<PAGE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
_________________________________________________________________
FORM 10-Q
Quarterly Report under Section 13 or 15 (d)
of the Securities and Exchange Act of 1934
_________________________________________________________________
For Quarter Ended Commission File Number
March 31, 1998 0-24926
CECIL BANCORP, INC.
-------------------
(Exact 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
Elkton, Maryland 21921
---------------- -----
(Address of principal (Zip Code)
executive office)
410 398-1650
--------------
(Registrant's Telephone Number)
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 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.
Yes X NO
------- -------
Number of shares outstanding of common stock
as of March 31, 1998
$0.01 par value common stock 470,182 shares
- ---------------------------- --------------
class outstanding
1
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CECIL BANCORP, INC., AND SUBSIDIARIES
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. Financial Statements (Unaudited)
Consolidated Condensed Statements of
Financial Condition - March 31, 1998
and December 31, 1997 3-4
Consolidated Condensed Statements of
Operations for Three Months Ended
March 31, 1998 and 1997 5
Consolidated Condensed Statement of
Cash Flows for Three Months Ended
March 31, 1998 and 1997 6-7
Notes to Consolidated Condensed
Financial Statements 8
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9-19
PART II. OTHER INFORMATION 20-22
ITEM 4. Submission of Matters to a Vote of
Security Holders
2
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CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Cash $ 1,912,441 $ 961,993
Cash - interest-bearing 2,913,960 880,809
Investment securities
Securities held-to-maturity 3,007,940 2,997,516
Securities available-for-sale at
estimated market value 535,217 528,043
Mortgage backed securities
Securities held to maturity 377,810 411,641
Securities available for sale at
estimated market value 1,248,749 1,405,483
Loans held for sale 1,094,031 1,362,969
Loans receivable, net 53,962,286 53,211,517
Real estate owned 317,300 171,229
Office properties, equipment and leasehold
improvements at cost, less accumulated
depreciation and amortization 642,461 659,464
Stock in Federal Home Loan Bank of
Atlanta - at cost 457,700 438,100
Accrued interest receivable 433,747 466,610
Mortgage servicing rights 102,768 103,605
Prepaid expenses 58,405 37,455
Other assets 6,964 23,796
----------- -----------
TOTAL ASSETS $67,071,779 $63,660,230
=========== ===========
</TABLE>
3
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CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES
Savings deposits $56,133,639 $52,953,698
Advance payments by borrowers for
property taxes and insurance 913,326 665,734
Employee stock ownership debt 269,556 269,556
Other liabilities 409,768 517,604
Deferred taxes 3,517 20,055
Advances from Federal Home Loan
Bank of Atlanta 1,750,000 1,750,000
----------- -----------
TOTAL LIABILITIES 59,479,806 56,176,647
----------- -----------
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, $.01 par value
Authorized: 4,000,000 shares
Issued and outstanding: 470,182
shares 4,702 4,702
Additional paid in capital 4,000,351 4,000,351
Employee stock ownership debt (269,556) (269,556)
Deferred compensation - Management
Recognition Plan (118,361) (118,361)
Retained earnings, substantially
restricted 3,963,501 3,847,661
Accumulated other comprehensive income 11,336 18,786
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 7,591,973 7,483,583
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $67,071,779 $63,660,230
=========== ===========
</TABLE>
4
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<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
Quarter Ended March 31,
-----------------------------
1998 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
INTEREST INCOME
Loans receivable $1,169,550 $1,096,702
Mortgage-backed securities 28,611 35,582
Investment securities 39,925 29,210
Other interest-earning assets 46,424 28,207
---------- ----------
Total interest income 1,284,510 1,189,701
---------- ----------
INTEREST EXPENSE
Deposits
NOW accounts 30,633 17,244
Passbook accounts and statement savings 68,259 71,476
Money market deposit accounts 17,781 17,760
Certificates 491,978 411,304
---------- ----------
Interest expense on deposits 608,651 517,784
Borrowings 31,024 59,917
---------- ----------
Total interest expense 639,675 577,701
---------- ----------
Net interest income 644,835 612,000
Provision for loan losses 22,500 10,500
---------- ----------
Net interest income after
provision for loan losses 622,335 601,500
---------- ----------
NONINTEREST INCOME (LOSS)
Loan service charges 7,424 8,820
Dividends on FHLB stock 8,006 7,707
Gain on sale of loans 12,885 4,736
Checking account fees 34,907 27,348
Commission income 22,584
Other 12,259 21,857
---------- ----------
Total noninterest income 98,065 70,468
---------- ----------
NONINTEREST EXPENSE
Compensation and benefits 266,119 238,149
Occupancy expense 26,542 29,548
Equipment and data processing expense 52,418 46,271
SAIF deposit insurance premium 13,861 6,744
Other 117,617 111,118
---------- ----------
Total noninterest expense 476,557 431,830
---------- ----------
Income before income taxes 243,843 240,138
