UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
o	For the quarterly period ended September 30, 2012.

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the transition period from __________ to __________

Commission File Number 0-24926

CECIL BANCORP, INC.

(Exact name of Registrant as specified in its charter)

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

127 North Street, Elkton, Maryland	21921
(Address of principal executive offices)	(Zip Code)

(410) 398-1650

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x YES     o NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x YES     o NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o YES     x NO

APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

At October 31, 2012, there were 7,422,164 shares of common stock outstanding

1

CECIL BANCORP, INC. AND SUBSIDIARIES

CONTENTS

		PAGE
PART I - FINANCIAL INFORMATION
ITEM 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets -	3
	September 30, 2012 and December 31, 2011
	Consolidated Statements of Operations and Comprehensive Income Loss	4-5
	for the Three and Nine Months Ended September 30, 2012 and 2011
	Consolidated Statements of Cash Flows	6
	for the Nine Months Ended September 30, 2012 and 2011
	Notes to Consolidated Financial Statements	7-27
ITEM 2.	Management’s Discussion and Analysis of Financial Condition	28-38
	and Results of Operations
ITEM 3.	Quantitative and Qualitative Disclosure About Market Risk	38
ITEM 4.	Controls and Procedures	38
PART II – OTHER INFORMATION		38-40
SIGNATURES		41
CERTIFICATIONS		42-45




2

PART I. FINANCIAL INFORMATION

ITEM 1.           FINANCIAL STATEMENTS

CECIL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(dollars in thousands)

	September 30,			December 31,
	2012			2011
ASSETS:
Cash and due from banks	$	1,618		$	1,578
Interest bearing deposits with banks		29,745			32,274
Federal funds sold		319			559
Total cash and cash equivalents		31,682			34,411
Investment securities:
Securities available-for-sale at fair value		29,205			23,656
Securities held-to-maturity (fair value of $4,904 in 2012 and $9,736 in 2011)		4,860			9,745
Restricted investment securities – at cost		4,204			4,296
Loans receivable		314,374			330,262
Less: allowance for loan losses		(9,731	)		(12,412	)
Net loans receivable		304,643			317,850
Other real estate owned		40,752			30,966
Premises and equipment, net		9,773			10,041
Accrued interest receivable		1,504			1,523
Mortgage servicing rights		444			467
Bank owned life insurance		8,422			8,284
Deferred tax assets		-			9,318
Assets held for sale		-			5,903
Income taxes receivable		5,509			5,276
Other assets		1,981			1,935
TOTAL ASSETS	$	442,979		$	463,671
LIABILITIES:
Deposits	$	342,114		$	339,075
Other liabilities		12,134			10,612
Junior subordinated debentures		17,000			17,000
Advances from Federal Home Loan Bank of Atlanta		53,500			63,500
Other borrowed funds		1,169			1,169
Total liabilities		425,917			431,356
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value; authorized 1,000,000 shares
Series A issued and outstanding 11,560 shares, liquidation preference $1,000 per share, in 2012 and 2011		11,317			11,200
Series B issued and outstanding 164,575 shares, liquidation preference $17.20 per share, in 2012 and zero in 2011		2,796			-
Common stock, $.01 par value; authorized 100,000,000 shares in 2012 and 10,000,000 in 2011, issued and outstanding 7,422,164 shares in 2012 and 2011		74			75
Additional paid in capital		12,299			12,299
Retained (deficit) earnings		(9,646	)		8,721
Accumulated other comprehensive income		222			20
Total stockholders’ equity		17,062			32,315
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	442,979		$	463,671

See accompanying notes to consolidated financial statements.

