<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------------
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 0-24926
CECIL BANCORP, INC.
---------------------
(Name of Small Business Issuer in its Charter)
Maryland 52-1883546
------------------- -----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
127 North Street, Elkton, Maryland 21921-5547
------------------------------------------ ----------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (410) 398-1650
----------------
Securities registered pursuant to Section 12(b) of the Exchange Act:
Not applicable
--------------
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $8,122,100
----------
As of March 5, 1999, the registrant had 607,731 shares of Common Stock issued
and outstanding. The aggregate market value of shares held by nonaffiliates on
such date was $12,811,976 based on the closing sale price of $25.25 per share of
the Registrant's Common Stock on March 5, 1999. For purposes of this
calculation, it is assumed that the 100,326 shares held by directors and
officers of the Registrant, are shares held by affiliates.
Transitional small business disclosure format (check one): Yes No X
____ ----
DOCUMENT INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the year ended
December 31, 1998 (the "Annual Report"). (Parts I and II).
2. Portions of the Proxy Statement for the Registrant's 1999 Annual
Meeting of Stockholders (the "Proxy Statement"). (Part III)
<PAGE>
PART I
Item 1. Description of Business
- --------------------------------
General
Cecil Bancorp, Inc. 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") 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 ("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 multiple savings institution holding company subject
to regulation by the Office of Thrift Supervision ("OTS") of the Department of
the Treasury.
On September 30, 1998, the Company completed its acquisition of Columbian
Bank, A Federal Savings Bank ("Columbian") through the exchange of 1.7021 shares
of Company common stock for each outstanding share of Columbian common stock in
a transaction valued at approximately $2.8 million. The Company issued an
additional 128,155 shares of Common Stock in the acquisition of Columbian, which
is currently held as a subsidiary of the Company. The Company holds all of the
stock of Cecil Federal and Columbian and operates them as two separate savings
institutions.
The Company is primarily engaged in the business of directing, planning and
coordinating the business activities of Cecil Federal and Columbian (together,
referred to herein as the "Banks"). Accordingly, the information set forth in
this report, including financial statements and related data, relates primarily
to Cecil Federal and its subsidiaries and Columbian. 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. The Company's main office and telephone number are the same as Cecil
Federal's (see below).
Cecil Federal Savings Bank. Cecil Federal is a community-oriented
financial institution which commenced operations in 1959 as a Federal mutual
savings and loan association. It converted to a Federal mutual savings bank in
January 1993 and, effective November 10, 1994, Cecil Federal converted from
mutual to stock form, with the sale and issuance of 100,000 shares of its Common
Stock to the Company. Its deposits have been federally insured up to applicable
limits, and it has been a member of the Federal Home Loan Bank ("FHLB") system
since 1959. Cecil Federal's deposits are currently insured by the Savings
Association Insurance Fund ("SAIF") of the FDIC and it is a member of the FHLB
of Atlanta.
Cecil Federal's primary business, as conducted through its two offices
located in Elkton and North East, Maryland, is the origination of mortgage loans
secured by single-family residential real estate located primarily in Cecil
County, Maryland, with funds obtained through the attraction of deposits,
primarily certificate accounts with terms of 60 months or less, savings accounts
and transaction accounts. To a lesser extent, Cecil Federal also makes loans on
commercial and multi-family real estate, construction loans on one- to four-
family residences, home equity loans and land loans. Cecil Federal also makes
consumer loans including education loans, personal and commercial lines of
credit, automobile loans and loans secured by deposit accounts. Cecil Federal
purchases mortgage-backed securities and invests in other liquid investment
securities when warranted by the level of excess funds.
Cecil Federal has two wholly owned subsidiaries, Cecil Service Corporation
and Cecil Financial Services Corporation. Cecil Service Corporation's primary
business is acting as leasing agent for the North East Plaza Branch and Cecil
Financial Services Corporation's primary business is the operation, through a
partnership with UVEST Investment Services, of a full range of brokerage and
investment services.
1
<PAGE>
Cecil Federal's business strategy is to operate as an independent
community-oriented savings bank dedicated to residential mortgage lending, and,
to a lesser extent, construction and consumer lending, funded primarily by
retail deposits. Cecil Federal has sought to implement this strategy by (1)
emphasizing residential mortgage lending through the origination of adjustable-
rate mortgage loans; (2) investing in adjustable-rate and short-term liquid
investments; (3) reducing interest rate risk exposure by better matching asset
and liability maturities and rates; (4) maintaining asset quality; (5)
containing operating expenses; and (6) maintaining a high level of capital
combined with moderate growth.
Cecil Federal's main office is located at 127 North Street, Elkton,
Maryland 21921 and its main telephone number is (410) 398-1650.
Columbian Bank, a Federal Savings Bank. Columbian was originally chartered
by the State of Maryland in 1893. Columbian became a member of the FHLB System
and obtained federal deposit insurance in October 1985. In January 1989,
Columbian converted to a federal stock institution and on September 26, 1990,
Columbian changed its name to Columbian Bank, a Federal Savings Bank and became
a federally chartered stock savings bank.
Columbian's principal business consists of accepting deposits from the
general public and investing those funds in mortgage loans and other investments
permitted to federal savings banks. Columbian's principal market area is
Harford County, Maryland.
Columbian's executive offices are located at 303-307 St. John Street, Havre
de Grace, Maryland 21078, and its main telephone number is (410) 939-2313.
Market Area
Cecil Federal. Cecil Federal's home office is located in the town of
Elkton, Maryland, which is in Cecil County. Cecil Federal operates one full
service branch office in North East, Maryland, which is also in Cecil County.
Cecil Federal considers Cecil County to be its primary market area as
substantially all of its lending and deposit gathering functions are performed
within Cecil County.
Cecil Federal attracts deposits through two full service offices in Cecil
County, Maryland each with drive-through facilities. Cecil Federal's main
office in Elkton has served as Cecil Federal's largest single source of
deposits. Elkton is the County seat and has a population of 9,800. Elkton is a
center for commerce and industry, education and health care for the County.
Cecil Federal's full service branch is located in the North East Shopping Plaza
in North East. North East has a population of 1,913 and is geographically
located in the center of Cecil County. The population of Cecil County was
71,347 as of the 1990 census.
Major employers in Cecil County are Perry Point Veterans Hospital, medical
services; W.L. Gore & Associates, GORE-TEX fabric products; Union Hospital,
medical services; Thiokol Corporation; Blue Chip Products, automotive products;
Terumo Medical, medical products; as well as State, County and Local
Governments.
Cecil County is located in the extreme northeast of the Chesapeake Bay, at
the crux of four states - Maryland, Delaware, Pennsylvania and New Jersey.
Elkton is located about 50 miles from Philadelphia and Baltimore. One-fifth of
the U.S. population resides within 300 miles of the County. Interstate I-95,
the main north-south East Coast artery, bisects the County. In addition, the
four lane U.S. 40 parallels the Interstate. Cecil County has over 200 miles of
waterfront between 5 rivers and the Chesapeake Bay.
Columbian. Columbian's home office is in Havre de Grace, Maryland, which
is in Harford County. Harford County, in northeastern Maryland, is 23 miles
from Baltimore and 20 miles from Wilmington, Delaware. Bel Air, Maryland, the
county seat, is 80 miles from Philadelphia. Harford County is a major
transportation link; Interstate 95 and mainlines for CSX Railroad and Conrail
run through the County. The County=s major industrial centers along the I-95
Corridor are Aberdeen, Belcamp, Edgewood and Havre de Grace. Major private
employers in Harford County are Upper Chesapeake Health Systems, Inc., Bata Shoe
Co., Clorox Co., Constar/Crown, Cork and Seal, Cy-tec Industries, Frito-Lay,
Inc., GAP Stores and General Electric. The U.S. Army Aberdeen Proving Ground is
the major government employer in the county.
2
<PAGE>
Lending Activities
General. Cecil Federal's primary business is the origination of mortgage
loans secured by single-family residential real estate located primarily in
Cecil County, Maryland. To a lesser extent, Cecil Federal also makes loans on
commercial and multi-family real estate, construction loans on one- to four-
family residences, home equity loans and land loans. Cecil Federal also makes
consumer loans including education loans, personal and commercial lines of
credit, automobile loans, and loans secured by deposit accounts.
The principal lending activity of Columbian is the origination of
conventional mortgage loans for the purpose of purchasing or refinancing owner-
occupied, one- to four-family residential properties in its primary market area.
Columbian also originates or participates in loans for the construction or
renovation of commercial property and residential housing developments and
occasionally originates permanent financing upon completion. In addition,
Columbian originates consumer loans secured by deposits, second mortgages on
residential property, or automobiles, as well as unsecured personal loans and
occasionally originates loans secured by commercial and nonresidential real
estate.
3
<PAGE>
Analysis of Loan and Mortgage-Backed Securities Portfolio
Set forth below is selected data relating to the composition of the Banks=
loan and mortgage-backed securities portfolio by type of loan and type of
security at the dates indicated. At December 31, 1998, the Banks had no
concentrations of loans exceeding 10% of total loans other than as disclosed
below.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------
1998 1997
---------------------- ------------------
Amount % Amount %
------------ -------- -------- --------
(Dollars in thousands)
Type of Loan -- Cecil Federal
- -----------------------------
<S> <C> <C> <C> <C>
Real estate loans:
Construction loans (1).......................................... $ 4,842 8.65% $ 3,134 5.89%
One- to four-family residential (2)(3).......................... 45,377 81.02 42,840 80.51
Multi-family residential........................................ 869 1.55 1,066 2.00
Land............................................................ 357 0.64 1,390 2.61
Commercial...................................................... 2,459 4.39 2,470 4.64
Commercial business loans........................................ 2,052 3.66 1,621 3.05
Consumer loans:
Automobile loans................................................ 1,481 2.64 819 1.54
Education loans................................................. 60 0.11 75 .14
Savings account loans........................................... 801 1.43 542 1.02
Home improvement loans.......................................... 15 0.03 9 .02
Personal loans.................................................. 2,688 4.80 1,775 3.33
------- ------- ------- -------
Subtotal loans.............................................. 61,001 108.92 55,741 104.75
Less:
Loans held for sale............................................. 2,515 (4.49) 1,363 (2.56)
Loans in process................................................ 2,134 (3.81) 893 (1.68)
Discounts and other............................................. 123 (0.22) 100 (.19)
Loan loss reserve............................................... 222 (0.40) 174 (.32)
------- ------- ------- -------
Total loans.................................................. 56,007 100.00% 53,211 100.00%
======= ======= ======= =======
Mortgage-backed securities....................................... $ 1,076 $ 1,817
======= =======
Total loans and mortgage-backed securities - Cecil Federal.. $57,083 $55,028
======= =======
<CAPTION>
At December 31,
----------------------------------------
1998 1997
------------------- ----------------
Amount % Amount %
------- ----- ------ -------
(Dollars in thousands)
Type of Loan -- Columbian
- -------------------------
<S> <C> <C> <C> <C>
Real estate loans:
Single-family residential...................................... $15,059 81.23% $14,137 75.18%
Construction................................................... 691 3.73 1,655 8.80
Home equity and second mortgages............................... 1,311 7.07 1,583 8.42
Commercial..................................................... 1,946 10.50 2,067 10.99
Consumer loans:
Installment.................................................... 11 0.06 19 0.10
Savings account................................................ 109 0.59 169 0.90
------- -------
19,127 19,630
Less:
Allowance for loan losses...................................... 180 (0.97) (180) (0.96)
Loans in process............................................... 269 (1.45) (501) (2.66)
Deferred loan origination fees................................. 140 (0.75) (144) (0.77)
------- ------- ------- -------
Total....................................................... $18,538 100.00% $18,805 100.00%
======= ======= ======= =======
Mortgage-backed securities.................................... 1,834 2,348
Total loans and mortgage-backed securities --
Columbian................................................. $20,372 $21,153
======= =======
- -------------------------
(1) All construction loans were for residential properties.
(2) Includes home equity loans.
(3) Includes loans held for sale.
</TABLE>
One- to Four-Family Residential Real Estate Lending
4
<PAGE>
Cecil Federal. The primary emphasis of Cecil Federal's lending activity is
the origination of conventional mortgage loans on one- to four-family
residential dwellings. Most loans are originated in amounts up to $150,000, on
single-family properties located in Cecil Federal's primary market area of Cecil
County, Maryland. As of December 31, 1998, loans on one- to four-family
residential properties accounted for approximately 81.84% of Cecil Federal's
loan portfolio. Cecil Federal makes conventional mortgage loans, as well as
loans guaranteed by the Rural Development (USDA Housing Loans) and loans
originated under the Maryland Community Development Administration ("CDA") loan
program.
Cecil Federal's mortgage loan originations are generally for terms of 15,
20 and 30 years, amortized on a monthly basis with interest and principal due
each month. Residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms as borrowers may
refinance or prepay loans at their option, without penalty. Conventional
residential mortgage loans granted by Cecil Federal customarily contain "due-on-
sale" clauses which permit Cecil Federal to accelerate the indebtedness of the
loan upon transfer of ownership of the mortgaged property.
Cecil Federal uses standard Federal Home Loan Mortgage Corporation
("FHLMC") documents, to allow for the sale of loans in the secondary mortgage
market. Cecil Federal's lending policies generally limit the maximum loan-to-
value ratio on mortgage loans secured by owner-occupied properties to 90% of the
lesser of the appraised value or purchase price of the property, with the
condition that private mortgage insurance is required on loans with a loan-to-
value ratio in excess of 80%. Loans originated under Rural Development and CDA
programs have loan-to-value ratios of up to 100% due to the guarantees provided
by those agencies. The substantial majority of loans in Cecil Federal's loan
portfolio have loan-to-value ratios of 80% or less.
Cecil Federal, since the early 1980s, has offered adjustable-rate mortgage
loans with terms of up to 30 years. Adjustable-rate loans offered by Cecil
Federal include loans which reprice every one, three or five years and provide
for an interest rate which is based on the interest rate paid on U.S. Treasury
securities of a corresponding term. Cecil Federal also offers a loan product
which provides for a fixed interest rate for the first ten years, and then
converts to a one year adjustable rate loan.
Cecil Federal retains all adjustable-rate mortgages it originates, which
are designed to reduce Cecil Federal's exposure to changes in interest rates.
Cecil Federal's adjustable rate mortgages include caps on increases or decreases
of 2% per year, and 6% over the life of the loan. The retention of adjustable-
rate mortgage loans in Cecil Federal's loan portfolio helps reduce Cecil
Federal's exposure to increases in interest rates. However, there are
unquantifiable credit risks resulting from potential increased costs to the
borrower as a result of repricing of adjustable-rate mortgage loans. It is
possible that during periods of rising interest rates, the risk of default on
adjustable-rate mortgage loans may increase due to the upward adjustment of
interest cost to the borrower.
Cecil Federal also originates conventional fixed-rate mortgages with terms
of 15, 20 or 30 years. Cecil Federal has originated all fixed-rate mortgage
loans in recent years for sale in the secondary mortgage market, and a
substantial majority of all fixed-rate loans originated since 1990 have been
sold, primarily to the Federal Home Loan Mortgage Corporation ("FHLMC"), with
servicing retained by Cecil Federal. Management assesses its fixed rate loan
originations on an ongoing basis to determine whether Cecil Federal's portfolio
position warrants the loans being sold or held in Cecil Federal's portfolio.
During the year ended December 31, 1998, Cecil Federal originated $7.7
million in adjustable-rate mortgage loans and $5.3 million in fixed-rate
mortgage loans (of which $2.8 million of fixed-rate mortgage loans were sold in
the secondary mortgage market). Approximately 13% of all loan originations
during 1998 were refinancings of loans already in Cecil Federal's loan
portfolio. At December 31, 1998, Cecil Federal's loan portfolio included $32.8
million in adjustable rate one- to four-family residential mortgages or 53.77%
of Cecil Federal's loan portfolio, and $6.1 million in fixed rate one- to four-
family residential loans or 10.00% of Cecil Federal's portfolio.
Cecil Federal also offers second mortgage loans. These loans are secured
by a junior lien on residential real estate. The total of first and second
liens may not exceed an 90% loan to value ratio. Loans have terms of 5, 10 and
5
<PAGE>
15 years and have fixed rates. As of December 31, 1998, Cecil Federal had $4.8
million outstanding in second mortgage loans.
During the first quarter of 1995, Cecil Federal began offering home equity
lines of credit. These loans are secured by a junior lien on residential real
estate. Customers are approved for a line of credit which provides for an
interest rate which varies monthly and customers pay 2% of the balance per
month. At December 31, 1998, Cecil Federal had $680,000 in outstanding home
equity loans.
Columbian. Columbian's principal lending activity has been the origination
of loans secured by first mortgages on existing one- to four-family residences
in Columbian's market area. Columbian also originates a limited number of
second mortgages and home equity loans secured by one- to four-family
residences. The average mortgage loan amount has been between $100,000 and
$150,000. At December 31, 1998, $15.1 million, or 81.23%, of Columbian's total
loans were secured by first liens or one- to four-family residences, a
substantial majority of which were existing, owner-occupied, single-family
residences in Columbian's market area. At December 31, 1998, $3.1 million, or
20.53%, of Columbian's one- to four-family residential loans were adjustable
rate mortgages ("ARMs"), and $12.0 million, or 79.47%, carried fixed rates.
Columbian's one- to four-family residential mortgage loans generally are
for terms of 15 to 30 years, amortized on a monthly basis, with principal and
interest due each month. Columbian also originates mortgages with a balloon
feature which allows Columbian to elect to renegotiate the loan after fifteen
years at then-prevailing interest rates. Residential real estate loans often
remain outstanding for significantly shorter periods than their contractual
terms. Borrowers may refinance or prepay loans at their option without penalty.
These loans customarily contain "due-on-sale" clauses which permit Columbian to
accelerate repayment of a loan upon transfer of ownership of the mortgaged
property.
Columbian's lending policies generally limit the maximum loan-to-value
ratio on one- to four-family residential mortgage loans secured by owner-
occupied properties to 95% of the appraised value, with private mortgage
insurance required on loans with loan-to-value ratios in excess of 80%. The
maximum loan-to-value ratio on mortgage loans secured by non-owner-occupied
properties is also limited to 80%.
Columbian's fixed-rate, one- to four-family residential mortgage loans are
underwritten in accordance with applicable guidelines and requirements for sale
to the Federal Home Loan Mortgage Corporation ("FHLMC") in the secondary market.
Columbian offers one- and three-year ARMs, one- to four-family residential
mortgage loans. These loans are indexed to the 52-week rate on the one-year and
three-year U.S. Treasury securities, respectively, plus a margin of 200 basis
points. The rates at which interest accrues on these loans are adjustable every
one or three years, generally with limitations on adjustments of two percentage
points per adjustment period and six percentage points over the life of the
mortgage.
The retention of ARMs in Columbian's portfolio helps reduce Columbian's
exposure to increases in prevailing market interest rates. However, there are
unquantifiable credit risks resulting from potential increases in costs to
borrowers in the event of upward repricing of ARMs. It is possible that during
periods of rising interest rates, the risk of default on ARMs may increase due
to increases in interest costs to borrowers. Further, ARMs which provide for
initial rates of interest below the fully indexed rates may be subject to
increased risk of delinquency or default as the higher, fully indexed rate of
interest subsequently replaces the lower, initial rate. In order to qualify
borrowers at a rate equal to two percentage points above any discounted
introductory rate. In addition, although ARMs allow Columbian to increase the
sensitivity of its interest-earning assets to changes in interest rates, the
extent of this interest sensitivity is limited by the periodic and lifetime
interest rate adjustment limitations and the ability of borrowers to convert the
loans to fixed-rates. Accordingly, there can be no assurance that yields on
Columbian's ARMs will fully adjust to compensate for increases in Columbian's
cost of funds. Finally, ARMs increase Columbian's exposure to decreases in
prevailing market interest rates, although decreases in Columbian's cost of
funds would tend to offset this effect.
6
<PAGE>
Columbian also offers home equity lines of credit and second mortgage
loans. Home equity lines of credit carry a variable rate, indexed to the Prime
Rate as published in the Wall Street Journal plus 2.0%, adjusted monthly or may
be originated on a fixed rate basis. Second mortgage loans are offered on a
fixed rate basis and require payments of principal and interest monthly. The
maximum term for a home equity line of credit or second mortgage loan is 15
years. Columbian will lend up to 80% of the appraised value of the underlying
property less the amount outstanding on the first mortgage. At December 31,
1998, home equity and second mortgage loans totaled $1.3 million and comprised
7.07% of Columbian's gross loans outstanding.
Construction Lending
Cecil Federal. Cecil Federal's construction lending has primarily involved
lending to individuals for construction of single-family residences, although
Cecil Federal does lend to builders, and has, on occasion, loaned funds for the
construction of commercial properties and multi-family real estate. All loans
for the construction of speculative sale homes have a loan value ratio of not
more than 75%. Substantially all construction loans originated convert to a
permanent loan. Cecil Federal has financed the construction of non-residential
properties on a case by case basis. At December 31, 1998, the loan portfolio
included $4.8 million in loans secured by properties under construction.
A substantial majority of Cecil Federal's construction loans (except loans
to builders) are structured to convert to permanent loans upon completion of
construction, and usually have an initial construction loan term of six months
prior to converting to a permanent loan. Cecil Federal originated $2.9 million
in construction loans during the year ended December 31, 1998. Loan proceeds
are disbursed during the construction phase according to a draw schedule based
on the stage of completion. Construction projects are inspected by Cecil
Federal's officers. Construction loans are underwritten on the basis of the
estimated value of the property as completed and loan-to-value ratios must
conform to the requirements for the permanent loan.
Columbian. Columbian also offers construction loans to qualified
developers for construction of one- to four-family residences in Columbian's
market area and has purchased participation interests in construction loans from
other institutions. Typically, Columbian has emphasized lending to individuals
to refurnish or rehabilitate multi-family dwellings or church buildings and
construction of planned residential developments. Columbian lends on a limited
basis to private developers for speculative single-family housing construction.
These loans generally have adjustable interest rates and are underwritten in
accordance with the same standards as Columbian's mortgages on existing
properties, except the loans generally provide for disbursement in stages during
a construction period from six to 12 months, during which period the borrower is
required to make monthly payments of accrued interest on the outstanding loan
balance. Construction loans generally have a maximum loan-to-value ratio of
80%. Borrowers must satisfy all credit requirements which would apply to
Columbian's permanent mortgage loan financing for the subject property. While
Columbian's construction loans generally require repayment in full upon the
completion of construction, Columbian occasionally makes construction loans that
convert to permanent loans following construction.
At December 31, 1998, Columbian had $700,000 in construction loans
outstanding, comprising 3.73% of Columbian=s gross loan portfolio. Columbian=s
largest construction loan at December 31, 1998 was a $425,000 commitment to fund
construction of a single family residence, of which $362,000 was outstanding at
December 31, 1998.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate,
Columbian may be required to advance funds beyond the amount originally
committed to permit completion of the development. If the estimate of value
proves to be inaccurate, Columbian may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment. The ability of a developer to sell developed lots or
completed dwelling units will depend on, among other things, demand, pricing,
availability of comparable properties and economic conditions.
7
<PAGE>
Columbian has sought to minimize this risk by limiting construction lending to
qualified borrowers in Columbian's market area, limiting the aggregate amount of
outstanding construction loans and imposing a stricter loan-to-value ratio
requirement than required for one- to four-family mortgage loans.
Land Loans
Cecil Federal also, from time to time, originates loans secured by raw
land. Land loans originated to individuals have a term of up to 10 years and
interest rates adjust every one, three or five years. Land loans originated to
developers have terms of up to three years. All land loans have a loan-to-value
ratio not exceeding 75%. Cecil Federal may expand its lending on raw land, as
market conditions allow, to qualified borrowers, experienced in the development
and sale of raw land. At December 31, 1998 Cecil Federal had $400,000 in land
loans outstanding, or .64% of Cecil Federal's loan portfolio.
Loans involving construction financing and loans on raw land have a higher
level of risk than loans for the purchase of existing homes since collateral
values, land values, development costs and construction costs can only be
estimated at the time the loan is approved. Cecil Federal has sought to
minimize its risk in construction lending and in lending for the purchase of raw
land by offering such financing primarily to builders and developers to whom
Cecil Federal has loaned funds in the past and to persons who intend to occupy
the completed structure. Cecil Federal also limits construction lending and
loans on raw land to the Cecil County market area, with which management is
familiar. All construction loans and loans on raw land in Cecil Federal's loan
portfolio were performing according to their terms at December 31, 1998.
Multi-Family and Commercial Real Estate Lending
Loans secured by multi-family and commercial real estate generally are
larger and involve greater risks than one- to four-family residential mortgage
loans. Because payments on loans secured by such properties are often dependent
on successful operation or management of the properties, repayment of such loans
may be subject to a greater extent to adverse conditions in the real estate
market or the economy. The Banks seek to minimize these risks in a variety of
ways, including limiting the size and loan-to-value ratios of its multi-family
and commercial real estate loans and, restricting such loans to its primary
market area.
Cecil Federal. Cecil Federal's permanent multi-family and commercial real
estate loans are secured by improved property such as office buildings,
apartment buildings and retail establishments which are located in Cecil
Federal's primary market area. Multi-family and commercial real estate loans
generally have terms of 20 years, and provide for interest rate adjustments
every one, three or five years. Multi-family and commercial mortgages are
generally made in amounts not exceeding 75% of the lesser of the appraised value
or purchase price of the property. All of Cecil Federal's multi-family and
commercial property loans require regular payments of principal and interest.
At December 31, 1998, loans secured by multi-family (i.e., more than four units)
totaled $869,000, or 1.55%, of Cecil Federal's total loan portfolio and loans
secured by commercial properties constituted approximately $2.4 million, or
4.39%, of Cecil Federal's total loan portfolio.
Columbian. Columbian's multi-family residential loans are primarily
secured by small apartment projects within Columbian's market area. The maximum
loan amounts for such loans are $500,000 and may not exceed 80% of the lesser of
cost or appraised value or purchase price whichever is less. Such loans
generally amortize on the basis of a 30 year period and generally require a
balloon payment after three years. Columbian also makes a limited number of
commercial real estate loans for terms of up to 15 years with payments of
principal and interest sufficient to fully repay the loan by maturity and may
also underwrite certain commercial real estate loans for a shorter term with a
balloon feature. The interest rates on commercial real estate loans are
negotiated on a loan-by-loan basis. At December 31, 1998, Columbian's largest
commercial real estate loan was a first and second mortgage on a 25,000 square
foot office building. At December 31, 1998, multi-family and commercial loans
totaled $1.9 million and comprised 10.50% of Columbian's gross loan portfolio.
8
<PAGE>
Commercial Business Loans
Cecil Federal offers commercial business loans and both secured and
unsecured loans and letters of credit, or lines of credit for businesses located
in its primary market area. Most business loans have a six month term, while
lines of credit can remain open for longer periods. All owners, partners and
officers must sign the loan agreement. The security for a business loan depends
on the amount borrowed, the business involved and the strength of the borrower's
firm and position. At December 31, 1998 Cecil Federal had $2.1 million
outstanding in commercial business loans.
Commercial business lending entails significant risk, as the payments on
such loans may depend upon the successful operation or management of the
business involved. Although Cecil Federal attempts to limit its risk of loss on
such loans by limiting the amount and the term, and by requiring personal
guarantees of principals of the business (when additional guarantees are deemed
necessary by management and such guarantees are allowed by regulation), the risk
of loss on commercial business loans is substantially greater than the risk of
loss from residential real estate lending.
Consumer Lending
Consumer loans generally involve more risk than first mortgage loans.
Repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of damage, loss or
depreciation, and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Further, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount which can be recovered. These loans may also give rise to claims and
defenses by a borrower against the Banks, and a borrower may be able to assert
against the Banks claims and defenses which it has against the seller of the
underlying collateral. In underwriting consumer loans, Columbian considers the
borrower's credit history, an analysis of the borrower's income, expenses and
ability to repay the loan and the value of the collateral.
Cecil Federal. Consumer loans comprise the second largest category of
loans outstanding for Cecil Federal. Cecil Federal's consumer loans consist of
automobile loans, savings account loans, education loans and home improvement
loans and other consumer loans. At December 31, 1998, the consumer loan
portfolio totaled $5.0 million, or 9.01%, of total loans. Consumer loans are
generally offered for terms of up to five years at fixed interest rates.
Management expects to continue to promote consumer loans as part of its strategy
to provide a wide range of personal financial services to its customers and as a
means to increase the yield on Cecil Federal's loan portfolio.
Cecil Federal makes loans for automobiles and recreational vehicles, both
new and used, directly to the borrowers. The loans can be for up to 100% of the
purchase price or the retail value listed by the National Automobile Dealers
Association. The terms of the loans are determined by the age and condition of
the collateral. Collision insurance policies are required on all these loans,
unless the borrower has substantial other assets and income. At December 31,
1998, the total amount of automobile loans was $1.5 million.
Cecil Federal makes savings account loans for up to 90% of the amount of
the depositor's savings account balance. The maximum amount of the loan takes
into consideration the amount of interest due. The term of the loan is either
interest due monthly on demand, or a term loan not to exceed 5 years. The
interest rate is 2% higher than the rate being paid on the savings account.
Cecil Federal's education loans are made to existing deposit customers, in
amounts of up to $10,000, and are paid out over four years, with $2,500
disbursed per year. Interest is payable annually until the student leaves
school and amortization over an eight year period then begins.
Cecil Federal also makes other consumer loans, which may or may not be
secured. The term of the loans usually depends on the collateral. Unsecured
loans usually do not exceed $100,000 and have a term of no longer than 12
months. At December 31, 1998, the total amount of other consumer loans (which
consist of personal loans) was $2.7 million.
Consumer loans are generally originated at higher interest rates than
residential mortgage loans but also tend to have a higher risk than residential
loans due to the loan being unsecured or secured by rapidly depreciable assets
(see
9
<PAGE>
discussion below). Despite these risks, Cecil Federal's level of consumer
loan delinquencies generally has been low. No assurance can be given, however,
that Cecil Federal's delinquency rate on consumer loans will continue to remain
low in the future.
Columbian. Columbian's consumer loans primarily consist of loans secured
by deposit accounts at Columbian, automobile loans and personal loans. At
December 31, 1998, Columbian had approximately $130,000 in consumer loans, or
.65%, of Columbian's gross loan portfolio.
Columbian makes loans secured by deposit accounts for up to 90% of the
amount of the deposit. The interest rate on these loans generally is two
percentage points above the rate paid on the deposit account, and interest is
billed on a monthly basis. These loans are payable on demand, and the deposit
account must be pledged as collateral to secure the loan. Columbian offers both
new and used automobile loans. Columbian's automobile loans are generally
underwritten in amounts not to exceed the loan value of the automobile, as
published by the National Automobile Dealers Association for used vehicles or
the Black Invoicing Book for new automobiles. A minimum down payment of 20% is
required. The terms of such loans vary based on the age of the car and the
amount financed up to a maximum of 60 months.
Mortgage-Backed Securities
The Banks maintain a portfolio of mortgage-backed securities in the form of
Government National Mortgage Association ("GNMA"), FNMA and FHLMC participation
certificates and securities issued by other nonagency organizations. GNMA
certificates are guaranteed as to principal and interest by the full faith and
credit of the United States, while FNMA and FHLMC certificates are each
guaranteed by their respective agencies. Mortgage-backed securities generally
entitle the Banks to receive a pro rata portion of the cash flows from an
identified pool of mortgages. Although mortgage-backed securities yield from 30
to 100 basis points less than the loan which are exchanged for such securities,
they present substantially lower credit risk and are more liquid than individual
mortgage loans and may be used to collateralize obligations of the Banks.
Because the Banks receive regular payments of principal and interest from its
mortgage-backed securities, these investments provide more consistent cash-flows
than investments in other debt securities which generally only pay principal at
maturity. Mortgage-backed securities also help the Banks meet certain
definitional tests for favorable treatment under federal banking laws. See
ARegulation - Qualified Thrift Lenders Test@ and ARegulation - Taxation@
Mortgage-backed securities, however, expose the Banks to certain unique
risks. In a declining rate environment, accelerated prepayments of loans
underlying these securities expose the Banks to the risk that they will be
unable to obtain comparable yields upon reinvestment of the proceeds. In the
event the mortgage-backed security has been funded with an interest-bearing
liability with a maturity comparable to the original estimated life of the
mortgage-backed security, the Banks= interest rate spread could be adversely
affected. Conversely, in a rising interest rate environment, the Banks may
experience a lower than estimated rate of repayment on the underlying mortgages,
effectively extending the estimated life of the mortgage-backed security and
exposing the Banks to the risk that it may be required to fund the asset with a
liability bearing a higher rate of interest. The Banks seek to minimize the
effect of extension risk by focusing on investments in adjustable-rate and/or
relatively short-term (seven years or shorter maturity) mortgage-backed
securities.
The Banks have historically invested in mortgage-backed securities as an
alternative to supplement its lending efforts and maintain compliance with
certain regulatory requirements. As of December 31, 1998 the total investment
in mortgage-backed securities for Cecil Federal and Columbian were $1.1 million
and $1.8 million, respectively.
The OTS has adopted a statement of policy with respect to investments in
mortgage derivative products which are defined to include collateralized
mortgage obligations ("CMOs"), REMICs, CMO and REMIC residuals and stripped
mortgage-backed securities ("SMBSs"). The policy distinguishes between high-
risk and nonhigh-risk mortgage securities. Mortgage derivative products with an
average life or price volatility in excess of a benchmark 30-year mortgage-
backed pass-through security are considered high-risk mortgage securities.
Under the policy, savings associations may generally only invest in high-risk
mortgage securities in order to reduce interest rate risk. In addition, all
high-risk mortgage securities acquired after February 9, 1992 must be carried in
the institution's trading account or
10
<PAGE>
as assets held for sale. At December 31, 1998 neither of the Banks had mortgage
derivative products which met the definition of high risk mortgage securities.
Loan Maturity Schedule
The following tables set forth certain information at December 31, 1998
regarding the dollar amount of loans maturing in the Banks' portfolio based on
their contractual terms to maturity, including scheduled repayments of
principal. Demand loans, loans having no stated schedule of repayments and no
stated maturity, and overdrafts ar reported as due in one year or less.
11
<PAGE>
The following table sets forth the estimated maturity of Cecil Federal's
loan portfolio at December 31, 1998 based on their contractual terms to
maturity. The table does not include any estimate of prepayments or scheduled
principal repayments which significantly shorten the average life of all
mortgage loans and may cause Cecil Federal's repayment experience to differ from
that shown below. Demand loans, loans having no stated maturity, and overdrafts
are reported as due in one year or less. The following information is not net
of loans in process, deferred loan fees and allowance for loan losses, and does
include loans held for sale.
<TABLE>
<CAPTION>
Due during the years ending Due After Due after Due after
December 31, 3 through 5 through 10 through Due after
--------------------------------- 5 years after 10 years after 15 years 15 years after
1999 2000 2001 12/31/98 12/31/98 12/31/98 12/31/98 Total
---- ---- ---- ---------- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Single-family residential.... $ 148 $ 49 $ 794 $ 542 $ 3,004 $ 5,038 $35,121 $44,696
Construction................. 2,592 316 347 -- -- -- 1,587 4,842
Home equity and second
mortgages................... 680 39 153 456 1,533 2,496 56 5,413
Commercial................... 746 2 25 62 169 -- -- 1,004
Consumer..................... 1,751 423 867 1,674 232 99 -- 5,046
------ ----- --------- --------- --------- --------- ------- -------
Total...................... $5,917 $ 829 $ 2,186 $ 2,734 $ 4,938 $ 7,633 $36,764 $61,001
====== ===== ========= ========= ========= ========= ======= =======
</TABLE>
The following table sets forth the estimated maturity of Columbian's loan
portfolio at December 31, 1998 based on their contractual terms to maturity.
The table does not include any estimate of prepayments or scheduled principal
repayments which significantly shorten the average life of all mortgage loans
and may cause Columbian's repayment experience to differ from that shown below.
Demand loans, loans having no stated maturity, and overdrafts are reported as
due in one year or less. The following information is not net of loans in
process, deferred loan fees and allowance for loan losses.
12
<PAGE>
<TABLE>
<CAPTION>
Due After Due after Due after
Due during the years 3 through 5 through 10 through Due after
ending December 31, 5 years 10 years 15 years 15 years
------------------------ after after after after
1999 2000 2001 12/31/98 12/31/98 12/31/98 12/31/98 Total
----- ------ ------ --------- --------- --------- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Single-family residential....... $ 49 $ 65 $ 456 $ 641 $ 2,846 $ 2,894 $8,108 $15,059
Construction.................... 166 -- -- 235 -- -- 290 691
Home equity and second
mortgages...................... -- 37 49 389 463 298 75 1,311
Commercial...................... 460 12 153 156 105 948 112 1,946
Consumer........................ 21 18 27 54 -- -- -- 120
----- ----- ------- -------- --------- --------- ------ -------
Total......................... $ 696 $ 132 $ 685 $ 1,475 $ 3,414 $ 4,140 $8,585 $19,127
===== ===== ======= ======== ========= ========= ====== =======
</TABLE>
13
<PAGE>
The next table sets forth at December 31, 1998, the dollar amount of all
loans due after December 31, 1998 which have predetermined interest rates and
have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rates Adjustable Rates
----------------- ----------------
(In thousands)
Cecil Federal
- -------------
<S> <C> <C>
Real estate mortgage................... $18,224 $30,838
Real estate construction............... 4,032 810
Consumer and commercial business....... 5,444 1,653
------- -------
Total................................ $27,700 $33,301
======= =======
Columbian
- ---------
Real estate - mortgage:
Single family residential............. $11,971 $ 3,087
Construction.......................... 512 179
Home equity and second mortgages...... 706 605
Commercial............................ 1,940 --
Consumer............................... 120 --
------- -------
Total............................... $15,255 $ 3,871
======= =======
Total............................... $42,955 $37,172
======= =======
</TABLE>
Loan Solicitation and Processing
The Banks' lending activities are subject to written, non-discriminatory
underwriting standards and loan origination procedures outlined in loan policies
established by the Banks' boards of directors. Detailed loan applications are
obtained to determine the borrower's ability to repay, and the more significant
items on these applications are verified through the use of credit reports,
financial statements and confirmations. Property valuations are performed by
independent outside appraisers approved by the Banks' boards of directors.
The aggregate amount of loans which a federal institution may make on the
security of liens on non-residential real property may not exceed 400% of the
institution=s capital as determined under the capital standards mandated by
FIRREA. In addition, FIRREA authorizes the Director of OTS to permit federal
savings institutions to exceed the 400% of capital limit in certain
circumstances. This restriction has not had a material impact on the Banks
operations.
With certain limited exceptions, the maximum amount the Banks may lend to
any borrower (including certain related entities of the borrower) at any one
time may not exceed 15% of the unimpaired capital and surplus of the
institution, plus an additional 10% of unimpaired capital and surplus for loans
fully secured by readily marketable collateral. The Home Owners' Loan Act
("HOLA") additionally authorizes savings institutions to make loans to one
borrower, for any purpose, in an amount not to exceed $500,000 or, by order of
the Director of the OTS, in an amount not to exceed the lesser of $30,000,000 or
30% of unimpaired capital and surplus to develop residential housing, provided
(i) the purchase price of each single-family dwelling in the development does
not exceed $500,000, (ii) the savings institution is in compliance with the
fully phased in capital requirements, (iii) the loans comply with applicable
loan-to-value requirements, and (iv) the aggregate amount of loans made under
this authority does not exceed 150% of unimpaired capital and surplus. HOLA
also authorizes loans to any one borrower to finance sales of real property
acquired in satisfaction of debts in an amount up to 50% of unimpaired capital
and surplus. Loans-to-one borrower limits do not apply to purchase money notes
taken from the purchaser of real property acquired by the institution in
satisfaction of debts previously contracted if no new funds are advanced to the
borrower and the savings association is not placed in a more detrimental
position as the result of such sale. Under these limits, at December 31, 1998,
Cecil Federal's loans-to-one borrower cannot exceed $1.2 million and Columbian's
loans-to-one borrower cannot exceed $500,000.
14
<PAGE>
Cecil Federal. The Board of Directors of Cecil Federal has established
written lending policies for Cecil Federal and has delegated to its Loan
Committee the authority to approve all loans up to $200,000. Secured loans of
up to $50,000 and unsecured loans of up to $25,000 may be approved by Chief
Executive Officer Mary Halsey or Chief Operating Officer Brian Hale. Secured
loans of up to $25,000 and unsecured loans of up to $15,000 may be approved by
Vice President Sandra Feltman. Assistant Treasurer Barbara Howard may approve
secured loans of up to $25,000 and unsecured loans up to $5,000. Consumer Loan
officer Carole Allen may approve secured loans of up to $15,000 and unsecured
loans of up to $5,000. Branch managers may approve secured loans up to $10,000
and unsecured loans of up to $2,500. The Loan Committee consists of Chief
Executive Officer Halsey, Senior Vice President Hale, Chief Lending Officer
Feltman, two or three directors and the chairman of the Appraisal Committee.
All loans over $200,000 must be approved by the full board of Directors.
Interest rates on approved loans are subject to change if the loan is not funded
within 60 days of approval, unless a written commitment has been made for a
longer period of time. It has been management's experience that substantially
all approved loans are funded.
Columbian. The Board of Directors of Columbian has established written
lending policies for Columbian. Columbian's President and Chief Lending Officer
have authority to approve all consumer loans below $25,000, and the executive
committee of the Board of Directors must approve loans at or above $25,000. All
mortgage loans must be approved by the full Board of Directors. Interest rates
on approved loans are subject to change if the loan is not funded within 60 days
of approval, unless a written commitment has been made for a longer period of
time. It has been management's experience that substantially all approved loans
are funded.
Loan Originations and Sales
Loan originations are derived from a number of sources. Residential
mortgage loan originations primarily come from walk-in customers and referrals
by realtors, depositors and borrowers. Applications are taken at both offices,
but are processed in Cecil Federal's main office, and submitted for approval, as
noted above.
Cecil Federal has not purchased loans in the secondary mortgage market.
All fixed-rate loans are originated according to FHLMC guidelines and, depending
on market conditions, may be sold to FHLMC after origination. Cecil Federal
retains servicing on all loans sold.
15
<PAGE>
Set forth below is a table showing Cecil Federal's and Columbian's loan and
origination, purchase and sale activity for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
------ ------
(In thousands)
Cecil Federal
- -------------
<S> <C> <C>
Loans originated:
Real estate loans:
Construction loans....................... $ 2,874 $ 708
One- to four-family...................... 15,600 13,511
Multi-family............................. 144 350
Non-residential and other................ 2,083 2,486
Consumer loans............................ 4,142 2,435
Commercial loans.......................... 1,746 1,330
------- -------
Total loans originated................... $26,589 $20,820
======= =======
Loans sold:
Whole loans............................... $ 2,814 $ 3,040
------- -------
Total loans sold......................... $ 2,814 $ 3,040
======= =======
Columbian
- ---------
Loans originated:
Real estate loans:
Construction loans....................... $ 615 $ 661
One- to four-family...................... 2,775 2,170
Multi-family............................. -- --
Non-residential and other................ 30 --
Consumer loans............................ -- --
Commercial loans.......................... 375 348
------- ------
Total loans originated................... $ 3,795 $ 3,179
======= ======
Loans sold:
Whole loans............................... $ -- $ --
------- -------
Total loans sold......................... $ -- $ --
======= =======
</TABLE>
Interest Rates and Loan Fees
Interest rates charged by Cecil Federal on mortgage loans are primarily
determined by competitive loan rates offered in its market area. Mortgage loan
interest rates reflect factors such as general market interest rate levels, the
supply of money available to the financial institutions industry and the demand
for such loans. These factors are in turn affected by general economic
conditions, the monetary policies of the Federal government, including the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board"), and
general supply of money in the economy.
In addition to interest earned on loans, the Banks receive fees in
connection with loan commitments and originations, loan modifications, late
payments and for miscellaneous services related to its loans. Income from these
activities varies from period to period with the volume and type of loans
originated, which in turn is dependent on prevailing mortgage interest rates and
their effect on the demand for loans in the markets served by the Banks. The
Banks also receive servicing fees of .25% to .375% of the loan amount of the
loans that it services. At December 31, 1998, Cecil Federal was servicing $18.3
million in loans for other financial institutions. For the years ended December
31, 1998, 1997 and 1996 Cecil Federal recognized servicing income of $41,000,
$42,000 and $38,000, respectively, and total fee income of $225,846, $184,000
and $188,000, respectively.
16
<PAGE>
Interest rates charged by Columbian on mortgage loans are primarily
determined by competitive loan rates offered in its market area and minimum
yield requirements for loans purchased by the FHLMC. Mortgage loan rates
reflect factors such as prevailing market interest rate levels, the supply of
money available to the savings industry and the demand for such loans. These
factors are in turn affected by general economic conditions, the monetary
policies of the federal government, including the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"), the general supply of
money in the economy, tax policies and governmental budget matters.
Columbian charges fees in connection with loan commitments and
originations, rate lock-ins, loan modifications, late payments and changes of
property ownership and for miscellaneous services related to its loans. Loan
origination fees are calculated as a percentage of the loan principal.
Columbian typically receives fees of between zero and three points (one point
being equivalent to 1% of the principal amount of the loan) in connection with
the origination of fixed-rate and adjustable-rate residential mortgage loans.
The loan origination fee, net of certain direct loan origination expenses, is
deferred and accreted into income over the contractual life of the loan using
the interest method. If a loan is prepaid, refinanced or sold, all remaining
deferred fees with respect to such loan are taken into income at such time.
Non-Performing Loans and Other Problem Assets
The Banks' managements review their respective portfolios on a regular
basis. The Banks' collection procedures provide that when a loan becomes 10
days past due a written notification of the late payment is sent. When the loan
is past due 30 days, the borrower is contacted by telephone, and payment is
requested. After 45 days past due, a property inspection and customer visit
takes place. If payment is not received by the time the loan is 90 days past
due, the loan is placed on non-accrual status, the borrower is contacted again,
and efforts are made to formulate an affirmative plan to cure the delinquency.
After a loan becomes past due 60 days, the Banks also provide a final notice
that it will initiate legal proceedings in 30 days, after which foreclosure
procedures commence. Loans are charged-off when management concludes that they
are uncollectible.
Real estate acquired by the Banks as a result of foreclosure is classified
as real estate owned until such time as it is sold. When such property is
acquired, it is recorded at the lower of its unpaid principal balance or fair
value. Any required write-down of the loan to its fair value upon foreclosure
is charged against the allowance for losses.
17
<PAGE>
The following table sets forth information with respect to the Banks' non-
performing assets at the dates indicated. At the dates shown, Cecil Federal and
Columbian, had no restructured loans within the meaning of Statement of
Financial Accounting Standards No. 15.
<TABLE>
<CAPTION>
At December 31,
----------------
1998 1997
------ ------
(In thousands)
Cecil Federal
- -------------
<S> <C> <C>
Loans accounted for on a non-accrual basis: (1)
Residential real estate........................... $ 359 $ 580
Consumer.......................................... -- --
----- -----
Total........................................... $ 359 $ 580
===== =====
Accruing loans which are contractually past
due 90 days or more:
Residential real estate........................... $ 101 $ 100
Consumer.......................................... 15 23
----- -----
Total........................................... $ 116 $ 123
===== =====
Total of nonaccrual and 90 days past due loans.. $ 475 $ 703
===== =====
Percentage of total loans.......................... .85% 1.32%
===== =====
Other non-performing assets........................ $ 61 $ 171
===== =====
Columbian
- ---------
Loans accounted for on a nonaccrual basis: (1)
Real estate - mortgage:
Single-family residential...................... $ -- $ 49
Construction................................... -- 90
Home equity and second mortgages............... -- --
Commercial..................................... -- --
Consumer......................................... -- 6
----- -----
Total.......................................... $ -- $ 145
===== =====
Accruing loans which are contractually
past due 90 days or more:
Real estate - mortgage:
Single-family residential...................... $ 88 $ --
Construction................................... -- --
Home equity and second mortgages............... -- --
Commercial..................................... -- --
Consumer......................................... -- --
----- -----
Total.......................................... $ 88 $ --
===== =====
Total nonperforming loans...................... $ 88 $ 145
===== =====
Percentage of total loans.......................... .47% .74%
===== =====
Other nonperforming assets (2)..................... $ 263 $ 284
===== =====
Loans modified in troubled debt restructurings..... $ -- $ --
===== =====
- -------------------------
</TABLE>
(1) Non-accrual status denotes loans on which, in the opinion of management,
the collection of additional interest is unlikely. Payments received on a
non-accrual loan are either applied to the outstanding principal balance or
recorded as interest income, depending on assessment of the collectibility
of the loan.
(2) Other nonperforming assets represents property acquired by Columbian
through foreclosure or repossession or accounted for as a foreclosure in-
substance. This property is carried at the lower of its fair market value
or the principal balance of the related loan, whichever is lower.
Except as discussed below, at December 31, 1998, Cecil Federal did not have
any loans which were not currently classified as non-accrual, 90 days past due
or restructured but where known information about possible credit
18
<PAGE>
problems of borrowers caused management to have serious concerns as to the
ability of the borrowers to comply with present loan repayment terms and would
result in disclosure as non-accrual, 90 days past due or restructured.
At December 31, 1998, Cecil Federal's nonaccruing loans and accruing loans
more than 90 days past due totaled $563,000, which consisted of 15 single-family
residential properties and four consumer loans. During the year ended December
31, 1998, gross interest income of $18,000 would have been recorded on loans
accounted for on a non-accrual basis if such loans had been current throughout
the respective period. Four of the existing delinquent single-family
residential properties, totaling $146,000, are currently in bankruptcy.
During the year ended December 31, 1998, gross interest income for
Columbian of $17,275 would have been recorded on loans accounted for on a
nonaccrual basis if the loans had been current throughout the respective
periods.
At December 31, 1998, Columbian did not have any loans not currently
classified as nonaccrual, 90 days past due or restructured but where known
information about possible credit problems of borrowers causes management to
have serious concerns as to the ability of the borrowers to comply with present
loan repayment terms and may result in disclosure as nonaccrual, 90 days past
due or restructured.
Columbian's other nonperforming assets of $188,000 consisted of three
properties acquired through foreclosure. Such properties consisted of two small
multi-family dwellings, which were carried at $135,000 at December 31, 1998 and
Columbian's participation in a townhouse project, which was carried at $53,000
at December 31, 1998.
Asset Classification and Allowance for Loan Losses
General. Federal regulations require savings associations to review their
assets on a regular basis and to classify them as "substandard," "doubtful" or
"loss," if warranted. Assets classified as substandard or doubtful require the
institution to establish general and specific allowances for loan losses. If an
asset or portion thereof is classified loss, the insured institution must either
establish a specified allowance in the amount of the portion of the asset
classified loss, or charge off such amount. An asset which does not currently
warrant classification, but which possesses weaknesses or deficiencies deserving
close attention, is required to be designated as "special mention." Currently,
general loss allowances established to cover losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses do not
qualify as regulatory capital. See "Regulation of the Banks -- Regulatory
Capital Requirements."
In making loans, management recognizes the fact that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a secured loan, the quality of the security for the
loan.
It is management's policy to maintain reserves for estimated losses on
loans and real estate acquired. General loan loss reserves are provided based
on, among other things, estimates of the historical loan loss experience,
evaluation of economic conditions in general and in various sectors of the
Company's personnel. Specific reserves will be provided for individual loans
where the ultimate collection is considered questionable by management after
reviewing the current status of loans which are contractually past due and
considering the net realizable value of the security of the loan or guarantees,
if applicable. It is management's policy to establish specific reserves for
estimated losses on delinquent loans and real estate owned when it determines
that losses are anticipated to be incurred on the underlying properties. At
December 31, 1998, Cecil Federal's and Columbian's allowance for loan losses
amounted to $222,000 and $180,000, respectively.
Future reserves may be necessary if economic conditions or other
circumstances differ substantially form the assumptions used in making the
initial determinations. There can be no assurance that regulators, in reviewing
the Banks' loan portfolios in the future, will not ask the Banks to increase
their allowance for loan losses for the periods indicated.
The following table sets forth an analysis of Cecil Federal's and
Columbian's allowance for loan losses for the periods indicated.
19
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------
1998 1997
---- ----
(In thousands)
Cecil Federal
- -------------
<S> <C> <C>
Balance at beginning of period............. $ 174 $ 118
----- -----
Loans charged-off:
Residential real estate mortgage loans.... -- 7
Consumer.................................. 77 49
----- -----
Total charge-offs.......................... 77 56
----- -----
Recoveries:
Residential real estate mortgage loans.... -- --
Consumer.................................. 35 25
----- -----
Total recoveries........................... 35 25
----- -----
Net loans charged-off...................... 41 31
----- -----
Provision for loan losses.................. 90 87
----- -----
Balance at end of period................... $ 222 $ 174
===== =====
Ratio of net charge-offs to average loans
outstanding during the period............. .07% .06%
===== =====
Columbian
- ---------
Balance at beginning of period............. $ 180 $ 180
Total charge offs.......................... -- --
----- -----
Total recoveries........................... -- --
----- -----
Net loans charged off...................... -- --
----- -----
Provision for loan losses.................. -- --
----- -----
Balance at end of period................... $ 180 $ 180
===== =====
Ratio of net charge-offs to average
loans outstanding during the period...... --% --%
===== =====
</TABLE>
20
<PAGE>
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------
1998 1997
----------------------------- ----------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Gross Loans Amount Gross Loans
------------- -------------- -------- ------------
(Dollars in thousands)
Cecil Federal
- -------------
<S> <C> <C> <C> <C>
Real estate loans:
Construction loans................. $ 9,100 8.65% $ 7,100 5.89%
One- to four-family residential.... 80,300 81.02 63,000 80.51
Multi-family residential........... 5,100 1.55 4,000 2.00
Land............................... 13,000 0.64 10,200 2.61
Commercial......................... 23,500 4.39 18,400 4.64
Commercial loans.................... 30,900 3.66 24,200 3.05
Automobiles......................... 5,000 2.64 -- 1.54
Education loans..................... -- 0.11 -- 0.14
Savings account loans............... -- 1.43 -- 1.02
Home improvement loans.............. -- 0.03 -- 0.02
Personal loans...................... 55,100 4.80 47,100 3.33
------- --------
222,000 174,000
Less:
Loans held for sale................ -- (4.49) -- (2.56)
Loans in process................... -- (3.81) -- (1.68)
Discounts and other................ -- (0.22) -- (0.19)
Loan loss reserve.................. -- (0.40) -- (0.32)
------- ------- -------- ------
Total allowance for loan losses..... $ 222 100.00% $174,000 100.00%
======= ======= ======== ======
Columbian
- ------------------------------------
Real estate - mortgage:
Single-family residential......... $ 37 81.23% $ 37 75.18%
Construction...................... 105 3.73 105 8.80
Home equity and second mortgages.. 8 7.07 8 8.42
Commercial........................ 25 10.5 25 10.99
Consumer............................ 5 0.65 5 1.00
------- --------
Total allowance for loan losses.. $ 180 $ 180
======= ========
Less:
Loans held for sale................ -- -- -- --
Loans in process................... -- (1.45) -- (2.66)
Deferred loan origination fees..... -- (0.76) -- (0.77)
Loan loss reserve.................. -- (0.97) -- (0.96)
------- ------- -------- ------
Total allowance for loan losses..... $ 180 100.00% $174,000 100.00%
======= ======= ======== ======
</TABLE>
21
<PAGE>
Investment Activities
Cecil Federal. Cecil Federal is required under federal regulations to
maintain a minimum amount of liquid assets, which can be invested in specified
short-term securities, and is also permitted to make certain other investments.
