<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 28, 1997
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.
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(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 25, 1997, the aggregate value of the 3,002,373 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
202,112 shares held by all directors and officers of the Registrant as a
group, was approximately $105,083,055. This figure is based on the closing
price of $35.00 per share of the Registrant's Common Stock on April 25, 1997.
Number of shares of Common Stock outstanding as of April 25, 1997: 3,204,485
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 28, 1997 are incorporated into Part II, Items 5-8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 1997 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 26 branch offices located in Prince
George's, Montgomery, Charles, Calvert and Anne Arundel counties, Maryland, five
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 28, 1997, MFB had total assets of $1.13
billion, total liabilities of $1.03 billion and total stockholders' equity of
$95.3 million or $29.67 per share based on 3,210,150 shares of common stock
outstanding. MFB had net income of $6.5 million for the year ended February 28,
1997.
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 28, 1997, representing 93.6% of the Company's $1.13 billion of total
assets at that date. The Association's total loan portfolio at February 28, 1997
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 28, 1997, single-family residential loans comprised the largest
group of loans, amounting to $954.8 million or 89.5% of the gross loan and
mortgage-backed securities portfolio. The Association also had $64.4 million of
mortgage-backed securities, which accounted for 6.0% of the gross loan and
mortgage-backed securities portfolio at such date. Construction loans at such
date amounted to $6.8 million or 0.6% 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 $34.8 million or 3.3%
of the gross loan and mortgage-backed securities portfolio at February 28, 1997.
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
focused on its origination of second mortgages and home equity lines of credit
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 77.7%, 50.7% and 65.7% of total loans
originated in fiscal 1995, 1996 and 1997, 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>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
----------------------- ----------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------ --------- ------------ --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Permanent loans:
Single-family(1)............. $ 954,750 89.5% $ 947,995 88.8% $ 855,857 86.8%
Multi-family................. 2,081 0.2 2.472 0.2 2,662 0.3
Commercial(2)................ 34,833 3.3 41,824 3.9 40,731 4.1
Land......................... -- -- -- -- -- --
Construction loans:
Single-family................ 6,846 0.6 2,815 0.3 1,244 0.1
Other property............... -- -- 2,344 0.2 7,315 0.7
Mortgage-backed securities....... 64,415 6.0 66,491 6.2 75,804 7.7
Consumer and other loans......... 4,010 0.4 4,232 0.4 2,997 0.3
------------ --------- ------------ --------- ---------- ---------
Total gross loans and
mortgage-backed securities
receivable..................... 1,066,935 100.00% 1,068,173 100.00% 986,610 100.00%
========= ========= =========
Less:
Undisbursed portion of mortgage
loans........................ 3,240 1,722 2,728
Unamortized premiums and
discounts, net............... 653 783 1,010
Net deferred loan fees......... 2,356 3,815 4,284
Allowance for loan losses...... 4,599 4,474 4,424
------------ ------------ ----------
Total loans and mortgage-backed
securities receivable, net... $ 1,056,087 $ 1,057,379 $ 974,164
============ ============ ==========
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1994 1993
----------------- -----------
AMOUNT PERCENT AMOUNT PERCENT
---------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
Permanent loans:
Single-family(1)............. $ 656,833 86.5% $596,508 83.0%
Multi-family................. 2,740 0.4 2,807 0.4
Commercial(2)................ 36,548 4.8 39,252 5.5
Land......................... 1,542 0.2 1,583 0.2
Construction loans:
Single-family................ 6,485 0.9 11,581 1.6
Other property............... 7,849 1.0 8,447 1.2
Mortgage-backed securities....... 44,200 5.8 53,672 7.4
Consumer and other loans......... 2,788 0.4 5,113 0.7
---------- ----- --------- ---------
Total gross loans and
mortgage-backed securities
receivable..................... 758,985 100.0% 718,963 100.0%
===== =========
Less:
Undisbursed portion of mortgage
loans........................ 8,609 11,135
Unamortized premiums and
discounts, net............... 1,025 1,581
Net deferred loan fees......... 4,065 4,065
Allowance for loan losses...... 4,187 4,267
---------- ---------
Total loans and mortgage-backed
securities receivable, net..... $ 741,099 $ 697,915
========== =========
</TABLE>
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(1) Includes $96.1 million, $69.7 million, $51.9 million, $40.9 million and
$40.6 million of second-mortgage loans and home equity lines of credit at
each of the respective dates.
(2) Includes $14.0 million, $13.6 million, $12.5 million, $10.8 million and $6.4
million of single-family, non-owner occupied rental properties at each of
the respective dates.
<PAGE>
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 28, 1997. 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>
<CAPTION>
AMOUNTS DUE
---------------------------
<S> <C> <C> <C> <C>
BALANCE AT AFTER ONE YEAR
FEBRUARY 28, IN ONE YEAR THROUGH FIVE AFTER FIVE
1997 OR LESS YEARS YEARS
---------------- ----------- -------------- ----------
(IN THOUSANDS)
Real estate loans(1)(2):
Fixed-rate...................................... $ 431,469 $ 6,238 $ 51,220 $ 374,011
Adjustable-rate................................. 620,659 1,067 4,771 614,821
Consumer and other loans.......................... 3,959 158 3,475 326
---------------- ----------- ------- ----------
Total loans and mortgage-backed securities, $ 1,056,087 $ 7,463 $ 59,466 $ 989,158
net(3)(4) ================ =========== ======= ==========
</TABLE>
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(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 $3.6 million at
February 28, 1997, $1.1 million of which are scheduled to convert to
permanent loans in fiscal 1998.
(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, 1998, $429.0 million
have fixed rates of interest and $619.6 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.
Residential real estate loans are originated by the Association through its
branch offices as well as by a team of commissioned loan officers, working out
of the Company's five loan production offices. 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 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 $39.2
million, $54.5 million and $78.6 million of such loans during fiscal 1995, 1996
and 1997, respectively, exclusive of loans exchanged for mortgage-backed
securities. The Association was servicing approximately $34.7 million of loans
for others at February 28, 1997. As of February 28, 1997, the Association had
commitments to sell loans totalling approximately $6.8 million.
The Association has also purchased 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., Maryland
and Virginia metropolitan areas. Whole loan purchases amounted to $71.5 million,
$1.0 million and $-0- during fiscal 1995, 1996 and 1997, respectively. During
fiscal 1995, 1996 and 1997, the Association also purchased $41.7 million, $-0-,
and $9.9 million, respectively, of mortgage-backed securities. The purchase of
mortgage-backed securities is intended to supplement the Association's
investment in loans receivable.
<PAGE>
6
The following table sets forth the Association's loan and mortgage-backed
security originations, purchases, sales and principal repayments during the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
<S> <C> <C> <C>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
------------ ------------ ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Gross loans and mortgage-backed securities at beginning of period....... $ 1,068,173 $ 986,610 $ 758,985
------------ ------------ ------------
Loans originated:
Real estate loans:
Permanent loans:
Single-family (adjustable-rate)...................................... 118,693 103,341 169,867
Single-family (fixed-rate)........................................... 65,615 109,825 52,713
Commercial........................................................... -- 5,435 9,803
Construction loans.................................................... 5,100 941 2,614
------------ ------------ ------------
Total real estate loans originated.................................. 189,408 219,542 234,997
Consumer and other loans............................................... 1,759 3,331 1,785
------------ ------------ ------------
Total loans originated............................................... 191,167 222,873 236,782
------------ ------------ ------------
Loans and mortgage-backed securities purchased:
Whole loans............................................................ -- 1,006 71,535
FHLMC participation certificates....................................... 1,980 -- 10,100
GNMA participation certificates........................................ 7,945 -- 10,196
FNMA participation certificates........................................ -- -- 21,364
------------ ------------ ------------
Total loans and mortgage-backed securities purchased................. 9,925 1,006 113,195
------------ ------------ ------------
Total loans and mortgage-backed securities originated and purchased.. 201,092 223,879 349,977
------------ ------------ ------------
Loans transferred to foreclosed real estate............................. 1,229 281 632
Loans sold.............................................................. 78,615 54,521 14,219
Loans repaid............................................................ 122,486 87,514 107,501
Total loans transferred to foreclosed real estate, sold and repaid... 202,330 142,316 122,352
------------ ------------ ------------
Net loan activity....................................................... (1,238) 81,563 227,625
------------ ------------ ------------
Gross loans and mortgage-backed securities at the end of period......... 1,066,935 1,068,173 986,610
Less:
Undisbursed portion of mortgage loans.................................. 3,240 1,722 2,728
Unamortized premiums and discounts, ne................................. 653 783 1,010
Net deferred loan fees................................................. 2,356 3,815 4,284
Allowance for loan losses.............................................. 4,599 4,474 4,424
------------ ------------ ------------
Net loans and mortgage-backed securities at the end of period........... $ 1,056,087 $ 1,057,379 $ 974,164
============ ============ ============
</TABLE>
<PAGE>
7
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 $214,600 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 16% of its gross loan portfolio at February 28, 1997 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 loans and 70% of the appraised value for construction
loans.
<PAGE>
8
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>
9
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 28, 1997 was approximately $13.8
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 76.3%, 48.5% and 64.4% of the Association's total originations
of conventional single-family residential mortgages in fiscal 1995, 1996 and
1997, respectively. ARMs (including mortgage-backed securities) accounted for
approximately $620.7 million or 58.8% of the Association's net loan portfolio
(including mortgage-backed securities) at February 28, 1997.
Some ARMs currently offered by Maryland Federal have up to 30-year terms and
interest rates which 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>
10
an average of approximately eight years. At February 28, 1997 approximately
$431.5 million or 40.9% of the Association's net loan portfolio consisted of
long-term, fixed-rate residential mortgage loans (including mortgage-backed
securities).
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 28, 1997, $44.4
million or 4.2% of the Association's gross loan and mortgage-backed securities
portfolio consisted of second mortgage loans, compared to $48.3 million or 4.6%
at February 29, 1996. At February 28, 1997, $51.7 million or 4.8% of the
Association's gross loan and mortgage-backed securities portfolio consisted of
home equity loans compared to $21.4 million or 2.0% at February 29, 1996.
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 28, 1997, $6.8 million or 0.6% of Maryland Federal's gross loan
and mortgage-backed securities portfolio consisted of construction loans, 100%
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 1997,
the Association's origination of construction loans amounted to $5.1 million, as
compared to $900,000 during fiscal 1996 and $2.6 million during fiscal 1995. At
February 28, 1997, the Association's construction loans varied in size from
$100,000 to $4.4 million. The Association's
<PAGE>
11
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 28, 1997, the Association's construction loan portfolio was
comprised of 9 loans to separate borrowers in the aggregate amount of
$6.8 million, of which the Association had undisbursed funds of $3.2 million. As
of February 28, 1997, the largest loan consisted of a $4.4 million loan for the
construction of residential townhouses located in Prince George's County,
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 28, 1997, the Association had
$34.8 million or 3.3% 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.
There were no originations of commercial real estate loans during fiscal
1997 compared to $5.4 million during fiscal 1996 and $9.8 million during fiscal
1995. As of February 28, 1997, the Association's largest commercial real estate
loan consisted of a $5.0 million loan secured by three office park buildings
located in Riverdale, Maryland. It is the 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.
<PAGE>
12
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 $13.8
million at February 28, 1997, 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 (subject to certain exceptions), which limit was $366.9
million at February 28, 1997. 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 20% of the Association's assets, provided that any
amounts in excess of 10% of the Association's assets be used only for small
business loans. 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 28, 1997, 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 28, 1997,
consumer loans accounted for $4.0 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, loans secured by savings accounts and unsecured personal loans. Consumer
loan originations during fiscal years 1995, 1996 and 1997 were $1.8 million,
$3.3 million and $1.8 million, respectively, of which automobile loan
<PAGE>
13
originations amounted to $1.0 million, $1.5 million and $1.3 million,
respectively, during such periods.
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 $2.4 million at February 28, 1997. The weighted average
interest rate on automobile loans was 7.76% at February 28, 1997.
During fiscal 1995, the Association began originating unsecured personal
loans in amounts up to $10,000. At February 28, 1997, unsecured personal loans
amounted to $1.3 million. During fiscal 1997, the Association reintroduced
secured savings loans. At February 28, 1997, secured savings loans amounted to
$137,000.
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
1997, 1996 and 1995 amounted to approximately $131,000, $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 the life of the related loans
as an adjustment of yield, if the commitment is exercised, or if
<PAGE>
14
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 28, 1997, the Association's participation in loans to facilitate
the purchase of foreclosed real estate amounted to $24,000.
<PAGE>
15
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 at any other period shown.
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Total non-performing loans:(1)
Non-accrual loans......................... $ 2,990 $ -- $ 20 $ 2,748 $ 464
Accruing loans which are 90 days or more
overdue................................. 1,640 3,386 1,536 3,155 1,155
------ ------ ------ ------ ------
Total non-performing loans.............. $ 4,630 $ 3,386 $ 1,556 $ 5,903 $ 1,619
====== ====== ====== ====== ======
Total non-performing loans to total loans
receivable-net............................ 0.5% 0.3% 0.2% 0.8% 0.3%
====== ====== ====== ====== ======
Total foreclosed real estate................ $ 1,299 $ 2,090 $ 2,695 $ 3,210 $ 4,032
====== ====== ====== ====== ======
Total non-performing loans and foreclosed
real estate to total assets............... 0.5% 0.5% 0.4% 1.04% 0.7%
====== ====== ====== ====== ======
</TABLE>
- ------------------------
(1) Consists of residential, commercial real estate loans and consumer loans.
The $4.6 million of non-accrual loans and accruing loans which were 90
days or more overdue at February 28, 1997 consisted of 45 first mortgage and
11 consumer loans with average principal balances of approximately $102,000
and $3,000, respectively. It is believed that these delinquencies are
reflective of current economic conditions. The $1.3 million of foreclosed
real estate at February 28, 1997 consisted primarily of a condominium/office
complex located in Hyattsville, Maryland and an industrial park located in
Forestville, Maryland, which had carrying values of $580,000 and $440,000,
respectively. At February 28, 1997, the Association also held three
single-family residential properties and one additional commercial property
with aggregate carrying values of approximately $220,000 and $60,000,
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 $224,000, $-0- and $4,000
for fiscal 1997, 1996 and 1995, respectively. The amount of interest income
that was recorded on these loans was $52,000, $-0- and $2,000 for fiscal
1997, 1996 and 1995, 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 of February 28, 1997, the
Association had approximately $9.8 million of classified assets,
<PAGE>
16
which includes $5.9 million of the non-performing assets shown in the table
above. Of this total, approximately $9.8 million was classified as
substandard and $28,000 was classified as doubtful.
ALLOWANCE FOR LOAN LOSSES. During fiscal 1997, the Association made
provisions for loan losses of $275,000 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 1995 and 1996, the Association made
provisions for losses on loans of $300,000 and $120,000, respectively. During
fiscal 1995, 1996 and 1997, the Association made net charges to the allowance
for loan losses of $13,000, $70,000 and $150,000, respectively. During fiscal
1995, 1996 and 1997, such provisions and charge-offs primarily reflected
estimated losses with respect to consumer 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
provisions 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>
17
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
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period................ $ 4,474 $ 4,424 $ 4,187 $ 4,267 $ 2,348
------ ------ ------ ------ ------
Provision:
Real estate-residential................... (50) 50 300 662 1,940
Consumer loans............................ 325 70 -- -- --
------ ------ ------ ------ ------
Total provision......................... 275 120 300 662 1,940
------ ------ ------ ------ ------
Transfer to allowance for losses on
foreclosed real estate.................... -- -- 50 739 --
------ ------ ------ ------ ------
Charge-offs, net:
Real estate-residential................... 19 45 9 -- 13
Consumer loans............................ 131 25 4 3 8
------ ------ ------ ------ ------
Total charge-offs, net.................. 150 70 13 3 21
------ ------ ------ ------ ------
Balance, end of period...................... $ 4,599 $ 4,474 $ 4,424 $ 4,187 $ 4,267
====== ====== ====== ====== ======
Ratio of charge-offs to average loans and
mortgage-backed securities outstanding.... 0.014% 0.007% 0.001% ---% .003%
====== ====== ====== ====== ======
</TABLE>
The Association also maintains an allowance for losses on foreclosed real
estate. At February 28, 1997, the Association's allowance for losses on
foreclosed real estate amounted to $1.3 million. For additional information,
see Notes 4 and 5 of the Notes to Consolidated Financial Statements.
