SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 29, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______________
Commission file number: 0-18107
MARYLAND FEDERAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 52-1640579
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3505 HAMILTON STREET
HYATTSVILLE, MARYLAND 20782
(Address) (Zip Code)
Registrant's telephone number, including area code: (301) 779-1200
Securities registered pursuant to Section 12(b) of the Act:
NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
PREFERRED STOCK PURCHASE RIGHTS
COMMON STOCK (PAR VALUE $.01 PER SHARE)
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of April 26, 1996, the aggregate value of the 2,840,835 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
319,233 shares held by all directors and officers of the Registrant as a group,
was approximately $85,225,050. This figure is based on the closing price of
$30.00 per share of the Registrant's Common Stock on April 26, 1996.
Number of shares of Common Stock outstanding as of April 26, 1996: 3,160,068
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year
ended February 29, 1996 are incorporated into Part II, Items 5 - 8 of this Form
10-K.
(2) Portions of the definitive proxy statement for the 1996 Annual Meeting
of Stockholders are incorporated into Part III, Items 10 - 13 of this Form 10-K.
PART I
ITEM 1. BUSINESS.
GENERAL
Maryland Federal Bancorp, Inc. ("MFB" or the "Company") was incorporated
under the laws of the State of Maryland in June 1989 and is the unitary
savings and loan holding company and sole stockholder of Maryland Federal
Savings and Loan Association ("Maryland Federal" or the "Association"). The
Company does not presently own or operate any subsidiary except for the
Association. Maryland Federal's business is conducted through 25 branch
offices located in Prince George's, Montgomery, Charles, Calvert and Anne
Arundel counties, Maryland, six loan production offices, and one wholly-owned
subsidiary. The principal executive offices of both the Company and the
Association are located at 3505 Hamilton Street, Hyattsville, Maryland 20782,
and their telephone number is (301) 779-1200.
On a consolidated basis, at February 29, 1996, MFB had total assets of
$1.14 billion, total liabilities of $1.05 billion and total stockholders'
equity of $94.0 million or $29.84 per share based on 3,149,705 shares of
common stock outstanding. MFB had net income of $8.7 million for the year
ended February 29, 1996.
The Association is primarily engaged in the business of attracting
deposits from the general public and investing such deposits primarily in
permanent loans secured by first liens on one- to four-family residential
properties and, to a lesser extent, in commercial real estate located in the
Association's market area and in consumer loans. The Association also
maintains a substantial portfolio of mortgage-backed securities as well as
United States Government and agency securities and other permissible
investments and, through a subsidiary, engages in insurance agency activities
to a limited extent.
The Company, as a registered savings and loan holding company, is
subject to examination and regulation by the Office of Thrift Supervision
("OTS"), a department of the United States Treasury, and is subject to
various reporting and other requirements of the Securities and Exchange
Commission ("SEC"). Maryland Federal, as a federally chartered savings and
loan association, is subject to examination and comprehensive regulation by
the OTS, which became the successor to the Federal Home Loan Bank Board
("FHLBB") pursuant to the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA"), which was enacted in August 1989, and by
the Federal Deposit Insurance Corporation ("FDIC"). Customer deposits with
the Association are insured to the maximum extent provided by law through the
Savings Association Insurance Fund ("SAIF"), which is administered by the
FDIC. Maryland Federal is a member of the Federal Home Loan Bank of Atlanta
("FHLB of Atlanta"), which is one of 12 regional banks comprising the Federal
Home Loan Bank System ("FHLB System"). Maryland Federal is further subject to
regulations administered by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board") governing reserves required to be maintained
against deposits and certain other matters.
2
LENDING ACTIVITIES
LOAN AND MORTGAGE-BACKED SECURITY PORTFOLIO COMPOSITION. Maryland
Federal's net loan and mortgage-backed security portfolio totalled $1.06
billion at February 29, 1996, representing 92.5% of the Company's $1.14
billion of total assets at that date. The Association's total loan portfolio
at February 29, 1996 consisted primarily of conventional mortgage loans,
which are loans that are neither insured by the Federal Housing
Administration ("FHA") nor partially guaranteed by the Department of Veterans
Affairs ("VA"). In addition, the Association maintains a portfolio of
mortgage-backed securities, which consists primarily of Government National
Mortgage Association ("GNMA"), Federal Home Loan Mortgage Corporation
("FHLMC") and Federal National Mortgage Association ("FNMA") participation
certificates. GNMA certificates are guaranteed by the full faith and credit
of the United States while FHLMC and FNMA certificates are guaranteed by
those quasi-governmental agencies.
At February 29, 1996, single-family residential loans comprised the
largest group of loans, amounting to $948.0 million or 88.8% of the gross
loan and mortgage-backed securities portfolio. The Association also had
$66.5 million of mortgage-backed securities, which accounted for 6.2% of the
gross loan and mortgage-backed securities portfolio at such date.
Construction loans at such date amounted to $5.2 million or 0.5% of the gross
loan and mortgage-backed securities portfolio. Commercial real estate loans
accounted for substantially all of the remainder of the loan portfolio,
amounting to $41.8 million or 3.9% of the gross loan and mortgage-backed
securities portfolio at February 29, 1996.
In recent years, management of Maryland Federal has increased the
origination of adjustable-rate and/or short-term loans, which included
primarily adjustable-rate mortgage loans ("ARMs"). Since fiscal 1991, the
Association has significantly increased its origination of second mortgages
and home equity lines of credit from prior years due to the shorter terms and
the low level of credit risk associated with such loans. The origination of
ARMs, commercial loans, consumer loans and construction loans accounted for
52.8%, 77.7% and 50.7% of total loans originated in fiscal 1994, 1995 and
1996, respectively.
Commercial real estate lending entails significant additional risks as
compared with single-family residential property lending. It is the
Association's policy to limit its origination of commercial real estate loans.
3
The following table sets forth the composition of the Association's loan
portfolio by type of loan at the dates indicated.
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- -------- -------
(Dollars in Thousands)
Real estate loans:
Permanent loans:
Single-family(1) $947,995 88.8% $855,857 86.8% $656,833 86.5% $596,508 83.0% $590,467 84.5%
Multi-family 2,472 0.2 2,662 0.3 2,740 0.4 2,807 0.4 2,897 0.4
Commercial(2) 41,824 3.9 40,731 4.1 36,548 4.8 39,252 5.5 38,325 5.5
Land -- -- -- -- 1,542 0.2 1,583 0.2 -- --
Construction loans:
Single-family 2,815 0.3 1,244 0.1 6,485 0.9 11,581 1.6 5,428 0.8
Other property 2,344 0.2 7,315 0.7 7,849 1.0 8,447 1.2 8,534 1.2
Mortgage-backed securities 66,491 6.2 75,804 7.7 44,200 5.8 53,672 7.4 45,823 6.5
Consumer and other loans 4,232 0.4 2,997 0.3 2,788 0.4 5,113 0.7 7,531 1.1
---------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total gross loans and
mortgage-backed
securities receivable 1,068,173 100.00% 986,610 100.0% 758,985 100.0% 718,963 100.0% 699,005 100.0%
------ ----- ----- ----- -----
------ ----- ----- ----- -----
Less:
Undisbursed portion of
mortgage loans 1,722 2,728 8,609 11,135 5,425
Unamortized premiums and
discounts, net 783 1,010 1,025 1,581 1,467
Net deferred loan fees 3,815 4,284 4,065 4,065 3,233
Allowance for loan
losses 4,474 4,424 4,187 4,267 2,348
---------- -------- -------- -------- --------
Total loans and mortgage-
backed securities
receivable, net $1,057,379 $974,164 $741,099 $697,915 $686,532
---------- -------- -------- -------- --------
---------- -------- -------- -------- --------
_______________
(1) Includes $48.3 million, $48.3 million, $37.8 million, $33.3 million and
$36.5 million of second-mortgage loans at each of the respective dates.
(2) Includes $13.6 million, $12.5 million, $10.8 million, $6.4 million and $5.6
million of single-family, non-owner occupied rental properties at each of
the respective dates.
4
CONTRACTUAL MATURITIES OF LOANS. The following table sets forth the
scheduled contractual maturities of the Association's loans and mortgage-backed
securities at February 29, 1996. Demand loans, loans having no stated schedule
of repayments and no stated maturity, and overdraft loans are reported as due in
one year or less. The amounts shown for each period do not take into account
loan prepayments and normal amortization of the Association's loan portfolio.
AMOUNTS DUE
-----------------------------------------
ARTER ONE YEAR
BALANCE AT IN ONE YEAR THROUGH FIVE AFTER FIVE
FEBRUARY 29, 1996 OR LESS YEARS YEARS
----------------- ----------- ------------- ----------
(In Thousands)
Real estate loans(1)(2):
Fixed-rate $489,649 $4,301 $60,100 $425,248
Adjustable-rate 563,561 3,338 308 559,915
Consumer and other loans 4,169 133 3,470 566
---------- ------ ------- --------
Total loans and mortgage-
backed securities, net(3)(4) $1,057,379 $7,772 $63,878 $985,729
---------- ------ ------- --------
---------- ------ ------- --------
______________
(1) Includes single and multi-family residential mortgage loans, loans on
income-producing property secured by other real estate, construction and
commercial business loans secured by real estate and mortgage-backed
securities.
(2) Construction loans, net of undisbursed portion, totalled $3.4 million at
February 29, 1996, $3.1 million of which are scheduled to convert to
permanent loans in fiscal 1997.
(3) Net of undisbursed portion of mortgage loans, unamortized premiums and
discounts, net deferred loan fees and allowance for loan losses.
(4) Of the total loans due to mature after February 28, 1997, $489.4 million
have fixed rates of interest and $560.2 million have adjustable or
floating rates of interest.
Scheduled contractual maturities of loans and mortgage-backed securities
do not necessarily reflect the actual term of the Association's loan and
mortgage-backed securities portfolio. The average life of mortgage loans is
substantially less than their contractual terms because of loan prepayments and
because of enforcement of due-on-sale clauses, which grant the Association the
right to declare a loan immediately due and payable in the event, among other
things, that the borrower sells the real property subject to the mortgage and
the loan is not repaid. The average life of mortgage loans tends to increase,
however, when current market rates on mortgage loans substantially exceed rates
on existing mortgage loans and, conversely, decrease when current market rates
on mortgage loans decline below rates on existing mortgage loans.
5
Interest rates charged by Maryland Federal on loans are affected
principally by the demand for such loans and the supply of funds available
for lending purposes. These factors are, in turn, affected by general
economic conditions, monetary policies of the federal government, including
the Federal Reserve Board, legislative tax policies and government budgetary
matters.
ORIGINATION, PURCHASE AND SALE OF LOANS. As a federally chartered
savings and loan association, the Association has general authority to
originate and purchase loans secured by real estate located throughout the
United States. However, in accordance with the Association's conservative
lending practices, all of the Association's mortgage loan portfolio is
secured by real estate located in the Washington, D.C. or Baltimore
metropolitan areas.
Historically, residential real estate loans have been originated by the
Association through its branch offices. However, since January 1988, the
Association has, in addition to its branch network, used a team of
commissioned loan officers, working out of the Company's six loan production
offices, to originate real estate loans. Loan approvals are the
responsibility of personnel who are compensated on a non-incentive basis.
Residential and commercial real estate loan originations have been
attributable to referrals from real estate brokers and builders, mortgage
brokers, depositors and walk-in customers. Consumer loan originations are
primarily attributable to walk-in customers.
Maryland Federal occasionally sells whole loans and participations in
loans to other financial institutions and institutional investors. All of
such loans have consisted of long-term, fixed-rate mortgages. The
Association sold $21.1 million, $39.2 million and $54.5 million of such loans
during fiscal 1994, 1995 and 1996, respectively, exclusive of loans exchanged
for mortgage-backed securities. The Association was servicing approximately
$28.4 million of loans for others at February 29, 1996. As of February 29,
1996, the Association had commitments to sell loans totalling approximately
$33.3 million.
