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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Amendment No. 1)
[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.
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(Name of Small Business Issuer in its Charter)
Maryland 52-1883546
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
127 North Street, Elkton, Maryland 21921-5547
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(410) 398-1650
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Securities registered pursuant to Section 12(b)
of the Exchange Act:
Not applicable
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Securities registered pursuant to Section 12(g)
of the Exchange Act:
Common Stock, par value $.01 per share
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(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
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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
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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)
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PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
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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.
SUBSEQUENT FINANCIAL AND ACCOUNTING DEVELOPMENTS
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Subsequent to the issuance of the consolidated financial
statements for the year ended December 31, 1998, and the filing
of its Form 10-KSB for the year ended December 31, 1998, an
error in the calculation of certain compensation and benefits
expenses related to stock options was discovered. The Company
and its subsidiaries, in consultation with their independent
auditors, collectively concluded that the Company would restate
its consolidated financial statements and related disclosures
for the year ended December 31, 1998 and for the first three
quarters of fiscal 1999, and amend its Form 10-KSB for the year
ended December 31, 1998, and first, second, and third quarter
1999 Forms 10-QSB to reflect the correction of the error. The
purpose of the restatements and amended filings was to reflect
the changes necessary to correct the error.
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The principal effects of the changes on the accompanying
financial statements are presented in "Note 21 -- Restatement"
of the Notes to the Consolidated Financial Statements, which is
included in "Part II -- Item 7 -- Financial Statements" and is
incorporated herein by reference for more information.
YEAR 2000 ISSUES
As the Year 2000 approaches, there is growing concern that
many computers and computer systems could malfunction. Banks,
as with many other industries, could be faced with errors in
their account processing, payment systems, ATM systems, security
systems, or virtually any system controlled by a computer.
The cause is rooted in the programming of the date field
within computer systems and software. For many years, computer
systems were designed to record only the last two digits of
the year in the date field in order to save costly data storage
space. This programming concept works well while we are still
in the 1900's. This concept does not work well for the Year
2000, as that year could be read by a computer to mean 1900.
Bank regulators and computer system experts are emphasizing
systems and software products be implemented and tested for Year
2000 readiness. This task is a monumental undertaking for all
parties involved from vendor service providers, computer systems
manufacturers, software providers, and finally the 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
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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
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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
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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.
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Validation Phase: The Banks will validate any decision making by
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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
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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
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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
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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.
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%
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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 $2,529,863 or 3.5% to $74,545,912 at December 31,
1998 from $72,016,049 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 $7,006,939, or 8.3% to
$91,150,213 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 $12,729, or
1.9% to $672,738 at December 31, 1998 from $685,467 at December
31, 1997.
The Company's stockholders' equity increased by $561,867,
or 5.9% to $10,074,202 at December 31, 1998 from $9,512,335 at
December 31, 1997. The increase was primarily due to an
increase in retained earnings of $336,126, or 6.4%. For the
year ended December 31, 1998, the Company paid its regular
annualized dividend of $.40 per share.
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RESULTS OF OPERATIONS
Economic and Market Conditions. The Banks' results of
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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 $139,478, or 19.2% to
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$589,050 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 0.60% and 6.00% 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
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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
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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, 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
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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,
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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
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$330,273, or 13.4% to $2,795,531 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
$69,856, or 5.3% to $1,390,792 for the year ended December 31,
1998 from $1,320,936 for the year ended December 31, 1997. The
increase can be attributable to 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
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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
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December 31, 1998 and December 31, 1997 was $536,794 and
$524,366, respectively, which equates to effective rates of
47.7% and 41.8%, respectively. The increase was a result of
acquisition expenses of $302,501 that are not tax deductible.
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,
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1998 1997
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AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivables . . . . . . . . . . . $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 . . . . . 5,198 335 6.45 4,627 278 6.01
------- ------ ------- ------
Total interest-earning assets. . . . 92,533 7,601 8.21 88,621 7,339
Non-interest-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
====== ======
Net interest rate spread . . . . . . . . . 3.52% 3.49%
==== ====
Net yield on interest-earning assets . . . 3.77% 3.78%
==== ====
Average interest-earning assets
to average interest-bearing liabilities. 105.67% 106.37%
====== ======
<FN>
__________
(1) Includes loans held-for-sale.
</FN>
</TABLE>
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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
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Increase (Decrease)
Due to
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Rate/
Volume Rate Volume Total
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(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>
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.
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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.
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.
9
<PAGE>
<PAGE>
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, 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.
10
<PAGE>
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
-----------------
PAGE
FINANCIAL STATEMENTS
Independent Auditors' Report 12
Consolidated Statements of Financial Condition 13
Consolidated Statements of Income and Comprehensive
Income 15
Consolidated Statements of Stockholders' Equity 17
Consolidated Statements of Cash Flows 18
Notes to Consolidated Financial Statements 20
11
<PAGE>
<PAGE>
[SIMON MASTER & SIDLOW LETTERHEAD]
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.