3

CECIL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

(dollars in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
INTEREST INCOME:
Interest and fees on loans	$	4,425		$	5,130		$	13,570		$	16,321
Interest on investment securities		111			61			294			215
Dividends on FHLB and FRB stock		27			17			83			51
Other interest income		16			11			45			44
Total interest income		4,579			5,219			13,992			16,631
INTEREST EXPENSE:
Interest expense on deposits		935			1,076			2,845			3,462
Interest expense on junior subordinated debentures		96			176			354			652
Interest expense on advances from FHLB		493			620			1,649			1,841
Interest expense on other borrowed funds		-			20			20			44
Total interest expense		1,524			1,892			4,868			5,999
NET INTEREST INCOME		3,055			3,327			9,124			10,632
PROVISION FOR LOAN LOSSES		2,850			958			5,910			5,958
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		205			2,369			3,214			4,674
NONINTEREST INCOME:
Deposit account fees		125			151			361			425
ATM fees		117			116			355			339
Commission income		-			-			1			1
Gain on sale of loans		28			44			1,381			131
Loss on sale of other real estate owned		-			(141	)		(225	)		(286	)
Loss on investments		-			-			-			(50	)
Income from bank owned life insurance		46			55			138			157
Other		147			75			399			224
Total noninterest income		463			300			2,410			941
NONINTEREST EXPENSE:
Salaries and employee benefits		1,307			1,299			3,789			3,988
Occupancy expense		184			237			543			637
Equipment and data processing expense		310			331			944			957
FDIC deposit insurance premiums		272			52			802			876
Other real estate owned expense and valuation		4,520			298			6,362			1,639
Professional fees		413			482			1,327			808
Loan collection expense		86			823			516			1,337
Other		350			432			1,113			1,139
Total noninterest expense		7,442			3,954			15,396			11,381
NET LOSS BEFORE INCOME TAXES		(6,774	)		(1,285	)		(9,772	)		(5,766	)
INCOME TAX EXPENSE (BENEFIT)		9,081			(537	)		7,869			(2,370	)
NET LOSS (CARRIED FORWARD)	$	(15,855	)	$	(748	)	$	(17,641	)	$	(3,396	)

4

CECIL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

(dollars in thousands, except per share data)

(Continued)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
NET LOSS (BROUGHT FORWARD)	$	(15,855	)	$	(748	)	$	(17,641	)	$	(3,396	)
OTHER COMPREHENSIVE GAIN (LOSS)
Unrealized gains (losses) on investment securities, net of deferred taxes		100			(10	)		202			(59	)
TOTAL COMPREHENSIVE LOSS	$	(15,755	)	$	(758	)	$	(17,439	)	$	(3,455	)
NET LOSS	$	(15,855	)	$	(748	)	$	(17,641	)	$	(3,396	)
PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION		(359	)		(182	)		(726	)		(544	)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS	$	(16,214	)	$	(930	)	$	(18,367	)	$	(3,940	)
Loss per common share - basic	$	(2.18	)	$	(0.13	)	$	(2.47	)	$	(0.53	)
Loss per common share - diluted	$	(2.18	)	$	(0.13	)	$	(2.47	)	$	(0.53	)
Dividends declared per common share	$	0.00		$	0.00		$	0.00		$	0.00

See accompanying notes to consolidated financial statements.

5

CECIL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

 (dollars in thousands)

	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(17,641	)	$	(3,396	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,014			651
Provision for loan losses		5,910			5,958
Gain on sale of loans		(1,381	)		(131	)
Loss on sale of other real estate owned		225			286
Loss on investments		-			50
Loss on premises and equipment		6			22
Gain on assets held for sale		(18	)		-
Income from bank owned life insurance		(138	)		(157	)
Valuation allowance on other real estate owned		5,338			1,415
Valuation allowance on deferred tax assets		9,187			-
Excess servicing rights		(58	)		(69	)
Origination of loans held for sale		(19,427	)		(5,798	)
Proceeds from sales of loans held for sale		20,789			5,872
Net change in:
Accrued interest receivable and other assets		(323	)		(7,482	)
Other liabilities		913			577
Net cash provided by (used in) operating activities		4,396			(2,202	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale		(13,692	)		(8,119	)
Purchases of investment securities held-to-maturity		(500	)		(17,519	)
Net redemption of restricted investment securities		92			53
Proceeds from sales, maturities, calls and principal payments of investment securities available-for-sale		8,054			419
Proceeds from maturities, calls and principal payments of investment securities held-to-maturity		5,253			11,697
Net (increase) decrease in loans		(10,728	)		16,429
Proceeds from sale of other real estate owned		2,768			1,707
Proceeds from sale of premises and equipment		25			20
Proceeds from sale of assets held for sale		5,911			-
Purchases of premises and equipment		(143	)		(340	)
Net cash (used in) provided by investing activities		(2,960	)		4,347
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		3,039			(15,401	)
Net decrease in advances from Federal Home Loan Bank of Atlanta		(10,000	)		-
Proceeds from issuance of preferred stock		2,796			-
Proceeds from issuance of common stock		-			21
Net cash used in financing activities		(4,165	)		(15,380	)
DECREASE IN CASH AND CASH EQUIVALENTS		(2,729	)		(13,235	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		34,411			51,969
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	31,682		$	38,734
Supplemental disclosures of cash flows information:
Cash paid for income taxes	$	-		$	1,355
Cash paid for interest	$	4,595		$	5,342
Transfer of loans to other real estate owned	$	18,044		$	10,400

See accompanying notes to consolidated financial statements.