The Association has in the past occasionally pooled long-term,
fixed-rate loans and exchanged them on a servicing retained basis for
mortgage-backed securities guaranteed by the FHLMC in the same unpaid
principal amount as the mortgage loans exchanged. Although the
mortgage-backed securities (participation certificates) received in the
exchange do not reduce the overall effective maturity of the Association's
assets, they are more liquid than traditional mortgage loans because a large
and active secondary market for such securities currently exists. Such
securities may also be used to collateralize the Association's borrowings.
During fiscal 1996, the Association did not engage in any such exchanges.
The Association also purchases whole loans in the secondary market in
order to increase the diversity of its portfolio and provide it with assets
which are consistent with its asset and liability management goals. The
Association buys both fixed-rate and adjustable-rate mortgages from mortgage
bankers on a servicing released basis, depending on the market at the time of
purchase. These loans, each of which is individually underwritten by the
Association, are secured by properties located in the Washington, D.C.,
6
Maryland and Virginia metropolitan areas. Whole loan purchases amounted to
$36.5 million, $71.5 million and $1.0 million during fiscal 1994, 1995 and
1996, respectively. During fiscal 1994, 1995 and 1996, the Association also
purchased $8.1 million, $41.7 million and $-0-, respectively, of
mortgage-backed securities. The purchase of mortgage-backed securities is
intended to supplement the Association's investment in loans receivable.
7
The following table sets forth the Association's loan and mortgage-backed
security originations, purchases, sales and principal repayments during the
periods indicated.
YEAR ENDED
----------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
Gross loans and mortgage-backed
securities at beginning of period $ 986,610 $758,985 $718,963
---------- -------- --------
Loans originated:
Real estate loans:
Permanent loans:
Single-family (adjustable-rate) 103,341 169,867 132,217
Single-family (fixed-rate) 109,825 52,713 128,917
Commercial 5,435 9,803 8,685
Construction loans 941 2,614 3,202
---------- -------- --------
Total real estate loans
originated 219,542 234,997 273,021
Consumer and other loans 3,331 1,785 384
---------- -------- --------
Total loans originated 222,873 236,782 273,405
---------- -------- --------
Loans and mortgage-backed securities
purchased:
Whole loans 1,006 71,535 36,484
FHLMC participation certificates -- 10,100 --
GNMA participation certificates -- 10,196 --
FNMA participation certificates -- 21,364 7,060
Real estate mortgage investment
conduit certificates -- -- 1,053
---------- -------- --------
Total loans and mortgage-backed
securities purchased 1,006 113,195 44,597
---------- -------- --------
Total loans and mortgage-backed
securities originated and
purchased 223,879 349,977 318,002
---------- -------- --------
Loans transferred to foreclosed real
estate 281 632 514
Loans sold 54,521 14,219 39,179
Loans repaid 87,514 107,501 238,287
---------- -------- --------
Total loans transferred to
foreclosed real estate, sold
and repaid 142,316 122,352 277,980
---------- -------- --------
Net loan activity 81,563 227,625 40,022
---------- -------- --------
Gross loans and mortgage-backed
securities at the end of period 1,068,173 986,610 758,985
Less:
Undisbursed portion of mortgage
loans 1,722 2,728 8,609
Unamortized premiums and discounts,
net 783 1,010 1,025
Net deferred loan fees 3,815 4,284 4,065
Allowance for loan losses 4,474 4,424 4,187
---------- -------- --------
Net loans and mortgage-backed
securities at the end of period $1,057,379 $974,164 $741,099
---------- -------- --------
---------- -------- --------
8
LOAN UNDERWRITING POLICIES. The Board of Directors has authorized the
Loan Committee of the Association (comprised of the President and Chief
Executive Officer (Chairman), Executive Vice President, Senior Vice President
and Chief Loan Officer) to approve any real estate secured loan or investment
of $500,000 or less. All actions of the Loan Committee are promptly reported
to and ratified by the Board of Directors. The President of the Association
has the authority to approve any other loan up to $500,000 which is secured
by collateral other than real estate. Residential loans will generally be
originated in amounts up to the limits established from time to time by the
FNMA and FHLMC for secondary market resale purposes. This amount is
presently $207,000 for single-family, fixed-rate residential loans.
Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations. After analysis of the loan application and the property or
collateral involved, including an appraisal of the property by independent
appraisers approved by the Association's Board of Directors, the lending
decision is made in accordance with the underwriting guidelines of the
Association.
It is the Association's policy to obtain a title insurance policy
insuring that the Association has a valid first lien on the mortgaged real
estate and that the property is free of encroachments. Borrowers must also
obtain paid hazard insurance policies prior to closing and, when the property
is in a flood plain as designated by the Department of Housing and Urban
Development, paid flood insurance policies. Most borrowers are also required
to advance funds on a monthly basis together with each payment of principal
and interest to a mortgage escrow account from which the Association makes
disbursements for items such as real estate taxes, hazard insurance premiums
and private mortgage insurance premiums as they become due.
Maryland Federal is permitted to lend up to 100% of the appraised value
of the real property securing a loan; however, if the amount of a residential
loan originated or refinanced exceeds 90% of the appraised value, the
Association is required by federal regulations to obtain private mortgage
insurance on the portion of the principal amount of the loan that exceeds 80%
of the appraised value of the security property. The Association's lending
policy requires private mortgage insurance when the loan-to-value ratio
exceeds 80%. The Association generally lends up to 95% of the appraised value
of single-family residential dwellings when the required private mortgage
insurance is obtained. Management believes, however, that a substantial
portion of its portfolio is significantly below an 80% loan-to-value ratio.
The Association estimates that approximately 15% of its gross loan portfolio
at February 29, 1996 is covered by private mortgage insurance. The
Association generally lends up to 75% of the appraised value of the
properties securing its commercial real estate and multi-family residential
properties and 70% of the appraised value for construction loans.
9
REAL ESTATE LENDING STANDARDS. Effective March 19, 1993, all financial
institutions were required to adopt and maintain comprehensive written real
estate lending policies that are consistent with safe and sound banking
practices. These lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies adopted by the
federal banking agencies, including the OTS, in December 1992
("Guidelines"). The Guidelines set forth uniform regulations prescribing
standards for real estate lending. Real estate lending is defined as
extensions of credit secured by liens on interests in real estate or made for
the purpose of financing the construction of a building or other improvements
to real estate, regardless of whether a lien has been taken on the property.
The policies must address certain lending considerations set forth in
the Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also
be appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the institution's board of
directors at least annually. The LTV ratio framework, with a LTV ratio being
the total amount of credit to be extended divided by the appraised value of
the property at the time the credit is originated, must be established for
each category of real estate loans. If not a first lien, the lender must
combine all senior liens when calculating this ratio. The Guidelines, among
other things, establish the following supervisory LTV limits: raw land (65%);
land development (75%); construction (commercial, multifamily and
nonresidential) (80%); improved property (85%); and one-to-four family
residential (owner occupied) (no maximum ratio; however any LTV ratio in
excess of 90% should require appropriate insurance or readily marketable
collateral).
Certain institutions can make real estate loans that do not conform with
the established LTV ratio limits up to 100% of the institution's total
capital. Within this aggregate limit, total loans for all commercial,
agricultural, multifamily and other non-one-to-four family residential
properties should not exceed 30% of total capital. An institution will come
under increased supervisory scrutiny as the total of such loans approaches
these levels. Certain loans are exempt from the LTV ratios (e.g. those
guaranteed by a government agency, loans to facilitate the sale of real
estate owned and loans renewed, refinanced or restructured by the original
lender(s) to the same borrower(s) where there is no advancement of new funds,
etc.).
Under federal regulations prior to the enactment of FIRREA, the
aggregate amount of loans that the Association could have made to any one
borrower, including related entities, was, with certain exceptions, limited
to the lesser of 10% of the Association's net withdrawable deposits or 100%
of its regulatory capital. The Association was in compliance with this
regulation. As a result of FIRREA, the permissible amount of loans-to-one
borrower now follows the national bank standard for all loans made by savings
institutions, as compared to the pre-FIRREA rule that applied only to
commercial loans made by federally chartered institutions. The national bank
standard generally does not permit loans-to-one borrower to exceed 15% of the
Association's unimpaired capital and surplus. Loans
10
in an amount equal to an additional 10% of unimpaired capital and surplus
also may be made to a borrower if the loans are fully secured by readily
marketable securities.
Based on the 15% of unimpaired capital and surplus standard, the maximum
amount which the Association could have loaned to one borrower and the
borrower's related entities at February 29, 1996 was approximately $13.2
million. At such date, the largest aggregate amount of loans by the
Association to any one borrower, including related entities, consisted of
$5.1 million of permanent loans secured by rental townhouses and
single-family homes located in Prince George's and Montgomery Counties,
Maryland and Northern Virginia.
RESIDENTIAL REAL ESTATE LENDING. The Association has offered ARMs since
1978 and, when market conditions and certain competitive market pressures in
the Association's primary market area have permitted, has emphasized their
origination rather than that of long-term, fixed-rate loans. The origination
of ARMs represented 50.6%, 76.3% and 48.5% of the Association's total
originations of conventional single-family residential mortgages in fiscal
1994, 1995 and 1996, respectively. ARMs (including mortgage-backed
securities) accounted for approximately $563.6 million or 53.3% of the
Association's net loan portfolio (including mortgage-backed securities) at
February 29, 1996.
The ARMs currently offered by Maryland Federal have up to 30-year terms
and interest rates which primarily adjust every one or three years based upon
changes in an index based on the weekly average yield on United States
Treasury securities adjusted to a constant maturity of one or three years,
respectively, as made available by the Federal Reserve Board, plus a margin.
The amount of any increase or decrease in the interest rate is limited to 2%
per year, with a limit of 6% over the life of the loan. No downward
adjustments below the interest rate at the time of origination are permitted.
These loans currently contain provisions permitting them to be converted to
fixed-rate loans at the first adjustment date. If the borrower converts the
loan, the Association will usually sell such loan into the secondary market.
The Association does not offer ARMs with negative amortization. Since fiscal
1992, the Association has also originated adjustable-rate mortgage loans
which adjust to a fixed-rate loan upon either the fifth or seventh year at a
rate based on a margin of 5/8ths of one percent over the FHLMC's 60-day
delivery rate for conventional single-family home loans. The rate then
remains constant for the remaining life of the loan. Upon repricing, these
loans, in addition to those originated or acquired with the intent to sell,
may also be sold and will be recorded at the lower of cost or fair value
at such time. The Association has experienced changing demands for ARMs as a
result of fluctuations in interest rates, but expects to continue to
emphasize ARMs as market conditions permit in order to reduce the impact on
its operations of rapid increases in market rates of interest. Such loans,
however, generally do not adjust as rapidly as changes in the Association's
cost of funds.
Fixed-rate residential mortgage loans currently originated generally
have 30-year terms, although some have 15-year terms with commensurately
lower interest rates. The Association estimates that its residential
mortgage loans generally remain outstanding for
11
an average of approximately eight years. At February 29, 1996 approximately
$489.6 million or 46.3% of the Association's net loan portfolio consisted of
long-term, fixed-rate residential mortgage loans (including mortgage-backed
securities). In the past, the Association has occasionally exchanged
qualifying long-term, fixed-rate residential mortgages for FHLMC
participation certificates. The Association did not engage in any such
exchanges in the past year but may resume doing so in the future.
The Association also occasionally originates loans on multi-family
residential properties and will continue to do so if and when favorable
lending opportunities are presented. Multi-family residential mortgage loans
are primarily secured by multi-family rental units. Generally, such loans
are originated with fixed-rates of interest set at specified margins above
the one-and three-year treasury bill yields, and with 25- or 30-year
amortization schedules. The Association generally will not originate such
loans with a loan-to-value ratio of greater than 75%. The majority of the
loans include a one or five year balloon payment provision. In addition,
such loans are usually required to have a minimum debt service coverage of
1.15% at the time of origination.