<PAGE>
18
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>
Year Ended
-------------------------------------------------------------------------------------------------------
FEBRUARY 28, 1997 FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994 FEBRUARY 28, 1993
--------------------- --------------------- -------------------- -------------------- ---------------------
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)..... $4,169 99.6% $4,238 99.6% $4,233 99.7% $3,991 99.6% $4,068 99.3%
Consumer and
other loans.. 430 0.4 236 0.4 191 0.3 196 0.4 199 0.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total...... $4,599 100.0% $4,474 100.0% $4,424 100.0% $4,187 100.0% $4,267 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
- ------------------------
(1) Includes residential and commercial real estate loans and construction
loans.
<PAGE>
19
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.
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 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
(IN THOUSANDS)
United States Government and agency obligations......................... $ 9,974 $ 7,997 $ 21,918
State and County Government obligations................................. 1,474 1,476 1,658
Equity securities....................................................... 5,225 8,577 7,103
Interest-bearing deposits............................................... 8,381 15,711 9,271
Federal funds sold...................................................... 15,406 5,058 1,408
Securities purchased under agreements to resell......................... 2,259 11,034 9,623
Federal Home Loan Bank stock............................................ 11,364 12,514 9,784
------------ ------------ ------------
Total................................................................ $ 54,083 $ 62,367 $ 60,765
============ ============ ============
</TABLE>
As of February 28, 1997, 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, federal funds sold and
Federal Home Loan Bank stock.
<PAGE>
20
The following table sets forth at February 28, 1997 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 28, 1997 WHICH MATURE
-----------------------------------------------------------------------------------------------
IN AFTER ONE YEAR AFTER FIVE YEARS
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS
---------------------- ---------------------- -------------------------- -------------------
<CAPTION>
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............. $ 6,000 5.50% $ 3,973 5.80% $ -- ---% $ -- --%
State and County Government --
obligations.................... -- -- 1,230 4.56 245 4.15 -- --
Equity securities................ 5,225 1.70 -- -- -- -- -- --
Interest-bearing deposits........ 8,381 5.37 -- -- -- -- -- --
Federal funds sold............... 15,406 5.26 -- -- -- -- --
Securities purchased under
agreements to resell........... 2,259 4.80 -- -- -- -- -- --
Federal Home Loan Bank stock..... -- -- -- -- -- -- 11,364 7.25
--------- ------- ----- ---------
Total........................ $ 37,271 4.79 $ 5,203 5.50 $ 245 4.15 $ 11,364 7.25
========= ======= ====== =========
</TABLE>
<PAGE>
21
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. 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 28, 1997, Maryland Federal operated 23 automated teller
machines ("ATMs") in addition to participating in the
HONOR-Registered Trademark-/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>
22
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 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
-------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- --------- ---------- --------- ---------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Regular savings accounts...................... $ 74,488 9.4% $ 76,514 9.7% $ 94,104 12.3%
Checking accounts............................. 53,937 6.8 44,497 5.6 39,994 5.2
MMDAs......................................... 42,385 5.4 45,315 5.7 51,398 6.7
Fixed-rate certificates....................... 307,303 39.0 274,266 34.9 239,977 31.4
Money market certificates:
91 day 6,469 0.8 6,632 0.8 4,208 0.6
6 month 20,895 2.7 23,171 2.9 19,256 2.5
12 month 113,871 14.4 146,177 18.5 139,686 18.3
18 month --- --- --- --- 13 ---
Variable-rate certificates.................... 15,869 2.0 21,166 2.7 42,742 5.6
Jumbo certificates............................ 88,620 11.2 116,313 14.7 101,350 13.3
Mini-jumbo certificates....................... 36,043 4.6 12,284 1.6 9,456 1.3
IRA certificates.............................. 29,053 3.7 22,596 2.9 21,570 2.8
----------- --------- ---------- --------- ---------- ---------
Total......................................... $ 788,933 100.0% $ 788,931 100.0% $ 763,754 100.0%
=========== ========= ========== ========= ========= =========
</TABLE>
<PAGE>
23
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
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
---------------------- --------------------- ---------------------
<CAPTION>
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....................... $ 75,417 3.22% $ 80,731 3.33% $123,019 3.40%
Checking accounts.............................. 48,156 1.52 42,158 1.80 37,915 1.78
MMDAs.......................................... 42,904 3.04 45,915 3.03 56,349 3.20
Fixed-rate certificates........................ 308,184 5.57 243,810 5.81 220,975 5.04
Money market certificates:
91 day 6,764 4.75 5,370 4.39 5,729 3.28
6 month 23,922 5.03 21,439 4.70 20,738 3.43
12 month 122,119 5.44 166,130 5.88 80,774 4.77
18 month -- -- 4 3.50 251 4.12
Variable-rate certificates..................... 17,034 5.12 27,019 5.24 63,774 4.43
Jumbo certificates............................. 92,367 5.75 110,989 6.04 61,967 5.43
Mini-jumbo certificates........................ 23,643 5.50 8,823 5.28 5,777 5.14
IRA certificates............................... 26,619 5.74 21,308 6.10 25,191 4.61
----------- --------- ---------- --------- ---------- ---------
Total.......................................... $787,129 4.93 $773,696 5.16 $702,459 4.30
=========== ========= ========== ========= ========== =========
</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>
24
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
----------------------------------------
<S> <C> <C> <C>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
------------ ------------ ------------
<CAPTION> (IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease)
before interest credited............................................... $ (25,102) $ (337) $ 64,754(1)
Interest credited....................................................... 25,104 25,514 20,950
------------ ------------ ------------
Net deposit increase.................................................... $ 2 $ 25,177 $ 85,704
============ ============ ============
</TABLE>
- ------------------------
(1) Reflects approximately $50.5 million of deposit inflows as a result
of the acquisition of deposits of various savings institutions during
fiscal 1995.
The following table sets forth the amount of certificates of deposit in the
amount of $100,000 or more at February 28, 1997, which mature during each of the
periods indicated.
<TABLE>
<CAPTION>
AMOUNTS AT FEBRUARY 28, 1997 WHICH MATURE
----------------------------------------------
<S> <C> <C> <C> <C>
AFTER THREE AFTER
IN THREE MONTHS SIX MONTHS
MONTHS THROUGH THROUGH AFTER 12
OR LESS SIX MONTHS 12 MONTHS MONTHS
--------- ----------- ----------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Certificates of deposit........................................... $ 55,437 $ 23,548 $ 33,986 $ 23,450
========= =========== =========== =========
</TABLE>
<PAGE>
25
The following table presents certain information concerning Maryland
Federal's deposits at February 28, 1997 and the scheduled quarterly maturities
of its certificates of deposit.
<TABLE>
<CAPTION>
Weighted
Percentage of Average
Total Nominal
Amount Deposits Rate
---------- ------------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Regular savings accounts.................................................... $ 74,488 9.44% 3.22%
Checking accounts........................................................... 53,937 6.84 1.45
MMDAs....................................................................... 42,385 5.37 3.10
---------- ------
Total..................................................................... 170,810 21.65 2.63
---------- ------
Certificate accounts maturing by quarter:
May 31, 1997.............................................................. 196,687 24.93 5.19
August 31, 1997........................................................... 94,525 11.98 5.35
November 30, 1997......................................................... 90,322 11.45 5.35
February 28, 1998......................................................... 84,291 10.69 5.53
May 31, 1998.............................................................. 25,633 3.25 5.65
August 31, 1998........................................................... 39,120 4.96 6.15
November 30, 1998......................................................... 16,441 2.08 6.28
February 28, 1999......................................................... 10,192 1.29 5.69
May 31, 1999.............................................................. 11,916 1.51 5.78
August 31, 1999........................................................... 22,254 2.82 5.90
November 30, 1999......................................................... 9,018 1.14 5.89
February 29, 2000......................................................... 6,365 0.81 5.82
Thereafter................................................................ 11,359 1.44 5.68
---------- ------
Total certificate accounts............................................... 618,123 78.35 5.45
---------- ------
Total deposits........................................................... $ 788,933 100.00% 4.84
========== ======
</TABLE>
<PAGE>
26
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 28, 1997 which mature during the periods
indicated.
<TABLE>
<CAPTION>
Amounts at February 28, 1997 Maturing in the Year
Balance at Ending
-------------------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
February 28, February 29, February 28, February 28, February 29,
Interest Rate: 1997 1996 1998 1999 2000 Thereafter
- --------------------------- ------------------ ------------ ------------ ------------ ------------ -----------
<CAPTION>
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
4.00% or less.............. $ 2,711 $ 1,547 $ 2,685 $ 26 $ -- $ --
4.01% to 6.00%............. 527,148 407,702 438,624 52,600 27,930 7,994
6.01% to 8.00%............. 86,964 211,282 23,642 38,602 21,387 3,333
8.01% to 10.00%............ 1,292 1,756 874 150 236 32
10.01% to 12.00%........... 8 318 -- 8 -- --
------------------ ------------ ------------ ------------ ------------ -----------
Total.................. $618,123 $ 622,605 $ 465,825 $ 91,386 $ 49,553 $ 11,359
================== ============ ============ ============ ============ ===========
</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 28, 1997, advances
mature as follows:
<TABLE>
<CAPTION>
Weighted
Average
Fiscal Year Amount Rate
- ------------------------ ----------------------- --------------------
<S> <C> <C> <C>
(Dollars in Thousands)
1998 $ 136,100 5.83%
1999 78,500 5.99
2000 11,000 6.23
After 2002............. 680 6.50
----------
Total............... $ 226,280 5.91
==========
</TABLE>
<PAGE>
27
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 28, 1997 February 29, 1996 February 28, 1995
----------------------- ----------------------- -----------------------
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.................................... $ 226,280 5.91% $ 243,780 5.88% $ 190,730 5.98%
</TABLE>
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>
<CAPTION>
Year Ended
----------------------------------------------------
February 28, February 29, February 28,
1997 1996 1995
---------------- ---------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Advances from FHLB:
Average balance outstanding.............................. $ 228,479 $ 213,176 $ 160,877
Maximum amount outstanding at any month-end during the
period.................................................. $ 237,780 $ 251,030 $ 195,680
Weighted average interest rate during the period......... 5.86% 6.08% 5.42%
Total short-term borrowings at end of period.............. $ 136,100 $ 127,750 $ 122,550
</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
<PAGE>
28
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 28, 1997, the Association was authorized to have a maximum
investment of approximately $22.5 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.
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 about one-third of the
market area's gross regional product. The Federal sector is currently reducing
jobs. 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 Company has been able to expand its margins but it may not be able to in the
future.
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.
<PAGE>
29
EMPLOYEES
At February 28, 1997, MFB had unpaid executive officers, all of whom serve
in the same capacity with the Association. At February 28, 1997, the Association
and its subsidiary had 224 full-time employees, including its executive
officers, as well as 45 part-time employees. None of these employees are
represented by a collective bargaining agent, and the Association has enjoyed
harmonious relations with its personnel.
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
<PAGE>
30
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 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
<PAGE>
31
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
unless the loans are made pursuant to a benefit or compensation program that (i)
is widely available to employees of the association and (ii) does not give
preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
association. Section 22(h) 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 28, 1997, the Association had 14 loans with
an aggregate balance of approximately $1.5 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.
<PAGE>
32
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.
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.
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
<PAGE>
33
considered to be of substantial supervisory concern. The matrix so
created results in nine assessment risk classifications.
On November 14, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule reduced 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 then current levels (23 basis points for
institutions in the lowest risk category.) The reduction was effective with
respect to the semiannual premium assessment beginning January 1, 1996.
On September 30, 1996, President Clinton signed into law legislation which
eliminates the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio. The legislation required all SAIF member institutions pay a one-time
special assessment to recapitalize the SAIF, with the aggregate amount to be
sufficient to bring the reserve ratio in the SAIF to 1.25% of insured deposits.
The legislation also provides for the merger of the BIF and the SAIF, with such
merger being conditioned upon the prior elimination of the thrift charter.
FDIC regulations imposed a one-time special assessment equal to 65.7 basis
points for all SAIF-assessable deposits as of March 31, 1995, which was accrued
as an expense on September 30, 1996. The Association's one-time special
assessment amounted to $5.1 million. Net of related tax benefits, the one-time
special assessment amounted to $3.1 million. The payment of such special
assessment had the effect of immediately reducing the Association's capital by
such amount.
In the fourth quarter of 1996, the FDIC lowered the assessment rates for
SAIF members to reduce the disparity in the assessment rates paid by BIF and
SAIF members. Beginning October 1, 1996, effective SAIF rates generally range
from zero basis points to 27 basis points, except that during the fourth quarter
of 1996, the rates for SAIF members ranged from 18 basis points to 27 basis
points in order to include assessments paid to the Financing Corporation
("FICO"). From 1997 through 1999, SAIF members will pay 6.4 basis points to fund
the FICO, while BIF member institutions will pay approximately 1.3 basis points.
The Association's insurance premiums, which had amounted to 23 basis points,
were thus reduced to 6.4 basis points effective January 1, 1997. Based upon the
$798.8 million of assessable deposits at December 31, 1996, the Association
would expect to pay approximately $331,500 less in insurance premiums per
quarter during fiscal 1998.
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
<PAGE>
34
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 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
28, 1997, 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
<PAGE>
35
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.
The following table sets forth certain information concerning Maryland
Federal's regulatory capital at February 28, 1997.
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
--------- --------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Capital under GAAP.............................................................. $ 91,716 $ 91,716 $ 91,716
Additional capital items:
Qualifying general loan loss
allowance..................................................................... -- -- 4,599
Other........................................................................... (4,116) (4,116) (4,116)
--------- --------- -----------
Total regulatory capital........................................................ 87,600 87,600 92,199
Minimum required capital........................................................ 17,020 34,040 48,184
--------- --------- -----------
Excess regulatory capital....................................................... $ 70,580 $ 53,560 $ 44,015
========= ========= ===========
Regulatory capital as a
percentage(1)................................................................... 7.72% 7.72% 15.30%
Minimum capital required as a
percentage (1).................................................................. 1.50% 3.00% 8.00%
--------- --------- -----------
Regulatory capital as a percentage
in excess of requirement....................................................... 6.22% 4.72% 7.30%
========= ========= ===========
</TABLE>
<PAGE>
36
- ------------------------
(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 $602.3 million.
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
<PAGE>
37
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 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 28, 1997, 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. Under Section 2303 of the Economic Growth and
Regulatory Paperwork Reduction Act of 1996, a savings association can comply
with the QTL test by either meeting the QTL test set forth in the HOLA and
implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended ("Code"). The QTL test set forth in the HOLA requires a thrift
institution to maintain 65% of portfolio assets in Qualified Thrift Investments
("QTIs"). Portfolio assets are defined as total assets less intangibles,
property used by a savings institution in its business and liquidity investments
in an amount not exceeding 20% of assets. Generally, QTIs are residential
housing related assets. At February 28, 1997, the amount of the Association's
assets which were invested
<PAGE>
38
in QTIs was 96.0%, which exceeded the percentage required to qualify the
Association under the QTL test. 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).
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 soundness concerns. In addition, a Tier 1 association deemed
to be in need of more than
<PAGE>
39
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 28, 1997, the Association's advances from the FHLB of Atlanta
amounted to $226.3 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 28,
1997, the Association had $11.4 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 interest subsidies on advances targeted for community investment
and low- and moderate-
<PAGE>
40
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 28, 1997,
dividends paid by the FHLB of Atlanta to the Association totalled $852,000.