6

CECIL BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

1.       GENERAL

In the opinion of management of Cecil Bancorp, Inc. and subsidiaries (the “Company”), the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position as of September 30, 2012, the results of its operations and comprehensive income for the three and nine months ended September 30, 2012 and 2011, and cash flows for the nine months ended September 30, 2012 and 2011.  These statements are condensed and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  The statements should be read in conjunction with the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year or for any other period.

2.       FINANCIAL STATEMENT PREPARATION

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Estimates are used when accounting for uncollectible loans, depreciation and amortization, intangible assets, deferred income taxes, and contingencies, among others.  Actual results could differ from those estimates.

3.       GOING CONCERN CONSIDERATION

Due to our elevated level of nonperforming assets and recurring operating losses, there is substantial doubt regarding our ability to continue as a going concern.  Management is taking steps to improve our financial condition.  The financial statements and the accompanying footnotes have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and does not include any adjustment to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result form the outcome of any extraordinary regulatory action, which would affect our ability to continue as a going concern.

4.       EARNINGS PER SHARE

Basic earnings per common share are computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period.  Diluted earnings per share are computed after adjusting the denominator of the basic earnings per share computation for the effects of all dilutive potential common shares outstanding during the period.  The dilutive effects of options, warrants, and their equivalents are computed using the “treasury stock” method.  For the three and nine months ended September 30, 2012 and 2011, all 523,076 options and warrants were excluded from the diluted earnings per share calculation because their effect was antidilutive.  All earnings per share calculations have been adjusted to give retroactive effect to the 2-for-1 stock split, effected through a 100% stock dividend, declared by the Board of Directors in May 2011.  The calculation of net loss per common share for the three and nine months ended September 30, 2012 and 2011 is as follows:

7

	Three Months Ended September 30,						Nine Months Ended September 30,
Basic and diluted:	2012			2011			2012			2011
Net loss	$	(15,855,000	)	$	(748,000	)	$	(17,641,000	)	$	(3,396,000	)
Preferred stock dividends and discount accretion		(359,000	)		(182,000	)		(726,000	)		(544,000	)
Net loss available to common stockholders	$	(16,214,000	)	$	(930,000	)	$	(18,367,000	)	$	(3,940,000	)
Average common shares outstanding		7,422,164			7,419,496			7,422,164			7,410,979
Basic and diluted loss per common share	$	(2.18	)	$	(0.13	)	$	(2.47	)	$	(0.53	)

5.       ACCOUNTING FOR STOCK BASED COMPENSATION PLANS

In November 2009, the Company approved the granting of 120,250 restricted stock awards with a fair market value of $2.00 per share.  The awards vest over a period of five years.  All restricted stock awards have been adjusted to give retroactive effect to the 2-for-1 stock split declared by the Board of Directors in May 2011.  A summary of the Company’s activity and related information for restricted stock for the periods indicated is as follows:

	Nine Months Ended						Year Ended
	September 30, 2012						December 31, 2011
				Weighted-						Weighted-
				Average						Average
	Shares			Exercise Price			Shares			Exercise Price
Unvested at beginning of period		111,694			$	2.00		116,288			$	2.00
Forfeited		(780	)			2.00		(1,926	)			2.00
Awarded		—				—		—				—
Released		—				—		(2,668	)			2.00
Unvested at end of period		110,914			$	2.00		111,694			$	2.00