As discussed in Note 21 to the financial statements, an error
resulting in an overstatement of previously reported compensation and
benefits expense as of December 31, 1998 was discovered subsequent to
the issuance of the 1998 consolidated financial statements.
Accordingly, the 1998 financial statements have been restated to
correct the error.
/s/ Simon, Master & Sidlow, P.A.
February 23, 2000
12
<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
-------- --------
(As Restated)
<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>
The accompanying notes are an integral part of the
consolidated financial statements.
13
<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
-------- --------
(As Restated)
<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 672,738 685,467
Advances from Federal Home Loan Bank
of Atlanta (Note 10) 1,750,000 1,750,000
------------ -----------
TOTAL LIABILITIES 91,150,213 84,143,274
------------ -----------
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, $.01 par value
Authorized: 4,000,000 shares
Issued and outstanding: 606,471 shares
in 1998 and 592,869 shares in 1997 6,065 5,929
Additional paid in capital 4,735,470 4,561,520
Employee stock ownership debt (231,048) (269,556)
Deferred compensation - Management
Recognition Plan (80,676) (118,361)
Retained earnings, substantially
restricted 5,628,467 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 10,074,202 9,512,335
------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $101,224,415 $93,655,609
============ ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
14
<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
----------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997
-------- --------
(As Restated)
<S> <C> <C>
INTEREST INCOME
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 1,390,792 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 2,795,531 2,465,258
---------- ----------
Income before income taxes 1,125,844 1,252,894
---------- ----------
INCOME TAXES (Note 11)
Current 595,196 531,318
Deferred (58,402) (6,952)
---------- ----------
Total income taxes 536,794 524,366
---------- ----------
NET INCOME $ 589,050 $ 728,528
========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
15
<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
----------------------------------------------------------
(Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997
-------- --------
(As Restated)
<S> <C> <C>
NET INCOME $ 589,050 $ 728,528
OTHER COMPREHENSIVE INCOME
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 $ 564,512 $ 748,269
========= ==========
Earnings per common share and
common share equivalent $ 1.03 $ 1.30
========= ==========
Earnings per common share -
assuming full dilution $ 1.02 $ 1.28
========= ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
16
<PAGE>
<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 $ 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 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 589,050 589,050
Deferred compensation
amortization 37,685 37,685
Stock options exercised 114 73,008 73,122
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 (As
Restated) $ 6,065 $4,735,470($ 231,048)($ 80,676) $5,628,467 $ 15,924 $10,074,202
========== ========== ========== =========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
17
<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997
-------- --------
(As Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and fees received on loans
and investments $ 8,072,285 $ 7,606,523
Cash paid to suppliers and employees ( 2,520,333) ( 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 ( 724,935) 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 ( 32,726,296) ( 21,186,239)
Principal collected on loans 30,523,178 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 192,739 188,378
Purchase of real estate owned ( 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 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 58,807 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 6,941,724 1,434,567
----------- -----------
18
<PAGE>
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>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997
-------- --------
(As Restated)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES
Net Income $ 589,050 $ 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 in other liabilities 2,912 189,198
(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)
---------- ----------
( 1,313,985) 423,167
---------- ----------
($ 724,935) $1,151,695
========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
19
<PAGE>
<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.
20
<PAGE>
<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.
21
<PAGE>
<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.
22
<PAGE>
<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.
<PAGE>
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.
23
<PAGE>
<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.
24
<PAGE>
<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.
25
<PAGE>
<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)
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 benefitplans. 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, "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 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
========== ====== ====== ==========
December 31, 1997
---------------------------------------------
U.S. Treasury Securities
and obligations of U.S.
government and Federal
Agencies $5,842,776 $1,291 $4,614 $5,839,453
========== ====== ====== ==========
</TABLE>
26
<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
========== ======= ====== ==========
December 31, 1997
----------------------------------------------
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.
27
<PAGE>
<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
========== ======= ======= ==========
December 31, 1997
----------------------------------------------
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
--------- ---------- ---------- --------
December 31, 1998
----------------------------------------------
<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.
28
<PAGE>
<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.
29
<PAGE>
<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:
<TABLE>
<CAPTION>
Fixed Rate Variable Rate
(6.00%-8.50%) (7.00%-8 1/8%) Total
------------- -------------- -----
<S> <C> <C> <C>
First mortgages $2,734,500 $ 528,700 $3,263,200
========== ========== ==========
</TABLE>
30
<PAGE>
<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:
Year ending December 31, 1999 $ 40,950
2000 30,450
2001 21,050
2002 19,050
2003 17,850
Thereafter 23,800
----------
$ 153,150
==========
31
<PAGE>
<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>
32
<PAGE>
<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:
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
===========
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:
<TABLE>
<CAPTION>
Maturity Interest
Date Rate December 31, 1998
-------- --------- -----------------
<S> <C> <C>
12/20/99 5.93% $1,750,000
</TABLE>
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.
