UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 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 of (I.R.S. Employer
incorporation or organization) Identification Number)
3505 Hamilton Street, Hyattsville, MD. 20782
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number,
including area code: (301) 779-1200
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
------ ------
Number of Shares of Common Stock Outstanding as of
July 5, 1996
Title of Class Number of Shares Outstanding
-------------------- ----------------------------
Common Stock ($.01 3,080,068 Shares
par value per share)
INDEX
PART I - FINANCIAL INFORMATION: PAGE
----
Item 1. Financial Statements:
Consolidated Statements of Financial
Condition as of May 31, 1996 and
February 29, 1996 1
Consolidated Statements of Income and
Retained Earnings for the three
months ended May 31, 1996 and 1995 2
Consolidated Statements of Cash Flows for
the three months ended May 31, 1996 and
1995 3
Notes to Consolidated Financial Statements 4-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7-13
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security
Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
May 31, February 29,
1996 1995
---------- ------------
(In Thousands)
ASSETS
Cash and cash equivalents $ 21,109 $ 27,963
Securities purchased under agreements to resell 12,119 11,034
Securities available for sale 72,232 74,791
Securities held to maturity (fair value, $16,646,000 and $10,007,000,
respectively) 16,753 10,072
Loans held for sale, at cost 5,161 16,296
Loans receivable, net 974,589 974,888
Accrued interest receivable 5,761 6,009
Federal Home Loan Bank stock, at cost 11,889 12,514
Foreclosed real estate, net 1,867 2,090
Premises and equipment, net 4,697 4,829
Other assets 2,272 2,852
---------- ------------
Total assets $1,128,449 $1,143,338
---------- ------------
---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 781,528 $ 788,931
Advances from Federal Home Loan Bank of Atlanta 230,280 243,780
Advances from borrowers for taxes and insurance 13,578 9,124
Income taxes 2,553 2,143
Accrued expenses and other liabilities 5,856 5,378
---------- ------------
Total liabilities 1,033,795 1,049,356
---------- ------------
STOCKHOLDERS' EQUITY
Preferred stock; 10,000,000 shares authorized; none issued -- --
Common stock; $.01 par value; 15,000,000 shares authorized; 3,831,444 and
3,821,081 shares issued, respectively 38 38
Additional paid-in capital 35,163 34,917
Retained earnings, substantially restricted 68,884 67,492
Unrealized holding gains, net 1,454 2,420
Treasury stock, at cost; 671,376 shares (10,885) (10,885)
---------- ------------
Total stockholders' equity 94,654 93,982
---------- ------------
Total liabilities and stockholders' equity $1,128,449 $1,143,338
---------- ------------
---------- ------------
See Notes to Consolidated Financial Statements.
-1-
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
Three Months Ended May 31,
-----------------------------------
1996 1995
------------- ---------------
(In Thousands, Except Per Share Data)
Interest income:
Loans receivable:
First mortgage loans $ 17,010 $ 16,231
Consumer and other loans 1,563 1,131
Investment securities 757 695
Mortgage-backed and related securities 1,096 1,274
Other interest-earning assets 231 112
--------- ---------
Total interest income 20,657 19,443
--------- ---------
Interest expense:
Deposits 9,961 9,725
Advances from Federal Home Loan Bank of Atlanta 3,491 2,819
Advances from borrowers for taxes and insurance 9 7
--------- ---------
Total interest expense 13,461 12,551
--------- ---------
Net interest income 7,196 6,892
Provision for loan losses 85 --
--------- ---------
Net interest income after provision for loan losses 7,111 6,892
--------- ---------
Noninterest income:
Loan fees and service charges 76 68
Banking service charges and fees 367 332
Gain on sales of first mortgage loans 246 84
Other 47 38
--------- ---------
Total noninterest income 736 522
--------- ---------
Noninterest expense:
Compensation and benefits 2,483 2,157
Occupancy and equipment 716 746
SAIF deposit insurance premiums 449 420
Loss on foreclosed real estate, net 5 168
Advertising 181 110
Other 937 855
--------- ---------
Total noninterest expense 4,771 4,456
--------- ---------
Income before income taxes 3,076 2,958
Income tax expense 1,178 1,128
--------- ---------
NET INCOME 1,898 1,830
Retained earnings, substantially restricted:
Balance, beginning of period 67,492 60,537
Cash dividends (506) (384)
--------- ---------
Balance, end of period $ 68,884 $ 61,983
--------- ---------
--------- ---------
Primary earnings per share $ .59 $ .58
--------- ---------
--------- ---------
See Notes to Consolidated Financial Statements.