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
28, 1997, 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 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
<PAGE>
41
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 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. Prior to the enactment, on August 20, 1996, of the Small
Business Job Protection Act of 1996 (the "Small Business Act"), for federal
income tax purposes, thrift institutions such as the Association, which met
certain definitional tests primarily relating to their assets and the nature of
their business, were permitted to establish tax reserves for bad debts and to
make annual additions thereto, which additions could, within specified
limitations, be deducted in arriving at their taxable income. The Association's
deduction with respect to "qualifying loans," which are generally loans secured
<PAGE>
42
by certain interests in real property, could be computed using an amount based
on a six-year moving average of the Association's actual loss experience (the
"Experience Method"), or a percentage equal to 8.0% of the Association's taxable
income (the "PTI Method"), computed without regard to this deduction and with
additional modifications and reduced by the amount of any permitted addition to
the non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and the
Association will be required to use the Specific Charge-off Method of computing
additions to its bad debt reserve for taxable years beginning with the
Association's taxable year beginning March 1, 1996. In addition, the Association
will be required to recapture (i.e., take into taxable income) over a six-year
period, beginning with the Association's taxable year beginning March 1, 1996,
the excess of the balance of its bad debt reserves as of February 29, 1996 over
the balance of such reserves as of February 29, 1988 ("pre-1987 bad-debt
reserves"), adjusted downward for any decline in outstanding loans from February
29, 1988. However, under the Small Business Act such recapture requirements will
be suspended for each of the two successive taxable years beginning March 1,
1996 in which the Association originates a minimum amount of certain residential
loans during such years that is not less than the average of the principal
amounts of such loans made by the Association during its six taxable years
preceding March 1, 1996. The Association has previously provided for deferred
taxes on the amount to be recaptured; therefore, the Small Business Act will not
further affect the Association's net income.
The Association has not provided a deferred tax liability on bad debt
reserves for tax purposes that arose in fiscal years beginning before December
31, 1987. Such bad debt reserves for the Association amounted to approximately
$11,000,000 with an income tax effect of approximately $4,200,000 at February
28, 1997. This bad debt reserve will become taxable for income tax purposes if
the Association does not maintain certain qualified assets as defined or the
reserve is charged for other than bad debt losses.
Distributions. If the Association distributes cash or property to its
stockholders, and the distribution is treated as being from its pre-1987 bad
debt reserves, the distribution will cause the Association to have additional
taxable income. A distribution is deemed to have been made from pre-1987 bad
debt reserves to the extent that (a) the reserves exceed the amount that would
have been accumulated on the basis of actual loss experience, and (b) the
distribution is a "non-qualified distribution." A distribution with respect to
stock is a non-dividend distribution to the extent that, for federal income tax
purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case of a current distribution,
together with all other such distributions during the taxable year, it exceeds
the institution's current and post-1951 accumulated earnings and profits. The
amount of additional taxable income created by a non-dividend distribution is an
amount that when reduced by the tax attributable to it is equal to the amount of
the distribution.
<PAGE>
43
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 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, 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 Company's consolidated federal income tax returns for
taxable years through February 28, 1993 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 imposed on the Association, net earnings are generally defined as
net income of the Association 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>
44
Item 2. Properties.
- ------------------
The following table presents property owned and leased by the Association
at February 28, 1997.
<TABLE>
<CAPTION>
Net Book
Value of
Property or
Owned Lease Leasehold
or Expiration Improvements at
Leased Date February 28, 1997
--------- ----------- ------------------
<S> <C> <C> <C>
Location:
Main Office:
3505 Hamilton Street Owned
Hyattsville, MD 20782 -- $ 263,750
Branch and Loan Production
Offices:
4277 Branch Avenue, Leased 7/31/97 688
Marlow Heights
7934 Wisconsin Avenue, Owned -- 99,657
Bethesda
211 East Charles Street, Owned -- 586,614
La Plata
10666 Campus Way South, Leased 7/31/98 666
Upper Marlboro
8951 Edmonston Road, Leased 1/31/99 951
Greenbelt
6309 Allentown Road, Leased 1/31/98 930
Camp Springs
8490 Annapolis Road, Leased 5/4/99 7,263
New Carrolton
7130 Minstrel Way, Suite 220 Leased 4/30/01 ---
Columbia
</TABLE>
<PAGE>
45
<TABLE>
<CAPTION>
Net Book
Value of
Property or
Owned Lease Leasehold
or Expiration Improvements at
Leased Date February 28, 1997
--------- ----------- ------------------
<S> <C> <C> <C>
571 N. Solomons Island Road Leased 3/31/99 $ 25,310
Prince Frederick
3033 Solomons Island Road Owned -- 263,155
Edgewater
1400 Mercantile Lane, Suite 120 Leased 9/30/99 ---
Landover
6 Montgomery Village Avenue, Leased 8/31/98 461
Suite 340
Gaithersburg
6816 Race Track Road, Leased 8/31/02 5,449
Bowie
15421 New Hampshire Avenue, Leased 1/31/02 640
Cloverly
11200 Viers Mill Road, Leased 11/30/01 565
Wheaton
3425 Leonardtown Road, Owned -- 378,623
Waldorf
16575 South Frederick Avenue, Leased 6/30/00 7,916
Gaithersburg
10414 Auto Park Drive, Leased 7/31/97 --
West Bethesda
13600 Laurel--Bowie Road, Leased 8/31/01 13,771
Laurel
</TABLE>
<PAGE>
46
<TABLE>
<CAPTION>
Net Book
Value of
Property or
Owned Lease Leasehold
or Expiration Improvements at
Leased Date February 28, 1997
--------- ----------- ----------------
<S> <C> <C> <C>
6901 Laurel-Bowie Road, Owned -- $316,389
Bowie
11428 Cherry Hill Road, Leased 7/31/98 2,080
Cherry Hill
5801 Deale-Churchton Road, Leased 8/14/02 423
Deale
1419 Forest Drive Leased 12/31/01 3,215
Annapolis
1470 Rockville Pike Owned -- 557,289
Rockville
2001 Davidsonville Road Owned -- 276,768
Crofton
9546 Livingston Road Leased 11/30/97 985
Fort Washington
11110 Mall Circle Leased 1/31/05 41,076
St. Charles
Administrative Offices:
9200 Edmonston Road Leased 10/31/98 39,290
Greenbelt
3321 Toledo Terrace #203 & 204 Owned -- 215,859
Toledo Terrace
</TABLE>
<PAGE>
47
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 1997 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 18, 1997 ("Proxy
Statement").
<PAGE>
48
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 Beneficiary Owners and Management.
- ------------------------------------------------------------------------
The information required herein is incorporated by reference from pages 5
and 6 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
- -------------------------------------------------------
The information required herein is incorporated by reference from page
12 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 28, 1997 and
February 29, 1996
Consolidated Statements of Income for the Years Ended February 28,
1997, February 29, 1996 and February 28, 1995
Consolidated Statements of Stockholders' Equity for the Years Ended
February 28, 1997, February 29, 1996 and February 28, 1995
Consolidated Statements of Cash Flows for the Years Ended February 28,
1997, February 29, 1996 and February 28, 1995
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>
49
(3) The following exhibits are filed as part of this Form 10-K and this
list includes the Exhibit Index.
<TABLE>
<CAPTION>
No. Exhibits
--------- ---------------------------------------------------------------------------------------------
<C> <S>
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*******
10.6 Non-Qualified Executive Deferred Compensation Plan for Robert
H. Halleck
13 1997 Annual Report to Stockholders
21 Subsidiaries--Reference is made to Item 1, "Business--General" for
the required information
23 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
- ------------------------
* 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 29, 1992 filed by the Company
with the SEC on May 29, 1992.
<PAGE> 50
- -------------------------
***** 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 28, 1997.
(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> 51
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 22, 1997 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 22, 1997
Richard B. Bland, Chairman of
the Board
/s/ Robert H. Halleck
- ---------------------------------- May 22, 1997
Robert H. Halleck, Director,
President and Chief Executive
Officer (principal executive
officer)
/s/ Lynn B. Hounslow
- ---------------------------------- May 22, 1997
Lynn B. Hounslow
Senior Vice President, Treasurer
and Chief Financial Officer
(principal financial officer and
principal accounting officer)
/s/ A. William Blaker, Jr.
- ----------------------------------- May 22, 1997
A. William Blake, Jr., Director
and Executive Vice President
/s/ Richard R. Mace
- ----------------------------------- May 22, 1997
Richard R. Mace, Director
<PAGE>
52
/s/ David A. McNamee
- ------------------------------------ May 22, 1997
David A. Mcnamee, Director
/s/ Thomas H. Welsh, III
- ------------------------------------ May 22, 1997
Thomas H. Welsh, III, Director
<PAGE>
EXHIBIT 10.6
NON-QUALIFIED EXECUTIVE DEFERRED COMPENSATION PLAN
FOR ROBERT H. HALLECK
<PAGE>
MARYLAND FEDERAL BANCORP, INC.
NON-QUALIFIED EXECUTIVE DEFERRED COMPENSATION PLAN
FOR ROBERT H. HALLECK
THIS NON-QUALIFIED EXECUTIVE DEFERRED COMPENSATION PLAN ("Plan") is made
this 16th day of May, 1996, by and between MARYLAND FEDERAL BANCORP, INC.
("Corporation") and ROBERT H. HALLECK ("Employee").
Introductory Statement:
WHEREAS, as a result of a reduction in the amount of compensation that
may be taken into account in determining contributions to qualified
retirement plans, the benefits that Employee will, upon retirement, be
entitled to received pursuant to the Maryland Federal Savings and Loan
Association Retirement Plan ("Qualified Plan") will be significantly less
than the benefits he would have received absent such reduction, and the
amount which the Corporation is required to contributed to the Qualified Plan
for each of the remaining years prior to Employee's retirement will be
significantly reduced; and
WHEREAS, Corporation wishes to restore Employee's retirement benefits to
approximate the amounts to which he was entitled prior to such reduction
through provision of deferred compensation ("Deferred Compensation"), the
receipt of which shall be in accordance with the terms of this Plan; and
WHEREAS, the Corporation desires to establish a trust ("Trust") and to
transfer to the Trust assets which shall be held herein for the benefit of
the Employee; and
<PAGE>
WHEREAS, it is the intention of the Corporation to make contributions to
the Trust in such amounts as the Employee shall determine in accordance with
the procedures set forth herein.
NOW, THEREFORE, in consideration of the Introductory Statement and other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. ACCRUAL OF DEFERRED COMPENSATION.
a. During each year of Employee's employment with the Corporation,
commencing with the year ending December 31, 1996 and continuing until
Employee's retirement or other termination of Employment, Employee shall
accrue deferred compensation, which deferred compensation shall be paid in
accordance with the terms hereof.
b. Amounts accrued each year shall be contributed by the Corporation
to a trust established by the Corporation in the form attached hereto as
Exhibit "A" ("Trust"). The sum of Sixty Five Thousand Dollars ($65,000)
shall be contributed to such Trust upon final ratification of this Plan by
the Board of Directors. In addition, the Corporation shall contribute to the
Trust the sum of Sixty Five Thousand Dollars ($65,000) effective December 31,
1996 and each December 31 thereafter for so long as Employee continues to
serve as a full time employee of the Corporation. In the event does not
provide a minimum of One Thousand (1,000) hours of service to the Corporation
for any calendar year, the Corporation shall
-2-
<PAGE>
have no obligation to make any contribution to the Trust with respect to
Employee for such year.
c. All amounts set aside for the benefit of Employee hereunder shall
remain the property of the Corporation, and shall be invested and reinvested
as determined by the Corporation.
d. Employee agrees on behalf of himself, his heirs, successors,
assigns and designated beneficiaries, to assume all risk in connection with
the increase or decrease in the value of all funds invested hereunder.
e. Title to and beneficial ownership of the amounts set aside for
deferred compensation shall remain in the Corporation and the Employee and
his designated beneficiary shall not have any property interest whatsoever in
the assets of the Corporation.
2. PAYMENT OF DEFERRED COMPENSATION. The Deferred Compensation accrued
and set aside hereunder shall be paid to Employee as follows:
a. Payment upon Retirement. Beginning on the first business day of
the first month after termination of Employee's employment with the
Corporation after attaining age 65, the Corporation shall pay the amount held
in the Deferred Compensation Reserve to Employee, in fifteen (15) annual
installments. Each installment shall equal the amount then held in the
Deferred Compensation Reserve, divided by the number of years of payment
remaining pursuant to this Plan.
For example, if the amount of the Deferred Compensation Reserve
immediately before the first installment is to be paid to
-3-
<PAGE>
Employee is $450,000, the first installment would be $30,000 ($450,000/15).
If the amount in such Reserve appreciated to $462,000 immediately prior to
the second installment, such second installment would be $33,000.
b. Payments upon Death of Employee After Commencement of Deferred
Compensation Payout. Upon the death of Employee after Deferred Compensation
has begun being paid, the unpaid installments shall continue to be paid to
the Beneficiary under the same schedule and in the same manner as set forth
in paragraph 2.a above.
c. Payments upon Death or Total Disability of Employee Prior to
Commencement of Deferred Compensation Payout. Upon the death or Total
Disability of Employee prior to the commencement of payments of Deferred
Compensation, the Corporation shall commence payments of Deferred
Compensation one (1) month after the date of death or determination of Total
Disability, and shall continue to make such payments to the Beneficiary over
a period of 15 years under the same schedule and in the same manner as set
forth in paragraph 2.a above.
Employee shall be deemed to be totally disabled if (1) he receives
benefit payments from the disability insurance policy carried for his benefit
by the Corporation and such payments have continued for a period of twelve
(12) months, which period shall be deemed to include any waiting period under
such policy, or (2) he is, because of a medically determinable disease,
injury or other mental or physical disability, unable to perform
substantially all
-4-
<PAGE>
of his regular duties to the Corporation (or such other entity to which
Employee was working on a full time basis after termination of his employment
with the Corporation for any reason) on a substantially full-time basis, such
disability has continued after Employee has used all of his sick leave and
for a period of at least ninety (90) days thereafter.
3. DESIGNATION OF BENEFICIARY. Employee shall have the right to
designate the Beneficiary to receive payments hereunder upon his death, by a
instrument executed by Employee in the form attached hereto as Exhibit B.
Employee shall have the right to name more than one Beneficiary, and in which
event shall designate the proportions or amounts payable to each of them, and
the right to name additional contingent Beneficiaries to take in the event of
the death of the Beneficiary initially named. Employee may revoke or amend the
designation of Beneficially from time to time without the consent of any
other party. In the event that no Beneficiary has been named or is then
living, any benefits otherwise payable to a Beneficiary shall be paid to the
Employee's estate.
4. MISCELLANEOUS.
a. Nothing contained herein shall be construed as conferring upon the
Employee the right of continued employment with the Corporation in any
capacity whatsoever.
b. This Agreement shall be binding upon and inure to the benefit of
the Corporation, it successors and assigns, and the Employee and his heirs,
executors, administers and legal representatives.
-5-
<PAGE>
c. This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and supersedes all other agreements
and understandings between the parties with respect to such subject matter.
This Agreement may be amended or modified only by an instrument in writing
signed by both parties.
d. This Agreement shall be construed in accordance with and governed
by the laws of the State of Maryland.
IN WITNESS WHEREOF, the Corporation and the Employee have executed this
Agreement as of the date first above written.
ATTEST: MARYLAND FEDERAL BANCORP, INC.
