<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 29, 1996
OR
/ / 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: 0-18107
MARYLAND FEDERAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 52-1640579
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3505 HAMILTON STREET
HYATTSVILLE, MARYLAND 20782
(Address) (Zip Code)
Registrant's telephone number, including area code: (301) 779-1200
Securities registered pursuant to Section 12(b) of the Act:
NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
PREFERRED STOCK PURCHASE RIGHTS
COMMON STOCK (PAR VALUE $.01 PER SHARE)
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or 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. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of April 26, 1996, the aggregate value of the 2,840,835 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
319,233 shares held by all directors and officers of the Registrant as a group,
was approximately $85,225,050. This figure is based on the closing price of
$30.00 per share of the Registrant's Common Stock on April 26, 1996.
Number of shares of Common Stock outstanding as of April 26, 1996: 3,160,068
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year
ended February 29, 1996 are incorporated into Part II, Items 5 - 8 of this Form
10-K.
(2) Portions of the definitive proxy statement for the 1996 Annual Meeting
of Stockholders are incorporated into Part III, Items 10 - 13 of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Maryland Federal Bancorp, Inc. ("MFB" or the "Company") was incorporated
under the laws of the State of Maryland in June 1989 and is the unitary
savings and loan holding company and sole stockholder of Maryland Federal
Savings and Loan Association ("Maryland Federal" or the "Association"). The
Company does not presently own or operate any subsidiary except for the
Association. Maryland Federal's business is conducted through 25 branch
offices located in Prince George's, Montgomery, Charles, Calvert and Anne
Arundel counties, Maryland, six loan production offices, and one wholly-owned
subsidiary. The principal executive offices of both the Company and the
Association are located at 3505 Hamilton Street, Hyattsville, Maryland 20782,
and their telephone number is (301) 779-1200.
On a consolidated basis, at February 29, 1996, MFB had total assets of
$1.14 billion, total liabilities of $1.05 billion and total stockholders'
equity of $94.0 million or $29.84 per share based on 3,149,705 shares of
common stock outstanding. MFB had net income of $8.7 million for the year
ended February 29, 1996.
The Association is primarily engaged in the business of attracting
deposits from the general public and investing such deposits primarily in
permanent loans secured by first liens on one- to four-family residential
properties and, to a lesser extent, in commercial real estate located in the
Association's market area and in consumer loans. The Association also
maintains a substantial portfolio of mortgage-backed securities as well as
United States Government and agency securities and other permissible
investments and, through a subsidiary, engages in insurance agency activities
to a limited extent.
The Company, as a registered savings and loan holding company, is
subject to examination and regulation by the Office of Thrift Supervision
("OTS"), a department of the United States Treasury, and is subject to
various reporting and other requirements of the Securities and Exchange
Commission ("SEC"). Maryland Federal, as a federally chartered savings and
loan association, is subject to examination and comprehensive regulation by
the OTS, which became the successor to the Federal Home Loan Bank Board
("FHLBB") pursuant to the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA"), which was enacted in August 1989, and by
the Federal Deposit Insurance Corporation ("FDIC"). Customer deposits with
the Association are insured to the maximum extent provided by law through the
Savings Association Insurance Fund ("SAIF"), which is administered by the
FDIC. Maryland Federal is a member of the Federal Home Loan Bank of Atlanta
("FHLB of Atlanta"), which is one of 12 regional banks comprising the Federal
Home Loan Bank System ("FHLB System"). Maryland Federal is further subject to
regulations administered by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board") governing reserves required to be maintained
against deposits and certain other matters.
<PAGE>
2
LENDING ACTIVITIES
LOAN AND MORTGAGE-BACKED SECURITY PORTFOLIO COMPOSITION. Maryland
Federal's net loan and mortgage-backed security portfolio totalled $1.06
billion at February 29, 1996, representing 92.5% of the Company's $1.14
billion of total assets at that date. The Association's total loan portfolio
at February 29, 1996 consisted primarily of conventional mortgage loans,
which are loans that are neither insured by the Federal Housing
Administration ("FHA") nor partially guaranteed by the Department of Veterans
Affairs ("VA"). In addition, the Association maintains a portfolio of
mortgage-backed securities, which consists primarily of Government National
Mortgage Association ("GNMA"), Federal Home Loan Mortgage Corporation
("FHLMC") and Federal National Mortgage Association ("FNMA") participation
certificates. GNMA certificates are guaranteed by the full faith and credit
of the United States while FHLMC and FNMA certificates are guaranteed by
those quasi-governmental agencies.
At February 29, 1996, single-family residential loans comprised the
largest group of loans, amounting to $948.0 million or 88.8% of the gross
loan and mortgage-backed securities portfolio. The Association also had
$66.5 million of mortgage-backed securities, which accounted for 6.2% of the
gross loan and mortgage-backed securities portfolio at such date.
Construction loans at such date amounted to $5.2 million or 0.5% of the gross
loan and mortgage-backed securities portfolio. Commercial real estate loans
accounted for substantially all of the remainder of the loan portfolio,
amounting to $41.8 million or 3.9% of the gross loan and mortgage-backed
securities portfolio at February 29, 1996.
In recent years, management of Maryland Federal has increased the
origination of adjustable-rate and/or short-term loans, which included
primarily adjustable-rate mortgage loans ("ARMs"). Since fiscal 1991, the
Association has significantly increased its origination of second mortgages
and home equity lines of credit from prior years due to the shorter terms and
the low level of credit risk associated with such loans. The origination of
ARMs, commercial loans, consumer loans and construction loans accounted for
52.8%, 77.7% and 50.7% of total loans originated in fiscal 1994, 1995 and
1996, respectively.
Commercial real estate lending entails significant additional risks as
compared with single-family residential property lending. It is the
Association's policy to limit its origination of commercial real estate loans.
<PAGE>
3
The following table sets forth the composition of the Association's loan
portfolio by type of loan at the dates indicated.
<TABLE>
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Permanent loans:
Single-family(1) $947,995 88.8% $855,857 86.8% $656,833 86.5% $596,508 83.0% $590,467 84.5%
Multi-family 2,472 0.2 2,662 0.3 2,740 0.4 2,807 0.4 2,897 0.4
Commercial(2) 41,824 3.9 40,731 4.1 36,548 4.8 39,252 5.5 38,325 5.5
Land -- -- -- -- 1,542 0.2 1,583 0.2 -- --
Construction loans:
Single-family 2,815 0.3 1,244 0.1 6,485 0.9 11,581 1.6 5,428 0.8
Other property 2,344 0.2 7,315 0.7 7,849 1.0 8,447 1.2 8,534 1.2
Mortgage-backed securities 66,491 6.2 75,804 7.7 44,200 5.8 53,672 7.4 45,823 6.5
Consumer and other loans 4,232 0.4 2,997 0.3 2,788 0.4 5,113 0.7 7,531 1.1
---------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total gross loans and
mortgage-backed
securities receivable 1,068,173 100.00% 986,610 100.0% 758,985 100.0% 718,963 100.0% 699,005 100.0%
------ ----- ----- ----- -----
------ ----- ----- ----- -----
Less:
Undisbursed portion of
mortgage loans 1,722 2,728 8,609 11,135 5,425
Unamortized premiums and
discounts, net 783 1,010 1,025 1,581 1,467
Net deferred loan fees 3,815 4,284 4,065 4,065 3,233
Allowance for loan
losses 4,474 4,424 4,187 4,267 2,348
---------- -------- -------- -------- --------
Total loans and mortgage-
backed securities
receivable, net $1,057,379 $974,164 $741,099 $697,915 $686,532
---------- -------- -------- -------- --------
---------- -------- -------- -------- --------
</TABLE>
_______________
(1) Includes $48.3 million, $48.3 million, $37.8 million, $33.3 million and
$36.5 million of second-mortgage loans at each of the respective dates.
(2) Includes $13.6 million, $12.5 million, $10.8 million, $6.4 million and $5.6
million of single-family, non-owner occupied rental properties at each of
the respective dates.
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4
CONTRACTUAL MATURITIES OF LOANS. The following table sets forth the
scheduled contractual maturities of the Association's loans and mortgage-backed
securities at February 29, 1996. Demand loans, loans having no stated schedule
of repayments and no stated maturity, and overdraft loans are reported as due in
one year or less. The amounts shown for each period do not take into account
loan prepayments and normal amortization of the Association's loan portfolio.
<TABLE>
AMOUNTS DUE
-----------------------------------------
ARTER ONE YEAR
BALANCE AT IN ONE YEAR THROUGH FIVE AFTER FIVE
FEBRUARY 29, 1996 OR LESS YEARS YEARS
----------------- ----------- ------------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Real estate loans(1)(2):
Fixed-rate $489,649 $4,301 $60,100 $425,248
Adjustable-rate 563,561 3,338 308 559,915
Consumer and other loans 4,169 133 3,470 566
---------- ------ ------- --------
Total loans and mortgage-
backed securities, net(3)(4) $1,057,379 $7,772 $63,878 $985,729
---------- ------ ------- --------
---------- ------ ------- --------
</TABLE>
______________
(1) Includes single and multi-family residential mortgage loans, loans on
income-producing property secured by other real estate, construction and
commercial business loans secured by real estate and mortgage-backed
securities.
(2) Construction loans, net of undisbursed portion, totalled $3.4 million at
February 29, 1996, $3.1 million of which are scheduled to convert to
permanent loans in fiscal 1997.
(3) Net of undisbursed portion of mortgage loans, unamortized premiums and
discounts, net deferred loan fees and allowance for loan losses.
(4) Of the total loans due to mature after February 28, 1997, $489.4 million
have fixed rates of interest and $560.2 million have adjustable or
floating rates of interest.
Scheduled contractual maturities of loans and mortgage-backed securities
do not necessarily reflect the actual term of the Association's loan and
mortgage-backed securities portfolio. The average life of mortgage loans is
substantially less than their contractual terms because of loan prepayments and
because of enforcement of due-on-sale clauses, which grant the Association the
right to declare a loan immediately due and payable in the event, among other
things, that the borrower sells the real property subject to the mortgage and
the loan is not repaid. The average life of mortgage loans tends to increase,
however, when current market rates on mortgage loans substantially exceed rates
on existing mortgage loans and, conversely, decrease when current market rates
on mortgage loans decline below rates on existing mortgage loans.
<PAGE>
5
Interest rates charged by Maryland Federal on loans are affected
principally by the demand for such loans and the supply of funds available
for lending purposes. These factors are, in turn, affected by general
economic conditions, monetary policies of the federal government, including
the Federal Reserve Board, legislative tax policies and government budgetary
matters.
ORIGINATION, PURCHASE AND SALE OF LOANS. As a federally chartered
savings and loan association, the Association has general authority to
originate and purchase loans secured by real estate located throughout the
United States. However, in accordance with the Association's conservative
lending practices, all of the Association's mortgage loan portfolio is
secured by real estate located in the Washington, D.C. or Baltimore
metropolitan areas.
Historically, residential real estate loans have been originated by the
Association through its branch offices. However, since January 1988, the
Association has, in addition to its branch network, used a team of
commissioned loan officers, working out of the Company's six loan production
offices, to originate real estate loans. Loan approvals are the
responsibility of personnel who are compensated on a non-incentive basis.
Residential and commercial real estate loan originations have been
attributable to referrals from real estate brokers and builders, mortgage
brokers, depositors and walk-in customers. Consumer loan originations are
primarily attributable to walk-in customers.
Maryland Federal occasionally sells whole loans and participations in
loans to other financial institutions and institutional investors. All of
such loans have consisted of long-term, fixed-rate mortgages. The
Association sold $21.1 million, $39.2 million and $54.5 million of such loans
during fiscal 1994, 1995 and 1996, respectively, exclusive of loans exchanged
for mortgage-backed securities. The Association was servicing approximately
$28.4 million of loans for others at February 29, 1996. As of February 29,
1996, the Association had commitments to sell loans totalling approximately
$33.3 million.
The Association has in the past occasionally pooled long-term,
fixed-rate loans and exchanged them on a servicing retained basis for
mortgage-backed securities guaranteed by the FHLMC in the same unpaid
principal amount as the mortgage loans exchanged. Although the
mortgage-backed securities (participation certificates) received in the
exchange do not reduce the overall effective maturity of the Association's
assets, they are more liquid than traditional mortgage loans because a large
and active secondary market for such securities currently exists. Such
securities may also be used to collateralize the Association's borrowings.
During fiscal 1996, the Association did not engage in any such exchanges.
The Association also purchases whole loans in the secondary market in
order to increase the diversity of its portfolio and provide it with assets
which are consistent with its asset and liability management goals. The
Association buys both fixed-rate and adjustable-rate mortgages from mortgage
bankers on a servicing released basis, depending on the market at the time of
purchase. These loans, each of which is individually underwritten by the
Association, are secured by properties located in the Washington, D.C.,
<PAGE>
6
Maryland and Virginia metropolitan areas. Whole loan purchases amounted to
$36.5 million, $71.5 million and $1.0 million during fiscal 1994, 1995 and
1996, respectively. During fiscal 1994, 1995 and 1996, the Association also
purchased $8.1 million, $41.7 million and $-0-, respectively, of
mortgage-backed securities. The purchase of mortgage-backed securities is
intended to supplement the Association's investment in loans receivable.
<PAGE>
7
The following table sets forth the Association's loan and mortgage-backed
security originations, purchases, sales and principal repayments during the
periods indicated.
YEAR ENDED
----------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
Gross loans and mortgage-backed
securities at beginning of period $ 986,610 $758,985 $718,963
---------- -------- --------
Loans originated:
Real estate loans:
Permanent loans:
Single-family (adjustable-rate) 103,341 169,867 132,217
Single-family (fixed-rate) 109,825 52,713 128,917
Commercial 5,435 9,803 8,685
Construction loans 941 2,614 3,202
---------- -------- --------
Total real estate loans
originated 219,542 234,997 273,021
Consumer and other loans 3,331 1,785 384
---------- -------- --------
Total loans originated 222,873 236,782 273,405
---------- -------- --------
Loans and mortgage-backed securities
purchased:
Whole loans 1,006 71,535 36,484
FHLMC participation certificates -- 10,100 --
GNMA participation certificates -- 10,196 --
FNMA participation certificates -- 21,364 7,060
Real estate mortgage investment
conduit certificates -- -- 1,053
---------- -------- --------
Total loans and mortgage-backed
securities purchased 1,006 113,195 44,597
---------- -------- --------
Total loans and mortgage-backed
securities originated and
purchased 223,879 349,977 318,002
---------- -------- --------
Loans transferred to foreclosed real
estate 281 632 514
Loans sold 54,521 14,219 39,179
Loans repaid 87,514 107,501 238,287
---------- -------- --------
Total loans transferred to
foreclosed real estate, sold
and repaid 142,316 122,352 277,980
---------- -------- --------
Net loan activity 81,563 227,625 40,022
---------- -------- --------
Gross loans and mortgage-backed
securities at the end of period 1,068,173 986,610 758,985
Less:
Undisbursed portion of mortgage
loans 1,722 2,728 8,609
Unamortized premiums and discounts,
net 783 1,010 1,025
Net deferred loan fees 3,815 4,284 4,065
Allowance for loan losses 4,474 4,424 4,187
---------- -------- --------
Net loans and mortgage-backed
securities at the end of period $1,057,379 $974,164 $741,099
---------- -------- --------
---------- -------- --------
<PAGE>
8
LOAN UNDERWRITING POLICIES. The Board of Directors has authorized the
Loan Committee of the Association (comprised of the President and Chief
Executive Officer (Chairman), Executive Vice President, Senior Vice President
and Chief Loan Officer) to approve any real estate secured loan or investment
of $500,000 or less. All actions of the Loan Committee are promptly reported
to and ratified by the Board of Directors. The President of the Association
has the authority to approve any other loan up to $500,000 which is secured
by collateral other than real estate. Residential loans will generally be
originated in amounts up to the limits established from time to time by the
FNMA and FHLMC for secondary market resale purposes. This amount is
presently $207,000 for single-family, fixed-rate residential loans.
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. After analysis of the loan application and the property or
collateral involved, including an appraisal of the property by independent
appraisers approved by the Association's Board of Directors, the lending
decision is made in accordance with the underwriting guidelines of the
Association.
It is the Association's policy to obtain a title insurance policy
insuring that the Association has a valid first lien on the mortgaged real
estate and that the property is free of encroachments. Borrowers must also
obtain paid hazard insurance policies prior to closing and, when the property
is in a flood plain as designated by the Department of Housing and Urban
Development, paid flood insurance policies. Most borrowers are also required
to advance funds on a monthly basis together with each payment of principal
and interest to a mortgage escrow account from which the Association makes
disbursements for items such as real estate taxes, hazard insurance premiums
and private mortgage insurance premiums as they become due.
Maryland Federal is permitted to lend up to 100% of the appraised value
of the real property securing a loan; however, if the amount of a residential
loan originated or refinanced exceeds 90% of the appraised value, the
Association is required by federal regulations to obtain private mortgage
insurance on the portion of the principal amount of the loan that exceeds 80%
of the appraised value of the security property. The Association's lending
policy requires private mortgage insurance when the loan-to-value ratio
exceeds 80%. The Association generally lends up to 95% of the appraised value
of single-family residential dwellings when the required private mortgage
insurance is obtained. Management believes, however, that a substantial
portion of its portfolio is significantly below an 80% loan-to-value ratio.
The Association estimates that approximately 15% of its gross loan portfolio
at February 29, 1996 is covered by private mortgage insurance. The
Association generally lends up to 75% of the appraised value of the
properties securing its commercial real estate and multi-family residential
properties and 70% of the appraised value for construction loans.
<PAGE>
9
REAL ESTATE LENDING STANDARDS. Effective March 19, 1993, all financial
institutions were required to adopt and maintain comprehensive written real
estate lending policies that are consistent with safe and sound banking
practices. These lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies adopted by the
federal banking agencies, including the OTS, in December 1992
("Guidelines"). The Guidelines set forth uniform regulations prescribing
standards for real estate lending. Real estate lending is defined as
extensions of credit secured by liens on interests in real estate or made for
the purpose of financing the construction of a building or other improvements
to real estate, regardless of whether a lien has been taken on the property.
The policies must address certain lending considerations set forth in
the Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also
be appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the institution's board of
directors at least annually. The LTV ratio framework, with a LTV ratio being
the total amount of credit to be extended divided by the appraised value of
the property at the time the credit is originated, must be established for
each category of real estate loans. If not a first lien, the lender must
combine all senior liens when calculating this ratio. The Guidelines, among
other things, establish the following supervisory LTV limits: raw land (65%);
land development (75%); construction (commercial, multifamily and
nonresidential) (80%); improved property (85%); and one-to-four family
residential (owner occupied) (no maximum ratio; however any LTV ratio in
excess of 90% should require appropriate insurance or readily marketable
collateral).
Certain institutions can make real estate loans that do not conform with
the established LTV ratio limits up to 100% of the institution's total
capital. Within this aggregate limit, total loans for all commercial,
agricultural, multifamily and other non-one-to-four family residential
properties should not exceed 30% of total capital. An institution will come
under increased supervisory scrutiny as the total of such loans approaches
these levels. Certain loans are exempt from the LTV ratios (e.g. those
guaranteed by a government agency, loans to facilitate the sale of real
estate owned and loans renewed, refinanced or restructured by the original
lender(s) to the same borrower(s) where there is no advancement of new funds,
etc.).
Under federal regulations prior to the enactment of FIRREA, the
aggregate amount of loans that the Association could have made to any one
borrower, including related entities, was, with certain exceptions, limited
to the lesser of 10% of the Association's net withdrawable deposits or 100%
of its regulatory capital. The Association was in compliance with this
regulation. As a result of FIRREA, the permissible amount of loans-to-one
borrower now follows the national bank standard for all loans made by savings
institutions, as compared to the pre-FIRREA rule that applied only to
commercial loans made by federally chartered institutions. The national bank
standard generally does not permit loans-to-one borrower to exceed 15% of the
Association's unimpaired capital and surplus. Loans
<PAGE>
10
in an amount equal to an additional 10% of unimpaired capital and surplus
also may be made to a borrower if the loans are fully secured by readily
marketable securities.
Based on the 15% of unimpaired capital and surplus standard, the maximum
amount which the Association could have loaned to one borrower and the
borrower's related entities at February 29, 1996 was approximately $13.2
million. At such date, the largest aggregate amount of loans by the
Association to any one borrower, including related entities, consisted of
$5.1 million of permanent loans secured by rental townhouses and
single-family homes located in Prince George's and Montgomery Counties,
Maryland and Northern Virginia.
RESIDENTIAL REAL ESTATE LENDING. The Association has offered ARMs since
1978 and, when market conditions and certain competitive market pressures in
the Association's primary market area have permitted, has emphasized their
origination rather than that of long-term, fixed-rate loans. The origination
of ARMs represented 50.6%, 76.3% and 48.5% of the Association's total
originations of conventional single-family residential mortgages in fiscal
1994, 1995 and 1996, respectively. ARMs (including mortgage-backed
securities) accounted for approximately $563.6 million or 53.3% of the
Association's net loan portfolio (including mortgage-backed securities) at
February 29, 1996.
The ARMs currently offered by Maryland Federal have up to 30-year terms
and interest rates which primarily adjust every one or three years based upon
changes in an index based on the weekly average yield on United States
Treasury securities adjusted to a constant maturity of one or three years,
respectively, as made available by the Federal Reserve Board, plus a margin.
The amount of any increase or decrease in the interest rate is limited to 2%
per year, with a limit of 6% over the life of the loan. No downward
adjustments below the interest rate at the time of origination are permitted.
These loans currently contain provisions permitting them to be converted to
fixed-rate loans at the first adjustment date. If the borrower converts the
loan, the Association will usually sell such loan into the secondary market.
The Association does not offer ARMs with negative amortization. Since fiscal
1992, the Association has also originated adjustable-rate mortgage loans
which adjust to a fixed-rate loan upon either the fifth or seventh year at a
rate based on a margin of 5/8ths of one percent over the FHLMC's 60-day
delivery rate for conventional single-family home loans. The rate then
remains constant for the remaining life of the loan. Upon repricing, these
loans, in addition to those originated or acquired with the intent to sell,
may also be sold and will be recorded at the lower of cost or fair value
at such time. The Association has experienced changing demands for ARMs as a
result of fluctuations in interest rates, but expects to continue to
emphasize ARMs as market conditions permit in order to reduce the impact on
its operations of rapid increases in market rates of interest. Such loans,
however, generally do not adjust as rapidly as changes in the Association's
cost of funds.
Fixed-rate residential mortgage loans currently originated generally
have 30-year terms, although some have 15-year terms with commensurately
lower interest rates. The Association estimates that its residential
mortgage loans generally remain outstanding for
<PAGE>
11
an average of approximately eight years. At February 29, 1996 approximately
$489.6 million or 46.3% of the Association's net loan portfolio consisted of
long-term, fixed-rate residential mortgage loans (including mortgage-backed
securities). In the past, the Association has occasionally exchanged
qualifying long-term, fixed-rate residential mortgages for FHLMC
participation certificates. The Association did not engage in any such
exchanges in the past year but may resume doing so in the future.
The Association also occasionally originates loans on multi-family
residential properties and will continue to do so if and when favorable
lending opportunities are presented. Multi-family residential mortgage loans
are primarily secured by multi-family rental units. Generally, such loans
are originated with fixed-rates of interest set at specified margins above
the one-and three-year treasury bill yields, and with 25- or 30-year
amortization schedules. The Association generally will not originate such
loans with a loan-to-value ratio of greater than 75%. The majority of the
loans include a one or five year balloon payment provision. In addition,
such loans are usually required to have a minimum debt service coverage of
1.15% at the time of origination.
The Association makes second mortgage loans and home equity loans only
where the first plus these mortgages in the aggregate do not exceed 90% of
the value of the property securing the loan. Maryland Federal's standard
underwriting procedures are used in evaluating these loans. At February 29,
1996, $48.3 million or 4.6% of the Association's gross loan and
mortgage-backed securities portfolio consisted of second mortgage loans,
compared to $48.3 million or 4.9% at February 28, 1995. At February 29,
1996, $21.4 million or 2.0% of the Association's gross loan and
mortgage-backed securities portfolio consisted of home equity loans compared
to $3.6 million or 0.4% at February 28, 1995.
CONSTRUCTION LENDING. The Association provides both fixed-rate and
floating-rate residential and commercial construction loans. Generally,
construction loans are made with terms not exceeding 24 months. Interest
rates on construction loans are currently set at floating rates above THE
WALL STREET JOURNAL prime rate for either a residential or commercial real
estate loan. The interest rate adjusts monthly. Advances are made on a
percentage of completion basis usually consisting of four draws after receipt
of an architect's or engineer's certification and approval by the
Association's inspector. Most construction loans are floating-rate balloon
loans. Construction loans are usually made only when the Association will
provide the permanent financing. In all cases, there must be permanent
financing before the loan is originated. The Association reclassifies
construction loans as either residential or commercial real estate loans at
the time of completion of the construction project, depending upon the nature
of the property which will secure the permanent loan. As of February 29,
1996, $5.2 million or 0.5% of Maryland Federal's gross loan and
mortgage-backed securities portfolio consisted of construction loans, 55% of
which consisted of loans on one- to four-family residential properties.