-2-
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended May 31,
---------------------------
1996 1995
-------------- -----------
(In Thousands)
OPERATING ACTIVITIES:
Net income $ 1,898 $ 1,830
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization:
Premises and equipment 213 270
Other (276) (319)
Loans originated for sale (22,890) (6,973)
Sale of loans originated for sale 34,025 7,163
Provision for loan losses on loans and foreclosed real estate 85 150
Gain on sales of foreclosed real estate (37) (22)
Deferred income taxes (124) 258
Tax benefits relating to stock options 37 169
Decrease in:
Accrued interest receivable 248 38
Other assets 508 1,093
Increase (decrease) in:
Current income taxes payable 1,141 (455)
Accrued expenses and other liabilities 476 (352)
-------------- -----------
Net cash provided by operating activities 15,304 2,850
-------------- -----------
INVESTING ACTIVITIES:
Loans originated (32,657) (35,627)
Loans purchased -- (1,006)
Principal collected on loans 33,081 15,980
Purchases of securities:
Available for sale (2,051) (112)
Held to maturity (7,879) --
Principal collected on mortgage-backed and related securities 3,256 1,465
Proceeds from maturities of securities:
Available for sale -- 1,181
Held to maturity 1,000 --
Net decrease (increase) in securities purchased under agreements to resell (1,085) 7,854
Decrease in Federal Home Loan Bank stock 625 147
Proceeds from sales of foreclosed real estate 376 108
Purchases of premises and equipment (81) (252)
-------------- -----------
Net cash used in investing activities (5,415) (10,262)
-------------- -----------
FINANCING ACTIVITIES:
Net decrease in deposits (7,403) (1,387)
Proceeds from Federal Home Loan Bank advances 13,000 65,000
Principal payments on Federal Home Loan Bank advances (26,500) (63,000)
Net increase in advances from borrowers for taxes and insurance 4,454 4,249
Proceeds from issuance of stock under stock plans 210 437
Cash dividends paid (504) (380)
-------------- -----------
Net cash provided by (used in) financing activities (16,743) 4,919
-------------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (6,854) (2,493)
CASH AND CASH EQUIVALENTS:
Beginning of period 27,963 15,775
-------------- -----------
End of period $ 21,109 $ 13,282
-------------- -----------
-------------- -----------
See Notes to Consolidated Financial Statements.
-3-
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
In the opinion of the management of Maryland Federal Bancorp, Inc. (the
"Company"), the accompanying unaudited consolidated financial statements reflect
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the Company's financial condition as of May 31, 1996, and
the results of its operations for the three months ended May 31, 1996, and 1995,
and cash flows for the three months ended May 31, 1996 and 1995. These
financial statements should be read in conjunction with the consolidated
financial statements and notes included in Maryland Federal Bancorp, Inc. and
Subsidiary's annual report for the fiscal year ended February 29, 1996. The
results of operations for the period ended May 31, 1996 are not necessarily
indicative of the operating results which may be achieved for the full fiscal
year.