6.       ASSETS MEASURED AT FAIR VALUE

The Company applies guidance issued by FASB regarding fair value measurements, which provides a framework for measuring and disclosing fair value under generally accepted accounting principles.  The guidance applies only to fair value measurements required or permitted under current accounting pronouncements, but does not require any new fair value measurements.  Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date.  The guidance also expands disclosures about financial instruments that are measured at fair value and eliminates the use of large position discounts for financial instruments quoted in active markets.  The disclosure’s emphasis is on the inputs used to measure fair value and the effect on the measurement on earnings for the period.  The adoption of the guidance did not have any effect on the Company’s financial position or results of operations.  For Level 1 assets, the Company uses quoted prices in active markets.  For Level 2 assets, the Company uses information from a third party pricing service, which is estimated using market prices of comparable instruments or other methods, such as the present value of future cash flows.  The following table shows the value (in thousands) at September 30, 2012 and December 31, 2011 of each major category of assets measured at fair value on the consolidated balance sheets, which consists solely of investment securities available-for-sale.  The changes in fair value were reflected as a component of other comprehensive income and did not affect net income.

8

	Fair Value Measurements at Reporting Date Using
Description	Carrying Value		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2012
Investment securities available-for-sale
Mutual funds – mortgage securities	$	713	$	713	$	—	$	—
Mutual funds – U.S. Government
securities		676		676		—		—
Equity securities		434		434		—		—
SBA securitized loan pools		3,920		—		3,920		—
Other debt securities		1,288		—		1,288		—
Mortgage-backed securities		22,174		—		22,174		—
Total investment securities available-for-sale	$	29,205	$	1,823	$	27,382	$	—
	Fair Value Measurements at Reporting Date Using
Description	Carrying Value		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2011
Investment securities available-for-sale
Mutual funds – mortgage securities	$	711	$	711	$	—	$	—
Mutual funds – U.S. Government
securities		674		674		—		—
Equity securities		362		362		—		—
SBA securitized loan pools		4,921		—		4,921		—
Other debt securities		3,167		—		3,167		—
Mortgage-backed securities		13,821		—		13,821		—
Total investment securities available-for-sale	$	23,656	$	1,747	$	21,909	$	—

We may be required from time to time to measure certain other financial assets and liabilities at fair value on a nonrecurring basis.  These adjustments to fair value usually result from application of lower of cost or market accounting or write-downs of individual assets.  For assets measured at fair value on a nonrecurring basis at September 30, 2012 and December 31, 2011, the following table provides (in thousands) the level of valuation assumptions used to determine each adjustment and the carrying value of the assets.  For both other real estate owned and impaired loans, Level 3 assets are valued at the lesser of the unpaid principal balance of the loan, or the appraised value of the underlying collateral, as determined by a third party appraiser.  There have been no changes in valuation techniques for the quarter ended September 30, 2012.  There were no transfers between valuation levels for any assets during the quarter ended September 30, 2012.

9

	Fair Value Measurements at Reporting Date Using
			Quoted Prices
			In Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2012
Other real estate owned:
Construction & Land Development	$	23,533	$	0	$	0	$	23,533
1-4 Family Residential		8,733		0		0		8,733
Commercial Real Estate		8,486		0		0		8,486
Total	$	40,752	$	0	$	0	$	40,752
Impaired loans:
Construction & Land Development	$	30,430	$	0	$	0	$	30,430
1-4 Family Residential		13,512		0		0		13,512
Commercial Real Estate		20,840		0		0		20,840
Commercial Business		226		0		0		226
Total	$	65,008	$	0	$	0	$	65,008
December 31, 2011
Other real estate owned:
Construction & Land Development	$	14,747	$	0	$	0	$	14,747
1-4 Family Residential		7,179		0		0		7,179
Commercial Real Estate		9,040		0		0		9,040
Total	$	30,966	$	0	$	0	$	30,966
Impaired loans:
Construction & Land Development	$	23,266	$	0	$	0	$	23,266
1-4 Family Residential		14,531		0		0		14,531
Multi-Family Residential		286		0		0		286
Commercial Real Estate		23,584		0		0		23,584
Commercial Business		661		0		0		661
Consumer		163		0		0		163
Total	$	62,491	$	0	$	0	$	62,491

7.           FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB ASC 825-10-50 requires that the Company disclose estimated fair values for both its on and off-balance-sheet financial instruments. The following methods and assumptions were used to estimate the fair value of the Company’s financial instruments. Changes in estimates and assumptions could have a significant impact on these fair values.

Investment Securities - The fair values of investment securities are based on quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices of comparable instruments.