The Association continues to offer construction loans because of the
short terms and higher interest rates associated with such loans. During
fiscal 1996, the Association's
<PAGE>
12
origination of construction loans amounted to $900,000, as compared to $2.6
million during fiscal 1995 and $3.2 million during fiscal 1994. At February
29, 1996, the Association's construction loans varied in size from $80,000 to
$2.0 million. The Association's construction loans have been for the
construction of small shopping centers, office buildings and small
residential subdivisions in the Association's market area. As of February
29, 1996, the Association's construction loan portfolio was comprised of 10
loans to separate borrowers in the aggregate amount of $5.2 million, of which
the Association had undisbursed funds of $1.7 million. As of February 29,
1996, the largest loan consisted of a $2.0 million loan for the construction
of a professional office building located in Olney, Maryland. The
Association may make additional loans to such borrowers in the future.
The underwriting criteria used by the Association are designed to
evaluate and minimize the risks of each construction loan. Among other
things, the Association generally considers an appraisal of the project, the
reputation of the borrower and the contractor, the amount of the borrower's
equity in the project, independent valuations and review of cost estimates,
plans and specifications, preconstruction sale and leasing information,
current and expected economic conditions in the area of the project, cash
flow projections of the borrower, and, to the extent available, guarantees by
the borrower and/or third parties.
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. Also, these types of loans generally have larger balances and
greater risks than residential mortgage loans because their repayment is
dependent on successful project completion as well as general and local
economic conditions and are generally less predictable and more difficult to
evaluate and monitor.
COMMERCIAL REAL ESTATE LENDING. At February 29, 1996, the Association
had $41.8 million or 3.9% of its gross loan and mortgage-backed securities
portfolio invested in commercial real estate loans, substantially all of
which are short-term loans. The Association rarely has originated, and does
not intend to emphasize in the future, the origination of land acquisition
and development loans. The commercial real estate loans originated by the
Association are primarily secured by small strip shopping centers, motels,
mini-warehouses, townhouse office units and apartment buildings. These loans
are generally three- to five-year balloon loans, amortized over 30 years, and
require a 1.15% debt service coverage at the time of origination. Commercial
real estate loans are not originated with more than a 75% loan-to-value ratio
and personal guarantees are obtained to the extent possible.
Originations of commercial real estate loans amounted to $5.4 million
during fiscal 1996 compared to $9.8 million during fiscal 1995 and $8.7
million during fiscal 1994. As of February 29, 1996, the Association's
largest commercial real estate loan consisted of a $3.5 million loan secured
by a recreational vehicle park located in Beltsville, Maryland. It is the
<PAGE>
13
present intention of management that all such loans will be secured by
properties in the Association's market area and that commercial real estate
loans will not exceed 10% of the total loan portfolio.
Although FIRREA reduced the limit on loans to any one borrower to an
amount generally equal to 15% of the Association's unimpaired capital and
surplus, subject to certain limited exceptions, which limit was approximately
$13.2 million at February 29, 1996, the Association typically has not
originated loans to any one borrower or project in excess of $5.0 million for
its own portfolio. FIRREA also reduced the amount which a federally
chartered savings institution may invest in loans secured by non-residential
real estate to four times the Association's capital, which limit was $352.6
million at February 29, 1996. This limit is not expected to have any effect
on Maryland Federal's commercial real estate lending activities.
Commercial real estate lending entails significant additional risks as
compared with single-family residential property lending. Commercial real
estate loans typically involve large loan balances to single borrowers or
groups of related borrowers. The payment experience on such loans is
typically dependent on the successful operation of the real estate project.
The success of such projects is sensitive to changes in supply and demand
conditions in the market for commercial real estate as well as economic
conditions. All of such loans are secured by properties located in Maryland
or the Washington, D.C. metropolitan area.
COMMERCIAL BUSINESS LENDING. Federal laws and regulations also
authorize the Association to make secured or unsecured loans for commercial,
corporate, business and agricultural purposes. The aggregate amount of such
loans outstanding may not exceed 10% of the Association's assets. In
addition, another 10% of total assets may be invested in commercial equipment
and consumer leasing, and the Association may use any or all of the 35%
consumer category described below for inventory and floor plan financing. As
of February 29, 1996, the Association did not have any commercial business
loans outstanding and the Association has no present plans with respect to
engaging in such lending in the future.
CONSUMER LENDING. Federal laws and regulations permit a federally
chartered thrift institution to make secured and unsecured consumer loans in
an aggregate amount of up to 35% of the institution's total assets. At
February 29, 1996, consumer loans accounted for $4.2 million or 0.4% of the
Association's gross loan and mortgage-backed securities portfolio.
In past years, the Association has originated consumer loans in order to
provide a range of financial services to its customers and because the
shorter terms and typically higher interest rates on such loans help the
Association maintain a profitable spread between its average loan yield and
its cost of funds. The Association currently offers automobile loans,
overdraft lines of credit and unsecured personal loans. Consumer loan
<PAGE>
14
originations during fiscal years 1994, 1995 and 1996 were $384,000, $1.8
million and $3.3 million, respectively, of which automobile loan originations
amounted to $304,000, $1.0 million and $1.5 million, respectively, during
such periods. At February 29, 1996, savings account loans amounted to
$238,000. The Association no longer originates loans secured by savings
accounts.
In 1985, the Association began originating automobile loans. Such loans
are generally originated with terms of four years for up to 90% of the
purchase price of a new car or 80% of the "Blue Book" value or purchase
price, whichever is less, in the case of a used car. Automobile loan rates
are determined based upon general market conditions and competition in the
market for such loans. Such loans amounted to $2.1 million at February 29,
1996. The weighted average interest rate on automobile loans was 7.82% at
February 29, 1996. The Association no longer makes loans secured by used
cars.
During fiscal 1995, the Association began originating unsecured personal
loans in amounts up to $10,000. At February 29, 1996, unsecured personal
loans amounted to $1.7 million.
The Association does not intend to continue its emphasis on consumer
lending. Such lending, when it involves loans on automobiles, can entail
greater risks than single-family residential lending due to the nature of the
collateral and, in certain cases, the absence of collateral. In addition,
consumer 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, personal bankruptcy and adverse economic conditions.
In most cases, any repossessed collateral for a defaulted consumer loan will
not provide an adequate source of repayment of the outstanding loan balance
because of improper repair and maintenance of the underlying security. The
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. However, the Association believes its use of
detailed loan and credit applications and investigations reduces this risk
and the generally higher yields earned on consumer loans compensate for the
increased credit risk associated with such loans. Net charge-offs of
consumer loans during fiscal 1996 and 1995 amounted to approximately $25,000
and $4,000, respectively.
LOAN FEES AND SERVICE CHARGES. In addition to interest earned on loans,
the Association receives income through servicing of loans and loan fees
charged in connection with loan originations (which are calculated as a
percentage of the amount loaned), loan modifications, loan commitments, late
payments, prepayments, repayments, changes of property ownership and for
miscellaneous services related to its loans. Income from these activities
varies from period to period with the volume and type of loans made.
SFAS 91 requires that loan origination fees and certain related direct
loan origination costs be offset and that the resulting net amount be
deferred and amortized over the life of the related loans as an adjustment to
the yield of such related loans. In addition, commitment fees are required
to be offset against related direct costs and recognized over
<PAGE>
15
the life of the related loans as an adjustment of yield, if the commitment is
exercised, or if the commitment expires unexercised, recognized in income
upon expiration of the commitment.
NON-PERFORMING LOANS AND FORECLOSED REAL ESTATE. When a borrower fails
to make a required loan payment, the Association attempts to cure the default
by contacting the borrower. In general, contacts with borrowers are made by
the Association after a payment is more than 30 days past due, at which time
a late charge is assessed. In most cases, defaults are cured promptly. If
the delinquency is not rectified within 90 days through the Association's
normal collection procedures, or an acceptable arrangement is not worked out
with the borrower, the Association will institute measures to remedy the
default, including commencing a foreclosure action or, in special
circumstances, accepting from the mortgagor a voluntary deed of the secured
property in lieu of foreclosure.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on
non-accrual status, previously accrued but unpaid interest is deducted from
interest income. Under federal regulations, consumer loans which are more
than 120 days delinquent are required to be written-off.
If foreclosure is effected, the property is sold at a public auction in
which the Association may participate as a bidder. If the Association is the
successful bidder, the acquired real estate property is then included in the
Association's "foreclosed real estate" account until it is sold. When
property becomes foreclosed real estate, it is recorded at the lower of cost
or fair value at the date of acquisition and any writedown resulting
therefrom is charged to the allowance for loan losses. Interest accrual
ceases on the date of acquisition and all costs incurred from that date in
maintaining the property are expensed. Costs incurred for the improvement or
development of such property are capitalized. An allowance, if necessary, is
provided to reduce the carrying value to its fair value less estimated
selling costs. The Association is permitted under OTS regulations to finance
sales of foreclosed real estate by "loans to facilitate," which may involve
more favorable interest rates and terms than generally would be granted under
the Association's underwriting guidelines. As of February 29, 1996, the
Association's participation in loans to facilitate the purchase of foreclosed
real estate amounted to $159,000.
<PAGE>
16
The following table sets forth information regarding non-accrual loans,
loans which are 90 days or more delinquent but on which the Association was
accruing interest and foreclosed real estate at the dates indicated. The
Association had $2.8 million of troubled debt restructurings at February 28,
1995 and there were no troubled debt restructurings during any other period
shown.
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total non-performing loans:(1)
Non-accrual loans $ -- $ 20 $2,748 $ 464 $ --
Accruing loans which are 90
days or more overdue 3,386 1,536 3,155 1,155 1,284
------ ------ ------ ------ ------
Total non-performing loans $3,386 $1,556 $5,903 $1,619 $1,284
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total non-performing loans to
total loans receivable-net 0.3% 0.2% 0.8% 0.3% 0.2%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total foreclosed real estate $2,090 $2,695 $3,210 $4,032 $3,561
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total non-performing loans
and foreclosed real estate to
total assets 0.5% 0.4% 1.04% 0.7% 0.6%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
____________
(1) Consists of residential, commercial real estate loans and consumer loans.
The $3.4 million of accruing loans which were 90 days or more overdue at
February 29, 1996 consisted of 34 first mortgage and 15 consumer loans with
average principal balances of approximately $98,000 and $4,000, respectively.
It is believed that these delinquencies are reflective of current economic
conditions. The $2.1 million of foreclosed real estate at February 29, 1996
consisted primarily of a condominium/office complex located in Hyattsville,
Maryland and an industrial park located in Forestville, Maryland, which had
carrying values of $1.1 million and $800,000, respectively. At February 29,
1996, the Association also held one single-family residential property and one
additional commercial property with aggregate carrying values of approximately
$122,000 and $135,000, respectively. All properties are currently being
marketed for sale. The amount of interest income that would have been recorded
on the nonaccrual loans in accordance with their original terms was $4,000 and
$342,000 for fiscal 1995 and 1994, respectively. The amount of interest income
that was recorded on these loans was $2,000 and $264,000 for fiscal 1995 and
1994, respectively.
Under current federal regulations, an institution's problem assets are
subject to classification according to one of three categories: "substandard",
"doubtful", and "loss." In addition, assets not currently requiring
classification but having potential weaknesses or risk characteristics that
could result in future problems may be subject to classification as "special
mention." See "Regulation - Regulation of the Association - Classification of
Assets." As
<PAGE>
17
of February 29, 1996, the Association had approximately $7.0 million of
classified assets, which includes $5.5 million of the non-performing assets
shown in the table above. Of this total, approximately $7.0 million was
classified as substandard and $14,000 was classified as doubtful.
ALLOWANCE FOR LOAN LOSSES. During fiscal 1996, the Association made
provisions for loan losses of $120,000 in recognition of the general risks of
credit loss in the portfolio and the general economic conditions in the
Association's market area. During fiscal 1994 and 1995, the Association made
provisions for losses on loans of $662,000 and $300,000, respectively. During
fiscal 1994, 1995 and 1996, the Association made charges to the allowance for
loan losses of $3,000, $13,000 and $70,000, respectively. During fiscal 1994,
1995 and 1996, such provisions and charge-offs primarily reflected estimated
losses with respect to construction and other loans which were adversely
affected by market conditions. In the future, the Association will make
additions to the allowance by charges to operations to reflect the amount
management determines is necessary based on its monthly risk analysis of the
loan portfolio.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on a monthly evaluation
of the portfolio, past loan loss experience, current economic conditions,
volume, growth and composition of the loan portfolio, and other relevant
factors. The allowance is increased by provisions for loan losses charged
against income. Although management believes that it has used the best
information available to it in making such determinations, future reserves may
be necessary and net income could be significantly affected if circumstances
differ substantially from the assumptions used in making the initial
determinations.
Effective December 21, 1993, the OTS, in connection with the Office of the
Comptroller of the Currency, the FDIC and the Federal Reserve Board, issued an
Interagency Policy Statement on the Allowance for Loan and Lease Losses ("Policy
Statement"). The Policy Statement, which effectively supersedes the proposed
guidance issued on September 1, 1992, includes guidance (i) on the
responsibilities of management for the assessment and establishment of an
adequate allowance and (ii) for the agencies' examiners to use in evaluating the
adequacy of such allowance and the policies utilized to determine such
allowance. The Policy Statement also sets forth quantitative measures for the
allowance with respect to assets classified substandard and doubtful and with
respect to the remaining portion of an institution's loan portfolio.
Specifically, the Policy Statement sets forth the following quantitative
measures which examiners may use to determine the reasonableness of an
allowance: (i) 50% of the portfolio that is classified doubtful; (ii) 15% of the
portfolio that is classified substandard; and (iii) for the portions of the
portfolio that have not been classified (including loans designated special
mention), estimated credit losses over the upcoming twelve months based on facts
and circumstances available on the evaluation date. While the Policy Statement
sets forth this quantitative measure, such guidance is not intended as a "floor"
or "ceiling."
<PAGE>
18
The following table presents information concerning the Association's
allowance for loan losses, charge-offs and recoveries during the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $4,424 $4,187 $4,267 $2,348 $1,298
------ ------ ------ ------ ------
Provision:
Real estate-residential 50 300 662 1,940 1,361
Consumer loans 70 -- -- -- --
------ ------ ------ ------ ------
Total provision 120 300 662 1,940 1,361
------ ------ ------ ------ ------
Transfer to allowance for
losses on foreclosed real
estate -- 50 739 -- --
------ ------ ------ ------ ------
Charge-offs:
Real estate-residential 45 9 -- 13 300
Consumer loans 25 4 3 8 11
------ ------ ------ ------ ------
Total charge-offs 70 13 3 21 311
------ ------ ------ ------ ------
Balance, end of period $4,474 $4,424 $4,187 $4,267 $2,348
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of charge-offs to
average loans and
mortgage-backed securities
outstanding 0.007% 0.001% --% .003% .05%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
The Association also maintains an allowance for losses on foreclosed real
estate. At February 29, 1996, the Association's allowance for losses on
foreclosed real estate amounted to $1.3 million. For additional information,
see Note 5 of the Notes to Consolidated Financial Statements.
<PAGE>
19
The following table sets forth the amount of the Association's allowance
for loan losses attributable to each type of loan indicated and the percent of
such type of loans to total loans (including mortgage-backed securities) and
participations of each at the dates indicated.
<TABLE>
<CAPTION>
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994 FEBRUARY 28, 1993 FEBRUARY 29, 1992
-------------------- -------------------- --------------------- ------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
loans(1) $4,238 99.6% $4,233 99.7% $3,991 99.6% $4,068 99.3% $2,141 98.9%
Consumer and
other loans 236 0.4 191 0.3 196 0.4 199 0.7 207 1.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $4,474 100.0% $4,424 100.0% $4,187 100.0% $4,267 100.0% $2,348 100.0%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
</TABLE>
_____________
(1) Includes residential and commercial real estate loans and construction
loans.
<PAGE>
20
INVESTMENT ACTIVITIES
The Association is required under OTS regulations to maintain
certain liquidity ratios and does so by investing in securities that qualify as
liquid assets. See "Regulation - Regulation of the Association - Federal Home
Loan Bank System" for a description of such regulations. Such securities
include obligations issued or fully guaranteed by the United States government,
certain federal agency obligations, certain time deposits and negotiable
certificates of deposit issued by commercial banks and other specified
investments, including commercial paper and corporate debt securities.
The Association's investment portfolio has primarily consisted of
obligations of the United States government and federal agencies, federal funds
sold, certificates of deposit and securities purchased under agreements to
resell.
Effective February 10, 1992, the OTS adopted a statement of
policy ("Statement") set forth in Thrift Bulletin 52 concerning (i) procedures
to be used in the selection of a securities dealer, (ii) the need to document
and implement prudent policies and strategies for securities, whether held for
investment, trading or for sale, and to establish systems and internal controls
to ensure that securities activities are consistent with the financial
institution's policies and strategies, (iii) securities trading and sales
practices that may be unsuitable in connection with securities held in an
investment portfolio, (iv) high-risk mortgage securities that are not suitable
for investment portfolio holdings for financial institutions, and (v)
disproportionately large holdings of long-term, zero-coupon bonds that may
constitute an imprudent investment practice. The Statement applies to
investment securities, high-yield, corporate debt securities, loans, mortgage-
backed securities and derivative securities, and provides guidance concerning
the proper classification of and accounting for securities held for investment,
sale and trading. Securities held for investment, sale or trading may be
differentiated based upon an institution's desire to earn an interest yield
(held for investment), to realize a holding gain from assets held for indefinite
periods of time (held for sale), or to earn a dealer's spread between the bid
and asked prices (held for trading). Depository institution investment
portfolios are maintained to provide earnings consistent with the safety factors
of quality, maturity, marketability and risk diversification. Securities that
are purchased to accomplish these objectives may be reported at their amortized
cost only when the depository institution has both the intent and ability to
hold the assets to maturity. Securities held for investment purposes are
accounted for at amortized cost and securities held for sale and securities held
for trading are to be accounted for at market. The Association believes that
its investment activities have and will be conducted in accordance with the
requirements of OTS policies and generally accepted accounting principles
("GAAP").
<PAGE>
21
The following table sets forth the carrying value of Maryland
Federal's investment securities and certain other interest-earning assets at the
dates indicated.
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
United States
Government and agency
obligations $ 7,997 $21,918 $ 26,727
State and County Government
obligations 1,476 1,658 184
Equity securities 8,578 7,103 4,911
Interest-bearing deposits 15,710 9,271 24,109
Federal funds sold 5,058 1,408 12,000
Securities purchased
under agreements to resell 11,034 9,623 29,018
Federal Home Loan Bank
stock 12,514 9,784 8,151
------- ------- --------
Total $62,367 $60,765 $105,100
------- ------- --------
------- ------- --------
</TABLE>
As of February 29, 1996, no investment securities of any single
issuer were held by the Association where the aggregate carrying value of such
securities exceeded 10% of the Company's stockholders' equity, other than United
States Government and agency obligations and Federal Home Loan Bank stock.
<PAGE>
22
The following table sets forth at February 29, 1996 the amount of
each category of the Association's investment securities and certain other
interest-earning assets which mature during each of the periods indicated and
the weighted average yield for each range of maturities.
<TABLE>
<CAPTION>
AMOUNTS AT FEBRUARY 29, 1996 WHICH MATURE
------------------------------------------------------------------------------
IN AFTER ONE YEAR AFTER FIVE YEARS
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS
---------------- ------------------ ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States government
and agency obligations $ 5,205 4.97% $2,792 5.30% $ -- --% $ -- --%
State and County Government
obligations -- -- 664 4.76 812 4.29 -- --
Equity securities 8,578 3.91 -- -- -- -- -- --
Interest-bearing deposits 15,710 5.54 -- -- -- -- -- --
Federal funds sold 5,058 5.38 -- -- -- -- -- --
Securities purchased
under agreements to resell 11,034 5.02 -- -- -- -- -- --
Federal Home Loan Bank
stock -- -- -- -- -- -- 12,514 7.25
------- ---- ------ ---- ---- ---- ------- ----
Total $45,585 5.03% $3,456 5.20% $812 4.29% $12,514 7.25%
------- ---- ------ ---- ---- ---- ------- ----
------- ---- ------ ---- ---- ---- ------- ----
</TABLE>
<PAGE>
23
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Association's
funds for use in lending and for other general business purposes. In addition
to deposits, the Association derives funds from loan amortizations and
prepayments, advances from the FHLB of Atlanta and, to a lesser extent, sales of
loans. It is the Association's policy to utilize the source of funds which has
the lowest available cost. Loan repayments are a relatively stable source of
funds, while deposit inflows and outflows are significantly influenced by
general market interest rates and economic conditions. Borrowings may be used
on a short-term basis to compensate for seasonal or other reductions in normal
sources of funds or for deposit inflows at less than projected levels.
Borrowings may also be used on a longer term basis to support expanded
activities. Historically, the Association's borrowings have primarily consisted
of advances from the FHLB of Atlanta and, to a lesser extent, institutional
repurchase agreements. See "Borrowings."
DEPOSITS. Due to changes in regulatory and economic conditions
during the 1980's, the Association has increasingly relied upon deregulated
fixed-rate certificate accounts and other authorized types of deposits. The
Association has established a number of different programs designed to attract
both short-term and long-term savings of the general public by providing a wide
assortment of accounts and rates consistent with OTS regulations. These
programs include regular savings accounts, checking accounts, money market
deposit accounts ("MMDAs") and variable and fixed-rate certificates. Also
included among these programs are individual retirement accounts ("IRAs") and
Keogh retirement accounts.
Maryland Federal's deposits are obtained primarily from residents
of the five counties in the State of Maryland in which Maryland Federal is
located. The Association does not utilize brokered deposits. The principal
methods used by Maryland Federal to attract deposit accounts include offering a
wide variety of services and accounts, competitive interest rates and convenient
office locations. At February 29, 1996, Maryland Federal operated 22 automated
teller machines ("ATMs") in addition to participating in the MOST-Registered
Trademark- ATM network.
The Association currently offers certificates of deposit with
minimum balance requirements beginning at $100, with the rates set as
appropriate based on a review of the rates offered by other financial
institutions in the Association's primary market area. The Association also
offers jumbo certificates of deposit in denominations of $100,000 or more. The
Association's MMDAs currently have a $1,000 minimum deposit, no regulatory
interest rate ceiling and limited check-writing privileges. The interest rate
on the account is reviewed frequently based on money market conditions.
<PAGE>
24
The following table shows the distribution of, and certain other
information relating to, the Association's deposits by type of deposit at the
dates indicated.
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
---------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Regular savings accounts $ 76,514 9.7% $ 94,104 12.3% $134,558 19.8%
Checking accounts 44,497 5.6 39,994 5.2 35,828 5.3
MMDAs 45,315 5.7 51,398 6.7 59,775 8.8
Fixed-rate certificates 274,266 34.9 239,977 31.4 199,656 29.4
Money market certificates:
91 day 6,632 0.8 4,208 0.6 7,840 1.2
6 month 23,171 2.9 19,256 2.5 24,883 3.7
12 month 146,177 18.5 139,686 18.3 52,744 7.8
18 month -- -- 13 -- 1,260 .2
Variable-rate certificates 21,166 2.7 42,742 5.6 95,881 14.1
Jumbo certificates 116,313 14.7 101,350 13.3 34,342 5.1
Mini-jumbo certificates 12,284 1.6 9,456 1.3 932 .1
IRA certificates 22,596 2.9 21,570 2.8 30,351 4.5
-------- ----- -------- ----- -------- -----
Total $788,931 100.0% $763,754 100.0% $678,050 100.0%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
</TABLE>
<PAGE>
25
The following table presents the average balance of each type of deposit
and the average rate paid on each type of deposit for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
----------------- ------------------ ------------------
AVERAGE AVERAGE AVERAGE
AVERAGE RATE AVERAGE RATE AVERAGE RATE
BALANCE PAID BALANCE PAID BALANCE PAID
------- ---- ------- ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Regular savings accounts $ 80,731 3.33% $123,019 3.40% $120,464 3.40%
Checking accounts 42,158 1.80 37,915 1.78 33,371 1.78
MMDAs 45,915 3.03 56,349 3.20 58,296 3.17
Fixed-rate certificates 243,810 5.81 220,975 5.04 190,938 5.75
Money market certificates:
91 day 5,370 4.39 5,729 3.28 10,147 3.30
6 month 21,439 4.70 20,738 3.43 28,697 3.34
12 month 166,130 5.88 80,774 4.77 48,134 3.86
18 month 4 3.50 251 4.12 2,817 4.56
Variable-rate certificates 27,019 5.24 63,774 4.43 96,741 4.63
Jumbo certificates 110,989 6.04 61,967 5.43 33,848 3.68
Mini-jumbo certificates 8,823 5.28 5,777 5.14 978 4.69
IRA certificates 21,308 6.10 25,191 4.61 35,784 4.37
-------- ---- -------- ---- -------- ----
Total $773,696 5.16% $702,459 4.30% $660,215 4.23%
-------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ----
</TABLE>
The large variety of deposit accounts offered by the Association has
increased the Association's ability to retain deposits and has allowed it to be
competitive in obtaining new funds, but has not eliminated the threat of
disintermediation (the flow of funds away from savings institutions into direct
investment vehicles such as government and corporate securities). However,
these accounts have been more costly than traditional accounts during periods of
high interest rates. In addition, the Association has become increasingly
vulnerable to short-term fluctuations in deposit flows as customers have become
more rate-conscious and willing to move funds into higher yielding accounts.
The ability of the Association to attract and retain deposits and the
Association's cost of funds have been, and will continue to be, significantly
affected by money market conditions.