NOTE 2 - RECAPITALIZATION OF SAIF AND EFFECT OF REDUCTION IN BANK
INSURANCE FUND PREMIUMS:
Deposits of the Association are currently insured by the Federal Deposit
Insurance Corporation ("FDIC") through the Savings Association Insurance Fund
("SAIF"). Both the SAIF and the Bank Insurance Fund ("BIF"), the deposit
insurance fund that covers most commercial bank deposits, are statutorily
required to be recapitalized to a ratio of 1.25% of insured reserve deposits.
Members of the SAIF and BIF have been paying average deposit insurance premiums
of between 23 and 25 basis points. While the BIF has reached the required
reserve ratio, the SAIF is not expected to be recapitalized until 2002 at the
earliest.
The FDIC established a new assessment rate schedule of zero to 27 basis
points for BIF members which began on January 1, 1996. Under that schedule,
approximately 91% of BIF members pay the lowest assessment rate of zero basis
points (subject to a $2,000 minimum). With respect to SAIF member institutions,
the previous assessment rate of 23 to 31 basis points applicable to SAIF member
institutions has been retained.
In order to mitigate the effect of the BIF/SAIF premium disparity, both the
House and Senate approved legislation included in the Balanced Budget Act of
1995 which would, among other things, recapitalize the SAIF by a one-time charge
of SAIF-insured institutions of approximately $6.6 billion, or approximately
$.80 to $.85 for every $100.00 of deposits, and eventually merge the SAIF with
the BIF. The legislation was vetoed by the President for reasons unrelated to
the recapitalization of the SAIF. The Association currently is unable to
predict the likelihood of enactment of such
-4-
legislation. If the proposed assessment of $.80 to $.85 per $100.00 of
deposits was effected based on deposits as of March 31, 1995, as proposed,
the Association's pro rata share would amount to approximately $6.1 million
to $6.5 million, respectively.
NOTE 3 - EARNINGS PER SHARE:
Primary earnings per share for the three months ended May 31, 1996 and 1995
are computed based on the weighted average number of shares actually
outstanding, plus the shares that would be outstanding assuming exercise of
dilutive stock options, all of which are considered to be common stock
equivalents. The number of shares that would be issued from the exercise of
stock options has been reduced by the number of shares that could have been
purchased from the proceeds at the average market price of the Company's stock
during the period. The number of shares used in the computations of primary
earnings per share was 3,237,611 and 3,175,647 for the three months ended May
31, 1996 and 1995, respectively.
The Company has not separately reported fully diluted earnings per share
since the amounts are not materially different from primary earnings per share.
NOTE 4 - COMMON STOCK ISSUED:
During the three months ended May 31, 1996, 2,580, 7,700 and 83 shares were
issued at $14.43, $22.125 and $24.00 per share ($37,229, $170,363 and $1,992),
respectively, as a result of stock options being exercised. During the three
months ended May 31, 1995, 5,050, 10,825 and 20,170 shares were issued at $7.50,
$9.96 and $14.43 per share ($37,875, $107,817 and $291,053), respectively, as a
result of stock options being exercised.
NOTE 5 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Three Months Ended
May 31,
-------------------
1996 1995
--------- --------
(In Thousands)
Cash paid for:
Interest $ 13,184 $ 12,408
Income taxes 111 -
-5-
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS:
Effective March 1, 1996, Maryland Federal adopted SFAS 121, SFAS 122 and
SFAS 123. Neither the initial adoption nor the ongoing effect of SFAS 121 and
SFAS 122 has had a significant impact on the financial condition or results of
operations of the Company. As allowed by SFAS 123, Maryland Federal is
continuing to follow the accounting prescribed by APB Opinion No. 25 in
accounting for employee stock compensation plans.
NOTE 7 - RECLASSIFICATIONS:
Certain amounts for the three months ended May 31, 1995 have
been reclassified for comparative purposes.
-6-
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Maryland Federal Bancorp, Inc. (the "Company") is the unitary savings and
loan holding company of Maryland Federal Savings and Loan Association (the
"Association") and its subsidiary. The Company and the Association are
sometimes collectively referred to as "Maryland Federal." The Company currently
owns 100% of the issued and outstanding common stock of the Association, which
is the principal asset of the Company. The Company does not presently own or
operate any subsidiaries other than the Association and its subsidiary.