By: /s/ Sarah M. Costlow By: /s/ Richard B. Bland
--------------------------- -------------------------
Secretary Chairman
WITNESS: EMPLOYEE:
/s/ Sarah M. Costlow /s/ Robert H. Halleck
- ------------------------------- -----------------------------
ROBERT H. HALLECK
-6-
<PAGE>
EXHIBIT 13
1997 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
[GRAPHIC]
ANNUAL REPORT 1997
Maryland Federal Bancorp
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
LOAN BRANCH
PRODUCTION OFFICES
OFFICES
PRINCE GEORGE'S COUNTY
3505 Hamilton Street
Columbia Hayattsville (301) 779-1200
7130 Minstrel Way
Suite 220 6816 Race Track Road
(301) 596-7880 Bowie (301) 464-5240
Gaithersburg 6901 Laurel-Bowie Road
6 Montgomery Village Avenue Bowie (301) 262-3707
Suite 340
(301) 590-3150 6309 Allentown Road
Camp Springs (301) 449-3838
Waldorf
3429 Leonardtown Road 11428 Cherry Hill Road
(301) 870-4081 Beltsville (301) 595-7058
[GRAPHIC]
ANNUAL REPORT 1997 Landover 9546 Livingston Road
1400 Mercantile Lane Ft. Washington (301) 248-4257
Suite 120
(301) 925-9191 8951 Edmonston Road
Greenbelt (301) 982-4525
Edgewater
3033 Solomons Island Road 10666 Campus Way South
(301) 261-7970 Upper Marlboro (301) 336-6666
13600 Laurel-Bowie Road
Laurel (301) 490-1508
4277 Branch Avenue
CONTENTS Marlow Heights (301) 423-0021
Offices and 8490 Annapolis Road
Location Map 1 New Carrollton (301) 459-4434
Financial Highlights 2 MONTGOMERY COUNTY
To Our Shareholders 3 7934 Wisconsin Avenue
Bethesda (301) 951-0767
Management's Discussion
and Analysis 6 16575 S. Frederick Avenue
Gaithersburg (301) 869-3350
Consolidated Financial
Statements 15 10414 Auto Park Avenue
West Bethesda (301) 469-9195
Notes to Consolidated
Financial Statements 20 11200 Viers Mill Road
Wheaton (301) 933-4030
Directors and Officers 29
15421 New Hampshire Avenue
Shareholders' Information 29 Silver Spring (301) 384-7163
1470 Rockville Pike
Rockville (301) 230-8970
7945 MacArthur Boulevard
Cabin John (301) 263-0017
CHARLES COUNTY
211 East Charles Street
La Plata (301) 934-4811
11110 Mall Circle #1005
Waldorf (301) 870-4098
3425 Leonardtown Road
Waldorf (301) 843-3312
ANNE ARUNDEL COUNTY
5801 Deale-Churchton Road
Deale (410) 867-4198
3033 Solomons Island Road
Edgewater (410) 956-4401
1419 Forest Drive
Annapolis (410) 268-6635
2001 Davidsonville Road
Crofton (301) 261-3200
CALVERT COUNTY
571 N. Solomons Island Road
Prince Frederick (301) 855-1154
</TABLE>
<PAGE>
[MAP]
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------------------------------------
YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C>
TOTAL ASSETS $1,128,483 $1,143,338 $1,058,781
NET INCOME 6,525 8,739 9,063
RETURN ON EQUITY 6.90% 9.72% 11.09%
EQUITY TO ASSET RATIO 8.33% 8.16% 8.46%
NON-PERFORMING ASSETS TO AVERAGE ASSETS 0.52% 0.49% 0.44%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[LOAN GRAPHICS]
[INTEREST INCOME GRAPHICS]
<PAGE>
TO OUR SHAREHOLDERS
The substantial but nonrecurring events that took place during fiscal
1997 make comparisons with previous years difficult; however, it was a year
that saw both financial and corporate goals accomplished. Maryland Federal's
net income for the fiscal year ended February 28, 1997, was $6,525,000 or
$2.00 primary earnings per share and
"... a year that saw
both financial and
corporate goals
accomplished."
reflected a one-time assessment to recapitalize the Savings Association
Insurance Fund (SAIF) of approximately $3.1 million, net of taxes, or $0.95
per share. In addition, there was a $1.6 million decrease in income tax
expense, or $0.49 per share, due to an adjustment to revise prior estimates
in recording the tax provision. Without consideration of the above-mentioned
two items, earnings for fiscal 1997 would have been approximately $8.0
million or $2.46 per share.
In comparison, net income for the fiscal year ended February 29, 1996 was
$8,739,000 or $2.63 primary earnings per share. Net income for fiscal 1996
included a nonrecurring gain of approximately $2.0 million, net of taxes, or
$0.60 per share, from the sale of 55% of your Company's holdings of Federal Home
Loan Mortgage Corporation (Freddie Mac) stock. Excluding the impact of this
event, Maryland Federal earned approximately $6.7 million or $2.03 per share
during fiscal 1996.
Without consideration of the effects of the substantial but nonrecurring
events that took place during fiscal 1997 as well as the impact of the gain from
the sale of Freddie Mac stock during fiscal 1996, your Company's net income for
the fiscal year ended February 28, 1997 increased by approximately $1.3 million,
or 20 percent over the prior fiscal year.
3
<PAGE>
One key force behind this earnings momentum was our net interest income
which increased by $2.5 million, or 9.0 percent, during fiscal 1997 compared to
the prior fiscal year. Such increase reflects management's successful efforts to
increase home equity lines of credit outstanding, from $21.4 million as of
February 29, 1996 to $51.7 million as of February 28, 1997. Every 25 basis point
rise in the prime rate increases our gross interest income on these loans at an
annualized rate of $2,500 per $1 million in loans outstanding, thereby giving
the Company a valuable cushion during periods of rising interest rates such as
those we most likely will experience in the current fiscal year. At the same
time, we made important progress in growing our core accounts by increasing
checking account balances 14.4 percent and the number of accounts by 19.5
percent. Most of our growth has been in our basic checking accounts upon which
we pay no interest, and has directly contributed to the decrease in the
Company's cost of deposits, from 5.11 percent as of February 29, 1996 to 4.84
percent as of February 28, 1997.
Complementing the increase in our net interest income was a 13.7 percent
increase in noninterest income (excluding the gain on sale of Freddie Mac
stock during fiscal 1996). Another positive development which is attributable
to the growth in checking accounts was a 16.4 percent increase in banking
service charges and fees. Also contributing to this increase was a new ATM
usage fee for noncustomers using Maryland Federal ATMs, which came about as a
result of rule changes for ATM fees. The revenues are meaningful and provide
a source of new customers since consumers frequently decide to become
Maryland Federal customers in order to access our convenient ATM network free
of charge. The revenues from these machines will enable us to expand our
network to more locations. Also contributing to the increase in noninterest
income were loan sales which often continue to generate ser-
"We believe this
next fiscal year
will give us more
opportunities to
increase our
market share..."
vice fee income after the initial gain on the sale of the loan is recorded.
In fiscal 1997, the Company sold approximately $77 million of loans to
primarily private companies.
One final force behind the earnings momentum was the low 2.7 percent
increase in noninterest expense (excluding the SAIF recapitalization
assessment during fiscal 1997). With the payment of the SAIF recapitalization
assessment, our federal deposit insurance premiums were reduced from a prior
annual rate of $.23 per $100 of insured deposits to a substantially lower
annual rate of $.064 per $100 of insured deposits. Based upon Maryland
Federal's level of deposits at February 28, 1997, this reduction is expected
to amount to approximately $1.3 million of savings, before taxes, on an
annual basis. There was also a 3.3 percent decrease in occupancy and
equipment expense, which was the result of relocating certain branch and loan
production offices to more suitable and less expensive locations as well as
the closing of our Tysons Corner loan production office. While the level of
compensation and benefits did increase by 13.2 percent, it was a direct
result of our efforts to attract and retain qualified staff as well as
additional funding required for our pension plans.
Because the last fiscal year offered few opportunities for profitable
asset growth, we had little need for growing our capital base, which is
already safely above the industry average. During the fiscal year which ended
February 28, 1997, the dividend to shareholders was increased from an annual
rate of $.64 per share to an annual rate of $.80 per share, a 25 percent
increase. Dividends to shareholders amounted to $2.2 million and the Company
repurchased 212,050 shares of its common stock at a cost of $6.3 million. In
addition, on November 21, 1996, the Board of Directors declared a 5 percent
stock dividend which was payable on December 12, 1996, to the shareholders of
record on December 2, 1996. On February 28, 1997, the closing price of the
Company's common stock was $37.25, an increase of 23 percent from the price
of $30.25 on the closing day of the previous fiscal year. The combination of
increased stock price, cash dividends, and the 5 percent stock dividend
produced a total an-
4
<PAGE>
nual return of approximately 30 percent to shareholders in fiscal 1997.
As of February 28, 1997, non-performing loans (loans ninety days or more
delinquent but still accruing, and nonaccrual loans) totaled $4.6 million and
represented 0.47 percent of total loans receivable. In our peer group, as
defined by the Office of Thrift Supervision, the average non-performing ratio
is 0.80 percent of total loans receivable. In fiscal 1997, the Company's
provision for loan losses totaled $275,000 and chargeoffs, net of recoveries,
amounted to approximately $150,000.
In the loan area, we took a number of steps to keep our main source of
revenue healthy. During the year, we closed over 1,200 loans, representing
various first and second mortgage products, totalling approximately $152.9
million. In addition, we closed $60.7 million or 1,276 home equity lines of
credit, with almost 50 percent of those committed lines already having been
disbursed. "Money Magazine" rates our home equity line of credit as the best in
our market area. Our auto loans are often similarly rated. Over 42 percent of
our production was in our popular 7/23 and 5/25 adjustable-rate first mortgage
loans. We have been making these loans for a number of years and are beginning
to see a meaningful number of them adjust each month. The adjustments are
resulting in increases in interest income at the current interest rate level of
the market, so the effect is a positive one on our net interest margin.
We continued to add to our product line in the past fiscal year. In
mid-summer, we created our web site (www.mdfed.com) and have used it as a source
of deposits by offering special rates available only through the Internet. The
site also gives investors and potential shareholders current information and a
means to communicate through e-mail. Further efforts to make the site more
interactive are being planned. Our new Maryland Federal debit card was initially
offered in November 1996. Originally provided in response to customer requests,
this service is also generating additional fee income for your Company. Our
approach has been cautious and has allowed us to avoid credit losses while
learning precisely how consumers want to use this new service. We have also
recently reintroduced our secured savings loan, which allows customers to use
their deposits as collateral for a low-cost installment loan.
There continued to be further consolidation of financial institutions in our
market area during the past fiscal year. These mergers have benefitted your
Company greatly. Our Annapolis and Cloverly offices were relocated into better
facilities at a lower cost by occupying sites declared surplus by merger
survivors. Customers in large numbers have decided locally managed institutions,
like Maryland Federal, are the best sources of financial services. Also, we are
finding a new wealth of employees who bring with them fresh ideas and methods
and frequently, new customers.
We believe this next fiscal year will give us more opportunities to
increase our market share in both the deposit and loan communities. We plan
to provide easier customer access in our expanding markets with new or
relocated branch offices, including the opening of a new branch office in the
Cabin John area of Montgomery County as well as the relocation of our Marlow
Heights office into an adjacent, larger facility with a drive-in. In order to
keep our customer service and performance at the highest possible levels, we
are in the process of updating our technology, including the installation of
a more user-friendly, higher-capacity, 24-hour telephone banking system. We
will continue to focus on asset and liability management by stressing our
home equity lines of credit and basic checking accounts. In addition, we are
revisiting Maryland Federal's method of delivering alternative investments in
order to determine how to best serve our customers' needs.
On behalf of the Board of Directors, we would like to thank our staff for
their accomplishments during this past year and our shareholders for their
continued support. We also appreciate our customers and will work hard to make
this current fiscal year a more profitable one for all concerned.
CORDIALLY,
/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.
<TABLE>
<CAPTION>
REQUIRED ACTUAL EXCESS
----------------------- -------------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Tangible capital $ 17,020 1.50% $ 87,600 7.72% $ 70,580
Core capital 34,040 3.00% 87,600 7.72% 53,560
Risk-based capital 48,184 8.00% 92,199 15.30% 44,015
</TABLE>
FINANCIAL CONDITION
ASSETS. Total assets decreased by $14.9 million or 1.3% to $1.13 billion
during fiscal 1997 versus an 8.0% increase in total assets during fiscal
1996. The decrease in fiscal 1997 was due primarily to decreases of $4.6
million or 64.4% in cash and due from banks, $7.3 million or 46.7% in
interest-bearing deposits with banks, $5.4 million or 7.3% in securities
available for sale, $1.2 million or 9.2% in Federal Home Loan Bank stock, at
cost, and $791,000 or 37.8% in foreclosed real estate, net, versus the prior
fiscal year. These decreases were partially offset by increases of $1.6
million or 9.8% in federal funds sold and securities purchased under
agreements to resell, $1.4 million or 13.7% in securities held to maturity,
$768,000 or 0.1% in loans receivable, net (including loans held for sale, at
cost), and $1.0 million or 35.3% in other assets. The decrease in securities
available for sale was primarily due to normal principal repayments received
on mortgage-backed and related securities which exceeded purchases. The
decrease in cash and due from banks and interest-bearing deposits with banks
was primarily the result of the payment of the one-time Federal Deposit
Insurance Corporation ("FDIC") special assessment to recapitalize the Savings
Association Insurance Fund ("SAIF"), and management's decision to reduce
borrowings from the Federal Home Loan Bank of Atlanta ("FHLB") and repurchase
shares of common stock of the Company.
LIABILITIES. Total liabilities decreased by $16.1 million or 1.5% to $1.03
billion during fiscal 1997 versus a 7.8% increase during fiscal 1996. This
decrease in fiscal 1997 was due primarily to decreases of $17.5 million or 7.2%
in advances from the FHLB, and $245,000 or 11.4% in income taxes versus the
prior fiscal year. These decreases were partially offset by an increase of $1.7
million or 30.8% in accrued expenses and other liabilities. The decrease in FHLB
advances was the result of management's decision to utilize the Association's
cash flow to reduce borrowings.
STOCKHOLDERS' EQUITY. Maryland Federal's total stockholders' equity
increased by $1.3 million or 1.4% during fiscal 1997 versus $8.2 million or 9.5%
during fiscal 1996. During fiscal 1997, such increase reflects net income of
$6.5 million, a $2.8 million increase related to the issuance of shares under
stock plans during the year, and a $415,000 increase recorded to recognize the
net change in unrealized holding gains, net, which were offset by dividends to
shareholders of $2.2 million and the repurchase of 212,050 shares of the
Company's common stock at a cost of $6.3 million. There were no such stock
repurchases during fiscal 1996.
6
<PAGE>
CAPITAL ADEQUACY
The Association is required under certain 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 28, 1997, the Association exceeded all of its
regulatory capital requirements. The prior table demonstrates the Association's
required and actual capital ratios at February 28, 1997.
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
28, 1997, the Association was considered to be "well capitalized." See Notes 13
and 14 of Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
Maryland Federal reported net income of $6.5 million ($2.00 primary earnings
per share) in fiscal 1997 versus $8.7 million ($2.63 primary earnings per share)
and $9.1 million ($2.70 primary earnings per share) in fiscal 1996 and 1995,
respectively. Primary earnings per share for fiscal 1996 and 1995 have been
adjusted to give retroactive effect of the 5% stock dividend paid on December
12, 1996. Net income reflects the net interest income re-
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
----------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
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) $ 2,690 $ (577) $ 2,113 $ 11,206 $ -- $ 11,206
Mortgage-backed and related securities (565) 7 (558) (41) 72 31
Investment securities and other interest-earning assets 344 (128) 216 (854) 644 (210)
--------- --------- --------- --------- --------- ---------
Total interest income 2,469 (698) 1,771 10,311 716 11,027
--------- --------- --------- --------- --------- ---------
Interest expense:
Deposits:
Certificates of deposit 910 (1,640) (730) 6,460 4,957 11,417
Noncertificate accounts (65) (311) (376) (1,435) (314) (1,749)
Advances from FHLB and other interest-bearing liabilities (2) 886 (465) 421 3,085 1,165 4,250
--------- --------- --------- --------- --------- ---------
Total interest expense 1,731 (2,416) (685) 8,110 5,808 13,918
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net interest income $ 738 $ 1,718 $ 2,456 $ 2,201 $ (5,092) $ (2,891)
========= ========= ========= ========= ========= =========
</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 28, 1997, are also indicated.