Loans Receivable - The fair value of the loan portfolio is estimated by evaluating homogeneous categories of loans with similar financial and credit risk characteristics. Loans are segregated by types, such as residential

10

mortgage, commercial real estate and consumer. Each loan category is further segmented into fixed and adjustable-rate interest terms.

The fair values of each loan category are estimated by discounting contractual cash flows adjusted for estimated prepayments. Assumptions regarding prepayment estimates and discount rates are judgmentally determined by using available market information.

Restricted Investment Securities - The fair value of the Company’s investment in stock of the FHLB and FRB approximates its carrying value.

Deposits - The fair values of deposits are estimated using a discounted cash flow calculation, adjusted for estimated decay rates, that applies interest rates currently offered for funding sources with similar maturities. Assumptions regarding discount rates and decay estimates are judgmentally determined by using available market information.

Junior Subordinated Debentures – The fair value was estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms.

Advances from the FHLB - The fair value of FHLB advances was estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms.

Other Borrowed Funds – The fair value was estimated by computing the discounted value of contractual cash flows at current interest rates for obligations with similar remaining terms.

Commitments to Extend Credit - The Company charges fees for commitments to extend credit. Interest rates on loans for which these commitments are extended are normally committed for periods of less than one month. Fees charged on standby letters of credit and other financial guarantees are deemed to be immaterial and these guarantees are expected to be settled at face amount or expire unused. It is impractical to assign any fair value to these commitments.

The estimated fair values of financial instruments (in thousands) at September 30, 2012 are as follows:

							Fair Value Measurements at Reporting Date Using
							Quoted Prices
							In Active			Significant
							Markets for			Other			Significant
							Identical			Observable			Unobservable
	Carrying						Assets			Inputs			Inputs
	Value			Fair Value			(Level 1)			(Level 2)			(Level 3)
Financial assets:
Investment securities:
Available-for-sale		$	29,205		$	29,205		$	1,823		$	27,382		$	—
Held-to-maturity			4,860			4,904			—			4,904			—
Loans receivable			314,374			344,922			—			—			344,922
Restricted investment securities			4,204			4,204			—			4,204			—
Financial liabilities:
Deposits			342,114			327,428			—			—			327,428
Junior subordinated debentures			17,000			17,026			—			17,026			—
Advances from FHLB			53,500			53,565			—			53,565			—
Other borrowed funds			1,169			1,168			—			1,168			—

11

The estimated fair values of financial instruments (in thousands) at December 31, 2011 are as follows:

							Fair Value Measurements at Reporting Date Using
							Quoted Prices
							In Active			Significant
							Markets for			Other			Significant
							Identical			Observable			Unobservable
	Carrying						Assets			Inputs			Inputs
	Value			Fair Value			(Level 1)			(Level 2)			(Level 3)
Financial assets:
Investment securities:
Available-for-sale		$	23,656		$	23,656		$	1,747		$	21,909		$	—
Held-to-maturity			9,745			9,736			—			9,736			—
Loans receivable			330,262			401,098			—			—			401,098
Restricted investment securities			4,296			4,296			—			4,296			—
Financial liabilities:
Deposits			339,075			322,027			—			—			322,027
Junior subordinated debentures			17,000			14,711			—			14,711			—
Advances from FHLB			63,500			63,662			—			63,662			—
Other borrowed funds			1,169			1,168			—			1,168			—

8.           INVESTMENT SECURITIES

Investment securities have been classified in the consolidated balance sheets according to management’s intent and ability to hold the investment.  Investment securities at September 30, 2012 and December 31, 2011 are summarized in the following table (in thousands).

	September 30, 2012
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-Sale:
Mutual funds - mortgage securities	$	747	$	5	$	39	$	713
Mutual funds - U.S. Government securities		686		—		10		676
Equity securities		226		208		—		434
SBA securitized loan pools		3,964		5		49		3,920
Other debt securities		1,289		—		1		1,288
Mortgage-backed securities		21,928		269		23		22,174
	$	28,840	$	487	$	122	$	29,205
Held-to-Maturity:
SBA securitized loan pools	$	1,543	$	—	$	17	$	1,526
Other debt securities		500		10		—		510
Mortgage-backed securities		2,567		56		5		2,618
U. S. Treasury securities and obligations		250		—		—		250
	$	4,860	$	66	$	22	$	4,904

