<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3505 Hamilton Street, Hyattsville, MD. 20782
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(Address of principal executive office) (Zip Code)
Registrant's telephone number,
including area code: (301) 779-1200
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO_____
Number of Shares of Common Stock Outstanding as of
January 8, 1998
Title of Class Number of Shares Outstanding
-------------------- ----------------------------
Common Stock ($.01 6,481,262 Shares
par value per share)
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION: PAGE
------
Item 1. Financial Statements:
Consolidated Statements of Financial
Condition as of November 30, 1997 and
February 28, 1997 1
Consolidated Statements of Income and
Retained Earnings for the nine and three
months ended November 30, 1997 and 1996 2
Consolidated Statements of Cash Flows for
the nine months ended November 30, 1997 and
1996 3
Notes to Consolidated Financial Statements 4-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7-15
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 15
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security
Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
1997 1997
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
ASSETS
Cash and due from banks.............................................................. $ 9,136 $ 2,558
Interest-bearing deposits with banks................................................. 42,671 8,381
Federal funds sold and securities purchased under agreements to resell............... 17,288 17,665
Securities available for sale........................................................ 71,928 69,360
Securities held to maturity (fair value, $23,451,000 and $11,417,000,
respectively)...................................................................... 23,438 11,448
Loans held for sale, at cost......................................................... 6,243 2,679
Loans receivable, net................................................................ 984,858 989,273
Accrued interest receivable.......................................................... 6,355 6,021
Federal Home Loan Bank stock, at cost................................................ 12,547 11,364
Foreclosed real estate, net.......................................................... 1,532 1,299
Premises and equipment, net.......................................................... 4,870 4,576
Other assets......................................................................... 3,428 3,859
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Total assets................................................................. $1,184,294 $ 1,128,483
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits............................................................................. $ 823,915 $ 788,933
Advances from Federal Home Loan Bank of Atlanta...................................... 241,930 226,280
Advances from borrowers for taxes and insurance...................................... 4,105 9,074
Income taxes......................................................................... 1,511 1,898
Accrued expenses and other liabilities............................................... 10,249 7,037
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Total liabilities............................................................ 1,081,710 1,033,222
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STOCKHOLDERS' EQUITY
Preferred stock; 10,000,000 shares authorized; none issued........................... -- --
Common stock; $.01 par value; 15,000,000 shares authorized; 8,286,714 and 4,093,576
shares issued, respectively........................................................ 83 41
Additional paid-in capital........................................................... 44,083 42,625
Retained earnings, substantially restricted.......................................... 72,232 66,976
Unrealized holding gains, net........................................................ 4,206 2,835
Treasury stock, at cost; 1,810,852 shares and 883,426 shares, respectively........... (18,020) (17,216)
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Total stockholders' equity..................................................... 102,584 95,261
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Total liabilities and stockholders' equity................................... $1,184,294 $ 1,128,483
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</TABLE>
See Notes to Consolidated Financial Statements.