<TABLE><CAPTION>
YEAR ENDED
FEB. 28, YEAR ENDED FEBRUARY 28, YEAR ENDED FEBRUARY 29, FEBRUARY 28,
1997 (4) 1997 1996 1995
-------- ------- ------------------------------ ------------------------------- ------------
(DOLLARS IN THOUSANDS)
YIELD/ AVERAGE AVERAGE AVERAGE
RATE BALANCE INTEREST YIELD/ RATE BALANCE INTEREST YIELD/ RATE BALANCE
----------- ------------ --------- ----------- ------------ --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:(1)
Loans receivable (2) 7.45% $ 993,218 $ 74,328 7.48% $ 957,320 $ 72,215 7.54% $ 809,647
Mortgage-backed and related
securities 6.81% 62,663 4,251 6.78% 71,042 4,809 6.77% 71,664
Investment securities and
other interest-earning
assets 5.38% 57,685 3,310 5.74% 51,758 3,094 5.98% 67,400
------------ --------- ------------ --------- ----------
Total interest-earning
assets 7.31% 1,113,566 81,889 7.35% 1,080,120 80,118 7.42% 948,711
--------- ---------
Noninterest-earning assets 14,392 15,771 19,971
`` ------------ ------------ ----------
Total assets $ 1,127,958 $ 1,095,891 $ 968,682
============ ============ ===========
Interest-bearing
liabilities:
Deposits:
Certificates of deposit 5.45% $ 620,652 34,329 5.53% $ 604,892 35,059 5.80% $ 485,176
Noncertificate accounts 2.63% 166,477 4,463 2.68% 168,804 4,839 2.87% 217,283
------------ --------- ------------ --------- ----------
Total deposits 4.84% 787,129 38,792 4.93% 773,696 39,898 5.16% 702,459
Advances from FHLB and
other interest-bearing
liabilities (3) 5.90% 229,347 13,413 5.85% 214,224 12,992 6.06% 161,850
------------ --------- ------------ --------- ----------
Total interest-bearing
liabilities 5.08% 1,016,476 52,205 5.14% 987,920 52,890 5.35% 864,309
--------- ---------
Noninterest-bearing
liabilities 18,530 20,751 23,366
------------ ------------ ----------
Total liabilities 1,035,006 1,008,671 887,675
Stockholders' equity 92,952 87,220 81,007
------------ ------------ ----------
Total liabilities and
stockholders' equity $ 1,127,958 $ 1,095,891 $ 968,682
============ ============ ==========
Net interest income/
interest rate spread 2.23% $ 29,684 2.21% $ 27,228 2.07%
==== ========= ==== ========= ====
Net interest-earning
assets/net yield on
interest-earning assets $ 97,090 2.67% $ 92,200 2.52% $ 84,402
============ ==== ============ ==== ==========
Ratio of interest-earning
assets to
interest-bearing
liabilities 1.10% 1.09%
==== ====
<CAPTION>
INTEREST YIELD/ RATE
--------- -----
<S> <C> <C>
Interest-earning assets:(1)
Loans receivable (2) $ 61,009 7.54%
Mortgage-backed and related
securities 4,778 6.67%
Investment securities and
other interest-earning
assets 3,304 4.90%
Total interest-earning ---------
assets 69,091 7.28%
Noninterest-earning assets
---------
Total assets
Interest-bearing
liabilities:
Deposits:
Certificates of deposit 23,558 4.86%
Noncertificate accounts 6,672 3.07%
---------
Total deposits 30,230 4.30%
Advances from FHLB and
other interest-bearing
liabilities (3) 8,742 5.40%
---------
Total interest-bearing
liabilities 38,972 4.51%
---------
Noninterest-bearing
liabilities
Total liabilities
Stockholders' equity
Total liabilities and
stockholders' equity
Net interest income/
interest rate spread $ 30,119 2.77%
========= ====
Net interest-earning
assets/net yield on
interest-earning assets 3.17%
====
Ratio of interest-earning
assets to
interest-bearing
liabilities 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 $0.9 million, $1.0 million and $1.0 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 28, 1997.
8
<PAGE>
sulting from the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities, and various
other elements such as provision for loan losses, noninterest income,
noninterest expense, and income tax expense. Included in noninterest expense
for fiscal 1997 was a one-time SAIF recapitalization assessment of $5.1
million, or approximately $3.1 million, net of applicable tax benefits.
Net Interest Income
During the fiscal year ended February 28, 1997, net interest income
increased by $2.5 million or 9.0% versus the prior fiscal year. The increase
was primarily the result of a 14 basis point net increase in the yield
earned on interest-earning assets over the rate paid on interest-bearing
liabilities ("interest rate spread"), coupled with a $4.9 million or 5.3%
increase in the relative amount of interest-earning assets over
interest-bearing liabilities during fiscal 1997 versus fiscal 1996. During
the fiscal 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 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.
Interest Income
LOANS RECEIVABLE. For the fiscal year ended February 28, 1997, interest
earned on loans receivable (including loans held for sale) increased by $2.1
million or 2.9% over the prior fiscal year. This increase resulted from a
$35.9 million or 3.7% increase in the average balance of loans receivable,
which more than offset a 6 basis point decrease in the average yield earned
on such assets to 7.48% during fiscal 1997 as compared to the prior fiscal
year. 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. The increase in the average
balance of loans receivable during both fiscal years was primarily due to the
increased demand in both first mortgage loans and home equity lines of
credit. 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 fiscal year ended
February 28, 1997, interest earned on mortgage-backed and related securities
decreased by $558,000 or 11.6% over the prior fiscal year. This decrease was
primarily due to an $8.4 million or 11.8% decrease in the average balance of
such assets, which more than offset a one basis point increase in the average
yield earned on such assets to 6.78%. For the fiscal 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 during both fiscal years was the result of maturities and
principal repayments as well as the sales of mortgage-backed and related
securities during fiscal 1996.
INVESTMENT SECURITIES AND OTHER INTEREST-EARNING ASSETS. Interest earned
on investment securities and other interest-earning assets increased by
$216,000 or 7.0% during fiscal 1997 versus the prior fiscal year. This
increase was primarily due to a $5.9 million or 11.5% increase in the average
balance of investment securities and other interest-earning assets, which
more than offset a 24 basis point decrease in the average yield earned on
such assets to 5.74% during fiscal 1997 versus the prior fiscal year.
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.
INTEREST EXPENSE
DEPOSITS. The Association's interest expense on deposits decreased by
$1.1 million or 2.8% to $38.8 million during fiscal 1997 versus the prior
fiscal year. This decrease was primarily due to a 23 basis point decrease in
the average rate paid on such deposits, which more than offset an increase in
the average balance of deposits of $13.4 million or 1.7% to $787.1 million
during fiscal 1997 versus the prior fiscal year. During fiscal 1996, interest
expense on deposits increased by $9.7 million or 32.0% as compared to the
prior fiscal year. This increase was primarily due to a $71.2 million or
10.1% increase in the average balance of deposits coupled with an 86 basis
point increase in the average rate paid on such deposits during fiscal 1996
versus the prior fiscal year. The Association continues to offer competitive
interest rates on deposits which helped to increase the average balance of
deposits during fiscal 1997 and 1996.
BORROWED FUNDS. Interest expense on borrowed funds (consisting of FHLB
advances and advances from borrowers for taxes and insurance) increased by
$421,000 or 3.2% during fiscal 1997 versus fiscal 1996. This increase was
primarily due to a $15.1 million or 7.1% increase in the average balance of
such funds to $229.3 million, which more than offset a 21 basis point
decrease in the average rate paid on such funds to 5.85% during fiscal 1997
versus the prior fiscal year. Interest expense on borrowed funds increased by
$4.3 million or 48.6% during fiscal 1996 versus fiscal
9
<PAGE>
1995. This increase was primarily due to a $52.4 million or 32.4% increase in
the average balance of such funds coupled with a 66 basis point increase in
the average rate paid on such funds during fiscal 1996 versus the prior
fiscal year. The increase in the average balance of such funds during fiscal
1997 reflects management's decision during fiscal 1996 to fund a major
portion of its loan growth with borrowed funds rather than deposits. However,
during fiscal 1997, management made an effort to curtail advances whenever
possible.
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 1997, 1996 and 1995, the Association's provision for
loan losses totaled $275,000, $120,000, and $300,000, respectively. See also
Note 4 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 28, 1997, non-performing loans (loans ninety days or more
delinquent but still accruing, and non-accrual loans) totaled $4.6 million
($4,595,000 of which consist of first mortgage loans, with the remaining $35,000
consisting of consumer and other loans) and represented 0.47% of total loans
receivable. At February 29, 1996, and February 28, 1995, non-performing loans
totaled $3.4 million ($3,333,000 of which consist of first mortgage loans, with
the remaining $53,000 consisting of consumer and other loans) and $1.6 million
($1,543,000 of which consist of first mortgage loans, with the remaining $13,000
consisting of consumer and other loans), respectively, and represented 0.34% and
0.17%, respectively, of total loans receivable. During fiscal 1997 and 1996,
non-performing loans increased by $1.2 million and $1.8 million, respectively,
as compared to the comparable prior fiscal years, due primarily to an increase
in non-performing residential first mortgage loans which resulted from the soft
economic conditions that existed in the local market area.
As of February 28, 1997, the allowance for loan losses amounted to $4.6
million and represented 99.3% of non-performing loans. As of February 29, 1996,
and February 28, 1995, the allowance for loan losses amounted to $4.5 million
and $4.4 million, respectively, and represented 132.1% and 284.2%, respectively,
of non-performing loans. During fiscal 1995, $50,000 was transferred out of the
allowance for loan losses into the allowance for losses on foreclosed real
estate. No such transfers took place during fiscal 1997 and 1996.
Noninterest Income
Total noninterest income decreased by $3.0 million or 52.1% during
fiscal 1997 versus fiscal 1996. This decrease was the result of a $3.3
million or 100.0% decrease in gain on sales of securities and a $32,000 or
25.2% decrease in other income, which more than offset increases of $244,000
or 16.4% in banking service charges and fees, $70,000 or 25.6% in loan fees
and service charges, and $48,000 or 9.2% in gain on sales of first mortgage
loans during fiscal 1997 versus the prior fiscal year. There were no sales of
securities during fiscal 1997. The increase in banking service charges and
fees was due primarily to increases in administrative fees collected on ATM
transactions for noncustomers and service fees collected on both commercial
and noncommercial checking accounts during fiscal 1997 versus fiscal 1996.
Total noninterest income increased by $3.7 million or 180.2% during fiscal
1996 versus fiscal 1995. This increase included a $3.3 million gain on sales of
securities. There were no sales of securities during fiscal 1995. 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.
NONINTEREST EXPENSE
Total noninterest expense increased by $5.6 million or 30.0% and $1.4
million or 8.4% during fiscal 1997 and 1996, respectively, versus the
comparable prior fiscal years. Included in noninterest expense for fiscal
1997 was a one-time SAIF recapitalization assessment of $5.1 million, or
approximately $3.1 million, net of applicable tax benefits. The components of
noninterest expense are discussed below.
COMPENSATION AND BENEFITS. Compensation and benefits increased by $1.2
million or 13.2% and $436,000 or 5.2% during fiscal 1997 and fiscal 1996,
respectively, versus the comparable prior fiscal years. The increase in
compensation and benefits was due primarily
10
<PAGE>
to increases in retirement and other employee benefit expenses, as well as
annual salary adjustments, during fiscal 1997 as compared to the prior fiscal
year. The increase in compensation and benefits during fiscal 1996 was 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 resulted in increased expenses during the
1996 fiscal year, as compared to fiscal 1995.
OCCUPANCY AND EQUIPMENT. Occupancy and equipment expense decreased by
$106,000 or 3.3% during fiscal 1997 as compared to fiscal 1996. Such decrease
was primarily the effect of relocating branch and loan production offices to
more suitable and less expensive locations and the closing of one branch office
during fiscal 1996. Occupancy and equipment expense increased by $399,000 or
14.3% during fiscal 1996 as compared to fiscal 1995. 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 increase in occupancy and equipment expense during fiscal
1996 as compared to fiscal 1995.
SAIF RECAPITALIZATION ASSESSMENT. Deposits of the Association are currently
insured by the FDIC through the SAIF. On September 30, 1996, legislation was
enacted to address the undercapitalization of the SAIF. As a result, the FDIC
imposed a one-time special assessment of $.657 for every $100 of assessable
deposits as of March 31, 1995. Based on the Association's assessable deposits,
Maryland Federal's pro rata share of the special recapitalization assessment was
$5.1 million or approximately $3.1 million, net of applicable tax benefits.
FEDERAL DEPOSIT INSURANCE PREMIUMS. Federal deposit insurance premiums paid
to the FDIC decreased by $255,000 or 14.6% during fiscal 1997 as compared to
fiscal 1996. Such decrease was primarily the result of the legislation discussed
above which also reduced the Association's insurance premium from 23 to 6.4
basis points effective January 1, 1997. Based upon Maryland Federal's level of
deposits at February 28, 1997, this reduction in insurance premiums is expected
to amount to approximately $1.3 million of savings, before taxes, on an annual
basis. Federal deposit insurance premiums paid to the FDIC increased by $180,000
or 11.5% during fiscal 1996, versus the prior fiscal year, due primarily to an
increase in the average balance of deposits.
LOSS ON FORECLOSED REAL ESTATE, NET. During the fiscal year ended February
28, 1997, loss on foreclosed real estate, net, decreased by $149,000 or 49.8%
versus the prior fiscal year, due primarily to a $100,000 decrease in provision
for possible losses on foreclosed real estate, as well as an increase in the
gain on the sales of such properties. 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
possible losses on foreclosed real estate. Foreclosed real estate, net, totaled
$1.3 million, $2.1 million and $2.7 million at fiscal year-end 1997, 1996 and
1995, respectively. See also Note 5 of Notes to Consolidated Financial
Statements.
ADVERTISING. Advertising expense increased by $41,000 or 7.6% and $28,000
or 5.5% during fiscal 1997 and fiscal 1996, respectively, versus the comparable
prior fiscal years.
OTHER. During fiscal year ended February 28, 1997, other noninterest
expense decreased by $202,000 or 5.1% versus the prior fiscal year. This
decrease was primarily due to expenses incurred for relocating branch offices
during fiscal 1996. Such expenses included new supplies, moving expense,
printing and postage. Other noninterest expense increased by $463,000 or 13.2%
during fiscal 1996 versus the prior fiscal year. 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, and losses due to two branch robberies
during fiscal 1996, contributed to the increase in other noninterest expense
versus the prior fiscal year.
INCOME TAXES
Maryland Federal made provisions for income taxes of $1.5 million, $5.5
million and $5.7 million in fiscal 1997, 1996 and 1995, respectively. The
$4.0 million or 73.0% decrease during fiscal 1997 versus the prior fiscal
year was due primarily to the one-time special assessment to recapitalize the
SAIF, and a $1.6 million adjustment to revise prior estimates in recording
the tax provision. The $145,000 or 2.6% decrease during fiscal 1996 versus
the prior fiscal year was due to the decreased profitability of the
Association. The effective tax rate for each of the three fiscal years was
18.6%, 38.8% and 38.5%, respectively.
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
11
<PAGE>
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 28, 1997,
the Association's interest rate spread increased to 2.21% as compared to 2.07%
during the prior fiscal year, reflecting a 21 basis point decrease in the
Association's rate paid on interest-bearing liabilities which more than offset a
7 basis point decrease in the yield earned on interest-earning assets.
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 32.5% as of February 28, 1997
versus 29.3% and 24.0% as of February 29, 1996 and February 28, 1995,
respectively. The deterioration in the one-year gap at February 28, 1997 versus
the prior fiscal year end is due primarily to increases of $40.2 million in
deposits and $8.3 million in advances from the FHLB and other interest-bearing
liabilities which more than offset increases of $13.8 million in loans and
mortgage-backed and related securities and $3.1 million in investment securities
and other interest-earning assets. These changes reflect management's decision
during fiscal 1996 and 1995 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 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-sensitive assets:
Loans and mortgage-backed and related securities (1) $ 266,478 $ 252,629 $ 216,868
Investment securities and other interest-earning assets 48,635 45,585 41,374
------------ ------------ ------------
Total interest-sensitive assets 315,113 298,214 258,242
------------ ------------ ------------
Interest-sensitive liabilities:
Deposits 544,571 504,358 389,177
Advances from FHLB and other interest-bearing liabilities (2) 136,847 128,579 123,464
------------ ------------ ------------
Total interest-sensitive liabilities 681,418 632,937 512,641
------------ ------------ ------------
Excess of interest-sensitive liabilities over interest-sensitive assets
(Gap) $ 366,305 $ 334,723 $ 254,399
============ ============ ============
Ratio of Gap to total assets 32.5% 29.3% 24.0%
============ ============ ============
</TABLE>
- ------------------------
(1) Includes loans held for sale.
