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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
_________________________________________________________________
FORM 10-QSB
[ ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE EXCHANGE ACT
For the transition period from _____ to _____.
Commission File Number: 0-24926
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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 June 30, 1998
$0.01 par value common stock 470,182 shares
- ---------------------------- --------------
Class Outstanding
1<PAGE>
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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 - June 30, 1998
and December 31, 1997 3-4
Consolidated Condensed Statements of
Operations for the Six Months Ended
and Three Months Ended June 30, 1998
and June 30, 1997 5-6
Consolidated Condensed Statement of
Cash Flows for the Six Months Ended
June 30, 1998 and June 30, 1997 7-8
Notes to Consolidated Condensed
Financial Statements 9
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9-21
PART II. OTHER INFORMATION 22
2<PAGE>
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CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Cash $ 1,634,157 $ 961,993
Cash - interest-bearing 1,158,183 880,809
Investment securities
Securities held-to-maturity 3,006,363 2,997,516
Securities available-for-sale at
estimated market value 542,245 528,043
Mortgage-backed securities
Securities held-to-maturity 328,980 411,641
Securities available-for-sale at
estimated market value 1,100,944 1,405,483
Loans held for sale 2,189,025 1,362,969
Loans receivable, net 56,282,833 53,211,517
Real estate owned -- 171,229
Office properties, equipment and leasehold
improvements at cost, less accumulated
depreciation and amortization 672,236 659,464
Stock in Federal Home Loan Bank of
Atlanta - at cost 457,700 438,100
Accrued interest receivable 464,333 466,610
Mortgage servicing rights 111,475 103,605
Prepaid expenses 25,695 37,455
Other assets 12,795 23,796
----------- -----------
TOTAL ASSETS $67,986,964 $63,660,230
=========== ===========
</TABLE>
3<PAGE>
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CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES
Savings deposits $56,430,250 $52,953,698
Advance payments by borrowers for
property taxes and insurance 1,181,092 665,734
Employee stock ownership debt 269,556 269,556
Other liabilities 301,269 517,604
Deferred taxes 7,047 20,055
Advances from Federal Home Loan
Bank of Atlanta 2,000,000 1,750,000
----------- -----------
TOTAL LIABILITIES 60,189,214 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 4,023,742 4,000,351
Employee stock ownership debt (269,556) (269,556)
Deferred compensation - Management
Recognition Plan (80,676) (118,361)
Retained earnings, substantially
restricted 4,110,428 3,847,661
Accumulated other comprehensive income 9,110 18,786
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 7,797,750 7,483,583
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $67,986,964 $63,660,230
=========== ===========
</TABLE>
4<PAGE>
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CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
(Unaudited)
INTEREST INCOME
Loans receivable $ 1,254,175 $ 1,119,873 $ 2,423,725 $ 2,216,574
Mortgage-backed securities 24,280 34,156 52,890 69,737
Investment securities 40,761 32,445 80,686 61,655
Other interest-earning assets 51,108 47,469 97,532 75,677
----------- ----------- ----------- -----------
Total interest income 1,370,324 1,233,943 2,654,833 2,423,643
INTEREST EXPENSE
Deposits
NOW accounts 34,752 20,020 65,385 37,264
Passbook accounts 72,191 73,311 140,450 144,787
Money market deposit accounts 18,518 17,189 36,299 34,949
Certificates 497,139 451,072 989,117 862,376
----------- ----------- ----------- -----------
Interest expense on deposits 622,600 561,592 1,231,251 1,079,376
Borrowings 33,504 39,836 64,528 99,752
----------- ----------- ----------- -----------
Total interest expense 656,104 601,428 1,295,779 1,179,128
----------- ----------- ----------- -----------
Net interest income 714,220 632,515 1,359,054 1,244,515
Provision for loan losses 22,500 25,500 45,000 36,000
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 691,720 607,015 1,314,054 1,208,515
NONINTEREST INCOME
Loan service charges 10,527 8,574 17,951 17,395
Dividends on FHLB stock 7,863 7,599 15,869 15,306
Gain on sale of loans 20,641 17,856 33,526 22,592
Checking account fees 34,897 30,904 69,804 58,253
Commission income 16,929 -- 39,513 --
Other 24,986 25,311 37,247 47,167
----------- ----------- ----------- -----------
Total noninterest income 115,843 90,244 213,910 160,713
NONINTEREST EXPENSE
Compensation and benefits 255,872 243,765 521,991 481,913
Occupancy expense 26,627 24,183 53,169 53,731
Equipment and data
processing expense 50,952 41,013 103,370 87,285
SAIF deposit insurance premium 13,966 12,975 27,827 19,719
Other 141,179 132,415 258,795 243,533
----------- ----------- ----------- -----------
