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 AUGUST 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
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(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
September 30, 1996
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
------------------- ----------------------------
Common Stock ($.01 2,980,561 Shares
par value per share)
INDEX
PART I - FINANCIAL INFORMATION: PAGE
----
Item 1. Financial Statements:
Consolidated Statements of Financial
Condition as of August 31, 1996
and February 29, 1996 1
Consolidated Statements of Income and
Retained Earnings for the six and three
months ended August 31, 1996 and 1995 2
Consolidated Statements of Cash Flows for
the six months ended August 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 7-15
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security
Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
August 31, February 29,
1996 1996
----------- -----------
(In Thousands)
ASSETS
Cash and cash equivalents $ 11,901 $ 27,963
Securities purchased under agreements to resell 19,519 11,034
Securities available for sale 64,534 74,791
Securities held to maturity (fair value, $16,501,000 and
$10,007,000, respectively) 16,579 10,072
Loans held for sale, at cost 5,700 16,296
Loans receivable, net 985,446 974,888
Accrued interest receivable 6,043 6,009
Federal Home Loan Bank stock, at cost 11,464 12,514
Foreclosed real estate, net 1,939 2,090
Premises and equipment, net 4,802 4,829
Other assets 2,590 2,852
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Total assets $1,130,517 $1,143,338
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 787,180 $ 788,931
Advances from Federal Home Loan Bank of Atlanta 227,530 243,780
Advances from borrowers for taxes and insurance 15,517 9,124
Income taxes 2,481 2,143
Accrued expenses and other liabilities 6,763 5,378
--------- ---------
Total liabilities 1,039,471 1,049,356
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STOCKHOLDERS' EQUITY
Preferred stock; 10,000,000 shares authorized; none issued -- --
Common stock; $.01 par value; 15,000,000 shares
authorized; 3,846,354 and 3,821,081 shares
issued, respectively 38 38
Additional paid-in capital 35,505 34,917
Retained earnings, substantially restricted 70,311 67,492
Unrealized holding gains, net 1,580 2,420
Treasury stock, at cost; 858,676 and 671,376 shares,
respectively (16,388) (10,885)
--------- ---------
Total stockholders' equity 91,046 93,982
--------- ---------
Total liabilities and stockholders' equity $1,130,517 $1,143,338
--------- ---------
--------- ---------
See Notes to Consolidated Financial Statements.
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MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
Six Months Ended August 31, Three Months Ended August 31,
-------------------------- -----------------------------
1996 1995 1996 1995
--------- ------- ------- -------
(In Thousands, Except Per Share Data)
Interest income:
Loans receivable:
First mortgage loans $33,846 $32,939 $16,836 $16,708
Consumer and other loans 3,293 2,309 1,730 1,178
Investment securities 1,385 1,333 628 638
Mortgage-backed and related securities 2,172 2,490 1,076 1,216
Other interest-earning assets 406 209 175 97
------- ------- ------- -------
Total interest income 41,102 39,280 20,445 19,837
------- ------- ------- -------
Interest expense:
Deposits 19,573 19,722 9,612 9,997
Advances from Federal Home Loan
Bank of Atlanta 6,870 5,878 3,379 3,059
Advances from borrowers for taxes
and insurance 20 23 11 16
------- ------- ------- -------
Total interest expense 26,463 25,623 13,002 13,072
------- ------- ------- -------
Net interest income 14,639 13,657 7,443 6,765
Provision for loan losses 145 -- 60 --
------- ------- ------- -------
Net interest income after provision for
loan losses 14,494 13,657 7,383 6,765
------- ------- ------- -------
Noninterest income:
Loan fees and service charges 174 132 98 64
Banking service charges and fees 752 706 385 374
Gain on sales of first mortgage loans 386 193 140 109
Gain on sales of investment and
mortgage-backed securities -- 1,433 -- 1,433
Other 73 71 26 33
------- ------- ------- -------
Total noninterest income 1,385 2,535 649 2,013
------- ------- ------- -------
Noninterest expense:
Compensation and benefits 4,963 4,392 2,480 2,235
Occupancy and equipment 1,501 1,553 785 807
SAIF deposit insurance premiums 905 856 456 436
Loss on foreclosed real estate, net 41 242 36 74
Advertising 326 273 145 163
Other 1,864 1,925 927 1,070
------- ------- ------- -------
Total noninterest expense 9,600 9,241 4,829 4,785
------- ------- ------- -------
Income before income taxes 6,279 6,951 3,203 3,993
Income tax expense 2,461 2,701 1,283 1,573
------- ------- ------- -------
NET INCOME 3,818 4,250 1,920 2,420
Retained earnings, substantially restricted:
Balance, beginning of period 67,492 60,537 68,884 61,983
Cash dividends (999) (832) (493) (448)
------- ------- ------- -------
Balance, end of period $70,311 $63,955 $70,311 $63,955
------- ------- ------- -------
------- ------- ------- -------
Primary earnings per share $1.20 $1.33 $.61 $.75
------- ------- ------- -------
------- ------- ------- -------
See Notes to Consolidated Financial Statements.