The Association makes second mortgage loans and home equity loans only
where the first plus these mortgages in the aggregate do not exceed 90% of
the value of the property securing the loan. Maryland Federal's standard
underwriting procedures are used in evaluating these loans. At February 29,
1996, $48.3 million or 4.6% of the Association's gross loan and
mortgage-backed securities portfolio consisted of second mortgage loans,
compared to $48.3 million or 4.9% at February 28, 1995. At February 29,
1996, $21.4 million or 2.0% of the Association's gross loan and
mortgage-backed securities portfolio consisted of home equity loans compared
to $3.6 million or 0.4% at February 28, 1995.
CONSTRUCTION LENDING. The Association provides both fixed-rate and
floating-rate residential and commercial construction loans. Generally,
construction loans are made with terms not exceeding 24 months. Interest
rates on construction loans are currently set at floating rates above THE
WALL STREET JOURNAL prime rate for either a residential or commercial real
estate loan. The interest rate adjusts monthly. Advances are made on a
percentage of completion basis usually consisting of four draws after receipt
of an architect's or engineer's certification and approval by the
Association's inspector. Most construction loans are floating-rate balloon
loans. Construction loans are usually made only when the Association will
provide the permanent financing. In all cases, there must be permanent
financing before the loan is originated. The Association reclassifies
construction loans as either residential or commercial real estate loans at
the time of completion of the construction project, depending upon the nature
of the property which will secure the permanent loan. As of February 29,
1996, $5.2 million or 0.5% of Maryland Federal's gross loan and
mortgage-backed securities portfolio consisted of construction loans, 55% of
which consisted of loans on one- to four-family residential properties.
The Association continues to offer construction loans because of the
short terms and higher interest rates associated with such loans. During
fiscal 1996, the Association's
12
origination of construction loans amounted to $900,000, as compared to $2.6
million during fiscal 1995 and $3.2 million during fiscal 1994. At February
29, 1996, the Association's construction loans varied in size from $80,000 to
$2.0 million. The Association's construction loans have been for the
construction of small shopping centers, office buildings and small
residential subdivisions in the Association's market area. As of February
29, 1996, the Association's construction loan portfolio was comprised of 10
loans to separate borrowers in the aggregate amount of $5.2 million, of which
the Association had undisbursed funds of $1.7 million. As of February 29,
1996, the largest loan consisted of a $2.0 million loan for the construction
of a professional office building located in Olney, Maryland. The
Association may make additional loans to such borrowers in the future.
The underwriting criteria used by the Association are designed to
evaluate and minimize the risks of each construction loan. Among other
things, the Association generally considers an appraisal of the project, the
reputation of the borrower and the contractor, the amount of the borrower's
equity in the project, independent valuations and review of cost estimates,
plans and specifications, preconstruction sale and leasing information,
current and expected economic conditions in the area of the project, cash
flow projections of the borrower, and, to the extent available, guarantees by
the borrower and/or third parties.
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. Also, these types of loans generally have larger balances and
greater risks than residential mortgage loans because their repayment is
dependent on successful project completion as well as general and local
economic conditions and are generally less predictable and more difficult to
evaluate and monitor.
COMMERCIAL REAL ESTATE LENDING. At February 29, 1996, the Association
had $41.8 million or 3.9% of its gross loan and mortgage-backed securities
portfolio invested in commercial real estate loans, substantially all of
which are short-term loans. The Association rarely has originated, and does
not intend to emphasize in the future, the origination of land acquisition
and development loans. The commercial real estate loans originated by the
Association are primarily secured by small strip shopping centers, motels,
mini-warehouses, townhouse office units and apartment buildings. These loans
are generally three- to five-year balloon loans, amortized over 30 years, and
require a 1.15% debt service coverage at the time of origination. Commercial
real estate loans are not originated with more than a 75% loan-to-value ratio
and personal guarantees are obtained to the extent possible.
Originations of commercial real estate loans amounted to $5.4 million
during fiscal 1996 compared to $9.8 million during fiscal 1995 and $8.7
million during fiscal 1994. As of February 29, 1996, the Association's
largest commercial real estate loan consisted of a $3.5 million loan secured
by a recreational vehicle park located in Beltsville, Maryland. It is the
13
present intention of management that all such loans will be secured by
properties in the Association's market area and that commercial real estate
loans will not exceed 10% of the total loan portfolio.
Although FIRREA reduced the limit on loans to any one borrower to an
amount generally equal to 15% of the Association's unimpaired capital and
surplus, subject to certain limited exceptions, which limit was approximately
$13.2 million at February 29, 1996, the Association typically has not
originated loans to any one borrower or project in excess of $5.0 million for
its own portfolio. FIRREA also reduced the amount which a federally
chartered savings institution may invest in loans secured by non-residential
real estate to four times the Association's capital, which limit was $352.6
million at February 29, 1996. This limit is not expected to have any effect
on Maryland Federal's commercial real estate lending activities.
Commercial real estate lending entails significant additional risks as
compared with single-family residential property lending. Commercial real
estate loans typically involve large loan balances to single borrowers or
groups of related borrowers. The payment experience on such loans is
typically dependent on the successful operation of the real estate project.
The success of such projects is sensitive to changes in supply and demand
conditions in the market for commercial real estate as well as economic
conditions. All of such loans are secured by properties located in Maryland
or the Washington, D.C. metropolitan area.
COMMERCIAL BUSINESS LENDING. Federal laws and regulations also
authorize the Association to make secured or unsecured loans for commercial,
corporate, business and agricultural purposes. The aggregate amount of such
loans outstanding may not exceed 10% of the Association's assets. In
addition, another 10% of total assets may be invested in commercial equipment
and consumer leasing, and the Association may use any or all of the 35%
consumer category described below for inventory and floor plan financing. As
of February 29, 1996, the Association did not have any commercial business
loans outstanding and the Association has no present plans with respect to
engaging in such lending in the future.
CONSUMER LENDING. Federal laws and regulations permit a federally
chartered thrift institution to make secured and unsecured consumer loans in
an aggregate amount of up to 35% of the institution's total assets. At
February 29, 1996, consumer loans accounted for $4.2 million or 0.4% of the
Association's gross loan and mortgage-backed securities portfolio.
In past years, the Association has originated consumer loans in order to
provide a range of financial services to its customers and because the
shorter terms and typically higher interest rates on such loans help the
Association maintain a profitable spread between its average loan yield and
its cost of funds. The Association currently offers automobile loans,
overdraft lines of credit and unsecured personal loans. Consumer loan
14
originations during fiscal years 1994, 1995 and 1996 were $384,000, $1.8
million and $3.3 million, respectively, of which automobile loan originations
amounted to $304,000, $1.0 million and $1.5 million, respectively, during
such periods. At February 29, 1996, savings account loans amounted to
$238,000. The Association no longer originates loans secured by savings
accounts.
In 1985, the Association began originating automobile loans. Such loans
are generally originated with terms of four years for up to 90% of the
purchase price of a new car or 80% of the "Blue Book" value or purchase
price, whichever is less, in the case of a used car. Automobile loan rates
are determined based upon general market conditions and competition in the
market for such loans. Such loans amounted to $2.1 million at February 29,
1996. The weighted average interest rate on automobile loans was 7.82% at
February 29, 1996. The Association no longer makes loans secured by used
cars.
During fiscal 1995, the Association began originating unsecured personal
loans in amounts up to $10,000. At February 29, 1996, unsecured personal
loans amounted to $1.7 million.
The Association does not intend to continue its emphasis on consumer
lending. Such lending, when it involves loans on automobiles, can entail
greater risks than single-family residential lending due to the nature of the
collateral and, in certain cases, the absence of collateral. In addition,
consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness, personal bankruptcy and adverse economic conditions.
In most cases, any repossessed collateral for a defaulted consumer loan will
not provide an adequate source of repayment of the outstanding loan balance
because of improper repair and maintenance of the underlying security. The
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. However, the Association believes its use of
detailed loan and credit applications and investigations reduces this risk
and the generally higher yields earned on consumer loans compensate for the
increased credit risk associated with such loans. Net charge-offs of
consumer loans during fiscal 1996 and 1995 amounted to approximately $25,000
and $4,000, respectively.
LOAN FEES AND SERVICE CHARGES. In addition to interest earned on loans,
the Association receives income through servicing of loans and loan fees
charged in connection with loan originations (which are calculated as a
percentage of the amount loaned), loan modifications, loan commitments, late
payments, prepayments, repayments, changes of property ownership and for
miscellaneous services related to its loans. Income from these activities
varies from period to period with the volume and type of loans made.
SFAS 91 requires that loan origination fees and certain related direct
loan origination costs be offset and that the resulting net amount be
deferred and amortized over the life of the related loans as an adjustment to
the yield of such related loans. In addition, commitment fees are required
to be offset against related direct costs and recognized over
15
the life of the related loans as an adjustment of yield, if the commitment is
exercised, or if the commitment expires unexercised, recognized in income
upon expiration of the commitment.
NON-PERFORMING LOANS AND FORECLOSED REAL ESTATE. When a borrower fails
to make a required loan payment, the Association attempts to cure the default
by contacting the borrower. In general, contacts with borrowers are made by
the Association after a payment is more than 30 days past due, at which time
a late charge is assessed. In most cases, defaults are cured promptly. If
the delinquency is not rectified within 90 days through the Association's
normal collection procedures, or an acceptable arrangement is not worked out
with the borrower, the Association will institute measures to remedy the
default, including commencing a foreclosure action or, in special
circumstances, accepting from the mortgagor a voluntary deed of the secured
property in lieu of foreclosure.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on
non-accrual status, previously accrued but unpaid interest is deducted from
interest income. Under federal regulations, consumer loans which are more
than 120 days delinquent are required to be written-off.
If foreclosure is effected, the property is sold at a public auction in
which the Association may participate as a bidder. If the Association is the
successful bidder, the acquired real estate property is then included in the
Association's "foreclosed real estate" account until it is sold. When
property becomes foreclosed real estate, it is recorded at the lower of cost
or fair value at the date of acquisition and any writedown resulting
therefrom is charged to the allowance for loan losses. Interest accrual
ceases on the date of acquisition and all costs incurred from that date in
maintaining the property are expensed. Costs incurred for the improvement or
development of such property are capitalized. An allowance, if necessary, is
provided to reduce the carrying value to its fair value less estimated
selling costs. The Association is permitted under OTS regulations to finance
sales of foreclosed real estate by "loans to facilitate," which may involve
more favorable interest rates and terms than generally would be granted under
the Association's underwriting guidelines. As of February 29, 1996, the
Association's participation in loans to facilitate the purchase of foreclosed
real estate amounted to $159,000.
16
The following table sets forth information regarding non-accrual loans,
loans which are 90 days or more delinquent but on which the Association was
accruing interest and foreclosed real estate at the dates indicated. The
Association had $2.8 million of troubled debt restructurings at February 28,
1995 and there were no troubled debt restructurings during any other period
shown.
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Total non-performing loans:(1)
Non-accrual loans $ -- $ 20 $2,748 $ 464 $ --
Accruing loans which are 90
days or more overdue 3,386 1,536 3,155 1,155 1,284
------ ------ ------ ------ ------
Total non-performing loans $3,386 $1,556 $5,903 $1,619 $1,284
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total non-performing loans to
total loans receivable-net 0.3% 0.2% 0.8% 0.3% 0.2%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total foreclosed real estate $2,090 $2,695 $3,210 $4,032 $3,561
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total non-performing loans
and foreclosed real estate to
total assets 0.5% 0.4% 1.04% 0.7% 0.6%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
____________
(1) Consists of residential, commercial real estate loans and consumer loans.
The $3.4 million of accruing loans which were 90 days or more overdue at
February 29, 1996 consisted of 34 first mortgage and 15 consumer loans with
average principal balances of approximately $98,000 and $4,000, respectively.
