f10k_123111.htm

PART I
		Page
Item 1.	Business	3
Item 1A.	Risk Factors	18
Item 1B.	Unresolved Staff Comments	18
Item 2.	Properties	19
Item 3.	Legal Proceedings	19
Item 4.	Mine Safety Disclosures	19

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
Item 6.	Selected Financial Data	21
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 8.	Financial Statements and Supplementary Data	39
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	81
Item 9A.	Controls and Procedures	81
Item 9B.	Other Information	81

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	82
Item 11.	Executive Compensation	82
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	82
Item 13.	Certain Relationships and Related Transactions, and Director Independence	83
Item 14.	Principal Accounting Fees and Services	83

PART IV

Item 15.	Exhibits, Financial Statement Schedules	83

Signatures		86

Cecil Bancorp, Inc. is the holding company for Cecil Bank (the “Bank”). The Company is a bank holding company subject to regulation by the Board of Governors of the Federal Reserve System (“Federal Reserve”). The Bank is a Maryland chartered commercial bank, is a member of the Federal Reserve System and the Federal Home Loan Bank (“FHLB”) of Atlanta, and is an Equal Housing Lender. Its deposits are insured to applicable limits by the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”). The Bank commenced operations in 1959 as a Federal savings and loan association. On October 1, 2002, the Bank converted from a stock federal savings bank to a Maryland commercial bank. Its deposits have been federally insured up to applicable limits, and it has been a member of the FHLB system since 1959.

The Bank’s business strategy is to operate as an independent community-oriented commercial bank dedicated to real estate, commercial, and consumer lending, funded primarily by retail deposits. The Bank has sought to implement this strategy by: (1) continuing to emphasize residential mortgage lending through the origination of adjustable-rate and fixed-rate mortgage loans; (2) investing in adjustable-rate and short-term liquid investments; (3) controlling interest rate risk exposure; (4) maintaining asset quality; (5) containing operating expenses; and (6) maintaining “well capitalized” status.

On December 23, 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Company sold 11,560 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”), and a warrant to purchase 523,076 shares (after adjusting for the 2-for-1 stock split approved by the Board of Directors in May 2011) of the Company’s common stock to the United States Department of the Treasury for an aggregate purchase price of $11.560 million in cash, with $37,000 in offering costs, and net proceeds of $11.523 million. The Series A Preferred Stock and the warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

The Series A Preferred Stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Department of Treasury may permit the Company to redeem the Series A Preferred Stock in whole or in part at any time after consultation with the appropriate federal banking agency. Any partial redemption must involve at least 25% of the Series A Preferred Stock issued. Upon redemption of the Series A Preferred Stock, the Company will have the right to repurchase the Warrant at its fair market value.

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

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

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

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act is intended to effect a fundamental restructuring of federal banking regulation. Among other things, the Dodd-Frank Act creates a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. The Dodd-Frank Act additionally creates a new independent federal regulator to administer federal consumer protection laws. The Dodd-Frank Act is expected to have a significant impact on our business operations as its provisions take effect. Among the provisions that may affect us are the following:

Holding Company Capital Requirements. The Dodd-Frank Act requires the Federal Reserve to apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets. The Dodd-Frank Act additionally requires capital requirements to be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness.

Deposit Insurance. The Dodd-Frank Act permanently increases the maximum deposit insurance amount for banks, savings institutions and credit unions to $250,000 per depositor and extends unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2012. The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. Effective one year from the date of enactment, the Dodd-Frank Act eliminates the federal statutory prohibition against the payment of interest on business checking accounts.

Corporate Governance. The Dodd-Frank Act will require publicly traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders. The new legislation also authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded or not. The Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

Prohibition Against Charter Conversions of Troubled Institutions. Effective one year after enactment, the Dodd-Frank Act prohibits a depository institution from converting from a state to federal charter or vice versa while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days. The notice must include a plan to address the significant supervisory matter. The converting institution must also file a copy of the conversion application with its current federal regulator which must notify the resulting federal regulator of any ongoing

Limits on Derivatives. Effective 18 months after enactment, the Dodd-Frank Act prohibits state-chartered banks from engaging in derivatives transactions unless the loans to one borrower limits of the state in which the bank is chartered takes into consideration credit exposure to derivatives transactions. For this purpose, derivative transaction includes any contract, agreement, swap, warrant, note or option that is based in whole or in part on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities securities, currencies, interest or other rates, indices or other assets.

Transactions with Affiliates and Insiders. Effective one year from the date of enactment, the Dodd-Frank Act expands the definition of affiliate for purposes of quantitative and qualitative limitations of Section 23A of the Federal Reserve Act to include mutual funds advised by a depository institution or its affiliates. The Dodd-Frank Act will apply Section 23A and Section 22(h) of the Federal Reserve Act (governing transactions with insiders) to derivative transactions, repurchase agreements and securities lending and borrowing transaction that create credit exposure to an affiliate or an insider. Any such transactions with affiliates must be fully secured. The current exemption from Section 23A for transactions with financial subsidiaries will be eliminated. The Dodd-Frank Act will additionally prohibit an insured depository institution from purchasing an asset from or selling an asset to an insider unless the transaction is on market terms and, if representing more than 10% of capital, is approved in advance by the disinterested directors.

Debit Card Interchange Fees. Effective July 21, 2011, the Dodd-Frank Act requires that the amount of any interchange fee charged by a debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer. Within nine months of enactment, the Federal Reserve Board is required to establish standards for reasonable and proportional fees which may take into account the costs of preventing fraud. While the restrictions on interchange fees do not apply to banks that, together with their affiliates, have assets of less than $10 billion, the rule could affect the competitiveness of debit cards issued by smaller banks.

Consumer Financial Protection Bureau. The Dodd-Frank Act creates a new, independent federal agency called the Consumer Financial Protection Bureau (“CFPB”), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB will have examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB will have authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, the Dodd-Frank Act will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

The Bank Holding Company Act also limits the investments and activities of bank holding companies. In general, a bank holding company is prohibited from acquiring direct or indirect ownership or control of more than 5% of the voting shares of a company that is not a bank or a bank holding company or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, providing services for its subsidiaries, non-bank activities that are closely related to banking, and other financially related activities. The activities of the Company are subject to these legal and regulatory limitations under the Bank Holding Company Act and Federal Reserve regulations.

Under the Bank Holding Company Act of 1956, a bank holding company must obtain the prior approval of the Federal Reserve before (1) acquiring direct or indirect ownership or control of any class of voting securities of any bank or bank holding company if, after the acquisition, the bank holding company would directly or indirectly own or control more than 5% of the class; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company.

Under the Bank Holding Company Act, any company must obtain approval of the Federal Reserve prior to acquiring control of the Company or the Bank. For purposes of the Bank Holding Company Act, “control” is defined as ownership of 25% or more of any class of voting securities of the Company or the Bank, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies of the Company or the Bank.

The Bank Holding Company Act permits the Federal Reserve to approve an application of bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than that holding company’s home state. The Federal Reserve may not approve the acquisition of a bank that has not been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the host state. The Bank Holding Company Act also prohibits the Federal Reserve from approving an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch. The Bank Holding Company Act does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank or bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. The State of Maryland allows out-of-state financial institutions to establish branches in Maryland, subject to certain limitations.

The Change in Bank Control Act and the related regulations of the Federal Reserve require any person or persons acting in concert (except for companies required to make application under the Holding Company Act), to file a written notice with the Federal Reserve before the person or persons acquire control of the Company or the Bank. The Change in Bank Control Act defines “control” as the direct or indirect power to vote 25% or more of any class of voting securities or to direct the management or policies of a bank holding company or an insured bank.

The Federal Reserve has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality, and overall financial condition. In a recent Supervisory Letter, the Federal Reserve staff has stated that, as a general matter, bank holding companies should eliminate cash dividends if net income available to shareholders for the past four quarters, net of dividends previously paid, is not sufficient to fully fund the dividend.

The Bank is a member of the Federal Reserve System and is subject to supervision by the Federal Reserve and the State of Maryland. Deposits of the Bank are insured by the FDIC to the legal maximum for each insured depositor. Deposits, reserves, investments, loans, consumer law compliance, issuance of securities, payment of dividends, establishment of branches, mergers and acquisitions, corporate activities, changes in control, electronic funds transfers, responsiveness to community needs, management practices, compensation policies, and other aspects of operations are subject to regulation by the appropriate federal and state supervisory authorities. In addition, the Bank is subject to numerous federal, state and local laws and regulations which set forth specific restrictions and procedural requirements with respect to extensions of credit (including to insiders), credit practices, disclosure of credit terms and discrimination in credit transactions.

The Federal Reserve regularly examines the operations and condition of the Bank, including, but not limited to, its capital adequacy, reserves, loans, investments, and management practices. These examinations are for the protection of the Bank’s depositors and the federal Deposit Insurance Fund. In addition, the Bank is required to furnish quarterly and annual reports to the Federal Reserve. The Federal Reserve’s enforcement authority includes the power to remove officers and directors and the authority to issue cease-and-desist orders to prevent a bank from engaging in unsafe or unsound practices or violating laws or regulations governing its business.

The Federal Reserve has adopted regulations regarding the capital adequacy, which require member banks to maintain specified minimum ratios of capital to total assets and capital to risk-weighted assets. See “Regulatory Capital Requirements.” Federal Reserve and State regulations limit the amount of dividends that the Bank may pay to the Company. Pursuant to the Written Agreement, the Bank may not pay dividends to the Company without the prior written approval of the Federal Reserve and the Commissioner.