12

	December 31, 2011
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-Sale:
Mutual funds - mortgage securities	$	747	$	5	$	41	$	711
Mutual funds - U.S. Government securities		686		—		12		674
Equity securities		226		136		—		362
SBA securitized loan pools		4,947		9		35		4,921
Other debt securities		3,200		4		37		3,167
Mortgage-backed securities		13,817		49		45		13,821
	$	23,623	$	203	$	170	$	23,656
Held-to-Maturity:
SBA securitized loan pools	$	2,161	$	—		32	$	2,129
Other debt securities		1,500		12		—		1,512
Mortgage-backed securities		5,334		41		30		5,345
U. S. Treasury securities and obligations		750		—		—		750
	$	9,745	$	53	$	62	$	9,736

As of September 30, 2012, unrealized losses (in thousands) on securities were comprised of the following based on the length of time that the securities have been in a continuous loss position:

	Less than 12 Months				More than 12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Available-for-Sale:
Mutual funds – mortgage securities	$	—	$	—	$	136	$	39	$	136	$	39
Mutual funds – US Govt securities		—		—		676		10		676		10
SBA securitized loan pools		1,076		38		507		11		1,583		49
Other debt securities		788		1		—		—		788		1
Mortgage-backed securities		3,699		9		336		14		4,035		23
Held-to-Maturity:
SBA securitized loan pools		301		3		1,175		14		1,476		17
Mortgage-backed securities		—		—		522		5		522		5
	$	5,864	$	51	$	3,352	$	93	$	9,216	$	144

As of December 31, 2011, unrealized losses (in thousands) on securities were comprised of the following based on the length of time that the securities have been in a continuous loss position:

	Less than 12 Months				More than 12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Available-for-Sale:
Mutual funds – mortgage securities	$	—	$	—	$	135	$	41	$	135	$	41
Mutual funds – US Govt securities		—		—		674		12		674		12
SBA securitized loan pools		3,892		35		—		—		3,892		35
Other debt securities		913		37		—		—		913		37
Mortgage-backed securities		7,141		41		203		4		7,344		45
Held-to-Maturity:
SBA securitized loan pools		2,129		32		—		—		2,129		32
Mortgage-backed securities		1,799		30		—		—		1,799		30
	$	15,874	$	175	$	1,012	$	57	$	16,886	$	232

13

The securities with unrealized holding losses are impaired due to declines in fair value resulting from changes in interest rates. None of these securities have exhibited a decline in value due to changes in credit risk. Additionally, the Company has the intent and ability to hold the mortgage-backed securities until they mature, and the equity securities until the foreseeable future, does not expect to realize losses on any of the investments, and it is more likely than not that we will not be required to sell. Therefore, management does not consider the declines in fair value to be other than temporary.

9.               CREDIT QUALITY OF LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The Company has segregated its loan portfolio into six segments, including construction and land development, 1-4 family residential, multi-family residential, commercial real estate, commercial business, and consumer.  The Company’s primary market area is in Northeastern Maryland in Cecil and Harford Counties, so exposure to credit risk is significantly affected by changes in these counties.

Construction lending primarily involves 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-to-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 originates loans secured by raw land, which are generally 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%.  Land loans have a higher level of risk than loans for the purchase of existing homes since collateral values can only be estimated at the time the loan is approved.  The Bank has sought to minimize this risk by offering such financing primarily to builders and developers to whom the Bank has loaned funds in the past and to persons who have previous experience in such projects.

The Bank offers fixed and adjustable rate conventional mortgage loans on one-to-four family residential dwellings.  Most loans are originated in amounts up to $350,000 on properties located in the Bank’s primary market area.  These loans are generally for terms of 15, 20 and 30 years amortized on a monthly basis with interest and principal due each month.  The Bank retains all adjustable rate mortgage loans it originates and sells the majority of fixed rate loans, primarily to FHLMC, with servicing retained by the Bank.  The retention of adjustable rate loans helps reduce the Bank’s exposure to rising interest rates.  However, 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 the interest cost to the borrower.