It is believed that these delinquencies are reflective of current economic
conditions. The $2.1 million of foreclosed real estate at February 29, 1996
consisted primarily of a condominium/office complex located in Hyattsville,
Maryland and an industrial park located in Forestville, Maryland, which had
carrying values of $1.1 million and $800,000, respectively. At February 29,
1996, the Association also held one single-family residential property and one
additional commercial property with aggregate carrying values of approximately
$122,000 and $135,000, respectively. All properties are currently being
marketed for sale. The amount of interest income that would have been recorded
on the nonaccrual loans in accordance with their original terms was $4,000 and
$342,000 for fiscal 1995 and 1994, respectively. The amount of interest income
that was recorded on these loans was $2,000 and $264,000 for fiscal 1995 and
1994, respectively.
Under current federal regulations, an institution's problem assets are
subject to classification according to one of three categories: "substandard",
"doubtful", and "loss." In addition, assets not currently requiring
classification but having potential weaknesses or risk characteristics that
could result in future problems may be subject to classification as "special
mention." See "Regulation - Regulation of the Association - Classification of
Assets." As
17
of February 29, 1996, the Association had approximately $7.0 million of
classified assets, which includes $5.5 million of the non-performing assets
shown in the table above. Of this total, approximately $7.0 million was
classified as substandard and $14,000 was classified as doubtful.
ALLOWANCE FOR LOAN LOSSES. During fiscal 1996, the Association made
provisions for loan losses of $120,000 in recognition of the general risks of
credit loss in the portfolio and the general economic conditions in the
Association's market area. During fiscal 1994 and 1995, the Association made
provisions for losses on loans of $662,000 and $300,000, respectively. During
fiscal 1994, 1995 and 1996, the Association made charges to the allowance for
loan losses of $3,000, $13,000 and $70,000, respectively. During fiscal 1994,
1995 and 1996, such provisions and charge-offs primarily reflected estimated
losses with respect to construction and other loans which were adversely
affected by market conditions. In the future, the Association will make
additions to the allowance by charges to operations to reflect the amount
management determines is necessary based on its monthly risk analysis of the
loan portfolio.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on a monthly evaluation
of the portfolio, past loan loss experience, current economic conditions,
volume, growth and composition of the loan portfolio, and other relevant
factors. The allowance is increased by provisions for loan losses charged
against income. Although management believes that it has used the best
information available to it in making such determinations, future reserves may
be necessary and net income could be significantly affected if circumstances
differ substantially from the assumptions used in making the initial
determinations.
Effective December 21, 1993, the OTS, in connection with the Office of the
Comptroller of the Currency, the FDIC and the Federal Reserve Board, issued an
Interagency Policy Statement on the Allowance for Loan and Lease Losses ("Policy
Statement"). The Policy Statement, which effectively supersedes the proposed
guidance issued on September 1, 1992, includes guidance (i) on the
responsibilities of management for the assessment and establishment of an
adequate allowance and (ii) for the agencies' examiners to use in evaluating the
adequacy of such allowance and the policies utilized to determine such
allowance. The Policy Statement also sets forth quantitative measures for the
allowance with respect to assets classified substandard and doubtful and with
respect to the remaining portion of an institution's loan portfolio.
Specifically, the Policy Statement sets forth the following quantitative
measures which examiners may use to determine the reasonableness of an
allowance: (i) 50% of the portfolio that is classified doubtful; (ii) 15% of the
portfolio that is classified substandard; and (iii) for the portions of the
portfolio that have not been classified (including loans designated special
mention), estimated credit losses over the upcoming twelve months based on facts
and circumstances available on the evaluation date. While the Policy Statement
sets forth this quantitative measure, such guidance is not intended as a "floor"
or "ceiling."
18
The following table presents information concerning the Association's
allowance for loan losses, charge-offs and recoveries during the periods
indicated.
YEAR ENDED
------------------------------------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Balance, beginning of period $4,424 $4,187 $4,267 $2,348 $1,298
------ ------ ------ ------ ------
Provision:
Real estate-residential 50 300 662 1,940 1,361
Consumer loans 70 -- -- -- --
------ ------ ------ ------ ------
Total provision 120 300 662 1,940 1,361
------ ------ ------ ------ ------
Transfer to allowance for
losses on foreclosed real
estate -- 50 739 -- --
------ ------ ------ ------ ------
Charge-offs:
Real estate-residential 45 9 -- 13 300
Consumer loans 25 4 3 8 11
------ ------ ------ ------ ------
Total charge-offs 70 13 3 21 311
------ ------ ------ ------ ------
Balance, end of period $4,474 $4,424 $4,187 $4,267 $2,348
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of charge-offs to
average loans and
mortgage-backed securities
outstanding 0.007% 0.001% --% .003% .05%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
The Association also maintains an allowance for losses on foreclosed real
estate. At February 29, 1996, the Association's allowance for losses on
foreclosed real estate amounted to $1.3 million. For additional information,
see Note 5 of the Notes to Consolidated Financial Statements.
19
The following table sets forth the amount of the Association's allowance
for loan losses attributable to each type of loan indicated and the percent of
such type of loans to total loans (including mortgage-backed securities) and
participations of each at the dates indicated.
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994 FEBRUARY 28, 1993 FEBRUARY 29, 1992
-------------------- -------------------- --------------------- ------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
Real estate
loans(1) $4,238 99.6% $4,233 99.7% $3,991 99.6% $4,068 99.3% $2,141 98.9%
Consumer and
other loans 236 0.4 191 0.3 196 0.4 199 0.7 207 1.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $4,474 100.0% $4,424 100.0% $4,187 100.0% $4,267 100.0% $2,348 100.0%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
_____________
(1) Includes residential and commercial real estate loans and construction
loans.
20
INVESTMENT ACTIVITIES
The Association is required under OTS regulations to maintain
certain liquidity ratios and does so by investing in securities that qualify as
liquid assets. See "Regulation - Regulation of the Association - Federal Home
Loan Bank System" for a description of such regulations. Such securities
include obligations issued or fully guaranteed by the United States government,
certain federal agency obligations, certain time deposits and negotiable
certificates of deposit issued by commercial banks and other specified
investments, including commercial paper and corporate debt securities.
The Association's investment portfolio has primarily consisted of
obligations of the United States government and federal agencies, federal funds
sold, certificates of deposit and securities purchased under agreements to
resell.
Effective February 10, 1992, the OTS adopted a statement of
policy ("Statement") set forth in Thrift Bulletin 52 concerning (i) procedures
to be used in the selection of a securities dealer, (ii) the need to document
and implement prudent policies and strategies for securities, whether held for
investment, trading or for sale, and to establish systems and internal controls
to ensure that securities activities are consistent with the financial
institution's policies and strategies, (iii) securities trading and sales
practices that may be unsuitable in connection with securities held in an
investment portfolio, (iv) high-risk mortgage securities that are not suitable
for investment portfolio holdings for financial institutions, and (v)
disproportionately large holdings of long-term, zero-coupon bonds that may
constitute an imprudent investment practice. The Statement applies to
investment securities, high-yield, corporate debt securities, loans, mortgage-
backed securities and derivative securities, and provides guidance concerning
the proper classification of and accounting for securities held for investment,
sale and trading. Securities held for investment, sale or trading may be
differentiated based upon an institution's desire to earn an interest yield
(held for investment), to realize a holding gain from assets held for indefinite
periods of time (held for sale), or to earn a dealer's spread between the bid
and asked prices (held for trading). Depository institution investment
portfolios are maintained to provide earnings consistent with the safety factors
of quality, maturity, marketability and risk diversification. Securities that
are purchased to accomplish these objectives may be reported at their amortized
cost only when the depository institution has both the intent and ability to
hold the assets to maturity. Securities held for investment purposes are
accounted for at amortized cost and securities held for sale and securities held
for trading are to be accounted for at market. The Association believes that
its investment activities have and will be conducted in accordance with the
requirements of OTS policies and generally accepted accounting principles
("GAAP").
21
The following table sets forth the carrying value of Maryland
Federal's investment securities and certain other interest-earning assets at the
dates indicated.
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
United States
Government and agency
obligations $ 7,997 $21,918 $ 26,727
State and County Government
obligations 1,476 1,658 184
Equity securities 8,578 7,103 4,911
Interest-bearing deposits 15,710 9,271 24,109
Federal funds sold 5,058 1,408 12,000
Securities purchased
under agreements to resell 11,034 9,623 29,018
Federal Home Loan Bank
stock 12,514 9,784 8,151
------- ------- --------
Total $62,367 $60,765 $105,100
------- ------- --------
------- ------- --------
As of February 29, 1996, no investment securities of any single
issuer were held by the Association where the aggregate carrying value of such
securities exceeded 10% of the Company's stockholders' equity, other than United
States Government and agency obligations and Federal Home Loan Bank stock.
22
The following table sets forth at February 29, 1996 the amount of
each category of the Association's investment securities and certain other
interest-earning assets which mature during each of the periods indicated and
the weighted average yield for each range of maturities.
AMOUNTS AT FEBRUARY 29, 1996 WHICH MATURE
------------------------------------------------------------------------------
IN AFTER ONE YEAR AFTER FIVE YEARS
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS
---------------- ------------------ ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
United States government
and agency obligations $ 5,205 4.97% $2,792 5.30% $ -- --% $ -- --%
State and County Government
obligations -- -- 664 4.76 812 4.29 -- --
Equity securities 8,578 3.91 -- -- -- -- -- --
Interest-bearing deposits 15,710 5.54 -- -- -- -- -- --
Federal funds sold 5,058 5.38 -- -- -- -- -- --
Securities purchased
under agreements to resell 11,034 5.02 -- -- -- -- -- --
Federal Home Loan Bank
stock -- -- -- -- -- -- 12,514 7.25
------- ---- ------ ---- ---- ---- ------- ----
Total $45,585 5.03% $3,456 5.20% $812 4.29% $12,514 7.25%
------- ---- ------ ---- ---- ---- ------- ----
------- ---- ------ ---- ---- ---- ------- ----
23
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Association's
funds for use in lending and for other general business purposes. In addition
to deposits, the Association derives funds from loan amortizations and
prepayments, advances from the FHLB of Atlanta and, to a lesser extent, sales of
loans. It is the Association's policy to utilize the source of funds which has
the lowest available cost. Loan repayments are a relatively stable source of
funds, while deposit inflows and outflows are significantly influenced by
general market interest rates and economic conditions. Borrowings may be used
on a short-term basis to compensate for seasonal or other reductions in normal
sources of funds or for deposit inflows at less than projected levels.
Borrowings may also be used on a longer term basis to support expanded
activities. Historically, the Association's borrowings have primarily consisted
of advances from the FHLB of Atlanta and, to a lesser extent, institutional
repurchase agreements. See "Borrowings."
DEPOSITS. Due to changes in regulatory and economic conditions
during the 1980's, the Association has increasingly relied upon deregulated
fixed-rate certificate accounts and other authorized types of deposits. The
Association has established a number of different programs designed to attract
both short-term and long-term savings of the general public by providing a wide
assortment of accounts and rates consistent with OTS regulations. These
programs include regular savings accounts, checking accounts, money market
deposit accounts ("MMDAs") and variable and fixed-rate certificates. Also
included among these programs are individual retirement accounts ("IRAs") and
Keogh retirement accounts.
Maryland Federal's deposits are obtained primarily from residents
of the five counties in the State of Maryland in which Maryland Federal is
located. The Association does not utilize brokered deposits. The principal
methods used by Maryland Federal to attract deposit accounts include offering a
wide variety of services and accounts, competitive interest rates and convenient
office locations. At February 29, 1996, Maryland Federal operated 22 automated
teller machines ("ATMs") in addition to participating in the MOST-Registered
Trademark- ATM network.
The Association currently offers certificates of deposit with
minimum balance requirements beginning at $100, with the rates set as
appropriate based on a review of the rates offered by other financial
institutions in the Association's primary market area. The Association also
offers jumbo certificates of deposit in denominations of $100,000 or more. The
Association's MMDAs currently have a $1,000 minimum deposit, no regulatory
interest rate ceiling and limited check-writing privileges. The interest rate
on the account is reviewed frequently based on money market conditions.