Total noninterest expense 488,596 454,351 965,152 886,181
----------- ----------- ----------- -----------
Income before income taxes 318,967 242,908 562,812 483,047
INCOME TAXES
Current 124,815 85,296 229,994 184,272
Deferred 2,905 14,770 (18,594) 3,649
----------- ----------- ----------- -----------
Total income taxes 127,720 100,066 211,400 187,921
----------- ----------- ----------- -----------
NET INCOME $ 191,247 $ 142,842 $ 351,412 $ 295,126
=========== =========== =========== ===========
Basic earnings per common share $ .43 $ .33 $ .79 $ .67
=========== =========== =========== ===========
Diluted earnings per common share $ .43 $ .32 $ .78 $ .67
=========== =========== =========== ===========
Cash dividends paid per common share$ .10 $ .10 $ .20 $ .20
=========== =========== =========== ===========
</TABLE>
5<PAGE>
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CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
<TABLE
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET INCOME $ 191,247 $ 142,842 $ 351,412 $ 295,126
OTHER COMPREHENSIVE GAIN (LOSS)
Unrealized gain (losses) on
investment securities, net
of deferred taxes (2,226) 15,618 (9,676) (661)
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME $ 189,021 $ 158,460 $ 341,736 $ 294,465
=========== =========== =========== ===========
</TABLE>
6<PAGE>
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CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1998 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and fees received on
loans and investments $ 2,813,996 $ 2,542,273
Cash paid to suppliers and employees (909,465) (848,550)
Proceeds from sale of loans 1,249,567 1,703,325
Origination of loans held for sale (2,125,200) (1,506,800)
Interest paid (1,295,779) (1,179,128)
Income taxes paid (382,570) (187,334)
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES (649,451) 523,786
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment
securities 2,000,000 2,500,000
Proceeds from maturities of
mortgage-backed securities 384,439 136,638
Purchases of investment securities (2,008,750) (2,501,641)
Loans originated (12,956,072) (8,410,502)
Principal collected on loans 9,922,859 7,449,087
Purchases of office properties, equipment
and leasehold improvements (48,381) (115,859)
Purchase of real estate owned (146,071) (147,258)
Proceeds from sale of real estate owned 317,300 --
Purchase of stock in Federal Home Loan Bank
of Atlanta (19,600) (15,200)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (2,554,276) (1,104,735)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Nets increase in demand deposits,
NOW accounts, and savings accounts 27,739,490 16,198,249
Proceeds from sales of certificates 4,018,708 5,894,684
Payments of maturing certificates of deposits (28,281,646) (16,462,598)
Increase in advance payments by
borrowers for property taxes and insurance 515,358 530,697
Dividends paid (88,645) (93,872)
Advances (repayments) to Federal Home Loan Bank
of Atlanta 250,000 (2,750,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,153,265 3,317,160
----------- -----------
NET INCREASE IN CASH 949,538 2,736,211
CASH
BEGINNING OF PERIOD 1,842,802 2,180,622
----------- -----------
END OF PERIOD $ 2,792,340 $ 4,916,833
=========== ===========
</TABLE>
7<PAGE>
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CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Continued)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1998 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES
Net Income $ 351,412 $ 295,126
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 35,609 23,447
Provision for loan losses 45,000 36,000
Amortization of investment security
discounts (120) (8,873)
Stock dividends (15,508) (15,086)
Increase in accrued interest receivable 2,277 4,468
Decrease in deferred tax asset
Increase in mortgage servicing rights (7,870) --
Decrease in prepaid expenses 11,760 12,258
(Increase) decrease in other assets 11,001 (13,829)
Decrease in other liabilities (216,335) (34,157)
(Increase) decrease in loans held for sale (909,159) 173,933
Release of vested MRP shares 61,076 44,184
Increase (decrease) in deferred tax liability (18,594) (6,315)
---------- ----------
(1,000,863) 228,660
---------- ----------
$ (649,451) $ 523,786
========== ==========
</TABLE>
8<PAGE>
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CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
JUNE 30, 1998
-------------
(1) BASIS OF PRESENTATION
---------------------
(1) Summary of Significant Accounting Policies
------------------------------------------
The accompanying unaudited financial statements have been
prepared in accordance with the accounting policies in effect at
December 31, 1997, as set forth in the annual consolidated
financial statements of Cecil Bancorp, Inc. and subsidiaries
(the "Bank"). In the opinion of Management, all adjustments
necessary for the fair presentation of the consolidated
financial statements are of a normal recurring nature and have
been included.