(2) Includes $0.7 million, $0.8 million and $0.9 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 28, 1997, the Association had $3.2 million of undisbursed loan
funds, $51.5 million in approved loan commitments and $2.0 million in
commitments to purchase mortgage-backed and related securities. These
commitments were partially offset by $6.8 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 1998 is $465.8
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 require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation. 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 28, 1997. 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>
<CAPTION>
FEBRUARY 28, 1997
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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) $ 70,393 $ 85,909 $ 55,437 $ 89,233 $ 70,403 $ 11,979 $ 383,354
8.37% 8.04% 7.78% 7.73% 7.79% 7.71% 7.94%
Adjustable
and
floating-rate
mortgage loans 170,375 256,145 134,522 43,597 -- -- 604,639
7.51% 6.86% 7.00% 7.44% -- -- 7.12%
Consumer and
other
loans 1,341 1,813 805 -- -- -- 3,959
9.40% 9.40% 9.40% -- -- -- 9.40%
Mortgage-
backed and
related
securities 24,369 12,071 6,917 12,485 8,017 276 64,135
6.54% 6.89% 7.01% 7.00% 7.02% 8.06% 6.81%
Investment
securities
and other
interest-
earning
assets 48,635 3,096 2,107 245 -- -- 54,083
5.37% 5.24% 5.89% 4.15% -- -- 5.38%
----------- ----------- ---------- ---------- ------------------ --------- ----------
Total
interest-
earning
assets 315,113 359,034 199,788 145,560 78,420 12,255 1,110,170
7.30% 7.14% 7.21% 7.57% 7.71% 7.72% 7.31%
----------- ----------- ---------- ---------- ------------------ --------- ----------
Interest-
bearing
liabilities:
Deposits 544,571 158,778 31,223 29,005 18,369 6,987 788,933
5.03% 5.19% 3.64% 2.48% 2.70% 3.01% 4.84%
Advances
from FHLB
and
other
interest-
bearing
liabilities
(2) 136,847 89,500 -- 680 -- -- 227,027
5.81% 6.03% -- 6.50% -- -- 5.90%
----------- ----------- ---------- ---------- ------------------ --------- ----------
Total
interest-
bearing
liabilities 681,418 248,278 31,223 29,685 18,369 6,987 1,015,960
5.19% 5.49% 3.64% 2.57% 2.70% 3.01% 5.08%
----------- ----------- ---------- ---------- ------------------ --------- ----------
Excess
(deficiency)
of
interest-
earning
assets
over
interest-
bearing
liabilities $ (366,305) $ 110,756 $ 168,565 $ 115,875 $ 60,051 $ 5,268 $ 94,210
=========== =========== ========== ========== ======== ========== =========
Cumulative
excess
(deficiency)
of
interest-
earning
assets
over
interest-
bearing
liabilities $ (366,305) $ (255,549) $ (86,984) $ 28,891 $ 88,942 $94,210 $ 94,210
=========== =========== ========== ========== ========== ========= ==========
Cumulative
excess
(deficiency)
as a
percentage
of total
assets (32.46)% (22.65)% (7.71)% 2.56% 7.88% 8.35% 8.35%
=========== =========== ========== ========== ========== ========= ==========
<CAPTION>
</TABLE>
- ------------------------
(1) Includes loans held for sale.
(2) Includes $0.7 million of interest-bearing advances from borrowers for taxes
and insurance.
13
<PAGE>
Selected Consolidated
Financial and Operating Data
<TABLE>
<CAPTION>
FEBRUARY 28,
FEB. 28, FEB. 29, -----------------------------------
------ -------
1997 1996 1995 1994 1993
------------ ------------ ------------ ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
AT YEAR END:
Total assets $ 1,128,483 $ 1,143,338 $ 1,058,781 $ 872,167 $ 814,789
Loans receivable (1) 991,952 991,184 898,728 696,993 644,329
Mortgage-backed and related securities 64,135 66,195 75,436 44,106 53,586
Investment securities and other interest-
earning assets (2) 54,083 62,367 60,765 105,100 92,835
Deposits 788,933 788,931 763,754 678,050 666,232
Borrowed funds 226,280 243,780 190,730 103,180 65,680
Stockholders' equity 95,261 93,982 85,796 77,623 69,196
FOR THE YEAR ENDED:
Total interest income 81,889 80,118 69,091 63,250 67,722
Total interest expense 52,205 52,890 38,972 32,411 38,598
------------ ------------ ------------ ---------- ----------
Net interest income 29,684 27,228 30,119 30,839 29,124
Provision for loan losses 275 120 300 662 1,940
------------ ------------ ------------ ---------- ----------
Net interest income after provision for loan
losses 29,409 27,108 29,819 30,177 27,184
Banking service charges and fees 1,736 1,492 1,392 1,594 1,087
Gain on sales of interest-earning assets 570 3,834 134 566 665
Other noninterest income 439 401 518 792 636
SAIF recapitalization assessment 5,077 -- -- -- --
Other noninterest expense 19,058 18,566 17,125 14,320 12,707
------------ ------------ ------------ ---------- ----------
Income before income taxes and cumulative
effect of accounting change 8,019 14,269 14,738 18,809 16,865
Income tax expense 1,494 5,530 5,675 7,097 6,485
------------ ------------ ------------ ---------- ----------
Income before cumulative effect of accounting
change 6,525 8,739 9,063 11,712 10,380
Cumulative effect of change in accounting for
income taxes -- -- -- 547 --
------------ ------------ ------------ ---------- ----------
Net income $ 6,525 $ 8,739 $ 9,063 $ 12,259 $ 10,380
============ ============ ============ ========== ==========
Primary earnings per share (3) $ 2.00 $ 2.63 $ 2.70 $ 3.54 $ 3.02
============ ============ ============ ========== ==========
Return on equity 6.9% 9.7% 11.1% 16.7% 16.0%
Equity-to-assets 8.3% 8.2% 8.5% 8.7% 7.9%
Cash dividends declared per share (3) $ .675 $ .548 $ .438 $ .376 $ .242
Dividend payout ratio 33.8% 20.8% 16.2% 10.6% 8.0%
Number of full service facilities 25 25 26 21 21
</TABLE>
- ------------------------
(1) Includes loans held for sale.
(2) Includes investment securities, federal funds sold, securities purchased
under agreements to resell and interest-bearing deposits with banks.
(3) As adjusted for 5% stock dividend declared on November 21, 1996.
14
<PAGE>
Financial Statements
<TABLE>
<S> <C>
- ----------------------------------------------
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
- ----------------------------------------------
</TABLE>
15
<PAGE>
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------------------ ------------
<S> <C> <C>
(IN THOUSANDS)
ASSETS
Cash and due from banks................................................ $ 2,558 $ 7,194
Interest-bearing deposits with banks................................... 8,381 15,711
Federal funds sold and securities purchased under agreements to resell. 17,665 16,092
Securities available for sale.......................................... 69,360 74,791
Securities held to maturity (fair value, 1997--$11,417,000 and
1996--$10,007,000)................................................... 11,448 10,072
Loans held for sale, at cost........................................... 2,679 16,296
Loans receivable, net.................................................. 989,273 974,888
Accrued interest receivable............................................ 6,021 6,009
Federal Home Loan Bank stock, at cost.................................. 11,364 12,514
Foreclosed real estate, net............................................ 1,299 2,090
Premises and equipment, net............................................ 4,576 4,829
Other assets........................................................... 3,859 2,852
---------- ------------
Total assets...................................................... $1,128,483 $1,143,338
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits............................................................... $ 788,933 $ 788,931
Advances from Federal Home Loan Bank of Atlanta........................ 226,280 243,780
Advances from borrowers for taxes and insurance........................ 9,074 9,124
Income taxes........................................................... 1,898 2,143
Accrued expenses and other liabilities................................. 7,037 5,378
---------- ------------
Total liabilities................................................. 1,033,222 1,049,356
---------- ------------
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, 1997--4,093,576 and 1996--3,821,081.......................... 41 38
Additional paid-in capital............................................. 42,625 34,917
Retained earnings, substantially restricted............................ 66,976 67,492
Unrealized holding gains, net.......................................... 2,835 2,420
Treasury stock, at cost; 1997--883,426 shares and 1996--671,376 shares. (17,216) (10,885)
----------- ------------
Total stockholders' equity........................................ 95,261 93,982
----------- ------------
Total liabilities and stockholders' equity...................... $1,128,483 $1,143,338
========== ============
See Notes to Consolidated Financial Statements.
</TABLE>
16
<PAGE>
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income:
Loans receivable:
First mortgage loans....................................... $ 67,196 $ 67,093 $ 56,960
Consumer and other loans................................... 7,132 5,122 4,049
Securities available for sale and held to maturity........... 5,154 5,921 6,361
Other interest-earning assets................................ 2,407 1,982 1,721
------------ ------------ ------------
Total interest income...................................... 81,889 80,118 69,091
------------ ------------ ------------
Interest expense:
Deposits..................................................... 38,792 39,898 30,230
Advances from Federal Home Loan Bank of Atlanta.............. 13,385 12,962 8,714
Advances from borrowers for taxes and insurance.............. 28 30 28
------------ ------------ ------------
Total interest expense..................................... 52,205 52,890 38,972
------------ ------------ ------------
Net interest income............................................ 29,684 27,228 30,119
Provision for loan losses...................................... 275 120 300
------------ ------------ ------------
Net interest income after provision for loan losses............ 29,409 27,108 29,819
------------ ------------ ------------
Noninterest income:
Banking service charges and fees............................. 1,736 1,492 1,392
Loan fees and service charges................................ 344 274 302
Gain on sales of first mortgage loans........................ 570 522 134
Gain on sales of securities.................................. -- 3,312 --
Other........................................................ 95 127 216
------------ ------------ ------------
Total noninterest income................................... 2,745 5,727 2,044
------------ ------------ ------------
Noninterest expense:
Compensation and benefits.................................... 9,991 8,828 8,392
Occupancy and equipment...................................... 3,084 3,190 2,791
SAIF recapitalization assessment............................. 5,077 -- --
Federal deposit insurance premiums........................... 1,497 1,752 1,572
Loss on foreclosed real estate, net.......................... 150 299 364
Advertising.................................................. 577 536 508
Other........................................................ 3,759 3,961 3,498
------------ ------------ ------------
Total noninterest expense.................................. 24,135 18,566 17,125
------------ ------------ ------------
Income before income taxes..................................... 8,019 14,269 14,738
Income tax expense............................................. 1,494 5,530 5,675
------------ ------------ ------------
NET INCOME..................................................... $ 6,525 $ 8,739 $ 9,063
============ ============ ============
Primary earnings per share..................................... $ 2.00 $ 2.63 $ 2.70
============ ============ ============
</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, 1994...................... $36 $32,134 $52,890 $ -- $(7,437) $77,623
Net income..................................... -- -- 9,063 -- -- 9,063
Issuance of 69,172 shares of common stock under
stock plans and related tax benefits.......... 1 1,057 -- -- -- 1,058
Purchase of 140,475 shares of treasury stock... -- -- -- -- (3,448) (3,448)
Cash dividends ($.438 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 and related tax benefits.... 1 1,726 -- -- -- 1,727
Cash dividends ($.548 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
Net income..................................... -- -- 6,525 -- -- 6,525
Issuance of 123,466 shares of common stock
under stock plans and related tax benefits.... 1 2,837 -- -- -- 2,838
Stock dividend, 149,029 shares at $32.75 per
share......................................... 2 4,871 (4,873) -- -- --
Cash paid in lieu of stock dividend for
fractional shares............................. -- -- (11) -- -- (11)
Purchase of 212,050 shares of treasury stock... -- -- -- -- (6,331) (6,331)
Cash dividends ($.675 per share)............... -- -- (2,157) -- -- (2,157)
Change in unrealized holding gains, net......... -- -- -- 415 -- 415
--- ----------- ------------ ----------- ---------- ------------
Balance, February 28, 1997...................... $41 $42,625 $66,976 $2,835 $(17,216) $95,261
=== =========== ============ =========== ========== ============
</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 28, February 29, February 28,
1997 1996 1995
------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................ $ 6,525 $ 8,739 $ 9,063
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization:
Premises and equipment............................................. 916 1,123 884
Other.............................................................. (1,021) (722) (1,547)
Loans originated for sale........................................... (63,723) (67,152) (15,454)
Sale of loans originated for sale................................... 77,340 53,727 13,967
Provision for losses on loans and foreclosed real estate............ 375 320 600
Gain on sales of securities......................................... -- (3,312) --
Gain on sales of foreclosed real estate............................. (102) (27) (74)
Deferred income taxes............................................... 181 (970) (211)
Tax benefits relating to stock options.............................. 661 603 315
Decrease (increase) in:
Accrued interest receivable........................................ (12) (398) (783)
Other assets....................................................... (1,331) 1,725 (2,283)
Increase (decrease) in:
Current income taxes payable....................................... (649) (622) 409
Accrued expenses and other liabilities............................. 1,521 (85) 1,683
------------ ------------ ------------
Net cash provided by (used in) operating activities............... 20,681 (7,051) 6,569
------------ ------------ ------------
INVESTING ACTIVITIES:
Loans originated..................................................... (120,104) (149,152) (225,562)
Loans purchased...................................................... -- (1,006) (71,535)
Principal collected on loans......................................... 105,379 71,825 97,445
Purchases of securities:
Available for sale.................................................. (10,950) (3,364) (619)
Held to maturity.................................................... (13,852) -- (54,796)
Principal collected on mortgage-backed and related securities........ 11,265 8,361 10,056
Proceeds from maturities of securities:
Available for sale.................................................. 6,411 -- 2,557
Held to maturity.................................................... 12,000 14,130 17,000
Proceeds from sales of securities:
Available for sale.................................................. -- 3,423 --
Held to maturity.................................................... -- 1,909 --
Net decrease (increase) in federal funds sold and
securities purchased under agreements to resell..................... (1,573) (6,469) 19,395
Decrease (increase) in Federal Home Loan Bank stock.................. 1,150 (2,730) (1,633)
Proceeds from sales of foreclosed real estate........................ 2,022 713 871
Purchases of premises and equipment.................................. (663) (563) (2,762)
------------ ------------ ------------
Net cash used in investing activities............................. (8,915) (62,923) (209,583)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net increase in deposits............................................. 2 25,177 35,202
Proceeds from acquisitions of deposits............................... -- -- 50,502
Proceeds from Federal Home Loan Bank advances........................ 151,000 249,350 178,800
Principal payments on Federal Home Loan Bank advances................ (168,500) (196,300) (91,250)
Net increase (decrease) in advances from borrowers for taxes and
insurance........................................................... (50) (587) 1,060
Proceeds from issuance of stock under stock plans.................... 2,177 1,124 743
Cash paid in lieu of stock dividend for fractional shares............ (11) -- --
Purchase of treasury stock........................................... (6,331) -- (3,448)
Cash dividends paid.................................................. (2,019) (1,660) (1,363)
------------ ------------ ------------
Net cash provided by (used in) financing activities............... (23,732) 77,104 170,246
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... (11,966) 7,130 (32,768)
CASH AND CASH EQUIVALENTS:
Beginning of year................................................... 22,905 15,775 48,543
------------ ------------ ------------
End of year......................................................... $ 10,939 $ 22,905 $ 15,775
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE>
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 AND CASH EQUIVALENTS:
For the purpose of presentation in the consolidated statements of cash flows,
cash and cash equivalents include cash and due from banks, and
interest-bearing deposits with banks.
SECURITIES:
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 would 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 fair 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.
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" ("SFAS 114") and Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures" ("SFAS 118"). These statements require creditors
to account for impaired loans, except for those loans that are accounted for
at fair value or at the lower of cost or fair value, at the present value of
the expected future cash flows discounted at the loan's effective interest
rate, or the fair value of the collateral if the loan is collateral
dependent. A loan is impaired when, based on current information and events,
it is probable that a creditor will be unable to collect all principal and
interest amounts due according to the contractual terms of the loan agreement.
Neither the initial adoption nor the ongoing effect to date of SFAS 114 and
SFAS 118 has had a significant impact on the consolidated financial
statements of Maryland Federal.
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.
LOAN SERVICING:
The Association services mortgage loans for investors that are not included
in the consolidated statements of financial condition. Fees earned for
servicing loans owned by investors are reported as income when the related
mortgage loan payments are collected. Loan servicing costs are charged to
expense as incurred.
Effective January 1, 1997, Maryland Federal adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS 125"), which
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on the consistent
application of a financial-components approach that focuses on control. This
approach requires the recognition of financial assets and servicing assets
that are controlled by the reporting entity and the liabilities it has
incurred, the derecognition of financial assets when control is surrendered,
and the derecognition of liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. The
adoption of SFAS 125 has not had a significant impact on the consolidated
financial statements of Maryland Federal.
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 $1,281,000
and $1,568,000 as of February 28, 1997 and February 29, 1996, respectively,
and is included in other assets in the accompanying consolidated statements
of financial condition.
LONG-LIVED ASSETS:
Long-lived assets to be held and those to be disposed of and certain other
intangibles are evaluated for impairment using the guidance of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"),
which was adopted by Maryland Federal on March 1, 1996. SFAS 121 establishes
when an impairment loss should be recognized and how an impairment loss
should be measured. The adoption of SFAS 121 did not have a significant
impact on the consolidated financial statements of Maryland Federal.