The Association controls the flow of deposits by having the senior officers
of the Association meet frequently to determine the interest rates which the
Association will offer to the general public. Such officers consider the amount
of funds needed by the Association on both a short and long-term basis, the
rates being offered by the Association's
<PAGE>
26
competitors, alternative sources of funds, and the projected level of
interest rates in the future. Maryland Federal does not necessarily seek to
match the highest rates paid by competing institutions.
The following table sets forth the net deposit flows of the Association
during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease)
before interest credited $ (337)(1) $64,754(1) $(8,971)(1)
Interest credited 25,514 20,950 20,789
-------- ---------- -----------
Net deposit increase
(decrease) $25,177 $85,704 $11,818
-------- ---------- -----------
-------- ---------- -----------
</TABLE>
_____________________
(1) Reflects approximately $-0-, $50.5 million and $20.0 million of deposit
inflows as a result of the acquisition of deposits of various savings
institutions during fiscal 1996, 1995 and 1994, respectively.
The following table sets forth the amount of certificates of deposit in the
amount of $100,000 or more at February 29, 1996, which mature during each of the
periods indicated.
<TABLE>
<CAPTION>
AMOUNTS AT FEBRUARY 29, 1996 WHICH MATURE
-------------------------------------------------
AFTER THREE AFTER
IN THREE MONTHS SIX MONTHS
MONTHS THROUGH THROUGH AFTER 12
OR LESS SIX MONTHS 12 MONTHS MONTHS
------- ---------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Certificates of deposit $59,989 $32,506 $28,637 $34,023
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
<PAGE>
27
The following table presents certain information concerning Maryland
Federal's deposits at February 29, 1996 and the scheduled quarterly maturities
of its certificates of deposit.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PERCENTAGE OF NOMINAL
AMOUNT TOTAL DEPOSITS RATE
------ -------------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Regular savings accounts $ 76,514 9.70% 3.28%
Checking accounts 44,497 5.64 1.57
MMDAs 45,315 5.74 3.00
-------- ------ -----
Total $166,326 21.08% 2.75%
-------- ------ -----
Certificate accounts maturing
by quarter:
May 31, 1996 180,799 22.92 5.54
August 31, 1996 102,003 12.93 5.78
November 30, 1996 74,965 9.50 5.75
February 28, 1997 71,716 9.09 5.73
May 31, 1997 48,062 6.09 5.69
August 31, 1997 32,455 4.11 5.49
November 30, 1997 18,424 2.34 5.60
February 28, 1998 10,630 1.35 6.03
May 31, 1998 10,995 1.39 6.07
August 31, 1998 18,883 2.39 6.61
November 30, 1998 12,515 1.59 6.75
February 28, 1999 6,282 0.80 5.90
Thereafter 34,876 4.42 5.96
-------- ------ -----
Total certificate accounts 622,605 78.92 5.74
-------- ------ -----
Total deposits $788,931 100.00% 5.11%
-------- ------ -----
-------- ------ -----
</TABLE>
<PAGE>
28
The following table presents, by various interest rate
categories, the amounts of certificate accounts at the dates indicated and the
amounts of certificate accounts at February 29, 1996 which mature during the
periods indicated.
<TABLE>
<CAPTION>
AMOUNTS AT FEBRUARY 29, 1996
BALANCE AT MATURING IN THE YEAR ENDING
--------------------------- --------------------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
INTEREST RATE: 1996 1995 1997 1998 1999 THEREAFTER
- -------------- ---- ---- ---- ---- ---- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
4.00% or less $ 1,547 $ 52,792 $ 1,366 $ 181 $ -- $ --
4.01 to 6.00% 407,702 360,080 296,827 82,740 11,149 16,986
6.01% to 8.00% 211,282 154,923 130,464 25,818 37,363 17,637
8.01% to 10.00% 1,756 9,968 539 808 156 253
10.01% to 12.00% 318 495 311 -- 7 --
-------- -------- -------- -------- ------- -------
Total $622,605 $578,258 $429,507 $109,547 $48,675 $34,876
-------- -------- -------- -------- ------- -------
-------- -------- -------- -------- ------- -------
</TABLE>
The Association does not utilize brokered deposits. FIRREA prohibits any
savings institution not meeting minimum capital requirements from accepting,
directly or indirectly, brokered deposits or from offering higher than
prevailing rates in the institution's market area. The Association currently
meets all of its capital requirements and is not subject to this prohibition.
BORROWINGS. The Association obtains advances from the FHLB of Atlanta upon
the security of its capital stock in the FHLB of Atlanta and a portion of its
first mortgages and participation certificates. See "Regulation - Regulation of
the Association - Federal Home Loan Bank System." At February 29, 1996,
advances mature as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
FISCAL YEAR AMOUNT RATE
----------- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1997 $127,750 6.06%
1998 75,350 5.75
1999 39,000 5.55
2000 1,000 4.90
2001 -- --
Thereafter 680 6.50
-------- ----
Total $243,780 5.88%
-------- ----
-------- ----
</TABLE>
<PAGE>
29
FHLB advances are made pursuant to several different credit programs, each
of which has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on either a fixed
percentage of assets or the FHLB of Atlanta's assessment of the Association's
creditworthiness. FHLB advances are generally available to meet seasonal and
other withdrawals of deposit accounts and to expand lending.
The following table sets forth certain information regarding the borrowings
of the Association at the dates indicated.
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
--------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Advances from FHLB $243,780 5.88% $190,730 5.98% $103,180 5.13%
</TABLE>
<PAGE>
30
The following table sets forth certain information concerning the
borrowings of the Association for the periods indicated, which is based on
daily average balances.
<TABLE>
YEAR ENDED
---------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Advances from FHLB:
Average balance outstanding $213,176 $160,877 $ 86,754
Maximum amount outstanding at
any month-end during the period $251,030 $195,680 $104,180
Weighted average interest rate
during the period 6.08% 5.42% 5.12%
Total short-term borrowings at
end of period $127,750 $122,550 $ 34,250
</TABLE>
SUBSIDIARIES
OTS regulations permit the Association to invest up to 2% of its assets in
capital stock of, and secured and unsecured loans to, subsidiary service
corporations and an additional 1% of its assets when the additional funds are
utilized for community or inner-city purposes. In addition, federally chartered
savings institutions which are in compliance with their regulatory capital
requirements also may make conforming loans to service corporations in which the
institution owns or holds more than 10% of the capital stock in an aggregate
amount of up to 50% of the institution's regulatory capital. A savings
institution meeting its regulatory requirements also may make, subject to the
loans-to-one borrower limitations, conforming loans to service corporations in
which the institution does not own or hold more than 10% of the capital stock
and certain other corporations meeting specified requirements. Federally
chartered savings institutions also are authorized to invest up to 30% of their
assets in finance subsidiaries whose sole purpose is to issue debt or equity
securities that the Association is authorized to issue directly, subject to
certain limitations. OTS regulations also limit the aggregate amount of direct
investments, including loans, by a SAIF-insured institution in real estate,
service corporations, operating subsidiaries and equity securities as defined
therein.
At February 29, 1996, the Association was authorized to have a maximum
investment of approximately $22.9 million in its subsidiaries, exclusive of the
1% of assets permitted for community or inner-city purposes and the ability to
make conforming loans. As of such date, the Association had invested
approximately $45,000 in its sole subsidiary.
<PAGE>
31
Maryland Federal currently operates one wholly-owned service corporation
subsidiary, MASSLA Corporation ("MASSLA"). MASSLA, incorporated in December
1971, provides various types of insurance products. MASSLA offers group
homeowners and accidental death insurance policies to the Association's
customers and employees.
MARKET AREA AND COMPETITION
Maryland Federal's primary market area consists of Prince George's,
Montgomery, Charles, Anne Arundel and Calvert counties in the Maryland suburbs
of Washington, D.C. The Federal government accounts for 35% of the market
area's gross regional product. The Federal sector is currently shedding 13,000
jobs per year. The slack is being picked up by the technology and education
sectors but the losses do hold down the expansion potential for the area
economy.
Interest rates on deposits in the Washington area have traditionally been
among the highest in the nation. Recent surveys suggest this is still the case.
The consolidation trend has made it easier to attract deposits as acquirors
reduce rates. Margin compression is present because market rates have increased
in recent months. At this time the trend of interest rates is not clear.
Maryland Federal's competition for real estate loans comes primarily from
mortgage banking companies, commercial banks and other savings institutions.
Maryland Federal competes for loan originations primarily through the interest
rates and loan fees it charges and the efficiency and quality of services it
provides borrowers, real estate brokers and builders. Factors which affect
competition include the general and local economic conditions, current interest
rate levels and volatility in the mortgage markets.
EMPLOYEES
At February 29, 1996, MFB had unpaid executive officers, all of whom serve
in the same capacity with the Association. At February 29, 1996, the
Association and its subsidiary had 236 full-time employees, including its
executive officers, as well as 40 part-time employees. None of these employees
are represented by a collective bargaining agent, and the Association has
enjoyed harmonious relations with its personnel.
<PAGE>
32
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company and the Association. The
description of these laws and regulations, as well as descriptions of laws and
regulations contained elsewhere herein, does not purport to be complete and is
qualified in its entirety by reference to the applicable laws and regulations.
REGULATION OF THE COMPANY
GENERAL. The Company is a registered savings and loan holding company
within the meaning of the Home Owners' Loan Act, as amended ("HOLA"). As such,
the Company is subject to OTS regulations, examinations, supervision and
reporting requirements. As a SAIF-insured subsidiary of a savings and loan
holding company, the Association is subject to certain restrictions in its
dealings with the Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings association. However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association; (ii)
transactions between the savings association and its affiliates; and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet a qualified
thrift lender ("QTL") test, then such unitary holding company also shall become
subject to the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings association requalifies as a QTL
within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "- Regulation of the
Association - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Association,
the Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
test as set forth below, the activities of the Company and any of its
subsidiaries (other than the Association or other subsidiary savings
associations) would thereafter be subject to further restrictions. Among other
things, no multiple savings and loan holding company or subsidiary thereof which
is not a savings association shall commence or continue for a limited period of
time after becoming a multiple savings and loan holding company or subsidiary
thereof any business activity, upon
<PAGE>
33
prior notice to, and no objection by the OTS, other than: (i) furnishing or
performing management services for a subsidiary savings association; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing,
or liquidating assets owned by or acquired from a subsidiary savings
association; (iv) holding or managing properties used or occupied by a
subsidiary savings association; (v) acting as trustee under deeds of trust;
(vi) those activities authorized by regulation as of March 5, 1987 to be
engaged in by multiple savings and loan holding companies; or (vii) unless
the Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies, those activities authorized by the
Federal Reserve Board as permissible for bank holding companies. Those
activities described in (vii) above also must be approved by the Director of
the OTS prior to being engaged in by a multiple savings and loan holding
company.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
associations and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings association is any company or
entity which controls, is controlled by or is under common control with the
savings association. In a holding company context, the parent holding company
of a savings association (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings association.
In addition, Sections 22(h) and 22(g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings association, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the association's
loans to one borrower limit. Section 22(h) also requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
and also requires prior board approval for certain loans. In addition, the
aggregate amount of extensions of credit by a savings association to all
insiders cannot exceed the association's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At February 29, 1996, the
<PAGE>
34
Association had 14 loans with an aggregate balance of approximately $1.8
million outstanding to its executive officers and directors.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings association or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings association or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, also may acquire control of any savings association, other
than a subsidiary savings association, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office located in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by the state-chartered associations or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings associations).
Under the Bank Holding Company Act of 1956, the Federal Reserve Board is
authorized to approve an application by a bank holding company to acquire
control of a savings association. In addition, a bank holding company that
controls a savings association may merge or consolidate the assets and
liabilities of the savings association with, or transfer assets and liabilities
to, any subsidiary bank which is a member of the Bank Insurance Fund ("BIF")
with the approval of the appropriate federal banking agency and the Federal
Reserve Board. As a result of these provisions, there have been a number of
acquisitions of savings associations by bank holding companies in recent years.
REGULATION OF THE ASSOCIATION
GENERAL. The Association is a federally chartered savings association, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, the Association is subject to
broad federal regulation and oversight by the OTS and the FDIC extending to all
aspects of its operations. The Association is a member of the FHLB of Atlanta
and is subject to certain limited regulation by the Federal Reserve Board.
<PAGE>
35
FEDERAL REGULATION. The OTS has extensive authority over the operations of
savings associations. As part of this authority, savings associations are
required to file periodic reports with the OTS and are subject to periodic
examinations by the OTS and the FDIC to test the Association's compliance with
various regulatory requirements. The investment and lending authority of
savings associations are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally chartered savings associations and may also apply to state-chartered
savings associations. Such regulation and supervision is primarily intended for
the protection of depositors.
The OTS' enforcement authority over all savings associations and their
holding companies was substantially enhanced by FIRREA. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. FIRREA significantly
increased the amount of and grounds for civil money penalties.
INSURANCE OF ACCOUNTS. The deposits of the Association are insured up to a
maximum extent permitted by SAIF, which is administered by the FDIC, and is
backed by the full faith and credit of the United States Government. As
insurer, the FDIC is authorized to conduct examinations of, and to require
reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings associations, after giving the OTS
an opportunity to take such action.
Both the SAIF and BIF are statutorily required to be capitalized to a ratio
of 1.25% of insured reserve deposits. While the BIF has reached the required
reserve ratio, the SAIF is not expected to be recapitalized until 2002 at the
earliest. Legislation has authorized $8 billion for the SAIF; however, such
funds only become available to the SAIF if the FDIC determines that the funds
are needed to cover losses of the SAIF and several other stringent criteria are
met.
On November 14, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule will reduce deposit insurance premiums for
BIF member institutions to zero basis points (subject to a $2,000 minimum) for
institutions in the lowest risk category, while holding deposit insurance
premiums for SAIF members at their current levels (23 basis points for
institutions in the lowest risk category, as discussed below.) The reduction
was effective with respect to the semiannual premium assessment beginning
January 1, 1996.
<PAGE>
36
Under current FDIC regulations, SAIF-institutions are assigned to one of
three capital groups which are based solely on the level of an institution's
capital - "well capitalized," "adequately capitalized," and "undercapitalized" -
which are defined in the same manner as the regulations establishing the prompt
corrective action system under Section 38 of the Federal Deposit Insurance Act.
See "- Prompt Corrective Regulatory Action." These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications, with rates ranging from .23%
for well capitalized, healthy institutions to .31% for undercapitalized
institutions with substantial supervisory concerns. The Association's current
deposit insurance assessment rate is .23%.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Association, if it determines after a hearing that
the institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result
in termination of the Association's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings associations
are required to maintain minimum levels of regulatory capital. Pursuant to
FIRREA, the OTS has established capital standards applicable to all savings
associations. These standards generally must be as stringent as the comparable
capital requirements imposed on national banks. The OTS also is authorized to
impose capital requirements in excess of these standards on individual
associations on a case-by-case basis.
Current OTS capital standards require savings associations to satisfy three
different capital requirements. Under these standards, savings associations
must maintain "tangible" capital equal to 1.5% of adjusted total assets, "core"
capital equal to 3% of adjusted total assets and "total" capital (a combination
of core and "supplementary" capital) equal to 8.0% of "risk-weighted" assets.
For purposes of the regulation, core capital generally consists of common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits and "qualifying supervisory goodwill." Core capital is generally
reduced by the amount of a savings association's intangible assets for which no
market exists. Limited exceptions to the deduction of intangible assets are
provided for purchased mortgage servicing rights and qualifying supervisory
goodwill. Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the
<PAGE>
37
savings association's intangible assets, with only a limited exception
for purchased mortgage servicing rights.
Both core and tangible capital are further reduced by an amount equal to a
savings association's debt and equity investments in subsidiaries engaged in
activities not permissible to national banks (other than subsidiaries engaged in
activities undertaken as agent for customers or in mortgage banking activities
and subsidiary depository institutions or their holding companies). At February
29, 1996, the Association had no qualifying supervisory goodwill or purchased
mortgage servicing rights. In addition, as of such date, the Association had no
investments in or extensions of credit to subsidiaries engaged in activities not
permissible to national banks.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core and supplementary capital in
its total capital, provided that the amount of supplementary capital does not
exceed the savings institution's core capital. Supplementary capital includes
(i) permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt, and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory redeemable preferred stock, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets. In determining the required
amount of risk-based capital, total assets, including certain off-balance sheet
items, are multiplied by a risk weight based on the risks inherent in the type
of assets. The risk weights assigned by the OTS for principal categories of
assets are (i) 0% for cash and securities issued by the U.S. Government or
unconditionally backed by the full faith and credit of the U.S. Government; (ii)
20% for securities (other than equity securities) issued by U.S. Government
sponsored agencies and mortgage-backed securities issued by, or fully guaranteed
as to principal and interest by, the FNMA or the FHLMC, except for those classes
with residual characteristics or stripped mortgage-related securities; (iii) 50%
for prudently underwritten permanent one-to-four family first lien mortgage
loans not more than 90 days delinquent and having a loan-to-value ratio of not
more than 80% at origination unless insured to such ratio by an insurer approved
by the FNMA or the FHLMC, and qualifying residential bridge loans made directly
for the construction of one-to-four family residences; (iv) 100% for all other
loans and investments, including consumer loans, commercial loans, and single-
family residential real estate loans more than 90 days delinquent, and for
repossessed assets.
<PAGE>
38
The following table sets forth certain information concerning Maryland
Federal's regulatory capital at February 29, 1996.
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
(DOLLARS IN THOUSANDS)
Capital under GAAP $88,147 $88,147 $88,147
Additional capital items:
Qualifying general loan
loss allowance --- --- 4,424
Other (3,988) (3,988) (3,988)
-------- -------- --------
Total regulatory capital 84,159 84,159 88,583
Minimum required capital 17,125 34,250 47,195
-------- -------- --------
Excess regulatory capital $67,034 $49,909 $41,388
-------- -------- --------
-------- -------- --------
Regulatory capital as a
percentage(1) 7.37% 7.37% 15.02%
Minimum capital required
as a percentage (1) 1.50% 3.00% 8.00%
-------- -------- --------
Regulatory capital as a
percentage in excess of
requirement 5.87% 4.37% 7.02%
-------- -------- --------
-------- -------- --------
______________
(1) Tangible capital and core capital are computed as a percentage of adjusted
total assets of $1.1 billion. Risk-based capital is computed as a
percentage of adjusted risk-weighted assets of $589.8 million.
<PAGE>
39
Any savings association that fails any of the capital
requirements is subject to possible enforcement actions by the OTS or the FDIC.
Such actions could include a capital directive, a cease and desist order, civil
money penalties, the establishment of restrictions on an association's
operations, termination of federal deposit insurance and the appointment of a
conservator or receiver. The OTS' capital regulation provides that such
actions, through enforcement proceedings or otherwise, could require one or more
of a variety of corrective actions.
In August 1993, the OTS and other federal banking agencies
published a final rule modifying their existing risk-based capital standards to
provide for consideration of interest rate risk when assessing capital adequacy
of a bank. Under the final rule, the OTS must explicitly include a bank's
exposure to declines in the economic value of its capital due to changes in
interest rates as a factor in evaluating a bank's capital adequacy. In
addition, in August 1995, the OTS and the other federal banking agencies
published a joint policy statement for public comment that describes the process
the banking agencies will use to measure and assess the exposure of a bank's net
economic value to change in interest rates. Under the policy statement, the OTS
will consider results of supervisory and internal interest rate risk models as
one factor in evaluating capital adequacy. The OTS intends, at a future date,
to incorporate explicit minimum requirements for interest rate risk in its risk-
based capital standards through the use of a model developed from the policy
statement, a future proposed rule and the public comments received therefrom.
PROMPT CORRECTIVE REGULATORY ACTION. The FDIC Improvement Act
requires each appropriate agency and the FDIC to take prompt corrective action
to resolve the problems of insured depository institutions that fall below a
certain capital ratio. Such action must be accomplished at the least possible
long-term cost to the appropriate deposit insurance fund.
In September 1992, the federal banking agencies (including the
OTS) adopted substantially similar regulations which are intended to implement
the system of prompt corrective action established by the FDIC Improvement Act.
These regulations were effective December 19, 1992. Under the regulations, a
savings association shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure, (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital
ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0%
under certain circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less
than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to
<PAGE>
40
total assets that is equal to or less than 2.0%. The FDIC Improvement
Act and the regulations also specify circumstances under which the OTS may
reclassify a well capitalized savings association as adequately capitalized and
may require an adequately capitalized savings association or an undercapitalized
savings association to comply with supervisory actions as if it were in the next
lower category (except that the OTS may not reclassify a significantly
undercapitalized savings association as critically undercapitalized). At
February 29, 1996, the Association was in the "well capitalized" category.
LIQUIDITY REQUIREMENTS. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required liquid
asset ratio is 5%. The Association has consistently complied with applicable
regulatory liquidity requirements and is currently in compliance with such
requirements.
ACCOUNTING REQUIREMENTS. Applicable OTS accounting regulations
and reporting requirements apply the following standards: (i) regulatory reports
will incorporate generally accepted accounting principles when generally
accepted accounting principles are used by federal banking agencies; (ii)
savings association transactions, financial condition and regulatory capital
must be reported and disclosed in accordance with OTS regulatory reporting
requirements that will be at least as stringent as for national banks; and (iii)
the Director of the OTS may prescribe regulatory reporting requirements more
stringent than generally accepted accounting principles whenever the Director
determines that such requirements are necessary to ensure the safe and sound
reporting and operation of savings associations.
QUALIFIED THRIFT LENDER TEST. All savings associations are
required to meet a QTL test set forth in Section 10(m) of the HOLA and
regulations of the OTS thereunder to avoid certain restrictions on their
operations. A savings association that does not meet the QTL test set forth in
the HOLA and implementing regulations must either convert to a bank charter or
comply with the following restrictions on its operations: (i) the association
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the association shall be restricted to those
of a national bank; (iii) the association shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the association shall
be subject to the rules regarding payment of dividends by a national bank. Upon
the expiration of three years from the date the association ceases to be a QTL,
it must cease any activity and not retain any investment not permissible for a
national bank and immediately repay any outstanding FHLB advances (subject to
safety and soundness considerations).
<PAGE>
41
An association's Qualified Thrift Investments are required to
represent 65% of portfolio assets on a monthly average basis in nine out of
every 12 months. Qualified Thrift Investments are defined as total assets less
intangibles, property used by a savings association in its business and
liquidity investments in an amount not exceeding 20% of assets. Under the
definition of Qualified Thrift Investments, liquidity investments and the book
value of property used in an association's business are not considered Qualified
Thrift Investments. In addition, Qualified Thrift Investments do not include
any intangible asset. Subject to a 20% of portfolio assets limit, however,
savings associations are able to treat as Qualified Thrift Investments 200% of
their investments in loans to finance "starter homes" and loans for the
construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas. At
February 29, 1996, approximately 96.2% of the Association's assets were invested
in Qualified Thrift Investments.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. OTS regulations govern
capital distributions by savings associations, which include cash dividends,
stock redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other transactions charged to the capital account of a
savings association. Generally, the regulations create a safe harbor for
specified levels of capital distributions from associations meeting at least
their minimum capital requirements, so long as such associations notify the OTS
and receive no objection to the distribution from the OTS. Associations and
distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Generally, Tier 1 associations, which are savings associations
that before and after the proposed distribution meet or exceed their fully
phased-in capital requirements, may make capital distributions during any
calendar year equal to the higher of (i) 100% of net income for the calendar
year-to-date plus 50% of its "surplus capital ratio" at the beginning of the
calendar year or (ii) 75% of net income over the most recent four-quarter
period. The "surplus capital ratio" is defined to mean the percentage by which
the association's ratio of total capital to assets exceeds the ratio of its
fully phased-in capital requirement to assets. "Fully phased-in capital
requirement" is defined to mean an association's capital requirement under the
statutory and regulatory standards applicable on December 31, 1994, as modified
to reflect any applicable individual minimum capital requirement imposed upon
the association. See "- Regulatory Capital Requirements."
Tier 2 associations, which are associations that before and after
the proposed distribution meet or exceed their minimum capital requirements, may
make capital distributions over the most recent four quarter period up to 75% of
their net income during that four quarter period.
In order to make distributions under these safe harbors, Tier 1
and Tier 2 associations must submit written notice to the OTS 30 days prior to
making the distribution. The OTS may object to the distribution during that
30-day period based on safety and
<PAGE>
42
soundness concerns. In addition, a Tier 1 association deemed to be in need
of more than normal supervision by the OTS may be downgraded to a Tier 2 or
Tier 3 association as a result of such a determination.
Tier 3 associations, which are associations that do not meet
current minimum capital requirements, or that have capital in excess of either
their fully phased-in capital requirement or minimum capital requirement but
which have been notified by the OTS that it will be treated as a Tier 3
association because they are in need of more than normal supervision, cannot
make any capital distributions without obtaining OTS approval prior to making
such distributions.
OTS regulations also prohibit the Association from declaring or
paying any dividends or from repurchasing any of its stock if, as a result, the
regulatory (or total) capital of the Association would be reduced below the
amount required to be maintained for the liquidation account established by it
for certain depositors in connection with its conversion from mutual to stock
form in June 1987.
On December 5, 1994, the OTS published a notice of proposed
rulemaking to amend its capital distribution regulation. Under the proposal,
savings institutions would be permitted to only make capital distributions that
would not result in their capital being reduced below the level required to
remain "adequately capitalized," as defined above under "-Prompt Corrective
Action." Because the Association is a subsidiary of a holding company, the
proposal would require the Association to provide notice to the OTS of its
intent to make a capital distribution. The Association does not believe that
the proposal will adversely affect its ability to make capital distributions if
it is adopted substantially as proposed.