The results of operations for the six month periods ended
June 30, 1998 are not necessarily indicative of the results to be
expected for the full 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 period. 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 449,819 and 440,845, 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.
9
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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. On November 10, 1994,
Cecil Federal Savings Bank ("Cecil Federal" or the "Bank") converted
from mutual to stock form and reorganized into the holding company
form of ownership as a wholly owned subsidiary of the Company. 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 benefits, occupancy
expenses, equipment and data processing expenses, deposit insurance
expenses and other operating expenses.
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
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.
PROPOSED TRANSACTIONS
- ---------------------
On May 29, 1998, the Company entered into a merger agreement to
acquire Columbian Bank, FSB., a $30.0 million savings bank located in
Havre de Grace, Maryland.
The Merger Agreement provides for the acquisition of Columbian
Bank, A Federal Savings Bank ("Columbian") by Cecil Bancorp (also
referred to as the "Company" or the " Applicant") as follows: (1) Cecil
Bancorp will organize Interim as a wholly owned interim federal
savings bank (2) Interim will merge with and into Columbian with
Columbian surviving as a wholly-owned subsidiary of Cecil Bancorp, and
each outstanding share of Columbian's common stock will be
automatically converted into the right to receive shares of Company
Common Stock (and cash in lieu of fractional shares), based upon an
exchange ratio as more fully described below and (3) the issued and
outstanding shares of Interim common stock will be converted into an
equal number of shares of Columbian common stock, all of which will be
owned by Cecil Bancorp. Together these transactions are referred
herein as the "Merger".
Pursuant to the Merger Agreement, each share of Columbian Common
Stock outstanding at the Effective Date (except for shares owned or
held by Columbian or the Company (other than in a fiduciary capacity
or in any 401(k) plan of Columbian), or Dissenting Shares) will be
converted into the right to receive a number of shares of Company
Common Stock, determined pursuant to the Exchange Ratio based upon the
Cecil Trading Price. The Cecil Trading Price will be determined by
the average of the closing price of a share of Company Common Stock as
reported by "Bloomberg Business News") for the last five days in which
Company Common Stock was traded prior to OTS approval of the Merger,
and the Exchange Ratio will therefore be set as follows: (i) if the
Cecil Trading Price is more than $29.375, the Exchange Ratio will be
1.5645; (ii) if the Cecil Trading Price is more than $27.00 and equal
to or less than $29.375, the Exchange Ratio will be determined by
dividing $45.96 by the Cecil Trading Price, and will be between 1.5645
and 1.7021; (iii) if the Cecil Trading Price is equal to or more than
$20.00 and equal to or less than $27.00, the Exchange Ratio will be
1.7021; and (iv) if the Cecil Trading Price is less than $20.00, the
Exchange Ratio will be determined by dividing $34.04 by the Cecil
Trading Price.
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
Completion of the Merger is subject to (i) the receipt of all
required regulatory approvals and (ii) the approval of Columbian's
stockholders. Consummation of the merger is expected to occur late in
the third quarter or in the fourth quarter of 1998.
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.