The Bank is subject to restrictions imposed by federal law on extensions of credit to, and certain other transactions with, the Company and other affiliates, and on investments in their stock or other securities. These restrictions prevent the Company and the Bank’s other affiliates from borrowing from the Bank unless the loans are secured by specified collateral, and require those transactions to have terms comparable to terms of arms-length transactions with third persons. In addition, secured loans and other transactions and investments by the Bank are generally limited in amount as to the Company and as to any other affiliate to 10% of the Bank’s capital and surplus and as to the Company and all other affiliates together to an aggregate of 20% of the Bank’s capital and surplus. Certain exemptions to these limitations apply to extensions of credit and other transactions between the Bank and its subsidiaries. These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds for acquisitions and for payment of dividends, interest, and operating expenses.

permanent improvements to real estate. These policies must establish loan portfolio diversification standards; prudent underwriting standards, including loan-to-value limits, that are clear and measurable; loan administration procedures; and documentation, approval, and reporting requirements. A bank’s real estate lending policy must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies (the “Interagency Guidelines”) adopted by the federal bank regulators. The Interagency Guidelines, among other things, call for internal loan-to-value limits for real estate loans that are not in excess of the limits specified in the Guidelines. The Interagency Guidelines state, however, that it may be appropriate in individual cases to originate or purchase loans with loan-to-value ratios in excess of the supervisory loan-to-value limits.

The Bank’s deposits are insured to applicable limits by the FDIC. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the maximum deposit insurance amount has been permanently increased from $100,000 to $250,000 and unlimited deposit insurance has been extended to non-interest-bearing transaction accounts until December 31, 2012. Prior to the Dodd-Frank Act, the FDIC had established a Temporary Liquidity Guarantee Program under which, for the payment of an additional assessment by insured banks that did not opt out, the FDIC fully guaranteed all non-interest-bearing transaction accounts until December 31, 2010 (the “Transaction Account Guarantee Program”) and all senior unsecured debt of insured depository institutions or their qualified holding companies issued between October 14, 2008 and October 31, 2009, with the FDIC’s guarantee expiring by December 31, 2012 (the “Debt Guarantee Program”). The Company opted out of the Debt Guarantee Program. The Bank did not opt out of either the Transaction Account Guarantee Program or the Debt Guarantee Program but did not issue any guaranteed debt.

The FDIC has adopted a risk-based premium system that provides for quarterly assessments based on an insured institution’s ranking in one of four risk categories based on their examination ratings and capital ratios. Well-capitalized institutions with the CAMELS ratings of 1 or 2 are grouped in Risk Category I and, until 2009, were assessed for deposit insurance at an annual rate of between five and seven basis points of insured deposits with the assessment rate for an individual institution determined according to a formula based on a weighted average of the institution’s individual CAMELS component ratings plus either five financial ratios or the average ratings of its long-term debt. Institutions in Risk Categories II, III and IV were assessed at annual rates of 10, 28 and 43 basis points, respectively.

Starting in 2009, the FDIC significantly raised the assessment rate in order to restore the reserve ratio of the Deposit Insurance Fund to the statutory minimum of 1.15%. For the quarter beginning January 1, 2009, the FDIC raised the base annual assessment rate for institutions in Risk Category I to between 12 and 14 basis points while the base annual assessment rates for institutions in Risk Categories II, III and IV were increased to 17, 35 and 50 basis points, respectively. For the quarter beginning April 1, 2009 the FDIC set the base annual assessment rate for institutions in Risk Category I to between 12 and 16 basis points and the base annual assessment rates for institutions in Risk Categories II, III and IV at 22, 32 and 45 basis points, respectively. An institution’s assessment rate could be lowered by as much as five basis points based on the ratio of its long-term unsecured debt to deposits or, for smaller institutions based on the ratio of certain amounts of Tier 1 capital to adjusted assets. The assessment rate may be adjusted for Risk Category I institutions that have a high level of brokered deposits and have experienced higher levels of asset growth (other than through acquisitions) and could be increased by as much as ten basis points for institutions in Risk Categories II, III and IV whose ratio of brokered deposits to deposits exceeds 10%. Reciprocal deposit arrangements like CDARS® were treated as brokered deposits for Risk Category II, III and IV institutions but not for institutions in Risk Category I. An institution’s base assessment rate would also be increased if an institution’s ratio of secured liabilities (including FHLB advances and repurchase agreements) to deposits exceeds 25%. The maximum adjustment for secured liabilities for institutions in Risk Categories I, II, III and IV would be 8, 11, 16 and 22.5 basis points, respectively, provided that the adjustment may not increase an institution’s base assessment rate by more than 50%.

The FDIC imposed a special assessment equal to five basis points of assets less Tier 1 capital as of June 30, 2009, payable on September 30, 2009, and reserved the right to impose additional special assessments. Instead of imposing additional special assessments during 2009, the FDIC required all insured depository institutions to prepay their estimated risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012 on December 30, 2009. For

The Dodd-Frank Act requires the FDIC to take such steps as necessary to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020. In setting the assessments, the FDIC is required to offset the effect of the higher reserve ratio against insured depository institutions with total consolidated assets of less than $10 billion. The Dodd-Frank Act also broadens the base for FDIC insurance assessments so that assessments will be based on the average consolidated total assets less average tangible equity capital of a financial institution rather than on its insured deposits. The FDIC has adopted a new restoration plan to increase the reserve ratio to 1.15% by September 30, 2020 with additional rulemaking regarding the method to be used to achieve a 1.35% reserve ratio by that date and offset the effect on institutions with assets less than $10 billion in assets.

The FDIC has adopted new assessment regulations that redefine the assessment base as average consolidated assets less average tangible equity. Insured banks with more than $1.0 billion in assets must calculate quarterly average assets based on daily balances while smaller banks and newly chartered banks may use weekly averages. Average assets are reduced by goodwill and other intangible assets. Average tangible equity equals Tier 1 capital. For institutions with more than $1.0 billion in assets, average tangible equity is calculated on a weekly basis, while smaller institutions may use the quarter-end balance. The base assessment rate for insured institutions in Risk Category I ranges between 5 to 9 basis points and for institutions in Risk Categories II, III, and IV, the assessment rates are 14, 23, and 35 basis points, respectively. An institution’s assessment rate is reduced based on the amount of its outstanding unsecured long-term debt and for institutions in Risk Categories II, III, and IV may be increased based on their brokered deposits. Risk Categories are eliminated for institutions with more than $10 billion in assets, which will be assessed at a rate between 5 and 35 basis points.

In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the Federal Savings and Loan Insurance Corporation. The FICO assessment rates, which are determined quarterly, averaged .008% of insured deposits on an annualized basis in fiscal year 2011. These assessments will continue until the FICO bonds mature in 2017.

The Federal Reserve has established guidelines for maintenance of appropriate levels of capital by bank holding companies and member banks. The regulations impose two sets of capital adequacy requirements: minimum leverage rules, which require bank holding companies and banks to maintain a specified minimum ratio of capital to total assets, and risk-based capital rules, which require the maintenance of specified minimum ratios of capital to “risk-weighted” assets.

The regulations of the Federal Reserve in effect at December 31, 2011 impose capital ratio requirements on bank holding companies with assets of more than $500 million as of June 30 of the prior year. The Company, therefore, became subject to the Federal Reserves capital ratio requirements during 2010. Beginning September 30, 2011, the Company is no longer subject to the capital requirements on a consolidated basis since total assets have not exceeded $500 million for four consecutive quarters. The Bank continues to be subject to the Federal Reserve’s capital standards. The regulations of the Federal Reserve in effect at December 31, 2011, required all member banks to maintain a minimum leverage ratio of “Tier 1 capital” (as defined in the risk-based capital guidelines discussed in the following paragraphs) to total assets of 3.0%. The capital regulations state, however, that only the strongest bank holding companies and banks, with composite examination ratings of 1 under the rating system used by the federal bank regulators, would be permitted to operate at or near this minimum level of capital. All other banks are expected to maintain a leverage ratio of at least 1% to 2% above the minimum ratio, depending on the assessment of an individual organization’s capital adequacy by its primary regulator. A bank experiencing or anticipating significant growth is expected to maintain capital well above the minimum levels. In addition,

In general, the risk-based capital rules of the Federal Reserve in effect at December 31, 2011, required member banks to maintain minimum levels based upon a weighting of their assets and off-balance sheet obligations according to risk. The risk-based capital rules have two basic components: a core capital (Tier 1) requirement and a supplementary capital (Tier 2) requirement. Core capital consists primarily of common stockholders’ equity, noncumulative perpetual preferred stock, and minority interests in the equity accounts of consolidated subsidiaries; less all intangible assets, except for certain mortgage servicing rights and purchased credit card relationships. Supplementary capital elements include, subject to certain limitations, the allowance for losses on loans and leases; perpetual preferred stock that does not qualify as Tier 1 capital; long-term preferred stock with an original maturity of at least 20 years from issuance; hybrid capital instruments, including perpetual debt and mandatory convertible securities; subordinated debt, intermediate-term preferred stock, and up to 45% of pre-tax net unrealized gains on available for sale equity securities.

The risk-based capital regulations require all commercial banks to maintain a minimum ratio of total capital to total risk-weighted assets of 8%, with at least 4% as core capital. For the purpose of calculating these ratios: (i) supplementary capital is limited to no more than 100% of core capital; and (ii) the aggregate amount of certain types of supplementary capital is limited. In addition, the risk-based capital regulations limit the allowance for credit losses that may be included in capital to 1.25% of total risk-weighted assets.

The federal bank regulatory agencies have established a joint policy regarding the evaluation of commercial banks’ capital adequacy for interest rate risk. Under the policy, the Federal Reserve’s assessment of a bank’s capital adequacy includes an assessment of the bank’s exposure to adverse changes in interest rates. The Federal Reserve has determined to rely on its examination process for such evaluations rather than on standardized measurement systems or formulas. The Federal Reserve may require banks that are found to have a high level of interest rate risk exposure or weak interest rate risk management systems to take corrective actions. Management believes its interest rate risk management systems and its capital relative to its interest rate risk are adequate.