---------- ----------
INCOME TAXES
Current 105,179 98,976
Deferred (21,499) (11,121)
---------- ----------
Total income taxes 83,680 87,855
---------- ----------
NET INCOME $ 160,163 $ 152,283
========== ==========
OTHER COMPREHENSIVE LOSS
Unrealized losses on investment
securities, net of deferred taxes (7,450) (16,279)
---------- ----------
COMPREHENSIVE INCOME $ 152,713 $ 136,004
========== ==========
Basic earnings per common share $ .36 $ .35
========== ==========
Diluted earnings per common share $ .36 $ .35
========== ==========
Cash dividends paid per common share $ .10 $ .10
========== ==========
</TABLE>
5
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CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Quarter Ended March 31,
-----------------------------
1998 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and fees received on
loans and investments $ 1,394,001 $ 1,269,659
Cash paid to suppliers and employees (496,637) (414,793)
Proceeds from sale of loans 444,206 624,719
Origination of loans held for sale (323,000) (608,500)
Interest paid (639,675) (577,701)
Income taxes paid (180,050) (75,000)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 198,845 218,384
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale and maturities of
investment securities 2,000,000 2,000,000
Proceeds from maturities of
mortgage-backed securities 188,617 63,624
Purchases of investment securities (2,008,750) (1,501,484)
Loans originated (4,909,425) (3,772,745)
Principal collected on loans 4,296,773 3,325,694
Purchase of real estate owned (146,071)
Purchases of office properties, equipment
and leasehold improvements (22,572)
Purchase of stock in Federal Home Loan Bank
of Atlanta (19,600) (15,200)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (598,456) 77,317
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Nets increase in demand deposits,
NOW accounts, and savings accounts 13,588,642 7,105,950
Proceeds from sales of certificates 2,374,606 2,430,776
Payments of maturing certificates of deposits (12,783,307) (8,200,617)
Increase in advance payments by
borrowers for property taxes and insurance 247,592 282,593
Dividends paid (44,323) (46,936)
Repayments to Federal Home Loan Bank of
Atlanta (1,250,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,383,210 321,766
----------- -----------
NET INCREASE IN CASH 2,983,599 617,467
CASH
Beginning of period 1,842,802 2,180,622
----------- -----------
End of period $ 4,826,401 $ 2,798,089
=========== ===========
</TABLE>
6
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CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Continued)
<TABLE>
<CAPTION>
Quarter Ended March 31,
-----------------------------
1998 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net Income $ 160,163 $ 152,283
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 17,003 11,430
Provision for loan losses 22,500 10,500
Amortization of investment security
premiums and discounts (1,685) (5,008)
Stock dividends (7,704) (7,380)
Decrease in loans held for sale 108,321 11,483
Decrease in accrued interest receivable 32,863 26,614
Decrease in mortgage servicing rights 837
Increase in prepaid expenses (20,950) (14,760)
(Increase) decrease in other assets 16,832 (7,314)
Increase (decrease) in other liabilities (107,836) 48,991
Decrease in deferred taxes (21,499) (8,455)
---------- ----------
38,682 66,101
---------- ----------
$ 198,845 $ 218,384
========== ==========
</TABLE>
7<PAGE>
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CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
MARCH 31, 1998
--------------
(1) BASIS OF PRESENTATION
---------------------
The accompanying unaudited financial statements have been
prepared in accordance with instructions for Form 10-QSB
and therefore, do not include all disclosures necessary
for a complete presentation of the statements of
condition, statements of operations and statements of
cash flows in conformity with GAAP. However, all
adjustments which are in the opinion of management
necessary for the fair presentation of the interim
financial statements have been included. The results of
operations for the three months ended March 31, 1998 are
not necessarily indicative of the results that may be
expected for the entire year.
(2) Earnings per Share
------------------
Earnings per common share were computed by dividing net
income by the weighted average number of shares of common
stock outstanding during the quarter. The weighted
average number of shares of common stock outstanding was
443,227 and 438,552 in 1998 and 1997, respectively. The
weighted average number of shares of common stock for
computation of diluted earnings per common share was
449,577 and 440,582, respectively.
(3) Other Financial Information
---------------------------
Simon, Master & Sidlow, P.A., Cecil Bancorp's independent
certified public accountants, performed a limited review
of the financial data presented on pages 1 through 5
inclusive. The review was performed in accordance with
standards for such reviews established by the American
Institute of Certified Public Accountants. The review
did not constitute an audit; accordingly, Simon, Master &
Sidlow, P.A. did not express an opinion on the
aforementioned data. The financial data include any
material adjustments or disclosures proposed by Simon,
Master & Sidlow, P.A. as a result of their review.