In June 1997, the Bank prepared an action plan to begin
evaluating our systems and software products. The Bank's plan
consists of the following:
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
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: 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 the Bank's 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 the Bank's 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 compatibility 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. During
March and April 1998, the Bank's data processor completed a four-week
Integration Test and a four-week System Test. On May 4, 1998 through
May 15, 1998, the Bank's 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. 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
13<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
transactions from our processor plus any other transaction suggested
by the individual banks. Due to the fact that Cecil Federal 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. The Bank's data processor will be setting a
future testing date for customers who will be converting to Year 2000
system upgrades after the August 1998 testing dates.
In addition to processor system testing, ongoing testing of less
critical systems will be completed through the end of 1998. With the
help of our vendors, 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.
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 be 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 the data 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 the Bank's
data processor bringing the present processing system into Year 2000
compliance before the third quarter of 1998. If it looks like the
Bank's data 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.
14<PAGE>
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CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 on its net interest income by achieving a
more favorable match between the maturities and 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 mortgages offered by the Bank were originated for sale in
the secondary market. Since July 1, 1995, the Bank has originated
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 is principally the origination of adjustable-rate mortgages,
with an appropriate blend of fixed rate mortgage loans in its primary
market area.
FINANCIAL CONDITION
- -------------------
Comparison of financial condition at June 30, 1998 and December 31,
1997.
The Company's total assets at June 30, 1998 increased $4,326,734
or 6.8% to $67,986,964 from $63,660,230 at December 31, 1997. The
increase was primarily the result of an increase in loans receivable,
cash and loans-held-for-sale. Total liabilities increased $4,012,567
or 7.1% to $60,189,214 at June 30, 1998 from $56,176,647 at December
31, 1997. This increase was the result of an increase in savings
deposits and escrows. Stockholder's equity increased $314,167 or
4.2%.
Cash increased $672,164 or 69.9% to $1,634,157 at June 30, 1998
from $961,993 at December 31, 1997. Interest-bearing cash increased
$277,374 or 31.5% to $1,158,183 at June 30, 1998 from $880,809 at
December 31, 1997. The increases were primarily due to an increase in
deposits and repayments of loans.
Loans receivable increased $3,071,316 or 5.8% to $56,282,833 at
June 30, 1998 from $53,211,517 at December 31, 1997. The increase in
loans receivable was a result of increased loan originations. The
loans-held-for sale portfolio increased $826,056 or 60.6% to
$2,189,025 at June 30, 1998 from $1,362,969 at December 31, 1997. The
increase was a result of increased fixed rate originations. Loans
held-for-sale will continue to be sold to fund portfolio needs. Real
estate owned decreased to a zero balance during second quarter of
1998. The company sold the two single-family
15<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
properties that were taken back as a result of foreclosure.
Total savings deposits increased $3,476,552 or 6.6% to
$56,430,250 at June 30, 1998 from $52,953,698 at December 31, 1997.
Increases are attributable to increased marketing and cross selling
plans. Escrows held for the payments of taxes and insurances
increased $515,358 or 77.4% to $1,181,092 at June 30, 1998 from
$665,734 at December 31, 1997. Increases are attributable to changes
in the calculation of reserves on mortgage escrow accounts. Advances
from the Federal Home Loan Bank of Atlanta increased $250,000 or 14.3%
to $2,000,000 at June 30, 1998 from $1,750,000 at December 31, 1997.
Increases were due to general funding needs.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended June 30, 1998
- --------------------------------
Net income for the three month period ended June 30, 1998
increased $48,405 or 33.9% to $191,247 as compared to net income for
the same period in 1997 of $142,842. The annualized return on average
assets and annualized return on average equity were 1.13% and 9.91%
respectively, for the three-month period ended June 30, 1998. This
compares to an annualized return on average assets and annualized
return on average equity of .91% and 7.90% respectively, for the same
period in 1997.
Net interest income, the Bank's primary source of income,
increased 12.9%, or $81,705 for the three months ended June 30, 1998,
over the same period in 1997. The weighted average yield on interest
earning assets increased from 8.32% for the three months ended June
30, 1997 to 8.62% for the three months ended June 30, 1998. The
weighted average rate paid on interest bearing liabilities decreased
from 4.56% for the three months ended June 30, 1997 to 4.40% for the
three months ended June 30, 1998.