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MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable:
First mortgage loans............................................ $ 50,175 $ 50,589 $ 16,651 $ 16,743
Consumer and other loans........................................ 7,042 5,160 2,507 1,867
Securities available for sale and held to maturity................ 3,869 3,931 1,348 1,222
Other interest-earning assets..................................... 2,513 1,841 989 587
--------- --------- --------- ---------
Total interest income......................................... 63,599 61,521 21,495 20,419
--------- --------- --------- ---------
Interest expense:
Deposits.......................................................... 29,947 29,258 10,087 9,685
Advances from Federal Home Loan Bank of Atlanta................... 10,303 10,152 3,502 3,282
Advances from borrowers for taxes and insurance................... 18 23 1 3
--------- --------- --------- ---------
Total interest expense........................................ 40,268 39,433 13,590 12,970
--------- --------- --------- ---------
Net interest income................................................... 23,331 22,088 7,905 7,449
Provision for loan losses............................................. 160 195 30 50
--------- --------- --------- ---------
Net interest income after provision for loan losses................... 23,171 21,893 7,875 7,399
--------- --------- --------- ---------
Noninterest income:
Banking service charges and fees.................................. 1,631 1,213 556 461
Loan fees and service charges..................................... 341 257 152 83
Gain on sales of first mortgage loans............................. 440 501 271 115
Gain on sales of securities....................................... 165 -- -- --
Other............................................................. 94 78 45 5
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Total noninterest income...................................... 2,671 2,049 1,024 664
--------- --------- --------- ---------
Noninterest expense:
Compensation and benefits......................................... 7,634 7,474 2,652 2,511
Occupancy and equipment........................................... 2,323 2,271 805 770
SAIF recapitalization assessment.................................. -- 5,077 -- 5,077
Federal deposit insurance premiums................................ 386 1,294 129 389
Loss on foreclosed real estate, net............................... 83 101 49 60
Advertising....................................................... 451 434 129 108
Other............................................................. 3,045 2,835 1,003 971
--------- --------- --------- ---------
Total noninterest expense..................................... 13,922 19,486 4,767 9,886
--------- --------- --------- ---------
Income (loss) before income taxes..................................... 11,920 4,456 4,132 (1,823)
Income tax expense (benefit).......................................... 4,617 151 1,606 (2,310)
--------- --------- --------- ---------
NET INCOME............................................................ 7,303 4,305 2,526 487
Retained earnings, substantially restricted:
Balance, beginning of period...................................... 66,976 67,492 70,435 70,311
Stock dividends................................................... -- (4,884) -- (4,884)
Cash dividends.................................................... (2,047) (1,515) (729) (516)
--------- --------- --------- ---------
Balance, end of period............................................ $ 72,232 $ 65,398 $ 72,232 $ 65,398
--------- --------- --------- ---------
--------- --------- --------- ---------
Primary earnings per share............................................ $ 1.10 $ .65 $ .38 $ .08
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NOVEMBER 30,
----------------------
1997 1996
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(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.............................................................................. $ 7,303 $ 4,305
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization:
Premises and equipment.............................................................. 618 660
Other............................................................................... (813) (856)
Loans originated for sale............................................................. (59,110) (54,529)
Sale of loans originated for sale..................................................... 55,546 67,191
Provision for losses on loans and foreclosed real estate.............................. 300 235
Gain on sales of securities........................................................... (165) --
Gain on sales of foreclosed real estate............................................... (127) (55)
Deferred income taxes................................................................. (897) 309
Tax benefits relating to stock options................................................ 305 119
Decrease (increase) in:
Accrued interest receivable......................................................... (334) 15
Other assets........................................................................ 216 (2,002)
Increase (decrease) in:
Current income taxes payable........................................................ (315) (525)
Accrued expenses and other liabilities.............................................. 3,126 1,428
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Net cash provided by operating activities....................................... 5,653 16,295
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INVESTING ACTIVITIES:
Loans originated........................................................................ (124,890) (93,847)
Principal collected on loans............................................................ 128,436 83,749
Purchases of securities:
Available for sale.................................................................... (15,088) (3,985)
Held to maturity...................................................................... (18,965) (12,870)
Principal collected on mortgage-backed and related securities........................... 8,438 8,831
Proceeds from maturities of securities:
Available for sale.................................................................... 620 5,293
Held to maturity...................................................................... 7,000 11,000
Proceeds from sales of securities....................................................... 5,902 --
Net decrease in federal funds sold and securities purchased under agreements to
resell................................................................................ 377 762
Decrease (increase) in Federal Home Loan Bank stock..................................... (1,183) 1,237
Proceeds from sales of foreclosed real estate........................................... 1,387 1,162
Purchases of premises and equipment..................................................... (912) (597)
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Net cash provided by (used in) investing activities............................. (8,878) 735
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FINANCING ACTIVITIES:
Net increase in deposits................................................................ 34,982 13,168
Proceeds from Federal Home Loan Bank advances........................................... 106,100 92,000
Principal payments on Federal Home Loan Bank advances................................... (90,450) (113,750)
Net decrease in advances from borrowers for taxes and insurance......................... (4,969) (4,993)
Proceeds from issuance of stock under stock plans....................................... 1,195 650
Purchase of treasury stock.............................................................. (804) (5,880)
Cash dividends paid..................................................................... (1,961) (1,502)
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Net cash provided by (used in) financing activities............................. 44,093 (20,307)
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................................... 40,868 (3,277)
CASH AND CASH EQUIVALENTS:
Beginning of period..................................................................... 10,939 22,905
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End of period........................................................................... $ 51,807 $ 19,628
---------- ----------
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</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
In the opinion of the management of Maryland Federal Bancorp, Inc.