FEDERAL HOME LOAN BANK SYSTEM. The Association is a member of
the FHLB of Atlanta, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a
reserve or central bank for its members within its assigned region. Each FHLB
is funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. Each FHLB makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the Board of
Directors of the FHLB. At February 29, 1996, the Association's advances from
the FHLB of Atlanta amounted to $243.8 million.
As a member, the Association is required to purchase and maintain
stock in the FHLB of Atlanta in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year or 5% of its outstanding advances. At
February 29, 1996, the Association had $12.5 million in FHLB stock, which was in
compliance with this requirement.
The FHLBs are required to provide funds for the resolution of
troubled savings associations and to contribute to affordable housing programs
through direct loans or
<PAGE>
43
interest subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have adversely
affected the level of FHLB dividends paid and could continue to do so in the
future. These contributions also could have an adverse effect on the value
of FHLB stock in the future. For the year ended February 29, 1996, dividends
paid by the FHLB of Atlanta to the Association totalled $750,000.
CLASSIFICATION OF ASSETS. Under current federal regulations, an
institution's problem assets are subject to classification according to one of
three categories: "substandard," "doubtful" and "loss." For assets classified
"substandard" and "doubtful," the institution is required to establish prudent
general loan loss reserves in accordance with generally accepted accounting
principles. Assets classified "loss" must be either completely written off or
supported by a 100% specific reserve. A classification category designated
"special mention" also must be established and maintained for assets not
currently requiring classification but having potential weaknesses or risk
characteristics that could result in future problems. An institution is
required to develop an in-house program to classify its assets, including
investments in subsidiaries, on a regular basis and to set aside appropriate
loss reserves on the basis of such classification. Federal examiners may
disagree with an insured institution's classifications and amounts reserved. At
February 29, 1996, the Association's classified assets totalled approximately
$7.0 million, of which approximately $7.0 million were assets classified
substandard and $14,000 were assets classified as doubtful. The substandard
assets relate primarily to a townhouse/office project, an industrial warehouse
facility, a shopping center and various single-family homes.
INTERSTATE BRANCHING. OTS policy permits interstate branching to
the full extent permitted by statute (which is essentially unlimited).
Generally, federal law prohibits federal thrifts from establishing, retaining or
operating a branch outside the state in which the federal association has its
home office unless the association meets the Internal Revenue Service's domestic
building and loan test (generally, 60% of a thrift's assets must be housing-
related) ("IRS Test"). The IRS Test requirement does not apply if, among other
things, the law of the state where the branch would be located would permit the
branch to be established if the federal association were chartered by the state
in which its home office is located. Furthermore, the OTS will evaluate a
branching applicant's record of compliance with the Community Reinvestment Act
of 1977, as amended ("CRA"). A poor CRA record may be the basis for denial of a
branching application.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts) and non-personal time deposits.
At February 29, 1996, the Association was in compliance with applicable
requirements.
The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy applicable liquidity
requirements. Because required reserves must be maintained in the form of vault
cash or a noninterest-bearing account at
<PAGE>
44
a Federal Reserve Bank, however, the effect of this reserve requirement is to
reduce an institution's earning assets.
FINANCIAL REPORTING. Insured institutions are required to submit
independently audited annual reports to the FDIC and the appropriate agency (and
state supervisor when applicable). These publicly available reports must
include (a) annual financial statements prepared in accordance with generally
accepted accounting principles and such other disclosure requirements as
required by the FDIC or the appropriate agency and (b) a report signed by the
Chief Executive Officer and the Chief Financial Officer or Chief Accounting
Officer of the institution which contains a statement of the management's
responsibilities for (i) preparing financial statements; (ii) establishing and
maintaining adequate internal controls for financial reporting; and (iii)
complying with the laws and regulations relating to safety and soundness and an
assessment as to the most recent fiscal year of (aa) the effectiveness of its
internal controls and (bb) the institution's compliance with applicable laws and
regulations relating to safety and soundness. With respect to any internal
control report, the institution's independent public accountants must attest to,
and report separately on, assertions of the institution's management contained
in such report. Any attestation by the independent accountant pursuant to this
section would be made in accordance with generally accepted auditing standards
for attestation engagements.
Large insured institutions, as determined by the FDIC, are
required to monitor the above activities through an independent audit committee
which has access to independent legal counsel.
FEDERAL AND STATE TAXATION
GENERAL. The Company and the Association are subject to the
generally applicable corporate tax provisions of the Code, as well as certain
additional provisions of the Code which apply to thrifts and other types of
financial institutions. The following discussion of federal taxation is
intended only to summarize certain federal income tax matters, and is not a
comprehensive description of the tax rules applicable to the Company and the
Association.
FISCAL YEAR. The Company and the Association and its subsidiary
currently file a consolidated federal income tax return on the basis of a fiscal
year ending on the last day in February.
METHOD OF ACCOUNTING. The Association maintains its books and
records for federal income tax purposes using the accrual method of accounting.
The accrual method of accounting generally requires that items of income be
recognized when all events have occurred that establish the right to receive the
income and the amount of income can be determined with reasonable accuracy and
that items of expense be deducted at the later of (i) the time when all
events have occurred that establish the liability to pay the expense and the
amount of such liability can be determined with reasonable accuracy or (ii)
the time
<PAGE>
45
when economic performance with respect to the item of expense has occurred.
The Association maintains its books and records for financial reporting
purposes using the accrual method of accounting and has established deferred
tax assets and liabilities which are recognized for estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are recorded using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax laws or rates is
recognized in income in the period that includes the enactment date.
BAD DEBT RESERVES. Under applicable provisions of the Code,
savings institutions such as the Association are permitted to establish reserves
for bad debts and to make annual additions thereto which qualify as deductions
from taxable income. The bad debt deduction is generally based on savings
institutions actual loss experience (the "Experience Method"). In addition,
provided that certain definitional tests relating to the composition of assets
and the nature of its business are met, a savings institution may elect annually
to compute its allowable addition to its bad debt reserves for qualifying real
property loans (generally loans secured by improved real estate) by reference to
a percentage of its taxable income (the "Percentage Method").
Under the Experience Method, the deductible annual addition is
the amount necessary to increase the balance of the reserve at the close of the
taxable year to the greater of (i) the amount which bears the same ratio to
loans outstanding at the close of the taxable year as the total net bad debts
sustained during the current and five preceding taxable years bear to the sum of
the loans outstanding at the close of those six years or (ii) the balance in the
reserve account at the close of the last taxable year prior to the most recent
adoption of the Experience Method, whichever is later (assuming that the loans
outstanding have not declined since then) (the "base year"). For taxable years
beginning after 1987, the base year shall be the last taxable year beginning
before 1988.
Under the Percentage Method, the bad debt deduction with respect
to qualifying real property loans is computed as a percentage of Maryland
Federal's taxable income before such deduction, as adjusted for certain items
(such as capital gains and the dividends received deduction). Under this method
a qualifying institution such as the Association generally may deduct 8% of its
taxable income.
For taxable years ended on or before February 28, 1987, the
Association generally elected to use the Percentage Method to compute the amount
of its bad debt deduction with respect to its qualifying real property loans.
As of February 29, 1996, the Association's qualified assets constituted
approximately 96.2% of its total assets and the balance of its accumulated bad
debt reserve was less than 5% of its qualifying real property loans. As a
result, the Association does not believe that any of the restrictions imposed
upon the computation of the bad debt deduction under pre-Act law would be a
limiting factor. For the taxable year ended February 29, 1988 and thereafter,
the Association is subject to the
<PAGE>
46
rules for computing the bad debt deduction by the Code and uses the method of
computing the bad debt deduction for its qualifying real property loans that
provides it with the maximum tax benefits available.
The income of the Company would not be subject to the bad debt
deduction allowed the Association, whether or not consolidated tax returns are
filed; however, losses of the Company or its subsidiaries included in the
consolidated tax returns may reduce the bad debt deduction allowed the
Association if a deduction is claimed under the Percentage Method.
The Association must maintain a reserve for tax purposes equal to
the bad debt deductions which it has taken reduced by (i) the amount of bad
debts that it has actually charged off, and increased by (ii) the amount of
recoveries on debts previously charged off. The Association's accumulated bad
debt reserve for tax purposes was approximately $17.2 million at February 29,
1996.
DISTRIBUTIONS. If the Association were to distribute cash or
property to its sole stockholder (other than in exchange for its stock) having a
total fair market value in excess of its accumulated earnings and profits, the
Association would generally be required to recognize as income an amount which,
when reduced by the amount of federal income tax that would be attributable to
the inclusion of such amount in income, is equal to the lesser of: (i) the
amount by which the fair market value of such distribution exceeds the post-1951
accumulated earnings and profits of the Association, or (ii) the sum of (a) the
amount of the accumulated bad debt reserve of the Association with respect to
qualifying real property loans (to the extent that additions to such reserve
exceed the additions that would be permitted under the Experience Method) and
(b) the amount of the Association's supplemental bad debt reserve (a special tax
reserve account to which a certain portion of the Association's pre-1963 bad
debt reserves was required to be allocated).
If the Association were to distribute cash or property to its
stockholder in redemption of its stock (pursuant to a liquidation of the
Association or otherwise), the Association would generally be required to
recognize as income an amount which, when reduced by the amount of federal
income tax that would be attributable to the inclusion of such amount in income,
is equal to the lesser of: (i) the amount of the distribution or (ii) the sum of
(a) the amount of the accumulated bad debt reserve of the Association with
respect to qualifying real property loans (to the extent that additions to such
reserve exceed the additions that would be permitted under the experience
method) and (b) the amount of the Association's supplemental bad debt reserve.
MINIMUM TAX. In addition to the regular federal income tax, for
taxable years beginning after December 31, 1986, the former corporate add-on
minimum tax has been replaced with an alternative minimum tax generally equal to
20% of alternative minimum taxable income. The alternative minimum tax will be
imposed in lieu of the regular corporate income tax, if the regular corporate
income tax is less than the alternative
<PAGE>
47
minimum tax. Alternative minimum taxable income essentially consists of
regular taxable income increased by certain tax preference items and other
adjustments, including, among other items, (i) 100% of the amount by which
the bad debt deduction of a thrift institution exceeds the amount that would
have been allowable if the institution had determined its bad debt deduction
based on the Experience Method, (ii) for taxable years beginning in 1987
through 1989, one-half of the excess of pre-tax book income of a corporation
(including members of a group filing a consolidated tax return) over
alternative minimum taxable income (determined without regard to this
adjustment and the deduction for alternative tax net operating losses) and
(iii) for taxable years beginning after 1989, 75% of the excess of "adjusted
current earnings" of a corporation (including members of a group filing a
consolidated tax return) over alternative minimum taxable income (determined
without regard to this adjustment and the deduction for alternative tax net
operating losses).
AUDIT BY IRS. The Association's consolidated federal income tax
returns for taxable years through February 29, 1992 have been closed for the
purpose of examination by the IRS.
MARYLAND TAXES. The Association and the Company are subject to
Maryland taxation at a rate of 7% of their net earnings. For the purpose of the
7% franchise tax, net earnings are generally defined as net income as determined
for state corporate income tax purposes, plus (i) interest income from
obligations of the United States, of any state, including Maryland, and of any
county, municipal or public corporation authority, special district or political
subdivision of any state, including Maryland, and (ii) any profit realized from
the sale or exchange of bonds issued by the State of Maryland or any of its
political subdivisions.
<PAGE>
48
ITEM 2. PROPERTIES.
The following table presents property owned and leased by the
Association at February 29, 1996.
<TABLE>
NET BOOK
VALUE OF
PROPERTY OR
OWNED LEASE LEASEHOLD
OR EXPIRATION IMPROVEMENTS AT
LEASED DATE FEBRUARY 29, 1996
------ ---------- -----------------
<S> <C> <C> <C>
Location:
Main Office:
3505 Hamilton Street Owned --- $292,739
Hyattsville, MD 20782
Branch and Loan Production
Offices:
4277 Branch Avenue, Leased 7/4/96 2,063
Marlow Heights
7934 Wisconsin Avenue, Owned --- 94,091
Bethesda
211 East Charles Street, Owned --- 595,911
La Plata
10666 Campus Way South, Leased 7/31/98 1,997
Upper Marlboro
8951 Edmonston Road, Leased 1/31/99 1,585
Greenbelt
6309 Allentown Road, Leased 1/31/98 1,551
Camp Springs
8490 Annapolis Road, Leased 5/4/99 10,168
New Carrollton
3905 National Drive, Suite 340 Leased month- ---
Burtonsville to-month
</TABLE>
<PAGE>
49
<TABLE>
NET BOOK
VALUE OF
PROPERTY OR
OWNED LEASE LEASEHOLD
OR EXPIRATION IMPROVEMENTS AT
LEASED DATE FEBRUARY 29, 1996
------ ---------- -----------------
<S> <C> <C> <C>
571 N. Solomons Island Road Leased 3/31/99 $42,184
Prince Frederick
3033 Solomons Island Road Owned --- 259,751
Edgewater
1400 Mercantile Lane, Suite 120
Landover Leased 9/30/99 ---
8230 Old Court House Road, Leased 10/31/99 ---
Suite 425
Tysons Corner
6 Montgomery Village Avenue,
Suite 340
Gaithersburg Leased 8/31/98 768
6816 Race Track Road, Leased 8/31/02 7,423
Bowie
15509 New Hampshire Avenue,
Cloverly Leased 5/23/96 1,067
11200 Viers Mill Road,
Wheaton Leased 11/30/96 5,973
3425 Leonardtown Road, Owned --- 388,860
Waldorf
16575 South Frederick Avenue, Leased 6/30/00 13,194
Gaithersburg
10414 Auto Park Drive, Leased 7/31/96 ---
West Bethesda
</TABLE>
<PAGE>
50
<TABLE>
NET BOOK
VALUE OF
PROPERTY OR
OWNED LEASE LEASEHOLD
OR EXPIRATION IMPROVEMENTS AT
LEASED DATE FEBRUARY 29, 1996
------ ---------- -----------------
<S> <C> <C> <C>
13600 Laurel - Bowie Road, Leased 8/31/01 $ 19,279
Laurel
6901 Laurel-Bowie Road, Owned --- 321,017
Bowie
11428 Cherry Hill Road, Leased 7/31/98 3,466
Cherry Hill
5801 Deale-Churchton Road, Leased 8/14/02 592
Deale
934 Bay Ridge Road Leased 9/30/96 5,358
Bay Forest
1470 Rockville Pike Owned --- 561,111
Rockville
2001 Davidsonville Road Owned --- 279,622
Crofton
9546 Livingston Road, Leased 11/30/97 2,539
Fort Washington
11110 Mall Circle Leased 1/31/05 57,507
St. Charles
Administrative Offices:
9200 Edmonston Road Leased 10/31/98 65,887
Greenbelt
3321 Toledo Terrace #203 & 204 Owned --- 220,565
Toledo Terrace
</TABLE>
<PAGE>
51
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings
other than routine, non-material legal proceedings occurring in the ordinary
course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein is incorporated by reference
from page 29 of the Company's 1996 Annual Report to Stockholders attached hereto
as Exhibit 13 ("Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from
page 14 of the Company's Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required herein is incorporated by reference from
pages 6 to 13 of the Company's Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from
pages 16 to 28 of the Company's Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from
pages 2 to 4 of the definitive proxy statement of the Company for the Company's
Annual Meeting of Stockholders to be held on June 19, 1996 ("Proxy Statement").
<PAGE>
52
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from
pages 6 to 12 of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from
pages 4 to 6 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from
page 13 of the Proxy Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report
(1) The following financial statements are incorporated by
reference from Item 8 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statements of Financial Condition at February 29,
1996 and February 28, 1995
Consolidated Statements of Income for the Years Ended February
29, 1996, February 28, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the Years
Ended February 29, 1996, February 28, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended
February 29, 1996, February 28, 1995 and 1994
Notes to Consolidated Financial Statements
(2) All other schedules for which provision is made in the
applicable accounting regulation of the SEC are omitted because of the absence
of conditions under which they are required or because the required information
is included in the consolidated financial statements and related notes thereto.
<PAGE>
53
(3) The following exhibits are filed as part of this Form 10-K
and this list includes the Exhibit Index.
NO. EXHIBITS PAGE
----- -------- ----
3.1 Articles of Incorporation *
3.2 Bylaws *
4.1 Specimen Common Stock Certificate *
4.2 Rights Agreement Dated as of January 18, 1990 **
10.1(a) Key Employee Stock Compensation Program ***
10.1(b) 1988 Employee Stock Purchase Plan ***
10.1(c) 1989 Stock Option and Stock Appreciation
Rights Plan ***
10.2 Employment Agreement with Robert H. Halleck (see
"- Employment Agreements" in Item 11 of this
Report for a list of Maryland Federal employees
who have employment agreements which are
substantially identical in all material respects,
except as described therein as to salary and
term, to the employment agreement with Robert
H. Halleck) ****
10.3 1992 Stock Incentive Plan *****
10.4 1993 Directors' Stock Option Plan *****
10.5 1995 Stock Option Plan *******
13 1996 Annual Report to Stockholders E-1
21 Subsidiaries -- Reference is made to Item 1,
"Business - General" for the required
information --
23 Consent of Independent Auditors E-32
_________________
* Incorporated by reference to the Form 8-B Registration Statement filed
by the Company with the SEC on November 8, 1989.
** Incorporated by reference to the Form 8-A Registration Statement filed
by the Company with the SEC on January 28, 1990.
*** Incorporated by reference to the Form S-4 Registration Statement (No.
33-29945) filed by the Company with the SEC on July 13, 1989.
**** Incorporated by referenced to the Annual Report on Form 10-K for the
fiscal year ended February 28, 1992 filed by the Company with the SEC
on May 29, 1992.
<PAGE>
54
***** Incorporated by reference to the Annual Report on Form 10-K for
the fiscal year ended February 28, 1993 filed by the Company with
the SEC on May 28, 1993.
****** Incorporated by reference to the Annual Report on Form 10-K for the
fiscal year ended February 28, 1994 filed by the Company with the SEC
on May 27, 1994.
******* Incorporated by reference to the Company's definitive proxy statement
for its 1995 Annual Meeting of Stockholders filed by the Company with
the SEC on May 24, 1995.
(b) The Company did not file any Current Reports on Form 8-K during the
fiscal quarter ended February 29, 1996.
(c) See (a)(3) above for all exhibits filed herewith and the exhibit
index.
(d) There are no other financial statements and financial statement
schedules which were excluded from the Annual Report which are required to be
included herein.
<PAGE>
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MARYLAND FEDERAL BANCORP, INC.
May 28, 1996 By: /s/ Robert H. Halleck
-----------------------------
Robert H. Halleck
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Richard B. Bland May 28, 1996
- -------------------------------------
Richard B. Bland, Chairman of
the Board
/s/ Robert H. Halleck May 28, 1996
- -------------------------------------
Robert H. Halleck, Director,
President and Chief Executive
Officer (principal executive
officer)
/s/ Lynn B. Hounslow May 28, 1996
- -------------------------------------
Lynn B. Hounslow
Senior Vice President, Treasurer and Chief
Financial Officer (principal
financial officer and principal
accounting officer)
/s/ A. William Blake, Jr. May 28, 1996
- -------------------------------------
A. William Blake, Jr., Director and
Executive Vice President
/s/ Richard R. Mace May 28, 1996
- -------------------------------------
Richard R. Mace, Director
<PAGE>
56
/s/ David A. McNamee May 28, 1996
- -------------------------------------
David A. McNamee, Director
/s/ Thomas H. Welsh, III, May 28, 1996
- -------------------------------------
Thomas H. Welsh, III, Director
<PAGE>
EXHIBIT 13
1996 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
ANNUAL REPORT
CONTENTS
Offices and
Location Map 1
Financial Highlights 2
To Our Shareholders 3
Management's Discussion
and Analysis 6
Consolidated Financial
Statements 15
Notes to Consolidated
Financial Statements 20
Directors and Officers 29
Shareholders' Information 29
LOAN PRODUCTION OFFICES
Burtonsville
3905 National Drive
Suite 340
(301) 989-8384
Gaithersburg
6 Montgomery Village Avenue
Suite 340
(301) 590-3150
Waldorf
3429 Leonardtown Road
(301) 870-4081
Landover
1400 Mercantile Lane
Suite 120
(301) 925-9191
Edgewater
3033 Solomons Island Road
(301) 261-7970
Tysons Corner
8230 Old Court House Road
Suite 425
(703) 749-0990
BRANCH
OFFICES
PRINCE GEORGE'S COUNTY
3505 Hamilton Street
Hyattsville (301) 779-1200
6816 Race Track Road
Bowie (301) 464-5240
6901 Laurel-Bowie Road
Bowie (301) 262-3707
6309 Allentown Road
Camp Springs (301) 449-3838
11428 Cherry Hill Road
Beltsville (301) 595-7058
9546 Livingston Road
Ft. Washington (301) 248-4257
8951 Edmonston Road
Greenbelt (301) 982-4525
10666 Campus Way South
Upper Marlboro (301) 336-6666
13600 Laurel-Bowie Road
Laurel (301) 490-1508
4277 Branch Avenue
Marlow Heights (301) 423-0021
8490 Annapolis Road
New Carrollton (301) 459-4434
MONTGOMERY COUNTY
7934 Wisconsin Avenue
Bethesda (301) 951-0767
16575 S. Frederick Avenue
Gaithersburg (301) 869-3350
10414 Auto Park Avenue
West Bethesda (301) 469-9195
11200 Viers Mill Road
Wheaton (301) 933-4030
15509 New Hampshire Avenue
Silver Spring (301) 384-7163
1470 Rockville Pike
Rockville (301) 230-8970
CHARLES COUNTY
211 East Charles Street
La Plata (301) 934-4811
11110 Mall Circle #1053
Waldorf (301) 870-4186
3425 Leonardtown Road
Waldorf (301) 843-3312
ANNE ARUNDEL COUNTY
5801 Deale-Churchton Road
Deale (301) 867-4198
3033 Solomons Island Road
Edgewater (410) 956-4401
934 Bay Ridge Road
Annapolis (410) 268-6635
2001 Davidsonville Road
Crofton (301) 261-3200
CALVERT COUNTY
571 N. Solomons Island Road
Prince Frederick (410) 535-5889
<PAGE>
Financial Highlights
YEAR ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
TOTAL ASSETS $1,143,338 $1,058,781 $872,167
NET INCOME 8,739 9,063 12,259
RETURN ON EQUITY 9.72% 11.09% 16.70%
EQUITY TO ASSET RATIO 8.16% 8.46% 8.70%
NON-PERFORMING ASSETS TO AVERAGE ASSETS 0.49% 0.44% 1.08%
TOTAL ASSETS 2/28/94 2/28/95 2/29/96
LOANS 2/28/94 2/28/95 2/29/96
2
<PAGE>
TO OUR SHAREHOLDERS
"WE WERE ABLE TO MAKE CONSIDERABLE
PROGRESS IN THE CONTROL OF OUR EXPENSES."
While there was some improvement in the net interest income of Maryland
Federal Bancorp, Inc. in the fourth quarter of the fiscal year 1996, your
management expects further improvement is going to occur sometime during
fiscal 1997. We were able to make considerable progress in the control of our
expenses. Loan volume remained strong throughout most of the fiscal year.
Your Company is beginning to see the results of a long-term effort to change
the mix of loans we retain in our portfolio. Our net income during the fiscal
year ended February 29, 1996 was $8,739,000 or $2.76 primary earnings per
share. This was a decrease of 3.6 percent from the earnings of $9,063,000 or
$2.84 primary earnings per share achieved in fiscal 1995.
A major factor in our income during fiscal 1996 was the sale of 49,000
shares of the common stock of the Federal Home Loan Mortgage Corporation
(Freddie Mac) which we had acquired a number of years ago. The after-tax
income from these shares amounted to approximately $1,985,000. The Company
still holds 38,816 shares of Freddie Mac stock in its securities portfolio.
During fiscal 1996, your Board of Directors increased the dividend from
an annual rate of $.50 per share to an annual rate of $.64 per share, a 28
percent increase. At February 29, 1996, the closing price of the common
stock of Maryland Federal Bancorp, Inc. was $30.25, and represented an
increase of 21 percent over the closing price of $25.00 on February 28, 1995.
During fiscal 1996, total assets increased 8.0 percent from
$1,058,781,000 to
3
<PAGE>
$1,143,338,000. We have always as a company stressed profitability rather
than growth and continue to do so. Loan growth during the year was moderate
with net loans receivable increasing 10.3 percent to $991,184,000 from
$898,728,000 at the end of fiscal 1995. Once again we used a balanced
funding approach with an increase of $25,177,000 in deposits and an increase
of $53,050,000 in borrowed funds. As we proceed into fiscal 1997, we expect
to reduce our level of borrowed funds and increase our level of core
deposits. The result should be a lowering of the Company's cost of
liabilities.
We have noticed a heightened concern in the media about the decline in
the quality of the loan portfolios in the banking system. During the past
few months, we have seen an increase in our number of past due loans;
however, our coverage of non-performing loans as of February 29, 1996 was 132
percent.
As the fiscal year progressed, we noticed an increased preference by our
customers for deposits with terms in excess of one year. This lengthening of
our average term of deposits slows the rate of decline in our cost of funds
but does help us increase our core deposit base. We are noticing an increase
in customers seeking more localized financial institutions as the pace of
consolidation continues in the Washington, D.C. market. We have plans to
pursue the opportunities provided by this trend in future years.