Maryland Federal's earnings are primarily dependent upon its net interest
income, which is determined by the Association's interest rate spread (i.e.,
the difference between the yields earned on its interest-earning assets and the
rates paid on its interest-bearing liabilities) and the relative amounts of its
interest-earning assets and interest-bearing liabilities. The Association's net
income is also affected by the level of its noninterest income, provision for
estimated losses on loans and noninterest expense.
Deposit flows and the cost of funds are influenced by interest rates on
competing investments and general market rates of interest. Lending activities
are affected by consumer demand, the interest rate environment, and the
availability of funds.
FINANCIAL CONDITION
Assets. Total assets as of May 31, 1996 decreased $14.9 million or 1.3% to
$1.13 billion as compared to February 29, 1996. This decrease was primarily due
to decreases of $11.4 million or 1.2% in loans receivable, net (including loans
held for sale), $6.9 million or 24.5% in cash and cash equivalents and $2.6
million or 3.4% in securities available for sale. These decreases were
partially offset by increases of $6.7 million or 66.3% in securities held to
maturity and $1.1 million or 9.8% in securities purchased under agreements to
resell. The decrease in loans receivable, net, was due to management's decision
to actively participate in the secondary market, the excess proceeds of which
were primarily invested in securities held to maturity.
Liabilities. Total liabilities as of May 31, 1996 decreased $15.6 million
or 1.5% to $1.03 billion as compared to February 29, 1996. This decrease was
primarily due to a $7.4 million or 0.9% decrease in deposits and a $13.5 million
or 5.5% decrease in advances from the Federal Home Loan Bank of Atlanta
("FHLB"). These decreases were partially offset by an increase of $4.5 million
or 48.8% in advances from borrowers for taxes and insurance. The decrease in
FHLB
-7-
advances was the result of management's decision to make use of the
Association's cash flow to reduce borrowings rather than build liquidity during
the three months ended May 31, 1996.
Stockholders' Equity. Stockholders' equity increased $672,000 or 0.7% to
$94.7 million at May 31, 1996, versus $94.0 million at February 29, 1996. Such
increase primarily reflects net income of $1.9 million which more than offset a
$966,000 decrease in unrealized holding gains, net, during the three months
ended May 31, 1996.
RESULTS OF OPERATIONS
Maryland Federal reported net income of $1.9 million and $1.8 million
during the three months ended May 31, 1996 and 1995, respectively. Net income
increased by $68,000 during the three months ended May 31, 1996, as compared to
the same period in 1995. The increase in net income was the result of a
$304,000 increase in net interest income and a $214,000 increase in noninterest
income, which more than offset increases of $315,000 in noninterest expense, and
$85,000 and $50,000 in provision for loan losses and income tax expense,
respectively.
Net Interest Income
Net interest income increased by $304,000 or 4.4% for the three months
ended May 31, 1996, as compared to the same period in 1995. The increase for
the three months ended May 31, 1996 was primarily the result of a $12.7 million
or 14.1% increase in the average balance of interest-earning assets over
interest-bearing liabilities, which more than offset an 11 basis point net
decrease in the yield earned on interest-earning assets over the rate paid on
interest-bearing liabilities ("interest rate spread"), as compared to same
period in 1995.
Interest Income
Loans receivable. During the three months ended May 31, 1996, interest
earned on loans receivable increased by $1.2 million or 7.0%, as compared to the
same period in 1995. This increase was primarily the result of a $73.4 million
or 8.0% increase in the average balance of loans receivable, which more than
offset an eight basis point decrease in the average yield earned thereon to
7.49%. The increase in the average balance of loans receivable reflects the
high demand in loan originations for first mortgage loans and consumer and other
loans.