33
<PAGE>
<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% $ 481,579 $ 428,611
State 113,617 102,707
Deferred (benefit) expense (58,402) (6,952)
---------- ----------
Total $ 536,794 $ 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>
34
<PAGE>
<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.
35
<PAGE>
<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.
36
<PAGE>
<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
------ ------ ------- -------
<S> <C> <C> <C> <C>
As of December 31, 1998 (in thousands) (in thousands)
Total risk-based capital
(to risk-weighted assets) $8,144 18.37% > $4,433 > 10.0%
- -
Tier I capital
(to risk-weighted assets) 7,921 17.87% > 2,660 > 6.0%
- -
Tier I capital
(to adjusted total assets) 7,921 11.09% > 3,571 > 5.0%
- -
Tangible capital
(to adjusted total assets) 7,921 11.09% > 1,071 > 1.5%
- -
As of December 31, 1997
Total risk-based capital
(to risk-weighted assets) $7,326 18.08% > $4,052 > 10.0%
- -
Tier I capital
(to risk-weighted assets) 7,150 17.65% > 2,431 > 6.0%
- -
Tier I capital
(to adjusted total assets) 7,150 11.23% > 3,183 > 5.0%
- -
Tangible capital
(to adjusted total assets) 7,160 11.25% > 955 > 1.5%
- -
COLUMBIAN
---------
To Be Well Capitalized
under Prompt
Corrective Action
Actual Provisions
--------------- --------------------
Amount Ratio Amount Ratio
------ ------ ------- -------
As of December 31, 1998 (in thousands) (in thousands)
Total risk-based capital
(to risk-weighted assets) $2,185 15.05% > $1,452 > 10.0%
- -
Tier I capital
(to risk-weighted assets) 2,082 14.34% > 872 > 6.0%
- -
Tier I capital
(to adjusted total assets) 2,082 6.98% > 1,491 > 5.0%
- -
Tangible capital
(to adjusted total assets) 2,082 6.98% > 447 > 1.5%
- -
</TABLE>
37
<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
13. REGULATORY CAPITAL MATTERS (Continued)
COLUMBIAN (Continued)
---------
<TABLE>
<CAPTION>
CECIL
To Be Well Capitalized
under Prompt
Corrective Action
Actual Provisions
--------------- --------------------
Amount Ratio Amount Ratio
------ ------ ------- -------
<S> <C> <C> <C> <C>
As of December 31, 1997 (in thousands) (in thousands)
Total risk-based capital
(to risk-weighted assets) $2,094 15.41% > $1,359 > 10.0%
- -
Tier I capital
(to risk-weighted assets) 1,991 14.65% > 815 > 6.0%
- -
Tier I capital
(to adjusted total assets) 1,991 6.64% > 1,499 > 5.0%
- -
Tangible capital
(to adjusted total assets) 1,991 6.64% > 450 > 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.
38
<PAGE>
<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:
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
========
39
<PAGE>
<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.
The following table summarizes information about the
management recognition plan at December 31:
<TABLE>
<CAPTION>
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.
40
<PAGE>
<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 43,092 $ 9.86 43,707 $ 9.86
Granted 1,787 6.87
Exercised (10,045) (5.85) (2,402) (7.63)
------- ------ ------ ------
Outstanding at
end of year 33,047 $11.07 43,092 $ 9.86
======= ====== ====== ======
Options exercisable
at year end 20,204 23,758
======= ======
</TABLE>
41
<PAGE>
<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 $589,050 $1.03 $1.02
Pro forma 577,783 1.01 1.00
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.
42
<PAGE>
<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.
43
<PAGE>
<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
---------- ----------
$6,660,907 $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).
44
<PAGE>
<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
570,395 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 578,938 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:
45
<PAGE>
<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 $589,050 570,395 $1.03
Effect of dilutive securities
Stock options 8,543 (.01)
-------- ------- -----
Diluted EPS
Net income $589,050 578,938 $1.02
======== ======= =====
<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.
46
<PAGE>
<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 debt with
similar terms and remaining maturity.
47
<PAGE>
<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>
48
<PAGE>
<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 December December
30, 1998 31, 1998 31, 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 $ 501,838 $ 565,666
Columbian 69,715 87,212 162,862
---------- ---------- ----------
Combined $ 392,379 $ 589,050 $ 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.