The Federal Reserve has established regulations that classify banks by capital levels and provide for the Federal Reserve to take various “prompt corrective actions” to resolve the problems of any bank that fails to satisfy the capital standards. Under these regulations, a well-capitalized bank is one that is not subject to any regulatory order or directive to meet any specific capital level and that has a total risk-based capital ratio of 10% or more, a Tier 1 risk-based capital ratio of 6% or more, and a leverage ratio of 5% or more. An adequately capitalized bank is one that does not qualify as well-capitalized but meets or exceeds the following capital requirements: a total risk-based capital ratio of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3% if the bank has the highest composite examination rating. A bank that does not meet these standards is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized, depending on its capital levels. A bank that falls within any of the three undercapitalized categories established by the prompt corrective action regulation is subject to severe regulatory sanctions. As of December 31, 2011, the Bank was well capitalized as defined in the Federal Reserve’s regulations.

The Company’s mortgage banking business is subject to the rules and regulations of the U.S. Department of Housing and Urban Development (“HUD”), the Federal Housing Administration (“FHA”), the Veterans’ Administration (“VA”), and FNMA with respect to originating, processing, selling, and servicing mortgage loans. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines, which include provisions for inspections and appraisals, require credit reports on prospective borrowers, and fix maximum loan amounts. Lenders such as the Company are required annually to submit to FNMA, FHA and VA audited financial statements, and each regulatory entity has its own financial requirements. The Company’s affairs are also subject to examination by the Federal Reserve, FNMA, FHA and VA at all times to assure compliance with the applicable regulations, policies, and procedures. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Fair Housing Act, Fair Credit Reporting Act, the National Flood Insurance Act and the Real Estate Settlement Procedures Act and related regulations that prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. The Company’s mortgage banking operations also are affected by various state and local laws and regulations and the requirements of various private mortgage investors.

The Bank’s executive office, two branches, and financial and loan centers are in Elkton, Maryland, and additional Cecil County branches are located in North East, Fair Hill, Rising Sun, Cecilton, and Conowingo, Maryland. Elkton is the county seat, and has a population of approximately 12,000. The population of the Cecil County is approximately 86,000. Cecil County is located in the extreme northeast of the Chesapeake Bay, at the crux of four states - Maryland, Delaware, Pennsylvania, and New Jersey. Elkton is located about 50 miles from Philadelphia and Baltimore. One-fifth of the U.S. population resides within 300 miles of the County. Interstate I-95, the main north-south East Coast artery, bisects the County. In addition, the four lane U.S. 40 parallels the Interstate. Cecil County has over 200 miles of waterfront between five rivers and the Chesapeake Bay. Key employers include companies such as Air Products, ATK, DuPont, General Electric, W.L. Gore & Associates, IKEA and Terumo Medical, as well as State, County and Local Governments.

The Bank also operates one branch in Aberdeen and two banking offices in Havre de Grace, Maryland, in Harford County. Harford County is twenty-three miles from Baltimore and twenty miles from Wilmington, Delaware. The county is a major transportation link; Interstate 95 and mainlines for CSX Railroad and Conrail run through the County. The County’s major industrial centers along the I-95 Corridor are Aberdeen, Belcamp, Edgewood and Havre de Grace. Major private sector employers in the county include Battelle, CACI, Clorox Products Manufacturing, Custom Direct, Computer Sciences Corporation, Cytec Engineered Materials, EAI (a subsidiary of SAIC), EG&G/Lear Siegler, EPS, Frito-Lay, Independent Can, MITRE Corporation, Northrop Grumman, Nutramax Laboratories, Rite Aid, SafeNet, SAIC, Saks Fifth Avenue, Smiths Detection, SURVICE Engineering, and Upper Chesapeake Health. The U.S. Army Aberdeen Proving Ground is the major government employer in the county.

One to Four Family Residential Real Estate Lending. The Bank offers conventional mortgage loans on one- to four-family residential dwellings. Most loans are originated in amounts up to $350,000, on single-family properties located in the Bank’s primary market area. The Bank makes conventional mortgage loans, as well as loans guaranteed under the Rural Development Program of the Department of Agriculture (USDA Housing Loans). The Bank’s mortgage loan originations are generally for terms of 15, 20 and 30 years, amortized on a monthly basis with interest and principal due each month. Residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms as borrowers may refinance or prepay loans at their option, without penalty. Conventional residential

mortgage loans granted by the Bank customarily contain “due-on-sale” clauses that permit the Bank to accelerate the indebtedness of the loan upon transfer of ownership of the mortgaged property. The Bank uses standard Federal Home Loan Mortgage Corporation (“FHLMC”) documents, to allow for the sale of loans in the secondary mortgage market. The Bank’s lending policies generally limit the maximum loan-to-value ratio on mortgage loans secured by owner-occupied properties to 95% of the lesser of the appraised value or purchase price of the property, with the condition that private mortgage insurance is required on loans with a loan-to-value ratio in excess of 80%. Loans originated under Rural Development programs have loan-to-value ratios of up to 100% due to the guarantees provided by those agencies. The substantial majority of loans in the Bank’s loan portfolio have loan-to-value ratios of 80% or less.

The Bank offers adjustable-rate mortgage loans with terms of up to 30 years. Adjustable-rate loans offered by the Bank include loans which reprice every one, three or five years and provide for an interest rate which is based on the interest rate paid on U.S. Treasury securities of a corresponding term. All newly originated residential adjustable rate mortgage loans have interest rate adjustments limited to three percentage points annually with no interest rate ceiling over the life of the loan. New loans also have an interest rate floor imbedded within the promissory note. Previously originated loans contain a limit on rate adjustments of two percentage points annually and six percentage points over the life of the loan.

The Bank retains all adjustable-rate mortgages it originates, which are designed to reduce the Bank’s exposure to changes in interest rates. The retention of adjustable-rate mortgage loans in the Bank’s loan portfolio helps reduce the Bank’s exposure to increases in interest rates. However, there are unquantifiable credit risks resulting from potential increased costs to the borrower as a result of repricing of adjustable-rate mortgage loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower.

The Bank also originates conventional fixed-rate mortgages with terms of 15, 20, or 30 years. The Bank has originated all fixed-rate mortgage loans in recent years for sale in the secondary mortgage market, and a substantial majority of all fixed-rate loans originated since 1990 have been sold, primarily to the FHLMC, with servicing retained by the Bank. Management assesses its fixed rate loan originations on an ongoing basis to determine whether the Bank’s portfolio position warrants the loans being sold or held in the Bank’s portfolio.

During the year ended December 31, 2011, the Bank originated $2,145,000 in adjustable-rate mortgage loans and $7,157,000 in fixed-rate mortgage loans. The Bank also offers second mortgage loans. These loans are secured by a junior lien on residential real estate. The total of first and second liens may not exceed a 90% loan to value ratio. Second mortgage loans have terms of 5, 10 and 15 years and have fixed rates. The Bank offers home equity lines of credit, which are secured by a junior lien on residential real estate. Customers are approved for a line of credit that provides for an interest rate, which varies monthly, and customers pay 2% of the balance per month.

Construction and Land Loans. The Bank’s construction lending has primarily involved lending for construction of single-family residences, although the Bank does lend funds for the construction of commercial properties and multi-family real estate. All loans for the construction of speculative sale homes have a loan value ratio of not more than 80%. The Bank has financed the construction of non-residential properties on a case by case basis. Loan proceeds are disbursed during the construction phase according to a draw schedule based on the stage of completion. Construction projects are inspected by contracted inspectors or bank personnel. Construction loans are underwritten on the basis of the estimated value of the property as completed.

The Bank also, from time to time, originates loans secured by raw land. Land loans granted to individuals have a term of up to 10 years and interest rates adjust every one, three or five years. Land loans granted to developers have terms of up to three years. The substantial majority of land loans have a loan-to-value ratio not exceeding 75%. Loans involving construction financing and loans on raw land have a higher level of risk than loans for the purchase of existing homes since collateral values, land values, development costs and construction costs can only be estimated at the time the loan is approved. The Bank has sought to minimize its risk in construction lending and in lending for the purchase of raw land by

Multi-Family and Commercial Real Estate Lending. The Bank originates loans on multi-family residential and commercial properties in its market area. Loans secured by multi-family and commercial real estate generally are larger and involve greater risks than one- to four-family residential mortgage loans. Because payments on loans secured by such properties are often dependent on successful operation or management of the properties, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks in a variety of ways, including limiting the size and loan-to-value ratios of its multi-family and commercial real estate loans. The Bank’s permanent multi-family and commercial real estate loans are typically secured by retail or wholesale establishments, motels/hotels, service industries and industrial or warehouse facilities. Multi-family and commercial real estate loans generally have terms of 20 to 40 years, are either tied to the prime rate or have interest rate adjustments every one, three or five years. These adjustable rate loans have no interest rate change limitations, either annually or over the life of the loan. The loans are also subject to imbedded interest rate floors with no interest rate ceiling over the life of the loan. Multi-family and commercial mortgages are generally made in amounts not exceeding 80% of the lesser of the appraised value or purchase price of the property. Interest rates on commercial real estate loans are negotiated on a loan-by-loan basis. During 2011, the Bank began making loans under the Small Business Administration (“SBA”) Section 7(a) program, under which the SBA guarantees up to 75% of loans of up to $5 million for the purchase or expansion of small businesses. The Bank may sell the guaranteed portion of SBA loans into the secondary market and retain the unguaranteed portion in its portfolio. Pursuant to the written agreement with the Reserve Bank and the Commissioner, the Bank has adopted a plan for monitoring the risks of its commercial real estate loan portfolio which includes the reduction of certain concentrations in the portfolio.

Commercial Business Loans. The Bank offers commercial business loans and both secured and unsecured loans and letters of credit, or lines of credit for businesses located in its primary market area. Most business loans have a one year term, while lines of credit can remain open for longer periods. All owners, partners, and officers must sign the loan agreement. The security for a business loan depends on the amount borrowed, the business involved, and the strength of the borrower’s firm. Commercial business lending entails significant risk, as the payments on such loans may depend upon the successful operation or management of the business involved. Although the Bank attempts to limit its risk of loss on such loans by limiting the amount and the term, and by requiring personal guarantees of principals of the business (when additional guarantees are deemed necessary by management), the risk of loss on commercial business loans is substantially greater than the risk of loss from residential real estate lending.