(the "Company"), the accompanying unaudited consolidated financial statements
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the Company's financial condition as of
November 30, 1997, and the results of its operations for the nine and three
months ended November 30, 1997 and 1996, and cash flows for the nine months
ended November 30, 1997 and 1996. These financial statements should be read
in conjunction with the consolidated financial statements and notes included
in Maryland Federal Bancorp, Inc. and Subsidiary's annual report for the
fiscal year ended February 28, 1997. The results of operations for the
period ended November 30, 1997 are not necessarily indicative of the
operating results which may be achieved for the full fiscal year.
NOTE 2 - TWO-FOR-ONE STOCK SPLIT:
On October 17, 1997, the Board of Directors declared a two-for-one split
of the Company's common stock, effected in the form of a 100 percent stock
dividend paid on November 21, 1997, to shareholders of record at the close of
business on November 7, 1997. Par value remains at $.01 per share as a result
of transferring $41,425 to common stock from additional paid-in capital,
representing the aggregate par value of the shares issued under the stock
split. All historical weighted average share and per share amounts have been
restated to reflect the stock split. Share amounts presented in the
Consolidated Statements of Financial Condition reflect the actual share
amounts outstanding for each period presented.
NOTE 3 - EARNINGS PER SHARE:
Primary earnings per share for the nine months ended November 30, 1997
and 1996 are computed based on the weighted-average number of shares actually
outstanding, as adjusted for applicable stock dividends and stock splits,
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
period. The number of shares used in the computations of primary earnings
per share was 6,661,333 and 6,644,418 for the nine months ended November 30,
1997 and 1996, respectively.
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The Company has not separately reported fully diluted earnings per share
since the amounts are not materially different from primary earnings per
share.
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"). SFAS 128 specifies the computation, presentation, and
disclosure requirements for earnings per share ("EPS") for entities with
publicly-held common stock, effective for periods ending after December 15,
1997. It replaces Primary EPS and Fully Diluted EPS with Basic EPS and
Diluted EPS, respectively. The impact of implementation is not quantified;
however, the Company expects upon adoption, Basic EPS will be slightly higher
than Primary EPS and Diluted EPS will be approximately the same as Fully
Diluted EPS.
NOTE 4 - COMMON STOCK ISSUED:
During the nine months ended November 30, 1997, 47,209 shares were
issued at an average of $23.18 per share ($1,094,000) as a result of stock
options being exercised. During the nine months ended November 30, 1996,
28,212 shares were issued at an average of $19.31 per share ($545,000) as a
result of stock options being exercised. In addition, 3,422 shares were
issued at $29.32 per share ($100,000) and 4,310 shares were issued at $24.33
per share ($105,000) through Maryland Federal Bank's (which changed its name
from Maryland Federal Savings and Loan Association effective September 21,
1997) Employee Stock Purchase Plan during the nine months ended November 30,
1997 and 1996, respectively.
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") and
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
establishes standards for the reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements.
SFAS 131 specifies the presentation and disclosure of operating segment
information reported in the annual report and interim reports issued to
stockholders. The provisions of both statements will be effective for fiscal
years beginning after December 15, 1997. The management of the Company
believes that the adoption of these statements will not have a material
impact on the Company's financial position, results of operations, or
liquidity.
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<PAGE>
NOTE 6 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Nine Months Ended
November 30,
--------------------
1997 1996
-------- -------
(In Thousands)
Cash paid for:
Interest.................... $39,609 $38,476
Income taxes............... 5,173 1,482
NOTE 7 - RECLASSIFICATIONS:
Certain amounts for the nine and three months ended November 30,
1996 have been reclassified for comparative purposes.