See "Regulation." It has generally been Cecil Federal's policy to maintain a
liquidity portfolio substantially in excess of the amount required to satisfy
regulatory requirements. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives, Management's judgment as
to the attractiveness of the yields then available in relation to other
opportunities, its expectations of the level of yield that will be available in
the future and its projections as to the short term demand for funds to be used
in Cecil Federal's loan origination and other activities.
The general objectives of Cecil Federal's investment policy are to (i)
maintain liquidity levels sufficient to meet the operating needs of Cecil
Federal and applicable regulatory requirements, (ii) minimize interest rate risk
by managing the repricing characteristics of Cecil Federal's assets and
liabilities, (iii) reduce credit risk by investing primarily in U.S. Treasury
and agency securities and (iv) absorb excess liquidity when loan demand is low
and/or deposit growth is high. Cecil Federal's investment activities are
conducted by senior management (specifically Chief Executive Officer Halsey and
supervised by the Board of Directors. Investments are governed by an investment
policy adopted by the Board, which currently provides for maintenance of an
investment portfolio for the purposes of providing earnings, ensuring a minimum
liquidity reserve and facilitating Cecil Federal's asset/liability management
objectives (e.g., limiting the weighted average terms to maturity or repricing
of Cecil Federal's interest-earning assets). In accordance with the policy,
management has primarily invested in U.S. Treasury, government and agency
securities and mutual funds.
Cecil Federal carries its investments at cost as adjusted for discounts and
unamortized premiums. Cecil Federal's intention is to hold all investments to
maturity and Cecil Federal does not currently foresee any conditions that would
require any sales of its investments.
Columbian. Columbian is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies and state and municipal governments, deposits at the FHLB of Atlanta,
certificates of deposits in federally insured institutions, certain bankers'
acceptances and federal funds. Columbian may also invest, subject to certain
limitations, in commercial paper having one of the two highest investment
ratings of a nationally recognized credit rating agency, and certain other types
of corporate debt securities and mutual funds. Federal regulations require
Columbian to maintain an investment in FHLB of Atlanta stock and a minimum
amount of liquid assets which may be invested in cash and specified securities.
From time to time, the OTS adjusts the percentage of liquid assets which savings
are required to maintain. For additional information, see "Regulation --
Liquidity Requirements."
Columbian invests in investment securities in order to diversify its
assets, manage cash flow, obtain yield and maintain the minimum levels of liquid
assets required by regulatory authorities. Such investments generally include
sales of federal funds, and purchases of federal government and agency
securities and qualified deposits in other financial institutions. Investment
decisions generally are made by the Chief Financial Officer in accordance with
investment strategies approved by the Investment Committee of the Board of
Directors of Columbian.
For additional information, see Note 3 of Notes to Consolidated Financial
Statements.
22
<PAGE>
The following table sets forth the carrying value of the Banks' investment
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
Cecil Federal Columbian
At December 31, At December 31,
---------------- --------------
1998 1997 1998 1997
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. government and agency securities...... $3,004 $2,998 $3,244 $4,881
Other...................................... 559 528 1,513 422
------ ------ ------ ------
Total investment securities............... 3,563 3,526 4,757 5,303
Federal funds sold.......................... -- -- 1,125 500
Interest-earning deposits and certificates
of deposit................................. 3,642 881 2,570 1,638
FHLB stock.................................. 458 438 215 215
------ ------ ------ ------
Total investments........................ $7,663 $4,844 $8,667 $7,656
====== ====== ====== ======
</TABLE>
23
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for Cecil Federal's investment portfolio at
December 31, 1998.
<TABLE>
<CAPTION>
More than Total
One Year or Less One to Five Years Five to Ten Years Ten Years Investment Portfolio
------------------ ------------------ ------------------ ------------------ --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cecil Federal
- -------------
Securities available for
sale:
U.S. government and
agency securities.... $ -- -- % $ -- --% $ -- --% $ -- --% $ -- $ -- -- %
Other.................. 559 5.38 -- -- -- -- -- -- 559 560 5.38
Interest-earning
deposits and
certificates of
deposits............ -- -- -- -- -- -- -- -- -- -- --
FHLB stock............. -- -- -- -- -- -- -- -- -- -- --
------ ------ ----- ------- ------ ------ ------
Total................ $ 559 5.38 $ -- -- $ -- -- $ -- -- $ 559 $ 560 5.38
====== ====== ===== ======= ====== ====== ======
Securities held to
maturity:
U.S. government and
agency securities.... $3,004 5.48% $ -- -- $ -- -- $ -- -- $3,004 $3,004 5.48
Other.................. -- -- -- -- -- -- -- -- -- -- --
Interest-earning
deposits and
certificates of
deposits............ 3,642 4.35 -- -- -- -- -- -- 3,642 3,642 4.35
FHLB stock............. 458 7.44 -- -- -- -- -- -- 458 458 7.44
------ ------ ------- ------- ------ ------
Total................ $7,104 5.03 $ -- -- $ -- -- $ -- -- $7,104 $7,104 5.03
====== ====== ======= ======= ====== ======
</TABLE>
24
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for Columbian's investment portfolio at
December 31, 1998.
<TABLE>
<CAPTION>
More than Total
One Year or Less One to Five Years Five to Ten Years Ten Years Investment Portfolio
------------------ ------------------ ------------------ ------------------ --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Columbian
- ---------
Securities available for
sale:
U.S. government and
agency securities..... $ -- -- % $ -- --% $2,020 7.57% $ -- --% $2,020 $2,020 7.57%
Other................... 1,513 5.54 -- -- -- -- -- -- 1,513 1,513 5.54
Interest-earning
deposits and
certificates of
deposits............. -- -- -- -- -- -- -- -- -- -- --
FHLB stock.............. -- -- -- -- -- -- -- -- -- -- --
------ -------- -------- -------- ------ ------
Total................. $1,513 5.54 $ -- -- $2,020 7.57 $ -- -- $3,533 $3,533 6.70
====== ======== ======== ======== ====== ======
Securities held to
maturity:
U.S. government
securities............. $ -- -- -- $ --% $ 725 6.66 $499 6.70 $1,224 $1,224 6.68%
Federal funds sold...... 1,125 4.18 -- -- -- -- -- -- 1,125 1,125 4.18
Other................... -- -- -- -- -- -- -- -- -- -- --
Interest-earning
deposits and
certificates of
deposits............. 2,570 4.77 -- -- -- -- -- -- 2,570 2,570 4.77
FHLB stock.............. 215 7.44 -- -- -- -- -- -- 215 215 7.44
------ -------- -------- -------- ------ ------
Total................. $3,910 4.75 -- $ -- $ 725 6.66 $499 6.70 $5,134 $5,134 5.21
====== ======== ======== ======== ====== ======
</TABLE>
25
<PAGE>
Deposit Activity and Other Sources of Funds
General. Deposits are the primary source of Cecil Federal's and
Columbian's funds for lending and other investment purposes. In addition to
deposits, the Banks derive funds from loan principal repayments and interest
payments and maturing investment securities. Loan repayments and interest
payments are a relatively stable source of funds, while deposit inflows and
outflows are significantly influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources, or on a longer term
basis for general business purposes. The Banks primarily use advances from the
Federal Home Loan Bank of Atlanta for borrowings.
Deposits. Deposits are attracted principally from within the Banks'
primary market areas through the offering of a variety of deposit instruments,
including savings accounts and certificates of deposit ranging in term from 91
days to 60 months, as well as regular checking, NOW, passbook and money market
deposit accounts. Deposit account terms vary, principally on the basis of the
minimum balance required, the time periods the funds must remain on deposit and
the interest rate. The Banks also offer individual retirement accounts
("IRAs").
The Banks' policies are designed primarily to attract deposits from local
residents. The Banks do not accept deposits from brokers due to the volatility
and rate sensitivity of such deposits. Interest rates paid, maturity terms,
service fees and withdrawal penalties are established by the Banks on a periodic
basis. Determination of rates and terms are predicated upon funds acquisition
and liquidity requirements, rates paid by competitors, growth goals and federal
regulations.
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by Cecil Federal between the dates
indicated.
<TABLE>
<CAPTION>
Increase
(Decrease)
Balance at From Balance at
December 31, % December 31, December 31, %
1998 Deposits 1997 1997 (1) Deposits
-------- ------ -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Regular checking............. $ 2,512 4.17% $ 1,601 $ 911 1.72%
NOW accounts................. 6,413 10.65 1,375 5,038 9.51
Passbook..................... 8,686 14.42 644 8,042 15.19
Statement savings............ 2,001 3.33 727 1,274 2.41
Commercial checking.......... 93 .15 35 58 .11
Money market................. 2,359 3.92 (290) 2,649 5.00
Christmas club............... 71 .12 (8) 79 .15
91 day CD.................... 7,473 12.41 1,249 6,224 11.75
6 month CD................... 5,917 9.83 998 4,919 9.29
1 year CD.................... 7,170 11.91 1,214 5,956 11.25
18 month CD.................. 2,791 4.64 344 2,447 4.62
30 month CD.................. 3,037 5.04 538 2,499 4.72
42 month CD.................. -- -- (52) 52 0.10
60 month CD.................. 3,608 5.99 (617) 4,225 7.98
18 month IRA CD.............. 7,370 12.24 (150) 7,520 14.20
14 month variable CD......... 708 1.18 (353) 1,061 2.00
------- ------ ------- -------- ------
$60,209 100.00% $ 7,255 $ 52,954 100.00%
======= ====== ======= ======== ======
</TABLE>
___________
(1) Certain reclassifications have been made to the 1997 figures to conform
with current year presentation.
26
<PAGE>
Time Deposits by Rates
The following table sets forth the time deposits in Cecil Federal classified by
rates at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
2 - 3.99% (1)........................ $ 490 $ 79
4 - 5.99%............................ 30,225 27,513
6 - 7.99%............................ 7,429 7,390
8 - 9.99%............................ -- --
------- -------
$38,144 $34,982
======= =======
- -------------------------
</TABLE>
(1) Includes Club Accounts.
Time Deposit Maturity Schedule
The following table sets forth the amount and maturities of time deposits
at December 31, 1998 for Cecil Federal.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- ---- -------- --------- --------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
2 - 3.99% (1)...... $ 490 $ -- $ -- $ -- $ 490
4 - 5.99%.......... 24,189 3,889 1,131 1,016 30,225
6 - 7.99%.......... 4,707 2,146 57 519 7,429
------- ------ ------ ------- -------
$29,386 $6,035 $1,188 $1,535 $38,144
======= ======= ====== ======= =======
- -------------------------
</TABLE>
(1) Includes Club Accounts.
The following table indicates the amount of Cecil Federal's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1998.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
---------------- --------------
(In thousands)
<S> <C>
Three months or less............ $ 4,745
Over three through six months... 5,017
Over six through twelve months.. 6,819
Over twelve months.............. 1,423
-------
Total......................... $18,004
=======
</TABLE>
27
<PAGE>
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by Columbian between the dates indicated.
<TABLE>
<CAPTION>
Increase
(Decrease)
Balance at from Balance at
December 31, December 31, December 31,
1998 % Deposits 1997 1997 % Deposits
------------ ------------- ------------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Passbook Accounts................ $ 2,130 7.76% $ 302 $ 1,828 6.61%
Six Month Certificates........... 10 0.03% (52) 62 0.22%
Twelve Month Certificates........ 344 1.25% (274) 618 2.24%
Thirteen Month Certificates...... 3,460 12.60% (123) 3,583 12.96%
Eighteen Month Certificates...... 3,698 13.46% 680 3,018 10.92%
Nineteen Month Certificates...... 850 3.09% (82) 932 3.37%
Twenty Five Month Certificates... 2,158 7.86% 816 1,342 4.85%
Thirty Month Certificates........ 126 0.46% (82) 208 0.75%
Thirty Seven Month Certificates.. 933 3.40% 181 752 2.72%
Forty Two Month Certificates..... 224 0.82% (274) 498 1.80%
Forty Nine Month Certificates.... 731 2.66% 500 231 0.84%
Sixty Month Certificates......... 4,755 17.31% (3,126) 7,881 28.51%
Sixty One Month Certificates..... 1,677 6.11% 871 806 2.92%
Chesapeake Accounts.............. 1,085 3.95% (36) 1,121 4.06%
Statement Savings................ 4,076 14.84% 335 3,741 13.53%
NOW Checking..................... 1,170 4.26% 156 1,014 3.67%
IRA's............................ 39 0.14% 32 7 0.03%
------- ------ ------- ------- ------
$27,466 100.00% $ (176) $27,642 100.00%
======= ====== ======= ======= ======
</TABLE>
The following table sets forth the term certificates in Columbian
classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------
Rate 1998 1997
- ---- ---- ----
(In thousands)
<S> <C> <C>
2.00 - 3.99%...... $ -- $ --
4.00 - 5.99%...... 13,318 10,943
6.00 - 7.99%...... 5,692 8,995
-------- -------
$ 19,010 $ 19,938
======== ========
</TABLE>
The following table sets forth the amount and maturities of term
certificates at December 31, 1998 for Columbian.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- ---- -------- --------- --------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
4.00 - 5.99%.. $7,901 $2,990 $ 704 $ 1,712 $13,307
6.00 - 7.99%.. 3,064 1,520 56 1,063 5,703
------ ------ ------ ------- -------
$10,965 $4,510 $ 760 $ 2,775 $ 19,010
======= ====== ====== ======= ========
</TABLE>
The following table indicates the amount of Columbian's term certificates
of $100,000 or more by time remaining until maturity as of December 31, 1998.
28
<PAGE>
<TABLE>
<CAPTION>
Term
Maturity Period Certificates
--------------- ------------
(In thousands)
<S> <C>
Three months or less............................... $ 2,056
Over three through six months...................... 700
Over six through 12 months......................... 103
Over 12 months..................................... 1,155
-----------
Total............................................. $ 4,014
===========
</TABLE>
Savings Deposit Activity
The following table sets forth the savings activities of the Banks for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Deposits............................................................. $72,420,748 $35,246,621
Withdrawals.......................................................... 69,344,611 34,603,911
----------- -----------
Net increase (decrease) before interest credited.................... 3,076,137 642,710
Interest credited.................................................... 4,002,772 3,823,369
----------- -----------
Net increase (decrease) in savings deposits......................... $ 7,078,909 $ 4,466,079
=========== ===========
</TABLE>
Management attributes the increase in deposits (prior to interest credited)
for the year ended December 31, 1998 to increased marketing of existing products
to current customers, and the addition of several new savings products.
Borrowings. Savings deposits historically have been the primary source of
funds for the Banks' lending and investment activities and for its general
business activities. The Banks are authorized, however, to use advances from
the FHLB of Atlanta to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. Advances from the FHLB typically would be
secured by the Banks' stock in the FHLB and a portion of the Banks' mortgage
loans. Cecil Federal utilized short-term advances from FHLB during the year.
The FHLB of Atlanta functions as a central reserve bank providing credit
for savings institutions and certain other member financial institutions. As
members, the Banks are required to own capital stock in the FHLB and are
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met.
Subsidiary Activities
As federally chartered savings banks, the Banks may invest up to 2% of its
assets in subsidiaries, with an additional investment of 1% of assets where such
investment serves primarily community, inner-city, and community development
purposes. Under such limitations, as of December 31, 1998, Cecil Federal was
authorized to invest up to approximately $1.4 million in the stock of or in the
loans to subsidiaries. In addition, institutions meeting regulatory capital
requirements and certain other tests may invest up to 50% of their regulatory
capital in conforming first mortgage loans to subsidiaries. At December 31,
1998, Cecil Federal had $82,000 invested in its subsidiaries.
Cecil Federal's wholly owned subsidiaries, Cecil Service Corporation and
Cecil Financial Services Corporation were each established in 1971. Cecil
Service Corporation's primary business is acting as leasing agent for the North
East Plaza Branch. The dollar amount invested in this business activity was
$35,000 for 1998. In 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. UVEST Investment Services is a registered broker-dealer and
member of both the National Association of Securities Dealers and the Securities
29
<PAGE>
Investment Protection Corporation (SIPC). Headquartered in Charlotte, North
Carolina, UVEST has been providing bank-based investment services through the
Southeast since 1982. The dollar amount invested in this business activity was
$48,000 for 1998.
SAIF-insured savings institutions are required to give the FDIC and the
Director of the OTS 30 days' prior notice before establishing or acquiring a new
subsidiary, or commencing any new activity through an existing subsidiary. Both
the FDIC and the Director of the OTS have authority to order termination of
subsidiary activities determined to pose a risk to the safety or soundness of
the institution. In addition, savings institutions are required to deduct the
amount of their investments in and extensions of credit to subsidiaries engaged
in activities not permissible to national banks from capital in determining
regulatory capital compliance. See "Regulation of the Banks -- Regulatory
Capital Requirements."
Competition
The Banks experience substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans.
Direct competition for savings deposits comes from other savings institutions,
credit unions, regional bank holding companies and commercial banks located in
its primary market area. Significant competition for the Banks' other deposit
products and services comes from money market mutual funds, brokerage firms,
insurance companies and retail stores. The primary factors in competing for
loans are interest rates and loan origination fees and the range of services
offered by various financial institutions. Competition for origination of real
estate loans normally comes from other savings institutions, commercial banks,
mortgage bankers, mortgage brokers and insurance companies.
Cecil Federal is one of 8 financial institutions with offices in Cecil
County, Maryland. Cecil Federal's primary competition comes from those
institutions as well as numerous additional regional commercial banks and thrift
institutions, which have branch offices near Cecil Federal's market area. Many
of these financial institutions have financial resources substantially greater
than Cecil Federal.
Cecil Federal is able to compete effectively in its primary market area by
offering competitive interest rates and loan fees, and a wide variety of deposit
products and by emphasizing personal customer service and cultivating
relationships with the local businesses. Management believes that, as a result
of Cecil Federal's commitment to competitive pricing, varied products and
personal service, Cecil Federal has developed a solid base of core deposits and
Cecil Federal's loan origination activities are an asset to the community.
Columbian faces strong competition both in originating real estate,
consumer and other loans and in attracting deposits. Columbian competes for
real estate and other loans principally on the basis of interest rates, the
types of loans it originates and the quality of service it provides to
borrowers. Its competition in originating loans comes primarily from other
savings institutions, commercial banks and mortgage bankers making loans secured
by real estate located in Columbian's market area. Commercial banks, credit
unions and finance companies provide vigorous competition in consumer lending.
Competition may increase as a result of the continuing reduction of restrictions
on the interstate operations of financial institutions.
30
<PAGE>
Regulation of the Banks
As federally chartered savings institutions, the Banks are subject to
extensive regulation by the OTS. The lending activities and other investments
of the Banks must comply with various federal regulatory requirements. The OTS
periodically examines the Banks for compliance with various regulatory
requirements. The FDIC also has the authority to conduct special examinations
of the Banks because their deposits are insured by the SAIF. The Banks must
file reports with OTS describing their activities and financial condition. The
Banks are also subject to certain reserve requirements promulgated by the
Federal Reserve Board. This supervision and regulation is intended primarily
for the protection of depositors. As a savings institution holding company, the
Company is subject to OTS regulation, examination, supervision and reporting
requirements. Certain of these regulatory requirements are referred to below or
appear elsewhere herein.
Regulatory Capital Requirements. Under OTS capital standards, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and "total" capital
(a combination of core and "supplementary" capital) equal to 8% of risk-weighted
assets. Regulatory tangible, core and total capital are not calculated in
accordance with generally accepted accounting principles. The OTS regulation
defines core capital as common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill," less intangible assets other than certain qualifying supervisory
goodwill and certain mortgage servicing rights. At December 31, 1998, the Banks
had no qualifying supervisory goodwill or mortgage servicing rights. Tangible
capital is the same as core capital, except it excludes qualifying supervisory
goodwill and other intangible assets other than certain mortgage servicing
rights.
The OTS capital rule requires that core and tangible capital be further
reduced by an amount equal to a savings institution's debt and equity
investments in any subsidiary engaged in activities not permissible for national
banks, other than a subsidiary engaged in activities undertaken as agent for
customers or in mortgage banking activities and certain subsidiary depository
institutions or their holding companies ("nonincludable subsidiary"). At
December 31, 1998, the Banks had no investments in or extensions of credit to
subsidiaries engaged in activities not permissible for national banks.
Adjusted total assets are a savings association's total assets as
determined under generally accepted accounting principles adjusted for certain
goodwill amounts and increased by a pro rated portion of the assets of
subsidiaries in which the savings association holds a minority interest and
which are not engaged in activities for which the capital rules require
deduction of its debt and equity investments. Adjusted total assets are reduced
by the amount of assets that have been deducted from capital, the portion of the
savings association's investments in subsidiaries that must be deducted from
capital under the capital rules and, for purposes of the core capital
requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loss allowances. Total core and supplementary capital are reduced by the amount
of capital instruments held by other depository institutions pursuant to
reciprocal arrangements and by the amount of the savings association's high
loan-to-value ratio land loans and non-residential construction loans and equity
investments other than those deducted from core and tangible capital. At
December 31, 1998, the Banks had no high ratio land or nonresidential
construction loans and had no equity investments for which OTS regulations
require deduction from total capital.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each on-balance-sheet asset and the credit-
equivalent amount of each off-balance-sheet item after being multiplied by an
assigned risk weight. Under the OTS risk-weighting system, cash and securities
backed by the full faith and credit of the U.S. Government are given a 0% risk
weight. Mortgage-backed securities issued, or fully guaranteed as to principal
and interest, by the FNMA or FHLMC are assigned a 20% risk weight. One- to
four-family first mortgages not more than 90 days past due with loan-to-value
ratios under 80%, multi-family mortgages (maximum 36 dwelling units) with
31
<PAGE>
loan-to-value ratios under 80% and average annual occupancy rates over 80%, and
certain qualifying loans for the construction of one- to four-family residences
pre-sold to home purchasers are assigned a risk weight of 50%. Consumer loans,
commercial loans, non-qualifying mortgage loans, most commercial real estate
loans, repossessed assets and assets more than 90 days past due, as well as all
other assets not specifically categorized, are assigned a risk weight of 100%.
The portion of equity investments not deducted from core or supplementary
capital is assigned a 100% risk-weight. OTS capital regulations require savings
institutions to maintain minimum total capital, consisting of core capital plus
supplemental capital, equal to 8.0% of risk-weighted assets.
The table below presents Cecil Federal's capital position relative to its
various regulatory capital requirements at December 31, 1998.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
---------- -----------
(Dollars in thousands)
<S> <C> <C>
Tangible capital...................................... $7,921 11.09%
Tangible capital requirement.......................... 1,071 1.50
------ -----
Excess............................................... $6,850 9.59%
====== =====
Core capital.......................................... $7,921 11.09%
Core capital requirement.............................. 2,142 3.00
------ -----
Excess............................................... $5,779 8.09%
====== =====
Total capital (i.e., core and supplementary capital).. $8,144 18.37%
Risk-based capital requirement........................ 3,547 8.00
------ -----
Excess............................................... $4,597 10.37%
====== =====
- -------------------------
</TABLE>
(1) Based upon adjusted total assets for purposes of the tangible core
capital requirements, and risk-weighted assets for purposes of the
risk-based capital requirements.
32
<PAGE>
The table below provides information with respect to Columbian's compliance
with its regulatory capital requirements at December 31, 1998.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
---------- -----------
(Dollars in thousands)
<S> <C> <C>
Tangible capital................ $2,082 6.98%
Tangible capital requirement.... 447 1.5
------ -----
Excess......................... $1,635 5.48%
====== =====
Core capital.................... $2,082 6.98%
Core capital requirement........ 894 3.0
------ -----
Excess......................... $1,188 3.98%
====== =====
Risk-based capital.............. $2,185 15.05%
Risk-based capital requirement.. 1,162 8.0
------ -----
Excess......................... $1,023 7.05%
====== =====
- -------------------------
</TABLE>
(1) Based on adjusted total assets for purposes of the tangible capital
and core capital requirements and risk-weighted assets for purpose of
the risk-based capital requirement.
OTS risk-based capital rules require savings institutions with more than a
"normal" level of interest rate risk to maintain additional total capital. A
savings institution's interest rate risk is measured in terms of the sensitivity
of its "net portfolio value" to changes in interest rates. Net portfolio value
is defined, generally, as the present value of expected cash inflows from
existing assets and off-balance sheet contracts less the present value of
expected cash outflows from existing liabilities. A savings institution is
considered to have a "normal" level of interest rate risk exposure if the
decline in its net portfolio value after an immediate 200 basis point increase
or decrease in market interest rates (whichever results in the greater decline)
is less than two percent of the current estimated economic value of its assets.
A savings institution with a greater than normal interest rate risk is required
to deduct from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.
The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. Institutions
with less than $300 million in assets and a risk-based capital ratio above 12%,
like the Banks, generally are exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS will require any exempt
institution that it determines may have a high level of interest rate risk
exposure to file such schedule on a quarterly basis and may be subject to an
additional capital requirement based upon its level of interest rate risk as
compared to its peers. Based upon calculations as of December 31, 1998, the
Banks are not required to deduct an interest-rate risk capital component from
total capital.
In addition to requiring generally applicable capital standards for savings
associations, the Director of OTS is authorized to establish the minimum level
of capital for a savings association at such amount or at such ratio of capital-
to-assets as the Director determines to be necessary or appropriate for such
association in light of the particular circumstances of the association. Such
circumstances would include a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk and certain risks
arising from non-traditional activities. The Director of OTS may treat the
failure of any savings association to maintain capital at or above such level as
an unsafe or unsound practice and may issue a directive requiring any savings
association which fails to maintain capital at or above the minimum level
required by the Director to submit and adhere to a plan for increasing capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.
33
<PAGE>
Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized" institution) may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A
"significantly undercapitalized" institution, as well as any undercapitalized
institution that did not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution could also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total
assets falls below a "critical capital level," the institution will be subject
to conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized.
The federal banking regulators, including the OTS, have adopted uniform
regulations implementing the prompt corrective action provisions of FDICIA.
Under such regulations, the federal banking regulators measure a depository
institution's capital adequacy on the basis of the institution's total risk-
based capital ratio (the ratio of its total capital to risk-weighted assets),
Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted
assets) and leverage ratio (the ratio of its core capital to adjusted total
assets). Under the regulations, a savings institution that is not subject to an
order or written directive to meet or maintain a specific capital level is
deemed "well capitalized" if it also has: (i) a total risk-based capital ratio
of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater;
and (iii) a leverage ratio of 5.0% or greater. An "adequately capitalized"
savings institution is an institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
ratio of 4.0% or greater (or 3.0% or greater if the institution has a composite
1 CAMEL rating). An "undercapitalized" savings institution is an institution
that has (i) a total risk-based capital ratio less than 8.0%; or (ii) a Tier 1
risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less
than 4.0% (or 3.0% if the institution has a composite 1 CAMEL rating). A
"significantly undercapitalized" savings institution is defined as an
institution that has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage
ratio of less than 3.0%. A "critically undercapitalized" savings institution is
defined as an institution that has a ratio of "tangible equity" to total assets
of less than 2.0%. Tangible equity is defined as core capital plus cumulative
perpetual preferred stock (and related surplus) less all intangibles other than
qualifying supervisory goodwill and certain purchased mortgage servicing rights.