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MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months ended August 31,
---------------------------
1996 1995
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(In Thousands)
OPERATING ACTIVITIES:
Net income $ 3,818 $ 4,250
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization:
Premises and equipment 428 538
Other (584) (549)
Loans originated for sale (39,671) (19,509)
Sale of loans originated for sale 50,267 19,364
Provision for loan losses on loans and foreclosed real estate 145 200
Gain on sales of securities -- (1,433)
Gain on sales of foreclosed real estate (37) (26)
Deferred income taxes (438) 120
Tax benefits relating to stock options 86 222
Decrease (increase) in:
Accrued interest receivable (34) (422)
Other assets 119 952
Increase (decrease) in:
Current income taxes payable 1,304 (881)
Accrued expenses and other liabilities 1,396 (439)
------ ------
Net cash provided by operating activities 16,799 2,387
------ ------
INVESTING ACTIVITIES:
Loans originated (66,417) (87,322)
Loans purchased -- (1,006)
Principal collected on loans 56,075 37,300
Purchases of securities:
Available for sale (2,085) (144)
Held to maturity (9,867) --
Principal collected on mortgage-backed and related securities 6,146 3,875
Proceeds from maturities of securities:
Available for sale 5,292 1,200
Held to maturity 3,000 4,130
Net decrease (increase) in securities purchased under (8,485) 6,648
agreements to resell
Decrease (increase) in Federal Home Loan Bank stock 1,050 (528)
Proceeds from sales of securities available for sale -- 3,105
Proceeds from sales of foreclosed real estate 449 146
Purchases of premises and equipment (401) (454)
------ ------
Net cash used in investing activities (15,243) (33,050)
------ ------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits (1,751) 12,221
Proceeds from Federal Home Loan Bank advances 43,250 102,500
Principal payments on Federal Home Loan Bank
advances (59,500) (88,300)
Net increase in advances from borrowers for taxes
and insurance 6,393 6,339
Proceeds from issuance of stock under stock plans 503 553
Purchase of treasury stock (5,503) --
Cash dividends paid (1,010) (765)
------ ------
Net cash provided by (used in) financing activities (17,618) 32,548
------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (16,062) 1,885
CASH AND CASH EQUIVALENTS:
Beginning of period 27,963 15,775
------ ------
End of period $11,901 $17,660
------ ------
------ ------
See Notes to Consolidated Financial Statements.
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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
August 31, 1996, and the results of its operations for the six and three
months ended August 31, 1996, and 1995, and cash flows for the six months
ended August 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
August 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.
While the BIF has reached the required reserve ratio, the SAIF was 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 had been retained.
In order to mitigate the effect of the BIF/SAIF premium disparity, on
September 30, 1996, the President signed legislation which will, among other
things, recapitalize the SAIF by a one-time charge of SAIF-insured
institutions of approximately $4.5 billion, or approximately $.65 for every
$100.00 of deposits, and eventually merge the SAIF with the BIF. Based on
the Association's deposits as of March 31, 1995, the Association's pro rata
share of the special assessment would amount to approximately $3.1 million,
net of taxes and will be payable during the quarter ending November 30, 1996.