24
The following table shows the distribution of, and certain other
information relating to, the Association's deposits by type of deposit at the
dates indicated.
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
---------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
Regular savings accounts $ 76,514 9.7% $ 94,104 12.3% $134,558 19.8%
Checking accounts 44,497 5.6 39,994 5.2 35,828 5.3
MMDAs 45,315 5.7 51,398 6.7 59,775 8.8
Fixed-rate certificates 274,266 34.9 239,977 31.4 199,656 29.4
Money market certificates:
91 day 6,632 0.8 4,208 0.6 7,840 1.2
6 month 23,171 2.9 19,256 2.5 24,883 3.7
12 month 146,177 18.5 139,686 18.3 52,744 7.8
18 month -- -- 13 -- 1,260 .2
Variable-rate certificates 21,166 2.7 42,742 5.6 95,881 14.1
Jumbo certificates 116,313 14.7 101,350 13.3 34,342 5.1
Mini-jumbo certificates 12,284 1.6 9,456 1.3 932 .1
IRA certificates 22,596 2.9 21,570 2.8 30,351 4.5
-------- ----- -------- ----- -------- -----
Total $788,931 100.0% $763,754 100.0% $678,050 100.0%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
25
The following table presents the average balance of each type of deposit
and the average rate paid on each type of deposit for the periods indicated.
YEAR ENDED
-------------------------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
----------------- ------------------ ------------------
AVERAGE AVERAGE AVERAGE
AVERAGE RATE AVERAGE RATE AVERAGE RATE
BALANCE PAID BALANCE PAID BALANCE PAID
------- ---- ------- ---- ------- ----
(DOLLARS IN THOUSANDS)
Regular savings accounts $ 80,731 3.33% $123,019 3.40% $120,464 3.40%
Checking accounts 42,158 1.80 37,915 1.78 33,371 1.78
MMDAs 45,915 3.03 56,349 3.20 58,296 3.17
Fixed-rate certificates 243,810 5.81 220,975 5.04 190,938 5.75
Money market certificates:
91 day 5,370 4.39 5,729 3.28 10,147 3.30
6 month 21,439 4.70 20,738 3.43 28,697 3.34
12 month 166,130 5.88 80,774 4.77 48,134 3.86
18 month 4 3.50 251 4.12 2,817 4.56
Variable-rate certificates 27,019 5.24 63,774 4.43 96,741 4.63
Jumbo certificates 110,989 6.04 61,967 5.43 33,848 3.68
Mini-jumbo certificates 8,823 5.28 5,777 5.14 978 4.69
IRA certificates 21,308 6.10 25,191 4.61 35,784 4.37
-------- ---- -------- ---- -------- ----
Total $773,696 5.16% $702,459 4.30% $660,215 4.23%
-------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ----
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
26
competitors, alternative sources of funds, and the projected level of
interest rates in the future. Maryland Federal does not necessarily seek to
match the highest rates paid by competing institutions.
The following table sets forth the net deposit flows of the Association
during the periods indicated.
YEAR ENDED
--------------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
Increase (decrease)
before interest credited $ (337)(1) $64,754(1) $(8,971)(1)
Interest credited 25,514 20,950 20,789
-------- ---------- -----------
Net deposit increase
(decrease) $25,177 $85,704 $11,818
-------- ---------- -----------
-------- ---------- -----------
_____________________
(1) Reflects approximately $-0-, $50.5 million and $20.0 million of deposit
inflows as a result of the acquisition of deposits of various savings
institutions during fiscal 1996, 1995 and 1994, respectively.
The following table sets forth the amount of certificates of deposit in the
amount of $100,000 or more at February 29, 1996, which mature during each of the
periods indicated.
AMOUNTS AT FEBRUARY 29, 1996 WHICH MATURE
-------------------------------------------------
AFTER THREE AFTER
IN THREE MONTHS SIX MONTHS
MONTHS THROUGH THROUGH AFTER 12
OR LESS SIX MONTHS 12 MONTHS MONTHS
------- ---------- --------- ------
(IN THOUSANDS)
Certificates of deposit $59,989 $32,506 $28,637 $34,023
------- ------- ------- -------
------- ------- ------- -------
27
The following table presents certain information concerning Maryland
Federal's deposits at February 29, 1996 and the scheduled quarterly maturities
of its certificates of deposit.
WEIGHTED
AVERAGE
PERCENTAGE OF NOMINAL
AMOUNT TOTAL DEPOSITS RATE
------ -------------- ----
(DOLLARS IN THOUSANDS)
Regular savings accounts $ 76,514 9.70% 3.28%
Checking accounts 44,497 5.64 1.57
MMDAs 45,315 5.74 3.00
-------- ------ -----
Total $166,326 21.08% 2.75%
-------- ------ -----
Certificate accounts maturing
by quarter:
May 31, 1996 180,799 22.92 5.54
August 31, 1996 102,003 12.93 5.78
November 30, 1996 74,965 9.50 5.75
February 28, 1997 71,716 9.09 5.73
May 31, 1997 48,062 6.09 5.69
August 31, 1997 32,455 4.11 5.49
November 30, 1997 18,424 2.34 5.60
February 28, 1998 10,630 1.35 6.03
May 31, 1998 10,995 1.39 6.07
August 31, 1998 18,883 2.39 6.61
November 30, 1998 12,515 1.59 6.75
February 28, 1999 6,282 0.80 5.90
Thereafter 34,876 4.42 5.96
-------- ------ -----
Total certificate accounts 622,605 78.92 5.74
-------- ------ -----
Total deposits $788,931 100.00% 5.11%
-------- ------ -----
-------- ------ -----
28
The following table presents, by various interest rate
categories, the amounts of certificate accounts at the dates indicated and the
amounts of certificate accounts at February 29, 1996 which mature during the
periods indicated.
AMOUNTS AT FEBRUARY 29, 1996
BALANCE AT MATURING IN THE YEAR ENDING
--------------------------- --------------------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
INTEREST RATE: 1996 1995 1997 1998 1999 THEREAFTER
- -------------- ---- ---- ---- ---- ---- ----------
(IN THOUSANDS)
4.00% or less $ 1,547 $ 52,792 $ 1,366 $ 181 $ -- $ --
4.01 to 6.00% 407,702 360,080 296,827 82,740 11,149 16,986
6.01% to 8.00% 211,282 154,923 130,464 25,818 37,363 17,637
8.01% to 10.00% 1,756 9,968 539 808 156 253
10.01% to 12.00% 318 495 311 -- 7 --
-------- -------- -------- -------- ------- -------
Total $622,605 $578,258 $429,507 $109,547 $48,675 $34,876
-------- -------- -------- -------- ------- -------
-------- -------- -------- -------- ------- -------
The Association does not utilize brokered deposits. FIRREA prohibits any
savings institution not meeting minimum capital requirements from accepting,
directly or indirectly, brokered deposits or from offering higher than
prevailing rates in the institution's market area. The Association currently
meets all of its capital requirements and is not subject to this prohibition.
BORROWINGS. The Association obtains advances from the FHLB of Atlanta upon
the security of its capital stock in the FHLB of Atlanta and a portion of its
first mortgages and participation certificates. See "Regulation - Regulation of
the Association - Federal Home Loan Bank System." At February 29, 1996,
advances mature as follows:
WEIGHTED
AVERAGE
FISCAL YEAR AMOUNT RATE
----------- ------ ----
(DOLLARS IN THOUSANDS)
1997 $127,750 6.06%
1998 75,350 5.75
1999 39,000 5.55
2000 1,000 4.90
2001 -- --
Thereafter 680 6.50
-------- ----
Total $243,780 5.88%
-------- ----
-------- ----
29
FHLB advances are made pursuant to several different credit programs, each
of which has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on either a fixed
percentage of assets or the FHLB of Atlanta's assessment of the Association's
creditworthiness. FHLB advances are generally available to meet seasonal and
other withdrawals of deposit accounts and to expand lending.
The following table sets forth certain information regarding the borrowings
of the Association at the dates indicated.
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
--------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
(DOLLARS IN THOUSANDS)
Advances from FHLB $243,780 5.88% $190,730 5.98% $103,180 5.13%
30
The following table sets forth certain information concerning the
borrowings of the Association for the periods indicated, which is based on
daily average balances.
YEAR ENDED
---------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Advances from FHLB:
Average balance outstanding $213,176 $160,877 $ 86,754
Maximum amount outstanding at
any month-end during the period $251,030 $195,680 $104,180
Weighted average interest rate
during the period 6.08% 5.42% 5.12%
Total short-term borrowings at
end of period $127,750 $122,550 $ 34,250
SUBSIDIARIES
OTS regulations permit the Association to invest up to 2% of its assets in
capital stock of, and secured and unsecured loans to, subsidiary service
corporations and an additional 1% of its assets when the additional funds are
utilized for community or inner-city purposes. In addition, federally chartered
savings institutions which are in compliance with their regulatory capital
requirements also may make conforming loans to service corporations in which the
institution owns or holds more than 10% of the capital stock in an aggregate
amount of up to 50% of the institution's regulatory capital. A savings
institution meeting its regulatory requirements also may make, subject to the
loans-to-one borrower limitations, conforming loans to service corporations in
which the institution does not own or hold more than 10% of the capital stock
and certain other corporations meeting specified requirements. Federally
chartered savings institutions also are authorized to invest up to 30% of their
assets in finance subsidiaries whose sole purpose is to issue debt or equity
securities that the Association is authorized to issue directly, subject to
certain limitations. OTS regulations also limit the aggregate amount of direct
investments, including loans, by a SAIF-insured institution in real estate,
service corporations, operating subsidiaries and equity securities as defined
therein.
At February 29, 1996, the Association was authorized to have a maximum
investment of approximately $22.9 million in its subsidiaries, exclusive of the
1% of assets permitted for community or inner-city purposes and the ability to
make conforming loans. As of such date, the Association had invested
approximately $45,000 in its sole subsidiary.
31
Maryland Federal currently operates one wholly-owned service corporation
subsidiary, MASSLA Corporation ("MASSLA"). MASSLA, incorporated in December
1971, provides various types of insurance products. MASSLA offers group
homeowners and accidental death insurance policies to the Association's
customers and employees.
MARKET AREA AND COMPETITION
Maryland Federal's primary market area consists of Prince George's,
Montgomery, Charles, Anne Arundel and Calvert counties in the Maryland suburbs
of Washington, D.C. The Federal government accounts for 35% of the market
area's gross regional product. The Federal sector is currently shedding 13,000
jobs per year. The slack is being picked up by the technology and education
sectors but the losses do hold down the expansion potential for the area
economy.
Interest rates on deposits in the Washington area have traditionally been
among the highest in the nation. Recent surveys suggest this is still the case.
The consolidation trend has made it easier to attract deposits as acquirors
reduce rates. Margin compression is present because market rates have increased
in recent months. At this time the trend of interest rates is not clear.
Maryland Federal's competition for real estate loans comes primarily from
mortgage banking companies, commercial banks and other savings institutions.
Maryland Federal competes for loan originations primarily through the interest
rates and loan fees it charges and the efficiency and quality of services it
provides borrowers, real estate brokers and builders. Factors which affect
competition include the general and local economic conditions, current interest
rate levels and volatility in the mortgage markets.
EMPLOYEES
At February 29, 1996, MFB had unpaid executive officers, all of whom serve
in the same capacity with the Association. At February 29, 1996, the
Association and its subsidiary had 236 full-time employees, including its
executive officers, as well as 40 part-time employees. None of these employees
are represented by a collective bargaining agent, and the Association has
enjoyed harmonious relations with its personnel.
32
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company and the Association. The
description of these laws and regulations, as well as descriptions of laws and
regulations contained elsewhere herein, does not purport to be complete and is
qualified in its entirety by reference to the applicable laws and regulations.