The OTS may reclassify a well capitalized savings institution as adequately
capitalized and may require an adequately capitalized or undercapitalized
institution to comply with the supervisory actions applicable to institutions in
the next lower capital category if the OTS determines, after notice and an
opportunity for a hearing, that the institution is in an unsafe or unsound
condition or that the institution has received and not corrected a less-than-
satisfactory rating for any CAMEL rating category. The Banks are classified as
well capitalized under the prompt corrective action regulations.
34
<PAGE>
The table below presents the Cecil Federal=s capital position at December
31, 1998 relative to its various minimum regulatory capital requirements under
the prompt corrective regulations.
<TABLE>
<CAPTION>
Percent of
Assets
Amount (1)
---------- ---------
(Dollars in thousands)
<S> <C> <C>
Tangible equity......................... $7,921 11.09%
Tangible equity requirement............. 1,071 1.50
------ -----
Excess................................. $6,850 9.59%
====== =====
Tier 1 or leverage capital.............. $7,921 11.09%
Tier 1 or leverage capital requirement.. 2,142 3.00
------ -----
Excess................................. $5,779 8.09%
====== =====
Tier 1 risk-based capital............... $7,921 17.87%
Tier 1 risk-based capital requirement... 1,773 4.00
------ -----
Excess................................. $6,148 13.87%
====== =====
Risk-based capital...................... $8,144 18.37%
Risk-based capital requirement.......... 3,547 8.00
------ -----
Excess................................. $4,597 10.37%
====== =====
- -------------------------
</TABLE>
(1) Based upon adjusted total assets for purposes of the tangible equity and
Tier 1 or leverage capital requirements, and risk-weighted assets for
purposes of the Tier 1 risk-based and risk-based capital requirements.
35
<PAGE>
The table below presents the Columbian=s capital position at December 31,
1998 relative to its various minimum regulatory capital requirements under the
prompt corrective regulations.
<TABLE>
<CAPTION>
Percent of
Assets
Amount (1)
---------- ---------
(Dollars in thousands)
<S> <C> <C>
Tangible equity......................... $2,082 6.98%
Tangible equity requirement............. 447 1.50
------ -----
Excess................................. $1,635 5.48%
====== =====
Tier 1 or leverage capital.............. $2,082 6.98%
Tier 1 or leverage capital requirement.. 894 3.00
------ -----
Excess................................. $1,188 3.98%
====== =====
Tier 1 risk-based capital............... $2,082 14.34%
Tier 1 risk-based capital requirement... 581 4.00
------ -----
Excess................................. $1,501 10.34%
====== =====
Risk-based capital...................... $2,185 15.05%
Risk-based capital requirement.......... 1,162 8.00
------ -----
Excess................................. $1,023 7.05%
====== =====
- -------------------------
</TABLE>
(1) Based upon adjusted total assets for purposes of the tangible equity and
Tier 1 or leverage capital requirements, and risk-weighted assets for
purposes of the Tier 1 risk-based and risk-based capital requirements.
Safety and Soundness Standards. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the federal
banking agencies, including the OTS and the Federal Reserve Board, released
Interagency Guidelines Establishing Standards for Safety and Soundness and
published a final rule establishing deadlines for submission and review of
safety and soundness compliance plans. The final rule and the guidelines went
into effect on August 9, 1995. The guidelines require depository institutions
to maintain internal controls and information systems and internal audit systems
that are appropriate for the size, nature and scope of the institution's
business. The guidelines also establish certain basic standards for loan
documentation, credit underwriting, interest rate risk exposure, and asset
growth. The guidelines further provide that depository institutions should
maintain safeguards to prevent the payment of compensation, fees and benefits
that are excessive or that could lead to material financial loss, and should
take into account factors such as comparable compensation practices at
comparable institutions. If the appropriate federal banking agency determines
that a depository institution is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an acceptable plan to
achieve compliance with the guidelines. A depository institution must submit an
acceptable compliance plan to its primary federal regulator within 30 days of
receipt of a request for such a plan. Failure to submit or implement a
compliance plan may subject the institution to regulatory sanctions.
Additionally under FDICIA, as amended by the CDRI Act, the federal banking
agencies are required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
federal banking agencies, including the OTS and the Federal Reserve Board,
issued proposed guidelines relating to asset quality and earnings. Under the
proposed guidelines, an FDIC insured depository institution should maintain
systems, commensurate with its size and the nature and scope of its operations,
to identify problem assets and prevent deterioration in those assets as well as
to evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves. Management believes that the asset
quality and earnings standards, in the form proposed by the banking agencies,
would not have a material effect on the operations of the Banks.
36
<PAGE>
Liquidity Requirements. The Banks are required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than a specified percentage
(currently 4%) of its net withdrawable savings deposits plus short-term
borrowings. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average daily liquidity and short-term liquidity ratios of
the Banks at December 31, 1998 were 17.88% and 16.14%, respectively, for Cecil
Federal and 21.33% and 18.35%, respectively, for Columbian, substantially all of
which qualified as short-term liquidity. A substantial sustained decline in
savings deposits could adversely affect the Banks= liquidity which could result
in restricted operations and additional borrowings from the FHLB.
Deposit Insurance. The Banks are required to pay assessments based on a
percent of its insured deposits to the FDIC for insurance of its deposits by the
SAIF. Under the Federal Deposit Insurance Act, the FDIC is required to set
semi-annual assessments for SAIF-insured institutions at a level necessary to
maintain the designated reserve ratio of the SAIF at 1.25% of estimated insured
deposits or at a higher percentage of estimated insured amounts that the FDIC
determines to be justified for that year by circumstances indicating a
significant risk of substantial future losses to the SAIF. The FDIC also
administers the Bank Insurance Fund ("BIF"), which has the same designated
reserve ratio as the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations. See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.
The FDIC has adopted a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings have been reduced to zero and institutions in the
lowest risk assessment classification are assessed at the rate of 0.27% of
insured deposits. Until December 31, 1999, however, SAIF-insured institutions,
will be required to pay assessments to the FDIC at the rate of 6.5 basis points
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO") an agency of the federal government established to finance
takeovers of insolvent thrifts. During this period, BIF members will be
assessed for these obligations at the rate of 1.3 basis points. After December
31, 1999, both BIF and SAIF members will be assessed at the same rate for FICO
payments.
Each depository institution participating in a SAIF-to-BIF conversion
transaction is required to pay an exit fee to SAIF equal to 0.90% of the
deposits transferred and an entrance fee to BIF based on the current reserve
ratio of the BIF. A savings institution is not prohibited from adopting a
commercial bank or savings bank charter if the resulting bank remains a SAIF
member.
Qualified Thrift Lender Test. A savings institution that does not meet the
Qualified Thrift Lender ("QTL") test must either convert to a bank charter or
comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution shall be restricted to those
of a national bank; (iii) the institution shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the institution shall
be subject to the rules regarding payment of dividends by a national bank. Upon
the expiration of three years from the date the institution ceases to be a QTL,
it must cease any activity and not retain any investment not
37
<PAGE>
permissible for a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations).
To qualify as a QTL, a savings institution must either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles, property used by
a savings institution in its business and liquidity investments in an amount not
exceeding 20% of assets. Qualified Thrift Investments consist of (i) loans,
equity positions or securities related to domestic, residential real estate or
manufactured housing and educational, small business and credit card loans; and
(ii) subject to an aggregate 20% of portfolio assets limit, shares of stock in
the FHLMC and the FNMA, loans for personal, family, household purposes, 50% of
the dollar amount of residential mortgage loans originated and sold within 90
days of origination, and 200% of an institution's investments in loans to
finance "starter homes" and loans for construction, development or improvement
of housing and community service facilities or for financing small businesses in
"credit-needy" areas. In order to maintain QTL status, the savings institution
must maintain a weekly average percentage of Qualified Thrift Investments to
portfolio assets equal to 65% on a monthly average basis in nine out of 12
months. A savings institution that fails to maintain QTL status will be
permitted to requalify once, and if it fails the QTL test a second time, it will
become immediately subject to all penalties as if all time limits on such
penalties had expired. Failure to qualifying as a QTL results in a number of
sanctions, including the imposition of certain operating restrictions imposed on
national banks and a restriction on obtaining additional advances from the FHLB
system. Upon failure to qualify as a QTL for two years, a savings institution
must convert to a commercial bank.
At December 31, 1998, approximately 93.59% of Cecil Federal's and 68.00% of
Columbian's assets were invested in Qualified Thrift Investments, which were in
excess of the percentage required to qualify the Banks under the QTL test.
Limits on Loans to One Borrower. Savings institutions generally are
subject to the lending limits applicable to national banks. With certain
limited exceptions, a savings institution's loans and extensions of credit
outstanding to any borrower (including certain related entities of the borrower)
at any one time shall not exceed 15% of the unimpaired capital and surplus of
the institution. A savings institution may lend an additional amount, equal to
10% of unimpaired capital and surplus, if such loan is fully secured by readily
marketable collateral. Savings institutions are additionally authorized to make
loans to one borrower, for any purpose, in an amount not to exceed $500,000 or,
by order of the Director of OTS, in an amount not to exceed the lesser of
$30,000,000 or 30% of unimpaired capital and surplus to develop residential
housing, provided: (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the savings institution is in
compliance with its fully phased-in capital requirements; (iii) the loans comply
with applicable loan-to-value requirements, and; (iv) the aggregate amount of
loans made under this authority does not exceed 150% of unimpaired capital and
surplus. The lending limits generally do not apply to purchase money mortgage
notes taken from the purchaser of real property acquired by the savings
institution in satisfaction of debts previously contracted if no new funds are
advanced to the borrower and the institution is not placed in a more detrimental
position as a result of the sale. Certain types of loans are excepted from the
lending limits, including loans secured by savings deposits. The loans-to-one
borrower limits have not had a significant impact on the operations of the
Banks. The Banks have no lending relationships in excess of applicable loans-
to-one borrower limits. At December 31, 1998, Cecil Federal's regulatory loans-
to-one-borrower limit was $1,215,600, and Columbian's limit was $500,000.
Dividend Restrictions. Under regulations of the OTS, the Banks may not pay
dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Banks at the time of their
conversions to stock form. In addition, savings institution subsidiaries of
savings and loan holding companies are required to give the OTS 30 days' prior
notice of any proposed declaration of dividends to the holding company.
Federal regulations impose additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by the Banks. Under these regulations, a savings institution that,
immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution, has total capital (as defined by OTS regulation)
that is equal to or greater than the amount of its fully phased-in capital
requirements (a
38
<PAGE>
"Tier 1 Institution") is generally permitted without OTS approval, after notice,
to make capital distributions during a calendar year in the amount of up to the
greater of (i) 100% of its net income to date during the calendar year plus an
amount that would reduce by one-half the amount by which its capital-to-assets
ratio exceeded its fully phased-in capital requirement to assets ratio at the
beginning of the calendar year, or (ii) 75% of its net income for the previous
four quarters. A savings institution with total capital in excess of current
minimum capital requirements but not in excess of the fully phased-in
requirements (a "Tier 2 Institution") is permitted to make capital distributions
without OTS approval of between up to 75% of its net income for the previous
four quarters, less dividends already paid for such period. A savings
institution that fails to meet current minimum capital requirements (a "Tier 3
Institution") is prohibited from making any capital distributions without the
prior approval of the OTS. Tier 1 Institutions that have been notified by the
OTS that they are in need of more than normal supervision will be treated as
either a Tier 2 or Tier 3 Institution. Unless the OTS determines that the Banks
are institutions requiring more than normal supervision, the Banks expect to be
authorized to pay dividends in accordance with the provisions of the OTS
regulations discussed above as a Tier 1 Institution.
Under the OTS' prompt corrective action regulations, the Banks are also
prohibited from making any capital distributions if after making the
distribution, the Banks would have: (i) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%. The OTS, after consultation with the FDIC,
however, may permit an otherwise prohibited stock repurchase if made in
connection with the issuance of additional shares in an equivalent amount and
the repurchase will reduce the institution's financial obligations or otherwise
improve the institution's financial condition.
In addition to the foregoing, earnings of the Banks appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then current tax rate by the Banks on the amount of earnings
removed from the reserves for such distributions. See "Taxation."
Federal Home Loan Bank System. The FHLB System consists of 12 district
FHLBs subject to supervision and regulation by the Federal Housing Finance Board
("FHFB"). The FHLBs provide a central credit facility primarily for member
institutions. As members of the FHLB of Atlanta, the Banks are required to
acquire and hold shares of capital stock in the FHLB of Atlanta in an amount at
least equal to 1% of the aggregate unpaid principal of their home mortgage
loans, home purchase contracts, and similar obligations at the beginning of each
year, or 1/20 of its advances (borrowings) from the FHLB of Atlanta, whichever
is greater. The Banks were in compliance with this requirement with investments
in FHLB of Atlanta stock at December 31, 1998, of $457,700 and $214,600 for
Cecil Federal and Columbian, respectively. The FHLB of Atlanta serves as a
reserve or central bank for its member institutions within its assigned
district. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It offers advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB of Atlanta. Long-term advances may only be made for the
purpose of providing funds for residential housing finance. The Banks use short
term advances from the FHLB of Atlanta during the year.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, all FDIC-insured depository institutions must maintain average daily
reserves equal to 3% on the first $47.8 million of transaction accounts, plus
10% on all remaining transaction accounts. This percentage is subject to
adjustment by the Federal Reserve Board. Because required reserves must be
maintained in the form of vault cash or in a noninterest bearing account at a
Federal Reserve Bank, the effect of the reserve requirement is to reduce the
amount of the institution's interest-earning assets. At December 31, 1998, the
Banks met their reserve requirements.
Regulation of the Company
The Company is registered as a savings and loan holding company with the
OTS and subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the Banks
are subject to certain restrictions in its dealings with the Company and
affiliates thereof.
Activities Restrictions. The Board of Directors of the Company presently
operates the Company as a multiple savings and loan holding company and is
subject to certain activities restrictions. Among other things, no multiple
39
<PAGE>
savings and loan holding company or subsidiary thereof which is not a savings
association shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof, any
business activity, upon prior notice to, and no objection by the OTS, other than
(i) furnishing or performing management services for a subsidiary savings
association, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution, (iv) holding or managing properties used or occupied by a
subsidiary savings institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by the FSLIC by regulation as of
March 5, 1987 to be engaged in by multiple holding companies or (vii) those
activities authorized by the Federal Reserve Board as permissible for bank
holding companies, unless the Director of OTS by regulation prohibits or limits
such activities for savings and loan holding companies. Those activities
described in (vii) above must also be approved by the Director of OTS prior to
being engaged in by a multiple holding company.
Transactions with Affiliates. Transactions between savings associations
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings association is any company or entity which
controls, is controlled by or is under common control with the savings
association. In a holding company context, the parent holding company of a
savings association (such as the Company) and any companies which are controlled
by such parent holding company are affiliates of the savings association.
Generally, Sections 23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the institution or subsidiary as those provided to a non-
affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings association. Section 106 of the Bank
Holding Company Act ("BHCA") which also applies to the Bank prohibits the Bank
from extending credit to or offering any other services, or fixing or varying
the consideration for such extension of credit or service, on the condition that
the customer obtain some additional service from the institution or certain of
its affiliates or not obtain services of a competitor of the institution,
subject to certain exceptions.
Savings associations are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to an
executive officer and to a greater than 10% stockholder of a savings association
and certain affiliated entities of either, may not exceed, together with all
other outstanding loans to such person and affiliated entities the association's
loan to one borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus and an additional 10% of such capital and surplus
for loans fully secured by certain readily marketable collateral). Section
22(h) also prohibits loans, above amounts prescribed by the appropriate federal
banking agency, to directors, executive officers and greater than 10%
stockholders of a savings association, and their respective affiliates, unless
such loan is approved in advance by a majority of the board of directors of the
association with any "interested" director not participating in the voting. The
Federal Reserve Board has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval if required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Further, the Federal Reserve Board pursuant to
Section 22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also generally prohibits a
depository institution from paying the overdrafts of any of its executive
officers or directors.
Section 22(g) of the Federal Reserve Act requires that loans to executive
officers of depository institutions not be made on terms more favorable than
those afforded to other borrowers, requires approval for such extensions of
credit by the board of directors of the institution, and imposes reporting
requirements for and additional restrictions on the type, amount and terms of
credits to such officers. In addition, Section 106 of the BHCA prohibits
extensions of credit to executive officers, directors, and greater than 10%
stockholders of a depository institution by any other institution which has a
correspondent banking relationship with the institution, unless such extension
of credit is on substantially
40
<PAGE>
the same terms as those prevailing at the time for comparable transactions with
other persons and does not involve more than the normal risk of repayment or
present other unfavorable features.
Restrictions on Acquisitions. Savings and loan holding companies are
generally prohibited from acquiring, without prior approval of the Director of
OTS, (i) control of any other savings association or savings and loan holding
company or substantially all the assets thereof or (ii) more than 5% of the
voting shares of a savings association or holding company thereof which is not a
subsidiary. Except with the prior approval of the Director of OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock, may also acquire
control of any savings association, other than a subsidiary savings association,
or of any other savings and loan holding company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
The OTS regulations permit federal associations to branch in any state or
states of the United States and its territories. Except in supervisory cases or
when interstate branching is otherwise permitted by state law or other statutory
provision, a federal association may only establish an out-of-state branch under
such OTS regulation if (i) the federal association qualifies as a Qualified
Thrift Lender or a "domestic building and loan association" under '7701(a)(19)
of the Internal Revenue Code of 1986, as amended (the "Code") and the total
assets attributable to all branches of the association in the state would
qualify such branches taken as a whole for treatment as a Qualified Thrift
Lender or for treatment as a domestic building and loan association and (ii)
such branch would not result in (a) formation of a prohibited multi-state
multiple savings and loan holding company or (b) a violation of certain
statutory restrictions on branching by savings association subsidiaries of
banking holding companies. Federal associations generally may not establish new
branches unless the association meets or exceeds minimum regulatory capital
requirements. The OTS will also consider the association's record of compliance
with the Community Reinvestment Act of 1977 in connection with any branch
application.
The BHCA specifically authorizes the Federal Reserve Board to approve an
application by a bank holding company to acquire control of any savings
association. Pursuant to rules promulgated by the Federal Reserve Board,
owning, controlling or operating a savings association is a permissible activity
for bank holding companies, if the savings association engages only in deposit-
taking activities and lending and other activities that are permissible for bank
holding companies.
A bank holding company that controls a savings association may merge or
consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings association plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the BHCA.
Taxation
General. The Company and its subsidiaries file a consolidated federal
income tax return on a fiscal year basis. Consolidated returns have the effect
of eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur.
Thrift institutions are subject to the provisions of the Code in the same
general manner as other corporations. Prior to recent legislation, institutions
such as Cecil Federal and Columbian which met certain definitional tests and
other
41
<PAGE>
conditions prescribed by the Code benefitted from certain favorable provisions
regarding their deductions from taxable income for annual additions to their bad
debt reserve. For purposes of the bad debt reserve deduction, loans were
separated into "qualifying real property loans," which generally are loans
secured by interests in certain real property, and nonqualifying loans, which
are all other loans. The bad debt reserve deduction with respect to
nonqualifying loans was based on actual loss experience, however, the amount of
the bad debt reserve deduction with respect to qualifying real property loans
could be based upon actual loss experience (the "experience method") or a
percentage of taxable income determined without regard to such deduction (the
"percentage of taxable income method"). Legislation recently signed by the
President repealed the percentage of taxable income method of calculating the
bad debt reserve. Cecil Federal and Columbian historically have elected to use
the percentage of taxable income method.
Earnings appropriated to an institution's bad debt reserve and claimed as a
tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount was included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
Beginning with the first taxable year beginning after December 31, 1995,
savings institutions, such as the Banks, are treated the same as commercial
banks. Institutions with $500 million or more in assets will only be able to
take a tax deduction when a loan is actually charged off. Institutions with
less than $500 million in assets will still be permitted to make deductible bad
debt additions to reserves, but only using the experience method.
The Banks' federal income tax returns have not been audited in the last
five years. For further information regarding federal income taxes, see Note 11
of the Notes to Consolidated Financial Statements in the Annual Report.
Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"), enacted
on August 10, 1993, the maximum federal corporate income tax rate was increased
from 34% to 35% for taxable income over $10.0 million, with a 3% surtax imposed
on taxable income over $15.0 million. Also under provisions of RRA, a separate
depreciation calculation requirement has been eliminated in the determination of
adjusted current earnings for purposes of determining alternative minimum
taxable income, rules relating to payment of estimated corporate income taxes
were revised, and certain acquired intangible assets such as goodwill and
customer-based intangibles were allowed a 15-year amortization period.
Beginning with tax years ending on or after January 1, 1993, RRA also provides
that securities dealers must use mark-to-market accounting and generally reflect
changes in value during the year or upon sale as taxable gains or losses. The
IRS has indicated that financial institutions which originate and sell loans
will be subject to the rule.
State Income Taxation. The State of Maryland imposes an income tax of
approximately 7% on income measured substantially the same as federally taxable
income. The Banks' state income tax returns have not been audited during the
past five fiscal years. For additional information, see Note 11 of the Notes to
Consolidated Financial Statements in the Annual Report.
Employees
Cecil Federal had 21 full-time employees and three part-time employees as
of December 31, 1998, none of whom was represented by a collective bargaining
agreement. Cecil Federal believes that it enjoys excellent relations with its
personnel.
As of December 31, 1998, Columbian had seven full-time employees and one
part-time employee, none of whom was represented by a collective bargaining
agreement. Management believes its relations with its employees are good.
Item 2. Description of Property
- --------------------------------
Cecil Federal. The following table sets forth the location and certain
additional information regarding Cecil Federal's offices at December 31, 1998.
Cecil Federal owns the Elkton office and currently leases the North East office.
42
<PAGE>
<TABLE>
<CAPTION>
Year Square
Opened Footage Deposits Net Book Value
-------- ------- ----------- --------------
<S> <C> <C> <C> <C>
Main Office:
127 North Street
Elkton, Maryland 1969 3,500 $46,128,430 $233,333
Loan Center
135 North Street
Elkton, MD 21922 1995 (2) 3,000 -- 74,341
Branch Office:
108 North East Plaza
North East, Maryland 1975 (1) 2,000 14,080,482 49,383
----------- --------------
$60,208,912 $357,057
=========== ==============
- -------------
</TABLE>
(1) Original lease signed 11/74 for 20 years with five year renewals.
Currently paying $1,365 per month. A lease extension was signed 1/16/95
for 10 years with 5 year renewals.
(2) Original lease signed 5/23/95 for five years with three successive five
year renewals. Currently paying $1,700 per month.
Columbian. The following table sets forth certain additional information
regarding Columbian's office facilities as of December 31, 1998.
<TABLE>
<CAPTION>
Year Opened Square Footage Net Book Value
----------- -------------- --------------
<S> <C> <C> <C>
Main Office:
303-307 St. John Street
Havre de Grace, Maryland
21078 1970 3,355 $105,628
</TABLE>
43
<PAGE>
Columbian also owns a parcel of land on Route 40 near Havre de Grace which
it acquired in fiscal year 1995 and which had a book value of $220,000 as of
December 31, 1998. Columbian is currently in the process of improving this
property to serve as a branch office which it plans to open in fiscal year 1999.
The net book value of Columbian's office furniture, fixtures and equipment
was $25,000 as of December 31, 1998.
Item 3. Legal Proceedings
- --------------------------
There are currently no pending legal proceedings to which the Company is a
party or to which any of its property is subject, although from time to time the
Banks are involved in routine legal proceedings occurring in the ordinary course
of business.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The information contained under the section captioned "Market and Dividend
Information" in the Annual Report is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.
Item 7. Financial Statements
- -----------------------------
The Independent Auditor's Report and Related Consolidated Financial
Statements and Notes thereto contained in the Annual Report are incorporated
herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- ----------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
Information concerning the directors and executive officers of the Company
is incorporated herein by reference to the section captioned "Proposal I --
Election of Directors" in the Proxy Statement.
Based solely on a review of reports of beneficial ownership filed on Forms
3, 4 and 5, there were no delinquent filers of such reports for the fiscal year
ended December 31, 1998.
44
<PAGE>
Item 10. Executive Compensation
- --------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors -- Executive
Compensation" in the Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
-----------------------------------------------
Information required by this item is incorporated herein by reference
to the section captioned "Voting Securities and Principal Holders
Thereof" in the Proxy Statement.
(b) Security Ownership of Management
--------------------------------
Information required by this item is incorporated herein by reference
to the sections captioned "Voting Securities and Principal Holders
Thereof" and "Proposal I -- Election of Directors."
(c) Changes in Control
------------------
Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation of
which may at a subsequent date result in a change in control of the
registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors -- Transactions
with Management" in the Proxy Statement.
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) Documents Filed as Part of this Report
--------------------------------------
(1) Financial Statements. The following financial statements contained in
--------------------
the Annual Report, Exhibit 13 hereto, are incorporated herein by reference.
Independent Auditors' Report
Consolidated Statements of Financial Condition as of December 31, 1998
and 1997
Consolidated Statements of Operations for the Years Ended December 31,
1998 and 1997
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998 and 1997
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules. All schedules for which provision is
-----------------------------
made in the applicable accounting regulations of the SEC are omitted because of
the absence of conditions under which they are required or because the required
information is included in the consolidated financial statements and related
notes thereto.
45
<PAGE>
(3) Exhibits. The following is a list of exhibits filed as part of this
--------
Annual Report on Form 10-KSB with an index to their location in the sequentially
numbered copy of this Annual Report on Form 10-KSB.
No. Description
--- -----------
3.1 Articles of Incorporation of Cecil Bancorp, Inc. *
3.2 Bylaws of Cecil Bancorp, Inc. *
3.3 Federal Stock Charter **
3.4 Federal Stock Bylaws **
4 Form of Common Stock Certificate *
10.2 Employment Agreement between Cecil Bancorp, Inc., Cecil Federal Savings
Bank and Mary Halsey *
10.3 Cecil Bancorp, Inc. Stock Option and Incentive Plan ***
10.4 Cecil Bancorp, Inc. Management Recognition Plan ***
10.5 Cecil Federal Savings Bank Retirement Plan for Non-Employee
Directors****
10.6 Columbian Bank, a Federal Savings Bank 1994 Stock Option and Incentive
Plan**
13 Annual Report to Stockholders for the year ended December 31, 1998
21 Subsidiaries
23.1 Consent of Simon Master & Sidlow, P.A.
23.2 Consent of Anderson Associates, LLP
27 Financial Data Schedule
- -----------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-81374).
** Incorporated by reference to Columbian=s Registrant's Registration
Statement on Form 10-SB.
*** Incorporated by reference to the Company's Proxy Statement for its Annual
Meeting of May 25, 1995 (File No. 0-24926).
**** Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1994 (File No. 0-24926).
(b) During the quarter ended December 31, 1998, the Registrant filed the
following amendment to a previously filed Form 8-K: On December 1, 1998, the
Company filed a Current Report on Form 8-K amending the Form 8-K dated September
30, 1998, and reporting under Item 7 financial Statements disclosing 30 days of
post-merger operations of Cecil Bancorp, Inc. including the operations of
Columbian.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 25, 1999 By: /s/ Mary B. Halsey
------------------------------------------
Mary B. Halsey
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Mary B. Halsey Date: March 25, 1999
--------------------------------------------
Mary B. Halsey
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mary B. Halsey Date: March 25, 1999
--------------------------------------------
Mary B. Halsey
President and Chief Executive Officer
(Principal Financial and Accounting Officer)
By: /s/ Bernard L. Siegel Date: March 25, 1999
--------------------------------------------
Bernard L. Siegel
Chairman of the Board
By: /s/ Thomas L. Foard Date: March 25, 1999
--------------------------------------------
Thomas L. Foard
Secretary and Director
By: Date:
--------------------------------------------
William F. Burkley
Director
By: /s/ Howard J. Neff Date: March 25, 1999
--------------------------------------------
Howard J. Neff
Director
By: /s/ Doris P. Scott Date: March 25, 1999
--------------------------------------------
Doris P. Scott
Director
<PAGE>
By: /s/ Howard B. Tome Date: March 25, 1999
--------------------------------------------
Howard B. Tome
Director
By: /s/ Donald F. Angert Date: March 23, 1999
--------------------------------------------
Donald F. Angert
Director
By: /s/ Robert L. Johnson Date: March 23, 1999
--------------------------------------------
Robert L. Johnson
Director
<PAGE>
INDEX TO EXHIBITS
Exhibit DESCRIPTION
- ------- -----------
3.1 Articles of Incorporation of Cecil Bancorp, Inc. *
3.2 Bylaws of Cecil Bancorp, Inc. *
3.3 Federal Stock Charter **
3.4 Federal Stock Bylaws **
4 Form of Common Stock Certificate *
10.2 Employment Agreement between Cecil Bancorp, Inc., Cecil Federal
Savings Bank and
Mary Halsey *
10.3 Cecil Bancorp, Inc. Stock Option and Incentive Plan ***
10.4 Cecil Bancorp, Inc. Management Recognition Plan ***
10.5 Cecil Federal Savings Bank Retirement Plan for Non-Employee
Directors****
10.6 Columbian Bank, a Federal Savings Bank 1994 Stock Option and Incentive
Plan**
13 Annual Report to Stockholders for the year ended December 31, 1998
21 Subsidiaries
23.1 Consent of Simon Master & Sidlow, P.A.
23.2 Consent of Anderson Associates, LLP
27 Financial Data Schedule
- -----------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-81374).
** Incorporated by reference to Columbian=s Registrant's Registration
Statement on Form 10-SB.
*** Incorporated by reference to the Company's Proxy Statement for its Annual
Meeting of May 25, 1995 (File No. 0-24926).
**** Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1994 (File No. 0-24926).
<PAGE>
CECIL BANCORP, INC.
ANNUAL REPORT FOR
THE YEAR ENDED
DECEMBER 31, 1998
<PAGE>
[CECIL BANCORP LETTERHEAD]
March 22, 1999
To Our Stockholders:
On behalf of the directors, officers and employees of Cecil Bancorp, Inc.,
and its wholly-owned subsidiaries, Cecil Federal Savings Bank and Columbian
Bank, A Federal Savings Bank, we are pleased to deliver to you, our
shareholders, our annual report. The past twelve months have been an exciting
time for all of us. On May 29, 1998, our Company entered into a definitive
agreement to acquire Columbian Bank, A Federal Savings Bank, a locally based
financial institution in Harford County, Maryland. Located in Harve De Grace,
Columbian was founded in 1893. On September 30, 1998, Columbian Bank, A Federal
Savings Bank, officially joined our family, expanding our market to the south.
We are pleased with our union, and excited about the enhancements it will bring
to our shareholders and customers.
The enclosed audited financial statements reflect our operations for the
year ended December 31, 1998. During that period, total assets increased 8.1%
to $101 million. Our growth in savings and non-interest bearing deposits
continued, increasing 8.8% to $88 million. Earnings were impacted by one time
non tax-deductible acquisition expenses of $303,000.
Affirming our focus of offering new products and services to maintain and
enhance long term profitability, our subsidiary, Cecil Financial Services,
completed its first full year of operations. Offering alternative investment
services enhances interaction with our existing customers and creates important
new relationships.
Our efforts to enhance growth and product development are continuous. We
are pleased to announce our plans for a second location of Columbian Bank, A
Federal Savings Bank, in Havre de Grace on U.S. Route 40, to open in the third
quarter of this year. This full service branch will serve a rapidly growing
area of Harford County.
We approach Year 2000 in a state of readiness. Your company has developed
and implemented plans to limit exposure and target effective communication to
all customers. As a part of our comprehensive plan, we have upgraded computer
systems and software to ensure Year 2000 compliance, as well as keeping us in
the forefront of information technology. We look forward to the new millennium.
The management and Board of Directors wish to thank you for your business,
support and confidence in Cecil Bancorp, Inc. We encourage you to recommend
Cecil Federal and Columbian Bank, A Federal Savings Bank to your friends,
neighbors and associates. We pledge our continuing time and energy toward
future success.
Sincerely,
/s/ Bernard L. Siegel /s/ Mary Beyer Halsey
Bernard L. Siegel Mary Beyer Halsey
Chairman of the Board President and Chief Executive Officer
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights (a)
At December 31, Change
------------------ -----------------
1998 1997 Amount Percent
-------- -------- ------- -------
(In thousands, except shares outstanding)
<S> <C> <C> <C> <C>
Financial Position:
- ------------------
Total assets.............................. $101,224 $ 93,656 $ 7,568 8.1%
Loans receivable and mortgage-backed
securities (b)........................... 80,095 77,647 2,448 3.2
Deposits.................................. 87,675 80,596 7,079 8.8
Stockholders' equity...................... 10,118 9,512 606 6.4
Number of shares outstanding (actual)..... 606,494 592,869 13,625 2.3%
<CAPTION>
For the Year Ended
December 31, Change
------------------- -----------------
1998 1997 Amount Percent
-------- -------- ------ -------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Results of Operations:
- ---------------------
Interest income........................... $ 7,601 $ 7,340 $ 261 3.6%
Interest expense.......................... 4,111 3,990 121 3.0
Net interest income....................... 3,490 3,350 140 4.2
Provision for loan losses................. 90 87 3 3.5
Net interest income after provision
for loan losses.......................... 3,400 3,263 137 4.2
Non-interest income....................... 521 455 66 14.5
Non-interest expense (c).................. 2,924 2,465 459 18.6
Income taxes.............................. 493 524 (31) (5.9)
Net earnings.............................. 504 729 (225) (30.9)
</TABLE>
- -------------------------
(a) Reflects combined financial position and results of operations of Cecil
Bancorp, Inc. and Columbian Bank, a Federal Savings Bank at, and for the
years indicated.
(b) Includes loans held-for-sale and mortgage servicing rights.
(c) For the year ended December 31, 1998, includes one-time non-tax deductible
acquisition expenses of $303,000.
1
<PAGE>
Selected Consolidated Financial Information (a)
<TABLE>
<CAPTION>
At December 31,
-----------------
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Total amount of:
Assets.......................... $101,224 $93,656
Loans receivable, net (b)....... 77,185 73,379
Cash and investment securities.. 18,383 13,145
Mortgage-backed securities...... 2,910 4,165
Savings accounts................ 87,675 80,596
Borrowings...................... 1,750 1,750
Stockholders' Equity............ 10,118 9,512
<CAPTION>
- ------------------------------------------------------
<S> <C> <C>
Number of:
Real estate loans outstanding... 1,489 1,541
Savings accounts................ 9,796 9,399
Offices Cecil Federal......... 2 2
Columbian............. 1 1
<CAPTION>
Consolidated Summary of Operations
At December 31,
---------------
1998 1997
------- ------
<S> <C> <C>
(In Thousands)
Interest income....................................... $7,601 $7,340
Interest expense...................................... 4,111 3,990
Net interest income before provision
for loan losses...................................... 3,490 3,350
Provision for loan losses............................. 90 87
------ ------
Net interest income after provision for loan losses... 3,400 3,263
Noninterest income.................................... 521 455
Noninterest expense (c)............................... 2,924 2,465
Income before income taxes and cumulative
effect of accounting change.......................... 997 1,253
Federal income tax expense............................ 493 524
------ ------
Income before cumulative effect of accounting change.. 504 729
Cumulative effect of accounting change................ 0 0
------ ------
Net income............................................ $ 504 $ 729
====== ======
</TABLE>
- -------------------------
(a) Reflects combined financial position and results of operations of Cecil
Bancorp, Inc. and Columbian Bank, a Federal Savings Bank at, and for the
years indicated.
(b) Includes loans held for sale and mortgage-servicing rights.
(c) For the year ended December 31, 1998, includes one-time non-tax deductible
acquisitions costs of $303,000.
2
<PAGE>
<TABLE>
<CAPTION>
Key Operating Ratios (a)
At or for the
Year Ended December 31,
-----------------------
1998 1997
------ ------
(In Thousands)
<S> <C> <C>
Performance Ratios:
Return on average assets (net income divided
by average total assets) (b)................ .51% .82%
Return on average equity (net income
divided by average equity) (b).............. 5.14 7.88
Equity-to-assets ratio (average equity
divided by average total assets)............ 10.00 10.43
Interest rate spread.......................... 3.52 3.49
Net interest margin........................... 3.77 3.78
Average interest-earning assets as a
percentage of average interest-bearing
liabilities.................................. 105.67 106.37
Asset Quality Ratios:
Nonperforming loans as a percentage
of total loans.............................. .68 .83
Nonperforming assets as a percentage
of total assets............................. .78 1.64
Net charge-offs to average loans.............. .05 .04
Allowance for loan losses as a
percentage of total loans.................... .52 .48
Allowance for loan losses as a
percentage of non-performing loans........... 76.76% 57.86%
</TABLE>
- -------------------------
(a) Reflects combined financial position and results of operations of Cecil
Bancorp, Inc. and Columbian Bank, a Federal Savings Bank at, and for the
years indicated.
(b) For the year ended December 31, 1998, includes one-time non-tax deductible
acquisition costs of $303,000.
3
<PAGE>
BUSINESS OF THE COMPANY AND THE BANK
Cecil Bancorp, Inc.
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 ("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 form (the "Conversion"). Substantially all of the Company's assets
consists of the outstanding capital stock of Cecil Federal. On September 30,
1998, the Company completed its acquisition of Columbian Bank, a Federal Savings
Bank ("Columbian") through the exchange of 1.7021 shares of Company Common Stock
for each outstanding shares of Columbian Common Stock in a transaction valued at
approximately $2.8 million. The Company holds all of the stock of Cecil Federal
and Columbian and operates them as two separate savings institutions. Together,
Cecil Federal and Columbian are referred to herein as the "Banks". The
Company's principal business is the business of Cecil Federal and its wholly
owned subsidiaries, and of Columbian. Therefore, most of the discussion in this
Annual Report relates to the business of the Banks rather than the business of
the Company.
Cecil Federal Savings Bank
Cecil Federal is a community-oriented financial institution which
commenced operations in 1959 as a Federal mutual savings and loan association.
It converted to a Federal mutual savings bank in January 1993 and, effective
November 10, 1994, Cecil Federal converted from mutual to stock form. Its
deposits have been federally insured up to applicable limits, and it has been a
member of the Federal Home Loan Bank ("FHLB") system since 1959. Cecil
Federal's deposits are currently insured by the Savings Association Insurance
Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") and it is a
member of the FHLB of Atlanta.
Cecil Federal's primary business is the origination of mortgage loans
secured by single-family residential real estate located primarily in Cecil
County, Maryland, with funds obtained through the attraction of deposits,
primarily certificate accounts with terms of 60 months or less, savings accounts
and transaction accounts. To a lesser extent, Cecil Federal also makes loans on
commercial and multi-family real estate, construction loans on one- to four-
family residences, home equity loans and land loans. Cecil Federal also makes
consumer loans including education loans, personal and commercial lines of
credit, automobile loans and loans secured by deposit accounts. Cecil Federal
purchases mortgage-backed securities and invests in other liquid investment
securities when warranted by the level of excess funds.
Cecil Federal has two wholly owned subsidiaries, Cecil Service
Corporation and Cecil Financial Services Corporation. Cecil Service
Corporation's primary business is acting as leasing agent for the North East
Plaza Branch and Cecil Financial Services Corporation's primary business is the
operation, through a partnership with UVEST Investment Services, of a full range
of brokerage and investment services.
Cecil Federal's main office is located at 127 North Street, Elkton,
Maryland and its phone number is (410) 398-1650.
Columbian Bank, a Federal Savings Bank
Columbian was originally chartered by the State of Maryland in 1893.
In October 1985, Columbian became a member of the FHLB System and obtained
federal insurance of its deposits. In January 1989, Columbian converted to a
federally insured, state chartered capital stock institution through the sale
and issuance of 69,140 shares of common stock. On September 26, 1990, Columbian
changed its name to Columbian Bank, A Federal Savings Bank and became a
federally chartered stock savings bank. Columbian's deposits are also insured
by the SAIF of the FDIC, and it is a member of the FHLB of Atlanta.
4
<PAGE>
Columbian's primary business is the origination of mortgage loans
secured by single-family residential real estate located primarily in Harford
County, Maryland, with funds obtained through the attraction of deposits,
primarily certificate accounts with terms of 60 months or less and savings
accounts. To a lesser extent, Columbian also makes loans on commercial and
multi-family real estate, construction loans on one- to four-family residences,
home equity loans and land loans. Columbian purchases mortgage-backed
securities and invests in other liquid investment securities when warranted by
the level of excess funds.
Columbian's office is located at 303-307 St. John Street, Havre de
Grace, Maryland, and its phone number is (410) 939-2313.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Cecil Federal's primary business is the origination of mortgage loans
secured by single-family residential real estate located primarily in Cecil
County, Maryland, with funds obtained through the attraction of deposits,
primarily certificate accounts with terms of 60 months or less, savings accounts
and transaction accounts. To a lesser extent, Cecil Federal also makes loans on
commercial and multi-family real estate, construction loans on one- to four-
family residences, home equity loans and land loans. Cecil Federal also makes
consumer loans including education loans, personal and commercial lines of
credit, automobile loans and loans secured by deposit accounts. Although
consumer loans provide Cecil Federal with additional interest income, they also
involve greater risk. Cecil Federal purchases mortgage-backed securities and
invests in other liquid investment securities when warranted by the level of
excess funds. Cecil Federal's revenues are derived principally from interest
earned on loans and, to a lesser extent, from interest earned on investments and
mortgage-backed securities.
The principal business of Columbian is the acceptance of savings
deposits from the general public and the origination of conventional mortgage
loans for the purpose of financing or refinancing one to four family dwellings.
Its income is derived largely from interest and fees in connection with its
lending activities. Its principal expenses are interest paid on savings
deposits and non-interest expenses. Columbian's operations are conducted
through its office located at 303-307 St. John Street, Havre de Grace, Maryland.
The Banks' operations are influenced by general economic conditions
and by policies of financial institution regulatory agencies, including the OTS
and the FDIC. The Banks' cost of funds are influenced by interest rates on
competing investments and general market interest rates. Lending activities are
affected by the demand for financing of real estate and other types of loans,
which in turn is affected by the interest rates at which such financing may be
offered.
The Banks' net interest income is dependent primarily upon the
difference or spread between the average yield earned on loans, investments and
mortgage-backed securities and the average rate paid on deposits and borrowings
(if any), as well as the relative amounts of such assets and liabilities. The
Banks, like other thrift institutions, are subject to interest rate risk to the
degree that its interest-bearing liabilities mature or reprice at different
times, or on a different basis, than its interest-earning assets.
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.
5
<PAGE>
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
Banks. Cecil Federal and Columbian are preparing for the millennium.
The Banks have prepared an action plan to begin evaluating our systems
and software products. The Banks plan consists of the following:
Problem Awareness: The Banks are aware of the problems that could potentially
- -----------------
arise with the year 2000 problem. The Banks have analyzed what systems and
software need to be reviewed.
Assessment Phase: The Banks have made contacts with all its third party vendors
- ----------------
to assess exposure to problems. 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.
Vendors have been proactive in their response to the Year 2000
problem. The Banks' vendors have in place or will have in place procedures to
minimize risks associated with the of the Year 2000 problem by December 31,
1998.
Renovation Phase: Initial steps have been completed to assure compliance with
- ----------------
the Year 2000 problem. A new front-end processing system has been installed in
the third quarter of 1998 at Cecil Federal, and was installed at Columbian prior
to January 31, 1999. This system is already Year 2000 compliant. This system
replaces the Banks' previous teller systems which were not compliant.
Validation Phase: The Banks 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 March 31, 1999. The Banks will share testing information
with each other to minimize the amount of testing on the same systems. Software
and system testing will be done on an ongoing basis through the end of March
1999.
Implementation Phase: The Banks will monitor the implementation of the Year 2000
- --------------------
assessment and report results to the Board of Directors. The Banks will
continue to stress with their vendors the importance of this project. The Banks
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 March 31, 1999.
Contingency Plan: The Banks have prepared a contingency plan that allows for the
- ----------------
manual processing of transactions and reporting. The plan designates the
training and implementation of the manual operation in a worst case scenario.
The Contingency Plan is being updated in conjunction with our Disaster
Recovery Plan. The Contingency Plan has been updated and testing on the plan
will take place in the first and second quarters of 1999.
Customer Awareness: The Banks have also undertaken an effort to reach all
- ------------------
business customers via mail to explain how the Year 2000 issue affects their
business. All businesses need to be aware of the Year 2000 issue and make
attempts to correct any possible problems.
6
<PAGE>
The employees were also made aware of the process and have been
notified regarding the individuals who are responsible for Year 2000 compliance.
A memo was sent to all employees to assist them with their Year 2000 efforts.
Asset and Liability Management
Key components of a successful asset/liability management strategy are
the monitoring and managing of interest rate sensitivity of both the interest-
earning asset and interest-bearing liability portfolios.
The Banks have employed various strategies intended to minimize the
adverse effect of interest rate risk on future operations by providing a better
match between the interest rate sensitivity of its assets and liabilities. In
particular, the Banks' strategies are intended to stabilize net interest income
for the long-term by protecting its interest rate spread against increases in
interest rates. Such strategies include the origination for portfolio of one-
year, three-year and five-year adjustable-rate mortgage loans secured by one- to
four-family residential real estate and the origination of other loans with
greater interest rate sensitivities than long-term, fixed-rate residential
mortgage loans. Since the early 1980's the Banks have sought to make their loan
portfolios more interest rate sensitive by originating adjustable rate mortgage
loans for retention in their own portfolios. As of December 31, 1998,
adjustable rate mortgage loans constituted approximately 41.1% of the Banks'
total loan portfolios. All fixed-rate mortgage loans are originated according
to Federal Home Loan Mortgage Corporation ("FHLMC") standards for possible sale
in the secondary mortgage market and, depending on market conditions, may be
sold. The Banks invest excess funds in adjustable-rate or short term (5 years
or less) investments and mortgage-backed securities.
Asset/liability management in the form of structuring cash instruments
provides greater flexibility to adjust exposure to interest rates. During
periods of high interest rates, management believes it is prudent to offer
competitive rates on short-term deposits and less competitive rates for long-
term liabilities. This posture allows the Banks to benefit quickly from
declines in interest rates. Likewise, offering more competitive rates on long-
term deposits during the low interest rate periods allows the Banks to extend
the repricing and/or maturity of its liabilities thus reducing its exposure to
rising interest rates.
Comparison of Financial Condition at December 31, 1998 and December 31, 1997.
The Company's assets increased by $7,568,806, or 8.1% to $101,224,415
at December 31, 1998 from $93,655,609 at December 31, 1997. The Company's
emphasis on expanding the loans receivable portfolio continued. The loans
receivable portfolio increased by $3,701,981, or 4.8% to $77,184,604 at December
31, 1998 from $73,482,623 at December 31, 1997. Cash and interest-earning cash
increased as a result of an increase in savings deposits. The Company's
investments held to maturity decreased by $1,614,034, or 27.6% to $4,228,742 at
December 31, 1998 from $5,842,776 at December 31, 1997. Investments held for
sale increased $1,106,432 or 37.1% to $4,091,843 at December 31, 1998 from
$2,985,411 at December 31, 1997. Federal funds sold increased $625,000, or 125%
to $1,125,000 at December 31, 1998 from $500,000 at December 31, 1997. Mortgage
backed securities held to maturity decreased by $712,551, or 25.8% to $2,046,983
at December 31, 1998 from $2,759,534 at December 31, 1997. Mortgage backed
securities held for investment decreased by $542,223, or 38.6% to $863,260 at
December 31, 1998 from $1,405,483 at December 31, 1997. The decreases in the
mortgage backed securities were due to prepayments and maturities. Plant,
Property, and Equipment increased by $106,533, or 10.6% to $1,112,507 at
December 31, 1998 from $1,005,974 at December 31, 1997. The increases were
primarily due to the upgrade of equipment as part of Year 2000 plans.
The Company's liabilities increased $6,963,405, or 8.3% to $91,106,679
at December 31, 1998 from $84,143,274 at December 31, 1997. During the year
ended December 31, 1998, the Company was able to increase savings deposits as a
result of additional marketing campaigns. Savings Deposits increased
$7,078,909, or 8.8% to $87,674,802 at December 31, 1998 from $80,595,893 at
December 31, 1997. Advances from the Federal Home Loan Bank of Atlanta remained
constant at $1,750,000 at December 31, 1998 and at December 31, 1997. Other
liabilities decreased $56,263, or 8.2% to $629,204 at December 31, 1998 from
$685,467 at December 31, 1997.
7
<PAGE>
The Company's stockholders' equity increased by $605,401, or 6.4% to
$10,117,736 at December 31, 1998 from $9,512,335 at December 31, 1997. The
increase was primarily due to an increase in retained earnings of $251,619, or
4.8%. For the year ended December 31, 1998, the Company paid its regular
annualized dividend of $.40 per share.
Results of Operations
Economic and Market Conditions. The Banks' results of operations are
------------------------------
influenced by the changes in the economic conditions prevailing in the market
area and the general economy. The Banks concentrate on the traditional thrift
activities, continuing to emphasize one-to-four family residential lending
within its market area. The Banks' philosophy for funding loans is to rely on
deposits from its local market area rather than borrowing from outside sources,
although the Banks do borrow funds as required to fund lending needs.
During 1998, stable economic conditions prevailed in the Banks' market
areas. Federal Reserve fiscal policy was left virtually unchanged, leaving a
span of steady interest rates, both on savings and loan deposits. Demand for
fixed-rate mortgages were constant, although refinancings were down. As the
Banks expanded their outreach program, demand for small business and home equity
loans increased. The volume of savings deposits increased, as the Banks focused
on expanding their demand deposit base.
Net Income. Net income decreased $223,985, or 30.7% to $504,543 for
----------
the year ended December 31, 1998, from $728,528 for the same period in 1997.
The decrease is a direct result of one-time non-tax deductible acquisition
expenses of $303,000. The annualized return on average assets and annualized
return on average equity were .51% and 5.14% respectively, for the year ended
December 31, 1998. This compares to an annualized return on average assets and
the annualized return on average equity of 0.82% and 7.88%, respectively for the
same period in 1997.
Net Interest Income. Net interest income, the Company's primary source
-------------------
of income, increased $140,564, or 4.2% to $3,490,610 for the year ended December
31, 1998, from $3,350,046 for the year ended December 31, 1997. The weighted
average yield on all interest earning assets decreased from 8.28% for the year
ended December 31, 1997, to 8.21% for the year ended December 31, 1998. The
weighted average rate paid on interest bearing liabilities decreased from 4.79%
for the year ended December 31, 1997 to 4.69% for the year ended December 31,
1998.
Interest on loans receivable increased by $306,440, or 4.9% to
$6,549,552 for the year ended December 31, 1998 from $6,243,112 for the year
ended December 31, 1997. The increase is attributable to an increase in the
average balance outstanding, offset by a slight decrease in average yield. The
weighted average yield decreased from 8.71% for the year ended December 31, 1997
to 8.59% for the year ended December 31, 1998.
Interest on mortgage-backed securities decreased $75,403, or 25.4% to
$221,093 for the year ended December 31, 1998 from $296,496 for the year ended
December 31, 1997. The decrease is a result of a decrease in the average
balance offset by an increase in the weighted average yield. The Banks have
historically invested in mortgage-backed securities to supplement their lending
efforts and maintain compliance with certain regulatory requirements.
Interest on investment securities decreased $26,275, or 5.0% to
$495,721 for the year ended December 31, 1998 from $521,996 for the year ended
December 31, 1997. The decrease is a result of a decrease in the weighted
average yield. Interest on other investment securities increased $56,738, or
20.4% to $334,969 for the year ended December 31, 1998 from $278,231 for the
year ended December 31, 1997 as a result of an increase in both the weighted
average yield and the average balance outstanding. Other investments primarily
are short term liquidity accounts with variable rates.
Interest paid on savings deposits increased $179,403, or 4.7% to
$4,002,772 for the year ended December 31, 1998 from $3,823,369 for the year
ended December 31, 1997. The increase was the result of an increase in the
average balance outstanding, and a decrease in average cost of funds. Interest
expense paid on borrowings decreased $58,467,
8
<PAGE>
or 35.1% to $107,953 for the year ended December 31, 1998 from $166,420 for the
year ended December 31, 1997. The decrease was a result of a decrease in the
average cost of funds and the average balance outstanding.
Provision for Loan Losses. Provisions for loan losses increased
-------------------------
$3,000, or 3.4% to $90,000 for the year ended December 31, 1998 from $87,000 for
the year ended December 31, 1997. The provision was increased in connection
with management's ongoing analysis of the loan portfolio. Loan loss reserves
are based upon management's consideration of current and anticipated economic
conditions which may affect the ability of borrowers to repay loans. Management
also reviews individual loans for which full collectibility may not be
reasonably assured and considers, among other matters, the risk inherent in the
Banks' loan portfolio, and the estimated net realized value of the underlying
collateral. The evaluation process is ongoing and results in variations in the
Banks' provision for loan losses in various periods.
Noninterest income. Noninterest income increased $65,659, or 14.4% to
-------------------
$520,765 for the year ended December 31, 1998 from $455,106 for the year ended
December 31, 1997. Loan servicing fees increased 21.1%, up $11,425 for the year
ended December 31, 1998 over the same period in 1997. This was a result of the
increase in balances of the servicing portfolio. Gains on sale of loans
increased $21,793, or 46.5% to $68,698 for the year ended December 31, 1998 from
$46,905 for the year ended December 31, 1997. The increase was attributable to
an increase in volumes sold and premiums payable. Other fees decreased $15,585
or 13.2% to $102,775 for the year ended December 31, 1998 from $118,360 for the
year ended December 31, 1997. Commission income on alternative investment
products increased $58,157, or 358.4% to $74,386 for the year ended December 31,
1998 from $16,229 for the year ended December 31, 1997. The increase was
attributable to a full year's commission in 1998 versus three months of
commission in 1997.
Noninterest Expense. Noninterest expense increased $458,314, or 18.6%
--------------------
to $2,923,572 for the year ended December 31, 1998 from $2,465,258 for the year
ended December 31, 1997. The Company experienced an increase in compensation
and benefits of $197,897, or 15.0% to $1,518,833 for the year ended December 31,
1998 from $1,320,936 for the year ended December 31, 1997. The increase can be
attributable to stock option expense, increased personnel and annual merit
increases. Equipment and data processing expense increased $43,239, or 19.4% to
$265,751 for the year ended December 31, 1998 from $222,512 for the year ended
December 31, 1997. The increase can be attributed to expenses related to system
updates for Year 2000 compliance. The Company's SAIF premium increased $2,828,
or 3.5% to $83,492 for the year ended December 31, 1998 as compared to $80,664
for the year ended December 31, 1997. Other expenses decreased $88,125, or
12.8% to $602,011 for the year ended December 31, 1998 from $690,136 for the
year ended December 31, 1997. The decrease is attributable to a decrease in
advertising & promotion expense, loan expense, stationery & office supplies,
postage, meeting expense, and charitable contributions. One-time non-tax
deductible acquisition expenses of $302,501 attributed to the increase in
noninterest expenses for the year ended December 31, 1998.
