Deposits

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

	March 31, 2013					December 31, 2012
	Amount		Percent			Amount		Percent

Regular checking	$	22,854		7.71	%	$	24,834		7.28	%
NOW accounts		31,324		10.57			32,610		9.56
Passbook savings		10,532		3.55			10,648		3.12
Statement savings		12,485		4.21			11,005		3.23
Money market		14,979		5.05			18,133		5.31
Holiday club		135		0.05			70		0.02
Certificates of deposit		178,232		60.14			210,846		61.79
IRA certificates of deposit		21,543		7.27			26,079		7.64
Money market certificates		4,292		1.45			6,994		2.05
Total deposits	$	296,376		100.00	%	$	341,219		100.00	%

The following table shows the composition of the deposits held for sale (in thousands).

	March 31, 2013
Regular checking	$	1,605
NOW accounts		1,916
Passbook savings		3
Statement savings		183
Money market		2,480
Holiday club		1
Certificates of deposit		28,704
IRA certificates of deposit		4,635
Money market certificates		2,233
Total deposits held for sale	$	41,760

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, 2013 and December 31, 2012.

			Regulatory Minimums
	2003	2012	Well	Adequately
	Actual	Actual	Capitalized	Capitalized
Total risk-based capital ratio	10.87%	10.70%	10.00%	8.00%

Tier 1 risk-based capital ratio	9.60%	9.43%	6.00%	4.00%

Tier 1 leverage ratio	7.07%	7.13%	4.00%	5.00%

As of March 31, 2013 and December 31, 2012, 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.

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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 the Company’s material weakness in internal control over financial reporting identified during the December 31, 2012 external audit, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective. Management has enhanced procedures and controls related to the allowance for loan losses and other real estate owned during the quarter ended March 31, 2013. However, we will allow one more quarter to test the new procedures and controls before we confirm that they are operating effectively. There were no other 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, 2013, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. Other Information:

Item 1. Legal Proceedings -

Not Applicable

Item 1A.Risk Factors -

Not Applicable

Item 2. Unregistered 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 or its Mandatory Convertible Cumulative Junior Preferred Stock, Series B for the first quarter of 2013. As of March 31, 2013, unpaid cumulative dividends on the Series A and Series B Preferred Stock total $2.1 million.

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information -

Not Applicable

Item 6. Exhibits -

Exhibit No.	Description	Incorporated by Reference to:
2.1	Branch Purchase and Assumption Agreement, dated March 28, 2012, between Cecil Bank and Howard Bank (schedules have been omitted pursuant to Section 601(b)(2) of Regulation S-K)

3.1	Articles of Incorporation of Cecil Bancorp, Inc.	Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2012

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Exhibit No.	Description	Incorporated by Reference to:
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, Inc., as depositor, Wilmington Trust Company, as property and Delaware Trustee, and Charles F. Sposato, Mary B. Halsey and Jennifer Carr, as administrative trustees.	Not filed in accordance with the provisions of Item 601(b)(4)(iii) of Regulation S-K. The Registrant agrees to provide a copy of this document to the Commission upon request.

4.5	Junior Subordinated Indenture, dated as of March 23, 2006 between Cecil Bancorp, Inc. and Wilmington Trust Company, as Trustee.	Not filed in accordance with the provisions of Item 601(b)(4)(iii) of Regulation S-K. The Registrant agrees to provide a copy of this document to the Commission upon request.

4.6	Guarantee Agreement, dated as of March 23, 2006, between Cecil Bancorp, Inc., as Guarantor, and Wilmington Trust Company, as Guarantee Trustee.	Not filed in accordance with the provisions of Item 601(b)(4)(iii) of Regulation S-K. The Registrant agrees to provide a copy of this document to the Commission upon request.

4.7	Amended and Restated Declaration of Trust, dated as of November 30, 2006 by and among Wilmington Trust Company, as Delaware and institutional trustee, Cecil Bancorp, Inc., as sponsor, and Charles F. Sposato, Mary B. Halsey and Jennifer Carr, as administrators.	Exhibit 10.3 to Current Report on Form 8-K filed December 4, 2006.

4.8	Indenture, dated as of November 30, 2006, between Cecil Bancorp, Inc. and Wilmington Trust Company, as trustee.	Exhibit 10.1 to Current Report on Form 8-K filed December 4, 2006.

4.9	Guarantee Agreement, dated as of November 30, 2006, between Cecil Bancorp, Inc., as Guarantor, and Wilmington Trust Company, as Guarantee Trustee.	Exhibit 10.4 to Current Report on Form 8-K filed December 4, 2006.

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

Page 35

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

Page 36

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, 2013	By:	/s/ Robert Lee Whitehead
			Robert Lee Whitehead
			Senior Vice President and Chief Financial Officer
			(Duly Authorized Officer and Principal Financial and
			Accounting Officer)