REGULATION OF THE COMPANY
GENERAL. The Company is a registered savings and loan holding company
within the meaning of the Home Owners' Loan Act, as amended ("HOLA"). As such,
the Company is subject to OTS regulations, examinations, supervision and
reporting requirements. As a SAIF-insured subsidiary of a savings and loan
holding company, the Association is subject to certain restrictions in its
dealings with the Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings association. However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association; (ii)
transactions between the savings association and its affiliates; and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet a qualified
thrift lender ("QTL") test, then such unitary holding company also shall become
subject to the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings association requalifies as a QTL
within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "- Regulation of the
Association - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Association,
the Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
test as set forth below, the activities of the Company and any of its
subsidiaries (other than the Association or other subsidiary savings
associations) would thereafter be subject to further restrictions. Among other
things, no multiple savings and loan holding company or subsidiary thereof which
is not a savings association shall commence or continue for a limited period of
time after becoming a multiple savings and loan holding company or subsidiary
thereof any business activity, upon
33
prior notice to, and no objection by the OTS, other than: (i) furnishing or
performing management services for a subsidiary savings association; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing,
or liquidating assets owned by or acquired from a subsidiary savings
association; (iv) holding or managing properties used or occupied by a
subsidiary savings association; (v) acting as trustee under deeds of trust;
(vi) those activities authorized by regulation as of March 5, 1987 to be
engaged in by multiple savings and loan holding companies; or (vii) unless
the Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies, those activities authorized by the
Federal Reserve Board as permissible for bank holding companies. Those
activities described in (vii) above also must be approved by the Director of
the OTS prior to being engaged in by a multiple savings and loan holding
company.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
associations and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings association is any company or
entity which controls, is controlled by or is under common control with the
savings association. In a holding company context, the parent holding company
of a savings association (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings association.
In addition, Sections 22(h) and 22(g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings association, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the association's
loans to one borrower limit. Section 22(h) also requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
and also requires prior board approval for certain loans. In addition, the
aggregate amount of extensions of credit by a savings association to all
insiders cannot exceed the association's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At February 29, 1996, the
34
Association had 14 loans with an aggregate balance of approximately $1.8
million outstanding to its executive officers and directors.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings association or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings association or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, also may acquire control of any savings association, other
than a subsidiary savings association, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office located in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by the state-chartered associations or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings associations).
Under the Bank Holding Company Act of 1956, the Federal Reserve Board is
authorized to approve an application by a bank holding company to acquire
control of a savings association. In addition, a bank holding company that
controls a savings association may merge or consolidate the assets and
liabilities of the savings association with, or transfer assets and liabilities
to, any subsidiary bank which is a member of the Bank Insurance Fund ("BIF")
with the approval of the appropriate federal banking agency and the Federal
Reserve Board. As a result of these provisions, there have been a number of
acquisitions of savings associations by bank holding companies in recent years.
REGULATION OF THE ASSOCIATION
GENERAL. The Association is a federally chartered savings association, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, the Association is subject to
broad federal regulation and oversight by the OTS and the FDIC extending to all
aspects of its operations. The Association is a member of the FHLB of Atlanta
and is subject to certain limited regulation by the Federal Reserve Board.
35
FEDERAL REGULATION. The OTS has extensive authority over the operations of
savings associations. As part of this authority, savings associations are
required to file periodic reports with the OTS and are subject to periodic
examinations by the OTS and the FDIC to test the Association's compliance with
various regulatory requirements. The investment and lending authority of
savings associations are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally chartered savings associations and may also apply to state-chartered
savings associations. Such regulation and supervision is primarily intended for
the protection of depositors.
The OTS' enforcement authority over all savings associations and their
holding companies was substantially enhanced by FIRREA. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. FIRREA significantly
increased the amount of and grounds for civil money penalties.
INSURANCE OF ACCOUNTS. The deposits of the Association are insured up to a
maximum extent permitted by SAIF, which is administered by the FDIC, and is
backed by the full faith and credit of the United States Government. As
insurer, the FDIC is authorized to conduct examinations of, and to require
reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings associations, after giving the OTS
an opportunity to take such action.
Both the SAIF and BIF are statutorily required to be capitalized to a ratio
of 1.25% of insured reserve deposits. While the BIF has reached the required
reserve ratio, the SAIF is not expected to be recapitalized until 2002 at the
earliest. Legislation has authorized $8 billion for the SAIF; however, such
funds only become available to the SAIF if the FDIC determines that the funds
are needed to cover losses of the SAIF and several other stringent criteria are
met.
On November 14, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule will reduce deposit insurance premiums for
BIF member institutions to zero basis points (subject to a $2,000 minimum) for
institutions in the lowest risk category, while holding deposit insurance
premiums for SAIF members at their current levels (23 basis points for
institutions in the lowest risk category, as discussed below.) The reduction
was effective with respect to the semiannual premium assessment beginning
January 1, 1996.
36
Under current FDIC regulations, SAIF-institutions are assigned to one of
three capital groups which are based solely on the level of an institution's
capital - "well capitalized," "adequately capitalized," and "undercapitalized" -
which are defined in the same manner as the regulations establishing the prompt
corrective action system under Section 38 of the Federal Deposit Insurance Act.
See "- Prompt Corrective Regulatory Action." These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications, with rates ranging from .23%
for well capitalized, healthy institutions to .31% for undercapitalized
institutions with substantial supervisory concerns. The Association's current
deposit insurance assessment rate is .23%.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Association, if it determines after a hearing that
the institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result
in termination of the Association's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings associations
are required to maintain minimum levels of regulatory capital. Pursuant to
FIRREA, the OTS has established capital standards applicable to all savings
associations. These standards generally must be as stringent as the comparable
capital requirements imposed on national banks. The OTS also is authorized to
impose capital requirements in excess of these standards on individual
associations on a case-by-case basis.
Current OTS capital standards require savings associations to satisfy three
different capital requirements. Under these standards, savings associations
must maintain "tangible" capital equal to 1.5% of adjusted total assets, "core"
capital equal to 3% of adjusted total assets and "total" capital (a combination
of core and "supplementary" capital) equal to 8.0% of "risk-weighted" assets.
For purposes of the regulation, core capital generally consists of common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits and "qualifying supervisory goodwill." Core capital is generally
reduced by the amount of a savings association's intangible assets for which no
market exists. Limited exceptions to the deduction of intangible assets are
provided for purchased mortgage servicing rights and qualifying supervisory
goodwill. Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the
37
savings association's intangible assets, with only a limited exception
for purchased mortgage servicing rights.
Both core and tangible capital are further reduced by an amount equal to a
savings association's debt and equity investments in subsidiaries engaged in
activities not permissible to national banks (other than subsidiaries engaged in
activities undertaken as agent for customers or in mortgage banking activities
and subsidiary depository institutions or their holding companies). At February
29, 1996, the Association had no qualifying supervisory goodwill or purchased
mortgage servicing rights. In addition, as of such date, the Association had no
investments in or extensions of credit to subsidiaries engaged in activities not
permissible to national banks.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core and supplementary capital in
its total capital, provided that the amount of supplementary capital does not
exceed the savings institution's core capital. Supplementary capital includes
(i) permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt, and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory redeemable preferred stock, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets. In determining the required
amount of risk-based capital, total assets, including certain off-balance sheet
items, are multiplied by a risk weight based on the risks inherent in the type
of assets. The risk weights assigned by the OTS for principal categories of
assets are (i) 0% for cash and securities issued by the U.S. Government or
unconditionally backed by the full faith and credit of the U.S. Government; (ii)
20% for securities (other than equity securities) issued by U.S. Government
sponsored agencies and mortgage-backed securities issued by, or fully guaranteed
as to principal and interest by, the FNMA or the FHLMC, except for those classes
with residual characteristics or stripped mortgage-related securities; (iii) 50%
for prudently underwritten permanent one-to-four family first lien mortgage
loans not more than 90 days delinquent and having a loan-to-value ratio of not
more than 80% at origination unless insured to such ratio by an insurer approved
by the FNMA or the FHLMC, and qualifying residential bridge loans made directly
for the construction of one-to-four family residences; (iv) 100% for all other
loans and investments, including consumer loans, commercial loans, and single-
family residential real estate loans more than 90 days delinquent, and for
repossessed assets.
38
The following table sets forth certain information concerning Maryland
Federal's regulatory capital at February 29, 1996.
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
(DOLLARS IN THOUSANDS)
Capital under GAAP $88,147 $88,147 $88,147
Additional capital items:
Qualifying general loan
loss allowance --- --- 4,424
Other (3,988) (3,988) (3,988)
-------- -------- --------
Total regulatory capital 84,159 84,159 88,583
Minimum required capital 17,125 34,250 47,195
-------- -------- --------
Excess regulatory capital $67,034 $49,909 $41,388
-------- -------- --------
-------- -------- --------
Regulatory capital as a
percentage(1) 7.37% 7.37% 15.02%
Minimum capital required
as a percentage (1) 1.50% 3.00% 8.00%
-------- -------- --------
Regulatory capital as a
percentage in excess of
requirement 5.87% 4.37% 7.02%
-------- -------- --------
-------- -------- --------
______________
(1) Tangible capital and core capital are computed as a percentage of adjusted
total assets of $1.1 billion. Risk-based capital is computed as a
percentage of adjusted risk-weighted assets of $589.8 million.
39
Any savings association that fails any of the capital
requirements is subject to possible enforcement actions by the OTS or the FDIC.
Such actions could include a capital directive, a cease and desist order, civil
money penalties, the establishment of restrictions on an association's
operations, termination of federal deposit insurance and the appointment of a
conservator or receiver. The OTS' capital regulation provides that such
actions, through enforcement proceedings or otherwise, could require one or more
of a variety of corrective actions.
In August 1993, the OTS and other federal banking agencies
published a final rule modifying their existing risk-based capital standards to
provide for consideration of interest rate risk when assessing capital adequacy
of a bank. Under the final rule, the OTS must explicitly include a bank's
exposure to declines in the economic value of its capital due to changes in
interest rates as a factor in evaluating a bank's capital adequacy. In
addition, in August 1995, the OTS and the other federal banking agencies
published a joint policy statement for public comment that describes the process
the banking agencies will use to measure and assess the exposure of a bank's net
economic value to change in interest rates. Under the policy statement, the OTS
will consider results of supervisory and internal interest rate risk models as
one factor in evaluating capital adequacy. The OTS intends, at a future date,
to incorporate explicit minimum requirements for interest rate risk in its risk-
based capital standards through the use of a model developed from the policy
statement, a future proposed rule and the public comments received therefrom.
PROMPT CORRECTIVE REGULATORY ACTION. The FDIC Improvement Act
requires each appropriate agency and the FDIC to take prompt corrective action
to resolve the problems of insured depository institutions that fall below a
certain capital ratio. Such action must be accomplished at the least possible
long-term cost to the appropriate deposit insurance fund.
In September 1992, the federal banking agencies (including the
OTS) adopted substantially similar regulations which are intended to implement
the system of prompt corrective action established by the FDIC Improvement Act.
These regulations were effective December 19, 1992. Under the regulations, a
savings association shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure, (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital
ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0%
under certain circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less
than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to
40
total assets that is equal to or less than 2.0%. The FDIC Improvement
Act and the regulations also specify circumstances under which the OTS may
reclassify a well capitalized savings association as adequately capitalized and
may require an adequately capitalized savings association or an undercapitalized
savings association to comply with supervisory actions as if it were in the next
lower category (except that the OTS may not reclassify a significantly
undercapitalized savings association as critically undercapitalized). At
February 29, 1996, the Association was in the "well capitalized" category.
LIQUIDITY REQUIREMENTS. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required liquid
asset ratio is 5%. The Association has consistently complied with applicable
regulatory liquidity requirements and is currently in compliance with such
requirements.
ACCOUNTING REQUIREMENTS. Applicable OTS accounting regulations
and reporting requirements apply the following standards: (i) regulatory reports
will incorporate generally accepted accounting principles when generally
accepted accounting principles are used by federal banking agencies; (ii)
savings association transactions, financial condition and regulatory capital
must be reported and disclosed in accordance with OTS regulatory reporting
requirements that will be at least as stringent as for national banks; and (iii)
the Director of the OTS may prescribe regulatory reporting requirements more
stringent than generally accepted accounting principles whenever the Director
determines that such requirements are necessary to ensure the safe and sound
reporting and operation of savings associations.