8
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CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
Cecil Bancorp, Inc. ("the Company") was incorporated under the
laws of the State of Maryland in July 1994 at the direction of
the Board of Directors of Cecil Federal Savings Bank (the
"Bank"or"Cecil Federal") for the purpose of serving as a savings
institution holding company of Cecil Federal upon the
acquisition of all of the capital stock issued by Cecil Federal
in its conversion from mutual to stock (the "Conversion").
Substantially all of the company's assets consist of the
outstanding capital stock of Cecil Federal. The Company's
principal business is the business of Cecil Federal and its
wholly owned subsidiaries. As a result of the conversion and
reorganization, the Company issued and sold 481,361 shares of
its common stock at a price of $10.00 per share to its
depositors, borrowers, stock benefit plans and the public,
thereby recognizing net proceeds of $4,315,057. The Company's
common stock is registered with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company is classified
as a unitary savings institution holding company subject to
regulation by the Office of Thrift Supervision ("OTS") of the
Department of the Treasury.
The Company is primarily engaged in the business of directing,
planning and coordinating the business activities of Cecil
Federal. Accordingly, the information set forth in this report,
including financial statements and related data, relates
primarily to the Bank and its subsidiaries. In the future, the
Company may become an operating company or acquire or organize
other operating subsidiaries, including other financial
institutions. Currently, the Company does not maintain offices
separate from those of Cecil Federal or employ any persons other
than its officers who are not separately compensated for such
service.
Cecil Federal is principally engaged in the business of
attracting savings deposits from the general public and
investing those funds in loans for the purchase and construction
of one-to-four family residential real estate, primarily located
in Cecil County, Maryland, and in originating to a lessor
extent, land loans, commercial real estate loans, equity loans,
consumer loans and student loans. Also, during periods of
reduced loan demand, the Bank invests excess funds in mortgage-
backed securities and other investment securities, such as U.S.
Treasury obligations and overnight funds in the Federal Home
Loan Bank of Atlanta.
Cecil Federal's profitability is primarily dependent upon its
net interest income, which is the difference between interest
earned on its loan and investment portfolios and the cost of
funds or interest paid on deposits. Net interest income is
directly affected by the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rates
earned or paid on these balances.
To a lesser extent, the Bank's profitability is also affected by
the level of noninterest income and expense. Noninterest income
consists primarily of service fees and gains on sales of
investments. Noninterest expenses include salaries and
9<PAGE>
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CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
benefits, occupancy expenses, equipment and data processing
expenses, deposit insurance expenses and other operating
expenses.
The most significant outside factors influencing the operations
of Cecil Federal and other banks include general economic
conditions, competition in the local marketplace and related
monetary and fiscal policies of agencies that regulate financial
institutions. More specifically, lending activities are
influenced by the demand for real estate financing and other
types of loans, which in turn are affected by the interest rates
at which such loans may be offered and other factors affecting
loan demand and funds availability, while the cost of funds
(deposits) are influenced by interest rates on competing
deposits and general market rates of interest.
FINANCIAL SERVICES
- ------------------
On September 1, 1997, Cecil Financial Services, a service
corporation of Cecil Federal Savings Bank, began offering a full
range of brokerage and investment services in all our branches,
through a partnership with UVEST Investment Services.
With this expansion, Cecil Federal will now offer maximum
convenience in servicing customer needs. Mr. Roger L. Owens,
CLU, has been hired as investment representative. He will seek
to provide comprehensive investment products tailored to meet
current and future individual financial needs.
Cecil Financial, Inc. has partnered in this venture with UVEST
Investment Services, a registered broker-dealer and member of
both the National Association of Securities Dealers (NASD) and
the Securities Investment Protection Corporation (SIPC).
Headquartered in Charlotte, NC, UVEST has been providing bank-
based investment services throughout the Southeast since 1982.
Year 2000 Issues
- ----------------
As the Year 2000 approaches, there is growing concern that many
computers and computer systems could malfunction. Banks, as
with many other industries, could be faced with errors in their
account processing, payment systems, ATM systems, security
systems, or virtually any system controlled by a computer.
The cause is rooted in the programming of the date field within
computer systems and software. For many years, computer systems
were designed to record only the last two digits of the year in
the date field in order to save costly data storage space. This
programming concept works well while we are still in the 1900's.
This concept does not work well for the Year 2000, as that year
could be read by a computer to mean 1900.
Bank regulators and computer system experts are emphasizing
systems and software products be implemented and tested for Year
2000 readiness. This task is a monumental undertaking for all
parties involved from vendor service providers, computer systems
manufacturers, software providers, and finally the Bank. Cecil
Federal Savings Bank stands ready to prepare itself for the
millennium.
10<PAGE>
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CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
In June 1997, the Bank prepared an action plan to begin
evaluating our systems and software products. The Bank has
implemented a strategy to arrive at a solution to meet the Year
2000 requirements.