Consumer Lending. Consumer loans generally involve more risk than first mortgage loans. Repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance as a result of damage, loss, or depreciation, and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Further, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered. These loans may also give rise to claims and defenses by a borrower against the Bank, and a borrower may be able to assert against the Bank claims and defenses that it has against the seller of the underlying collateral.

The Bank’s consumer loans consist of automobile loans, deposit account loans, home improvement loans, and other consumer loans. Consumer loans are generally offered for terms of up to five years at fixed interest rates. Management expects to continue to promote consumer loans as part of its strategy to provide a wide range of personal financial services to its customers and as a means to increase the yield on the Bank’s loan portfolio. The Bank makes loans for automobiles and recreational vehicles, both new and used, directly to the borrowers. The loans can be for up to the lesser of 100% of the purchase price or the retail value published by the National Automobile Dealers Association. The terms of the loans are determined by the condition of the collateral. Collision insurance policies are required on all these loans, unless the borrower has substantial other assets and income. The Bank makes deposit account loans for up to

90% of the amount of the depositor’s account balance. The maximum amount of the loan takes into consideration the amount of interest due. The term of the loan is either interest due monthly on demand, or a term loan not to exceed 5 years. The interest rate is 2% higher than the rate being paid on the deposit account. The Bank also makes other consumer loans, which may or may not be secured. The term of the loans usually depends on the collateral. Unsecured loans usually do not exceed $100,000 and have a term of no longer than 12 months. Consumer loans are generally originated at higher interest rates than residential mortgage loans but also tend to have a higher risk than residential loans due to the loan being unsecured or secured by rapidly depreciable assets.

Loan Solicitation and Processing. The Bank’s lending activities are subject to written, non-discriminatory underwriting standards and loan origination procedures outlined in loan policies established by its board of directors. Detailed loan applications are obtained to determine the borrower’s ability to repay, and the more significant items on these applications are verified through the use of credit reports, financial statements, and confirmations. Property valuations required by policy are performed by independent outside appraisers approved by the board of directors. With certain limited exceptions, the maximum amount that the Bank may lend to any borrower (including certain related entities of the borrower) at any one time may not exceed 15% of the unimpaired capital and surplus of the institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. Under these limits, at December 31, 2011, the Bank’s loans to one borrower cannot exceed $8,355,000.

Loan Originations and Sales. Loan originations are derived from a number of sources. Residential mortgage loan originations primarily come from walk-in customers and referrals by realtors, depositors, and borrowers. Applications are taken at all offices, but are processed by the Bank and submitted for approval, as noted above. The Bank has not purchased loans in the secondary mortgage market. All fixed-rate loans are originated according to FHLMC guidelines and, depending on market conditions, may be sold to FHLMC after origination. The Bank retains servicing on all loans sold to FHLMC.

Interest Rates and Loan Fees. Interest rates charged by the Bank on mortgage loans are primarily determined by competitive loan rates offered in its market area. Mortgage loan interest rates reflect factors such as general market interest rate levels, the supply of money available to the financial institutions industry and the demand for such loans. These factors are in turn affected by general economic conditions, the monetary policies of the Federal government, including the Board of Governors of the Federal Reserve System (the “Federal Reserve”), and general supply of money in the economy. In addition to interest earned on loans, the Bank receives fees in connection with loan commitments and originations, loan modifications, late payments and for miscellaneous services related to its loans. Income from these activities varies from period to period with the volume and type of loans originated, which in turn is dependent on prevailing mortgage interest rates and their effect on the demand for loans in the markets served by the Bank. The Bank also receives servicing fees on the loan amount of the loans that it services. At December 31, 2011, the Bank was servicing $45.5 million in loans for other financial institutions. For the years ended December 31, 2011 and 2010, the Bank recognized gross servicing income of $214,000 and $148,000, respectively, and total loan fee income of $896,000 and $864,000, respectively.

Mortgage-Backed Securities. The Bank maintains a portfolio of mortgage-backed securities in the form of Government National Mortgage Association (“GNMA”), FNMA, and FHLMC participation certificates. GNMA certificates are guaranteed as to principal and interest by the full faith and credit of the United States, while FNMA and FHLMC certificates are guaranteed by the agencies. Since FNMA and FHLMC has been place in receivership, however, their obligations are effectively guaranteed by the U.S. Treasury. Mortgage-backed securities generally entitle the Bank to receive a pro rata portion of the cash flows from an identified pool of mortgages. Although mortgage-backed securities yield from 30 to 100 basis points less than the loans that are exchanged for such securities, they present substantially lower credit risk and are more liquid than individual mortgage loans and may be used to collateralize obligations of the Bank. Because the Bank receives regular payments of principal and interest from its mortgage-backed securities, these investments provide more consistent cash-flows than investments in other debt securities, which generally only pay principal at maturity.

Mortgage-backed securities, however, entail certain unique risks. In a declining rate environment, accelerated prepayments of loans underlying these securities expose the Bank to the risk that it will be unable to obtain comparable yields upon reinvestment of the proceeds. In the event the mortgage-backed security has been funded with an interest-bearing liability with a maturity comparable to the original estimated life of the mortgage-backed security, the Bank’s interest rate spread could be adversely affected. Conversely, in a rising interest rate environment, the Bank may experience a lower than estimated rate of repayment on the underlying mortgages, effectively extending the estimated life of the mortgage-backed security and exposing the Bank to the risk that it may be required to fund the asset with a liability bearing a higher rate of interest. The Bank seeks to minimize the effect of extension risk by focusing on investments in adjustable-rate and/or relatively short-term (seven years or shorter maturity) mortgage-backed securities.

Deposits. Deposits are attracted principally from the Bank’s market area through the offering of a variety of deposit instruments, including savings accounts and certificates of deposit ranging in term from 91 days to 60 months, as well as regular checking, NOW, passbook and money market deposit accounts. Deposit account terms vary, principally on the basis of the minimum balance required, the time periods the funds must remain on deposit, and the interest rate. The Bank also offers individual retirement accounts (“IRAs”). The Bank’s policies are designed primarily to attract deposits from local residents and businesses. To supplement local market deposits, the Bank has access to the national CD market through deposit brokers, including the Certificate of Deposit Account Registry Service (“CDARS”) of Promontory Interfinancial Network and Finance 500, Inc. The Bank may use this market to meet liquidity needs. At December 31, 2011, the Bank had no one-way buy certificates of deposit that were obtained through the CDARS network or Finance 500, Inc. Because CDARS and Finance 500, Inc. deposits are considered brokered deposits, the Bank would not be able to accept or renew these deposits without FDIC permission if the Bank were less than well capitalized. Interest rates, maturity terms, service fees and withdrawal penalties are established by the Bank on a periodic basis. Determination of rates and terms are predicated upon funds acquisition and liquidity requirements, rates paid by competitors, growth goals and federal regulations.

Borrowings. Deposits historically have been the primary source of funds for the Bank’s lending and investment activities and for its general business activities. The Bank is authorized, however, to use advances from the FHLB of Atlanta to supplement its supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB typically are secured by the Bank’s stock in the FHLB or pledged assets. The Bank utilized advances from FHLB during the year. The FHLB of Atlanta functions as a central reserve bank providing credit for member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of its loans and other assets (principally, securities which are obligations of, or guaranteed by, the United States) provided certain standards related to creditworthiness have been met. The Bank may also draw on a secured line of credit with the Community Bankers’ Bank.

The primary factors in competing for loans are interest rates, loan origination fees, and the range of services offered by lenders. Competitors for loan originations include other commercial banks, savings associations, mortgage bankers, mortgage brokers, and insurance companies. The Bank’s principal competitors for deposits are other financial institutions, including other banks, savings associations, and credit unions located in the Bank’s primary market area of Cecil and Harford Counties in Maryland or doing business in the market area through the internet, by mail, or by telephone. Competition among these institutions is based primarily on interest rates and other terms offered, service charges imposed on deposit accounts, the quality of services rendered, and the convenience of banking facilities. Additional competition for depositors’ funds comes from U.S. Government securities, private issuers of debt obligations

and suppliers of other investment alternatives for depositors, such as securities firms. Competition from credit unions has intensified in recent years as historical federal limits on membership have been relaxed. Because federal law subsidizes credit unions by giving them a general exemption from federal income taxes, credit unions have a significant cost advantage over banks and savings associations, which are fully subject to federal income taxes. Credit unions may use this advantage to offer rates that are highly competitive with those offered by banks and thrifts.

The banking business in Maryland generally, and the Bank’s primary service area specifically, is highly competitive with respect to both loans and deposits. The Bank competes with many larger banking organizations that have offices over a wide geographic area. These larger institutions have certain inherent advantages, such as the ability to finance wide-ranging advertising campaigns and promotions and to allocate their investment assets to regions offering the highest yield and demand. They also offer services, such as international banking, that are not offered directly by the Bank (but are available indirectly through correspondent institutions), and, by virtue of their larger total capitalization, such banks have substantially higher legal lending limits, which are based on bank capital, than does the Bank. The Bank can arrange loans in excess of its lending limit, or in excess of the level of risk it desires to take, by arranging participations with other banks. Other entities, both governmental and in private industry, raise capital through the issuance and sale of debt and equity securities and indirectly compete with the Bank in the acquisition of deposits.

In addition to competing with other commercial banks, savings associations, and credit unions, commercial banks such as the Bank compete with nonbank institutions for funds. For instance, yields on corporate and government debt and equity securities affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for available funds with mutual funds. These mutual funds have provided substantial competition to banks for deposits, and it is anticipated they will continue to do so in the future.