QUALIFIED THRIFT LENDER TEST. All savings associations are
required to meet a QTL test set forth in Section 10(m) of the HOLA and
regulations of the OTS thereunder to avoid certain restrictions on their
operations. A savings association that does not meet the QTL test set forth in
the HOLA and implementing regulations must either convert to a bank charter or
comply with the following restrictions on its operations: (i) the association
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the association shall be restricted to those
of a national bank; (iii) the association shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the association shall
be subject to the rules regarding payment of dividends by a national bank. Upon
the expiration of three years from the date the association ceases to be a QTL,
it must cease any activity and not retain any investment not permissible for a
national bank and immediately repay any outstanding FHLB advances (subject to
safety and soundness considerations).
41
An association's Qualified Thrift Investments are required to
represent 65% of portfolio assets on a monthly average basis in nine out of
every 12 months. Qualified Thrift Investments are defined as total assets less
intangibles, property used by a savings association in its business and
liquidity investments in an amount not exceeding 20% of assets. Under the
definition of Qualified Thrift Investments, liquidity investments and the book
value of property used in an association's business are not considered Qualified
Thrift Investments. In addition, Qualified Thrift Investments do not include
any intangible asset. Subject to a 20% of portfolio assets limit, however,
savings associations are able to treat as Qualified Thrift Investments 200% of
their investments in loans to finance "starter homes" and loans for the
construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas. At
February 29, 1996, approximately 96.2% of the Association's assets were invested
in Qualified Thrift Investments.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. OTS regulations govern
capital distributions by savings associations, which include cash dividends,
stock redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other transactions charged to the capital account of a
savings association. Generally, the regulations create a safe harbor for
specified levels of capital distributions from associations meeting at least
their minimum capital requirements, so long as such associations notify the OTS
and receive no objection to the distribution from the OTS. Associations and
distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Generally, Tier 1 associations, which are savings associations
that before and after the proposed distribution meet or exceed their fully
phased-in capital requirements, may make capital distributions during any
calendar year equal to the higher of (i) 100% of net income for the calendar
year-to-date plus 50% of its "surplus capital ratio" at the beginning of the
calendar year or (ii) 75% of net income over the most recent four-quarter
period. The "surplus capital ratio" is defined to mean the percentage by which
the association's ratio of total capital to assets exceeds the ratio of its
fully phased-in capital requirement to assets. "Fully phased-in capital
requirement" is defined to mean an association's capital requirement under the
statutory and regulatory standards applicable on December 31, 1994, as modified
to reflect any applicable individual minimum capital requirement imposed upon
the association. See "- Regulatory Capital Requirements."
Tier 2 associations, which are associations that before and after
the proposed distribution meet or exceed their minimum capital requirements, may
make capital distributions over the most recent four quarter period up to 75% of
their net income during that four quarter period.
In order to make distributions under these safe harbors, Tier 1
and Tier 2 associations must submit written notice to the OTS 30 days prior to
making the distribution. The OTS may object to the distribution during that
30-day period based on safety and
42
soundness concerns. In addition, a Tier 1 association deemed to be in need
of more than normal supervision by the OTS may be downgraded to a Tier 2 or
Tier 3 association as a result of such a determination.
Tier 3 associations, which are associations that do not meet
current minimum capital requirements, or that have capital in excess of either
their fully phased-in capital requirement or minimum capital requirement but
which have been notified by the OTS that it will be treated as a Tier 3
association because they are in need of more than normal supervision, cannot
make any capital distributions without obtaining OTS approval prior to making
such distributions.
OTS regulations also prohibit the Association from declaring or
paying any dividends or from repurchasing any of its stock if, as a result, the
regulatory (or total) capital of the Association would be reduced below the
amount required to be maintained for the liquidation account established by it
for certain depositors in connection with its conversion from mutual to stock
form in June 1987.
On December 5, 1994, the OTS published a notice of proposed
rulemaking to amend its capital distribution regulation. Under the proposal,
savings institutions would be permitted to only make capital distributions that
would not result in their capital being reduced below the level required to
remain "adequately capitalized," as defined above under "-Prompt Corrective
Action." Because the Association is a subsidiary of a holding company, the
proposal would require the Association to provide notice to the OTS of its
intent to make a capital distribution. The Association does not believe that
the proposal will adversely affect its ability to make capital distributions if
it is adopted substantially as proposed.
FEDERAL HOME LOAN BANK SYSTEM. The Association is a member of
the FHLB of Atlanta, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a
reserve or central bank for its members within its assigned region. Each FHLB
is funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. Each FHLB makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the Board of
Directors of the FHLB. At February 29, 1996, the Association's advances from
the FHLB of Atlanta amounted to $243.8 million.
As a member, the Association is required to purchase and maintain
stock in the FHLB of Atlanta in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year or 5% of its outstanding advances. At
February 29, 1996, the Association had $12.5 million in FHLB stock, which was in
compliance with this requirement.
The FHLBs are required to provide funds for the resolution of
troubled savings associations and to contribute to affordable housing programs
through direct loans or
43
interest subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have adversely
affected the level of FHLB dividends paid and could continue to do so in the
future. These contributions also could have an adverse effect on the value
of FHLB stock in the future. For the year ended February 29, 1996, dividends
paid by the FHLB of Atlanta to the Association totalled $750,000.
CLASSIFICATION OF ASSETS. Under current federal regulations, an
institution's problem assets are subject to classification according to one of
three categories: "substandard," "doubtful" and "loss." For assets classified
"substandard" and "doubtful," the institution is required to establish prudent
general loan loss reserves in accordance with generally accepted accounting
principles. Assets classified "loss" must be either completely written off or
supported by a 100% specific reserve. A classification category designated
"special mention" also must be established and maintained for assets not
currently requiring classification but having potential weaknesses or risk
characteristics that could result in future problems. An institution is
required to develop an in-house program to classify its assets, including
investments in subsidiaries, on a regular basis and to set aside appropriate
loss reserves on the basis of such classification. Federal examiners may
disagree with an insured institution's classifications and amounts reserved. At
February 29, 1996, the Association's classified assets totalled approximately
$7.0 million, of which approximately $7.0 million were assets classified
substandard and $14,000 were assets classified as doubtful. The substandard
assets relate primarily to a townhouse/office project, an industrial warehouse
facility, a shopping center and various single-family homes.
INTERSTATE BRANCHING. OTS policy permits interstate branching to
the full extent permitted by statute (which is essentially unlimited).
Generally, federal law prohibits federal thrifts from establishing, retaining or
operating a branch outside the state in which the federal association has its
home office unless the association meets the Internal Revenue Service's domestic
building and loan test (generally, 60% of a thrift's assets must be housing-
related) ("IRS Test"). The IRS Test requirement does not apply if, among other
things, the law of the state where the branch would be located would permit the
branch to be established if the federal association were chartered by the state
in which its home office is located. Furthermore, the OTS will evaluate a
branching applicant's record of compliance with the Community Reinvestment Act
of 1977, as amended ("CRA"). A poor CRA record may be the basis for denial of a
branching application.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts) and non-personal time deposits.
At February 29, 1996, the Association was in compliance with applicable
requirements.
The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy applicable liquidity
requirements. Because required reserves must be maintained in the form of vault
cash or a noninterest-bearing account at
44
a Federal Reserve Bank, however, the effect of this reserve requirement is to
reduce an institution's earning assets.
FINANCIAL REPORTING. Insured institutions are required to submit
independently audited annual reports to the FDIC and the appropriate agency (and
state supervisor when applicable). These publicly available reports must
include (a) annual financial statements prepared in accordance with generally
accepted accounting principles and such other disclosure requirements as
required by the FDIC or the appropriate agency and (b) a report signed by the
Chief Executive Officer and the Chief Financial Officer or Chief Accounting
Officer of the institution which contains a statement of the management's
responsibilities for (i) preparing financial statements; (ii) establishing and
maintaining adequate internal controls for financial reporting; and (iii)
complying with the laws and regulations relating to safety and soundness and an
assessment as to the most recent fiscal year of (aa) the effectiveness of its
internal controls and (bb) the institution's compliance with applicable laws and
regulations relating to safety and soundness. With respect to any internal
control report, the institution's independent public accountants must attest to,
and report separately on, assertions of the institution's management contained
in such report. Any attestation by the independent accountant pursuant to this
section would be made in accordance with generally accepted auditing standards
for attestation engagements.
Large insured institutions, as determined by the FDIC, are
required to monitor the above activities through an independent audit committee
which has access to independent legal counsel.
FEDERAL AND STATE TAXATION
GENERAL. The Company and the Association are subject to the
generally applicable corporate tax provisions of the Code, as well as certain
additional provisions of the Code which apply to thrifts and other types of
financial institutions. The following discussion of federal taxation is
intended only to summarize certain federal income tax matters, and is not a
comprehensive description of the tax rules applicable to the Company and the
Association.
FISCAL YEAR. The Company and the Association and its subsidiary
currently file a consolidated federal income tax return on the basis of a fiscal
year ending on the last day in February.
METHOD OF ACCOUNTING. The Association maintains its books and
records for federal income tax purposes using the accrual method of accounting.
The accrual method of accounting generally requires that items of income be
recognized when all events have occurred that establish the right to receive the
income and the amount of income can be determined with reasonable accuracy and
that items of expense be deducted at the later of (i) the time when all
events have occurred that establish the liability to pay the expense and the
amount of such liability can be determined with reasonable accuracy or (ii)
the time
45
when economic performance with respect to the item of expense has occurred.
The Association maintains its books and records for financial reporting
purposes using the accrual method of accounting and has established deferred
tax assets and liabilities which are recognized for estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are recorded using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax laws or rates is
recognized in income in the period that includes the enactment date.
BAD DEBT RESERVES. Under applicable provisions of the Code,
savings institutions such as the Association are permitted to establish reserves
for bad debts and to make annual additions thereto which qualify as deductions
from taxable income. The bad debt deduction is generally based on savings
institutions actual loss experience (the "Experience Method"). In addition,
provided that certain definitional tests relating to the composition of assets
and the nature of its business are met, a savings institution may elect annually
to compute its allowable addition to its bad debt reserves for qualifying real
property loans (generally loans secured by improved real estate) by reference to
a percentage of its taxable income (the "Percentage Method").
Under the Experience Method, the deductible annual addition is
the amount necessary to increase the balance of the reserve at the close of the
taxable year to the greater of (i) the amount which bears the same ratio to
loans outstanding at the close of the taxable year as the total net bad debts
sustained during the current and five preceding taxable years bear to the sum of
the loans outstanding at the close of those six years or (ii) the balance in the
reserve account at the close of the last taxable year prior to the most recent
adoption of the Experience Method, whichever is later (assuming that the loans
outstanding have not declined since then) (the "base year"). For taxable years
beginning after 1987, the base year shall be the last taxable year beginning
before 1988.
Under the Percentage Method, the bad debt deduction with respect
to qualifying real property loans is computed as a percentage of Maryland
Federal's taxable income before such deduction, as adjusted for certain items
(such as capital gains and the dividends received deduction). Under this method
a qualifying institution such as the Association generally may deduct 8% of its
taxable income.
For taxable years ended on or before February 28, 1987, the
Association generally elected to use the Percentage Method to compute the amount
of its bad debt deduction with respect to its qualifying real property loans.
As of February 29, 1996, the Association's qualified assets constituted
approximately 96.2% of its total assets and the balance of its accumulated bad
debt reserve was less than 5% of its qualifying real property loans. As a
result, the Association does not believe that any of the restrictions imposed
upon the computation of the bad debt deduction under pre-Act law would be a
limiting factor. For the taxable year ended February 29, 1988 and thereafter,
the Association is subject to the
46
rules for computing the bad debt deduction by the Code and uses the method of
computing the bad debt deduction for its qualifying real property loans that
provides it with the maximum tax benefits available.