Our increased emphasis on consumer and home equity lending allowed us to
continue to grow our total interest income during the past fiscal year.
Total interest income in fiscal 1996 was $80,118,000, an increase of 16.0
percent from the total of $69,091,000 achieved in fiscal 1995. In future
months, we expect the level of liability costs to decrease at a more rapid
rate than that of interest yields, resulting in an improved net interest
margin. However, the future course of interest rates is uncertain; the level
of interest rates is significantly less than it was a year ago so we believe
our margins will improve regardless of market conditions as our short-term
liabilities reprice.
"WE ARE NOTICING AN INCREASE IN CUSTOMERS SEEKING
MORE LOCALIZED FINANCIAL INSTITUTIONS. . ."
During fiscal 1995, the Board of Directors and the management of your
Company were mindful of the uncharacteristic 19.6 percent increase in
non-interest expense. During fiscal 1996, non-interest expense only
increased 8.4 percent from $17,125,000 to $18,566,000. We are going to try
very hard to reduce the percentage increase even more in this current fiscal
year. Given the cost of technology and the needs of our customers, this is a
major challenge.
In fiscal 1996, Maryland Federal closed its Cipriano Square office
because it had never reached the size needed to become profitable. The
deposits of that office were consolidated with our Greenbelt office, located
less than two miles away. Also, during the year we relocated our
Gaithersburg office into a free-standing building with a drive-in and an ATM.
The move enabled us to reduce expenses, expand service, and increase our
visibility in this growing part of Montgomery County. We have developed a
profitability model for our branch offices and it has proven to be useful in
deciding which offices to close, expand, or relocate. During this present
fiscal year, we have four offices with expiring leases. This will give us
the opportunity to determine if they are the most efficient way to serve our
customers' needs in those markets. We are not committed to bricks and mortar
as the only way to serve our customers, but we do realize that for many years
to come it will remain our primary means of service.
As the year progressed, we were able to reduce our staff of loan
originators as several staff members made other career choices in the face of
a slow real estate market. This selection process allows us to keep our top
producers while continuing to control overhead. In the fiscal year which
will end February 28,
4
<PAGE>
1997, we will be opening at least one loan production office dedicated solely
to the origination of home equity lines of credit and fixed-rate second
trusts. These forms of secondary financing are becoming our major loan
products outside of our normal adjustable-rate first trust mortgage loans.
In fiscal 1996, we processed 2,575 applications which resulted in
approximately $215 million in loan originations. This was a decline of
approximately $85 million from the previous fiscal year; however, we are
pleased with the changes that we have made in our origination mix. Almost 10
percent of the total originations was made up of home equity lines of credit.
At the beginning of the year, we set a goal of having a total of $20,000,000
in outstanding home equity lines of credit by the end of our fiscal year. We
exceeded that goal by $1,355,000 and are currently growing those outstandings
by approximately $2,000,000 per month. Since these loans adjust to prime on
a quarterly basis, they are helping to reduce our interest rate mismatch
which negatively impacted our earnings. Adjustable-rate mortgages accounted
for approximately $105 million or 50 percent of first mortgage loan
originations. During the year, we were able to find several new secondary
market sources for our fixed-rate and adjustable-rate mortgage loans. By
selling more loans, we are able to increase our fee income, and rebuild our
servicing portfolio which was diminished during the refinance boom of several
years ago.
In recent months, we have worked hard to develop a number of internal
incentive programs to motivate employees to recommend and sell additional
services to customers and to reward them for doing so. However, unlike many
institutions, we believe customers appreciate being served promptly and
accurately; so while selling services will become increasingly important at
Maryland Federal, providing service will always be the most important part of
our job.
There have been five significant accomplishments during the past fiscal
year:
- - Meeting our goal of $20,000,000 in outstanding Primeline Home Equity Lines
of Credit.
- - Repositioning our Totally Free Checking to provide free point of sale
transactions, free ATM transactions and other free services based on
balances. The result has been a doubling of our rate of account growth.
- - Changing our Tel-A-Balance automated banking system to a seven day a week,
24 hour a day service.
- - Creating a major increase in our capability to sell loans in the secondary
market.
- - Significantly reducing the rate of growth in our expenses.
We expect to accomplish several tasks in the fiscal year which will end
on February 28, 1997:
- - Providing easier customer access in our expanding markets with new or
relocated branch offices and new loan production offices.
- - Providing better customer service outside traditional banking hours with
better ATM services, a web site on the Internet and a debit card.
- - Continuing focus on asset and liability management with more checking
accounts and increased home equity lines of credit.
Mildred Harkness, a director of the Company since 1977, died on January
21, 1996. Mrs. Harkness had a curiosity and enthusiasm which ensured that
management stayed on the course established by the Board of Directors. Her
philosophies will continue to guide us in the future. The financial world is
changing and challenging. We look forward to your continued support and
suggestions in the current fiscal year.
Sincerely,
/s/ Richard B. Bland
Richard B. Bland
CHAIRMAN OF THE BOARD
/s/ Robert H. Halleck
Robert H. Halleck
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Maryland Federal Bancorp, Inc. (the "Company") is the unitary savings and
loan holding company of Maryland Federal Savings and Loan Association (the
"Association") and its subsidiary. The Company and the Association are
sometimes collectively referred to as "Maryland Federal". The Company
currently owns 100% of the issued and outstanding common stock of the
Association, which is the principal asset of the Company. The Company does
not presently own or operate any subsidiaries other than the Association and
its subsidiary, MASSLA Corporation.
The following financial review presents management's analysis of the
consolidated financial condition and results of operations of Maryland
Federal, and should be read together with the consolidated financial
statements and accompanying notes which are presented elsewhere in this
report.
REQUIRED ACTUAL EXCESS
-------------- --------------- -------
(DOLLARS IN THOUSANDS)
Tangible capital $17,125 1.50% $84,159 7.37% $67,034
Core Capital 34,250 3.00% 84,159 7.37% 49,909
Risk-based capital 47,195 8.00% 88,583 15.04% 41,388
FINANCIAL CONDITION
ASSETS. Total assets increased by $84.6 million or 8.0% to $1.14 billion
during fiscal 1996 versus a 21.4% increase in total assets during fiscal
1995. The increase in fiscal 1996 was due primarily to increases of $12.2
million or 77.3% in cash and cash equivalents, $13.4 million or 467.6% in
loans held for sale, $79.0 million or 8.8% in loans receivable, net, and $2.7
million or 27.9% in Federal Home Loan Bank stock, at cost, versus the prior
fiscal year. These increases were partially offset by a decrease of $21.9
million or 20.5% in securities available-for-sale and held-to-maturity
(comprised primarily of mortgage-backed and related securities and U.S.
Government and agency obligations). During fiscal 1996, management
transferred $66.2 million of securities from held-to-maturity to
available-for-sale pursuant to a transition provision of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," ("SFAS 115"). The increase in loans
receivable (including loans held for sale) was due to the continuing strong
loan originations generated by our loan production staff throughout the year.
The decrease in securities and increase in cash and cash equivalents is the
result of management's decision to keep short-term liquidity in the form of
cash and cash equivalents. The increase in Federal Home Loan Bank stock, at
cost was necessary to collateralize the increase in advances from the Federal
Home Loan Bank of Atlanta ("FHLB").
LIABILITIES. Total liabilities increased by $76.4 million or 7.8% to
$1.05 billion during fiscal 1996 versus a $178.4 million or 22.5% increase
during fiscal 1995. The increase in fiscal 1996 was due primarily to
increases of $25.2 million or 3.3% in deposits and $53.1 million or 27.8% in
advances from the FHLB versus the prior fiscal year. The increases in
deposits and FHLB advances were necessitated by the increased demand for new
mortgage loans.
STOCKHOLDERS' EQUITY. Maryland Federal's total stockholders' equity
increased by $8.2 million or 9.5% during fiscal 1996 versus $8.2 million or
10.5% during fiscal 1995. During fiscal 1996, such increase reflects net
income of $8.7 million and a $1.7 million increase related to the exercise of
stock options during the year, which were offset by dividends to shareholders
of $1.8 million and a $496,000 decrease recorded to recognize the net change
in unrealized holding gains, net.
CAPITAL ADEQUACY
The Association is required under federal regulations to maintain minimum
tangible capital equal to 1.5% of its adjusted total assets, minimum core
capital equal to 3.0% of its adjusted total assets and minimum total capital
(a combination of core and supplementary capital) equal to 8.0% of its
risk-weighted assets. At February 29, 1996, the Association exceeded all of
its regulatory capital requirements. The prior table demonstrates the
Association's required and actual capital ratios
6
<PAGE>
at February 29, 1996.
The Office of Thrift Supervision ("OTS") has proposed to modify the
minimum core capital leverage ratio requirement in the same manner as has
been done by the Office of the Comptroller of the Currency for national
banks. Under the OTS proposal, only savings associations rated a composite 1
under the OTS CAMEL rating system will be permitted to operate at or near the
regulatory minimum leverage ratio of 3%. For all other savings associations,
the minimum core capital leverage ratio will be 3% plus at least an
additional 100 to 200 basis points. The OTS has not taken final action on
the proposal; however, it has reserved the right to apply this higher
standard to any insured financial institution when considering an
institution's capital adequacy.
In August 1993, the OTS issued a final rule which adds an interest rate
risk component to the existing 8% risk-based capital requirement. Under the
rule, a savings institution would be required to hold capital as a safeguard
against interest rate exposure in an amount equal to 50% of the decline in
the market value of the institution's portfolio equity (i.e., the net present
value of the institution's assets, liabilities and certain off-balance-sheet
items) that would result from a 200 basis point change in market interest
rates. The requirement would apply to those institutions considered to be
carrying "above normal" risk. "Above normal" risk is defined as occurring
when the decline in the market value of the portfolio equity, under a 200
basis point rate change, exceeds 2% of the market value of the institution's
assets.
However, in October 1994, the Director of the OTS indicated that it would
waive the capital deductions for institutions with a greater than "normal"
risk until the OTS publishes an appeals process. In August 1995, the OTS
issued Thrift Bulletin No. 67 which allows eligible institutions to request
an adjustment to their interest rate risk component as calculated by the OTS
or to request use of their own models to calculate their interest rate
component. The OTS also indicated that it will delay invoking its interest
rate risk rule requiring institutions with "above normal" interest rate risk
exposure to adjust their regulatory capital requirement until new procedures
are implemented and evaluated. The OTS has not yet established an effective
date for the capital deduction. Because of the Association's strong
capitalization, management does not believe that compliance with the new rule
would adversely affect its operations.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, each federal banking agency is also required to establish capital
levels for insured depository institutions including "well capitalized",
"adequately capitalized", "undercapitalized" and "critically
undercapitalized". A depository institution's capital adequacy will be
measured on the basis of its total risk-based capital ratio, Tier 1
risk-based capital ratio and leverage ratio. The degree of regulatory
intervention is tied to the institution's capital category, with increasing
scrutiny and more stringent restrictions being imposed as the institution's
capital declines.
To be considered "well capitalized," an institution must generally have a
total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital
ratio of at least 6% and a leverage capital ratio of at least 5%. At
February 29, 1996, the Association was considered to be "well capitalized."
It is management's strong belief that even after making payment of the
proposed one-time Savings Association Insurance Fund ("SAIF") deposit
insurance premium, which is discussed in the "SAIF deposit insurance
premiums" section under Noninterest Expense, the Association will still be
considered "well capitalized." See Notes 13 and 14 of Notes to Consolidated
Financial Statements.
RESULTS OF OPERATIONS
Maryland Federal reported net income of $8.7 million ($2.76 primary
earnings per share) in fiscal 1996 versus $9.1 million ($2.84 primary
earnings per share) and $12.3 million ($3.72 primary earnings per share) in
fiscal 1995 and 1994, respectively. Net income reflects the net interest
income resulting from the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities,
and various other
The following table presents, for the periods indicated, the changes in
interest income and interest expense attributable to (i) changes in volume
(changes in volume multiplied by prior year rate) and (ii) changes in rate
(changes in rate multiplied by prior year volume). Changes in rate/volume
(determined by multiplying the change in rate by the change in volume) have
been allocated to the change in rate and the change in volume based upon the
respective percentages of their combined totals.
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------------------
1996 VS. 1995 1995 VS. 1994
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- --------------------------
VOLUME RATE NET VOLUME RATE NET
------ ------ ------- ------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable (1) $11,206 $ -- $11,206 $10,292 $(5,705) $4,587
Mortgage-backed and related securities (41) 72 31 1,666 (181) 1,485
Investment securities and other interest-
earning assets (854) 644 (210) (1,415) 1,184 (231)
------- ------ ------- ------- ------- ------
Total interest income 10,311 716 11,027 10,543 (4,702) 5,841
------- ------ ------- ------- ------- ------
Interest expense:
Deposits:
Certificates of deposit 6,460 4,957 11,417 1,769 403 2,172
Noncertificate accounts (1,435) (314) (1,749) 155 (22) 133
Advances from FHLB and other interest-
bearing liabilities (2) 3,085 1,165 4,250 3,967 289 4,256
------- ------ ------- ------- ------- ------
Total interest expense 8,110 5,808 13,918 5,891 670 6,561
------- ------ ------- ------- ------- ------
Increase (decrease) in net interest income $ 2,201 $(5,092) $(2,891) $ 4,652 $(5,372) $ (720)
------- ------ ------- ------- ------- ------
------- ------ ------- ------- ------- ------
</TABLE>
(1) Includes loans held for sale.
(2) Includes interest expense on interest-bearing advances from borrowers for
taxes and insurance.
7
<PAGE>
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amounts of interest income of Maryland Federal
from interest-earning assets and the resultant average yields;(ii) the total
dollar amounts of interest expense on interest-bearing liabilities and the
resultant average rates; (iii) net interest income and the interest rate
spread; (iv) net interest-earning assets and the net yield earned on
interest-earning assets; and (v) the ratio of total interest-earning assets
to total interest-bearing liabilities. Average balances are calculated on a
daily basis. Yields and rates at February 29, 1996, are also indicated.
<TABLE>
<CAPTION>
FEB. 29, YEAR ENDED FEBRUARY 29, YEAR ENDED FEBRUARY 28, YEAR ENDED FEBRUARY 28,
1996 (4) 1996 1995 1994
-------- --------------------------- -------------------------- --------------------------
(DOLLARS IN THOUSANDS)
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
RATE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------ ------- -------- ------ ------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets: (1)
Loans receivable (2) 7.48% $ 957,320 $72,215 7.54% $809,647 $61,009 7.54% $677,360 $56,422 8.33%
Mortgage-backed and
related securities 6.78% 71,042 4,809 6.77% 71,664 4,778 6.67% 46,789 3,293 7.04%
Investment securities
and other interest-
earning assets 5.47% 51,758 3,094 5.98% 67,400 3,304 4.90% 101,787 3,535 3.47%
---------- ------- -------- ------- -------- -------
Total interest-
earning assets 7.33% 1,080,120 80,118 7.42% 948,711 69,091 7.28% 825,936 63,250 7.66%
------- ------- -------
Noninterest-earning
assets 15,771 19,971 15,153
---------- -------- --------
Total assets $1,095,891 $968,682 $841,089
---------- -------- --------
---------- -------- --------
Interest-bearing
liabilities:
Deposits:
Certificates of deposit 5.74% $ 604,892 35,059 5.80% $485,176 23,558 4.86% $448,084 21,386 4.77%
Noncertificate accounts 2.75% 168,804 4,839 2.87% 217,283 6,672 3.07% 212,131 6,539 3.08%
---------- ------- -------- ------- -------- -------
Total deposits 5.11% 773,696 39,898 5.16% 702,459 30,230 4.30% 660,215 27,925 4.23%
Advances from FHLB and
other interest-bearing
liabilities (3) 5.87% 214,224 12,992 6.06% 161,850 8,742 5.40% 88,209 4,486 5.09%
---------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 5.27% 987,920 52,890 5.35% 864,309 38,972 4.51% 748,424 32,411 4.33%
------- ------- -------
Noninterest-bearing
liabilities 20,751 23,366 18,009
---------- -------- --------
Total liabilities 1,008,671 887,675 766,433
Stockholders' equity 87,220 81,007 74,656
---------- -------- --------
Total liabilities and
stockholders' equity $1,095,891 $968,682 $841,089
---------- -------- --------
---------- -------- --------
Net interest income/
interest rate spread 2.06% $27,228 2.07% $30,119 2.77% $30,839 3.33%
----- ------- ----- ------- ----- ------- -----
----- ------- ----- ------- ----- ------- -----
Net interest-earning
assets/net yield on
interest-earning assets $ 92,200 2.52% $ 84,402 3.17% $ 77,512 3.73%
---------- ----- -------- ----- -------- -----
---------- ----- -------- ----- -------- -----
Ratio of interest-earning
assets to interest-bearing
liabilities 1.09% 1.10% 1.10%
----- ----- -----
----- ----- -----
</TABLE>
(1) Interest-earning assets include all assets on which interest was
contractually due.
(2) Includes loans held for sale.
(3) Average balances include $1.0 million, $1.0 million and $1.5 million
of interest-bearing advances from borrowers for taxes and insurance
during each of the respective years.
(4) Based on stated interest rates at February 29, 1996.
8
<PAGE>
elements such as provision for loan losses, noninterest income, noninterest
expense, income tax expense, and for fiscal 1994, the cumulative effect of
change in accounting for income taxes.
NET INTEREST INCOME
During the year ended February 29, 1996, net interest income decreased by
$2.9 million or 9.6% versus the prior fiscal year. The decrease was
primarily the result of a 70 basis point net decrease in the yield earned on
interest-earning assets over the rate paid on interest-bearing liabilities
("interest rate spread"), which more than offset a $7.8 million or 9.2%
increase in the relative amount of interest-earning assets over
interest-bearing liabilities during fiscal 1996 versus fiscal 1995. During
the year ended February 28, 1995, net interest income decreased by $720,000
or 2.3% versus the prior fiscal year. The decrease was primarily the result
of a 56 basis point net decrease in the interest rate spread, which more than
offset a $6.9 million or 8.9% increase in the relative amount of
interest-earning assets over interest-bearing liabilities during fiscal 1995
versus fiscal 1994.
INTEREST INCOME
LOANS RECEIVABLE. For the fiscal year ended February 29, 1996, interest
earned on loans receivable (including loans held for sale) increased by $11.2
million or 18.4% over the prior fiscal year. This increase resulted from a
$147.7 million or 18.2% increase in the average balance of loans receivable,
while maintaining an average yield earned on such assets at 7.54% during
fiscal 1996 as compared to the prior fiscal year. For the year ended
February 28, 1995, interest earned on loans receivable (including loans held
for sale) increased by $4.6 million or 8.1% over the prior fiscal year. This
increase resulted from a $132.3 million or 19.5% increase in the average
balance of loans receivable, which more than offset a 79 basis point decrease
in the average yield earned on such assets to 7.54% during fiscal 1995 as
compared to the prior fiscal year. The increase in the average balance of
loans receivable during both fiscal years was primarily due to the increased
demand in mortgage loan originations, and loan purchases during fiscal 1995.
The Association continues to offer adjustable rate mortgages and other rate
sensitive loans, such as our Primeline Home Equity Lines of Credit and second
trusts. These loans are generally retained in the loan portfolio while those
loans sold in the secondary market are primarily fixed rate loans.
MORTGAGE-BACKED AND RELATED SECURITIES. For the year ended February 29,
1996, interest earned on mortgage-backed and related securities increased by
$31,000 or 0.6% over the prior fiscal year. This increase resulted from a 10
basis point increase in the average yield earned on mortgage-backed and
related securities to 6.77%, which more than offset a $622,000 or 0.9%
decrease in the average balance of such assets during fiscal 1996 as compared
to fiscal 1995. The decrease in the average balance of mortgage-backed and
related securities was the result of the prepayment of principal as well as
the sales of mortgage-backed and related securities during fiscal 1996.
Interest earned on mortgage-backed and related securities increased by $1.5
million or 45.1% during fiscal 1995 versus fiscal 1994. Such increase was
primarily due to a $24.9 million or 53.2% increase in the average balance of
mortgage-backed and related securities, which more than offset a 37 basis
point decrease in the average yield earned on such assets to 6.67% during
fiscal 1995 versus fiscal 1994. The increase in the average balance of such
securities reflects purchases of new securities as a supplement to the
mortgage loans held in the Association's loan portfolio.
INVESTMENT SECURITIES AND OTHER INTEREST-EARNING ASSETS. Interest earned
on investment securities and other interest-earning assets decreased by
$210,000 or 6.4% during fiscal 1996 versus the prior fiscal year. This
decrease was primarily due to a $15.6 million or 23.2% decrease in the
average balance of investment securities and other interest-earning assets,
which more than offset a 108 basis point increase in the average yield earned
on such assets to 5.98% during fiscal 1996 versus fiscal 1995. During fiscal
1995, interest earned on investment securities and other interest-earning
assets decreased by $231,000 or 6.5% versus the prior fiscal year. This
decrease was primarily due to a $34.4 million or 33.8% decrease in the
average balance of investment securities and other interest-earning assets,
which more than offset a 143 basis point increase in the average yield earned
on such assets to 4.90% during fiscal 1995 versus fiscal 1994. For both
fiscal years, the decreases in the average balances were the result of
management's decision to partially fund the growth in mortgage loans by
reducing the Association's available liquidity.
INTEREST EXPENSE
DEPOSITS. The Association's interest expense on deposits increased by
$9.7 million or 32.0% to $39.9 million during fiscal 1996 versus the prior
fiscal year. This increase was primarily due to a $71.2 million or 10.1%
increase in the average balance of deposits to $773.7 million coupled with an
86 basis point increase in the average rate paid on such deposits during
fiscal 1996 versus the prior fiscal year. During fiscal 1995, interest
expense on deposits increased by $2.3 million or 8.3% as compared to the
prior fiscal year. This increase was primarily due to a $42.2 million or
6.4% increase in the average balance of deposits coupled with a 7 basis point
increase in the average rate paid on such deposits during fiscal 1995 versus
fiscal 1994. The Association continued to offer competitive interest rates
on deposits which helped to increase the average balance of deposits during
fiscal 1996 and 1995. In addition, the acquisitions of several branch
offices from The Resolution Trust Corporation and another financial
institution during fiscal 1995 also contributed to the increase in the
average balance of deposits during that fiscal year.
BORROWED FUNDS. Interest expense on borrowed funds (consisting of FHLB
advances and advances from borrowers for taxes and insurance) increased by
$4.3 million or 48.6% during fiscal 1996 versus fiscal 1995. This increase
was primarily due to a $52.4 million or 32.4% increase in the average balance
of such funds to $214.2 million coupled with a 66 basis point increase in the
average rate paid on such
9
<PAGE>
funds to 6.06% during fiscal 1996 versus the prior fiscal year. During
fiscal 1995, interest expense on borrowed funds increased by $4.3 million or
94.9% versus the prior fiscal year, primarily as a result of a $73.6 million
or 83.5% increase in the average balance of such funds coupled with a 31
basis point increase in the average rate paid on such funds to 5.40%. The
increase of such funds during fiscal 1996 and fiscal 1995 reflects
management's decision to fund a major portion of its loan growth with
borrowed funds rather than deposits.
PROVISION FOR LOAN LOSSES
Loan review procedures are utilized by the Association in order to ensure
that potential problem loans are identified early, thereby lessening any
potentially negative impact such problem loans may have on the Association's
earnings. During fiscal 1996, 1995, and 1994, the Association's provision
for loan losses totaled $120,000, $300,000, and $662,000, respectively. See
also Note 5 of Notes to Consolidated Financial Statements.
The allowance for loan losses is maintained at a level believed adequate
by management to absorb losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of
the loan portfolio, past loan loss experience, current economic conditions,
volume, growth and composition of the loan portfolio, and other relevant
factors. The allowance is increased by provisions for loan losses which are
charged against income. While management uses the best information available
to make such determinations, no assurance can be given as to whether future
adjustments may be necessary.
As of February 29, 1996, non-performing loans (loans ninety days or more
delinquent but still accruing, and non-accrual loans) totaled $3.4 million
and represented 0.34% of total loans receivable. At February 28, 1995 and
1994, non-performing loans totaled $1.6 million and $5.9 million,
respectively, and represented 0.17% and 0.85%, respectively, of total loans
receivable. During fiscal 1996, non-performing loans increased by $1.8
million as compared to fiscal 1995, due primarily to an increase in
non-performing residential first mortgage and consumer loans which resulted
from the soft economic conditions that existed in the current market area.
During fiscal 1995, non-performing loans decreased by $4.3 million as
compared to fiscal 1994, due primarily to significant reductions in the
non-performing commercial loan portfolio.
As of February 29, 1996, the allowance for loan losses amounted to $4.5
million and represented 132.1% of non-performing loans. As of February 28,
1995 and 1994, the allowance for loan losses amounted to $4.4 million and
$4.2 million, respectively, and represented 284.2% and 70.9%, respectively,
of non-performing loans. During fiscal 1995 and fiscal 1994, $50,000 and
$739,000, respectively, were transferred out of the allowance for loan losses
into the allowance for losses on foreclosed real estate. No such transfers
took place during fiscal 1996.