The Bank's plan consists of the following:
Problem Awareness: The Bank is aware of the problems that could
potentially arise with the year 2000 problem. As of June 1997,
the Bank began to analyze what systems and software needed to be
reviewed to prepare well in advance.
Assessment Phase: The Bank assessed and implemented a program
needed to meet system and software requirements prior to
December 31, 1997. The Bank has implemented plans that will
limit its exposure to the Year 2000 problem. The Bank has made
contacts with all its third party vendors to assess the Bank's
exposure to the problem. These include those that provide
Account & Item Processing; System Hardware Setup and ATM
Software; General Ledger Software; ATM Transaction Processing;
the ATM Service Provider; ATM Software; Financial Reporting
Software; Fed-Line Software; On-Line Bank Service Software; Loan
Sales Software; Loan Documentation Software; HMDA/Geocoding
Software; Payroll Processing; Computer Hardware; Spreadsheet
Software; and Word Processing Software.
All of the Bank's vendors have been proactive to the Year 2000
problem. The Bank's vendors have in place or will have in place
procedures to minimize the Bank's risk to the Year 2000 problem
by December 31, 1998.
Renovation Phase: The Bank will review the status of its
vendor's systems and software as of February 1998 and determine
the processes that need to be updated. The assessment phase
will be reviewed and problem areas will be identified.
Solutions to the problems will be discussed and procedures to
eliminate the problems will be established and reviewed with the
Board of Directors and management of the Bank. This process
will be completed by March 31, 1998.
Initial steps have been completed to assure compliance with
the Year 2000 problem. The Bank has contracted with its major
vendor to implement a new front-end processing system to be
installed in the third quarter of 1998. This system is already
Year 2000 compliant. This system replaces our previous teller
system which was not compliant. In addition, the Bank plans to
install 20 new personal computers and two file server computers,
which are also Year 2000 compliant. These two major investments
along with continued evaluation of our existing systems and
software products will provide some assurances as to compliance
to Year 2000 issues.
Validation Phase: The Bank will validate any decision making by
thoroughly assessing the systems compatibleness with the Year
2000 issues. Validations will be recorded and presented to the
Board of Directors. The target date for the validation phase is
December 31, 1998. Software and system testing will be done on
an ongoing basis through the end of 1998.
In March 1998, a Year 2000 Users' Group was established. The
first meeting of the users' group was held on April 7, 1998.
The meeting outlined the efforts of our processor to date and
our processor's future plans for Year 2000 qualification.
Documentation of efforts and plans are on file. On April 14,
1998, the Users' Group
11<PAGE>
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CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
met again to establish testing plans for the May 4th - May 15th
customer acceptance testing. Planned testing transactions were
developed and will be implemented at both the customer
acceptance testing and the August individual bank testing. The
testing plan is very detailed and complete as to system
applications. Cecil Federal was present at both meetings and
plans to take an active role in future meetings.
During March and April 1998, our processor completed a four-
week Integration Test and a four-week System Test. Our
processor completed system testing using three customers'
system files. Plans and test results will be available for
review by its customers of their testing. Although our
processor and its customers both realize that every aspect of
system processing is important, every customer will not be able
to test the entire system. The bank customers will have to rely
on each others' test results. Proxy testing is a must to
complete the testing process.
On May 4, 1998 through May 15, 1998, our processor has setup
customer acceptance testing at its home office. This testing
will be completed by a test group of 20 of data center customers
who will test the system. Two local banks using our data
center will be present for the testing. Using the same three
customers' files that our processor used during the Integration
Test and System Test, the customer group will run online and
offline processing, beginning with the date of December 31,
1999. Depending on the progress of the testing, the group will
continue processing, concentrating on the following dates:
. Monday, January 3, 2000
. Thursday, January 15, 2000
. Monday, January 31, 2000
. Tuesday, February 1, 2000
. Tuesday, February 29, 2000
. Friday, March 31, 2000
These bank customers will be testing all aspects of the system.
As test results are completed and reviewed, any necessary
changes will be corrected.
Individual banks will be testing for their processing systems
in August 1998. Testing will be done one Sunday in August. The
final testing phase will be the testing which customers must
perform to be able to validate their platform systems, teller
terminals and other ancillary systems. This testing will include
suggested transactions from our processor plus any other
transaction suggested by the individual banks. The suggested
transaction set is only for customer planning purposes. The
banks should develop their own transaction set to be used in
conjunction with our processor's transaction set. The bank will
test transactions against their own customer files. All test
results will be documented and distributed to customers. The
documentation for all testing days from each Data Center will be
combined into a Year 2000 reporting document which will detail
all processing and reporting processes and sent to all bank
customers.