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<PAGE>
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Maryland Federal Bancorp, Inc. (the "Company") is the unitary savings
and loan holding company of Maryland Federal Bank (the "Bank", which changed
its name from Maryland Federal Savings and Loan Association effective
September 21, 1997) and its subsidiary. The Company and the Bank are
sometimes collectively referred to as "Maryland Federal." The Company
currently owns 100% of the issued and outstanding common stock of the Bank,
which is the principal asset of the Company. The Company does not presently
own or operate any subsidiaries other than the Bank and its subsidiary.
Maryland Federal's earnings are primarily dependent upon its net
interest income, which is determined by the Bank's interest rate spread
(i.e., the difference between the yields earned on its interest-earning
assets and the rates paid on its interest-bearing liabilities) and the
relative amounts of its interest-earning assets and interest-bearing
liabilities. The Bank's net income is also affected by the level of its
noninterest income, provision for estimated losses on loans and noninterest
expense.
Deposit flows and the cost of funds are influenced by interest rates on
competing investments and general market rates of interest. Lending
activities are affected by consumer demand, the interest rate environment,
and the availability of funds.
FINANCIAL CONDITION
Assets. Total assets as of November 30, 1997 increased $55.8 million or
4.9% to $1.18 billion as compared to February 28, 1997. This increase was
primarily due to increases of $6.6 million or 257.2% in cash and due from
banks, $34.3 million or 409.1% in interest-bearing deposits with banks, $2.6
million or 3.7% in securities available for sale, $12.0 million or 104.7% in
securities held to maturity and $1.2 million or 10.4% in Federal Home Loan
Bank stock, at cost. These increases were partially offset by an $851,000 or
0.1% decrease in loans receivable, net (including loans held for sale). The
increases in cash and due from banks and interest-bearing deposits with banks
were due to management's decision to grow the Bank's short-term liquidity in
the form of such assets.
Liabilities. Total liabilities as of November 30, 1997 increased $48.5
million or 4.7% to $1.08 billion as compared to February 28, 1997. This
increase was primarily due to increases of $35.0 million or 4.4% in deposits,
$15.7 million or 6.9% in advances from the Federal Home Loan Bank of Atlanta
("FHLB"), and $3.2 million or 45.6% in accrued expenses and other labilities.
These increases were partially offset by a decrease of $5.0 million or 54.8%
in advances
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<PAGE>
from borrowers for taxes and insurance. The increases in deposits and
advances from the FHLB were necessitated by the continued demand for consumer
and other loans, including home equity lines of credit, and management's
intent to grow short-term liquidity. The decrease in advances from borrowers
for taxes and insurance was the result of real estate taxes paid, during the
quarter ended November 30, 1997, on behalf of borrowers for properties
pledged against mortgage loans.
Stockholders' Equity. Stockholders' equity increased $7.3 million or
7.7% to $102.6 million at November 30, 1997, versus $95.3 million at February
28, 1997. During the nine months ended November 30, 1997, such increase
primarily reflects net income of $7.3 million, a $1.5 million increase
related to the issuance of shares under Maryland Federal's stock plans, and a
$1.4 million increase recorded to recognize the net change in unrealized
holding gains, net, which were offset by dividends to shareholders of $2.0
million and the repurchase of 44,000 shares of the Company's common stock at
a cost of $804,000. As more fully discussed in Note 2 of Notes to
Consolidated Financial Statements, the Company effected a two-for-one split
of common stock. Share amounts presented in the Consolidated Statements of
Financial Condition reflect the actual share amounts outstanding for each
period presented.
RESULTS OF OPERATIONS
Maryland Federal reported net income of $7.3 million and $4.3 million
during the nine months ended November 30, 1997 and 1996, respectively. Net
income increased by $3.0 million or 69.6% during the nine months ended
November 30, 1997, as compared to the same period in 1996. The increase in
net income was the result of a $1.2 million increase in net interest income,
a $622,000 increase in noninterest income, a $5.6 million decrease in
noninterest expense, and a $35,000 decrease in provision for loan losses,
which more than offset a $4.5 million increase in income tax expense, during
the nine months ended November 30, 1997, as compared to the same period in
1996.