The income of the Company would not be subject to the bad debt
deduction allowed the Association, whether or not consolidated tax returns are
filed; however, losses of the Company or its subsidiaries included in the
consolidated tax returns may reduce the bad debt deduction allowed the
Association if a deduction is claimed under the Percentage Method.
The Association must maintain a reserve for tax purposes equal to
the bad debt deductions which it has taken reduced by (i) the amount of bad
debts that it has actually charged off, and increased by (ii) the amount of
recoveries on debts previously charged off. The Association's accumulated bad
debt reserve for tax purposes was approximately $17.2 million at February 29,
1996.
DISTRIBUTIONS. If the Association were to distribute cash or
property to its sole stockholder (other than in exchange for its stock) having a
total fair market value in excess of its accumulated earnings and profits, the
Association would generally be required to recognize as income an amount which,
when reduced by the amount of federal income tax that would be attributable to
the inclusion of such amount in income, is equal to the lesser of: (i) the
amount by which the fair market value of such distribution exceeds the post-1951
accumulated earnings and profits of the Association, or (ii) the sum of (a) the
amount of the accumulated bad debt reserve of the Association with respect to
qualifying real property loans (to the extent that additions to such reserve
exceed the additions that would be permitted under the Experience Method) and
(b) the amount of the Association's supplemental bad debt reserve (a special tax
reserve account to which a certain portion of the Association's pre-1963 bad
debt reserves was required to be allocated).
If the Association were to distribute cash or property to its
stockholder in redemption of its stock (pursuant to a liquidation of the
Association or otherwise), the Association would generally be required to
recognize as income an amount which, when reduced by the amount of federal
income tax that would be attributable to the inclusion of such amount in income,
is equal to the lesser of: (i) the amount of the distribution or (ii) the sum of
(a) the amount of the accumulated bad debt reserve of the Association with
respect to qualifying real property loans (to the extent that additions to such
reserve exceed the additions that would be permitted under the experience
method) and (b) the amount of the Association's supplemental bad debt reserve.
MINIMUM TAX. In addition to the regular federal income tax, for
taxable years beginning after December 31, 1986, the former corporate add-on
minimum tax has been replaced with an alternative minimum tax generally equal to
20% of alternative minimum taxable income. The alternative minimum tax will be
imposed in lieu of the regular corporate income tax, if the regular corporate
income tax is less than the alternative
47
minimum tax. Alternative minimum taxable income essentially consists of
regular taxable income increased by certain tax preference items and other
adjustments, including, among other items, (i) 100% of the amount by which
the bad debt deduction of a thrift institution exceeds the amount that would
have been allowable if the institution had determined its bad debt deduction
based on the Experience Method, (ii) for taxable years beginning in 1987
through 1989, one-half of the excess of pre-tax book income of a corporation
(including members of a group filing a consolidated tax return) over
alternative minimum taxable income (determined without regard to this
adjustment and the deduction for alternative tax net operating losses) and
(iii) for taxable years beginning after 1989, 75% of the excess of "adjusted
current earnings" of a corporation (including members of a group filing a
consolidated tax return) over alternative minimum taxable income (determined
without regard to this adjustment and the deduction for alternative tax net
operating losses).
AUDIT BY IRS. The Association's consolidated federal income tax
returns for taxable years through February 29, 1992 have been closed for the
purpose of examination by the IRS.
MARYLAND TAXES. The Association and the Company are subject to
Maryland taxation at a rate of 7% of their net earnings. For the purpose of the
7% franchise tax, net earnings are generally defined as net income as determined
for state corporate income tax purposes, plus (i) interest income from
obligations of the United States, of any state, including Maryland, and of any
county, municipal or public corporation authority, special district or political
subdivision of any state, including Maryland, and (ii) any profit realized from
the sale or exchange of bonds issued by the State of Maryland or any of its
political subdivisions.
48
ITEM 2. PROPERTIES.
The following table presents property owned and leased by the
Association at February 29, 1996.
NET BOOK
VALUE OF
PROPERTY OR
OWNED LEASE LEASEHOLD
OR EXPIRATION IMPROVEMENTS AT
LEASED DATE FEBRUARY 29, 1996
------ ---------- -----------------
Location:
Main Office:
3505 Hamilton Street Owned --- $292,739
Hyattsville, MD 20782
Branch and Loan Production
Offices:
4277 Branch Avenue, Leased 7/4/96 2,063
Marlow Heights
7934 Wisconsin Avenue, Owned --- 94,091
Bethesda
211 East Charles Street, Owned --- 595,911
La Plata
10666 Campus Way South, Leased 7/31/98 1,997
Upper Marlboro
8951 Edmonston Road, Leased 1/31/99 1,585
Greenbelt
6309 Allentown Road, Leased 1/31/98 1,551
Camp Springs
8490 Annapolis Road, Leased 5/4/99 10,168
New Carrollton
3905 National Drive, Suite 340 Leased month- ---
Burtonsville to-month
49
NET BOOK
VALUE OF
PROPERTY OR
OWNED LEASE LEASEHOLD
OR EXPIRATION IMPROVEMENTS AT
LEASED DATE FEBRUARY 29, 1996
------ ---------- -----------------
571 N. Solomons Island Road Leased 3/31/99 $42,184
Prince Frederick
3033 Solomons Island Road Owned --- 259,751
Edgewater
1400 Mercantile Lane, Suite 120
Landover Leased 9/30/99 ---
8230 Old Court House Road, Leased 10/31/99 ---
Suite 425
Tysons Corner
6 Montgomery Village Avenue,
Suite 340
Gaithersburg Leased 8/31/98 768
6816 Race Track Road, Leased 8/31/02 7,423
Bowie
15509 New Hampshire Avenue,
Cloverly Leased 5/23/96 1,067
11200 Viers Mill Road,
Wheaton Leased 11/30/96 5,973
3425 Leonardtown Road, Owned --- 388,860
Waldorf
16575 South Frederick Avenue, Leased 6/30/00 13,194
Gaithersburg
10414 Auto Park Drive, Leased 7/31/96 ---
West Bethesda
50
NET BOOK
VALUE OF
PROPERTY OR
OWNED LEASE LEASEHOLD
OR EXPIRATION IMPROVEMENTS AT
LEASED DATE FEBRUARY 29, 1996
------ ---------- -----------------
13600 Laurel - Bowie Road, Leased 8/31/01 $ 19,279
Laurel
6901 Laurel-Bowie Road, Owned --- 321,017
Bowie
11428 Cherry Hill Road, Leased 7/31/98 3,466
Cherry Hill
5801 Deale-Churchton Road, Leased 8/14/02 592
Deale
934 Bay Ridge Road Leased 9/30/96 5,358
Bay Forest
1470 Rockville Pike Owned --- 561,111
Rockville
2001 Davidsonville Road Owned --- 279,622
Crofton
9546 Livingston Road, Leased 11/30/97 2,539
Fort Washington
11110 Mall Circle Leased 1/31/05 57,507
St. Charles
Administrative Offices:
9200 Edmonston Road Leased 10/31/98 65,887
Greenbelt
3321 Toledo Terrace #203 & 204 Owned --- 220,565
Toledo Terrace
51
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings
other than routine, non-material legal proceedings occurring in the ordinary
course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein is incorporated by reference
from page 29 of the Company's 1996 Annual Report to Stockholders attached hereto
as Exhibit 13 ("Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from
page 14 of the Company's Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required herein is incorporated by reference from
pages 6 to 13 of the Company's Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from
pages 16 to 28 of the Company's Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from
pages 2 to 4 of the definitive proxy statement of the Company for the Company's
Annual Meeting of Stockholders to be held on June 19, 1996 ("Proxy Statement").
52
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from
pages 6 to 12 of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from
pages 4 to 6 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from
page 13 of the Proxy Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report
(1) The following financial statements are incorporated by
reference from Item 8 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statements of Financial Condition at February 29,
1996 and February 28, 1995
Consolidated Statements of Income for the Years Ended February
29, 1996, February 28, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the Years
Ended February 29, 1996, February 28, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended
February 29, 1996, February 28, 1995 and 1994
Notes to Consolidated Financial Statements
(2) All other schedules for which provision is made in the
applicable accounting regulation of the SEC are omitted because of the absence
of conditions under which they are required or because the required information
is included in the consolidated financial statements and related notes thereto.
53
(3) The following exhibits are filed as part of this Form 10-K
and this list includes the Exhibit Index.
NO. EXHIBITS PAGE
----- -------- ----
3.1 Articles of Incorporation *
3.2 Bylaws *
4.1 Specimen Common Stock Certificate *
4.2 Rights Agreement Dated as of January 18, 1990 **
10.1(a) Key Employee Stock Compensation Program ***
10.1(b) 1988 Employee Stock Purchase Plan ***
10.1(c) 1989 Stock Option and Stock Appreciation
Rights Plan ***
10.2 Employment Agreement with Robert H. Halleck (see
"- Employment Agreements" in Item 11 of this
Report for a list of Maryland Federal employees
who have employment agreements which are
substantially identical in all material respects,
except as described therein as to salary and
term, to the employment agreement with Robert
H. Halleck) ****
10.3 1992 Stock Incentive Plan *****
10.4 1993 Directors' Stock Option Plan *****
10.5 1995 Stock Option Plan *******
13 1996 Annual Report to Stockholders E-1
21 Subsidiaries -- Reference is made to Item 1,
"Business - General" for the required
information --
23 Consent of Independent Auditors E-32
_________________
* Incorporated by reference to the Form 8-B Registration Statement filed
by the Company with the SEC on November 8, 1989.
** Incorporated by reference to the Form 8-A Registration Statement filed
by the Company with the SEC on January 28, 1990.
*** Incorporated by reference to the Form S-4 Registration Statement (No.
33-29945) filed by the Company with the SEC on July 13, 1989.
**** Incorporated by referenced to the Annual Report on Form 10-K for the
fiscal year ended February 28, 1992 filed by the Company with the SEC
on May 29, 1992.
54
***** Incorporated by reference to the Annual Report on Form 10-K for
the fiscal year ended February 28, 1993 filed by the Company with
the SEC on May 28, 1993.
****** Incorporated by reference to the Annual Report on Form 10-K for the
fiscal year ended February 28, 1994 filed by the Company with the SEC
on May 27, 1994.
******* Incorporated by reference to the Company's definitive proxy statement
for its 1995 Annual Meeting of Stockholders filed by the Company with
the SEC on May 24, 1995.
(b) The Company did not file any Current Reports on Form 8-K during the
fiscal quarter ended February 29, 1996.
(c) See (a)(3) above for all exhibits filed herewith and the exhibit
index.
(d) There are no other financial statements and financial statement
schedules which were excluded from the Annual Report which are required to be
included herein.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MARYLAND FEDERAL BANCORP, INC.
May 28, 1996 By: /s/ Robert H. Halleck
-----------------------------
Robert H. Halleck
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Richard B. Bland May 28, 1996
- -------------------------------------
Richard B. Bland, Chairman of
the Board
/s/ Robert H. Halleck May 28, 1996
- -------------------------------------
Robert H. Halleck, Director,
President and Chief Executive
Officer (principal executive
officer)
/s/ Lynn B. Hounslow May 28, 1996
- -------------------------------------
Lynn B. Hounslow
Senior Vice President, Treasurer and Chief
Financial Officer (principal
financial officer and principal
accounting officer)
/s/ A. William Blake, Jr. May 28, 1996
- -------------------------------------
A. William Blake, Jr., Director and
Executive Vice President
/s/ Richard R. Mace May 28, 1996
- -------------------------------------
Richard R. Mace, Director
56
/s/ David A. McNamee May 28, 1996
- -------------------------------------
David A. McNamee, Director
/s/ Thomas H. Welsh, III, May 28, 1996
- -------------------------------------
Thomas H. Welsh, III, Director
EXHIBIT 13
1996 ANNUAL REPORT TO STOCKHOLDERS