Due to the fact that Cecil Federal Savings Bank is installing
and implementing new hardware and teller platform, the Bank will
have to do additional testing after the installation at the end
of the third quarter. Our processor will be setting a future
testing date for customers who will be converting to Year 2000
system upgrades after the August 1998 training dates.
In addition to our processor's system testing, ongoing testing
of less critical systems will be completed through the end of
1998. With the help of our vendors,
12<PAGE>
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CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
the Bank is upgrading and implementing many software changes
that will bring software and systems into Year 2000 compliance.
This testing will be ongoing throughout 1998.
Implementation Phase: The Bank will monitor the implementation
of the Year 2000 assessment and report results to the Board of
Directors. The Bank will continue to stress with its vendors
the importance of this project. The Bank will keep in continual
contact with its vendors until a final solution and
implementation has been completed. All plans are to be
completed as outlined above. The
implementation phase is to be completed by December 31, 1998.
The Bank has budgeted $150,000 for the Year 2000 issues which
consists of expenditures for computer systems, computer
hardware, software updates, and installation. In addition,
compliance assessment and compliance testing will be budgeted.
The impact of these expenditures are expected to have a minor
effect upon the company's results of operations, liquidity, and
capital resources. The majority of the expenditures will
capital expenditures that will be depreciated over a five-year
period.
Contingency Plan: The Bank's contingency plan is to provide for
a system change to our processor's new windows based processing
system. The new windows based processing system will replace
the processing system presently in use. Presently, this system
is available to the Bank. The new windows based processing
system is already Year 2000 compliant. All documentation points
to our processor bringing the present processing system into
Year 2000 compliance before the third quarter of 1998. If it
looks like our processor will not bring the present processing
system into to Year 2000 compliance by the end of 1998, the Bank
will decide to upgrade to the new windows based processing
system. By July 31, 1998, the conversion process will be
supported by written notification from our processor and what
type of timetable will be required to perform the conversion.
The Bank has decided to remain with the present processing
system due to cost restraints and ease of implementation with
the new teller system. The move from our present processing
system to The new windows based processing system would be a
conversion from what we are presently performing. The Bank
would like to take this conversion process in small steps. The
new teller system and new computer hardware is the first step in
the Year 2000 compliance process. The new windows based
processing system is our processing system for the future.
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. Cecil Federal's asset/liability management policies are
designed to reduce the impact of changes in interest rates
13<PAGE>
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CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
on its net interest income by achieving a more favorable match
between the maturities or repricing dates of its interest-
earning assets and interest-bearing liabilities. The Bank has
implemented these policies by generally emphasizing the
origination of one-year, three-year and five-year adjustable
rate mortgage loans and short-term consumer lending. The bank
now offers an adjustable rate product which remains fixed for
the first ten years and then converts to a one-year adjustable.
Prior to June 1994, most fixed-rate mortgage loans offered by
the Bank were originated for sale in the secondary market. From
July 1, 1994 through June 30, 1995 the bank elected to not sell
fixed rate mortgages that were originated, but chose to maintain
them in its portfolio. Management has been monitoring the
retention of fixed rate loans through its asset/liability
management policy. Beginning July 1, 1995, the bank began
originating fixed rate mortgages for sale in the secondary
market.
Management intends to continue to concentrate on maintaining its
interest rate spread in a manner consistent with its lending
policies, which are principally the origination of adjustable-
rate mortgages, with an appropriate blend of fixed-rate mortgage
loans in its primary market area.
Comparison of Financial Condition at March 31, 1998 and December
31, 1997
- ----------------------------------------------------------------
The Company's assets increased by $3,411,549, or 5.4% to
$67,071,779 at March 31, 1998 from $63,660,230 at December 31,
1997. The Company's emphasis on expanding the loans receivable
portfolio continued. In addition, strong deposit growth enabled
the Bank to increase its cash positions. The loans receivable
portfolio increased by $750,769, or 1.4% to $53,962,286 at March
31, 1998 from $53,211,517 at December 31, 1997. The remainder
of the Company's interest earning assets, primarily invested for
liquidity, remained constant. Cash and interest-earning cash
increased as a result of the sale of mortgage loans, prepayments
of the loan portfolio, and increased savings deposits. The
Company's stock investment in Federal Home Loan Bank of Atlanta
increased by $19,600, or 4.5% to $457,700 at March 31, 1998 from
$438,100 at December 31, 1997, as a result of requirements
imposed by the Federal Home Loan Bank of Atlanta. Federal Home
Loan Bank of Atlanta stock is currently paying an annualized
dividend rate of 7.25%.