Interest on loans receivable increased by $134,302 or 12.0%, from
$1,119,873 for the three months ended June 30, 1997 to $1,254,175 for
the three months ended June 30, 1998. The increase is attributable to
an increase in the average balance outstanding of $5,095,985. The
weighted average yield increased from 8.65% for the three months ended
June 30, 1997 to 8.80% for the three months ended June 30, 1998.
Interest on mortgage backed securities decreased $9,876 or 28.9%,
from $34,156 for the three months ended June 30, 1997 to $24,280 for
the three months ended June 30, 1998. The decrease was the result of
an decrease in the average outstanding balance. Interest on
investment securities increased $8,316 or 25.6% from $32,445 for the
three months ended June 30, 1997 to $40,761 for the three months ended
June 30, 1998. The average outstanding balance increased $673,000 for
the three months ended June 30, 1998 over the three months ended June
30, 1997. The weighted average yield decreased from 5.56% for the
three months ended June 30, 1997 to 5.42% for the three months ended
June 30, 1998.
Interest on other investments increased $3,639, or 7.6% from
$47,469 for the three months ended June 30, 1997 to $51,108 for the
three months ended June 30, 1998. The
16<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
average outstanding balance decreased slightly, which was offset by a
slight increase in the average yield.
Interest on savings deposits increased $61,008 or 10.9% from
$561,592 for the three months ended June 30, 1997 to $622,600 for the
three months ended June 30, 1998. The average balance outstanding
increased $8,889,909 for the period noted above. The weighted average
rate paid on deposits increased from 4.34% for the three months ended
June 30, 1997 to 4.38% for the three months ended June 30, 1998.
Interest expense paid on borrowings decreased $6,332, or 15.9% from
$39,836 for the three months ended June 30, 1997 to $33,504 for the
three months ended June 30, 1998.
Noninterest income increased 28.4%, up $25,599 for the three
months ended June 30, 1998, over the same period in 1997. Loan
servicing fees increased 22.8%, up $1,953 for the three months ended
June 30, 1998 over the same period in 1997. There was an increase in
gains on the sale of loans for the three months ended June 30, 1998 of
$2,785 over the same period in 1997. This increase was attributable
to the Bank's decision to continually sell loans on the secondary
market during 1998 to fund portfolio needs. Checking account fees
increased $3,993, or 12.9% Increases in this area can be primarily
attributable to increased service charges, as a result of steady
growth of demand deposits, and the activity of three ATM machines,
which are primarily used by non-customers.
Noninterest expense increased 7.5%, up $34,245 for the three
months ended June 30, 1998, over the same period in 1997.
Compensation and benefits increased 5.0% for the three months ended
June 30, 1998 over the same period in 1997, which is a result of
general merit increases and costs of benefits. Equipment and data
processing expenses increased 24.2% for the three months ended June
30, 1998 over the same period in 1997 as a result of the Company's
year 2000 compliance plan. The SAIF deposit premium decreased 7.6%
for the three months ended June 30, 1998 over the same period in 1997,
as a result of increases in savings deposits. Other expenses
increased by 6.6% for the three months ended June 30, 1998 over the
same period in 1997, as a result of increased legal expenses,
accounting and audit expenses, meeting expenses, and charitable
contributions.
Income tax expense for the three-month period ended June 30, 1998
and 1997 was $127,720 and $100,066, respectively, which equates to
effective rates of 40.0% and 41.2% respectively.
Six Months Ended June 30, 1998
- ------------------------------
Net income for the six-month period ended June 30, 1998 increased
$79,765 or 16.5% to $562,812, compared to net income of $483,047 for
the same period in 1997. The annualized return on average assets and
annualized return on average equity were 01.05% and 9.18%
respectively, for the six-month period ended June 30, 1998. This
compares to an annualized return on average assets and annualized
return on average equity of 0.96% and 8.21% respectively, for the same
period in 1997.
17<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net interest income, the Bank's primary source of income,
increased 8.7% up $105,539 for the six months ended June 30, 1998,
over the same period in 1997. The weighted average yield on interest
earning assets increased from 8.31% for the six months ended June 30,
1997 to 8.42% for the six months ended June 30, 1998. The weighted
average rate paid on interest bearing liabilities decreased from 4.65%
for the six months ended June 30, 1997 to 4.41% for the six months
ended June 30, 1998.