Maryland Federal reported net income of $2.5 million and $487,000 during
the three months ended November 30, 1997 and 1996, respectively. Net income
increased by $2.0 million or 418.7% during the three months ended November
30, 1997, as compared to the same period in 1996. The increase in net income
was the result of a $456,000 increase in net interest income, a $360,000
increase in noninterest income, a $5.1 million decrease in noninterest
expense, and a $20,000 decrease in provision for loan losses, which more than
offset a $3.9 million increase in income tax expense, during the three months
ended November 30, 1997, as compared to the same period in 1996.
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<PAGE>
NET INTEREST INCOME
Net interest income increased by $1.2 million or 5.6% and $456,000 or
6.1% for the nine and three months ended November 30, 1997, respectively, as
compared to the same periods in 1996. The increase for the nine months ended
November 30, 1997 was primarily the result of a nine basis point net increase
in the yield earned on interest-earning assets over the rate paid on
interest-bearing liabilities ("interest rate spread"), which more than offset
a $182,000 or 0.2% decrease in the average balance of interest-earning assets
over interest-bearing liabilities, as compared to the same period in 1996.
The increase for the three months ended November 30, 1997 was primarily the
result of a five basis point net increase in the interest rate spread coupled
with a $4.2 million or 4.5% increase in the average balance of
interest-earning assets over interest-bearing liabilities, as compared to the
same period in 1996.
INTEREST INCOME
Loans receivable. During the nine months ended November 30, 1997,
interest earned on loans receivable increased by $1.5 million or 2.6%, as
compared to the same period in 1996. This increase was primarily the result
of a $15.7 million or 1.6% increase in the average balance of loans
receivable coupled with an eight basis point increase in the average yield
earned thereon to 7.57%. During the three months ended November 30, 1997,
interest earned on loans receivable increased by $548,000 or 2.9%, as
compared to the same period in 1996. This increase was primarily the result
of an $11.8 million or 1.2% increase in the average balance of loans
receivable coupled with a 13 basis point increase in the average yield earned
thereon to 7.61%. The increase in the average balance of loans receivable
during both the nine and three month periods reflects the high demand in loan
originations for consumer and other loans.
Mortgage-backed and related securities. During the nine and three
months ended November 30, 1997, interest earned on mortgage-backed and
related securities decreased by $155,000 or 4.8% and $106,000 or 10.3%,
respectively, as compared to the same periods in 1996. These decreases
during the nine and three months ended November 30, 1997, were primarily the
result of a $2.7 million or 4.3% and a $5.8 million or 9.5% decrease in the
average balance of mortgage-backed and related securities, respectively,
coupled with a three and six basis point decrease in the average yield earned
on such securities to 6.76% and 6.73%, respectively, as compared to the same
periods in 1996. The decrease in the average balance of mortgage-backed and
related securities reflects the sale of a portion of such securities during
the second quarter of fiscal 1998.
Investment securities and other interest-earning assets. During the
nine and three months ended November 30, 1997, interest earned on investment
securities and other interest-earning assets increased by $765,000 or 29.7%
and $634,000 or 81.1%, respectively, as
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<PAGE>
compared to the same periods in 1996. These increases during the nine and
three months ended November 30, 1997, were primarily the result of a $15.4
million or 25.7% and a $42.5 million or 79.3% increase in the average balance
of investment securities and other interest-earning assets, respectively,
coupled with an 18 and six basis point increase in the average yield earned
on such assets to 5.90% and 5.90%, respectively, as compared to the same
periods in 1996.