The Company's liabilities increased $3,303,159, or 5.9% to
$59,479,806 at March 31, 1998 from $56,176,647 at December 31,
1997. During the three months ended March 31, 1998, the Company
was able to increase savings deposits as a result of additional
marketing campaigns. Savings Deposits increased $3,179,941, or
6.0% to $56,133,639 at March 31, 1998 from $52,953,698 at
December 31, 1997. Advances from the Federal Home Loan Bank of
Atlanta remained at $1,750,000. Escrow payments received in
advance for the payment of taxes and insurance on loans
receivable increased $247,592, or 37.2% to $913,326 at March 31,
1998 from $665,734 at December 31, 1997. Other liabilities
decreased $107,836 or 20.8% from $517,604 at December 31, 1997
to $409,768 at March 31, 1998.
The Company's stockholder's equity increased by $108,390 or
1.5% to $7,591,973 at March 31, 1998 from $7,483,583 at December
31, 1997. The increase was primarily due to an increase in
retained earnings of $115,840, or 3.0% and a decrease in the
14<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
unrealized net holding losses on available for sale investment
securities. The Company paid its regular dividend of $.10 per
share for the quarter ended March 31, 1998.
Results of Operations
- ---------------------
Three Months Ended March 31, 1998
- ---------------------------------
Net income increased $7,880, or 5.2% to $160,163 for the three
months ended March 31, 1998, from $152,283 for the same period
in 1997. The annualized return on average assets and annualized
return on average equity were 0.97% and 8.45% respectively, for
the three months ended March 31, 1998. This compares to an
annualized return on average assets of 1.01% and 8.53%
respectively for the same period in 1997.
Net interest income, the Company's primary source of income,
increased $32,835, or 5.4% to $644,835 for the three months
ended March 31, 1998, from $612,000 for the three months ended
March 31, 1997. The weighted average yield on all interest
earning assets decreased from 8.31% for the three months ended
March 31, 1997, to 8.23% for the three months ended March 31,
1998. The weighted average rate paid on interest bearing
liabilities increased from 4.40% for the three months ended
March 31, 1997 to 4.42% for the three months ended March 31,
1998. The increase was a result of an increase in the average
rate paid on deposits along with an increase in the average
balance outstanding.
Interest on loans receivable increased by $72,848, or 6.6% to
$1,169,550 for the three months ended March 31, 1998 from
$1,096,702 for the three months ended March 31, 1997. The
increase is attributable to both an increase in the weighted
average yield and an increase in the average balance
outstanding. The weighted average yield increased from 8.45%
for the three months ended March 31, 1997 to 8.49% for the three
months ended March 31, 1998. The average balance outstanding
increased $3,216,191, or 6.2% to $55,112,974 for the three
months ended March 31, 1998 from $51,896,784 for the three
months ended March 31, 1997.
Interest on mortgage backed securities decreased $6,971, or
19.6% to $28,611 for the three months ended March 31, 1998 from
$35,582 for the three months ended March 31, 1997. The decrease
is a result of a decrease in the average balance outstanding.
Since September 1996, there have been no new purchases of
mortgage backed securities.
Interest on investment securities increased $10,715, or 36.7% to
$39,925 for the three months ended March 31, 1998 from $29,210
for the three months ended March 31, 1997. The increase is a
result of an increase the average balance outstanding. Interest
on other investment securities increased as a result of an
increase in the average balance outstanding for the quarter.
Interest on other investments increased $1,682 or 22.8% to
$9,062 for the three months ended March 31, 1998 from $7,380 for
the three months ended March 31, 1997. Other investments
primarily are short term liquidity accounts with variable rates.
Interest on other interest
15<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
earning assets (primarily earnings on monies held at the Federal
Home Loan Bank and daily time deposit accounts) increased
$16,535 or 79.4% to $37,362 for the three months ended March 31,
1998 from $20,827 for the three months ended March 31, 1997.
Interest paid on savings deposits increased $90,867, or 17.5% to
$608,651 for the three months ended March 31, 1998 from $517,784
for the three months ended March 31, 1997. The increase was the
result of an increase in the average balance outstanding along
with an increase in the weighted average yield on deposits. The
average balance outstanding increased $7,150,206, or 15.0% to
$54,887,559 for the three months ended March 31, 1998 from
$47,737,353 for the same period in 1997. The weighted average
yield increased from 4.32% for the three months ended March 31,
1997 to 4.42% for the three months ended March 31, 1998.
Interest expense paid on borrowings decreased $28,893, or 48.2%
to $31,024 for the three months ending March 31, 1998 from
$59,917 for the three months ended March 31, 1997. The decrease
was a result of a decrease in the average balance outstanding
and a slight decrease in the average cost of funds.
Provisions for loan losses increased $12,000, or 114.3% to
$22,500 for the three months ended March 31, 1998 from $10,500
for the three month period ending March 31, 1997. The Bank
reported a voluntary increase in general reserves as a result of
the reassessment of reserve balances needed to provide for
increased exposure in outstanding loan categories other than
one-to-four residential loans.