Interest on loans receivable increased by $207,151 or 9.3%, from
$2,216,574 for the six months ended June 30, 1997 to $2,423,725 for
the six months ended June 30, 1998. The average balance outstanding
increased $4,265,882. The weighted average yield increased from 8.55%
for the six months ended June 30, 1997 to 8.65% for the six months
ended June 30, 1998.
Interest on mortgage backed securities increased $16,847 or
24.2%, from $69.737 for the six months ended June 30, 1997 to $52,890
for the six months ended June 30, 1998. The average outstanding
balance decreased $456,355 for the six months ended June 30, 1998
from the same period ended 1997, with the weighted average yield
remaining constant.
Interest on investment securities increased $19,031, or 30.9%,
from $61,655 for the six months ended June 30, 1997 to $80,686 for the
same period in 1998. The weighted average yield decreased from 5.70%
for the six months ended June 30, 1996 to 5.37% for the six months
ended June 30, 1998. The average outstanding balance increased
$670,901 from $2,333,318 for the six months ended June 30, 1997 to
$3,004,219 for the six months ended June 30, 1998.
Interest on other investments increased $21,855, or 28.9% from
$75,677 for the six months ended June 30, 1997 to $97,532 for the six
months ended June 30, 1997. The average balance outstanding increased
slightly. The weighted average yield increased slightly from 6.85% for
the six months ended June 30, 1996 to 6.92% for the six months ended
June 30, 1997. The average balance outstanding increased due to the
investment of excess cash in an FHLB time deposit.
Interest on savings deposits increased $151,875, or 14.1% from
$1,079,376 for the six months ended June 30, 1997 to $1,231,251 for
the six months ended June 30, 1998. The average balance outstanding
increased $5,212,493 for the period noted above. The weighted average
rate paid on deposits decreased from 4.33% for the six months ended
June 30, 1997 to 4.32% for the six months ended June 30, 1998.
Interest expense paid on borrowings decreased $35,224, or 35.3% from
$99,752 for the six months ended June 30, 1997 to $64,528 for the six
months ended June 30, 1998. Decreases are attributable to decreases
in the average balance outstanding and the weighted average cost of
funds.
Noninterest income increased $53,197 or 33.1% to $213,910 for the
six months ended June 30, 1998 from $160,713 for the same period in
1997. Gain on sale of loans was up $10,934 or 48.4% for the six
months ended June 30, 1998 over the same period in
18<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1997, as a result of the sale of fixed rate loans in the secondary
market. Other fees decreased 21.0% down $9,920 for the six months
ended June 30, 1998 over the same period in 1997. Increases in fee
income were offset by additional fees associated with the Bank's three
ATM machines, of which the Chesapeake City location is new.
Noninterest expense increased $78,971 or 8.9% to $965,152 for the
six-month period ended June 30, 1998 from $886,181 for the six months
ended June 30, 1997. The SAIF deposit premium increased 41.1%, up
$8,108 for the six months ended June 30, 1998, over the same period in
1997. Increases were a result of increased savings deposits, and a
special reduction of SAIF insurance rates that occurred during the six
month period of 1997. Other expenses increased 6.3%, up $78,971 for
the six-month period ended June 30, 1998, over the same period in
1997. The increase was attributable to an increase in legal fees,
audit and accounting fees, meeting expenses, and charitable
contributions.
Income tax expense for the six-month period ended June 30, 1998
and 1997 was $211,400 and $187,921 which equates to effective rates of
37.6% and 38.9% respectively.
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 June
30, 1998:
1998 1997
-------- --------
Nonperforming loans:
Residential mortgage $353,726 $504,756
Consumer and other 26,850 12,127
Assets acquired in settlement of loans:
Real estate held for development and sale -- --
Real estate held for investment and sale -- --
Repossessed assets $ -- $147,258
-------- --------
Total nonperforming assets $380,576 $664,141
======== ========
Residential mortgages classified consisted of 8 loans with
balances ranging from $1,000 to $172,000. Classified consumer loans
consisted of 1 loan as of June 30, 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.