INTEREST EXPENSE
Deposits. Interest expense on deposits during the nine and three months
ended November 30, 1997, increased by $689,000 or 2.4% and $402,000 or 4.2%,
respectively, as compared to the same periods in the prior fiscal year. The
increase during the nine months ended November 30, 1997, was primarily
attributable to a $27.9 million or 3.6% increase in the average balance of
deposits, which more than offset a six basis point decrease in the average
rate paid on such deposits, as compared to the same period in 1996. The
increase during the three months ended November 30, 1997, was primarily
attributable to a $31.2 million or 3.9% increase in the average balance of
deposits coupled with a one basis point increase in the average rate paid on
such deposits, as compared to the same period in 1996. The increase in the
average balance of deposits during the nine and three months ended November
30, 1997, as compared to the same periods in 1996, was due primarily to the
competitive interest rates offered on deposits by the Bank.
Borrowed funds. Interest expense on borrowed funds (including advances
from borrowers for taxes and insurance) increased by $146,000 or 1.4% and
$218,000 or 6.6% during the nine and three months ended November 30, 1997, as
compared to the same periods in 1996. These increases were primarily due to
an increase of $691,000 or 0.3% and $13.3 million or 5.9% in the average
balance of such funds coupled with a seven and four basis point increase in
the average rate paid on such funds during the nine and three months ended
November 30, 1997, as compared to the same periods in 1996.
PROVISION FOR LOAN LOSSES
Loan review procedures are utilized by the Bank in order to ensure that
potential problem loans are identified early, thereby lessening any
potentially negative impact such problem loans may have on the Bank's
earnings. During the nine and three months ended November 30, 1997, the
Bank's provision for loan losses totaled $160,000 and $30,000, respectively,
as compared to $195,000 and $50,000, respectively, during the same respective
prior periods in 1996.
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<PAGE>
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 November 30, 1997, non-performing loans (loans ninety days or more
delinquent but still accruing interest, and non-accrual loans) totaled $5.6
million ($5,607,000 of which consist of first mortgage loans, with the
remaining $25,000 consisting of consumer and other loans) and represented
0.57% of total loans receivable. At February 28, 1997, non-performing 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. As of November 30, 1997, the
allowance for loan losses amounted to $4.7 million and represented 83.5% of
non-performing loans. At February 28, 1997, the allowance for loan losses
amounted to $4.6 million and represented 99.3% of non-performing loans.
NONINTEREST INCOME
Total noninterest income increased by $622,000 or 30.4% and $360,000 or
54.2% during the nine and three months ended November 30, 1997, respectively,
as compared to the same periods in 1996. During the nine months ended
November 30, 1997, the increase was primarily the result of a $418,000 or
34.5% increase in banking service charges and fees, an $84,000 or 32.7%
increase in loan fees and service charges, and a $165,000 increase in gain
on sales of securities, which more than offset a decrease of $61,000 or 12.2%
in gain on sales of first mortgage loans, as compared to the same period in
1996. During the three months ended November 30, 1997, the increase was
primarily the result of a $95,000 or 20.6% increase in banking service
charges and fees, a $69,000 or 83.1% increase in loan fees and service
charges, a $156,000 or 135.7% increase in gain on sales of first mortgage
loans, and a $40,000 or 800.0% increase in other noninterest income, as
compared to the same period in 1996. There were no sales of securities
during the nine months ended November 30, 1996.
NONINTEREST EXPENSE
Total noninterest expense decreased by $5.6 million or 28.6% and $5.1
million or 51.8% for the nine and three months ended November 30, 1997,
respectively, as compared to the same periods in 1996. The components of
noninterest expense are discussed below.
-11-
<PAGE>
Compensation and benefits. During the nine and three months ended
November 30, 1997, compensation and benefits increased by $160,000 or 2.1%
and $141,000 or 5.6%, respectively, as compared to the same periods in 1996,
due primarily to additional staffing necessitated by the expansion of branch
offices, which more than offset a decrease in retirement benefit expense.
Occupancy and equipment. During the nine and three months ended
November 30, 1997, occupancy and equipment expense increased $52,000 or 2.3%
and $35,000 or 4.5%, respectively, as compared to the same periods in 1996.
The Bank relocated two branch offices and opened two new branch offices
during the first and third quarter of the fiscal year ending February 28,
1998.
Savings Association Insurance Fund ("SAIF") recapitalization assessment.
Deposits of the Bank are currently insured by the Federal Deposit Insurance
Corporation ("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 Bank'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, which was recognized and paid during the quarter ended November
30, 1996.