Popular Name	Location
Main Office	127 North Street, Elkton, MD 21921
Cecil Financial Center*	135 North Street, Elkton, MD 21921
Elkton Drive Thru Office	200 North Street, Elkton, MD 21921
Corporate Center	118 North Street, Elkton, MD 21921
North East*	108 North East Plaza, North East, MD 21901
Fair Hill	4434 Telegraph Road, Elkton, MD 21921
Rising Sun*	56 Rising Sun Towne Centre, Rising Sun, MD 21911
Turkey Point	1223 Turkey Point Road, North East, MD 21901
Cecilton	122 West Main Street, Cecilton, MD 21913
Crossroads*	114 E. Pulaski Hwy, Elkton, MD 21921
Aberdeen	3 W. Bel Air Avenue, Aberdeen, MD 21001
Conowingo	390 Conowingo Road, Conowingo, MD 21918
Downtown Havre de Grace	303-307 St John Street, Havre de Grace, MD 21078
Route 40 Havre de Grace	1609 Pulaski Highway, Havre de Grace, MD 21078

In the normal course of business, Cecil Bancorp is subject to various pending and threatened legal actions. The relief or damages sought in some of these actions may be substantial. After reviewing pending and threatened actions with counsel, management considers that the outcome of such actions will not have a material adverse effect on Cecil Bancorp’s financial position; however, the Bank is not able to predict whether the outcome of such actions may or may not have a material adverse effect on results of operations in a particular future period as the timing and amount of any resolution of such actions and relationship to the future results of operations are not known.

In order to conserve capital in the current uncertain economic environment, the Company’s Board of Directors determined that it was in the best interests of the Company and its stockholders not to declare a dividend on its common stock beginning in 2010 and not to declare the dividends payable beginning in 2010 on its Series A Preferred Stock. In addition, the Company has given notice of its intention to defer interest payments on the subordinated debentures underlying its two outstanding issues of trust preferred securities as permitted by the indentures therefor. During the period during which the Company defers payments on its subordinated debentures, it will be prohibited under the indentures from declaring or paying dividends on its capital stock. The Company will be prohibited from declaring or paying dividends on its common stock while dividends on its Series A Preferred Stock are in arrears. No determination has been made as to whether or when the Company will resume the payment of dividends on its common or preferred stock or interest payments on its subordinated debentures. Any such future payments will depend on a variety of factors

(Dollars in thousands, except per share data)	2011			2010			2009			2008			2007
RESULTS OF OPERATIONS:
Interest Income	$	21,359		$	27,467		$	30,296		$	29,451		$	28,244
Interest Expense		7,834			10,335			12,428			14,313			14,346
Net Interest Income		13,525			17,132			17,868			15,138			13,898
Provision for Loan Losses		6,958			5,340			10,640			3,405			935
Net Interest Income after Provision for Loan Losses		6,567			11,792			7,228			11,733			12,963
Noninterest Income		1,368			2,065			2,169			1,138			1,500
Noninterest Expenses		15,455			12,096			13,159			10,015			9,004
(Loss) Income before Income Taxes		(7,520	)		1,761			(3,762	)		2,856			5,459
Income Tax (Benefit) Expense		(2,815	)		649			(1,282	)		1,005			2,059
Net (Loss) Income		(4,705	)		1,112			(2,480	)		1,851			3,400
Preferred Stock Dividends and Discount Accretion		(725	)		(715	)		(791	)		-			-
Net (Loss) Income Available to Common Stockholders		(5,430	)		397			(3,271	)		1,851			3,400

PER SHARE DATA: (1)
Basic Net (Loss) Income Per Common Share	$	(.73	)	$	.06		$	(.45	)	$	.25		$	.46
Diluted Net (Loss) Income Per Common Share		(.73	)		.06			(.45	)		.25			.46
Dividends Declared Per Common Share		.00			.00			.0375			.05			.05
Book Value (at year end) (2)		2.84			3.59			3.53			3.92			3.71
Tangible Book Value (at year end) (2), (3)		2.78			3.53			3.48			3.58			3.38

FINANCIAL CONDITION (at year end):
Assets	$	463,671		$	487,195		$	509,819		$	492,397		$	401,432
Loans, net		317,850			364,842			424,047			401,749			355,595
Investment Securities		33,401			11,648			6,413			12,012			5,219
Deposits		339,075			358,138			382,338			364,551			267,032
Stockholders’ Equity		32,315			37,608			36,979			40,392			27,242

PERFORMANCE RATIOS (for the year):
Return on Average Assets		-.99	%		.22	%		-.49	%		.42	%		.92	%
Return on Average Equity		-13.18			2.93			-6.30			6.47			13.28
Net Interest Margin		3.46			3.90			3.90			3.78			4.05
Efficiency Ratio (4)		103.77			63.01			65.67			61.53			58.48
Dividend Payout Ratio		0.00			0.00			-8.46			20.41			10.87

CAPITAL AND CREDIT QUALITY RATIOS:
Average Equity to Average Assets		7.53	%		7.57	%		7.85	%		6.56	%		6.92	%
Allowance for Loan Losses to Loans		3.76			3.97			3.27			1.55			.87
Nonperforming Assets to Total Assets		20.39			17.59			9.66			2.70			1.42
Net Charge-offs to Average Loans		2.81			1.14			.63			.05			.01

Cecil Bancorp, Inc. (the “Company”) is the holding company for Cecil Bank (the “Bank”). The Bank is a community-oriented commercial bank chartered under the laws of the State of Maryland and is a member of the Federal Reserve System. The Bank commenced operations in 1959 as a Federal savings and loan association and converted to a Maryland commercial bank in 2002. The Bank conducts its business through its main office in Elkton, Maryland, and branches in Elkton, North East, Fair Hill, Rising Sun, Cecilton, Aberdeen, Conowingo, and Havre de Grace, Maryland. Cecil Service Corporation, a subsidiary of the Bank, acts as leasing agent for the leased branches. The Bank’s business strategy is to operate as an independent community-oriented financial institution funded primarily by retail deposits.

	2011						2010						2009
(Dollars in thousands)	Average Balance		Interest		Yield/ Cost		Average Balance		Interest		Yield/ Cost		Average Balance		Interest		Yield/ Cost
Assets:
Loans (2)	$	342,723	$	20,935	6.11	%	$	405,432	$	27,131	6.69	%	$	415,281	$	30,082	7.24	%
Investment securities		20,959		300	1.43			9,039		229	2.53			3,904		134	3.43
Other earning assets		27,310		124	0.45			25,126		107	0.42			39,024		80	0.21
Total earning assets		390,992		21,359	5.46			439,597		27,467	6.25			458,209		30,296	6.61
Other assets		83,346						61,918						43,149
Total assets	$	474,338					$	501,515					$	501,358
Liabilities and Stockholders’ Equity:
Deposits	$	346,046		4,480	1.29	%	$	372,794		6,681	1.79	%	$	373,003		8,836	2.37	%
FHLB advances		63,506		2,462	3.88			63,577		2,464	3.88			63,721		2,470	3.88
Fed funds purchased		-		-	0.00			-		-	0.00			132		1	0.96
Junior subordinated debentures		17,000		833	4.90			17,000		1,147	6.74			17,000		1,121	6.59
Other borrowed funds		1,169		59	5.06			890		43	4.87			-		-	0.00
Total interest-bearing liabilities		427,721		7,834	1.83			454,261		10,335	2.28			453,856		12,428	2.74
Net interest income and spread			$	13,525	3.63	%			$	17,132	3.97	%			$	17,868	3.87	%
Noninterest-bearing liabilities		10,916						9,307						8,168
Total liabilities		438,637						463,568						462,024
Stockholders’ equity		35,701						37,947						39,334
Total liabilities and stockholders’ equity	$	474,338					$	501,515					$	501,358

Net Interest Margin					3.46	%					3.90	%					3.90	%
Average interest earning assets to interest bearing liabilities					91.41	%					96.77	%					100.96	%

Net loss was $4.7 million for the year ended December 31, 2011, a decrease of $5.8 million from the net income of $1.1 million for 2010. The decrease in net income is primarily the result of a $3.6 million (21.1%) decrease in net interest income, a $3.4 million, or 27.8%, increase in noninterest expense, a $1.6 million, or 30.3%, increase in the provision for loan losses, and a $697,000, or 33.8%, decrease in noninterest income, partially offset by a $3.5 million decrease in income tax expense. Net loss available to common stockholders was $5.4 million for the year ended December 31, 2011, a decrease of $5.8 million from net income available to common stockholders of $397,000 for 2010. Net income/loss available to common stockholders includes preferred stock dividends and discount accretion totaling $725,000 and $715,000, respectively, for the years ended December 31, 2011 and 2010. Basic and diluted loss per common share for 2011 were both $0.73, down $0.79 from corresponding 2010 basic and diluted income per common share amounts of $0.06. Loss/earnings per share calculations have been adjusted retroactively for the 2-for-1 stock split, effected through a 100% stock dividend, declared by the Board of Directors in May 2011. The return on average assets and return on average equity were -0.99% and -13.18%, respectively, for the year ended December 31, 2011. This compares to a return on average assets and the return on average equity of 0.22% and 2.93%, respectively, for 2010.

Net interest income, the Company’s primary source of income, decreased $3.6 million, or 21.1%, to $13.5 million for the year ended December 31, 2011, from $17.1 million for the year ended December 31, 2010 primarily due to a decline in average earning assets. Average interest-earning assets decreased $48.6 million, or 1.1%, which caused the ratio of average interest-earning assets to average interest-bearing liabilities to decrease to 91.41% from 96.77%. The weighted average yield on interest-earning assets decreased 79 basis points to 5.46% for the year ended December 31, 2011 from 6.25% for the year ended December 31, 2010. The weighted average rate paid on interest-bearing liabilities decreased 45 basis points to 1.83% for the year ended December 31, 2011 from 2.28% for the year ended December 31, 2010. The net interest spread decreased to 3.63% for 2011 from 3.97% for 2010 and the net interest margin decreased to 3.46% for 2011 from 3.90% for 2010.