NONINTEREST INCOME
Total noninterest income increased by $3.7 million or 180.2% during
fiscal 1996 versus fiscal 1995. This increase included a $3.2 million gain
on sales of investment securities, as well as an $81,000 gain on sales of
mortgage-backed and related securities, which were considered as maturities
under SFAS 115. In addition, noninterest income increased by $100,000 or 7.2%
in banking service charges and fees and $388,000 or 289.6% in gain on sales
of first mortgage loans, which more than offset decreases of $28,000 or 9.3%
in loan fees and service charges and $89,000 or 41.2% in other noninterest
income during fiscal 1996 versus the prior fiscal year. The increase in
banking service charges and fees was due primarily to increases in
administrative fees received on insurance services, service fees collected on
both commercial and noncommercial checking accounts, and other miscellaneous
fees charged on customer accounts during fiscal 1996 versus fiscal 1995. The
increase in gain on sales of first mortgage loans was due primarily to an
increase in the origination of loans to be held for sale during fiscal 1996
versus the prior fiscal year. The decrease in other noninterest income was
due primarily to decreased income earned by the Association's subsidiary,
MASSLA Corporation, which offers various insurance products to the
Association's customers and employees, during fiscal 1996 versus fiscal 1995.
There were no sales of investment securities during fiscal 1995 and fiscal
1994.
Total noninterest income decreased by $908,000 or 30.8% during fiscal
1995 versus fiscal 1994. This decrease was the result of a $152,000 or 33.5%
decrease in loan fees and service charges, a $202,000 or 12.7% decrease in
banking service charges and fees, a $432,000 or 76.3% decrease in gain on
sales of first mortgage loans, and a $122,000 or 36.1% decrease in other
noninterest income during fiscal 1995 as compared to fiscal 1994. The
decrease in loan fees and service charges was due primarily to a decrease in
the Company's loan servicing portfolio during fiscal 1995 versus the prior
fiscal year. The decrease in banking service charges and fees was due
primarily to decreases in administrative fees received on insurance services
and income generated from sales of investment products to customers pursuant
to an agreement with Marketing One Securities, Inc., during fiscal 1995
versus fiscal 1994. The decrease in gain on sales of first mortgage loans
was due primarily to a decrease in the origination of loans to be held for
sale during fiscal 1995 versus the prior fiscal year. The decrease in other
noninterest income was due primarily to decreased income earned by the
Association's subsidiary, MASSLA Corporation, during fiscal 1995 versus
fiscal 1994.
NONINTEREST EXPENSE
Total noninterest expense increased by $1.4 million or 8.4% and $2.8
million or 19.6% during fiscal 1996 and fiscal 1995, respectively, versus the
comparable prior fiscal years. The components of noninterest expense are
discussed below.
COMPENSATION AND BENEFITS. Compensation and benefits increased by
$436,000 or 5.2%
10
<PAGE>
and $1.2 million or 16.1% during fiscal 1996 and fiscal 1995, respectively,
versus the comparable prior fiscal years. The increases in compensation and
benefits were due primarily to additional staffing necessitated by the
expansion of branch and loan production offices as well as the creation of a
new proof-of-deposit department during fiscal 1995 which also resulted in
increased expenses during the 1996 fiscal year. In addition, the Association
experienced increased rates associated with employee health care expense
during fiscal 1995.
OCCUPANCY AND EQUIPMENT. Occupancy and equipment expense increased by
$399,000 or 14.3% and $404,000 or 16.9% during fiscal 1996 and fiscal 1995,
respectively, versus the comparable prior fiscal years. Costs incurred with
the relocation of two branch offices, the creation of a new proof-of-deposit
department and new branch and loan production offices in fiscal 1995,
contributed to the increases in occupancy and equipment expenses during both
fiscal 1996 and fiscal 1995. In addition, for both fiscal years, the
increases were also the result of increases in depreciation expense and
maintenance contract expense related to the acquisition of additional
furniture and equipment.
SAIF DEPOSIT INSURANCE PREMIUMS. SAIF deposit insurance premiums paid to
the Federal Deposit Insurance Corporation ("FDIC") increased by $180,000 or
11.5% and $137,000 or 9.5% during fiscal 1996 and fiscal 1995, respectively,
versus the comparable prior fiscal years, due primarily to an increase in the
average balance of deposits.
Deposits of the Association are currently insured by the FDIC through the
SAIF. Both the SAIF and the Bank Insurance Fund ("BIF"), the deposit
insurance fund that covers most commercial bank deposits, are statutorily
required to be recapitalized to a ratio of 1.25% of insured reserve deposits.
Members of the SAIF and BIF have been paying average deposit insurance
premiums of between 23 and 25 basis points. While the BIF has reached the
required reserve ratio, the SAIF is not expected to be recapitalized until
2002 at the earliest.
The FDIC has established a new assessment rate schedule of zero to 27
basis points for BIF members beginning on January 1, 1996. Under that
schedule, approximately 91% of BIF members will pay the lowest assessment
rate of zero basis points (subject to a $2,000 minimum). With respect to
SAIF member institutions, the existing assessment rate of 23 to 31 basis
points applicable to SAIF member institutions has been retained.
In order to mitigate the effect of the BIF/SAIF premium disparity, both
the House and Senate approved legislation included in the Balanced Budget Act
of 1995 which would, among other things, recapitalize the SAIF by a one-time
charge of SAIF-insured institutions of approximately $6.6 billion, or
approximately $.80 to $.85 for every $100.00 of deposits, and eventually
merge the SAIF with the BIF. The legislation was vetoed by the President for
reasons unrelated to the recapitalization of the SAIF. The Association
currently is unable to predict the likelihood of enactment of such
legislation. If the proposed assessment of $.80 to $.85 per $100.00 of
deposits was effected based on deposits as of March 31, 1995, as proposed,
the Association's pro rata share would amount to approximately $6.1 million
to $6.5 million, respectively.
LOSS ON FORECLOSED REAL ESTATE, NET. During the fiscal year ended
February 29, 1996, loss on foreclosed real estate, net, decreased by $65,000
or 17.9% versus the prior fiscal year, due primarily to a decrease of
$100,000 in provision for losses on foreclosed real estate. During fiscal
1995, loss on foreclosed real estate, net, increased by $332,000 versus the
prior fiscal year. During fiscal 1995, the increase was primarily due to a
$300,000 provision for losses on foreclosed real estate. There was no such
provision made during fiscal 1994. Foreclosed real estate, net, totaled $2.1
million, $2.7 million and $3.2 million at year-end 1996, 1995 and 1994,
respectively. See also Note 5 of Notes to Consolidated Financial Statements.
ADVERTISING. Advertising expense increased by $28,000 or 5.5% and
$27,000 or 5.6% during fiscal 1996 and fiscal 1995, respectively, versus the
comparable prior fiscal years.
OTHER. Other noninterest expense increased by $463,000 or 13.2% and
$739,000 or 26.8% during fiscal 1996 and fiscal 1995, respectively, versus
the comparable prior fiscal years. During fiscal 1996, the increase in other
noninterest expense resulted from amortization of the cost in excess of fair
value of net assets acquired related to the acquisition of certain branch
offices during fiscal 1995. In addition, increases in regulatory exam fees,
postage and telephone expense during fiscal 1996 versus the prior fiscal
year, and losses due to two branch robberies during fiscal 1996, contributed
to the increase in other noninterest expense. During fiscal 1995, the
increase in other noninterest expense was due primarily to amortization of
the cost in excess of fair value of net assets acquired related to the
acquisition of certain branch offices, creation of a proof-of-deposit
department, and also increases in printing, postage, stationary, supplies,
microfilm costs, courier services and telephone expense due to the expansion
of the Association's branch and loan production office network.
INCOME TAXES
Maryland Federal made provisions for income taxes of $5.5 million, $5.7
million and $7.1 million in fiscal 1996, 1995 and 1994, respectively. The
$145,000 or 2.6% and $1.4 million or 20.0% decrease during fiscal 1996 and
fiscal 1995, respectively, as compared to the comparable prior fiscal years,
was due to the decreased profitability of the Association. The effective
tax rate for each of the three fiscal years was 38.8%, 38.5% and 37.7%,
respectively.
Effective March 1, 1993, Maryland Federal adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
SFAS 109 changes the way companies record deferred tax liabilities or assets
and requires ongoing adjustments for enacted changes in tax rates and
regulations. The cumulative effect of the change in accounting for income
taxes on prior years increased net income by $547,000 or $.17 per share, in
fiscal 1994. See also Note 11 of Notes to Consolidated Financial Statements.
11
<PAGE>
ASSET AND LIABILITY MANAGEMENT
GENERAL. The management of Maryland Federal recognizes that as a
depository institution it is subject to interest rate risk due to timing
differences in the repricing of its assets and liabilities. As a result,
Maryland Federal's earnings are largely dependent on its net interest income,
which is determined by the Association's interest rate spread and the
relative amounts of interest-earning assets and interest-bearing liabilities.
The Association's primary objectives, with respect to asset and liability
management, are to (i) improve the rate sensitivity of its interest-earning
assets in relation to interest-bearing liabilities; and (ii) increase the
ratio of interest-sensitive assets to interest-sensitive liabilities with
like maturities.
MONITORING. Management presently monitors and evaluates the potential
impact of interest rate movements upon the market value of portfolio equity
and the level of net interest income on a monthly basis. This evaluation is
performed in compliance with OTS regulations and is compared to Board
established limits to ensure that interest rate risk is maintained within
these guidelines. Various strategies are employed to further strengthen
Maryland Federal's interest rate risk position.
STRATEGIES. The Association utilizes a variety of methods to achieve its
asset and liability objectives, including emphasis on origination of
adjustable first trust loans for its portfolio, second trusts, and the sale
of fixed-rate mortgage loans in the secondary market. For the year ended
February 29, 1996, the Association's interest rate spread decreased to 2.07%
as compared to 2.77% during the prior fiscal year. The Association continues
to be adversely affected by a more rapid increase in its liability costs when
compared to the increases in the interest rates earned on its loans and
securities.
REPRICING. Comparison of maturities of repricing interest-earning assets
and interest-bearing liabilities is illustrated in the following "gap" table.
This table defines interest-sensitive assets and liabilities as those which
mature or reprice within one year or less. As shown in the table, the ratio
of the Association's one-year gap to total assets was 29.3% as of February
29, 1996 versus 24.0% and 26.6% as of February 28, 1995 and 1994,
respectively. The deterioration in the one-year gap at February 29, 1996
versus the prior fiscal year end is due primarily to increases of $115.2
million in deposits and $5.1 million in advances from the FHLB and other
interest-bearing liabilities which more than offset increases of $35.8
million in loans and mortgage-backed and related securities and $4.2 million
in investment securities and other interest-earning assets. These changes
reflect management's decision during fiscal 1995 and 1996 to fund loan growth
through a combination of short-term advances from the FHLB and longer-term
certificates of deposits, which are now approaching their scheduled
maturities.
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
------------ ------------ ------------
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-sensitive assets:
Loans and mortgage-backed and related securities (1) $252,629 $216,868 $184,944
Investment securities and other interest-earning
assets 45,585 41,374 89,770
-------- -------- --------
Total interest-sensitive assets 298,214 258,242 274,714
-------- -------- --------
Interest-sensitive liabilities:
Deposits 504,358 389,177 471,074
Advances from FHLB and other interest-bearing
liabilities (2) 128,579 123,464 35,368
-------- -------- --------
Total interest-sensitive liabilities 632,937 512,641 506,442
-------- -------- --------
Excess of interest-sensitive liabilities over
interest-sensitive assets (Gap) $334,723 $254,399 $231,728
-------- -------- --------
-------- -------- --------
Ratio of Gap to total assets 29.3% 24.0% 26.6%
-------- -------- --------
-------- -------- --------
</TABLE>
(1) Includes loans held for sale.
(2) Includes $0.8 million, $0.9 million and $1.1 million of interest-bearing
advances from borrowers for taxes and insurance for each of the
respective years.
LIQUIDITY AND CAPITAL RESOURCES
The Association is required under certain federal regulations to maintain
specified levels of "liquid" investments including United States Government
and federal agency securities and other investments. Regulations currently
in effect require the Association to maintain liquid assets of not less than
5% of its net withdrawable accounts plus short-term borrowings, of which
short-term liquid assets must consist of not less than 1%. The Association
has consistently maintained liquidity at or above the levels required by the
regulations.
The Association's principal sources of funds are deposits, amortization
and prepayment of outstanding loans, borrowed funds and proceeds from the
sale of loans. During the past several years, the Association has used such
funds primarily to maintain its required liquidity levels, meet its ongoing
commitments to fund maturing savings certificates and savings withdrawals,
and fund existing and continuing loan commitments.
At February 29, 1996, the Association had $1.7 million of undisbursed
loan funds and $64.0 million in approved loan commitments. These commitments
were partially offset by $33.3 million in forward commitments to sell. The
Association anticipates that it will have the funds necessary to meet these
obligations through the sources of funds mentioned above. The amount of
certificate accounts which are scheduled to mature in fiscal 1997 is $429.5
million. Management believes that, by evaluating competitive instruments and
pricing in its market area, it can, in most circumstances, manage and control
maturing deposits so that a substantial amount of such deposits are
redeposited in the Association.
12
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented in this
report have been prepared in accordance with generally accepted accounting
principles, which typically requires the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation. See Note 23
of Notes to Consolidated Financial Statements for estimated fair values of
certain assets and liabilities.
Virtually all of the assets and liabilities of Maryland Federal are
monetary in nature. As a result, interest rates have a more significant impact
on Maryland Federal's performance than the general level of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as
the prices of goods and services.
The following table summarizes the estimated maturities or repricing of
Maryland Federal's interest-earning assets and interest-bearing liabilities at
February 29, 1996. The weighted average rate of each category of assets and
liabilities is given below the respective dollar amounts. Management assumes,
based on the Association's experience, that certain loans receivable and
mortgage-backed securities can be expected to experience prepayments of
principal and that a substantial amount of core deposits will have significantly
longer effective maturities in spite of being subject to immediate withdrawal
terms.
<TABLE>
FEBRUARY 29, 1996
---------------------------------------------------------------------------
MORE THAN MORE THAN MORE THAN MORE THAN
1 YEAR 3 YEARS 5 YEARS 10 YEARS MORE
1 YEAR TO TO TO TO THAN
OR LESS 3 YEARS 5 YEARS 10 YEARS 20 YEARS 20 YEARS TOTAL
-------- --------- --------- --------- -------- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed-rate mortgage loans (1) $ 75,173 $ 105,800 $109,719 $ 92,419 $46,493 $ 4,807 $ 434,411
8.01% 7.79% 8.40% 7.62% 7.56% 7.64% 7.92%
Adjustable and floating-rate
mortgage loans 159,969 211,441 147,427 33,767 -- -- 552,604
7.24% 6.98% 7.12% 7.39% -- -- 7.12%
Consumer and other loans 1,410 1,912 847 -- -- -- 4,169
9.72% 9.72% 9.72% -- -- -- 9.72%
Mortgage-backed and related
securities 16,077 13,142 7,168 18,061 11,379 368 66,195
6.21% 6.95% 7.03% 6.94% 6.90% 7.07% 6.78%
Investment securities and other
interest-earning assets 45,585 2,792 664 812 -- 12,514 62,367
5.03% 5.30% 4.76% 4.29% -- 7.25% 5.47%
---------- ---------- --------- -------- ------- -------- -----------
Total interest-earning assets 298,214 335,087 265,825 145,059 57,872 17,689 1,119,746
7.05% 7.24% 7.65% 7.46% 7.43% 7.35% 7.33%
---------- ---------- --------- -------- ------- -------- -----------
Interest-bearing liabilities:
Deposits 504,358 192,821 49,979 31,864 6,347 3,562 788,931
5.26% 5.09% 5.15% 2.98% 2.74% 2.94% 5.11%
Advances from FHLB and other
interest-bearing liabilities (2) 128,579 114,350 1,000 680 -- -- 244,609
6.04% 5.68% 4.90% 6.50% -- -- 5.87%
---------- ---------- --------- -------- ------- -------- -----------
Total interest-bearing liabilities 632,937 307,171 50,979 32,544 6,347 3,562 1,033,540
5.42% 5.31% 5.16% 3.05% 2.74% 2.94% 5.27%
---------- ---------- --------- -------- ------- -------- -----------
Excess (deficiency) of interest-
earning assets over interest-
bearing liabilities $(334,723) $ 27,916 $214,846 $112,515 $51,525 $14,127 $ 86,206
---------- ---------- --------- -------- ------- -------- -----------
---------- ---------- --------- -------- ------- -------- -----------
Cumulative excess (deficiency)
of interest-earning assets
over interest-bearing
liabilities $(334,723) $(306,807) $(91,961) $20,554 $72,079 $86,206 $ 86,206
---------- ---------- --------- -------- ------- -------- -----------
---------- ---------- --------- -------- ------- -------- -----------
Cumulative excess (deficiency)
as a percentage of total
assets (29.28)% (26.83)% (8.04)% 1.80% 6.30% 7.54% 7.54%
---------- ---------- --------- -------- ------- -------- -----------
---------- ---------- --------- -------- ------- -------- -----------
</TABLE>
(1) Includes loans held for sale.
(2) Includes $0.8 million of interest-bearing advances from borrowers for
taxes and insurance.
13
<PAGE>
SELECTED CONSOLIDATED
FINANCIAL AND OPERATING DATA
<TABLE>
FEB. 29, FEBRUARY 28, FEB. 29,
------- -------------------------- -------
1996 1995 1994 1993 1992
------- ------ ------ ------ ------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
AT YEAR END:
Total assets $1,143,338 $1,058,781 $872,167 $814,789 $818,199
Loans receivable (1) 991,184 898,728 696,993 644,329 640,668
Mortgage-backed and related
securities 66,195 75,436 44,106 53,586 45,864
Investment securities and other
interest-earning assets (2) 62,367 60,765 105,100 92,835 107,592
Deposits 788,931 763,754 678,050 666,232 683,928
Borrowed funds 243,780 190,730 103,180 65,680 59,500
Stockholders' equity 93,982 85,796 77,623 69,196 60,268
FOR THE YEAR ENDED:
Total interest income 80,118 69,091 63,250 67,722 72,104
Total interest expense 52,890 38,972 32,411 38,598 50,923
-------- --------- -------- -------- --------
Net interest income 27,228 30,119 30,839 29,124 21,181
Provision for loan losses 120 300 662 1,940 1,361
-------- --------- -------- -------- --------
Net interest income after
provision for loan losses 27,108 29,819 30,177 27,184 19,820
Banking service charges and fees 1,492 1,392 1,594 1,087 785
Gain on sales of interest-earning
assets 3,834 134 566 665 696
Other noninterest income 401 518 792 636 567
Noninterest expense 18,566 17,125 14,320 12,707 11,863
Income before income taxes and
cumulative effect of accounting
change 14,269 14,738 18,809 16,865 10,005
Income tax expense 5,530 5,675 7,097 6,485 4,058
Income before cumulative effect
of accounting change 8,739 9,063 11,712 10,380 5,947
Cumulative effect of change in
accounting for income taxes -- -- 547 -- --
Net income $ 8,739 $ 9,063 $ 12,259 $ 10,380 $ 5,947
-------- --------- -------- -------- --------
-------- --------- -------- -------- --------
Primary earnings per share (3) $ 2.76 $ 2.84 $ 3.72 $ 3.17 $ 1.87
-------- --------- -------- -------- --------
-------- --------- -------- -------- --------
Return on equity 9.7% 11.1% 16.7% 16.0% 10.2%
Equity-to-assets 8.2% 8.5% 8.7% 7.9% 7.4%
Cash dividends declared per
share (3) $ .575 $ .46 $ .395 $ .254 $ .243
Dividend payout ratio 20.8% 16.2% 10.6% 8.0% 13.0%
Number of full service facilities 25 26 21 21 19
</TABLE>
(1) Includes loans held for sale.
(2) Includes investment securities, federal funds sold, securities purchased
under agreements to resell and interest-bearing deposits.
(3) As adjusted for 10% stock dividend declared on August 20, 1992.
14
<PAGE>
FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition 16
Consolidated Statements of Income 17
Consolidated Statements of Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
15
<PAGE>
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents $ 27,963 $ 15,775
Securities purchased under agreements
to resell 11,034 9,623
Securities available for sale 74,791 7,722
Securities held to maturity (fair
value, 1996 -- $10,007,000 and
1995 -- $96,768,000) 10,072 99,012
Loans held for sale, at cost 16,296 2,871
Loans receivable, net 974,888 895,857
Accrued interest receivable 6,009 5,611
Federal Home Loan Bank stock, at cost 12,514 9,784
Foreclosed real estate, net 2,090 2,695
Premises and equipment, net 4,829 5,389
Other assets 2,852 4,442
---------- ----------
Total assets $1,143,338 $1,058,781
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 788,931 $ 763,754
Advances from Federal Home Loan Bank of
Atlanta 243,780 190,730
Advances from borrowers for taxes and
insurance 9,124 9,711
Income taxes 2,143 3,451
Accrued expenses and other liabilities 5,378 5,339
---------- ----------
Total liabilities 1,049,356 972,985
---------- ----------
COMMITMENTS AND CONTINGENCIES
(Notes 16 and 20)
STOCKHOLDERS' EQUITY
Preferred stock; 10,000,000 shares
authorized, none issued -- --
Common stock; $.01 par value;
15,000,000 shares authorized;
shares issued, 1996 -- 3,821,081
and 1995 -- 3,712,424 38 37
Additional paid-in capital 34,917 33,191
Retained earnings, substantially restricted 67,492 60,537
Unrealized holding gains, net 2,420 2,916
Treasury stock, at cost; 671,376 shares (10,885) (10,885)
---------- ----------
Total stockholders' equity 93,982 85,796
---------- ----------
Total liabilities and stockholders'
equity $1,143,338 $1,058,781
---------- ----------
---------- ----------
16
See Notes to Consolidated Financial Statements.
<PAGE>
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income:
Loans receivable:
First mortgage loans $67,093 $56,960 $52,562
Consumer and other loans 5,122 4,049 3,860
Investment securities 2,566 2,596 2,013
Mortgage-backed and related securities 4,809 4,778 3,293
Other interest-earning assets 528 708 1,522
------- ------- -------
Total interest income 80,118 69,091 63,250
------- ------- -------
Interest expense:
Deposits 39,898 30,230 27,925
Advances from Federal Home Loan Bank of
Atlanta 12,962 8,714 4,444
Advances from borrowers for taxes and
insurance 30 28 42
------- ------- -------
Total interest expense 52,890 38,972 32,411
------- ------- -------
Net interest income 27,228 30,119 30,839
Provision for loan losses 120 300 662
------- ------- -------
Net interest income after provision for
loan losses 27,108 29,819 30,177
------- ------- -------
Noninterest income:
Loan fees and service charges 274 302 454
Banking service charges and fees 1,492 1,392 1,594
Gain on sales of first mortgage loans 522 134 566
Gain on sales of investment and mortgage-
backed securities 3,312 -- --
Other 127 216 338
------- ------- -------
Total noninterest income 5,727 2,044 2,952
------- ------- -------
Noninterest expense:
Compensation and benefits 8,828 8,392 7,226
Occupancy and equipment 3,190 2,791 2,387
SAIF deposit insurance premiums 1,752 1,572 1,435
Loss on foreclosed real estate, net 299 364 32
Advertising 536 508 481
Other 3,961 3,498 2,759
------- ------- -------
Total noninterest expense 18,566 17,125 14,320
------- ------- -------
Income before income taxes and
cumulative effect of accounting change 14,269 14,738 18,809
Income tax expense 5,530 5,675 7,097
------- ------- -------
Income before cumulative effect of
accounting change 8,739 9,063 11,712
Cumulative effect of change in accounting
for income taxes -- -- 547
------- ------- -------
NET INCOME $ 8,739 $ 9,063 $ 12,259
------- ------- -------
------- ------- -------
Primary earnings per share:
Income before cumulative effect of
accounting change $ 2.76 $ 2.84 $ 3.55
Cumulative effect of change in
accounting for income taxes -- -- .17
------- ------- -------
Net income $ 2.76 $ 2.84 $ 3.72
------- ------- -------
------- ------- -------
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE>
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED UNREALIZED
ADDITIONAL EARNINGS, HOLDING TOTAL
COMMON PAID-IN SUBSTANTIALLY GAINS, TREASURY STOCKHOLDERS'
STOCK CAPITAL RESTRICTED NET STOCK EQUITY
------ ---------- ------------- ---------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1993 $36 $31,235 $41,878 $ -- $ (3,953) $69,196
Net income -- -- 12,259 -- -- 12,259
Issuance of 84,291 shares of common
stock under stock plans -- 899 -- -- -- 899
Purchase of 133,782 shares of
treasury stock -- -- -- -- (3,484) (3,484)
Cash dividends ($.395 per share) -- -- (1,247) -- -- (1,247)
--- ------- ------- ------ -------- -------
Balance, February 28, 1994 36 32,134 52,890 -- (7,437) 77,623
Net income -- -- 9,063 -- -- 9,063
Issuance of 69,172 shares of common
stock under stock plans 1 1,057 -- -- -- 1,058
Purchase of 140,475 shares of
treasury stock -- -- -- -- (3,448) (3,448)
Cash dividends ($.46 per share) -- -- (1,416) -- -- (1,416)
Change in unrealized holding
gains, net -- -- -- 2,916 -- 2,916
--- ------- ------- ------ -------- -------
Balance, February 28, 1995 37 33,191 60,537 2,916 (10,885) 85,796
Net income -- -- 8,739 -- -- 8,739
Issuance of 108,657 shares of common
stock under stock plans 1 1,726 -- -- -- 1,727
Cash dividends ($.575 per share) -- -- (1,784) -- -- (1,784)
Change in unrealized holding
gains, net -- -- -- (496) -- (496)
--- ------- ------- ------ -------- -------
Balance, February 29, 1996 $38 $34,917 $67,492 $2,420 $(10,885) $93,982
--- ------- ------- ------ -------- -------
--- ------- ------- ------ -------- -------
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE>
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 8,739 $ 9,063 $ 12,259
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Cumulative effect of change in accounting for income taxes -- -- (547)
Depreciation and amortization:
Premises and equipment 1,123 884 747
Other (722) (1,547) (2,729)
Loans originated for sale (67,152) (15,454) (38,257)
Sale of loans originated for sale 53,727 13,967 38,640
Federal Home Loan Bank stock dividend -- -- (439)
Provision for losses on loans and foreclosed real estate 320 600 662
Gain on sales of securities (3,312) -- --
Gain on sales of foreclosed real estate (27) (74) (56)
Deferred income taxes (970) (211) 912
Decrease (increase) in:
Accrued interest receivable (398) (783) 630
Other assets 1,725 (2,283) (748)
Increase (decrease) in:
Current income taxes payable (19) 724 (308)
Accrued expenses and other liabilities (85) 1,683 (931)
-------- -------- --------
Net cash provided by (used in) operating activities (7,051) 6,569 9,835
-------- -------- --------
INVESTING ACTIVITIES:
Loans originated (149,152) (225,562) (235,007)
Loans purchased (1,006) (71,535) (36,484)
Principal collected on loans 71,825 97,445 220,702
Purchases of securities:
Available for sale (3,364) (619) --
Held to maturity -- (54,796) (36,711)
Principal collected on mortgage-backed and related securities 8,361 10,056 17,588
Proceeds from maturities of securities:
Available for sale -- 2,557 --
Held to maturity 14,130 17,000 28,100
Net decrease (increase) in securities purchased under agreements to resell (1,411) 19,395 13,711
Increase in Federal Home Loan Bank stock (2,730) (1,633) --
Proceeds from sales of securities:
Available for sale 3,423 -- --
Held to maturity 1,909 -- --
Proceeds from sales of foreclosed real estate 713 871 652
Purchases of premises and equipment (563) (2,762) (792)
-------- -------- --------
Net cash used in investing activities (57,865) (209,583) (28,241)
-------- -------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 25,177 35,202 (8,253)
Proceeds from acquisitions of deposits -- 50,502 20,071
Proceeds from Federal Home Loan Bank advances 249,350 178,800 57,000
Principal payments on Federal Home Loan Bank advances (196,300) (91,250) (19,500)
Net increase (decrease) in advances from borrowers for taxes and insurance (587) 1,060 402
Proceeds from issuance of stock under stock plans 1,124 743 899
Purchase of treasury stock -- (3,448) (3,484)
Cash dividends paid (1,660) (1,363) (1,142)
-------- -------- --------
Net cash provided by financing activities 77,104 170,246 45,993
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,188 (32,768) 27,587
CASH AND CASH EQUIVALENTS:
Beginning of year 15,775 48,543 20,956
-------- -------- --------
End of year $ 27,963 $ 15,775 $ 48,543
-------- -------- --------
-------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE>
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Maryland Federal Bancorp, Inc. (the "Company") is the unitary savings and
loan holding company and sole stockholder of Maryland Federal Savings and
Loan Association (the "Association"). The Company does not presently own or
operate any subsidiary except for the Association. The Association operates
25 branches located in Prince George's, Montgomery, Charles, Calvert and Anne
Arundel Counties in Maryland.