Noninterest income. Noninterest income increased $27,597, or
39.2% to $98,065 for the three months ended March 31, 1998 from
$70,468 for the three months ended March 31, 1997. Loan
servicing fees decreased 15.8%, down $1,396 for the three months
ended March 31, 1998 over the same period in 1997. This was a
result of the decrease in balances of the servicing portfolio.
Gains on sale of loans increased $8,149, or 172.1% to $12,885
for the three month period ending March 31, 1998 from $4,736 for
the three months ended March 31, 1997. The increase was
attributable to a decrease in the secondary market rates on
long-term fixed rate loans. Commission income increased $22,584
or 100.0% for the three months ended March 31, 1998 over the
same period in 1997. The increase is the result of the
establishment of Cecil Financial Services in September 1997.
Other fees decreased $2,039 or 4.1% to $47,166 for the three
months ended March 31, 1998 from $49,205 for the three months
ended March 31, 1997. Decreases were primarily attributable to
decreases in fee income.
Noninterest Expense. Noninterest expense increased $44,727, or
10.4% to $476,557 for the three months ended March 31, 1998 from
$431,830 for the three months ended March 31, 1997. The Company
experienced an increase in compensation and benefits of $27,970,
or 11.7% to $266,119 for the three months ended March 31, 1998
from $238,149 for the three months ended March 31, 1997. The
increase can be attributable to the hiring of a new employee for
Cecil Financial Services and annual salary increases. The
Company also experienced an increase in the amount paid to the
Savings Association Insurance Fund during the three months ended
March 31, 1998. Although lower premium rates became effective
January 1, 1997, the Company's SAIF premium increased $7,117, or
105.5% to $13,861 for the three months ended March 31,
16<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
1998 as compared to $6,744 for the three months ended March 31,
1997. This difference is attributable to a one-time credit
adjustment of $6,293 received in the first quarter of 1997. The
additional difference is due to the continued deposit growth at
the Bank.
Income Taxes. Income tax expense for the three months ended
March 31, 1998 and March 31, 1997 was $83,680 and $87,855
respectively, which equates to effective rates of 34.3% and
36.6%, respectively.
17<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Nonperforming Assets and Problem Loans
- --------------------------------------
Management reviews and identifies all loans and investments that
require designation as nonperforming assets. These assets
include: (I) loans accounted for on a nonaccrual basis,
consisting of all loans 90 or more days past due; (ii) troubled
debt restructuring; and (iii) assets acquired in settlement of
loans. The following table sets forth certain information with
respect to nonperforming assets at March 31, 1998:
1998 1997
------ -------
Nonperforming loans:
Residential mortgage $368,552 $381,101
Consumer and other 39,396 6,400
Assets acquired in settlement of loans:
Real estate held for development and sale
Real estate held for investment and sale
Repossessed assets $317,300 $ 0
-------- --------
Total Nonperforming Assets $725,248 $387,501
======== ========
Residential mortgages classified consisted of 12 loans with
balances ranging from $1,000 to $173,000. Classified consumer
loans consisted of 7 loans with balances ranging from $100 to
$27,000 as of March 31, 1998. The Bank acquired two
single-family dwellings that are both under contract and pending
settlement. These assets will be dispossessed in the second
quarter of 1998.
The provision for losses on loans is determined based on
management's review of the loan portfolio and analysis of
borrower's ability to repay, past collection experience, and
risk characteristics.
18<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
CAPITAL ADEQUACY
- ----------------
The Company Capital adequacy refers to the level of capital
required to sustain asset growth and to absorb losses. There
are currently no regulatory capital guidelines or requirements
for the Company.
The Bank The Office of Thrift Supervision ("OTS"), which is
the
bank's principal regulator, has established requirements for
tangible, core and risk-based measures of capital. As a result,
the three capital measures mentioned above were as follows at
March 31, 1998:
<TABLE>
<CAPTION>
Tangible Core Risk Based
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Available capital $7,324 $7,324 $7,522
Required capital 1,006 2,684 3,243
------ ------ ------
Excess $6,318 $4,640 $4,279
====== ====== ======
Available capital 10.91% 10.91% 18.56%
Required capital 1.50% 4.00% 8.00%
------ ------ ------
Excess 9.41% 6.91% 10.56%
====== ====== ======
</TABLE>
The Federal Deposit Improvement Act of 1991 ("FDICIA")
established five capital categories which are used to determine
the rate of deposit insurance premiums paid by insured
institutions, thus introducing the concept of risk adjusted
premiums. This act has the effect of requiring weaker banks to
pay higher insurance premiums while allowing healthier,
well-capitalized banks to pay lower premiums. The following
table summarizes the five capital categories and the minimum
capital requirements for each of the three capital requirements:
<TABLE>
<CAPTION>
Tangible Core Risk Based
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Well capitalized 5+% 6+% 10+%
Adequately capitalized 4%-4.99% 4%-5.99% 8%-9.99%
Undercapitalized 3%-3.99% 3%-3.99% 6%-7.99%
Significantly undercapitalized 2%-2.99% 2%-2.99% 0%-5.99%
Critically undercapitalized 0%-1.99% - -
- ----------------------------------------------------------------------------
</TABLE>
On March 31, 1998, the Bank's capital levels were sufficient to
qualify it as a well-capitalized institution, the most favorable
category, allowing the Bank to pay lower deposit insurance
premiums.