Mortgage-backed and related securities. Interest earned on mortgage-backed
and related securities decreased by $178,000 or 14.0% during the three months
ended May 31, 1996, as compared to the same
-8-
period in 1995. The decrease during the three months ended May 31, 1996 was
primarily due to a $10.7 million or 14.2% decrease in the average balance of
mortgage-backed and related securities, which more than offset a two basis
point increase in the average yield earned on such assets to 6.78%, as
compared to the same period in 1995. The decrease in the average balance of
such securities reflects principal repayments received on such securities.
Investment securities and other interest-earning assets. Interest earned
on investment securities and other interest-earning assets increased by $181,000
or 22.4% during the three months ended May 31, 1996, as compared to the same
period in 1995. This increase was primarily the result of a $19.4 million or
37.9% increase in the average balance of investment securities and other
interest-earning assets, which more than offset a decrease of 71 basis points in
the average yield earned on such assets to 5.59%, as compared to the same period
in 1995.
Interest Expense
Deposits. Interest expense on deposits during the three months ended May
31, 1996, increased by $236,000 or 2.4%, as compared to the same period in the
prior year. This increase was primarily attributable to an $18.0 million or
2.3% increase in the average balance of deposits, which more than offset a one
basis point decrease in the average rate paid on such deposits, during the three
months ended May 31, 1996, as compared to the same period in 1995. The increase
in the average balance of deposits during the three months ended May 31, 1996,
as compared to the same period in 1995, was due primarily to competitive
interest rates offered on deposits.
Borrowed funds. Interest expense on borrowed funds (including advances
from borrowers for taxes and insurance) increased by $674,000 or 23.8% during
the three months ended May 31, 1996, as compared to the same period in 1995.
This increase was primarily due to an increase of $51.5 million or 27.7% in the
average balance of such funds, which more than offset a 19 basis point decrease
in the average rate paid on such funds during the three months ended May 31,
1996, as compared to the same period in 1995. The increase in the average
balance of borrowed funds reflects management's decision during the latter part
of fiscal 1996 to utilize FHLB advances to fund loan growth, as such advances
were determined to be at least as, if not more, cost effective than acquiring
deposits at prevailing market rates.
Provision for Loan Losses
Loan review procedures are utilized by the Association in order to ensure
that potential problem loans are identified early, thereby lessening any
potentially negative impact such problem loans may have on the Association's
earnings. Provision for loan losses totaled $85,000 during the three months
ended May 31, 1996. There was no
-9-
provision for loan losses made during the three months ended May 31, 1995.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb losses in the loan portfolio. Management's determination
of the adequacy of the allowance is based on an evaluation of the loan
portfolio, past loan loss experience, current economic conditions, volume,
growth and composition of the loan portfolio, and other relevant factors. The
allowance is increased by provisions for loan losses which are charged against
income. While management uses the best information available to make such
determinations, no assurance can be given as to whether future adjustments may
be necessary.
As of May 31, 1996, non-performing loans (loans ninety days or more
delinquent but still accruing interest, and non-accrual loans) totaled $3.5
million ($3,510,000 of which are first mortgage loans, with the remaining
$33,000 being consumer and other loans) and represented 0.36% of total loans
receivable. At February 29, 1996, non-performing loans totaled $3.4 million
($3,333,000 of which are first mortgage loans, with the remaining $53,000 being
consumer and other loans) and represented 0.34% of total loans receivable. As
of May 31, 1996, the allowance for loan losses amounted to $4.5 million and
represented 127.5% of non-performing loans. At February 29, 1996, the allowance
for loan losses amounted to $4.5 million and represented 132.1% of
non-performing loans.
Noninterest Income
Total noninterest income increased $214,000 or 41.0% during the three
months ended May 31, 1996, as compared to the same period in 1995. This
increase was the result of increases of $162,000 or 192.9% in gain on sales of
first mortgage loans, $35,000 or 10.5% in banking services charges and fees,
$9,000 in other noninterest income and $8,000 in loan fees and service charges,
during the three months ended May 31, 1996, as compared to the same period in
1995.