The Bank originates multi-family residential loans in its market area.  These loans are generally larger and involve greater risks than one-to-four family residential loans.  Because payments on these loans are often dependent on the successful operation or management of the property, 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.  The loans typically have terms of 20 to 40 years, with rate adjustments every one, three, or five years.  They generally have imbedded interest rate floors, with no interest rate ceilings, and have no interest rate change limitations.

The Bank primarily originates commercial real estate loans in its market area.  These loans are generally larger and involve greater risks that one-to-four family residential loans.  Because payments on these loans are often dependent on the successful operation or management of the property, 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.  The loans typically have terms of 20 to 40 years, with rate adjustments every one, three, or five years.  They generally have imbedded interest rate floors, with no interest rate ceilings, and have no interest rate change limitations.  The Bank’s commercial real estate loans are typically secured by retail or wholesale establishments, motels/hotels, service industries, and industrial or warehouse facilities.  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.

14

The Bank offers secured and unsecured commercial business loans and lines of credit to 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 the principals of the business, the risk of loss on these loans is substantially greater than the risk of loss from residential real estate lending.

The Bank’s consumer loans consist of automobile loans, deposit account loans, home improvement loans, and other consumer loans.  The loans are generally offered for terms of up to five years at fixed interest rates.  Consumer loans are generally originated at higher interest rates than residential mortgage loans because of their higher risk.  Repossessed collateral for a defaulted loan may not provide an adequate source of repayment as a result of damage, loss, or depreciation.  In addition, 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.

On an ongoing basis, the Bank assigns a grade to each of its loans.  The internal grades are pass, special mention, substandard, doubtful, and loss.  Loans graded pass are loans where the borrower exhibits a strong balance sheet position and good earnings and cash flow history.  Loans graded special mention show potential weaknesses that deserve the Bank’s close attention.  If these potential weaknesses are not corrected, they may result in deterioration of the repayment prospects for the loan in the Bank’s credit position at some future date.  Substandard loans are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any.  Substandard loans have a well defined weakness that could jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the Bank will sustain some loss if the weaknesses are not corrected.  Loans graded doubtful have all the weaknesses inherent in substandard loans with the added characteristic that the weaknesses make collection or liquidation in full highly improbable.  Assets graded loss are considered uncollectible and of such little value that their continuance as an asset is not warranted.  The classification does not mean the loan has absolutely no recovery value, but that it is not practical to defer charging off the loan even though partial recovery may be effected in the future.

In accordance with new standards issued under the Disclosures of Credit Quality of Financing Receivables and the Allowance for Loan Losses, the following tables show credit quality indicators, the aging of receivables, and disaggregated balances of loans receivable and the allowance for loan losses (in thousands) as of September 30, 2012 and December 31, 2011.

Credit Quality Indicators
As of September 30, 2012
	Construction
	& Land		1-4 Family		Multi-Family		Commercial		Commercial
	Development		Residential		Residential		Real Estate		Business		Consumer		Total
Credit risk profile by internally assigned grade:
Pass	$	15,976	$	78,599	$	4,522	$	112,904	$	5,341	$	2,336	$	219,678
Special mention		2,202		1,796		-		19,327		82		5		23,412
Substandard		39,259		13,541		-		15,099		3,385		-		71,284
Total	$	57,437	$	93,936	$	4,522	$	147,330	$	8,808	$	2,341	$	314,374
Credit risk profile based on payment activity:
Current	$	54,440	$	79,188	$	4,225	$	137,700	$	8,000	$	2,339	$	285,892
Greater than 30 days past due		2,997		14,748		297		9,630		808		2		28,482
Total	$	57,437	$	93,936	$	4,522	$	147,330	$	8,808	$	2,341	$	314,374

15

The majority of our substandard loans are current with respect to their payment activity, but they are classified substandard because of other well defined weaknesses relating to the loan or financial condition of the borrower.

Credit Quality Indicators
As of December 31, 2011
	Construction
	& Land		1-4 Family		Multi-Family		Commercial		Commercial
	Development		Residential		Residential		Real Estate		Business		Consumer		Total
Credit risk profile by internally assigned grade:
Pass	$	28,194	$	86,467	$	4,458	$	118,723	$	6,359	$	2,734	$	246,485
Special mention		7,462		11,331		-		7,455		804		6		27,058
Substandard		27,342		12,823		-		15,710		686		158		56,719
Total	$	62,998	$	110,621	$	4,458	$	141,438	$	7,849	$