Income Taxes. Income tax expense for the year ended December 31, 1998
-------------
and December 31, 1997 was $493,260 and $524,366, respectively, which equates to
effective rates of 49.4% and 41.8%, respectively. The increase was a result of
acquisition expenses of $302,501 that are not tax deductible.
9
<PAGE>
Average Balances, Interest and Average Yields
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs
are derived by dividing income or expense by the average monthly balance of
assets or liabilities, respectively, for the periods presented. Average
balances are derived from month-end balances. Management does not believe that
the use of month-end balances instead of daily balances has caused any material
difference in the information presented.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1998 1997
----------------------------- -------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------- --------- -------- ------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivables (1)...................... $76,209 $ 6,549 8.59% $71,707 $ 6,243 8.71%
Investment securities...................... 7,616 496 6.51 7,312 522 7.14
Mortgage-backed securities................. 3,511 221 6.30 4,975 296 5.96
Other interest-earning assets.............. 5,197 335 6.45 4,627 278 6.01
------- ------- ------- -------
Total interest-earning assets............ 92,533 7,601 8.21 88,621 7,339
----- -----
Noninterest-earning assets.................... 5,704 4,864
------- -------
Total assets............................. $98,237 $93,485
======= =======
Interest-bearing liabilities:
Advances from FHLB.......................... 2,021 108 5.34 2,608 166 6.38
Deposits.................................... 84,577 3,995 4.72 79,768 3,815 4.78
Advances from borrowers for taxes
and insurance............................. 970 8 .83 941 8 .85
------- ------- ------- -------
Total interest-bearing liabilities....... 87,568 4,111 4.69 83,317 3,989
------- -------
Non-interest-bearing liabilities.............. 846 929
------- -------
Total liabilities........................ 88,414 84,246
Retained earnings............................. 9,823 9,239
------- -------
Total liabilities and retained earnings.. $98,237 $93,485
======= =======
Net interest income........................... $ 3,490 $ 3,350
======= =======
Interest rate spread.......................... 3.52% 3.49%
===== =====
Net yield on interest-earning assets.......... 3.77% 3.78%
======= =======
Ratio of average interest-earning assets
to average interest-bearing liabilities..... 105.67% 106.37%
======= =======
</TABLE>
- -------------------------
(1) Includes loans held-for-sale.
10
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Banks for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); (ii) changes in rates (change in
rate multiplied by old volume) and (iii) changes in both rate and volume
(changes in rate multiplied by the changes in volume). Dollars are in
thousands.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 vs. 1997
-------------------------------
Increase (Decrease)
Due to
-------------------------------
Rate/
Volume Rate Volume Total
------ ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable (1).................. $394 $ (85) $ (3) $306
Mortgage-backed securities............ (87) 17 (5) (75)
Investment securities................. 22 (46) (2) (26)
Other interest-earning assets......... 34 20 3 57
---- ----- ---- ----
Total interest-earning assets....... 363 (94) (7) 262
Interest expense:
Advances from FHLB.................... (37) (27) 6 (58)
Deposits............................... 230 (48) (2) 180
Advances from borrowers for
taxes and insurance.................. -- -- -- --
---- ----- ---- ----
Total interest-bearing liabilities.. 193 (75) 4 122
---- ----- ---- ----
Change in net interest income.......... $170 $ (19) $(11) $140
==== ===== ==== ====
</TABLE>
- --------------------
(1) Includes loans held for sale.
Liquidity and Capital Resources
The Banks' principal sources of funds are cash, receipts from
deposits, loan repayments by borrowers, proceeds from maturing investments,
advances (when utilized) from the FHLB and net earnings. The Banks have an
agreement with the FHLB of Atlanta to provide cash advances, should the need for
additional funds be required.
For regulatory purposes, liquidity is measured as a ratio of cash and
certain investments to withdrawable deposits and short-term borrowings. The
minimum level of liquidity required by regulation is presently 4%. The Banks=
liquidity ratio at December 31, 1998, was approximately 17.88%. The Banks
maintain a higher level of liquidity than required by regulation as a matter of
management philosophy in order to more closely match interest-sensitive assets
with interest-sensitive liabilities.
Commitments to originate mortgage loans are legally binding agreements
to lend to the Banks' customers. Commitments at December 31, 1998 to originate
adjustable-rate and fixed-rate mortgage loans were approximately $3,263,200,
expiring in 60 days or less. The Banks believe liquidity is adequate to fund
its future commitments.
The Banks have $40.2 million in certificates due within one year and
$30.6 million in other deposits without specific maturity at December 31, 1998.
Management estimates that most of the deposits will be retained or replaced by
new deposits.
11
<PAGE>
Impact of Inflation
The consolidated financial statements and related data presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. The primary
impact of inflation on the operations of the Banks are reflected in increased
operating costs. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a result,
interest rates, generally, have a more significant impact on a financial
institution's performance than does inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services. In the current interest rate environment, liquidity and the
maturity structure of the Banks= assets and liabilities are critical to the
maintenance of acceptable performance levels.
Impact of Accounting Pronouncements
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. In June 1996, the FASB issued SFAS 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" which was adopted by the Company effective January 1, 1997.
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. Many of these assets and liabilities
are components of financial assets that existed prior to the transfer. If the
transfer does not meet the criteria for a sale, the transfer is accounted for as
a secured borrowing with a pledge of collateral. The adoption of SFAS 125 did
not have a material impact on the Company's consolidated financial statements.
Earnings Per Share. Effective December 31, 1997, the Company adopted
SFAS 128, "Earnings Per Share". This Statement establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock. This Statement simplifies
the standards for computing earnings per share previously found in APB Opinion
No. 15, "Earnings Per Share", and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS, requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures, and
requires a reconciliation of the numerator and the denominator of the basic EPS
calculation to the numerator and the denominator of the diluted EPS calculation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. This statement is effective for
periods ending after December 15, 1997, and requires restatement of all prior
periods presented.
Disclosure of Capital Structure. Effective December 31, 1998 the
Company adopted SFAS No. 129, "Disclosure of Information About Capital
Structure." This statement consolidates existing guidance and requires entities
(public and non-public) to disclose certain information about the entity=s
capital structure. It contains no change in disclosure requirements for
entities such as the Company that were previously subject to the requirements of
Opinions 10 - "Omnibus Opinion - 1966" and 15 - "Earnings Per Share" and
Statement 47 - "Disclosure of Long-Term Obligations." Accordingly, no new
reporting requirements have been imposed on the Company.
Reporting Comprehensive Income. Effective for the years ended
December 31, 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which requires reporting of "Comprehensive income" and its components
in financial statements. "Comprehensive income" includes net income and other
items of comprehensive income, such as unrealized gains and losses on available-
for-sale securities and minimum pension liability adjustments,
12
<PAGE>
which are excluded from net income. This statement was effective for periods
beginning after December 15, 1997 and required the restatement of all prior
periods presented.
Disclosure About Segments of an Enterprise and Related Information.
Effective for the year ended December 31, 1998 the Company adopted SFAS No. 131
"Disclosure About Segments of an Enterprise and Related Information" which
supersedes SFAS No. 14 "Financial Reporting for Segments of a Business
Enterprise." SFAS No. 131 established standards for the way that public
enterprises report information about operating segments in financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. The adoption of
SFAS No. 131 did not have a material impact on the Company=s consolidated
financial statements.
Employers' Disclosure about Pensions and Other Post-retirement
Benefits. In February 1998, the FASB issued SFAS No. 132, "Employers=
Disclosure about Pensions and Other Post-retirement Benefits" which revises
employers' disclosure about pension and other post-retirement benefit plans.
SFAS No. 132 is effective for financial statements for the periods beginning
after December 31, 1997, and requires comparative information for earlier years
to be restated. This standard currently does not apply to the Company.
Accounting for Derivative Instruments and Hedging Activities. During
the second quarter of 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities, " which
will be effective for the Company's fiscal year 2000. This statement
establishes accounting and reporting standards requiring that every derivative
instruments, including certain derivative instrument imbedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement also requires that changes in the
derivative=s fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company is currently assessing the impact of
this new Statement on its consolidated financial position, liquidity, and
results of operations.
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Reports 14
Consolidated Statements of Financial Condition 16
Consolidated Statements of Income 18
Consolidated Statements of Stockholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 23
</TABLE>
13
<PAGE>
2002 W 14th Street
[SIMON MASTER & SIDLOW LETTERHEAD APPEARS HERE] Wilmington, DE 19806
(302) 652-3480
Fax (302) 656-8778
BOARD OF DIRECTORS AND STOCKHOLDERS
CECIL BANCORP, INC. AND SUBSIDIARIES
ELKTON, MARYLAND
Independent Auditors' Report
----------------------------
We have audited the accompanying consolidated statements of financial
condition of CECIL BANCORP, INC. AND SUBSIDIARIES as of December 31, 1998 and
1997 and the related consolidated statements of income and comprehensive income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial condition of CECIL
BANCORP, INC. AND SUBSIDIARIES as of December 31, 1998 and 1997 and the results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
We previously audited and reported upon the consolidated statement of
financial condition of CECIL BANCORP, INC. AND SUBSIDIARIES as of December 31,
1997 and the related consolidated statements of income, stockholders' equity and
cash flows for the year then ended, prior to their restatement for the 1998
pooling of interests. The contribution of CECIL BANCORP, INC. AND SUBSIDIARIES
to total assets, interest income and net income represented $63,660,230,
$5,018,366, and $565,666 of the respective restated totals. Separate financial
statements of Columbian Bank, a Federal Savings Bank included in the 1997
restated consolidated statement of financial position, and consolidated
statements of income, stockholders' equity, and cash flows were examined and
reported upon separately by other auditors. We also audited the combination of
the accompanying consolidated balance sheet and consolidated statements of
income, retained earnings, and cash flows for the year ended December 31, 1997,
after restatement of the 1998 pooling of interests. In our opinion, such
consolidated statements have been properly compiled on the basis described in
Note 19 to the consolidated financial statements.
/s/ Simon, Master & Sidlow, PA
January 27, 1999
14
<PAGE>
Anderson Associates, LLP
Certified Public Accountants
7621 Fitch Lane
Baltimore, Maryland 21236
410-882-8050
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors
Columbian Bank, A Federal Savings Bank
Havre de Grace, Maryland
We have audited the accompanying statements of financial condition of
Columbian Bank, A Federal Savings Bank as of December 31, 1997 and 1996, and the
related statements of operations, stockholders' equity and cash flows for each
of the two years in the two year period ended December 31, 1997. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Columbian Bank, A
Federal Savings Bank at December 31, 1997 and 1996, and the results of its
operations and cash flows for each of the two years in the two year period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Anderson Associates LLP
March 11, 1998
Baltimore, Maryland
15
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
December 31,
--------------
1998 1997
--------- --------
(1)
<S> <C> <C>
Cash $ 2,725,430 $ 1,297,546
Cash - Interest bearing 6,211,760 2,519,230
Federal funds sold 1,125,000 500,000
Investment securities
Securities held-to-maturity (estimated
market value of $4,232,699 in 1998 and
$5,839,453 in 1997) (Note 3) 4,228,742 5,842,776
Securities available-for-sale at estimated
market value (Note 3) 4,091,843 2,985,411
Mortgage-backed securities
Securities held-to-maturity (estimated
market value of $2,044,194 in 1998 and
$2,770,778 in 1997) (Note 4) 2,046,983 2,759,534
Securities available-for-sale at estimated
market value (Note 4) 863,260 1,405,483
Loans held for sale (estimated market value
of $2,581,475 in 1998 and $1,380,439 in 1997) 2,515,151 1,362,969
Loans receivable, net (Note 5) 74,545,912 72,016,049
Real estate owned 187,742 380,481
Office properties, equipment and leasehold
improvements at cost, less accumulated
depreciation and amortization (Note 6) 1,112,507 1,005,974
Stock in Federal Home Loan Bank of
Atlanta - at cost (Note 7) 672,300 652,700
Accrued interest receivable (Note 8) 597,922 662,992
Mortgage servicing rights 123,541 103,605
Prepaid expenses 50,040 37,455
Deferred taxes (Note 11) 114,891 52,869
Other assets 11,391 70,535
------------ -----------
TOTAL ASSETS $101,224,415 $93,655,609
============ ===========
</TABLE>
(1) Restated due to pooling of interest transaction
completed September 30, 1998
The accompanying notes are an integral part of the
consolidated financial statements.
16
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
-------------- -------------
(1)
<S> <C> <C>
LIABILITIES
Savings deposits (Note 9) $ 87,674,802 $80,595,893
Advance payments by borrowers for
property taxes and insurance 821,625 842,358
Employee stock ownership debt 231,048 269,556
Other liabilities 629,204 685,467
Advances from Federal Home Loan Bank
of Atlanta (Note 10) 1,750,000 1,750,000
------------ -----------
TOTAL LIABILITIES 91,106,679 84,143,274
------------ -----------
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, $.01 par value
Authorized: 4,000,000 shares
Issued and outstanding: 606,494 shares
in 1998 and 592,869 shares in 1997 6,065 5,929
Additional paid in capital 4,863,511 4,561,520
Employee stock ownership debt (231,048) (269,556)
Deferred compensation - Management
Recognition Plan (80,676) (118,361)
Retained earnings, substantially
restricted 5,543,960 5,292,341
Accumulated other comprehensive income net
of deferred taxes of $8,584 and $7,528
in 1998 and 1997, respectively 15,924 40,462
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 10,117,736 9,512,335
------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $101,224,415 $93,655,609
============ ===========
</TABLE>
(1) Restated due to pooling of interest transaction
completed September 30, 1998
The accompanying notes are an integral part of the
consolidated financial statements.
17
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
----------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
INTEREST INCOME (1)
Loans receivable $6,549,552 $6,243,112
Mortgage-backed securities 221,093 296,496
Investment securities 495,721 521,996
Other interest-earning assets 334,969 278,231
---------- ----------
Total interest income 7,601,335 7,339,835
---------- ----------
INTEREST EXPENSE
Interest expense on deposits 4,002,772 3,823,369
Borrowing 107,953 166,420
--------- ---------
Total interest expense 4,110,725 3,989,789
---------- ----------
Net interest income 3,490,610 3,350,046
Provision for loan losses 90,000 87,000
---------- ----------
Net interest income after provision
for loan losses 3,400,610 3,263,046
---------- ----------
NONINTEREST INCOME (LOSS)
Loan service charges 65,641 54,216
Dividends on FHLB stock 49,042 42,857
Gain on sale of loans 68,698 46,905
Gain on sale of office properties
and equipment 44,769
Commission income 74,386 16,229
Checking account fees 160,223 131,770
Other 102,775 118,360
---------- ----------
Total noninterest income 520,765 455,106
---------- ----------
NONINTEREST EXPENSE
Compensation and benefits 1,518,833 1,320,936
Occupancy expense 150,984 151,010
Equipment and data processing expense 265,751 222,512
SAIF deposit insurance premium 83,492 80,664
Merger expense 302,501
Other 602,011 690,136
---------- ----------
Total noninterest expense 2,923,572 2,465,258
---------- ----------
Income before income taxes 997,803 1,252,894
---------- ----------
INCOME TAXES (Note 11)
Current 551,662 531,318
Deferred ( 58,402) (6,952)
Total income taxes 493,260 524,366
---------- ----------
NET INCOME $ 504,543 $ 728,528
========== ==========
</TABLE>
(1) Restated due to pooling of interest transaction
completed September 30, 1998
The accompanying notes are an integral part of the
consolidated financial statements.
18
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
----------------------------------------------------------
(Continued)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1998 1997
---------- ----------
(1)
<S> <C> <C>
NET INCOME $ 504,543 $728,528
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on investment
securities, net of deferred taxes of
$1,556 and $1,435 in 1998 and 1997,
respectively (24,538) 19,741
--------- --------
TOTAL COMPREHENSIVE INCOME $ 480,005 $748,269
========= ========
Earnings per common share and
common share equivalent $ .88 $ 1.30
========= ========
Earnings per common share -
assuming full dilution $ .87 $ 1.28
========= ========
</TABLE>
(1) Restated due to pooling of interest transaction
completed September 30, 1998
The accompanying notes are an integral part of the
consolidated financial statements.
19
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
<TABLE>
<CAPTION>
Deferred
Employee Compensation- Accumulated
Stock Management Other Total
Common Paid-in Ownership Recognition Retained Comprehensive Stockholders'
Stock Capital Plan Plan Earnings Income Equity
------- ------------ ------------ ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1996 (1) $5,871 $4,472,547 $ (308,064) $ (156,047) $ 4,882,346 $ 20,721 $ 8,917,374
Change in net unrealized
gain on securities
available-for-sale 19,741 19,741
Cash dividends paid (298,133) (298,133)
Repayment of ESOP debt 38,508 38,508
Release of ESOP shares 38,508 38,508
Net income 728,528 728,528
Deferred compensation
amortization 37,686 37,686
Stock option exercised 23 23,602 23,625
Stock dividend 35 20,365 (20,400)
Release of vested
MRP shares 6,498 6,498
------ ---------- ----------- ----------- ----------- --------- -----------
BALANCE AT
DECEMBER 31, 1997 (1) 5,929 4,561,520 (269,556) (118,361) 5,292,341 40,462 9,512,335
Change in net unrealized
gain on securities
available-for-sale (24,538) (24,538)
Cash dividends paid (213,767) (213,767)
Stock dividends paid 22 40,460 (39,157) 1,325
Repayment of ESOP debt 38,508 38,508
Release of ESOP shares 38,508 38,508
Net income 504,543 504,543
Deferred compensation
amortization 37,685 37,685
Stock options exercised 114 201,049 201,163
Cash in lieu of fractional
shares paid at pooling of
interest transaction (1,417) (1,417)
Release of vested
MRP shares 23,391 23,391
------ ---------- ----------- ----------- ----------- --------- -----------
BALANCE AT
DECEMBER 31, 1998 $6,065 $4,863,511 $ (231,048) $ (80,676) $ 5,543,960 $ 15,924 $10,117,736
====== ========== =========== =========== =========== ========= ===========
</TABLE>
(1) Restated due to pooling of interest transaction completed September 30, 1998
The accompanying notes are an integral part of the
consolidated financial statements.
20
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES (1)
Interest and fees received on loans
and investments $ 8,072,285 $ 7,606,523
Cash paid to suppliers and employees (2,664,015) (2,343,345)
Proceeds from sale of loans 2,850,271 3,010,289
Origination of loans held for sale (4,350,500) (2,833,100)
Interest paid (4,110,725) (3,984,599)
Income taxes paid (665,933) (304,073)
------------- -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (868,617) 1,151,695
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale and maturities of
investment securities 7,899,844 8,390,651
Proceeds from maturities of
mortgage-backed securities 1,463,209 1,134,361
Purchases of investment securities (7,379,454) (7,934,136)
Purchases of mortgage-backed securities (219,678)
Loans originated (30,383,814) (21,186,239)
Principal collected on loans 28,180,696 17,616,540
Purchases of office properties, equipment
and leasehold improvements (205,317) (207,366)
Proceeds from sale of office properties,
equipment, and leasehold improvements 129,295
Proceeds from sale of real estate owned 426,902 188,378
Purchase of real estate owned (234,163) (171,229)
Purchase of stock in Federal Home Loan
Bank of Atlanta (19,600) (15,200)
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (471,375) (2,054,945)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW accounts, and savings accounts 67,432,105 31,077,447
Proceeds from sales of certificates 8,991,415 7,992,543
Payments of maturing certificates of deposits (69,344,611) (34,603,911)
Decrease in advance payments by borrowers
for property taxes and insurance (20,733) (45,513)
Proceeds from issuance of common stock 202,489 23,626
Repayments to Federal Home Loan
Bank of Atlanta (2,750,000)
Dividends paid (213,767) (298,133)
Unearned ESOP compensation decrease 38,508 38,508
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,085,406 1,434,567
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,745,414 531,317
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR 4,316,776 3,785,459
------------- -------------
END OF YEAR $ 10,062,190 $ 4,316,776
============= =============
</TABLE>
(1) Restated due to pooling of interest transactions
completed September 30, 1998
The accompanying notes are an integral part of the
consolidated financial statements.
21
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Continued)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1998 1997
--------- ---------
(1)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES
Net Income $ 504,543 $ 728,528
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Gain on sale of office properties,
equipment, and leasehold
improvements (44,769)
Depreciation 98,783 77,263
Provision for loan losses 90,000 87,000
Amortization of investment
security premiums 4,808 1,651
Net amortization of deferred loan fees (1,016)
Stock dividends (31,059) (30,655)
Increase (decrease) in accrued
interest receivable 65,070 (29,663)
(Increase) decrease in deferred
taxes (61,854) 61,525
Increase in mortgage servicing rights (19,936) (43,028)
(Increase) decrease in prepaid
expenses (12,585) 5,423
(Increase) decrease in other assets 59,144 (24,229)
Increase (decrease) in other liabilities (56,263) 189,198
(Increase) decrease in loans held
for sale (1,568,927) 130,284
Distribution from MRP Trust 61,076 44,183
Cash paid in lieu of fractional
shares (1,417)
----------- -----------
(1,373,160) 423,167
----------- -----------
$ (868,617) $ 1,151,695
=========== ===========
</TABLE>
(1) Restated due to pooling of interest transactions
completed September 30, 1998
The accompanying notes are an integral part of the
consolidated financial statements.
22
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
1. SUMMARY OF SIGNIFICANT ORGANIZATION AND ACCOUNTING POLICIES
a. Organization and Principles of Consolidation -- On September 30,
--------------------------------------------
1998, the Corporation merged with Columbian Bank, a Federal Savings
Bank ("Columbian") in a transaction accounted for as a pooling of
interest. All financial information includes the financial position
and results of operations of Columbian for all periods presented
prior to the date of the merger (See Note 19).
Cecil Bancorp, Inc. (the Corporation) is a savings and loan holding
company, and is the parent company of Cecil Federal Savings Bank
("Cecil") and Columbian (the Banks). Cecil and Columbian operate as
separate entities. The consolidated financial statements include
the accounts of the Corporation, the Banks, and Cecil's wholly
owned subsidiaries, Cecil Service Corporation and Cecil Financial
Services Corporation.
The Banks are members of the Federal Home Loan Bank System (FHLB)
and are subject to regulation by the Office of Thrift Supervision
(OTS), a division of the U.S. Government Department of Treasury. As
members of this System, the Banks maintain a required investment in
capital stock of the FHLB. The Banks maintain insurance on savings
deposits within certain limitations as members of the Savings
Association Insurance Fund (SAIF) which is administered by the
Federal Deposit Insurance Corporation (FDIC). Regulatory reserve
requirements, federal income tax requirements and related
restrictions of retained earnings are discussed in Notes 11, 12 and
13.
b. Cash and Cash Equivalents -- For purposes of reporting cash flows,
-------------------------
cash and cash equivalents include cash on hand, amounts due from
banks and federal funds sold. Generally, federal funds are
purchased and sold for one-day periods.
c. Investment Securities -- Regulations require the Banks to maintain,
---------------------
in cash and U.S. Government and other approved securities, an
amount equal to 4% of savings accounts (net of loans on savings
accounts) plus short-term borrowings. In addition, short-term
assets must constitute at least 1% of net withdrawable savings and
short-term borrowings.
The Corporation carries certain investments at amortized cost,
which are not adjusted to the lower of cost or market because
management has the ability and intent to hold them to maturity.
Gains and losses on sales of these securities are recognized when
realized and are shown in the consolidated statements of
operations.
The Corporation also classifies certain investments as available
for sale because these securities are not intended to be held to
maturity. Such securities are carried at fair value. Unrealized
gains and losses, net of tax, on securities available-for-sale are
recognized as direct increases or decreases in accumulated other
comprehensive income.
23
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
1. SUMMARY OF SIGNIFICANT ORGANIZATION AND ACCOUNTING POLICIES (Continued)
d. Allowance for Loan Losses -- A provision for loan losses is
-------------------------
charged to operations based on management's evaluation of the
potential loss in its portfolio. Such evaluation, which
includes a review of all loans of which full collectibility may
not be reasonably assured, considers among other matters the
estimated market value of the underlying collateral.
e. Property and Equipment -- Depreciation of office buildings and
----------------------
equipment is accumulated on the straight-line method over the
estimated useful lives of the related assets. Estimated lives
are 50 years for buildings and three to fifteen years for
equipment. Leasehold improvements are amortized on the straight
line method over the remaining terms of the related leases or
over their estimated useful lives, whichever is shorter.
Maintenance and repairs are charged to expense as incurred and
improvements are capitalized. The cost and accumulated
depreciation relating to premises and equipment retired or
otherwise disposed of are eliminated from the accounts and any
resulting gains and losses are credited or charged to income.
f. Mortgage Loan Interest Income -- The Corporation provides an
-----------------------------
allowance for uncollectible interest on all accrued interest
related to loans 90 days or more delinquent. This allowance is
netted against accrued interest receivable for financial
statement disclosure. Such interest ultimately collected is
credited to income in the period of recovery.
g. Loans Held for Sale -- Mortgage loans originated and held for
-------------------
sale in the secondary market are carried at the lower of cost
or market value determined on an aggregate basis. Gains and
losses on the sale of loans held for sale are determined using
the specific identification method.
h. Income Taxes -- Deferred taxes on income result from the
------------
recognition of the income tax effect of temporary differences
in reporting transactions for financial and tax purposes. Such
temporary differences relate primarily to deferred loan fees,
interest received in advance, accrued compensation to
directors, and the recapture of a special bad debt deduction
(See Note 11).
The Corporation and the Banks along with the subsidiaries file
consolidated Federal tax returns.
24
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
1. SUMMARY OF SIGNIFICANT ORGANIZATION AND ACCOUNTING POLICIES (Continued)
i. Real Estate Owned -- Real estate properties acquired through, or in
-----------------
lieu of, loan foreclosure are to be sold and are initially
recorded at fair value at the date of foreclosure. Costs
relating to development and improvement of property are
capitalized, whereas costs related to the holding of property
are expensed.
Valuations are periodically performed by management, and an
allowance for losses is established by a charge to operations
if the carrying value of a property exceeds its estimated net
realizable value.
j. Mortgage-backed Securities -- Mortgage-backed securities represent
--------------------------
participating interests in pools of long-term first mortgage
loans originated and serviced by issuers of the securities.
Mortgage-backed securities are carried at unpaid principal
balances, adjusted for unamortized premiums and unearned
discounts. Premiums and discounts are amortized using the
interest method over the remaining period to contractual
maturity, adjusted for anticipated prepayments. Certain
mortgage-backed securities are not adjusted to the lower of
cost or market because management intends and has the ability
to hold them to maturity. Should any be sold, cost of
securities sold is determined using the specific identification
method.
The Corporation also classifies certain mortgage-backed
securities as available for sale because these securities are
not intended to be held to maturity. Such securities are
carried at fair value. Unrealized gains and losses, net of tax,
on securities available for sale are recognized as direct
increases or decreases in accumulated other comprehensive
income.
k. Loan Origination Fees -- Loan commitment fees and loan fees for
---------------------
originating loans are accounted for in accordance with
Statement of Financial Accounting Standards No. 91, "Accounting
for Nonrefundable Fees and Costs Associated with Originating
and Acquiring Loans and Initial Direct Costs of Leases" (SFAS
91), which requires that certain direct costs associated with
the loan originating process be netted against originating fees
received, with the net resulting amount amortized over the
contractual lives of the loan on the level-yield method as an
adjustment to the loan's yield.