Interest and fees on loans receivable decreased by $6.2 million, or 22.8%, to $20.9 million for the year ended December 31, 2011 from $27.1 million for the year ended December 31, 2010. The decrease is attributable to a decrease in the average balance and a decline in the average yield earned. The average balance of loans receivable outstanding decreased $62.7 million, or 15.5%, to $342.7 million for the year ended December 31, 2011 from $405.4 million for the year ended December 31, 2010. The weighted average yield decreased to 6.11% for the year ended December 31, 2011 from 6.69% for the year ended December 31, 2010.

Interest on investment securities increased by $71,000, or 31.0%, to $300,000 for the year ended December 31, 2011 from $229,000 for the year ended December 31, 2010. The increase is attributable to an increase in the average balance outstanding, partially offset by a decrease in the weighted average yield. The average balance outstanding increased $11.9 million, or 131.9%, to $20.9 million for the year ended December 31, 2011 as compared to $9.0 million for the year ended December 31, 2010. The weighted average yield decreased to 1.43% for the year ended December 31, 2011 from 2.53% for the year ended December 31, 2010.

Dividends on Federal Home Loan and Federal Reserve Bank stock increased $17,000, or 33.3%, to $68,000 for the year ended December 31, 2011 from $51,000 for the year ended December 31, 2010 primarily due to an increase in the dividend rate paid by FHLB. The average balance outstanding decreased $33,000, or 0.8%, to $4.4 million for the year ended December 31, 2011 from $4.4 million for the year ended December 31, 2010. The weighted average yield increased to 1.56% for the year ended December 31, 2011 from 1.17% for the year ended December 31, 2010.

Interest expense on deposits decreased $2.2 million, or 32.9%, to $4.5 million for the year ended December 31, 2011 from $6.7 million for the year ended December 31, 2010. The decrease was the result of decreases in the average cost of funds and the average balance. The weighted average cost decreased to 1.29% for the year ended December 31, 2011 from 1.79% for the year ended December 31, 2010. The average balance outstanding decreased $26.7 million, or 7.2%, to $346.1 million for the year ended December 31, 2011 from $372.8 million for the year ended December 31, 2010.

Interest expense on junior subordinated debentures decreased $314,000, or 27.4%, to $833,000 for the year ended December 31, 2011 from $1.1 million for the year ended December 31, 2010 due to a decline in the weighted average rate. The interest rate on $10.0 million of the junior subordinated debentures began to adjust quarterly on April 1, 2011 to 3-month LIBOR + 1.38%. The weighted average cost decreased to 4.90% for the year ended December 31, 2011 from 6.74% for the year ended December 31, 2010. The average balance outstanding remained level at $17.0 million for the years ended December 31, 2011 and 2010.

Interest expense on other borrowed funds (consisting of a last-in, first-out loan participation accounted for as a secured borrowing) increased $16,000 to $59,000 for the year ended December 31, 2011 from $43,000 for the year ended December 31, 2010. Due to the fact that the funds were borrowed at the end of the first quarter 2010, the average balance outstanding increased $279,000, or 31.4%, to $1.2 million for the year ended December 31, 2011 from $890,000 for 2010. The weighted average cost increased to 5.06% for the year ended December 31, 2011 from 4.87% for the year ended December 31, 2010.

	2011 vs. 2010									2010 vs. 2009
	Increase			Due to Change						Increase			Due to Change
	or			In Average *						or			In Average *
(In thousands)	(Decrease)			Volume			Rate			(Decrease)			Volume			Rate

Interest income from earning assets:
Loans	$	(6,196	)	$	(3,962	)	$	(2,234	)	$	(2,951	)	$	(701	)	$	(2,250	)
Investment securities		71			203			(132	)		95			138			(43	)
Other interest-earning assets		17			6			11			27			(19	)		46
Total Interest Income		(6,108	)		(2,858	)		(3,250	)		(2,829	)		(1,202	)		(1,627	)
Interest expense:
Interest bearing deposits		(2,201	)		(452	)		(1,749	)		(2,155	)		(5	)		(2,150	)
FHLB advances		(2	)		(3	)		1			(6	)		(6	)		0
Fed funds purchased		0			0			0			(1	)		(1	)		0
Junior subordinated debentures		(314	)		0			(314	)		26			0			26
Other borrowed funds		16			14			2			43			43			0
Total Interest Expense		(2,501	)		(577	)		(1,924	)		(2,093	)		11			(2,104	)
Net Interest Income	$	(3,607	)	$	(2,281	)	$	(1,326	)	$	(736	)	$	(1,213	)	$	477

Noninterest income decreased $697,000, or 33.8%, to $1.4 million for the year ended December 31, 2011 from $2.1 million for the year ended December 31, 2010, primarily due to losses on the sale of other real estate owned. Deposit account fees decreased $39,000, or 6.5%, to $565,000 for the year ended December 31, 2011 from $604,000 for the year ended December 31, 2010. ATM fees increased $18,000, or 4.1%, to $455,000 for the year ended December 31, 2011 from $437,000 for the year ended December 31, 2010. This increase is attributable to increased fees resulting from increases in cardholder usage. Gain (loss) on the sale of other real estate owned decreased $711,000, or 323.2%, to a loss of $491,000 during the year ended December 31, 2011 from a gain of $220,000 during the year ended December 31, 2010 due to the continuing decline in real estate values. Gain on the sale of loans increased $137,000, or 50.4%, to $409,000 for the year ended December 31, 2011 from $272,000 for the year ended December 31, 2010 primarily due to the Bank’s new Small Business Administration loan program, the guaranteed portion of which are sold in the secondary market. A $50,000 loss on investments was recorded in the year ended December 31, 2011 as compared to zero for the same period in 2010. We fully reserved against our investment in the debt issued by a private company after the investee began experiencing financial difficulties and it became probable that our investment would not be recovered. Other noninterest income decreased by $51,000, or 15.8%, to $272,000 for the year ended December 31, 2011 from $323,000 for the year ended December 31, 2010 primarily due to a decrease in income earned on our investment in Maryland Title Center, LLC, a multiple bank owned title insurance agency.

Noninterest expense increased $3.4 million, or 27.8%, to $15.5 million for the year ended December 31, 2011 from $12.1 million for the year ended December 31, 2010, primarily due to increases in other real estate owned expenses and valuations and loan collection expense. The Company experienced a decrease in salaries and employee benefits of $1.4 million, or 24.9%, to $4.2 million for the year ended December 31, 2011 from $5.6 million for the year ended December 31, 2010 primarily due to declines in expense for the supplemental executive retirement plan and officer and employee salaries, partially offset by an increase in other employee benefits, primarily health insurance. Occupancy expense increased $17,000, or 2.3%, to $759,000 for the year ended December 31, 2011 from $742,000 for the year ended December 31, 2010 primarily due to an increase in office building repairs and maintenance, partially offset by a decline in utilities. Professional fees increased $855,000, or 143.5%, to $1.5 million for the year ended December 31, 2011 from $596,000 for the year ended December 31, 2010 primarily due to increased legal fees associated with the collection of delinquent loans. The FDIC insurance premium expense increased by $137,000, or 14.0%, to $1.1 million for the year ended December 31, 2011 from $978,000 for the year ended December 31, 2010 due to an increase in the assessment rate. Other real estate owned expenses and valuations increased by $2.1 million, or 163.3%, to $3.4 million for the year ended December 31, 2011 from $1.3 million for the year ended December 31, 2010 primarily due to an increase in the number and balance of properties owned, as well as the continued decline in real estate market values. Loan collection expense increased by $1.4 million, or 328.7%, to $1.8 million for the year ended December 31, 2011 from $422,000 for the year ended December 31, 2010 primarily due to increased expenses associated with the collection of a higher number and balance of nonperforming loans. Other expenses increased by $270,000, or 23.2%, to $1.4 million for the year ended December 31, 2011 from $1.2 million for the same period in 2010 primarily due to increases in loan expense and real estate taxes.

The Company’s assets decreased by $23.5 million, or 4.8%, to $463.7 million at December 31, 2011 from $487.2 million at December 31, 2010 primarily as a result of decreases in loans receivable and cash and cash equivalents. We used the cash received from the paydown in loans receivable during the year and excess cash at December 31, 2010 to allow higher rate certificates of deposit to run off, invest in investment securities, and increase our investment in Elkton Senior Apartments, LLC, a former other real estate owned property to whose development the Bank was contributing. Cash and cash equivalents decreased by $17.6 million, or 33.8%, to $34.4 million at December 31, 2011 from $52.0 million at December 31, 2010 primarily due to the decline in deposits, the purchase of investment securities, and the additional investment in Elkton Senior Apartments, LLC, partially offset by the decrease in loans receivable. Investment securities available-for-sale increased by $21.5 million to $23.7 million at December 31, 2011 from $2.2 million at December 31, 2010 primarily as a result of the cash obtained from the decline in loans receivable, as well as the investment of excess cash at December 31, 2010 in higher yielding assets.

The gross loans receivable portfolio decreased by $49.7 million, or 13.1%, to $330.3 million at December 31, 2011 from $379.9 million at December 31, 2010. The decrease in loans receivable reflects both a tightening of the Bank’s lending standards, diminished loan demand, and the transfer of nonperforming loans to other real estate owned. Management has also sought to shrink the loan portfolio in order to improve capital ratios. During the period, we realized a $18.6 million (22.8%) decline in construction and land development loans, a $6.5 million (5.5%) decrease in 1-4 family residential and home equity loans, a $665,000 (13.0%) decrease in multi-family residential loans, a $17.4 million (10.9%) decrease in commercial real estate loans, a $5.7 million (41.9%) decline in commercial business loans, and an $895,000 (23.6%) decline in consumer loans. The allowance for loan losses decreased by $2.7 million, or 17.7%, to $12.4 million at December 31, 2011 from $15.1 million at December 31, 2010 (see “Allowance for Loan Losses” below).