19<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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
principle 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 June 30, 1998:
Tangible Core Risk Based
- ----------------------------------------------------------------------
Available capital $7,562 $7,562 $7,758
Required capital 1,021 2,722 3,388
------ ------ ------
Excess $6,541 $4,840 $4,370
====== ====== ======
Available capital 11.11% 11.11% 18.32%
Required capital 1.50% 4.00% 8.00%
------ ------ ------
Excess 9.61% 7.11% 10.32%
====== ====== ======
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:
Tangible Core Risk-Based
- ----------------------------------------------------------------------
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% -- --
- ----------------------------------------------------------------------
On June 30, 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.
20<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
PART II. Other Information:
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
On April 15, 1998, the Registrant held its Annual
Meeting of Stockholders. Information regarding this meeting
was previously reported in the Form 10-QSB for the quarter
ended March 31, 1998.
Item 5. Other Information -
Not Applicable
Item 6. Exhibits and Reports on Form 8-K -
Cecil Bancorp filed a Form 8-K on June 4, 1998
announcing that it had signed an agreement to acquire
Columbian Bank, A Federal Savings Bank in a transaction
which will be accounted for as a pooling of interests.
Columbian Shareholders will receive approximately 1.7 shares
of Cecil Common Stock for each share of Columbian Common
Stock subject to adjustment as described in the Form 8-K.
For more information see the Form 8-K filed on June 4, 1998.
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: August 14, 1998 By: /s/ Mary Beyer Halsey
----------------------
Mary Beyer Halsey
President
Chief Executive Officer
22
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<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,634,157
<INT-BEARING-DEPOSITS> 1,158,183
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,643,189
<INVESTMENTS-CARRYING> 3,335,343
<INVESTMENTS-MARKET> 3,335,343
<LOANS> 56,282,833
<ALLOWANCE> 195,182
<TOTAL-ASSETS> 67,986,964
<DEPOSITS> 56,430,250
<SHORT-TERM> 2,000,000
<LIABILITIES-OTHER> 301,269
<LONG-TERM> 0
<COMMON> 4,702
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<OTHER-SE> 7,793,048
<TOTAL-LIABILITIES-AND-EQUITY> 67,986,964
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<INTEREST-INVEST> 65,041
<INTEREST-OTHER> 51,108
<INTEREST-TOTAL> 1,370,324
<INTEREST-DEPOSIT> 622,600
<INTEREST-EXPENSE> 656,104
<INTEREST-INCOME-NET> 714,220
<LOAN-LOSSES> 22,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 141,179
<INCOME-PRETAX> 318,967
<INCOME-PRE-EXTRAORDINARY> 318,967
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 191,247
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
<YIELD-ACTUAL> 4.31
<LOANS-NON> 353,725
<LOANS-PAST> 197,379
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 194,403
<CHARGE-OFFS> 25,485
<RECOVERIES> 3,764
<ALLOWANCE-CLOSE> 195,182
<ALLOWANCE-DOMESTIC> 195,182
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,914,148
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<FED-FUNDS-SOLD> 0
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<INVESTMENTS-HELD-FOR-SALE> 2,063,806
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<COMMON> 4,694
0
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<OTHER-SE> 7,293,169
<TOTAL-LIABILITIES-AND-EQUITY> 63,891,590
<INTEREST-LOAN> 1,119,873
<INTEREST-INVEST> 66,601
<INTEREST-OTHER> 47,469
<INTEREST-TOTAL> 1,233,943
<INTEREST-DEPOSIT> 561,592
<INTEREST-EXPENSE> 601,428
<INTEREST-INCOME-NET> 632,515
<LOAN-LOSSES> 25,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 132,415
<INCOME-PRETAX> 242,908
<INCOME-PRE-EXTRAORDINARY> 242,908
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<NET-INCOME> 142,842
<EPS-PRIMARY> .33
<EPS-DILUTED> .32
<YIELD-ACTUAL> 4.27
<LOANS-NON> 487,000
<LOANS-PAST> 406,000
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<ALLOWANCE-OPEN> 124,000
<CHARGE-OFFS> 4,000
<RECOVERIES> 2,000
<ALLOWANCE-CLOSE> 148,000
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