25
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
1. SUMMARY OF SIGNIFICANT ORGANIZATION AND ACCOUNTING POLICIES (Continued)
l. Use of Estimates -- The preparation of financial statements in
----------------
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could
differ from those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance
for credit losses and the valuation of real estate acquired in
connection with foreclosure or in satisfaction of loans. In
connection with the determination of the allowances for losses
on loans and foreclosed real estate, management obtains
independent appraisals for significant properties.
m. Loan Servicing -- The cost of mortgage servicing rights is amortized
--------------
in proportion to, and over the period of, estimated net
servicing revenue. Impairment of mortgage servicing rights is
assessed based on the fair value of those rights. Fair values
are estimated using discounted cash flows based on a current
market interest rate. The amount of impairment recognized is
the amount by which the capitalized mortgage servicing rights
exceed their fair value.
When participating interests in loans sold have an average
contractual interest rate, adjusted for normal servicing fees,
that differs from the agreed yield to the purchaser, gains or
losses are recognized equal to the present value of such
differential over the estimated remaining life of such loans.
The resulting "excess servicing receivable" or "deferred
servicing revenue" is amortized over the estimated life using a
method approximating the interest method.
Quoted market prices are not available for the excess servicing
receivables. Thus, the excess servicing receivables and the
amortization thereon are periodically evaluated in relation to
estimated future servicing revenue, taking into consideration
changes in interest rates, current repayment rates, and
expected future cash flows. The Corporation evaluates the
carrying value of the excess servicing receivables by
estimating the future servicing income of the excess servicing
receivables based on management's best estimate of remaining
loan lives and discounted at the original discount rate.
n. Advertising Expense -- Advertising costs are expensed as incurred.
-------------------
Advertising costs were $44,543 and $37,340 for the years ended
December 31, 1998 and 1997, respectively. The Corporation did
not have costs related to direct response advertising campaigns
during the years ended December 31, 1998 and 1997.
26
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
1. SUMMARY OF SIGNIFICANT ORGANIZATION AND ACCOUNTING POLICIES (Continued)
o. Segment Information -- The Corporation is in one business segment,
-------------------
the savings and loan banking business, and follows the
requirements of SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information".
p. Other Matters - The Corporation has established a company-wide task
-------------
force to review all computer-based systems and applications and
develop a company-wide action plan for the century date change
for the year 2000. The Corporation's goal is to have all
systems and applications compliant with the century change by
March 31, 1999. Preliminary cost estimates have not been
finalized, but remediation efforts will be expensed. None of
these costs is anticipated to have a material impact on the
Corporation's results in any one period. In addition, the
Corporation could possibly be affected by the century change to
the extent other entities not affiliated with it are
unsuccessful in addressing this issue on a timely basis.
q. Reclassification of 1997 Financial Statements -- Certain
---------------------------------------------
reclassifications have been made to the 1997 figures to conform
with current year presentation.
2. ADOPTION OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities"
which was adopted by the Corporation effective January 1, 1997. This
Statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings.
Under the financial-components approach, after a transfer of
financial assets, an entity recognizes all financial and servicing
assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have
been extinguished. The financial-components approach focuses on the
assets and liabilities that exist after the transfer. Many of these
assets and liabilities are components of financial assets that
existed prior to the transfer. If the transfer does not meet the
criteria for a sale, the transfer is accounted for as a secured
borrowing with a pledge of collateral. The adoption of SFAS 125 did
not have a material impact on the Corporation's consolidated
financial statements.
27
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
2. ADOPTION OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)
Effective December 31, 1997, the Corporation adopted SFAS 128, "Earnings
Per Share". This Statement establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock. This Statement
simplifies the standards for computing earnings per share previously
found in APB Opinion No. 15, "Earnings Per Share", and makes them
comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS,
requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital
structures, and requires a reconciliation of the numerator and the
denominator of the basic EPS calculation to the numerator and the
denominator of the diluted EPS calculation. Basic EPS excludes
dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the entity. This statement is effective for periods
ending after December 15, 1997, and requires restatement of all
prior periods presented.
Effective December 31, 1998 the Corporation adopted SFAS No. 129,
"Disclosure of Information about Capital Structure." This statement
consolidates existing guidance and requires entities (public and
non-public) to disclose certain information about the entity's
capital structure. It contains no change in disclosure requirements
for entities such as the Corporation that were previously subject to
the requirements of Opinions 10 - "Omnibus Opinion - 1966" and 15 -
"Earnings Per Share" and Statement 47 - "Disclosure of Long-Term
Obligations." Accordingly, no new reporting requirements have been
imposed on the Corporation.
Effective for the year ended December 31, 1998 the Corporation adopted
SFAS No. 130, "Reporting Comprehensive Income," which requires
reporting of "comprehensive income" and its components in financial
statements. "Comprehensive income" includes net income and other
items of comprehensive income, such as unrealized gains and losses
on available-for-sale securities and minimum pension liability
adjustments, which are excluded from net income. This statement was
effective for periods beginning after December 15, 1997 and required
the restatement of all prior periods presented.
Effective for the year ended December 31, 1998 the Corporation adopted
SFAS No. 131 "Disclosure About Segments of an Enterprise and Related
Information" which supersedes SFAS No. 14 "Financial Reporting for
Segments of a Business Enterprise". SFAS No. 131 established
standards for the way that public enterprises report information
about operating segments in financial statements issued to the
public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. The
adoption of SFAS No. 131 did not have a material impact on the
Corporation's consolidated financial statements.
28
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------
(Continued)
2. ADOPTION OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosure
about Pensions and Other Post-retirement Benefits", which revises
employers' disclosure about pension and other post-retirement
benefit plans. SFAS No. 132 is effective for financial statements
for the periods beginning after December 31, 1997, and requires
comparative information for earlier years to be restated. This
standard currently does not apply to the Corporation.
During the second quarter of 1998, the Financial Accounting Standards
Board issued SFAS No. 133, AAccounting for Derivative Instruments
and Hedging Activities,@ which will be effective for the Company's
fiscal year 2000. This statement establishes accounting and
reporting standards requiring that every derivative instrument,
including certain derivative instrument imbedded in other contracts,
be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement also requires that changes
in the derivative's fair value be recognized in earnings unless
specific hedge accounting criteria are met. The Company is currently
assessing the impact of this new Statement on its consolidated
financial position, liquidity, and results of operations.
3. INVESTMENT SECURITIES
Investment securities have been classified in the statements of
financial position according to management's intent.
The amortized costs and estimated market values of investment securities
held-to-maturity as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
December 31, 1998
-------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities
and obligations of U.S.
government and Federal
Agencies $4,228,742 $ 7,689 $ 3,732 $4,232,699
========== ========== ========== ==========
<CAPTION>
December 31, 1997
-------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities
and obligations of U.S.
government and Federal
Agencies $5,842,776 $ 1,291 $ 4,614 $5,839,453
========== ========== ========== ==========
</TABLE>
29
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
3. INVESTMENT SECURITIES (Continued)
The amortized costs and estimated market values of investment securities
available-for-sale as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
December 31, 1998
----------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities
and obligations of
U.S. Government and
Federal Agencies $2,000,000 $19,516 $ $2,019,516
Mutual Funds 2,071,899 2,691 2,263 2,072,327
---------- ------- ---------- ----------
$4,071,899 $22,207 $ 2,263 $4,091,843
========== ======= ========== ==========
<CAPTION>
December 31, 1997
----------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities
and obligations of
U.S. Government and
Federal Agencies $2,000,000 $35,315 $ $2,035,315
Mutual Funds 949,999 803 706 950,096
---------- ------- ---------- ----------
$2,949,999 $36,118 $ 706 $2,985,411
========== ======= ========== ==========
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1998, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
---------- ----------
<S> <C> <C>
Due in one year or less $3,003,652 $3,009,375
Due from five to ten years 2,724,638 2,746,120
Due beyond ten years 500,452 496,720
---------- ----------
$6,228,742 $6,252,215
========== ==========
</TABLE>
Investment securities carried at approximately $3,003,662 at December
31, 1998, were pledged to secure public deposits.
No gross gains or losses were realized during the years ended December
31, 1998 and 1997.
30
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
4. MORTGAGE BACKED SECURITIES
Mortgage-backed securities have been classified in the statements of
financial position according to management's intent.
The amortized costs and estimated market values for mortgage-backed
securities held-to-maturity as of December 31, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
December 31, 1998
----------------------------------------------
<S> <C> <C> <C> <C>
GNMA $ 729,674 $ 2,294 $ $ 731,968
FHLMC 1,009,480 1,329 3,235 1,007,574
FNMA 307,829 1,077 4,254 304,652
---------- ------- ------- ----------
$2,046,983 $ 4,700 $ 7,489 $2,044,194
========== ======= ======= ==========
<CAPTION>
December 31, 1997
----------------------------------------------
<S> <C> <C> <C> <C>
GNMA $1,019,533 $26,156 $ $1,045,689
FHLMC 1,316,456 9,073 1,307,383
FNMA 423,545 1,638 7,477 417,706
---------- ------- ------- ----------
$2,759,534 $27,794 $16,550 $2,770,778
========== ======= ======= ==========
</TABLE>
The amortized costs and estimated market values for mortgage-backed
securities available-for-sale as of December 31, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
As of December 31, 1998
FHLMC $ 857,261 $ 5,999 $ $ 863,260
========== ========== ========== ==========
As of December 31, 1997
FHLMC $1,390,245 $ 15,238 $ $1,405,483
========== ========== ========== ==========
</TABLE>
Certain mortgage-backed securities are subject to significant prepayment
risks. In periods of declining interest rates mortgages may be
repaid more rapidly than anticipated resulting in greater
amortization of premiums and reduced yields. In addition, the
Corporation may be unable to reinvest at an interest rate comparable
to the rate on the prepaying mortgage-backed security. In contrast,
in periods of increasing interest rates, market values of mortgage-
backed securities will decline.
31
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
4. MORTGAGE-BACKED SECURITIES (Continued)
Mortgage-backed securities carried at $854,578 at December 31, 1998,
were pledged to secure public deposits.
5. LOANS RECEIVABLE
The Corporation's lending activities are predominantly conducted in
Cecil and Harford Counties in the State of Maryland. The ability and
willingness of loan borrowers to honor their repayment commitments
is generally dependent on the health of the real estate economic
sector in the borrowers geographic area and the general economy.
A summary of loans receivable follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
First mortgage loans
1-4 Dwelling units $ 59,756,198 $ 56,002,532
5 or more 868,614 1,065,865
Non-Residential 2,458,561 2,470,091
Land 2,303,437 3,457,105
Construction 5,533,125 4,789,381
------------ ------------
70,919,935 67,784,974
Other loans
Home equity loans 1,991,622 2,557,345
Commercial loans 2,051,627 1,621,686
Home improvement loans 14,818 9,000
Consumer loans 4,180,088 2,611,650
Loans on savings deposits 910,010 711,124
Education 60,642 75,654
------------ ------------
80,128,742 75,371,433
Less:
Undisbursed proceeds on
loans in process (2,402,632) (1,394,100)
Deferred loan fees (262,738) (244,774)
Loans held for sale (2,515,151) (1,362,969)
Allowance for loan losses (402,309) (353,541)
------------- ------------
$ 74,545,912 $ 72,016,049
============ ============
</TABLE>
The Bank serviced loans for others in the approximate amount of
$18,324,000 and $20,792,260 in 1998 and 1997, respectively.
32
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
5. LOANS RECEIVABLE (Continued)
An analysis of the allowance for loan losses for the years ended December 31,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Balance at beginning of period $ 353,541 $ 297,691
Provision charged to operations 90,000 87,000
Charge-offs, net (41,232) (31,150)
--------- ---------
Balance at end of period $ 402,309 $ 353,541
========= =========
</TABLE>
Commercial and commercial real estate loans are considered impaired when
it is probable that the Corporation will not collect all amounts due in
accordance with the contractual terms of the loan. Except for certain
restructured loans, impaired loans are loans that are on nonaccrual status.
Loans that are returned to accrual status are no longer considered to be
impaired.
The allowance for loan losses includes impairment reserves related to
loans that are identified as impaired, which are based on discounted cash flows
using the loan's effective interest rate, or the fair value of the collateral
for collateral-dependent loans, or the observable market price of the impaired
loan. When foreclosure is probable, impairment is measured based on the fair
value of the collateral. Loans that experience insignificant payment delays
(less than 60 days) and insignificant shortfalls in payment amounts (less than
10%) generally are not classified as impaired. Restructured loans are reported
as impaired in the year of restructuring. Thereafter, such loans may be removed
from the impaired loan disclosure if the loans were paying a market rate of
interest at the time of restructuring and are performing in accordance with
their renegotiated terms. A loan is classified as an insubstance foreclosure
when the Corporation has taken possession of the collateral, regardless of
whether formal foreclosure proceedings take place.
The Corporation had no impaired loans at December 31, 1998 and 1997.
At December 31, 1998, the Bank had outstanding commitments to originate
loans as follows:
Fixed Rate Variable Rate
(6.00%-8.50%) (7.00%-8 1/8%) Total
------------- -------------- ----------
First mortgages $2,734,500 $528,700 $3,263,200
========== ======== ==========
33
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
6. OFFICE PROPERTIES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Office properties, equipment and leasehold improvements are summarized
by major classifications as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Land $ 271,333 $ 264,973
Buildings and improvements 644,387 644,387
Furniture, fixtures and equipment 625,612 584,902
Leasehold improvements 231,288 225,493
---------- ----------
1,772,620 1,719,755
Accumulated depreciation 660,113 713,781
---------- ----------
$1,112,507 $1,005,974
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1998 and 1997 was $98,783
and $77,263, respectively.
Leasehold improvements relate to office space for Cecil's branch office and
lending office. The branch office is being leased under the terms of an
operating lease with renewal options for two successive five year terms which
expire in May 2005. The lending office is being leased under the terms of an
operating lease which expires in May 2000, with renewal options for three
successive five year terms. Land is being leased for the operation of two
Automatic Teller Machines under the terms of operating leases which expire
through July 2002, with renewal options for three successive three year terms.
Annual rental on these leases was $41,580 and $39,750 in 1998 and 1997,
respectively.
The following is a schedule by years of future rental payments required
under the operating leases for the remaining non-cancelable terms:
<TABLE>
<S> <C>
Year ending December 31, 1999 $ 40,950
2000 30,450
2001 21,050
2002 19,050
2003 17,850
Thereafter 23,800
--------
$153,150
========
</TABLE>
34
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
7. FEDERAL HOME LOAN BANK STOCK
Investment in stock of the Federal Home Loan Bank is required of every
federally-insured savings bank. The Banks must own capital stock in an amount
equal to the greater of 1% of their residential mortgages and mortgage-backed
securities, or 3/10th of 1% of total assets. No ready market exists for the bank
stock, and it has no quoted market value.
8. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1998 and 1997, consists of the
following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Loans receivable $492,246 $519,989
Mortgage-backed securities 6,360 22,631
Investment securities 99,316 120,372
-------- --------
$597,922 $662,992
======== ========
</TABLE>
9. SAVINGS DEPOSITS
The following is a summary of savings deposits as of December 31:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
N.O.W. and Money
Market accounts $ 9,841,890 2.1534 $ 8,631,006 2.3547
Savings accounts 18,061,028 3.1010 16,083,532 3.5172
Term certificates 57,078,485 5.7330 54,842,201 5.9076
Checking accounts 2,693,399 1,039,154
----------- -----------
$87,674,802 $80,595,893
=========== ===========
</TABLE>
35
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
9. SAVINGS DEPOSITS (Continued)
A summary of certificate accounts by maturity as of December 31, 1998
follows:
<TABLE>
<S> <C>
Under 12 months $40,236,825
12 months to 24 months 10,545,101
24 months to 36 months 1,947,868
Over 36 months 4,348,691
-----------
$57,078,485
===========
</TABLE>
Eligible savings accounts are insured up to $100,000 by the Savings
Association Insurance Fund.
Savings deposits include certificates of deposit in denominations of $100,000
or more aggregating $22,018,496 and $15,825,910 as of December 31, 1998
and 1997.
The bank held deposits of approximately $2,168,574 for related parties at
December 31, 1998.
10. ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1998, short-term advances consist of the following:
Maturity Interest
Date Rate December 31, 1998
-------- ------- -----------------
12/20/99 5.93% $1,750,000
Wholly owned first mortgage loans on 1-4 dwelling units with unpaid principal
balances of approximately $36,467,000 were pledged to the FHLB as collateral on
advances.
11. INCOME TAXES
In August 1996, the provisions repealing the then current thrift bad debt rules
were passed by Congress. The new rules eliminate the 8% of taxable income method
for deducting additions to the tax bad debt reserves for all thrifts for tax
years beginning after December 31, 1995. These rules also require that all
thrift institutions recapture all or a portion of their tax bad debt reserves
added since the base year (last taxable year beginning before January 1, 1988).
The Corporation has previously recorded a deferred tax liability equal to the
tax bad debt recapture and as such, the new rules will have no effect on net
income or federal income tax expense.
36
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
11. INCOME TAXES (Continued)
The unrecaptured base year reserves will not be subject to recapture as
long as the Corporation continues to carry on the business of banking. In
addition, the balance of the pre-1998 tax bad debt reserves continue to be
subject to provisions of present law that require recapture in the case of
certain excess distributions to stockholders. For federal income tax purposes,
the Corporation has designated $551,280 of net worth as a reserve for tax bad
debts on loans. The use of this amount for purposes other than to absorb losses
on loans would result in taxable income and financial statement tax expense at
the then current tax rate.
The components of income tax expense were as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Current:
Federal at 34% $438,045 $428,611
State 113,617 102,707
Deferred (benefit) expense (58,402) (6,952)
-------- --------
Total $493,260 $524,366
======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, are
presented below:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Deferred loan origination fees $ 52,552 $ 51,968
Loan loss allowance 155,372 134,504
Reserve for uncollected interest 11,265 16,573
Tax basis of foreclosed real estate
in excess of book 16,655 16,168
Deferred compensation 101,701 79,281
Interest collected in advance 8,673 6,897
Other 7,205
-------- --------
Total gross deferred tax assets 346,218 312,596
-------- --------
</TABLE>
37
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
11. INCOME TAXES (Continued)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities:
FHLB Stock dividends $ 27,691 $ 26,880
Tax reserves for bad debts 115,507 139,601
Mortgage servicing rights 47,712 40,012
Tax accumulated depreciation in
excess of book 30,398 33,673
Net unrealized appreciation on
available for sale securities 10,019 19,561
-------- --------
Total gross deferred tax liabilities 231,327 259,727
-------- --------
Net deferred tax assets $114,891 $ 52,869
======== ========
</TABLE>
At December 31, 1998 and 1997, there is no valuation allowance
maintained against the deferred tax assets. The Corporation expects to fully
realize the benefit of the deferred tax assets.
12. RETAINED EARNINGS
Retained earnings are restricted by regulatory requirements and federal income
tax requirements.
In connection with the insurance of savings accounts by SAIF, the Banks are
required to meet certain capital requirements based on computations prescribed
by OTS (see Note 13).
Payment of dividends on the common stock of the Corporation will be subject to
the availability of funds from dividend distributions of the Banks, which are
subject to various restrictions. Under regulations of the OTS, the Banks are not
permitted to pay dividends on their common stock if their regulatory capital is
reduced below the amount required for the "liquidation account" or the capital
requirements imposed by FIRREA and the OTS. Since the banks meet the fully
phased-in capital requirements under FIRREA, they may pay a cash dividend on
their capital stock up to the higher of (i) 100% of their net income to date
during the calendar year plus an amount not to exceed 50% of their surplus
capital ratio at the beginning of the calendar year or (ii) 75% of their net
income over the most recent four quarter period.
38
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
13. REGULATORY CAPITAL MATTERS
The Banks are subject to various regulatory capital requirements administered by
their primary federal regulator, the Office of Thrift Supervision (OTS). Failure
to meet the minimum regulatory capital requirements can initiate certain
mandatory, and possible additional discretionary actions by regulators, that if
undertaken, could have direct material effect on the Banks and the consolidated
financial statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Banks must meet specific
capital guidelines involving quantitative measures of the Banks' assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Banks' capital amounts and classification under the
prompt corrective action guidelines are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios of: total risk-based
capital and Tier I capital risk-weighted assets (as defined in the regulations),
Tier I capital to adjusted total assets (as defined), and tangible capital to
adjusted total assets (as defined). Management believes, as of December 31,
1998, that the Banks meet all the capital adequacy requirements to which it is
subject.
As of December 31, 1998, the most recent notification from the OTS, the Banks
were categorized as well capitalized under the regulatory framework for prompt
corrective action. To remain categorized as well capitalized, the Bank will have
to maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as disclosed in the following table. There are no events or conditions
since the most recent notification that management believes have changed the
Banks' prompt corrective action category.
39
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
13. REGULATORY CAPITAL MATTERS (Continued)
The following tables illustrate the actual and required amounts and ratios for
the Corporation and the Banks as set forth by the Federal Deposit Insurance
Corporation (FDIC) and the OTS at the dates indicated.
<TABLE>
<CAPTION>
CECIL
- -----
To Be Well Capitalized
under Prompt
Corrective Action
Actual Provisions
-------------- -----------------------------------
Amount Ratio Amount Ratio
------ ------ ------ -----
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total risk-based capital [greater than or [greater than or
(to risk-weighted assets) $8,144 18.37% equal to symbol] $4,433 equal to symbol] 10.0%
Tier I capital [greater than or [greater than or
(to risk-weighted assets) 7,921 17.87% equal to symbol] 2,660 equal to symbol] 6.0%
Tier I capital [greater than or [greater than or
(to adjusted total assets) 7,921 11.09% equal to symbol] 3,571 equal to symbol] 5.0%
Tangible capital [greater than or [greater than or
(to adjusted total assets) 7,921 11.09% equal to symbol] $1,071 equal to symbol] 1.5%
As of December 31, 1997
Total risk-based capital [greater than or [greater than or
(to risk-weighted assets) $7,326 18.08% equal to symbol] $4,052 equal to symbol] 10.0%
Tier I capital [greater than or [greater than or
(to risk-weighted assets) 7,150 17.65% equal to symbol] 2,431 equal to symbol] 6.0%
Tier I capital [greater than or [greater than or
(to adjusted total assets) 7,150 11.23% equal to symbol] 3,183 equal to symbol] 5.0%
Tangible capital [greater than or [greater than or
(to adjusted total assets) 7,160 11.25% equal to symbol] 955 equal to symbol] 1.5%
<CAPTION>
COLUMBIAN
- ---------
To Be Well Capitalized
under Prompt
Corrective Action
Actual Provisions
-------------- -----------------------------------
Amount Ratio Amount Ratio
------ ------ ------ -----
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total risk-based capital [greater than or [greater than or
(to risk-weighted assets) $2,185 15.05% equal to symbol] $1,452 equal to symbol] 10.0%
Tier I capital [greater than or [greater than or
(to risk-weighted assets) 2,082 14.34% equal to symbol] 872 equal to symbol] 6.0%
Tier I capital [greater than or [greater than or
(to adjusted total assets) 2,082 6.98% equal to symbol] 1,491 equal to symbol] 5.0%
Tangible capital [greater than or [greater than or
(to adjusted total assets) 2,082 6.98% equal to symbol] 447 equal to symbol] 1.5%
</TABLE>
40
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
13. REGULATORY CAPITAL MATTERS (Continued)
<TABLE>
<CAPTION>
COLUMBIAN (Continued)
- ---------------------
To Be Well Capitalized
under Prompt
Corrective Action
Actual Provisions
-------------- -----------------------------------
Amount Ratio Amount Ratio
------ ------ ------ -----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
As of December 31, 1997
Total risk-based capital [greater than or [greater than or
(to risk-weighted assets) $2,094 15.41% equal to symbol] $1,359 equal to symbol] 10.0%
Tier I capital [greater than or [greater than or
(to risk-weighted assets) 1,991 14.65% equal to symbol] 815 equal to symbol] 6.0%
Tier I capital [greater than or [greater than or
(to adjusted total assets) 1,991 6.64% equal to symbol] 1,499 equal to symbol] 5.0%
Tangible capital [greater than or [greater than or
(to adjusted total assets) 1,991 6.64% equal to symbol] 450 equal to symbol] 1.5%
</TABLE>
14. OFFICER, DIRECTOR, AND EMPLOYEE PLANS
a. Employee Stock Ownership Plan -- In conjunction with the plan of
-----------------------------
conversion, the Board of Directors approved a contributory Employee Stock
Ownership Plan (ESOP) for employees who have attained age 21 and completed one
year of service with the Corporation or its subsidiaries, effective January 1,
1994. The ESOP acquired 38,508 shares of common stock in November 1994 for
$385,080 financed by a loan from the Corporation. Shares acquired with such loan
proceeds are to be held in a suspense account for allocation among the
participants as the loan is repaid. The loan agreement is secured by a pledge of
the common stock owned by the ESOP and purchased with the proceeds of the loan.
The outstanding loan balance is included as a liability in the accompanying
consolidated statements of financial condition, and the Corporation's obligation
related to the ESOP debt is reflected as a reduction in stockholders' equity.
The loan is to be paid in annual installments of $38,508 plus interest at prime
plus 1% (8.75% at December 31, 1998) over a ten year period. Payments began on
December 31, 1995. The Banks contribute sufficient cash funds to the ESOP to
repay the loan, plus such other amounts as the Corporation's Board of Directors
may determine in its discretion.
41
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
14. OFFICER, DIRECTOR, AND EMPLOYEE PLANS (Continued)
a. Employee Stock Ownership Plan (Continued)
-----------------------------
Contributions to the ESOP and shares released from the suspense account are to
be allocated among participants on the basis of their annual wages subject to
federal income tax withholding, plus any amounts withheld under a plan qualified
under Sections 125 or 401(k) of the Code and sponsored by the Corporation.
Participants must be employed at least 1,000 hours in a calendar year in order
to receive an allocation. Forfeitures will be reallocated to participants on the
same basis as other contributions. Dividends paid on allocated shares are
expected to be used to repay the ESOP loan, credited to participant accounts
within the ESOP, or paid to participants; dividends on unallocated shares are
expected to be used to repay the ESOP loan. The Corporation is to administer the
ESOP.
The Corporation accounts for its ESOP in accordance with Statement of Position
93-6. Accordingly, the debt of the ESOP is recorded as debt and shares pledged
as collateral are reported as unearned ESOP shares, a reduction of stockholders'
equity. As shares are released from collateral, the Banks record compensation
expense in an amount equal to the fair value of the shares, and the shares
become outstanding for earnings per share computations. Compensation expense is
also recognized for Corporation dividends on unallocated shares paid or added to
participant accounts. Compensation expense is reduced by the amount of the
annual interest paid by the ESOP to service the loan issued to acquire the
shares of stock. ESOP compensation expense was $24,445 and $43,751 in 1998 and
1997, respectively. The ESOP shares as of December 31, 1998 were as follows:
<TABLE>
<S> <C>
Shares released for allocation 15,403
Unreleased shares 23,105
--------
Total ESOP shares 38,508
========
Fair value of unreleased shares
at December 31, 1998 $542,968
========
</TABLE>
42
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
14. OFFICER, DIRECTOR, AND EMPLOYEE PLANS (Continued)
b. Stock-based Compensation Plans
------------------------------
During 1995, the Corporation formed a Management Recognition Plan ("MRP"), which
was authorized to acquire 4% of the shares of common stock issued on the date of
reorganization. The total shares authorized are to be awarded to directors and
to employees in key management positions in order to provide them with a
proprietary interest in the Corporation in a manner designed to encourage such
employees to remain with the Corporation.