Federal deposit insurance premiums. During the nine and three months
ended November 30, 1997, federal deposit insurance premiums to the FDIC
decreased $908,000 or 70.2% and $260,000 or 66.8%, respectively, as compared
to the same periods in 1996. These decreases were primarily the result of
the legislation discussed above, which also reduced the insurance premium
rates payable by the Bank from 23 to 6.4 basis points on every $100 of
assessable deposits effective January 1, 1997. Federal deposit insurance
premiums are a function of the size of the Bank's deposit base.
Loss on foreclosed real estate, net. During the nine and three months
ended November 30, 1997, loss on foreclosed real estate, net, decreased by
$18,000 or 17.8% and $11,000 or 18.3%, respectively, as compared to the same
periods in 1996.
Advertising. During the nine and three months ended November 30, 1997,
advertising expense increased by $17,000 or 3.9% and $21,000 or 19.4%,
respectively, as compared to the same periods in 1996.
Other. During the nine and three months ended November 30, 1997, other
noninterest expense increased by $210,000 or 7.4% and $32,000 or 3.3%,
respectively, as compared to the same periods in 1996. These increases were
primarily due to increases in legal fees and special services, and expenses
such as telephone and postage.
-12-
<PAGE>
INCOME TAXES
During the nine months ended November 30, 1997, the Company recognized a
provision for income taxes of $4.6 million as compared to $151,000 during the
same period in 1996. During the three months ended November 30, 1997, the
Company recognized a provision for income taxes of $1.6 million as compared
to an income tax benefit of $2.3 million during the same period in 1996.
During the nine and three months ended November 30, 1997, income tax expense
increased by $4.5 million and $3.9 million, respectively, as compared to the
same periods in 1996. These increases were primarily a result of the
one-time special assessment to recapitalize the SAIF (which was deductible
for tax purposes), and a $1.6 million adjustment to revise prior estimates in
recording the tax provision, both of which occurred during the third quarter
of the previous fiscal year.
CAPITAL ADEQUACY
The Bank 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 November 30, 1997, the Bank had tangible
capital equal to 8.08% of adjusted total assets, core capital equal to 8.08%
of adjusted total assets and total capital equal to 16.13% of risk-weighted
assets.
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
-13-
<PAGE>
effective date for the capital deduction. Because of the Bank'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
November 30, 1997, the Bank was considered to be "well capitalized."
LIQUIDITY AND CAPITAL RESOURCES
The Bank 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 Bank to maintain liquid assets of not less than 4% of its
net withdrawable accounts plus short-term borrowings. The Bank has
consistently maintained liquidity at or above the levels required by the
regulations.
The Bank'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 Bank 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 November 30, 1997, the Bank had $5.5 million of undisbursed loan
funds and $52.4 million in approved loan commitments. These commitments were
partially offset by $16.3 million in forward commitments to sell. In
addition, as of November 30, 1997, the Bank had $144.3 million of approved
home equity lines of credit, of which $76.2 million had been drawn by
borrowers. The Bank 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 by November 30,
1998 is $519.4 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 Bank.
-14-
<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.
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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
-15-
<PAGE>
PART II - OTHER INFORMATION:
Item 1 - Legal Proceedings
The Company is not involved in any pending legal proceedings
other than routine, nonmaterial legal proceedings occurring
in the ordinary course of business.
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
Not Applicable
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Date: JANUARY 14, 1998 By:/s/ Robert H. Halleck
---------------- ------------------------------
Robert H. Halleck, President
and Chief Executive Officer
Date: JANUARY 14, 1998 By:/s/ Lynn B. Hounslow
---------------- ------------------------------
Lynn B. Hounslow, Senior
Vice President, Treasurer,
Chief Financial Officer and
Principal Accounting Officer
-17-
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<PAGE>
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<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> NOV-30-1997
<EXCHANGE-RATE> 1
<CASH> 9,136
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0
0
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<NET-INCOME> 7,303
<EPS-PRIMARY> 1.10
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<LOANS-NON> 3,479
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