49
<PAGE>
<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
Assets
<TABLE>
<CAPTION>
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
=========== ==========
Liabilities and Stockholders' Equity
Other Liabilities $ 134,715 $ 28,136
Employee stock ownership debt 231,048 269,556
----------- ----------
365,763 297,692
----------- ----------
Stockholders' Equity
Common stock, $.01 par value
Authorized: 4,000,000 shares
Issued and outstanding: 606,471 shares
in 1998 and 592,869 shares in 1997 6,065 5,929
Additional paid in capital 4,735,470 4,561,520
Employee stock ownership debt ( 231,048) ( 269,556)
Deferred Compensation Management
Recognition Plan ( 80,676) ( 118,361)
Retained earnings 5,628,467 5,292,341
----------- ----------
Total stockholders' equity 10,058,278 9,471,873
----------- ----------
Total liabilities and stockholders'
equity $10,424,041 $9,769,565
=========== ==========
</TABLE>
50
<PAGE>
<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 62,727 43,979
Merger expenses 210,003
Other 31,003 22,488
-------- --------
303,733 66,467
-------- --------
Net income before income taxes 557,289 700,613
Income taxes
Current (31,603) (24,078)
Deferred (158) (3,837)
-------- --------
(31,761) (27,915)
-------- --------
Net income $589,050 $728,528
======== ========
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 (used) 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>
51
<PAGE>
<PAGE>
CECIL BANCORP, INC. AND SUBSIDIARIES
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------
(Continued)
21. RESTATEMENT
Subsequent to the issuance of the Corporation's 1998
consolidated financial statements and the filing of its
1998 Form 10-KSB with the Securities and Exchange
Commission (the "SEC"), an error in the calculation of
certain compensation and benefits expenses related to stock
options was discovered. The Corporation concluded that it
would restate its 1998 and first, second and third
quarter 1999 financial statements and related disclosures
to reflect the correction of the error. The restatement
resulted in an increase to previously reported net income
for the period ended December 31, 1998 of $84,507, net of
income tax expense of $43,534. Previously reported
earnings per share increased by $.15 a share for the year
ended December 31, 1998. The 1998 consolidated statements
of financial condition and related consolidated statements
of income and comprehensive income, stockholders' equity,
and cash flows have been restated to reflect this
adjustment, as detailed below:
<TABLE>
<CAPTION>
As Previously
As Restated Adjustment Reported
----------- ---------- -------------
<S> <C> <C> <C>
Other liabilities $ 672,738 $ 43,534 $ 629,204
Additional paid in capital 4,735,370 ( 128,041) 4,863,511
Retained earnings 5,628,467 84,507 5,543,960
Noninterest expense
Compensation and benefits 1,390,792 ( 128,041) 1,518,833
Income taxes
Current 595,196 43,534 551,662
Net income 589,050 84,507 504,543
Total comprehensive income 564,512 84,507 480,005
Earnings per common share and
common share equivalent 1.03 .15 .88
Earnings per common share -
assuming full dilution 1.02 .15 .87
</TABLE>
52
<PAGE>
<PAGE>
PART III
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 included in "Part II -- Item 7. Financial
Statements" are filed herewith.
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.
(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**
53
<PAGE>
<PAGE>
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).
*****Previously filed in the original Form 10-KSB for the year
ended December 31, 1998.
(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.
54
<PAGE>
<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 29, 2000 By:
-----------------------------
Mary B. Halsey
President and Chief Executive Officer
(Duly Authorized Representative)
<PAGE>
<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).
***** Previously filed in the original Form 10-KSB for the year
ended December 31, 1998.
EXHIBIT 23.1
Board of Directors and Stockholders
Cecil Bancorp, Inc.
Elkton, Maryland
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this
Amendment No. 1 to Annual Report on Form 10-KSB of Cecil
Bancorp, Inc. and Subsidiaries of our report dated February 23,
2000, 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
February 23, 2000, with respect to the consolidated financial
statements incorporated herein by reference.
Simon Master & Sidlow, P.A.
Wilmington, Delaware
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<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> 6,948,025
<INVESTMENTS-MARKET> 6,949,193
<LOANS> 77,463,372
<ALLOWANCE> 402,309
<TOTAL-ASSETS> 101,224,415
<DEPOSITS> 87,674,802
<SHORT-TERM> 1,750,000
<LIABILITIES-OTHER> 1,725,411
<LONG-TERM> 0
<COMMON> 6,065
0
0
<OTHER-SE> 10,068,137
<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> 0
<EXPENSE-OTHER> 2,795,531
<INCOME-PRETAX> 1,125,844
<INCOME-PRE-EXTRAORDINARY> 1,125,844
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 589,050
<EPS-BASIC> 1.03
<EPS-DILUTED> 1.02
<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>