The Corporation contributed funds in the amount of $263,351 to the MRP to enable
it to acquire the shares of stock that will be required to fund the MRP (18,174
shares). The number of shares awarded for the year ended December 31, 1995 was
17,507. Awards under the MRP are earned and non-forfeitable by a participant at
the rate of one-fifth per year of service.
The $263,351 contributed to the MRP is being amortized to compensation expense
as the plan participants become vested in those shares. Compensation expense in
connection with the MRP was $66,383 and $50,627 in 1998 and 1997, respectively.
The unamortized cost, which is comparable to deferred compensation, is reflected
as a reduction of stockholders' equity.
<TABLE>
<CAPTION>
The following table summarizes information about the management recognition
plan at December 31:
1998 1997
------ ------
<S> <C> <C>
Outstanding shares at beginning of year 7,796 10,395
Vested and paid shares (2,599) (2,599)
------ ------
Outstanding shares at end of year 5,197 7,796
====== ======
</TABLE>
The Corporation adopted stock option plans in 1992 and 1995 for the benefit of
directors, selected officers, and other key employees. The Plans provide for the
granting of options for the common shares of the Corporation at the fair market
value at the time the options are granted. The term of each option awarded is to
be determined by a committee of the Board of Directors, but shall not exceed ten
years. The term of an option shall not exceed five years for employees owning
more than 10% of the outstanding common stock at the time the option is granted.
Discretionary stock appreciation rights may be granted in conjunction with, or
independently of, any options granted under the Plans. Upon exercise of a stock
appreciation right, the related option, or portion thereof, is cancelled.
43
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
14. OFFICER, DIRECTOR, AND EMPLOYEE PLANS (Continued)
b. Stock-based Compensation Plans (Continued)
------------------------------
In accordance with the stock option plans a total of 57,838 shares of unissued
common stock are reserved for issuance pursuant to incentive stock options. The
number of shares reserved for the option plans did not change in 1998, except
for the effect of the pooling of interest transaction and the stock dividend.
The Company's 1995 Stock Option Plan (Five-Year Options) has authorized the
grant of options to management personnel for up to 44,519 shares of the
Company's common stock. All options granted have 10 year terms and vest ratably
over their respective terms.
The number of shares and the exercise prices in the following table have been
retroactively restated for the 1998 and 1997 stock dividends.
A summary of the Corporation's stock option activity, and related information
for the year ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------ -------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
----------------- ----------------- -------- ---------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 43,249 $ 9.86 43,864 $ 9.86
Granted 1,787 6.87
Exercised (10,045) (5.85) (2,402) (7.63)
------- ------- ------ -------
Outstanding at
end of year 33,204 $ 11.07 43,249 $ 9.86
======= ======= ======= =======
Options exercisable
at year end 20,204 23,758
======= =======
</TABLE>
44
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
14. OFFICER, DIRECTOR, AND EMPLOYEE PLANS (Continued)
b. Stock-based Compensation Plans (Continued)
------------------------------
The per share weighted average fair value of stock options granted during 1998
and 1997 was 6.60 and 5.90, respectively, on the date of the grants using the
Black Scholes option-pricing model as a valuation technique with the following
average assumptions: 3% expected dividend yield, 5.9 and 6.2 risk-free interest
rate, and expected life, 7.25 years and 8.25 years; and expected volatility, 21%
and 20% respectively.
For financial statement purposes, the Corporation measures the compensation
costs of its stock option plans under Accounting Principles Board (APB) Opinion
No. 25 whereby, no compensation cost is recorded if, at the grant date, the
exercise price of the options is equal to the fair market value of the
Corporation's common stock. Had the Corporation determined cost based on the
fair value at the grant date for its stock options under FASB Statement No. 123,
Accounting for Stock-Based Compensation, the Company's net income and earnings
per share for the years ended December 31, 1998 and 1997 would have been reduced
to the proforma amounts indicated below.
<TABLE>
<CAPTION>
Earnings per Share
------------------
Net income Basic Diluted
------------------ ------ -------
<S> <C> <C> <C>
December 31, 1998
As reported $504,543 $ .88 $ .87
Pro forma 493,276 .86 .85
December 31, 1997
As reported $728,528 $1.30 $1.28
Pro forma 714,356 1.27 1.26
</TABLE>
The pro forma amounts reflect only stock options granted in 1997 and subsequent
years. Therefore, the full impact of calculating the cost for stock options
under Statement No. 123 is not reflected in the pro forma amounts presented
above because the cost for options granted prior to January 1, 1997 is not
considered under the requirements of Statement No. 123.
45
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
14. OFFICER, DIRECTOR, AND EMPLOYEE PLANS (Continued)
c. Retirement Plan for Non-Employee Directors -- Effective January 1,
------------------------------------------
1995 the Corporation adopted a Retirement Plan for Non-Employee Directors. Under
this plan, each participating director would receive monthly benefits for the
ten-year period following termination of service on the Board, in an amount
equal to the product of his or her "Benefit Percentage," his or her "Vested
Percentage," and $500. A director's "Benefit Percentage" is based on his or her
overall years of service on the Board of Directors of the Corporation, and
increases in increments of 20% from 0% for less than five years of service, to
20% for five to nine years of service, to 40% for 10 to 14 years of service, to
60% for 15 to 19 years of service, to 80% for 20 to 24 years of service, and to
100% for 25 or more years of service.
A director's "Vested Percentage" is based on his or her full years of service as
a non-employee Director after January 1, 1995 and increases in increments of 10%
per year, from 10% for one full year of service after January 1, 1995, up to
100% for ten or more full years of service after January 1, 1995. In the event
that a director dies before collecting benefits under this plan, the director's
surviving spouse will be eligible to receive 50% of the benefits the director
would have received.
The Directors' Plan is unfunded. All benefits will be paid from the
Corporation's general assets. The Corporation recognizes annual compensation
expense as the benefits become vested. The amount of compensation expense
incurred by the Corporation in connection with the plan for the years ended
December 31, 1998 and 1997 was $42,000 per year.
46
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
15. PENSION PLAN
Cecil has a defined contribution pension plan covering all full-time employees
who meet certain eligibility requirements as to age and length of service. The
plan is funded by annual employer contributions determined at the rate of 10% of
compensation of eligible employees. Pension costs charged to operations in 1998
and 1997 amounted to $56,145 and $57,768, respectively.
Columbian has in effect a profit sharing plan for full-time employees who have
completed one full year of service. The Plan allows for annual contributions of
up to 15% of its payroll. The Plan does not provide for employee contributions.
Each participant in the plan becomes fully vested after five consecutive years
of service under the Plan and upon retirement receives the contributions on
behalf of the participant and the earnings thereon. Contributions charged to
operations in 1998 and 1997 amounted to $4,750 and $5,750, respectively.
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk.
The following commitments are outstanding as of December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Unfunded lines of credit $3,397,707 $2,890,000
Loan commitments 3,263,200 1,576,000
---------- ----------
$6,600,907 $4,466,000
========== ==========
</TABLE>
The Corporation's exposure to credit loss in the event of non-performance by the
other party to these instruments is represented by the contractual amount of the
instrument. The Corporation uses the same credit policies in granting such loan
commitments as it does for on-balance sheet instruments. The Corporation
generally requires collateral to support such financial instruments with credit
risk, which generally consists of the right to receive a first mortgage on
improved or unimproved real estate when performance under the contract occurs
(see Note 5).
47
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued)
The Corporation invests funds in the form of certificates of deposit at the
Federal Home Loan Bank. In addition, the Corporation maintains cash accounts at
the Federal Home Loan Bank and three local banks. Balances reflected on the
local bank's statements exceed the $100,000 insurance limit by varying amounts
throughout the year. The Corporation controls this risk by monitoring the
financial condition of the local banks. The Federal Home Loan Bank is an
instrumentality of the U.S. Government.
17. EARNINGS PER SHARE
During 1998 and 1997, options to acquire 20,204 and 23,758 shares, respectively
of the Corporation's stock were vested and exercisable (see Note 14). The
options expire through May 2006.
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
The weighted average number of shares of common stock outstanding was 570,504
and 559,365 in 1998 and 1997, respectively.
Diluted earnings per common share were determined on the assumption that the
options were exercised on May 31, 1997 and May 31, 1996 (the date they became
vested). The number of common shares was increased by the number of shares
issuable on the exercise options when the market price of the common stock
exceeds the exercise price of the options. This increase in the number of common
shares was reduced by the number of common shares that are assumed to have been
purchased with the proceeds from the exercise of the options; those purchases
were assumed to have been made at the year-end price of $23.50 and $20 at
December 31, 1998 and 1997, respectively. The weighted average number of shares
of common stock outstanding for computation of diluted earnings per common share
was 578,018 and 568,540 in 1998 and 1997, respectively.
The following table is a reconciliation of the numerators and denominators of
basic and diluted earnings per share computations for the years ended
December 31:
48
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
17. EARNINGS PER SHARE (Continued)
<TABLE>
<CAPTION>
1998
-------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
Net income $504,543 570,504 $ .88
Effect of dilutive securities
Stock options 7,514 (.01)
---------- ------------ ---------
Diluted EPS
Net income $504,543 578,018 $ .87
========== ============ =========
<CAPTION>
1997
-------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
Net income $728,528 559,365 $1.30
Effect of dilutive securities
Stock options 9,175 (.02)
---------- ------------ ---------
Diluted EPS
Net income $728,528 568,540 $1.28
========== ============ =========
</TABLE>
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the FASB issued SFAS No. 107 "Disclosure about Fair Value of
Financial Instruments" which requires that the Corporation disclose estimated
fair values for both its on and off-balance-sheet financial instruments. The
following methods and assumptions were used to estimate the fair value of the
Corporation's financial instruments. Changes in estimates and assumptions could
have a significant impact on these fair values.
Cash and Cash Equivalent
- ------------------------
The fair values of cash and cash equivalents approximates their carrying values.
49
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
18. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Securities
- ----------
The fair values of investment securities, securities available for sale and
securities to be held to maturity are based on quoted market prices, where
available. If a quoted market price is not available, fair value is estimated
using quoted market prices of comparable instruments.
Loans Receivable and Loans Held for Sale
- ----------------------------------------
The fair value of the loan portfolio is estimated by evaluating homogeneous
categories of loans with similar financial and credit risk characteristics.
Loans are segregated by types, such as residential mortgage, commercial real
estate and consumer. Each loan category is further segmented into fixed and
adjustable-rate interest terms.
The fair values of each loan category are estimated by discounting contractual
cash flows adjusted for estimated prepayments. Assumptions regarding prepayment
estimates and discount rates are judgmentally determined by using available
market information.
Investment in Stock of FHLB
- ---------------------------
The fair value of the Corporation's investment in stock of the FHLB approximates
its carrying value.
Savings Deposits
- ----------------
The fair values of passbook accounts, NOW accounts, demand deposit accounts and
variable rate money market accounts approximates their carrying values. The fair
values of fixed rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently offered for deposits
of similar remaining maturities.
Employee Stock Ownership Plan Debt
- ----------------------------------
The fair value of the Corporation's employee stock ownership plan debt is
estimated using a discounted cash flow analysis based on current market rates
for debt with similar terms and remaining maturity.
50
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
18. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of financial instruments at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Value Value
----------- -----------
<S> <C> <C>
Financial assets
Cash and cash equivalents $10,062,190 $10,062,190
Investment securities
Held to maturity 4,228,742 4,232,699
Available for sale 4,091,843 4,091,843
Mortgage-backed securities
Held to maturity 2,046,983 2,044,194
Available for sale 863,260 863,260
Loans held for sale 2,515,151 2,581,475
Loans receivable 74,545,912 77,002,747
Investment in stock of FHLB 672,300 672,300
Financial liabilities
Savings deposits 87,674,802 88,089,804
Employee stock ownership plan debt 231,048 231,048
</TABLE>
The estimated fair values of financial instruments at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Value Value
----------- -----------
<S> <C> <C>
Financial assets
Cash and cash equivalents $ 4,316,776 $ 4,316,776
Investment securities
Held to maturity 5,842,776 5,839,453
Available for sale 2,985,411 2,985,411
Mortgage-backed securities
Held to maturity 2,759,534 2,770,778
Available for sale 1,405,483 1,405,483
Loans held for sale 1,362,969 1,380,439
Loans receivable 72,016,049 72,612,581
Investment in stock of FHLB 652,700 652,700
Financial liabilities
Savings deposits 80,595,893 80,642,074
Employee stock ownership plan debt 269,556 269,556
</TABLE>
51
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
19. MERGER
In September 1998, the Corporation issued 128,155 shares of its common stock for
all outstanding common stock of Columbian. Columbian shareholders received
1.7021 shares of the Corporation's common stock for each share of Columbian
common stock. The merger qualified as a tax-free reorganization and was
accounted for as a pooling of interest. Accordingly, the Corporation's
consolidated financial statements were restated for all periods prior to the
business combination to include the results of operations, financial position
and cash flows of Columbian. No adjustments were necessary to conform
Columbian's methods of accounting to the methods used by the Corporation. There
were no significant intercompany transactions prior to consummation of the
merger. The costs associated with the merger totaled $302,501 in 1998.
The results of operations previously reported by the separate companies and the
combined amounts presented in the accompanying consolidated financial statements
are summarized below:
<TABLE>
<CAPTION>
Through Year ended Year ended
September 30, December 31, December 31,
1998 1998 1997
------------ ------------ ----------
<S> <C> <C> <C>
Interest income:
Cecil Bancorp, Inc. $4,010,179 $5,407,586 $5,018,366
Columbian 1,683,419 2,193,749 2,321,469
---------- ---------- ----------
Combined $5,693,598 $7,601,335 $7,339,835
========== ========== ==========
Net income (loss):
Cecil Bancorp, Inc. $ 322,664 $ 417,331 $ 565,666
Columbian 69,715 87,212 162,862
---------- ---------- ----------
Combined $ 392,379 $ 504,543 $ 728,528
========== ========== ==========
</TABLE>
There were no other changes in stockholders' equity prior to
consummation of the merger in 1998 that were material to the financial position
of the Corporation.
52
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
20. CECIL BANCORP, INC. - HOLDING COMPANY ONLY FINANCIAL INFORMATION
The following condensed statement of financial position as of December 31, 1998
and 1997 and condensed statements of income and cash flows for the years then
ended for Cecil Bancorp, Inc. should be read in conjunction with the
consolidated financial statements and notes thereto. 1997 amounts have been
restated due to the pooling of interest transaction completed September 30,
1998.
Statements of Financial Condition
<TABLE>
<CAPTION>
Assets
December 31,
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
Cash $ 246,293 $ 516,087
Investment in Subsidiary Banks 10,016,055 9,167,080
Deferred taxes 12,114 11,956
Prepaid expenses 149,579 74,442
----------- ----------
$10,424,041 $9,769,565
=========== ==========
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C>
Other Liabilities $ 91,181 $ 28,136
Employee stock ownership debt 231,048 269,556
----------- ----------
322,229 297,692
----------- ----------
Stockholders' Equity
Common stock, $.01 par value
Authorized: 4,000,000 shares
Issued and outstanding: 606,494 shares
in 1998 and 592,869 shares in 1997 6,065 5,929
Additional paid in capital 4,863,511 4,561,520
Employee stock ownership debt (231,048) (269,556)
Deferred Compensation Management
Recognition Plan (80,676) (118,361)
Retained earnings 5,543,960 5,292,341
----------- ----------
Total stockholders' equity 10,101,812 9,471,873
----------- ----------
Total liabilities and stockholders' equity $10,424,041 $9,769,565
=========== ==========
</TABLE>
53
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
20. CECIL BANCORP, INC. - HOLDING COMPANY ONLY FINANCIAL INFORMATION
(Continued)
<TABLE>
<CAPTION>
Statements of Income
Year ended December 31,
-----------------------
1998 1997
---------- ---------
<S> <C> <C>
Equity in earnings of Subsidiary Banks $ 861,022 $ 767,080
Operating expenses
Compensation and benefits 190,768 43,979
Merger expenses 210,003
Other 31,003 22,488
--------- ----------
431,774 66,467
--------- ----------
Net income before income taxes 429,248 700,613
Income taxes
Current (75,137) (24,078)
Deferred (158) (3,837)
--------- ----------
(75,295) (27,915)
--------- ----------
Net income $ 504,543 $ 728,528
========= ==========
<CAPTION>
Statements of Cash Flows
Year ended December 31,
-----------------------
1998 1997
---------- ---------
<S> <C> <C>
Cash flows from operating activities
Cash paid to suppliers and employees $(179,611) $ (21,402)
Dividends received from Subsidiary Banks 500,000
--------- ---------
Net cash provided by operating activities (179,611) 478,598
Cash flows from financing activities
Proceeds from sale of common stock 58,807 14,626
Unearned ESOP compensation decrease 38,508 38,508
Dividends paid (186,081) (276,641)
Cash in lieu of fractional share (1,417)
--------- ----------
Net cash used by financing activities (90,183) (223,507)
--------- ----------
Net increase (decrease) in cash (269,794) 255,091
Cash
Beginning of year 516,087 260,996
--------- ---------
End of year $ 246,293 $ 516,087
========= =========
</TABLE>
54
<PAGE>
MARKET AND DIVIDEND INFORMATION
Trading in the Common Stock
The Company's common stock is listed over-the-counter through the
National Daily Quotation System "Pink Sheets" published by the National
Quotation Bureau, Inc. There are currently 607,731 shares of the common stock
outstanding and approximately 687 holders of record of the common stock (not
including shares held in "street name") as of March 15, 1999.
The following table sets forth certain information as to the range of
the high and low bid prices for the Company's common stock for the calendar
quarters indicated and since the common stock's issuance on November 10, 1994.
<TABLE>
<CAPTION>
High Bid (1) Low Bid (1) Dividends Paid
----------- ---------- --------------
<S> <C> <C> <C>
Fiscal 1994:
Fourth Quarter $10.25 $10.00 none
Fiscal 1995:
First Quarter 10.75 10.00 $.08
Second Quarter 11.00 11.00 .16 (2)
Third Quarter 11.50 11.00 .24 (3)
Fourth Quarter 14.50 14.25 .08
Fiscal 1996:
First Quarter 15.00 14.50 .10 (4)
Second Quarter 15.00 15.00 .08
Third Quarter 15.75 15.00 .08
Fourth Quarter 15.75 15.00 .30 (5)
Fiscal 1997:
First Quarter 16.00 16.00 .10
Second Quarter 18.75 17.00 .10
Third Quarter 17.75 17.50 .10
Fourth Quarter 20.00 18.25 .33 (6)
Fiscal 1998:
First Quarter 22.25 22.00 .10
Second Quarter 20.00 19.50 .10
Third Quarter 24.25 24.00 .10
Fourth Quarter 25.50 23.75 .10
</TABLE>
- -------------------------
(1) Quotations reflect inter-dealer price, without retail mark-up, mark-down or
commissions, and may not represent actual transactions.
(2) Includes special dividend of $.08 per share.
(3) Includes special dividend of $.16 per share.
(4) Includes special dividend of $.02 per share.
(5) Includes special dividend of $.20 per share.
(6) Includes special dividend of $.23 per share.
55
<PAGE>
Dividend Restrictions
Under regulations of the OTS, the Banks are not permitted to pay
dividends on its capital stock if its regulatory capital would thereby be
reduced below regulatory capital requirements, or the amount then required for
the liquidation account established for the benefit of certain depositors of the
Banks at the time of its conversion to stock form. In addition, savings
institution subsidiaries of savings and loan holding companies such as the
Company are required to give the OTS 30 days' prior notice of any proposed
declaration of dividends to the holding company.
Federal regulations impose additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by the Banks. Under these regulations, a savings institution such as
the Banks that, immediately prior to, and on a pro forma basis after giving
effect to, a proposed capital distribution, has total capital (as defined by OTS
regulation) that is equal to or greater than the amount of its fully phased-in
capital requirements (a "Tier 1 Association") is generally permitted without OTS
approval, after notice, to make capital distributions during a calendar year in
the amount of (i) up to 100% of its net earnings to date during the calendar
year plus an amount that would reduce by one-half the amount by which its
capital-to-assets ratio exceeded its fully phased-in capital requirement to
assets ratio at the beginning of the calendar year, or (ii) 75% of its net
income for the previous four quarters. In addition to the foregoing, earnings
of the Banks appropriated to bad debt reserves and deducted for federal income
tax purposes are not available for payment of cash dividends or other
distributions to the Company without payment of taxes at the then current tax
rate by the Banks on the amount of earnings removed from the reserves for such
distributions.
Although the Company is not subject to these restrictions, the
Company's primary source of funds for payment of dividends, in addition to the
50% of the net proceeds retained from the conversion to stock form, are
dividends from the Banks. The Company intends to make full use of this
favorable tax treatment afforded to the Banks and Company and does not
contemplate use of any earnings of the Banks in a manner which would limit the
Banks' bad debt deduction or create federal tax liabilities.
56
<PAGE>
BOARD OF DIRECTORS
CECIL BANCORP, INC.
---------------------------
<TABLE>
<S> <C> <C> <C>
Benard L. Siegel Michael J. Doris P. Scott William F.
Chairman of the Board Scibinico Director Burkley
Treasurer Vice
and Director President
and Director
Mary B. Halsey Thomas L. Howard B. Tome Howard J.
President, C.E.O. and Foard Director Neff
Director Secretary Director
and Director
Donald F. Robert L. Johnson
Angert Director
Director
<CAPTION>
COLUMBIAN BANK,
CECIL FEDERAL SAVINGS BANK A FEDERAL SAVINGS BANK
---------------------------- ------------------------
<S> <C> <C> <C>
Bernard L. Siegel Michael J. Donald F. Angert Kathleen
Chairman of the Board Scibinico Chairman of the Board Guzzo
Treasurer President and Director Vice
and Director President
and
Director
Mary B. Halsey William F. Robert L. Johnson Laurie
President, C.E.O. and Burkley Secretary-Treasurer Thoner
Director Vice and Director
President and Director
Director
Thomas L. Foard Howard J. Wilbur B. Pearce William K.
Secretary and Director Neff Director Brendle
Director Director
Doris P. Scott Howard B. Arthur L. Gilbert
Director Tome Director
Director
Donald F. Angert
Director
<CAPTION>
OFFICE LOCATIONS
<S> <C> <C>
Main Office of Cecil Federal: Branch Office of Cecil Federal: Office of Columbian:
127 North Street 108 North East Plaza 303-307 St. John Street
Elkton, Maryland 21921-5547 North East, Maryland 21901 Havre de Grace, Maryland 21078
<CAPTION>
GENERAL INFORMATION
<S> <C> <C>
Independent Public Accountants Annual Meeting Annual Report on Form 10-KSB
Simon, Master & Sidlow, P.A. The 1999 Annual Meeting of A copy of the Company's Annual
Certified Public Accountants Stockholders will be held at Report on Form 10-KSB for the
Bentleys, Elkton, Maryland fiscal year ended December 31, 1998
General Counsel On Wednesday, April 21, as filed with the Securities and
William B. Calvert, Esq. 1999 at 9:00 a.m. Exchange Commission will be
101 Courthouse Plaza furnished without charge to
Elkton, Maryland 21921 stockholders as of the record date
for the 1999 Annual Meeting upon
Special Counsel written request to Mary B. Halsey,
Housley Kantarian & Bronstein, P.C. 127 North Street, P.O. Box 568,
1220 19th Street, N.W. Suite 700 Elkton, MD 21922-0568
Washington, D.C. 20036
</TABLE>
57
<PAGE>
EXHIBIT 21
Subsidiaries
State or Other
Jurisdiction of
Parent Incorporation
- ------ ---------------
Cecil Bancorp, Inc. Maryland
Subsidiaries (1)
- ----------------
Cecil Federal Savings Bank United States
Columbian Bank, A Federal Savings Bank United States
Subsidiaries of Cecil Federal Savings Bank
- ------------------------------------------
Cecil Service Corporation Maryland
Cecil Financial Services Corporation Maryland
- -------------------------
(1) The assets, liabilities and operations of the subsidiaries are included in
the consolidated financial statements contained in Item 8 hereof.
<PAGE>
EXHIBIT 23.1
[LETTERHEAD OF SIMON MASTER & SIDLOW, P.A.]
BOARD OF DIRECTORS AND STOCKHOLDERS
CECIL BANCORP, INC.
ELKTON, MARYLAND
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Annual Report (Form
10-KSB) of Cecil Bancorp, Inc. and Subsidiaries of our report dated January 27,
1999, included in the 1998 Annual Report to Stockholders of Cecil Bancorp, Inc.
We also consent to the incorporation by reference in Registration
Statements (Form 10-KSB Number 0-24926) of Cecil Bancorp, Inc. and Subsidiaries
of our report dated January 27, 1999, with respect to the consolidated financial
statements incorporated herein by reference.
/s/ Simon Master & Sidlow, P.A.
Wilmington, Delaware
January 27, 1999
<PAGE>
Exhibit 23.2
[LETTERHEAD OF ANDERSON ASSOCIATES, LLP]
Certified Public Accountants
7621 Fitch Lane
Baltimore, Maryland 21236
410-882-8050
MARCH 25, 1999
Board of Directors and Stockholders
Cecil Bancorp, Inc.
Elkton, Maryland
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Form 10-KSB Annual
Report for the year ended December 31, 1998, of Cecil Bancorp, Inc. and
Subsidiaries of our report dated March 11, 1998, relating to Columbian Bank, a
Federal Savings Bank, and included in the 1998 Annual Report to Stockholders of
Cecil Bancorp, Inc.
We also consent to the incorporation by reference in Registration
Statements (Number 0-24926) of Cecil Bancorp, Inc. and Subsidiaries of our
report dated March 11, 1998, relating to Columbian Bank, a Federal Savings Bank
with respect to the consolidated financial statements incorporated therin by
reference.
/s/ Anderson Associates, LLP
- ----------------------------
Baltimore, Maryland
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,725,430
<INT-BEARING-DEPOSITS> 6,211,760
<FED-FUNDS-SOLD> 1,125,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,955,103
<INVESTMENTS-CARRYING> 6,275,725
<INVESTMENTS-MARKET> 6,276,893
<LOANS> 74,545,912
<ALLOWANCE> 402,309
<TOTAL-ASSETS> 101,224,415
<DEPOSITS> 87,674,802
<SHORT-TERM> 1,750,000
<LIABILITIES-OTHER> 629,204
<LONG-TERM> 0
0
0
<COMMON> 6,065
<OTHER-SE> 10,111,671
<TOTAL-LIABILITIES-AND-EQUITY> 101,224,415
<INTEREST-LOAN> 6,549,552
<INTEREST-INVEST> 716,814
<INTEREST-OTHER> 334,969
<INTEREST-TOTAL> 7,601,335
<INTEREST-DEPOSIT> 4,002,772
<INTEREST-EXPENSE> 4,110,725
<INTEREST-INCOME-NET> 3,490,610
<LOAN-LOSSES> 90,000
<SECURITIES-GAINS> 520,765
<EXPENSE-OTHER> 2,923,572
<INCOME-PRETAX> 997,803
<INCOME-PRE-EXTRAORDINARY> 997,803
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 504,543
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.87
<YIELD-ACTUAL> 3.77
<LOANS-NON> 359,000
<LOANS-PAST> 204,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 353,541
<CHARGE-OFFS> 76,324
<RECOVERIES> 35,092
<ALLOWANCE-CLOSE> 402,309
<ALLOWANCE-DOMESTIC> 402,309
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