20
<PAGE>
INCOME TAXES:
The Company files a consolidated Federal income tax return with its
subsidiary. 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. 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 3,263,344, 3,325,845, and 3,356,401 in fiscal 1997, 1996 and 1995,
respectively. Maryland Federal has not separately reported fully diluted
earnings per share since the amounts are not materially different from
primary earnings per share.
STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") was issued in October 1995. This
statement encourages all entities to adopt a fair value based method of
accounting for their employee stock-based compensation plans. The statement
also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion 25"). Entities electing to remain with the
accounting in APB Opinion 25 must make pro forma disclosures of net income
and earnings per share, as if the fair value based method of accounting
defined in SFAS 123 had been applied. The accounting and disclosure
requirements of SFAS 123 are generally effective for transactions entered
into in fiscal years that begin after December 15, 1995, although they may be
adopted on issuance. Pro forma disclosures are required for entities that
elect to continue to measure compensation cost using APB Opinion 25, and must
include the effects of the awards granted in fiscal years that begin after
December 15, 1994. Maryland Federal applies APB Opinion 25 in accounting for
its stock compensation plans, as permitted by SFAS 123. Accordingly, no
compensation cost has been recognized. See Note 18 to Consolidated Financial
Statements.
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. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125" was issued in
December 1996. This statement defers the effective date until January 1, 1998
for certain provisions of SFAS 125 dealing with secured borrowings and
repurchase agreements, dollar-roll, and securities lending. This statement is
not expected to have a significant impact on Maryland Federal.
Statement of Financial Accounting Standards No. 128, "Earnings per Share" was
issued in February 1997. This statement replaces the presentation of primary
earnings per share with a presentation of basic earnings per share and also
requires dual presentation of basic and diluted earnings per share on the
face of the income statement. Basic earnings per share exclude dilution and
are computed by dividing income available to common stockholders by the
weighted-average number of shares outstanding for the period. Diluted
earnings per share reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised. This
statement will be effective for financial statements issued for periods
ending after December 15, 1997, and requires restatement of all prior-period
earnings per share data presented.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" was issued in February 1997. This
statement establishes standards for disclosing information about an entity's
capital structure. This statement is effective for financial statements for
periods ending after December 15, 1997.
RECLASSIFICATIONS:
Certain amounts for fiscal 1996 and 1995 have been reclassified to conform to
the presentation for fiscal 1997.
NOTE 2--FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO
RESELL:
Federal funds sold and securities purchased under agreements to resell are
summarized as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Federal funds sold $ 15,406 $ 5,058
Securities purchased under agreements to resell:
Mortgage-backed securities -- 11,034
U.S. Government securities 2,259 --
------------ ------------
Total $ 17,665 $ 16,092
============ ============
</TABLE>
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 28, 1997, these agreements mature within ninety
days. All of the agreements were to resell the identical securities.
Securities purchased under agreements to resell averaged approximately
$5,300,000 and $6,800,000 during fiscal 1997 and 1996, respectively, and the
maximum amounts outstanding at any month-end during fiscal 1997 and 1996 were
approximately $15,400,000 and $11,000,000, 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>
Securities available for sale:
February 28, 1997:
Federal Home Loan Mortgage Corporation $ 152 $ 4,467 $ -- $ 4,619
Mortgage-backed and related securities 63,985 722 572 64,135
Other 606 -- -- 606
----------- ----------- ----- ---------
Total $ 64,743 $ 5,189 $ 572 $ 69,360
=========== =========== ===== =========
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
=========== =========== ===== =========
Securities held to maturity:
February 28, 1997:
United States government and agency obligations $ 9,974 $ 11 $ 49 $ 9,936
State and municipal securities 1,474 7 -- 1,481
----------- ----------- ----- ---------
Total $ 11,448 $ 18 $ 49 $ 11,417
=========== =========== ===== =========
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
=========== =========== ===== =========
</TABLE>
Gross realized gains on sales of securities available for sale were
$3,231,000 in fiscal 1996. Gross realized gains and gross realized losses on
sales of securities held to maturity 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 1997 and 1995.
21
<PAGE>
The amortized cost and fair value of debt securities at February 28, 1997, 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>
SECURITIES SECURITIES
AVAILABLE FOR SALE HELD TO MATURITY
---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $ 6,000 $ 5,984
Due after one year through five years -- -- 5,203 5,182
Due after five years through ten years -- -- 245 251
Mortgage-backed and related securities 63,985 64,135 -- --
----------- --------- ----------- ---------
Total $ 63,985 $ 64,135 $ 11,448 $ 11,417
=========== ========= =========== =========
</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.
NOTE 4--LOANS RECEIVABLE:
Loans receivable consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
First mortgage loans:
Conventional, permanent $ 888,027 $ 899,907
Conventional, construction 6,846 5,159
VA and FHA 3,401 4,362
Participations 1,461 2,028
------------ ------------
Total first mortgage loans 899,735 911,456
------------ ------------
Consumer and other loans:
Second trust and home improvement 44,413 48,343
Home equity 51,683 21,355
Installment and other 4,010 4,232
------------ ------------
Total consumer and other loans 100,106 73,930
------------ ------------
Total loans 999,841 985,386
Less:
Undisbursed portion of mortgage loans 3,240 1,722
Unamortized premiums and discounts, net 373 487
Net deferred loan fees 2,356 3,815
Allowance for loan losses 4,599 4,474
------------ ------------
Loans receivable, net $ 989,273 $ 974,888
============ ============
</TABLE>
Nonaccrual loans totaled $2,990,000 at February 28, 1997. There were no
nonaccrual loans at February 29, 1996. The amount of interest income that
would have been recorded on nonaccrual loans in accordance with their
original terms was $224,000 and $4,000 for fiscal 1997 and 1995,
respectively. The amount of interest income that was recorded on nonaccrual
loans was $52,000 and $2,000 for fiscal 1997 and 1995, respectively.
The following is a summary of the changes in the allowance for loan losses:
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 4,474 $ 4,424 $ 4,187
Provision for losses 275 120 300
Charge-offs (166) (76) (16)
Recoveries 16 6 3
Transfer to allowance for losses on foreclosed real
estate -- -- (50)
----------- ----------- -----------
Balance at end of year $ 4,599 $ 4,474 $ 4,424
=========== =========== ===========
</TABLE>
NOTE 5--FORECLOSED REAL ESTATE:
Foreclosed real estate consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Acquired in foreclosure or by deed in lieu of foreclosure:
Residential properties $ 232 $ 122
Nonresidential properties 1,425 1,829
Commercial land 983 1,421
------ ------
Total foreclosed real estate 2,640 3,372
Less allowance for losses 1,341 1,282
------ ------
Foreclosed real estate, net $ 1,299 $ 2,090
====== ======
</TABLE>
The following is a summary of the changes in the allowance for losses on
foreclosed real estate:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1995 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 1,282 $ 1,082 $ 739
Provision for losses 100 200 300
Charge-offs (41) -- (7)
Transfer from allowance for loan losses -- -- 50
------ ------ ------
Balance at end of year $ 1,341 $ 1,282 $ 1,082
====== ====== ======
</TABLE>
The following is a summary of loss on foreclosed real estate, net:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
--------------- ----------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Holding costs $ 152 $ 126 $ 138
Provision for losses 100 200 300
Gain on sales (102) (27) (74)
----- ----- -----
$ 150 $ 299 $ 364
===== ===== =====
</TABLE>
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 totaled approximately $35,000,000, $28,400,000 and $28,000,000
as of February 28, 1997, February 29, 1996 and February 28, 1995,
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 at both
February 28, 1997 and February 29, 1996.
NOTE 7--ACCRUED INTEREST RECEIVABLE:
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Securities $ 787 $ 709
Loans receivable 5,234 5,300
------ ------
Total $ 6,021 $ 6,009
====== ======
</TABLE>
NOTE 8--PREMISES AND EQUIPMENT:
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Land $ 1,237 $ 1,237
Buildings and improvements 2,767 2,746
Furniture and equipment 7,977 7,554
Leasehold improvements 1,123 1,123
Automobiles 105 98
------ ------
Total premises and equipment 13,209 12,758
Less accumulated depreciation and amortization 8,633 7,929
------ ------
Premises and equipment, net $ 4,576 $ 4,829
====== ======
</TABLE>
22
<PAGE>
NOTE 9 - DEPOSITS:
The following is a summary of deposits:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RATE AT FEBRUARY 28, 1997 FEBRUARY 29, 1996
FEBRUARY 28, -------------------- --------------------
1997 AMOUNT PERCENT AMOUNT PERCENT
------------ -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Demand and checking
accounts, including
noninterest-bearing
deposits of $16,814,000
and $11,382,000 at
February 28, 1997 and
February 29, 1996,
respectively 1.45% $ 53,937 6.84% $ 44,497 5.64%
Money market 3.10% 42,385 5.37% 45,315 5.74%
Statement savings 3.22% 74,488 9.44% 76,514 9.70%
-------- --------- -------- ---------
170,810 21.65% 166,326 21.08%
-------- --------- -------- ---------
Certificates of deposit:
6.00% or less 529,859 67.16% 409,249 51.87%
6.01% to 8.00% 86,964 11.02% 211,282 26.78%
8.01% to 10.00% 1,292 .16% 1,756 .22%
10.01% to 12.00% 8 .01% 318 .05%
-------- --------- -------- ---------
5.45% 618,123 78.35% 622,605 78.92%
-------- --------- -------- ---------
Total 4.84% $788,933 100.00% $788,931 100.00%
======== ========= ======== =========
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100,000 was approximately $88,600,000 and
$116,300,000 at February 28, 1997 and February 29, 1996, respectively.
At February 28, 1997, 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)
1998 $441,309 $23,642 $ 874 $-- $465,825
1999 52,626 38,602 150 8 91,386
2000 27,930 21,387 236 -- 49,553
2001 7,441 3,173 32 -- 10,646
2002 536 26 -- -- 562
Thereafter 17 134 -- -- 151
--------- ---------- ---------- ----------- ---------
Total $529,859 $86,964 $1,292 $ 8 $618,123
========= ========== ========== =========== =========
The following is a summary of interest expense on deposits:
YEAR ENDED
--------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
Checking $ 730 $ 760 $ 840
Money market 1,304 1,393 1,698
Statement savings 2,429 2,686 4,134
Certificates of deposit 34,329 35,059 23,558
------------ ------------ ------------
Total $38,792 $39,898 $30,230
============ ============ ============
NOTE 10 - ADVANCES FROM FEDERAL HOME LOAN BANK OF ATLANTA:
At February 28, 1997, advances from the 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 28, 1997:
WEIGHTED
FISCAL AVERAGE
YEAR AMOUNT RATE
------ -------- -------
(DOLLARS IN THOUSANDS)
1998 $136,100 5.83%
1999 78,500 5.99%
2000 11,000 6.23%
After 2002 680 6.50%
--------
Total $226,280 5.91%
========
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:
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 28, FEBRUARY 29,
1997 1996
------------ ------------
(IN THOUSANDS)
Deferred tax liabilities:
Federal Home Loan Bank stock dividends $1,317 $1,317
Allowance for losses on loans and
foreclosed real estate -- 50
Unrealized holding gains 1,782 1,559
------------ ------------
Total deferred tax liabilities 3,099 2,926
------------ ------------
Deferred tax assets:
Loan fees 216 848
Allowance for losses on loans and
foreclosed real estate 408 --
Other 633 640
------------ ------------
Total deferred tax assets 1,257 1,488
------------ ------------
Net deferred tax liabilities $1,842 $1,438
============ ============
Pursuant to legislation enacted in 1996, the Association is not permitted to
use the reserve method previously available to thrift institutions to compute
its tax bad debt deduction for tax years beginning after December 31, 1995.
Under the provisions of this legislation, the Association will recapture its
post 1987 tax bad debt reserves in excess of actual specific bad debts
ratably over a six-year period beginning with fiscal 1997. The Association
has previously provided for deferred taxes on its post 1987 tax bad debt
reserves; therefore, this legislation will not affect the Association's net
income.
The Association has not provided a deferred tax liability on bad debt
reserves for tax purposes that arose in fiscal years beginning before
December 31, 1987. Such bad debt reserves for the Association amounted to
approximately $11,000,000 with an income tax effect of approximately
$4,200,000 at February 28, 1997. This bad debt reserve will become taxable
for income tax purposes if the Association does not maintain certain
qualified assets as defined or the reserve is charged for other than bad debt
losses.
The components of income tax expense are as follows:
YEAR ENDED
-------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
Current $1,313 $6,500 $5,886
Deferred 181 (970) (211)
------------ ------------ ------------
Total $1,494 $5,530 $5,675
============ ============ ============
Income tax expense differs from that computed at the statutory Federal income
tax rate as follows:
YEAR ENDED
-------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Statutory Federal income tax rate 34% 35% 35%
Income tax expense at
statutory rate $2,726 $4,994 $5,158
Increase (decrease) in taxes:
State taxes, net of Federal
income tax benefit 365 649 664
Other (1,597) (113) (147)
------------ ------------ ------------
Total $1,494 $5,530 $5,675
============ ============ ============
Income tax expense for fiscal 1997 reflects a $1.6 million decrease to revise
prior estimates in recording the income tax provision.
23
<PAGE>
NOTE 12--OTHER NONINTEREST EXPENSE:
Other noninterest expense amounts are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Printing, postage, stationery and supplies $ 1,302 $ 1,313 $ 1,529
Professional fees 414 339 327
Telephone 332 314 273
Other 1,711 1,995 1,369
------ ------ ------
Total $ 3,759 $ 3,961 $ 3,498
====== ====== ======
</TABLE>
NOTE 13--REGULATORY MATTERS:
The Association is subject to various regulatory capital requirements
administered by federal regulatory agencies. Failure to meet minimum capital
requirements can initiate certain regulatory actions that could have a direct
material effect on the consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Association must meet specific capital guidelines that involve
quantitative measures of the Association's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Association's capital amounts and classifications are also subject to
quantitative judgments by the regulators regarding components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth in
the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to adjusted total assets (as defined). Management believes, as of
February 28, 1997, that the Association meets all capital requirements to
which it is subject.
The most recent notification from the Office of Thrift Supervision ("OTS")
categorized the Association as well capitalized under the regulatory
framework for prompt corrective action. To be well capitalized under the
prompt corrective action provisions, the Association must maintain capital
ratios as set forth in the following table. There are no conditions or events
since that notification that management believes have changed the
Association's category.
The Association's capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
TO BE
WELL
CAPITALIZED
UNDER
PROMPT
FOR CORRECTIVE
CAPITAL ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
-------------------- ---------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- ----- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of February 28, 1997:
Total capital (to risk-weighted assets) $ 92,199 15.30% $ 48,184 8.00% $ 60,260 10.00%
Tier 1 capital (to risk-weighted assets) 87,600 14.54% N/A N/ A 36,156 6.00%
Tier 1 capital (to adjusted total assets) 87,600 7.72% 34,040 3.00% 56,736 5.00%
Tangible capital (to adjusted total assets) 87,600 7.72% 17,020 1.50% N/A N/A
As of February 29, 1996:
Total capital (to risk-weighted assets) 88,583 15.02% 47,195 8.00% 58,977 10.00%
Tier 1 capital (to risk-weighted assets) 84,159 14.27% N/A N/ A 35,386 6.00%
Tier 1 capital (to adjusted total assets) 84,159 7.37% 34,250 3.00% 57,096 5.00%
Tangible capital (to adjusted total assets) 84,159 7.37% 17,125 1.50% N/A N/A
</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.
Legislation was enacted September 30, 1996, to mitigate the disparity between
banks insured by the Bank Insurance Fund and thrifts insured by the Savings
Association Insurance Fund ("SAIF"), which were required to pay substantially
higher deposit insurance premiums. This legislation recapitalized the SAIF
through a one-time special assessment. The Association's pro-rata share of
this one-time special assessment was $5.1 million before taxes and was
recognized in fiscal 1997. This legislation also provides for a reduction in
deposit insurance premiums in subsequent periods and other regulatory reforms.