The Association is primarily engaged in the business of attracting deposits
from the general public and investing such deposits in permanent loans
secured by first liens on one- to four-family residential properties located
in the Washington, DC area. The Association, through a subsidiary, engages
in insurance agency activities to a limited extent.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company,
the Association and its wholly-owned subsidiary, MASSLA Corporation
(collectively, "Maryland Federal"). All significant intercompany balances
and transactions have been eliminated in consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS:
Cash equivalents consist of Federal funds sold. For purposes of the
consolidated statements of cash flows, Maryland Federal considers all highly
liquid debt instruments purchased with original maturities of three months or
less to be cash equivalents.
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY:
Effective March 1, 1994, Maryland Federal adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). Debt securities for which Maryland Federal
has the positive intent and ability to hold to maturity are classified as
held to maturity and are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using a method which
approximates the interest method. Debt securities not classified as held to
maturity and equity securities are classified as available for sale and
reported at fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of stockholders' equity, net of
the related tax effect.
Should any securities be sold, gains and losses would be recognized using the
specific-identification method. If there are declines in the fair value of
individual securities below their cost that are other than temporary, such
declines will be included in earnings as realized losses.
The adoption of SFAS 115, which has not been applied retroactively to prior
years' financial statements, resulted in an increase in stockholders' equity
by an after-tax amount of $2.7 million as of March 1, 1994. Prior to March
1, 1994, equity securities were stated at cost and debt securities, including
mortgage-backed and related securities were stated at cost, adjusted for
amortization of premiums and discounts.
LOANS HELD FOR SALE:
Mortgage loans held for sale in the secondary market are carried at the lower
of aggregate cost or estimated market value. Net unrealized losses, if any,
are recognized in a valuation allowance by charges to operations.
LOANS RECEIVABLE:
Loans receivable are stated at unpaid principal balances, less the allowance
for loan losses, and net deferred loan origination fees, costs and discounts.
Discounts and premiums on loans are amortized and reflected as an addition to
or reduction of income using the interest method over the remaining period to
contractual maturity.
The allowance for loan losses is increased by provisions charged to income
and decreased by charge-offs, net of recoveries. Management's periodic
evaluation of the adequacy of the allowance is based on the Association's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of any underlying collateral, and current economic conditions.
Uncollectible interest on loans that are contractually past due is charged
off or an allowance is established based on management's periodic evaluation.
The allowance is established by a charge to interest income equal to all
interest previously accrued, and income is subsequently recognized only to
the extent cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is no
longer in doubt, in which case the loan is returned to accrual status.
LOAN ORIGINATION AND COMMITMENT FEES AND RELATED COSTS:
Loan origination and commitment fees and certain direct loan origination
costs are being deferred and the net amount is being amortized as an
adjustment of the related loan's yield over the life of the loan. When loans
are sold or prepaid, the related unamortized loan fees are recognized in
income.
FORECLOSED REAL ESTATE:
Real estate acquired through, or in lieu of, loan foreclosure is initially
recorded at the lower of cost or fair value at the date of acquisition.
Losses estimated at the time of acquisition are charged to earnings in the
period in which the property is acquired and reduced by any allowance for
loss previously provided against the related loan. Holding costs are charged
to expense in the period in which incurred. Gains or losses on the sale of
foreclosed real estate are recognized upon disposition of the property.
Management periodically evaluates the recoverability of the carrying value of
foreclosed real estate. An allowance, if necessary, is provided to reduce
the carrying value to its fair value less estimated selling costs.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided over the estimated useful lives of
the respective assets principally on the straight-line method. Leasehold
improvements are being amortized using the straight-line method over the
terms of the related leases.
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED:
Cost in excess of fair value of net assets acquired is being amortized using
the straight-line method over 7 years. The unamortized balance was
$1,568,000 and $1,937,000 as of February 29, 1996 and February 28, 1995,
respectively, and is included in other assets in the accompanying
consolidated statements of financial condition.
INCOME TAXES:
The Company files a consolidated Federal income tax return with its
subsidiary. Effective March 1, 1993, Maryland Federal adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS
109") and has reported the cumulative effect of the change in the method of
accounting for income taxes as of March 1, 1993, in the consolidated
statement of income for the year ended February 28, 1994. Under the asset
and liability method of SFAS 109, deferred tax assets and liabilities are
recognized for estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are recorded using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. Under SFAS 109, the effect on deferred tax
assets and liabilities of a change in tax laws or rates is recognized in
income in the period that includes the enactment date.
EARNINGS PER SHARE:
Primary earnings per share are computed based on the weighted average number
of shares actually outstanding, as adjusted for applicable stock dividends,
plus the shares that would be outstanding assuming exercise of dilutive stock
options, all of which are considered to be common stock equivalents. The
number of shares that would be issued from the exercise of stock options has
been reduced by the number of shares that could have been purchased from the
proceeds at the average market price of the Company's stock during the year.
The number of shares used in the computations of primary earnings per share
was 3,167,472, 3,196,572 and 3,298,506 in fiscal 1996, 1995 and 1994,
respectively. Maryland Federal has not separately reported fully diluted
earnings per share since the amounts are not materially different from
primary earnings per share.
DERIVATIVE FINANCIAL INSTRUMENTS:
Effective March 1, 1995, Maryland Federal adopted, on a prospective basis,
Statement of Financial Accounting Standards No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments."
This statement requires certain disclosures about financial derivatives,
including amounts, nature and terms of the instruments. All derivative
financial instruments held or issued by Maryland Federal are held or issued
for purposes other than trading. Such financial instruments are recorded in
the financial statements when they are funded or related fees are incurred or
received. See disclosures in Notes 16, 20 and 23 to Consolidated Financial
Statements.
NEW ACCOUNTING PRONOUNCEMENTS:
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
was issued in March 1995. This statement establishes accounting standards
for impairment of certain long-lived assets held for use and held for
20
<PAGE>
disposal. This statement will be effective for fiscal years beginning after
December 15, 1995, and is not expected to have a significant impact on
Maryland Federal.
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights" was issued in May 1995. This statement requires
recognition as a separate asset at fair value, the rights to service mortgage
loans for others and evaluation of mortgage servicing rights for impairments.
This statement will be effective for fiscal years beginning after December
15, 1995, and is not expected to have a significant impact on Maryland
Federal.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", ("SFAS 123") was issued in October 1995. This
statement establishes financial accounting and reporting standards for
stock-based employee compensation plans. SFAS 123 defines a fair value based
method of accounting for such plans and encourages all entities to adopt that
method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost
for those plans using the intrinsic value based method of accounting,
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees".
SFAS 123 will be effective for transactions entered into in fiscal years
that begin after December 15, 1995. Maryland Federal intends to follow the
accounting prescribed by APB Opinion No. 25.
RECLASSIFICATIONS:
Certain amounts for fiscal 1995 and 1994 have been reclassified to conform to
the presentation for fiscal 1996.
NOTE 2 -- SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL:
Securities purchased under agreements to resell are summarized as follows:
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ -----------
(IN THOUSANDS)
Mortgage-backed securities $ 11,034 $ 7,955
U.S. Government securities -- 1,668
------------ -----------
Total $ 11,034 $ 9,623
------------ -----------
------------ -----------
The Association enters into purchases of securities under agreements to
resell. The amounts advanced under these agreements represent short-term
loans and are reflected as a receivable in the consolidated statements of
financial condition. The securities underlying the agreements are book-entry
securities. The securities were delivered by appropriate entry into a
third-party custodian's account designated by the Association under a written
custodial agreement that explicitly recognizes the Association's interest in
the securities. At February 29, 1996, these agreements mature within ninety
days. All of the agreements were to resell the identical securities.
Securities purchased under agreements to resell averaged approximately
$6,800,000 and $12,600,000 during fiscal 1996 and 1995, respectively, and the
maximum amounts outstanding at any month-end during fiscal 1996 and 1995 were
approximately $11,000,000 and $25,600,000, respectively.
NOTE 3 -- SECURITIES:
A summary of securities is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale securities:
February 29, 1996:
Federal Home Loan
Mortgage Corporation $ 152 $ 3,050 $ -- $ 3,202
Mortgage-backed and
related securities 64,704 1,062 170 65,596
Other 5,993 -- -- 5,993
----------- ---------- ------------ -----------
Total $ 70,849 $ 4,112 $ 170 $ 74,791
----------- ---------- ------------ -----------
----------- ---------- ------------ -----------
February 28, 1995:
Federal Home Loan
Mortgage Corporation $ 344 $ 4,749 $ -- $ 5,093
Other 2,629 -- -- 2,629
----------- ---------- ------------ -----------
Total $ 2,973 $ 4,749 $ -- $ 7,722
----------- ---------- ------------ -----------
----------- ---------- ------------ -----------
Held-to-maturity securities:
February 29, 1996:
United States government
and agency obligations $ 7,997 $ 9 $ 81 $ 7,925
State and municipal
securities 1,476 15 -- 1,491
Mortgage-backed and related
securities 599 -- 8 591
----------- ---------- ------------ -----------
Total $ 10,072 $ 24 $ 89 $ 10,007
----------- ---------- ------------ -----------
----------- ---------- ------------ -----------
February 28, 1995:
United States government
and agency obligations $ 21,918 $ 4 $ 448 $ 21,474
State and municipal
securities 1,658 -- 99 1,559
Mortgage-backed and related
securities 75,436 189 1,890 73,735
----------- ---------- ------------ -----------
Total $ 99,012 $ 193 $ 2,437 $ 96,768
----------- ---------- ------------ -----------
----------- ---------- ------------ -----------
</TABLE>
Gross realized gains on sales of available-for-sale securities were
$3,231,000 in fiscal 1996. Gross realized gains and gross realized losses on
sales of held-to-maturity securities were $89,000 and $8,000, respectively,
in fiscal 1996, which were considered as maturities under the provisions of
SFAS 115. There were no sales of securities during fiscal 1995 and 1994.
The amortized cost and fair value of debt securities at February 29, 1996, by
contractual maturity, are shown below. Maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without penalties. Securities not due at a single
maturity date are presented separately.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
SECURITIES SECURITIES
---------------------- -------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------------- -------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $ 4,000 $ 3,977
Due after one year through
five years -- -- 4,661 4,613
Due after five years through
ten years -- -- 812 826
Mortgage-backed and related
securities 64,704 65,596 599 591
----------- ----------- ----------- -----------
Total $ 64,704 $ 65,596 $ 10,072 $ 10,007
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
During fiscal 1996, Maryland Federal transferred $66,200,000 of securities
from held to maturity to available for sale as a result of guidance published
by the Financial Accounting Standards Board on the implementation of SFAS
115. The net unrealized gain on these securities at the date of transfer was
$526,000.
21
<PAGE>
NOTE 4 -- LOANS RECEIVABLE:
Loans receivable consist of the following:
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
(IN THOUSANDS)
First mortgage loans:
Conventional, permanent $ 899,907 $ 836,811
Conventional, construction 5,159 8,559
VA and FHA 4,362 5,584
Participations 2,028 2,130
--------- ---------
Total first mortgage loans 911,456 853,084
--------- ---------
Consumer and other loans:
Second trust and home improvement 48,343 48,261
Home equity 21,355 3,593
Installment and other 4,232 2,997
--------- ---------
Total consumer and other loans 73,930 54,851
--------- ---------
Total loans 985,386 907,935
Less:
Undisbursed portion of mortgage loans 1,722 2,728
Unamortized premiums and discounts, net 487 642
Net deferred loan fees 3,815 4,284
Allowance for loan losses 4,474 4,424
--------- ---------
Loans receivable, net $ 974,888 $ 895,857
--------- ---------
--------- ---------
Effective March 1, 1995, Maryland Federal adopted, on a prospective basis,
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan", as amended by Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures". The adoption of these statements had no impact
on the financial condition or results of operations of Maryland Federal,
since no loans have been identified as meeting the criteria of an impaired
loan.
There were no nonaccrual loans at February 29, 1996. Nonaccrual loans
totalled $20,000 at February 28, 1995. The amount of interest income that
would have been recorded on nonaccrual loans in accordance with their
original terms was $4,000 and $342,000 for fiscal 1995 and 1994,
respectively. The amount of interest income that was recorded on nonaccrual
loans was $2,000 and $264,000 for fiscal 1995 and 1994, respectively.
Non-performing loans are summarized as follows:
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
(IN THOUSANDS)
First mortgage loans $3,333 $1,543
Consumer and other loans 53 13
------ ------
Total $3,386 $1,556
------ ------
------ ------
NOTE 5 - ALLOWANCE FOR LOSSES:
The following is a summary of the changes in the allowance for losses:
FORECLOSED
LOANS REAL
RECEIVABLE ESTATE
---------- ----------
(IN THOUSANDS)
Balance, February 28, 1993 $4,267 $ --
Provision for losses 662 --
Charge-offs (3) --
Transfer to allowance for losses on
foreclosed real estate (739) 739
------ ------
Balance, February 28, 1994 4,187 739
Provision for losses 300 300
Charge-offs (13) (7)
Transfer to allowance for losses on
foreclosed real estate (50) 50
------ ------
Balance, February 28, 1995 4,424 1,082
Provision for losses 120 200
Charge-offs (70) --
------ ------
Balance, February 29, 1996 $4,474 $1,282
------ ------
------ ------
NOTE 6 - LOAN SERVICING:
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances
of these loans totalled approximately $28,400,000, $28,000,000 and $36,200,000
as of February 29, 1996, February 28, 1995 and 1994, respectively, and represent
primarily mortgage loans underlying FHLMC pass-through securities.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $700,000 and $800,000 at February 29, 1996 and
February 28, 1995, respectively.
NOTE 7 - ACCRUED INTEREST RECEIVABLE:
Accrued interest receivable is summarized as follows:
FEBRUARY 29, FEBRUARY 28,
1996 1995
----------- -----------
(IN THOUSANDS)
Securities $ 709 $1,008
Loans receivable 5,300 4,603
------ ------
Total $6,009 $5,611
------ ------
------ ------
NOTE 8 - PREMISES AND EQUIPMENT:
Premises and equipment consist of the following:
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
(IN THOUSANDS)
Land $ 1,237 $ 1,237
Buildings and improvements 2,746 2,723
Furniture and equipment 7,554 7,100
Leasehold improvements 1,123 1,344
Automobiles 98 98
Total premises and equipment 12,758 12,502
Less accumulated depreciation
and amortization 7,929 7,113
Premises and equipment, net $ 4,829 $ 5,389
NOTE 9 - DEPOSITS:
The following is a summary of deposits:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RATE AT FEBRUARY 29, 1996 FEBRUARY 28, 1995
FEBRUARY 29, ------------------ --------------------
1996 AMOUNT PERCENT AMOUNT PERCENT
------------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Demand and checking
accounts, including
noninterest-bearing
deposits of
$11,382,000 and
$8,381,000 at
February 29, 1996 and
February 28, 1995,
respectively 1.57% $ 44,497 5.64% $ 39,994 5.24%
Money market 3.00% 45,315 5.74% 51,398 6.73%
Statement savings 3.28% 76,514 9.70% 94,104 12.32%
--------- ------- --------- -------
166,326 21.08% 185,496 24.29%
--------- ------- --------- -------
Certificates of deposit:
6.00% or less 409,249 51.87% 412,872 54.06%
6.01% to 8.00% 211,282 26.78% 154,923 20.28%
8.01% to 10.00% 1,756 .22% 9,968 1.31%
10.01% to 12.00% 318 .05% 495 .06%
--------- ------- --------- -------
5.74% 622,605 78.92% 578,258 75.71%
--------- ------- --------- -------
Total 5.11% $ 788,931 100.00% $ 763,754 100.00%
--------- ------- --------- -------
--------- ------- --------- -------
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100,000 was approximately $116,300,000 and
$101,400,000 at February 29, 1996 and February 28, 1995, respectively.
22
<PAGE>
At February 29, 1996, scheduled maturities of certificates of deposit are as
follows:
6.00% 6.01% TO 8.01% TO 10.01% TO
FISCAL YEAR OR LESS 8.00% 10.00% 12.00% TOTAL
- ----------- ------- -------- -------- --------- --------
(IN THOUSANDS)
1997 $298,193 $130,464 $ 539 $311 $429,507
1998 82,921 25,818 808 -- 109,547
1999 11,149 37,363 156 7 48,675
2000 16,494 14,511 219 -- 31,224
2001 472 2,991 34 -- 3,497
Thereafter 20 135 -- -- 155
-------- -------- ------- ---- --------
Total $409,249 $211,282 $1,756 $318 $622,605
-------- -------- ------- ---- --------
-------- -------- ------- ---- --------
The following is a summary of interest expense on deposits:
YEAR ENDED
------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
Checking $ 760 $ 840 $ 594
Money market 1,393 1,698 1,850
Statement savings 2,686 4,134 4,095
Certificates of deposit 35,059 23,558 21,386
---------- ---------- ----------
Total $ 39,898 $ 30,230 $ 27,925
---------- ---------- ----------
---------- ---------- ----------
NOTE 10 - ADVANCES FROM FEDERAL HOME LOAN BANK OF ATLANTA:
At February 29, 1996, advances from Federal Home Loan Bank of Atlanta (the
"FHLB") are collateralized by a blanket agreement covering all qualifying
first mortgage loans and all the Association's stock in the FHLB. Advances
mature as follows as of February 29, 1996:
WEIGHTED
FISCAL AVERAGE
YEAR AMOUNT RATE
------ ------- --------
(DOLLARS IN THOUSANDS)
1997 $127,750 6.06%
1998 75,350 5.75%
1999 39,000 5.55%
2000 1,000 4.90%
After 2001 680 6.50%
--------
Total $243,780 5.88%
--------
--------
The Association, as a member of the FHLB System, is required to maintain an
investment in capital stock of the FHLB in an amount equal to the greater of
1% of its total mortgage assets or 5% of its outstanding advances.
NOTE 11 - INCOME TAXES:
As discussed in Note 1, Maryland Federal adopted SFAS 109 effective March 1,
1993. The cumulative effect of this change in accounting principle resulted
in an increase in earnings of $547,000, or $.17 per share, and is reported
separately in the consolidated statements of income. Prior years' financial
statements have not been restated to apply the provisions of SFAS 109. The
tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
(IN THOUSANDS)
Deferred tax liabilities:
Federal Home Loan Bank stock dividends $1,317 $1,317
Loan fees -- 185
Allowance for losses on loans and
foreclosed real estate 50 --
Unrealized holding gains 1,559 1,878
------- ------
Total deferred tax liabilities 2,926 3,380
------- ------
Deferred tax assets:
Loan fees 848 --
Allowance for losses on loans and
foreclosed real estate -- 227
Other 640 426
------- ------
Total deferred tax assets 1,488 653
------- ------
Net deferred tax liabilities $1,438 $2,727
------- ------
------- ------
Under the Internal Revenue Code, the Association is allowed a special bad
debt deduction based on a percentage of taxable income (presently 8 percent)
before such deduction and subject to certain limitations based on aggregate
loans and deposit account balances at the end of the year. SFAS 109
continues the exception for providing a deferred tax liability on bad debt
reserves for tax purposes of qualified thrift lenders such as the Association
that arose in fiscal years beginning before December 31, 1987. Such bad debt
reserve for the Association amounted to approximately $11,100,000 with an
income tax effect of approximately $4,200,000 at February 29, 1996. This bad
debt reserve would become taxable for Federal income tax purposes if the
Association does not maintain certain qualified assets as defined, if the
reserve is charged for other than bad debt losses or if the Association does
not maintain its thrift charter.
The components of income tax expense are as follows:
YEAR ENDED
-------------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
----------- ------------ -----------
(IN THOUSANDS)
Current $6,500 $5,886 $6,185
Deferred (970) (211) 912
------ ------ ------
Total $5,530 $5,675 $7,097
------ ------ ------
------ ------ ------
Income tax expense differs from that computed at the statutory Federal income
tax rate as follows:
YEAR ENDED
------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Statutory Federal income tax rate 35% 35% 35%
Income tax expense at
statutory rate $4,994 $5,158 $6,583
Increase (decrease) in taxes:
State taxes, net of Federal
income tax benefit 649 664 817
Other (113) (147) (303)
------ ------ ------
Total $5,530 $5,675 $7,097
------ ------ ------
------ ------ ------
23
<PAGE>
NOTE 12 - OTHER NONINTEREST EXPENSE:
Other noninterest expense amounts are summarized as follows:
YEAR ENDED
-----------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ -----------
(IN THOUSANDS)
Printing, postage,
stationery and supplies $1,313 $1,529 $1,161
Professional fees 339 327 310
Telephone 314 273 229
Other 1,995 1,369 1,059
------ ------ ------
Total $3,961 $3,498 $2,759
NOTE 13 - REGULATORY MATTERS:
In connection with the insurance of its deposits, the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") currently requires the
Association to maintain: (i) minimum tangible capital equal to 1.5% of adjusted
total assets, (ii) minimum core capital equal to 3% of adjusted total assets,
and (iii) minimum total capital equal to 8% of risk-weighted assets. The
Association exceeds all current capital requirements promulgated by the Office
of Thrift Supervision (the "OTS").
The following is a reconciliation of the Association's capital in accordance
with generally accepted accounting principles to the three components of
regulatory capital calculated under the requirements of FIRREA as of February
29, 1996, based on the Association's understanding of the applicable regulations
and related interpretations:
<TABLE>
<CAPTION>
REGULATORY CAPITAL
---------------------------------------------------------------------------------
PERCENT OF PERCENT OF PERCENT OF
TANGIBLE TANGIBLE CORE CORE RISK-BASED RISK-BASED
CAPITAL ASSETS CAPITAL ASSETS CAPITAL ASSETS
------- ---------- ------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity $88,147 $88,147 $88,147
Qualifying general loan
loss allowance -- -- 4,424
Other (3,988) (3,988) (3,988)
------- ------- -------
Regulatory capital
computed 84,159 7.37% 84,159 7.37% 88,583 5.02%
Minimum capital
requirement 17,125 1.50% 34,250 3.00% 47,195 8.00%
------- ----- ------- ----- ------- ----
Regulatory capital excess $67,034 5.87% $49,909 4.37% $41,388 7.02%
------- ----- ------- ----- ------- ----
------- ----- ------- ----- ------- ----
</TABLE>
In August 1993, the OTS issued a final rule which adds an interest rate risk
component to the existing 8% risk-based capital requirement. The OTS has not
yet established an effective date for this rule. Because of the Association's
strong capitalization, management does not believe that compliance with the new
rule would adversely affect its operations.