19<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
PART II. Other Information: PAGE
----
Item 1. Legal Proceedings -
Not Applicable
Item 2. Changes in Securities -
Not Applicable
Item 3. Defaults Upon Senior Securities -
Not Applicable
Item 4. Submission of Matters to a Vote of
Security Holders 21
Item 5. Other Information -
Not Applicable
Item 6. Exhibits and Reports on Form 8-K -
No reports on Form 8-K were filed during the
three months ended March 31, 1998
20<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
PART II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Cecil Bancorp, Inc. Was
held in April 15, 1998, at 10:00a.m. at the Swiss Inn, Elkton,
Maryland, for the purpose of electing a board of directors.
Proxies for the meeting were solicited pursuant to Section 14(a)
of the Securities Exchange Act of 1934 and there was no
solicitation in opposition to management's solicitations.
All of management's nominee for directors as listed in the
proxy statement were elected with the following vote:
To serve for a three-year term:
<TABLE>
<CAPTION>
Shares Shares
Voted Shares Not
"For" "Withheld" Voted
<S> <C> <C> <C>
Michael J. Scibinico 250,247 1,000 218,935
Thomas L. Foard 248,492 2,755 218,935
</TABLE>
21<PAGE>
<PAGE>
CECIL BANCORP INC. AND SUBSIDIARIES
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 1, 1998 By: /s/ Mary Beyer Halsey
----------------------
Mary Beyer Halsey
President
Chief Executive Officer
22
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,912,441
<INT-BEARING-DEPOSITS> 2,913,960
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,783,966
<INVESTMENTS-CARRYING> 3,385,750
<INVESTMENTS-MARKET> 3,385,750
<LOANS> 53,962,286
<ALLOWANCE> 194,403
<TOTAL-ASSETS> 67,071,779
<DEPOSITS> 56,133,639
<SHORT-TERM> 1,750,000
<LIABILITIES-OTHER> 409,768
<LONG-TERM> 0
<COMMON> 4,702
0
0
<OTHER-SE> 7,591,973
<TOTAL-LIABILITIES-AND-EQUITY> 67,071,779
<INTEREST-LOAN> 1,169,550
<INTEREST-INVEST> 68,536
<INTEREST-OTHER> 46,424
<INTEREST-TOTAL> 1,284,510
<INTEREST-DEPOSIT> 608,651
<INTEREST-EXPENSE> 639,675
<INTEREST-INCOME-NET> 644,835
<LOAN-LOSSES> 22,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 117,617
<INCOME-PRETAX> 243,843
<INCOME-PRE-EXTRAORDINARY> 243,843
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 160,163
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
<YIELD-ACTUAL> 4.13
<LOANS-NON> 368,000
<LOANS-PAST> 210,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 174,000
<CHARGE-OFFS> 8,000
<RECOVERIES> 7,000
<ALLOWANCE-CLOSE> 195,000
<ALLOWANCE-DOMESTIC> 195,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,025,169
<INT-BEARING-DEPOSITS> 772,920
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,084,373
<INVESTMENTS-CARRYING> 2,501,136
<INVESTMENTS-MARKET> 2,501,307
<LOANS> 50,309,268
<ALLOWANCE> 124,000
<TOTAL-ASSETS> 60,767,507
<DEPOSITS> 48,701,131
<SHORT-TERM> 3,250,000
<LIABILITIES-OTHER> 1,674,222
<LONG-TERM> 0
<COMMON> 4,694
0
0
<OTHER-SE> 7,137,460
<TOTAL-LIABILITIES-AND-EQUITY> 60,767,507
<INTEREST-LOAN> 1,096,702
<INTEREST-INVEST> 29,210
<INTEREST-OTHER> 63,789
<INTEREST-TOTAL> 1,189,701
<INTEREST-DEPOSIT> 517,784
<INTEREST-EXPENSE> 577,701
<INTEREST-INCOME-NET> 612,000
<LOAN-LOSSES> 10,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 111,118
<INCOME-PRETAX> 240,138
<INCOME-PRE-EXTRAORDINARY> 240,138
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 152,283
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
<YIELD-ACTUAL> 4.40
<LOANS-NON> 376,000
<LOANS-PAST> 112,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 121,000
<CHARGE-OFFS> 15,000
<RECOVERIES> 7,000
<ALLOWANCE-CLOSE> 124,000
<ALLOWANCE-DOMESTIC> 124,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