Other real estate owned increased $13.0 million, or 72.1%, to $31.0 million at December 31, 2011 from $18.0 million at December 31, 2010 due to the acquisition of additional properties in satisfaction of loans receivable. At December 31, 2011, $5.6 million of the other real estate owned balance consists of properties that have been sold. The properties cannot be accounted for as a sale because the Bank provided 100% financing to the purchaser. Once the purchaser contributes the required minimum investment, the sale will be reflected in the financial statements. Deferred tax assets decreased $952,000, or 9.3%, to $9.3 million at December 31, 2011 from $10.3 million at December 31, 2010 primarily due to loan loss expense for income tax reporting exceeding the expense for financial accounting reporting. Assets held for sale increased $4.4 million, or 296.2%, to $5.9 million at December 31, 2011 from $1.5 million at December 31, 2010 primarily due to the additional investment in Elkton Senior Apartments, LLC, partially offset by the valuation adjustment on premises held for sale. The Bank sold its interest in Elkton Senior Apartments, LLC subsequent to year-end. Other assets increased $3.1 million, or 77.4%, to $7.2 million at December 31, 2011 from $4.1 million at December 31, 2010, primarily due to an increase in income tax receivable, partially offset by the decline in the prepaid FDIC premium.

The Company’s liabilities decreased $18.2 million, or 4.1%, to $431.4 million at December 31, 2011 from $449.6 million at December 31, 2010. Deposits decreased $19.1 million, or 5.3%, to $339.1 million at December 31, 2011 from $358.1 million at December 31, 2010. Some of the cash received from the decline in loans receivable allowed us to not renew higher rate certificates of deposit. NOW and money market accounts increased by $4.0 million (8.7%), savings accounts increased by $374,000 (1.7%), certificates of deposit decreased by $20.1 million (7.6%), and checking accounts decreased by

The Bank’s total gross loans declined by $49.7 million, or 13.1%, during 2011. During the period, we realized a $18.6 million (22.8%) decline in construction and land development loans, a $6.5 million (5.5%) decrease in 1-4 family residential and home equity loans, a $665,000 (13.0%) decrease in multi-family residential loans, a $17.4 million (10.9%) decrease in commercial real estate loans, a $5.7 million (41.9%) decline in commercial business loans, and an $895,000 (23.6%) decline in consumer loans. The decline in loans receivable reflects the Bank’s tightened lending standards, diminished loan demand, and the transfer of nonperforming loans to other real estate owned, as well as efforts to shrink the balance sheet in order to improve capital ratios. The following table shows the composition of the loan portfolio at December 31.

(In thousands)	2011			2010			2009			2008			2007
Real estate loans:
Construction and land development	$	62,998		$	81,598		$	105,093		$	108,094		$	82,412
1-4 family residential and home equity		110,621			117,093			129,847			129,581			125,723
Multi-family residential		4,458			5,123			7,227			6,852			7,149
Commercial		141,438			158,799			172,703			143,126			126,850
Total real estate loans		319,515			362,613			414,870			387,653			342,134
Commercial business loans		7,849			13,513			19,290			15,995			10,206
Consumer loans		2,898			3,793			4,238			4,415			6,364
Gross loans		330,262			379,919			438,398			408,063			358,704
Less allowance for loan losses		(12,412	)		(15,077	)		(14,351	)		(6,314	)		(3,109	)
Net loans	$	317,850		$	364,842		$	424,047		$	401,749		$	355,595

	At December 31, 2011
	Remaining Maturities of Selected Credits in Years
(In thousands)	1 or Less		Over 1-5		Over 5		Total
Real estate:
Mortgage	$	112,952	$	170,387	$	14,848	$	298,187
Home equity and second mortgages		6,985		12,332		2,011		21,328
Commercial		4,464		3,070		315		7,849
Consumer		967		1,688		243		2,898
Total	$	125,368	$	187,477	$	17,417	$	330,262

Rate Terms:
Fixed	$	39,985	$	31,125	$	17,042	$	88,152
Variable or adjustable		85,383		156,352		375		242,110
Total	$	125,368	$	187,477	$	17,417	$	330,262

The Bank records provisions for loan losses in amounts necessary to maintain the allowance for loan losses at the level deemed appropriate. The allowance for loan losses is provided through charges to income in an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based upon evaluations of the collectability of loans and prior loan loss experience. The allowance is based on careful, continuous review and evaluation of the credit portfolio and ongoing, quarterly assessments of the probable losses inherent in the loan portfolio. The Bank employs a systematic methodology for assessing the appropriateness of the allowance, which includes determination of a specific allowance, a formula allowance, and an unallocated allowance. During the year ended December 31, 2011, there were no changes in the Bank’s methodology for assessing the appropriateness of the allowance.

The formula allowance is calculated by applying loss factors to corresponding categories of outstanding loans, excluding loans for which specific allocations have been made. Allowances are established for credits that do not have specific allowances according to the application of these credit loss factors to groups of loans based upon (a) their credit risk rating, for loans categorized as substandard or doubtful either by the Bank in its ongoing reviews or by bank examiners in their periodic examinations, or (b) by type of loans, for other credits without specific allowances. These factors are set by management to reflect its assessment of the relative level of risk inherent in each category of loans, based primarily on historical charge-off experience. During regulatory examinations each year, examiners review the credit portfolio, establish credit risk ratings for loans, identify charge-offs, and perform their own calculation of the allowance for loan losses. Additionally, the Bank engages an independent third party to review a significant portion of our loan portfolio. These reviews are intended to provide a self-correcting mechanism to reduce differences between estimated and actual observed losses.

The unallocated allowance is based upon management’s evaluation of current economic conditions that may affect borrowers’ ability to pay that are not directly measured in the determination of the specific and formula allowances. Management has chosen to apply a factor derived from the Board of Governors of the Federal Reserve System’s Principal Economic Indicators, specifically the charge-off and delinquency rates on loans and leases at commercial banks. This statistical data tracks delinquency ratios on a national level. While management does not believe the region that the Bank is located has been hit as hard as others across the nation, this ratio provides a global perspective on delinquency trends. Management has identified land acquisition and development loans, as well as construction speculation loans, as higher risk due to current economic factors. These loans are reviewed individually on a quarterly basis for specific impairment.

Determining the amount of the allowance for loan losses requires the use of estimates and assumptions, which is permitted under accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates. While management uses available information to estimate losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, as noted above, federal and state financial institution examiners, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

Management determined that the appropriate allowance for loan losses at December 31, 2011 was $12.4 million, (3.76% of total loans), a decrease of $2.7 million (17.7%) from the $15.1 million allowance (3.97% of total loans) at December 31, 2010. Net charge-offs for the year ended December 31, 2011 were 2.81% of average loans, as compared to net charge-offs of 1.14% of average loans for 2010. The provision for loan losses required for the years ended December 31, 2011 and 2010 was $7.0 million and $5.3 million, respectively. A summary of activity in the allowance is shown below.

	Years Ended December 31,
(Dollars in thousands)	2011			2010			2009			2008			2007

Balance of allowance, January 1	$	15,077		$	14,351		$	6,314		$	3,109		$	2,217
Loan charge-offs:
Real estate		(9,439	)		(4,532	)		(3,068	)		(189	)		0
Commercial loans		(982	)		(100	)		(88	)		(97	)		(30	)
Consumer		(40	)		(94	)		(72	)		(42	)		(40	)
Total charge-offs		(10,461	)		(4,726	)		(3,228	)		(328	)		(70	)
Loan recoveries:
Real estate		825			81			609			0			0
Commercial loans		0			1			0			110			0
Consumer		13			30			16			18			27
Total recoveries		838			112			625			128			27
Net charge-offs		(9,623	)		(4,614	)		(2,603	)		(200	)		(43	)
Provision for loan losses		6,958			5,340			10,640			3,405			935
Balance of allowance, December 31	$	12,412		$	15,077		$	14,351		$	6,314		$	3,109

Net charge-offs to average loans		2.81	%		1.14	%		0.63	%		0.05	%		0.01	%
Allowance to total loans		3.76	%		3.97	%		3.27	%		1.55	%		0.87	%

	2011				2010				2009				2008				2007
			Credit				Credit				Credit				Credit				Credit
(Dollars in thousands)	Amount		Mix		Amount		Mix		Amount		Mix		Amount		Mix		Amount		Mix
Amount applicable to:
Real estate loans:
Construction and land development	$	4,234	19	%	$	7,268	21	%	$	6,360	24	%	$	2,819	26	%	$	1,796	23	%
1-4 family residential and home equity		2,323	34			1,480	31			2,168	30			200	32			194	35
Multi-family residential		14	1			51	1			45	2			0	2			0	2
Commercial		4,243	43			4,455	42			3,079	39			1,248	35			931	35
Total Real Estate Loans		10,814	97			13,254	95			11,652	95			4,267	95			2,921	95
Commercial business loans		636	2			637	4			357	4			1,806	4			64	3
Consumer Loans		169	1			174	1			52	1			241	1			124	2
Unallocated		793	0			1,012	0			2,290	0			0	0			0	0
Total allowance	$	12,412	100	%	$	15,077	100	%	$	14,351	100	%	$	6,314	100	%	$	3,109	100	%

Management reviews and identifies loans and investments that require designation as nonperforming assets. Nonperforming assets are: loans accounted for on a nonaccrual basis, loans past due by 90 days or more but still accruing, restructured loans, and other real estate owned (assets acquired in settlement of loans). The increase in nonperforming assets is due to the continuing slow down in the real estate market. This slow down has resulted in the inability of investors to resell properties as originally anticipated, which has led to an increase in delinquencies. The Company continues to work with these customers, which has also led to an increase in restructured loans. The following table sets forth certain information with respect to nonperforming assets.