The OTS has proposed an increase in the core capital requirement for savings
institutions of at least 100 to 200 basis points higher than the current 3%
requirement for all but the highest rated savings institutions. The OTS has not
taken final action on the proposal; however, it has reserved the right to apply
this higher standard to any insured financial institution when considering an
institution's capital adequacy.
Pursuant to regulations included in the Federal Deposit Insurance Corporation
Improvement Act of 1991, an institution is categorized as "well capitalized" if
it has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based
capital ratio of at least 6% and a leverage capital ratio of at least 5%. At
February 29, 1996, the Association was considered to be "well capitalized" under
these regulations.
Both the House and Senate approved legislation included in the Balanced Budget
Act of 1995 which would, among other things, recapitalize the Savings
Association Insurance Fund (the "SAIF") by a one-time assessment of SAIF-insured
institutions and eventually merge the SAIF with the Bank Insurance Fund. The
legislation was vetoed by the President for reasons unrelated to the
recapitalization of the SAIF. The Association currently is unable to predict
the likelihood of enactment of such legislation. If the proposed assessment of
$.80 to $.85 per $100.00 of deposits was effected based on deposits as of March
31, 1995, as proposed, the Association would be required to pay a one-time
assessment of approximately $6.1 million to $6.5 million, respectively.
NOTE 14 - STOCKHOLDERS' EQUITY:
Under Federal regulations, the Association may not declare or pay a cash
dividend on its capital stock if the effect thereof would cause the
Association's regulatory capital to be reduced below the amount required for the
regulatory capital requirements imposed by the OTS.
Under the OTS regulations, the ability of thrift institutions such as the
Association to make "capital distributions" (defined to include payment of
dividends, stock repurchases, cash-out mergers, and other distributions charged
against the capital accounts of an institution) varies depending primarily on
the institution's regulatory capital level. Institutions are divided into three
tiers for purposes of these regulations.
At February 29, 1996, the Association was a Tier 1 institution (an institution
with capital in excess of its fully phased-in capital requirements), and
consequently was eligible to pay dividends. The OTS retains general discretion
to prohibit any otherwise permitted capital distributions on general safety and
soundness grounds and must be given 30 days advance notice of all capital
distributions.
NOTE 15 - EMPLOYEE RETIREMENT PLANS:
The Association has a qualified, noncontributory defined benefit retirement
plan. Full-time employees are eligible to participate in the plan when they
attain age 25 with one year of service. Amendments to the plan have established
the 100% vesting period at five years. Plan assets consist primarily of
investments in mutual funds.
The following sets forth the funded status of the plan and the amounts shown in
the accompanying consolidated statements of financial condition:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
(IN THOUSANDS)
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested benefits $ 3,476 $ 3,331
Nonvested benefits 187 350
------- -------
3,663 3,681
------- -------
Effect of projected future compensation 2,467 1,505
------- -------
Projected benefit obligation 6,130 5,186
Fair value of assets held in the plan 2,895 3,369
------- -------
Plan assets less than the projected
benefit obligation (3,235) (1,817)
Net unrecognized loss from past experience
different from that assumed 1,674 613
Unrecognized prior service cost 43 67
Unrecognized net transition asset (250) (305)
------- -------
Accrued pension cost (included in
accrued expenses and other liabilities) $(1,768) $(1,442)
------- -------
------- -------
</TABLE>
Components of net pension expense are as follows:
--------------------------------------------
YEAR ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
------------ ------------ ------------
1996 1995 1994
(IN THOUSANDS)
Service cost-benefits earned $571 $484 $420
Interest cost on projected
benefit obligation 363 363 279
Actual return on assets held
in the plan (448) (436) (336)
Net amortization and deferral (7) (12) (12)
---- ---- ----
Net pension expense $479 $399 $351
---- ---- ----
---- ---- ----
The weighted average discount rate used to measure the projected benefit
obligation is 7%, the rate of increase in future compensation levels is 5.5%,
and the expected long-term rate of return on assets is 9%.
The Association also maintains a contributory retirement 401K savings plan for
its employees. Employees who meet the length of service and age requirements
can contribute from 1% to 15% of their eligible compensation to the plan, up to
a maximum established by law. For eligible employees electing to participate,
the Association will also make a contribution to the plan equal to 50% of the
first 5% contributed by the employees. The Association's expense for fiscal
1996, 1995 and 1994 was $106,000, $110,000 and $72,000, respectively.
24
<PAGE>
NOTE 16 - COMMITMENTS AND CONTINGENCIES:
In the ordinary course of business, Maryland Federal has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, Maryland Federal
occasionally is a defendant in certain claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to
have a material adverse effect on the consolidated financial position of
Maryland Federal.
LEASE COMMITMENTS:
A number of the Association's branch and loan production office sites are
occupied under noncancelable leases which expire on various dates through 2005.
Management expects that, in the normal course of business, leases that expire
will be renewed or replaced by other leases. Total rent expense, including
equipment leases, was $1,066,000, $901,000 and $819,000, for fiscal 1996, 1995
and 1994, respectively.
The total commitments for future minimum annual rental payments for real
property and equipment leases are as follows as of February 29, 1996:
FISCAL YEAR AMOUNT
----------- ------
(IN THOUSANDS)
1997 $ 960
1998 785
1999 498
2000 245
2001 125
Thereafter 264
------
Total $2,877
------
------
LOAN COMMITMENTS:
As of February 29, 1996 and February 28, 1995, the Association had commitments
to originate and purchase loans totalling approximately $64,000,000 and
$52,300,000, respectively. As of February 29, 1996 and February 28, 1995, the
Association had commitments to sell loans totalling approximately $33,300,000
and $2,300,000, respectively.
NOTE 17 - RELATED PARTY TRANSACTIONS:
In the normal course of business, the Association may make loans to directors
and executive officers of Maryland Federal, their affiliates and members of
their immediate families. The aggregate balances of these loans greater than
$60,000 were $1,799,000 and $1,639,000 as of February 29, 1996 and February 28,
1995, respectively. During fiscal 1996, $396,000 were advanced and $236,000
were repaid with respect to these loans. During fiscal 1995, $609,000 were
advanced and $45,000 were repaid with respect to these loans.
The law firm in which the Chairman of the Board of the Company is a senior
partner, performs legal services for the Association in the ordinary course of
business. For fiscal 1996, 1995 and 1994, the firm received fees of $323,000,
$187,000 and $202,000, respectively, for services performed for the Association,
in addition to fees which were paid by borrowers.
NOTE 18 - STOCK PURCHASE AND STOCK OPTION PLANS:
The Board of Directors of the Company has adopted an Employee Stock Purchase
Plan. The aggregate number of shares of common stock which may be purchased
pursuant to the plan is 162,212 shares. Eligible employees are able to purchase
stock at not less than 85% of the lesser of the fair market value of the shares
on the first day or the last day of the offering period. Common stock purchases
are made through periodic payroll deductions of no less than 2% nor more than
10% of eligible compensation. Employee purchases amounted to 4,006 shares at a
price of $26.83 and 3,356 shares at a price of $20.19 in fiscal 1996, 3,332
shares at a price of $22.53 per share and 4,122 shares at a price of $20.19 in
fiscal 1995, and 3,985 shares at a price of $20.94 per share and 3,646 shares at
a price of $17.42 per share in fiscal 1994. Total number of shares remaining at
the end of fiscal 1996 amounted to 94,469 shares.
The Board of Directors has adopted a key employee stock compensation program, a
stock option and stock appreciation rights plan and a stock incentive plan.
Options may be granted to purchase up to an aggregate of 601,480 shares of
common stock at the fair market value of the shares at the time the options are
granted. These options may be exercised after three but no later than five
years after date of granting. As of February 29, 1996, options have been
granted to purchase 595,930 shares.
In March, 1993, the Board of Directors adopted a Directors' stock option plan.
Options may be granted to purchase up to an aggregate of 150,000 shares of
common stock at the fair market value of the shares at the time the options are
granted. These options may be exercised after six months but no later than ten
years after date of granting. During fiscal 1994, each nonemployee director of
the Company was granted compensatory options to purchase 6,000 shares of common
stock, and thereafter, on the anniversary of the effective date of the plan for
the next four years, each nonemployee director will receive compensatory options
to purchase 5,000 shares. As of February 29, 1996, options have been granted to
purchase 80,000 shares.
In March 1995, the Board of Directors adopted the 1995 stock option plan.
Options may be granted to employees to purchase up to an aggregate of 152,645
shares of common stock at the fair value of the shares at the time the options
are granted. These options may be exercised 33-1/3% per year over a three-year
period commencing on the first anniversary of the granting date, but no later
than ten years after date of granting. As of February 29, 1996, options have
been granted to purchase 103,800 shares.
The following table summarizes information on these stock option plans:
WEIGHTED
AVERAGE
PRICE
PER SHARE SHARES
--------- ------
Outstanding at February 28, 1993 $10.67 320,854
Granted 22.13 97,550
Exercised 9.82 (76,660)
Canceled 15.39 (20,473)
-------
Outstanding at February 28, 1994 14.05 321,271
Granted 25.13 101,250
Exercised 9.47 (61,718)
Canceled 22.12 (5,210)
-------
Outstanding at February 28, 1995 17.88 355,593
Granted 27.22 128,800
Exercised 9.36 (101,295)
Canceled 23.66 (10,100)
-------
Outstanding at February 29, 1996 23.26 372,998
-------
-------
Exercisable at February 29, 1996 19.48 145,950
-------
-------
NOTE 19 - STOCKHOLDERS' RIGHTS PLAN:
On January 18, 1990, the Board of Directors of the Company declared a dividend
distribution of one right for each outstanding share of common stock of the
Company to stockholders of record at the close of business on February 12, 1990.
Each right entitles the registered holder to purchase from the Company a unit
consisting of one one-hundredth of a share (a "Unit") of Series A Junior
Participating Preferred Stock, par value $.10 per share, at a purchase price of
$45.00 per Unit. The description and terms of the rights are set forth in a
rights agreement between the Company and the rights agent.
The rights may be exercised only if a person or group acquires beneficial
ownership of 20% or more of the Company's common stock or announces a tender
offer or exchange offer that would result in ownership of 20% or more of the
common stock (the "Acquirer"). The Company generally may redeem the rights for
one cent each at any time before any person or group acquires beneficial
ownership of 20% or more of the common stock.
In the event that any person acquires beneficial ownership of 20% or more of the
Company's common stock, all rights holders, except the Acquirer and affiliates
and associates thereof, will be entitled to purchase common stock from the
Company at 50% of the market price. If the Company is acquired in a merger,
statutory share exchange or other business combination after the acquisition of
beneficial ownership of 20% or more of the common stock, rights holders, other
than the Acquirer and its affiliates and associates, will be entitled to
purchase the Acquirer's shares at a similar discount.
These rights, which may have a potentially dilutive effect on earnings per
share, have been excluded from the weighted average number of shares
computation, as preconditions to the exercisability of such rights were not
satisfied.
NOTE 20 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Association is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated statements of financial condition. The contract amounts of
25
<PAGE>
those instruments reflect the extent of involvement the Association has in
particular classes of financial instruments.
The Association's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit written is represented by the contractual amount of
those instruments. The Association uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
A summary of the contract amount of the Association's exposure to
off-balance-sheet risk is as follows:
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
(IN THOUSANDS)
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $91,868 $59,367
Standby letters of credit 1,962 1,322
Commitments to extend credit are agreements to lend to a customer so long as
there is no violation of any condition established in the contract. Commitments
usually have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
Standby letters of credit are conditional commitments issued by the Association
to guarantee the performance of contractual obligations by a customer to a third
party. The majority of these guarantees extend until satisfactory completion of
the customer's contractual obligations.
NOTE 21 - SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
YEAR ENDED
-----------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
Cash paid for:
Interest $52,144 $38,480 $32,576
Income taxes 5,422 5,020 7,264
Transfer from loans to
foreclosed real estate 281 632 514
Loans to finance sales of
foreclosed real estate 208 360 104
NOTE 22 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK:
Most of the Association's business activities are with customers located in the
metropolitan Washington, DC area. Service industries and Federal, state and
local governments employ a significant portion of the Washington area labor
force. Adverse changes in economic conditions could have a direct impact on the
timing and amount of payments by borrowers.
NOTE 23 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
Fair value information which pertains to Maryland Federal's financial
instruments is based on the requirements set forth in Statement of Financial
Accounting Standards No. 107 ("SFAS 107"). In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of Maryland Federal.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents and Securities Purchased Under Agreements to Resell:
The carrying amount is a reasonable estimate of fair value.
Securities: Fair values for securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are estimated
using quoted market prices for similar securities.
Loans Receivable and Loans Held for Sale: For certain homogeneous categories of
loans, such as some residential mortgages and consumer loans, fair value is
estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics. The fair value of other types
of loans is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
Deposits: The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank of Atlanta: Rates currently available to
the Association for debt with similar terms and remaining maturities are used to
estimate fair value of existing debt.
Off-Balance-Sheet Instruments: The fair values of off-balance-sheet lending
commitments are estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties.
The estimated fair values of Maryland Federal's financial instruments are as
follows:
FEBRUARY 29, 1996 FEBRUARY 28, 1995
------------------- --------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- ---------
(IN THOUSANDS)
Financial assets:
Cash and cash equivalents $ 27,963 $ 27,963 $ 15,775 $ 15,775
Securities purchased under
agreements to resell 11,034 11,034 9,623 9,623
Securities available for sale 74,791 74,791 7,722 7,722
Securities held to maturity 10,072 10,007 99,012 96,768
Loans held for sale 16,296 16,399 2,871 2,903
Loans receivable, net 974,888 976,105 895,857 873,555
Financial liabilities:
Deposits 788,931 778,970 763,754 748,615
Advances from FHLB 243,780 243,612 190,730 187,948
Off-balance-sheet instruments:
Commitments to extend credit -- 557 -- 142
Standby letters of credit -- 39 -- 26
NOTE 24 - PARENT COMPANY ONLY FINANCIAL INFORMATION:
The condensed financial statements of the parent company only are presented
below:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Parent Company Only)
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
(IN THOUSANDS)
ASSETS:
Cash $ 792 $ 716
Investment in subsidiary 88,147 84,408
Securities available for sale 5,604 1,063
Other assets -- 31
--------- -------
Total assets $94,543 $86,218
--------- -------
--------- -------
LIABILITIES $ 561 $ 422
--------- -------
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock 38 37
Additional paid-in capital 34,917 33,191
Retained earnings 67,492 60,537
Unrealized holding gains, net 2,420 2,916
Treasury stock, at cost (10,885) (10,885)
--------- -------
Total stockholders' equity 93,982 85,796
--------- -------
Total liabilities and stockholders' equity $94,543 $86,218
--------- -------
--------- -------
26
<PAGE>
CONDENSED STATEMENTS OF INCOME
(Parent Company Only)
YEAR ENDED
----------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
Advisory fee income $ 160 $ 160 $ 160
Interest income 92 74 29
General and administrative expenses 87 97 84
------ ------ -------
Income before income taxes and
equity in net income of subsidiary 165 137 105
Income tax expense 58 53 37
------ ------ -------
Income before equity in net
income of subsidiary 107 84 68
Equity in net income of subsidiary 8,632 8,979 12,191
------ ------ -------
NET INCOME $8,739 $9,063 $12,259
------ ------ -------
------ ------ -------
CONDENSED STATEMENTS OF CASH FLOWS
(Parent Company Only)
YEAR ENDED
----------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income $8,739 $9,063 $12,259
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in net income of subsidiary,
net of distributions (3,632) (5,979) (6,691)
Decrease (increase) in other assets 31 (20) 112
Increase (decrease) in liabilities 15 (14) 50
------ ------- -------
Net cash provided by operating
activities 5,153 3,050 5,730
------ ------- -------
INVESTING ACTIVITIES:
Purchases of securities available
for sale (4,541) (319) (2,379)
Proceeds from maturities of securities
available for sale -- 1,635 --
------ ------- -------
Net cash provided by (used in)
investing activities (4,541) 1,316 (2,379)
FINANCING ACTIVITIES:
Proceeds from issuance of stock
under stock plans 1,124 943 699
Purchase of treasury stock -- (3,448) (3,484)
Cash dividends paid (1,660) (1,363) (1,142)
------ ------- -------
Net cash used in financing
activities (536) (3,868) (3,927)
------ ------- -------
INCREASE (DECREASE) IN CASH 76 498 (576)
CASH:
Beginning of year 716 218 794
------ ------- -------
End of year $ 792 $ 716 $ 218
------ ------- -------
------ ------- -------
NOTE 25 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following table presents selected quarterly financial data for the years
ended February 29, 1996 and February 28, 1995:
YEAR ENDED FEBRUARY 29, 1996
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $19,443 $19,837 $20,215 $20,623
Interest expense 12,551 13,072 13,563 13,704
------- ------- ------- -------
Net interest income 6,892 6,765 6,652 6,919
Provision for loan losses -- -- 50 70
------- ------- ------- -------
Net interest income after
provision for loan losses 6,892 6,765 6,602 6,849
Gain on sales of securities -- 1,433 1,879 --
Other noninterest income 522 580 661 652
Noninterest expense 4,456 4,785 4,592 4,733
------- ------- ------- -------
Income before income taxes 2,958 3,993 4,550 2,768
Income tax expense 1,128 1,573 1,747 1,082
------- ------- ------- -------
Net income $ 1,830 $ 2,420 $ 2,803 $ 1,686
------- ------- ------- -------
------- ------- ------- -------
Primary earnings per share $ .58 $ .75 $ .87 $ .56
------- ------- ------- -------
------- ------- ------- -------
YEAR ENDED FEBRUARY 28, 1995
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $15,464 $16,677 $18,063 $18,887
Interest expense 8,228 9,079 10,287 11,378
------- ------- ------- -------
Net interest income 7,236 7,598 7,776 7,509
Provision for loan losses 150 150 -- --
------- ------- ------- -------
Net interest income after
provision for loan losses 7,086 7,448 7,776 7,509
Noninterest income 566 515 499 464
Noninterest expense 3,788 4,078 4,364 4,895
------- ------- ------- -------
Income before income taxes 3,864 3,885 3,911 3,078
Income tax expense 1,489 1,499 1,474 1,213
------- ------- ------- -------
Net income $ 2,375 $ 2,386 $ 2,437 $ 1,865
------- ------- ------- -------
------- ------- ------- -------
Primary earnings per share $ .73 $ .73 $ .75 $ .63
------- ------- ------- -------
------- ------- ------- -------
27
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Maryland Federal Bancorp, Inc.
We have audited the accompanying consolidated statements of financial
condition of Maryland Federal Bancorp, Inc. and Subsidiary as of February 29,
1996 and February 28, 1995, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the years in the
three-year period ended February 29, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Maryland
Federal Bancorp, Inc. and Subsidiary as of February 29, 1996 and February 28,
1995, and the results of their operations and their cash flows for each of
the years in the three-year period ended February 29, 1996, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements,
Maryland Federal Bancorp, Inc. and Subsidiary adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" in fiscal 1995, and adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" in fiscal 1994.
STOY, MALONE & COMPANY, P.C.
Bethesda, Maryland
April 10, 1996
28
<PAGE>
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
RICHARD B. BLAND
CHAIRMAN OF THE BOARD, GENERAL COUNSEL TO THE
ASSOCIATION AND SENIOR PARTNER OF LANCASTER, BLAND,
EISELE & HERRING
ROBERT H. HALLECK
PRESIDENT, MARYLAND FEDERAL BANCORP, INC. AND
MARYLAND FEDERAL SAVINGS AND LOAN ASSOCIATION
A. WILLIAM BLAKE, JR.
EXECUTIVE VICE PRESIDENT,
MARYLAND FEDERAL BANCORP, INC. AND
MARYLAND FEDERAL SAVINGS AND LOAN ASSOCIATION
RICHARD R. MACE
SELF-EMPLOYED AS A SPORTING GOODS DEALER
DAVID A. McNAMEE
PRESIDENT, McNAMEE, HOSEA, JERNIGAN AND SCOTT, P.A.
THOMAS H. WELSH, III
SELF-EMPLOYED AS A REAL ESTATE DEVELOPER AND BUILDER
CORPORATE
OFFICERS
MARYLAND FEDERAL
BANCORP, INC.
PRESIDENT
Robert H. Halleck
EXECUTIVE VICE PRESIDENT
A. William Blake, Jr.
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Lynn B. Hounslow
SECRETARY
Sarah M. Costlow
MARYLAND FEDERAL SAVINGS
AND LOAN ASSOCIATION
PRESIDENT
Robert H. Halleck
EXECUTIVE VICE PRESIDENT
A. William Blake, Jr.
SENIOR VICE PRESIDENT
AND TREASURER
Clarice M. George
SENIOR VICE PRESIDENT AND
COMPTROLLER
Lynn B. Hounslow
SENIOR VICE PRESIDENTS
David E. Baker
Nancy B. Cohen
Ronald R. O'Brien
J. Diane Stevenson
SECRETARY
Sarah M. Costlow
VICE PRESIDENTS
Lorraine H. Blancke
Charlotte P. Krintz
Dennis C. McAdoo
Marvette M. Monroe
Belinda G. Norton
Ann C. Wiltbank
Mark J. Woolson
ASSISTANT VICE PRESIDENTS
Cynthia A. Brentlinger
Vivian E. Davis
William T. Evinger
Venitta E. Green
B. Gwen Henderson
Perry A. Johnson
Hilde H. Kochanek
June A. Moore
Mark A. Weber
Amy Woreta
ASSISTANT SECRETARIES
Margaret R. Campbell
Carol J. Downs
Elfrieda McDaniel
Janet L. Norris
ASSISTANT TREASURERS
Donna K. Abel
James P. Baker
Carla M. Boston
Wilhelma L. Christian
Megan Corry-Stevens
Dolores Dubich
Susie L. Edwards
Rosette C. Ephrem
Cynthia L. Frye
Stephanie T. Jones
Margrit Klosa
Keith C. Lounghery
Debbie L. Mancuso
Donna L. McGehee
Jamie R. Murdock
Christine J. Pfaff
Bonita J. Pieper
Michael J. Thompson
Leroy T. Tillery II
Deborah D. Young
AUDITOR
Laurie A. Zebrowski
GENERAL
INFORMATION FOR
SHAREHOLDERS
ANNUAL MEETING
The Annual Meeting of Shareholders of Maryland Federal Bancorp,
Inc. will be held at La Fontaine Bleu, 7963 Annapolis Road, Lanham,
Maryland, on June 19, 1996. A formal notice of the Meeting,
together with a proxy statement and a proxy form, will be mailed to
shareholders.
TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
INDEPENDENT AUDITORS
Stoy, Malone & Company, P.C.
7315 Wisconsin Avenue
Bethesda, Maryland 20814
GENERAL COUNSEL
Lancaster, Bland, Eisele & Herring
9450 Pennsylvania Avenue - Unit 20
Upper Marlboro, Maryland 20772
SPECIAL COUNSEL
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
Washington, D.C. 20005
SHAREHOLDER AND GENERAL INQUIRIES
Mr. Robert H. Halleck
PRESIDENT
Maryland Federal Bancorp, Inc.
3505 Hamilton Street
Hyattsville, MD 20782
(301) 779-1200
STOCK LISTING
The common stock of Maryland Federal Bancorp, Inc. is listed on the
over-the-counter market and quoted on the NASDAQ National Market
System under the symbol "MFSL". As of April 26, 1996, there were
3,831,444 shares issued, of which 3,160,068 were outstanding.
The following table sets forth market price information for the
common stock of the Company for the periods indicated.
FISCAL QUARTER ENDED HIGH LOW
May 31, 1994 30-1/2 23-1/2
August 31, 1994 29-1/2 26-1/4
November 30, 1994 27-3/4 22-1/2
February 28, 1995 27 22-1/2
FISCAL QUARTER ENDED HIGH LOW
May 31, 1995 35 23-5/8
August 31, 1995 34-7/8 30-1/4
November 30, 1995 33-1/4 29
February 29, 1996 32-1/2 30
As of April 26, 1996, the approximate number of shareholders of
record was 2,400. For a description of certain restrictions upon
the Company's ability to pay dividends see Note 14 of the Notes to
Consolidated Financial Statements.
ANNUAL AND OTHER REPORTS
Additional copies of this Annual Report to shareholders, and copies
of the Company's 10-K statements and quarterly reports, may be
obtained without charge by contacting the Company.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to incorporation by reference in the Registration Statements
(Numbers 33-31845 and 33-59832) on Form S-8 of Maryland Federal Bancorp, Inc.
of our report dated April 10, 1996, relating to the consolidated statements
of financial condition of Maryland Federal Bancorp, Inc. and Subsidiary as of
February 29, 1996 and February 28, 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended February 29, 1996, which report appears in the
February 29, 1996 annual report on Form 10-K of Maryland Federal Bancorp, Inc.
STOY, MALONE & COMPANY, P.C.
Bethesda, Maryland
May 28, 1996
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<PAGE>
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