Noninterest Expense
Total noninterest expense increased by $315,000 or 7.1% for the three
months ended May 31, 1996, as compared to the same period in 1995. The
components of noninterest expense are discussed below.
Compensation and benefits. During the three months ended May 31, 1996,
compensation and benefits increased by $326,000 or 15.1%, as compared to the
same period in 1995, due primarily to increases in retirement benefit expense,
annual salary adjustments and expenses incurred related to temporary personnel.
Occupancy and equipment. Occupancy and equipment expense decreased $30,000
or 4.0% during the three months ended May 31, 1996, as compared to the same
period in 1995.
-10-
SAIF deposit insurance premiums. During the three months ended May 31,
1996, SAIF deposit insurance premiums paid to the FDIC increased $29,000 or
6.9%, as compared to the same period in 1995, due primarily to an increase in
the average balance of deposits. SAIF deposit insurance premiums are a function
of the size of the Association's deposit base.
Loss on foreclosed real estate, net. During the three months ended May 31,
1996, loss on foreclosed real estate, net, decreased by $163,000 or 97.0%, as
compared to the same period in 1995. This decrease was primarily the result of
$150,000 provision made for possible losses on foreclosed real estate during the
three months ended May 31, 1995. There was no such provision made during the
same period in 1996.
Advertising. During the three months ended May 31, 1996, advertising
expense increased by $71,000 or 64.5%, as compared to
the same period in 1995.
Other. During the three months ended May 31, 1996, other noninterest
expense increased by $82,000 or 9.6%, as compared to the same period in 1995.
This increase was primarily due to increases in legal fees, franchise tax, and
expenses such as stationary and office supplies.
Income Taxes
The Company made provisions for income taxes of $1.2 million and $1.1
million during the three months ended May 31, 1996 and 1995, respectively. The
$50,000 or 4.4% increase was due primarily to the increased profitability of the
Company.
CAPITAL ADEQUACY
The Association is required under federal regulations to maintain minimum
tangible capital equal to 1.5% of its adjusted total assets, minimum core
capital equal to 3.0% of its adjusted total assets and minimum total capital (a
combination of core and supplementary capital) equal to 8.0% of its
risk-weighted assets. At May 31, 1996, the Association had tangible capital
equal to 7.63% of adjusted total assets, core capital equal to 7.63% of adjusted
total assets and total capital equal to 15.36% of risk-weighted assets.
The Office of Thrift Supervision ("OTS") has proposed to modify the minimum
core capital leverage ratio requirement in the same manner as has been done by
the Office of the Comptroller of the Currency for national banks. Under the OTS
proposal, only savings associations rated a composite 1 under the OTS CAMEL
rating system will be permitted to operate at or near the regulatory minimum
leverage ratio of 3%. For all other savings associations, the minimum core
capital leverage ratio will be 3% plus at least an additional 100 to 200 basis
-11-
points. The OTS has not taken final action on the proposal, however, it has
reserved the right to apply this higher standard to any insured financial
institution when considering an institution's capital adequacy.
In August 1993, the OTS issued a final rule which adds an interest rate
risk component to the existing 8% risk-based capital requirement. Under the
rule, a savings institution would be required to hold capital as a safeguard
against interest rate exposure in an amount equal to 50% of the decline in the
market value of the institution's portfolio equity (i.e., the net present value
of the institution's assets, liabilities and certain off-balance-sheet items)
that would result from a 200 basis point change in market interest rates. The
requirement would apply to those institutions considered to be carrying "above
normal" risk. "Above normal" risk is defined as occurring when the decline in
the market value of the portfolio equity, under a 200 basis point rate change,
exceeds 2% of the market value of the institution's assets.