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 28, 1997, 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 28, FEBRUARY 29,
1997 1996
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested benefits $ 4,131 $ 3,476
Nonvested benefits 225 187
------------ ------------
4,356 3,663
Effect of projected future compensation 2,279 2,467
------------ ------------
Projected benefit obligation 6,635 6,130
Fair value of assets held in the plan 3,740 2,895
------------ ------------
Plan assets less than the projected benefit obligation (2,895) (3,235)
Net unrecognized loss from past experience different from that
assumed 1,737 1,674
Unrecognized prior service cost (444) 43
Unrecognized net transition asset (236) (250)
------------ ------------
Accrued pension cost (included in accrued expenses and other
liabilities) $ (1,838) $ (1,768)
============ ============
</TABLE>
Components of net pension expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
--------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned $ 610 $ 571 $ 484
Interest cost on projected benefit obligation 429 363 363
Actual return on assets held in the plan (354) (448) (436)
Net amortization and deferral 86 (7) (12)
----- ----- -----
Net pension expense $ 771 $ 479 $ 399
===== ===== =====
</TABLE>
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 1997, 1996 and 1995 was $121,000, $106,000 and $110,000,
respectively.
During fiscal 1997, the Board of Directors approved a deferred compensation
plan for certain management personnel. Amounts deferred under this plan are
expensed as earned, but are payable only after employment has ended.
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 approximately $1,111,000, $1,066,000 and
$901,000 for fiscal 1997, 1996 and 1995, respectively.
The total commitments for future minimum annual rental payments for real
property and equipment leases are as follows as of February 28, 1997:
<TABLE>
<CAPTION>
FISCAL YEAR Amount
- --------------- --------------
(In Thousands)
<S> <C>
1998 $ 1,115
1999 867
2000 448
2001 337
2002 236
Thereafter 154
------
Total $ 3,157
======
</TABLE>
Loan Commitments:
As of February 28, 1997 and February 29, 1996, the Association had
commitments to originate and purchase loans totaling approximately
$51,500,000 and $64,000,000, respectively. As of February 28, 1997 and
February 29, 1996, the Association had commitments to sell loans totaling
approximately $6,800,000 and $33,300,000, 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 $1,512,000 and $1,799,000 as of February 28, 1997 and February
29, 1996, respectively. During fiscal 1997, $108,000 were advanced and
$395,000 were repaid with respect to these loans. During fiscal 1996,
$396,000 were advanced and $236,000 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 1997, 1996 and 1995, the firm received fees of
$410,000, $323,000 and $187,000, 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 166,720 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
4,310 shares at a price of $22.13 and 4,208 shares at a price of $24.33 in
fiscal 1997, 4,006 shares at a price of $26.83 and 3,356 shares at a price of
$20.19 in fiscal 1996, and 3,332 shares at a price of $22.53 per share and
4,122 shares at a price of $20.19 in fiscal 1995. The total number of shares
remaining at the end of fiscal 1997 amounted to 90,459 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 28, 1997, 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 156,000 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 28,
1997, options have been granted to purchase 103,500 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 160,160
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 28, 1997,
options have been granted to purchase 160,160 shares.
The following table summarizes information on these stock option plans:
<TABLE>
<CAPTION>
Weighted
Average
Price
Per Share Shares
----------- ----------
<S> <C> <C>
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
Adjustment for stock dividend -- 17,765
Granted 36.13 80,400
Exercised 17.14 (114,948)
Canceled 24.34 (9,482)
----------
Outstanding at February 28, 1997 27.05 346,733
==========
Exercisable at February 28, 1997 24.36 146,842
==========
</TABLE>
Had compensation cost been determined on the basis of fair value pursuant to
SFAS 123, net income and primary earnings per share would have been as
follows:
<TABLE>
<CAPTION>
Year Ended
--------------------------
February 28, February 29,
1997 1996
------------ ------------
(Dollars in Thousands,
Except Per Share Data)
<S> <C> <C>
Net income as reported $ 6,525 $ 8,739
Pro forma net income 6,338 8,650
Primary earnings per share as reported 2.00 2.63
Pro forma primary earnings per share 1.96 2.62
Weighted-average assumptions:
Risk-free interest rate 6.43% 5.65%
Expected life 8 years 5 years
Expected volatility of stock price 12.50% 11.00%
Expected dividends 2.00% 2.00%
</TABLE>
The range of exercise prices for the stock options outstanding at February
28, 1997, is $21.07 to $37.50, with a weighted-average contractual life of
approximately six years.
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes option-pricing model. The weighted-average fair value
of stock options granted during fiscal 1997 and 1996 is $9.65 and $4.84,
respectively. The method of accounting for options prescribed by SFAS 123
does not apply to options granted prior to January 1, 1995, and accordingly,
the resulting pro forma compensation costs may not be representative of that
to be expected in future years.
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.
25
<PAGE>
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 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:
<TABLE>
<CAPTION>
February 28, February 29,
1997 1996
------------ ------------
(In Thousands)
<S> <C> <C>
Financial instruments whose contract amounts represent credit
risk:
Commitments to extend credit $ 104,176 $ 91,868
Standby letters of credit 1,978 1,962
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended
----------------------------------------
February 28, February 29, February 28,
1997 1996 1995
------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C>
Cash paid for:
Interest $ 52,328 $ 52,144 $ 38,480
Income taxes 1,603 5,422 5,020
Transfer from loans to foreclosed real estate 1,229 281 632
Loans to finance sales of foreclosed real estate 544 208 360
</TABLE>
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 Federal Funds Sold 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:
<TABLE>
<CAPTION>
February 28, 1997 February 29, 1996
---------------------- ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- ----------- --------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 10,939 $ 10,939 $ 22,905 $ 22,905
Federal funds sold and securities purchased under agreements to
resell 17,665 17,665 16,092 16,092
Securities available for sale 69,360 69,360 74,791 74,791
Securities held to maturity 11,448 11,417 10,072 10,007
Loans held for sale 2,679 2,697 16,296 16,399
Loans receivable, net 989,273 978,464 974,888 976,105
Financial liabilities:
Deposits 788,933 764,973 788,931 778,970
Advances from FHLB 226,280 225,582 243,780 243,612
Off-balance-sheet instruments:
Commitments to extend credit -- 1,053 -- 557
Standby letters of credit -- 40 -- 39
</TABLE>
26
<PAGE>
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)
<TABLE>
<CAPTION>
February 28, February 29,
1997 1996
------------ ------------
(In Thousands)
<S> <C> <C>
ASSETS:
Cash $ 3,838 $ 792
Investment in subsidiary 91,716 88,147
Securities available for sale 512 5,604
Other assets 505 --
------------ ------------
Total assets $ 96,571 $ 94,543
============ ============
LIABILITIES: $ 1,310 $ 561
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock 41 38
Additional paid-in capital 42,625 34,917
Retained earnings 66,976 67,492
Unrealized holding gains, net 2,835 2,420
Treasury stock, at cost (17,216) (10,885)
------------ ------------
Total stockholders' equity 95,261 93,982
------------ ------------
Total liabilities and stockholders' equity $ 96,571 $ 94,543
============ ============
</TABLE>
Condensed Statements of Income
(Parent Company Only)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------
February 28, February 29, February 28,
1997 1996 1995
------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C>
Advisory fee income $ 160 $ 160 $ 160
Interest income 120 92 74
General and administrative expenses 228 87 97
------ ------ ------
Income before income taxes and equity in net income of subsidiary 52 165 137
Income tax expense 19 58 53
------ ------ ------
Income before equity in net income of subsidiary 33 107 84
Equity in net income of subsidiary 6,492 8,632 8,979
------ ------ ------
NET INCOME $ 6,525 $ 8,739 $ 9,063
====== ====== ======
</TABLE>
Condensed Statements of Cash Flows
(Parent Company Only)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------
February 28, February 29, February 28,
1997 1996 1995
------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,525 $ 8,739 $ 9,063
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in net income of subsidiary, net of distributions (2,492) (3,632) (5,979)
Decrease (increase) in other assets (505) 31 (20)
Increase (decrease) in liabilities 610 15 (14)
------ ------ ------
Net cash provided by operating activities 4,138 5,153 3,050
------ ------ ------
INVESTING ACTIVITIES:
Purchases of securities available for sale (1,020) (4,541) (319)
Proceeds from maturities of securities available for sale 6,112 -- 1,635
------ ------ ------
Net cash provided by (used in) investing activities 5,092 (4,541) 1,316
------ ------ ------
FINANCING ACTIVITIES:
Proceeds from issuance of stock under stock plans 2,177 1,124 943
Cash paid in lieu of stock dividend for fractional shares (11) -- --
Purchase of treasury stock (6,331) -- (3,448)
Cash dividends paid (2,019) (1,660) (1,363)
------ ------ ------
Net cash used in financing activities (6,184) (536) (3,868)
------ ------ ------
INCREASE IN CASH 3,046 76 498
CASH:
Beginning of year 792 716 218
------ ------ ------
End of year $ 3,838 $ 792 $ 716
====== ====== ======
</TABLE>
27
<PAGE>
NOTE 25--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following table presents selected quarterly financial data for the years
ended February 28, 1997 and February 29, 1996:
<TABLE>
<CAPTION>
Year Ended February 28, 1997
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income $ 20,657 $ 20,445 $ 20,419 $ 20,368
Interest expense 13,461 13,002 12,970 12,772
--------- --------- --------- ---------
Net interest income 7,196 7,443 7,449 7,596
Provision for loan losses 85 60 50 80
--------- --------- --------- ---------
Net interest income after provision for loan losses 7,111 7,383 7,399 7,516
Noninterest income 736 649 664 696
SAIF recapitalization assessment -- -- 5,077 --
Other noninterest expense 4,771 4,829 4,809 4,649
--------- --------- --------- ---------
Income (loss) before income taxes 3,076 3,203 (1,823) 3,563
Income tax expense (benefit) 1,178 1,283 (2,310) 1,343
--------- --------- --------- ---------
Net income $ 1,898 $ 1,920 $ 487 $ 2,220
========= ========= ========= =========
Primary earnings per share $ .56 $ .58 $ .16 $ .70
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended February 29, 1996
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
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 $ .55 $ .71 $ .83 $ .54
========= ========= ========= =========
</TABLE>
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 28,
1997 and February 29, 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the years in the
three-year period ended February 28, 1997. 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 28, 1997 and February 29,
1996, and the results of their operations and their cash flows for each of
the years in the three-year period ended February 28, 1997, in conformity
with generally accepted accounting principles.
STOY, MALONE & COMPANY, P.C.
Bethesda, Maryland
April 7, 1997
28
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Directors and Officers General
Information For
Board of Directors Shareholders
Richard B. Bland Annual Meeting
Chairman of the Board, General Counsel to the The Annual Meeting of Shareholders of
Association and Senior Partner of Lancaster, Bland, Maryland Federal Bancorp, Inc. will be
Eisele & Herring held at La Fontaine Bleu, 7963 Annapolis
Road, Lanham, Maryland, on June 18
Robert H. Halleck 1997. A formal notice of the Meeting,
President, Maryland Federal Bancorp, Inc. and together with a proxy statement and a
Maryland Federal Savings and Loan Association proxy form, will be mailed to shareholders.
A. William Blake, Jr. Transfer Agent and Registrar
Executive Vice President, Registrar and Transfer Company
Maryland Federal Bancorp, Inc. and 10 Commerce Drive
Maryland Federal Savings and Loan Association Cranford, New Jersey 07016
Richard R. Mace Independent Auditors
Self-employed as a sporting goods dealer Stoy, Malone & Company, P.C.
7315 Wisconsin Avenue
David A. McNamee Bethesda, Maryland 20814
President, McNamee, Hosea, Jernigan and Kim, P.A.
General Counsel
Thomas H. Welsh, III Lancaster, Bland, Eisele & Herring
Self-employed as a real estate developer and builder 9450 Pennsylvania Avenue - Unit 20
Upper Marlboro, Maryland 20772
</TABLE>
<TABLE>
<S> <C> <C> <C>
Corporate Senior Vice Presidents Assistant Secretaries Special Counsel
Officers David E. Baker Margaret R. Campbell Elias, Matz, Tiernan & Herrick, L.L.P.
Maryland Federal Nancy B. Cohen Carol J. Downs 734 15th Street, N.W.
Bancorp, Inc. Ronald R. O'Brien Elfrieda Y. McDaniel Washington, D.C. 20005
J. Diane Stevenson Janet L. Norris
President Shareholder and General Inquiries
Robert H. Halleck Secretary Assistant Treasurers Mr. Robert H. Halleck
Sarah M. Costlow James P. Baker President
Executive Vice President Wilhelma L. Christian Maryland Federal Bancorp, Inc.
A. William Blake, Jr. Vice Presidents Lawrence E. DeHof 3505 Hamilton Street
Lorraine H. Blancke Dolores M. Dubich Hyattsville, MD 20782
Senior Vice President and Charlotte P. Krintz Susie L. Edwards (301) 779-1200
Chief Financial Officer Dennis C. McAdoo Linda Ericksen
Lynn B. Hounslow Marvette M. Monroe Stephanie T. Jones Stock Listing
Belinda G. Norton Keith C. Loughery The common stock of Maryland Federal
Secretary Ann C. Wiltbank Debbie L. Mancuso Bancorp, Inc. is listed on the over-the-
Sarah M. Costlow Mark J. Woolson Donna L. McGehee counter market and quoted on the
Jamie R. Murdock NASDAQ National Market System under
Maryland Federal Savings Assistant Vice Presidents Bonita J. Pieper the symbol "MFSL". As of April 5, 1997,
and Loan Association Cynthia A. Brentlinger Megan J. Stevens there were 4,109,911 shares issued, of
Phillip Burrows Michael J. Thompson which 3,204,485 were outstanding.
President Vivian E. Davis Leroy T. Tillery II
Robert H. Halleck William T. Evinger The following table sets forth market price
Patricia Garcia Auditor information for the common stock of the
Executive Vice President B. Gwen Henderson Laurie A. Zebrowski Company for the periods indicated.
A. William Blake, Jr. Perry A. Johnson
Hilde H. Kochanek Fiscal Quarter Ended High Low
Senior Vice President William O'Rourke May 31, 1995 35 23-5/8
and Treasurer Mark A. Weber August 31, 1995 34-7/8 30-1/4
Clarice M. George Amy Woreta November 30, 1995 33-1/4 29
February 29, 1996 32-1/2 30
Senior Vice President and Fiscal Quarter Ended High Low
Comptroller May 31, 1996 30-3/8 29-1/4
Lynn B. Hounstow August 31, 1996 30-1/2 28
November 30, 1996 34-5/8 29-1/2
February 28, 1997 38-3/4 32-3/4
As of April 25, 1997, 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.
</TABLE>
29
<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 7, 1997, relating to the consolidated statements of
financial condition of Maryland Federal Bancorp, Inc. and Subsidiary as of
February 28, 1997 and February 29, 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the
years in the three-year period ended February 28, 1997, which report appears
in the February 28, 1997 annual report on Form 10-K of Maryland Federal
Bancorp, Inc.
/s/ Stoy, Malone & Company, P.C.
Bethesda, Maryland
May 22, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 2,558
<INT-BEARING-DEPOSITS> 8,381
<FED-FUNDS-SOLD> 17,665
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,360
<INVESTMENTS-CARRYING> 11,448
<INVESTMENTS-MARKET> 11,417
<LOANS> 991,952
<ALLOWANCE> 4,599
<TOTAL-ASSETS> 1,128,483
<DEPOSITS> 788,933
<SHORT-TERM> 145,174
<LIABILITIES-OTHER> 8,935
<LONG-TERM> 90,180
0
0
<COMMON> 41
<OTHER-SE> 95,220
<TOTAL-LIABILITIES-AND-EQUITY> 1,128,483
<INTEREST-LOAN> 74,328
<INTEREST-INVEST> 5,154
<INTEREST-OTHER> 2,407
<INTEREST-TOTAL> 81,889
<INTEREST-DEPOSIT> 38,792
<INTEREST-EXPENSE> 52,205
<INTEREST-INCOME-NET> 29,684
<LOAN-LOSSES> 275
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 24,135
<INCOME-PRETAX> 8,019
<INCOME-PRE-EXTRAORDINARY> 6,525
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,525
<EPS-PRIMARY> 2.00
<EPS-DILUTED> 2.00
<YIELD-ACTUAL> 2.67
<LOANS-NON> 2,990
<LOANS-PAST> 1,640
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 9,801
<ALLOWANCE-OPEN> 4,474
<CHARGE-OFFS> 166
<RECOVERIES> 16
<ALLOWANCE-CLOSE> 4,599
<ALLOWANCE-DOMESTIC> 4,599
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,599
</TABLE>