	December 31,
(Dollars in thousands)	2011			2010			2009			2008			2007
Non-accrual loans (1)	$	37,815		$	54,420		$	32,694		$	10,459		$	5,065
Loans 90 days past due and still accruing		0			0			0			0			0
Restructured loans (2)		25,771			13,283			11,959			0			0
Total non-performing loans (3)		63,586			67,703			44,653			10,459			5,065
Other real estate owned, net		30,966			17,994			4,594			2,843			655
Total non-performing assets	$	94,552		$	85,697		$	49,247		$	13,302		$	5,720

Non-performing loans to total loans		19.25	%		17.82	%		10.19	%		2.56	%		1.41	%
Non-performing assets to total assets		20.39	%		17.59	%		9.66	%		2.70	%		1.42	%
Allowance for loan losses to non-performing loans		19.52	%		22.27	%		32.14	%		60.37	%		61.38	%

(3) Performing loans considered potential problem loans, as defined and identified by management, amounted to $27,058,000 at December 31, 2011. Although these are loans where known information about the borrowers’ possible credit problems causes management to have doubts as to the borrowers’ ability to comply with the present loan repayment terms, most are well collateralized and are not believed to present significant risk of loss. Loans classified for regulatory purposes not included in nonperforming loans do not, in management’s opinion, represent or result from trends or uncertainties reasonably expected to materially affect future operating results, liquidity or capital resources or represent material credits where known information about the borrowers’ possible credit problems causes management to have doubts as to the borrowers’ ability to comply with the loan repayment terms.

The Bank maintains a portfolio of investment securities to provide liquidity as well as a source of earnings. The Bank’s investment securities portfolio consists primarily of U.S. Government and Agency securities and mortgage-backed and other securities issued by U.S. government-sponsored enterprises (“GSEs”) including Freddie Mac and Fannie Mae. The Bank also invests in securities backed by pools of SBA-guaranteed loans. The Bank has also invested in various mutual funds that invest in securities that the Bank is permitted to invest in directly, including the AMF Intermediate Mortgage, Ultra Short Mortgage, and Short U.S. Government Funds, which invest in agency and private label mortgage-backed securities. The Bank has also invested in the equity securities of Triangle Capital Corporation, a publicly traded business development/small business investment company that makes debt and equity investments in middle-market companies in the Southeastern states. As a member of the Federal Reserve and FHLB systems, the Bank is also required to invest in the stock of the Federal Reserve Bank of Richmond and FHLB of Atlanta, respectively.

(Dollars in thousands)	2011		2010		2009
Available-for-Sale:(1)
Mutual Funds-AMF Intermediate Mortgage Fund	$	135	$	133	$	148
Mutual Funds-AMF Ultra Short Mortgage Fund		576		581		571
Mutual Funds-AMF Short U.S. Government Fund		674		676		687
Equity Securities		362		359		229
SBA securitized loan pools		4,921		0		0
Other debt securities		3,167		0		0
Mortgage-backed Securities		13,821		410		79
Total		23,656		2,159		1,714

Held-to-Maturity:
U.S. Government and Agency (2)		750		750		500
SBA securitized loan pools		2,161		0		0
Other debt securities		1,500		0		0
Mortgage-backed Securities		5,334		8,689		4,149
Other		0		50		50
Total		9,745		9,489		4,699
Total Investment Securities (3)	$	33,401	$	11,648	$	6,413

	One Year or Less				One Year to Five Years				Five Years to Ten Years
			Weighted				Weighted				Weighted
			Average				Average				Average
(Dollars in thousands)	Amount		Yield		Amount		Yield		Amount		Yield
Available-for-Sale:
SBA securitized loan pools	$	—	—	%	$	988	3.63	%	$	3,933	0.86	%
Other debt securities		2,254	1.47			913	1.69			—	—
Mortgage Backed Securities		—	—			1,350	1.98			4,707	1.71
Held-to-Maturity:
U.S. Government and Agency		750	0.02			—	—			—	—
SBA securitized loan pools		—	—			2,161	0.91			—	—
Other debt securities		1,000	1.13			500	1.00			—	—
Mortgage Backed Securities		118	2.28			5,122	0.45			94	2.79
Total Debt Securities	$	4,122	1.15	%	$	11,034	1.14	%	$	8,734	1.34	%

	Over Ten Years				Total
			Weighted				Weighted
			Average				Average
(Dollars in thousands)	Amount		Yield		Amount		Yield
Available-for-Sale:
SBA securitized loan pools	$	—	—	%	$	4,921	1.42	%
Other debt securities		—	—			3,167	1.53
Mortgage Backed Securities		7,764	1.97			13,821	1.88
Held-to-Maturity:
U.S. Government and Agency		—	—			750	0.02
SBA securitized loan pools		—	—			2,161	0.91
Other debt securities		—	—			1,500	1.09
Mortgage Backed Securities		—	—			5,334	0.53
Total Debt Securities	$	7,764	1.97	%	$	31,654	1.40	%

		2011				2010
			Weighted					Weighted
	Average		Average	% of		Average		Average	% of
(Dollars in thousands)	Balance		Rate	Total		Balance		Rate	Total
NOW and Money Market Accounts	$	49,749	0.73%	14.38	%	$	43,966	1.31%	11.79	%
Savings accounts		22,220	0.25	6.42			21,820	0.44	5.85
Term Certificates		250,648	1.41	72.43			280,963	2.14	75.37
Checking Accounts		23,429	0.00	6.77			26,045	0.00	6.99
Total Deposits	$	346,046		100.00	%	$	372,794		100.00	%

2011						2010
		Maturity						Maturity
Amount		Date	Rate		Type	Amount		Date	Rate		Type

$	10,000	2012	5.060	%	Fixed	$	10,000	2012	5.060	%	Fixed
	7,500	2017	3.776		Fixed		7,500	2017	3.776		Fixed
	7,500	2017	3.690		Fixed		7,500	2017	3.690		Fixed
	11,000	2017	3.588		Fixed		11,000	2017	3.588		Fixed
	9,500	2017	3.875		Fixed		9,500	2017	3.875		Fixed
	15,000	2017	3.448		Fixed		15,000	2017	3.448		Fixed
	3,000	2017	2.955		Fixed		3,000	2017	2.955		Fixed
$	63,500					$	63,500

The ability to maximize net interest income is largely dependent upon the achievement of a positive interest rate spread (the difference between the weighted average interest yields earned on interest-earning assets and the weighted average interest rates paid on interest-bearing liabilities) that can be sustained during fluctuations in prevailing interest rates. Asset/liability management functions to maximize profitability within established guidelines for interest rate risk, liquidity, and capital adequacy. The Bank’s asset/liability management policies are designed to reduce the impact of changes in interest rates on its net interest income by achieving a more favorable match between the maturities or repricing dates of its interest-earning assets and interest-bearing liabilities. Measurement and monitoring of liquidity, interest rate risk, and capital adequacy are performed centrally through the Asset/Liability Management Committee, and reported under guidelines established by management, the Board of Directors and regulators. Oversight of this process is provided by the Board of Directors.

The Bank has implemented policies by generally emphasizing the origination of one-year, three-year and five-year adjustable rate mortgage loans, adjustable rate commercial loans and lines of credit, and short-term consumer loans. Since 1995, the Bank has, from time to time, originated fixed rate mortgages for sale in the secondary market. The Bank is currently originating loans for sale in the secondary market through the Federal Home Loan Mortgage Corporation. Management has been monitoring the retention of fixed rate loans through its asset/liability management policy. Management intends to continue to concentrate on maintaining its interest rate spread in a manner consistent with its lending policies, which are principally the origination of adjustable-rate mortgages and commercial loans, and may include an appropriate blend of fixed-rate mortgage loans in its primary market area.

The Bank’s net income is largely dependent on its net interest income. The Bank seeks to maximize its net interest margin within an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of assets differ significantly from the maturity or repricing characteristics of liabilities. Net interest income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing deposits and stockholders’ equity.

The Bank attempts to manage interest rate risk while enhancing net interest margin by adjusting its asset/liability position. At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the Bank may decide to increase its interest rate risk position somewhat in order to increase its net interest margin. The Bank monitors interest rate risk and adjusts the composition of its interest-related assets and liabilities in order to limit its exposure to changes in interest rates on net interest income over time. The Bank’s asset/liability committee reviews its interest rate risk position and profitability, and recommends adjustments. The asset/liability committee also reviews the securities portfolio, formulates investment strategies, and oversees the timing and implementation of transactions. Notwithstanding the Bank’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.

The Bank also analyzes interest rate risk based upon quantitative measures of the percentage changes in fair value of equity capital (or market value of portfolio equity) resulting from a hypothetical immediate change (or shock) of plus or minus 100, 200, 300, and 400 basis points in interest rate levels. Due to the current interest rate environment, the Company did not perform analysis on decreases of 200, 300, or 400 basis points as of December 31, 2011. This analysis is based upon models, which are based upon a number of significant assumptions regarding reactions of interest rates. At December 31, 2011,

this analysis indicated that a shock decrease of 100 basis points would increase the market value of portfolio equity by 7.1%, while interest rate shock increases of 100, 200, 300, and 400 basis points would decrease the market value of portfolio equity by 6.0%, 10.3%, 14.3%, and 18.1%, respectively. These models also provide an analysis of interest rate shock effects on net interest income. At December 31, 2011, this analysis indicated that a shock decrease of 100 basis points would increase net interest income by 8.2%. Interest rate shock increases of 100, 200, 300, and 400 basis points would decrease net interest income by 3.5%, 6.7%, 10.1%, and 13.5%, respectively.

Maryland		52-1883546
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

127 North Street, PO Box 568, Elkton, Maryland			21922-0568
(Address of principal executive office)			(Zip Code)

	Large accelerated filer o		Accelerated filer o
	Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company x

	2011									2010
	Stock Price Range						Per Share			Stock Price Range						Per Share
Quarter	Low			High			Dividend			Low			High			Dividend
1st Quarter		$	1.00		$	1.75		$	0.000		$	1.43		$	2.50		$	0.000
2nd Quarter			0.55			1.29			0.000			1.13			2.10			0.000
3rd Quarter			0.55			1.01			0.000			0.88			1.63			0.000
4th Quarter			0.30			1.01			0.000			0.85			1.60			0.000
Total								$	0.000								$	0.000