However, in October 1994, the Director of the OTS indicated that it would
waive the capital deductions for institutions with a greater than "normal" risk
until the OTS publishes an appeals process. In August 1995, the OTS issued
Thrift Bulletin No. 67 which allows eligible institutions to request an
adjustment to their interest rate risk component as calculated by the OTS or to
request use of their own models to calculate their interest rate component. The
OTS also indicated that it will delay invoking its interest rate risk rule
requiring institutions with "above normal" interest rate risk exposure to adjust
their regulatory capital requirement until new procedures are implemented and
evaluated. The OTS has not yet established an effective date for the capital
deduction. Because of the Association's strong capitalization, management does
not believe that compliance with the new rule would adversely affect its
operations.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, each federal banking agency is also required to establish capital levels
for insured depository institutions including "well capitalized", "adequately
capitalized", "undercapitalized" and "critically undercapitalized". A
depository institution's capital adequacy will be measured on the basis of its
total risk-based capital ratio, Tier 1 risk-based capital ratio and leverage
ratio. The degree of regulatory intervention is tied to the institution's
capital category, with increasing scrutiny and more stringent restrictions being
imposed as the institution's capital declines.
To be considered "well capitalized," an institution must generally have a
total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital
ratio of at least 6% and a leverage capital ratio of at least 5%. At May 31,
1996, the Association was considered to be "well capitalized." It is
management's strong belief that even after making payment of the proposed one-
time SAIF deposit insurance premium, the Association will still be considered
"well capitalized."
-12-
(See Note 2 of Notes to Consolidated Financial Statements.)
LIQUIDITY AND CAPITAL RESOURCES
The Association is required under certain federal regulations to maintain
specified levels of "liquid" investments including United States Government and
federal agency securities and other investments. Regulations currently in
effect require the Association to maintain liquid assets of not less than 5% of
its net withdrawable accounts plus short-term borrowings, of which short-term
liquid assets must consist of not less than 1%. The Association has
consistently maintained liquidity at or above the levels required by the
regulations.
The Association's principal sources of funds are deposits,
amortization and prepayment of outstanding loans, borrowed funds and proceeds
from the sale of loans. During the past several years, the Association has used
such funds primarily to maintain its required liquidity levels, meet its ongoing
commitments to fund maturing savings certificates and savings withdrawals, and
fund existing and continuing loan commitments.
At May 31, 1996, the Association had $1.2 million of undisbursed loan funds
and $57.3 million in approved loan commitments. These commitments were
partially offset by $15.9 million in forward commitments to sell. The
Association anticipates that it will have the funds necessary to meet these
obligations through the sources of funds mentioned above. The amount of
certificate accounts which are scheduled to mature by May 31, 1997 is $427.9
million. Management believes that, by evaluating competitive instruments and
pricing in its market area, it can, in most circumstances, manage and control
maturing deposits so that a substantial amount of such deposits are redeposited
in the Association.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented in this
report have been prepared in accordance with generally accepted accounting
principles, which typically requires the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation.
Virtually all of the assets and liabilities of Maryland Federal are
monetary in nature. As a result, interest rates have a more significant impact
on Maryland Federal's performance than the general level of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as
the prices of goods and services.
-13-
PART II - OTHER INFORMATION:
Item 1 - LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
routine, nonmaterial legal proceedings occurring in the ordinary course
of business.
Item 2 - CHANGES IN SECURITIES
Not Applicable
Item 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5 - OTHER INFORMATION
Not Applicable
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
Not Applicable
-14-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARYLAND FEDERAL BANCORP, INC.
Date: JULY 15, 1996 By: /s/ Robert H. Halleck
----------------------------
Robert H. Halleck, President
and Chief Executive Officer
Date: JULY 15, 1996 By: /s/ Lynn B. Hounslow
----------------------------
Lynn B. Hounslow, Senior
Vice President, Treasurer,
Chief Financial Officer and
Principal Accounting Officer
-15-