NOTE 3 - EARNINGS PER SHARE:
Primary earnings per share for the six months ended August 31,
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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 3,186,463 and 3,200,328 for
the six months ended August 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 six months ended August 31, 1996, 8,730, 11,400 and 833 shares
were issued at $14.43, $22.125 and $24.00 per share ($125,974, $252,225 and
$19,992), respectively, as a result of stock options being exercised. During
the six months ended August 31, 1995, 10,050, 10,825 and 20,940 shares were
issued at $7.50, $9.96 and $14.43 per share ($75,375, $107,817 and $302,164),
respectively, as a result of stock options being exercised. In addition,
4,310 shares were issued at $24.33 per share ($104,862) and 3,356 shares were
issued at $20.19 per share ($67,758) through Maryland Federal Savings and
Loan Association's Employee Stock Purchase Plan during the six months ended
August 31, 1996 and 1995, respectively.
NOTE 5 - TREASURY STOCK:
During the six months ended August 31, 1996, the Company acquired 187,300
shares of its $.01 par value common stock for a total cost of approximately
$5.5 million.
NOTE 6 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
SIX MONTHS ENDED AUGUST 31,
--------------------------
1996 1995
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(In Thousands)
Cash paid for:
Interest $25,539 $25,375
Income taxes 1,482 2,261
NOTE 7 - 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
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prescribed by APB Opinion No. 25 in accounting for employee stock
compensation plans.
Statement of Financial Accounting Standards No. 125,"Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", (SFAS 125) was issued in June 1996. This statement supersedes
SFAS 122 and provides accounting and reporting standards for transfers for
and servicing of financial assets and extinguishments of liabilities. Those
standards are based on consistent application of a financial-components
approach that focuses on control. SFAS 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996, and shall be applied prospectively. Earlier or
retroactive application is not permitted. Management has not yet determined
if the adoption and application of SFAS 125 will have a significant impact
on the financial condition or results of operations of the Company.
NOTE 8 - RECLASSIFICATIONS:
Certain amounts for the six and three months ended August 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 August 31, 1996 decreased $12.8 million or
1.1% to $1.13 billion as compared to February 29, 1996. This decrease was
primarily due to decreases of $16.1 million or 57.4% in cash and cash
equivalents, $10.3 million or 13.7% in securities available for sale, and
$1.1 million or 8.4% in Federal Home Loan Bank stock, at cost. These
decreases were partially offset by increases of $8.5 million or 76.9% in
securities purchased under agreements to resell and $6.5 million or 64.6% in
securities held to maturity. The decrease in securities available for sale
was primarily due to normal principal repayments received on mortgage-backed
and related securities and maturities which were used to fund the repurchase
of shares of common stock of the Company. The decrease in cash and cash
equivalents was primarily due to management's decision to use the
Association's high liquidity to invest in securities purchased under
agreements to resell and reduce borrowings from the Federal Home Loan Bank of
Atlanta ("FHLB").
Liabilities. Total liabilities as of August 31, 1996 decreased $9.9
million or 0.9% to $1.04 billion as compared to February 29, 1996. This
decrease was primarily due to a $1.8 million or 0.2% decrease in deposits and
a $16.3 million or 6.7% decrease in advances from FHLB. These decreases were
partially offset by an increase of
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$6.4 million or 70.1% in advances from borrowers for taxes and insurance.
The decrease in FHLB 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 six months ended August 31, 1996. The increase in
advances from borrowers for taxes and insurance was the result of the
accumulation of such funds for the payment of taxes and insurance applicable
to the loans held in the Association's loan portfolio during the third
quarter of 1996.
Stockholders' equity. Stockholders' equity decreased by $2.9 million or
3.1% to $91.0 million at August 31, 1996, versus $94.0 million at February
29, 1996. Such decrease primarily reflects the repurchase of shares of
Company's common stock for $5.5 million and an $840,000 decrease in
unrealized holding gains, net, on securities available for sale, which more
than offset net income of $3.8 million earned during the six months ended
August 31, 1996.
RESULTS OF OPERATIONS
Maryland Federal reported net income of $3.8 million and $4.3 million
during the six months ended August 31, 1996 and 1995, respectively. Net
income decreased by $432,000 or 10.2% during the six months ended August 31,
1996 as compared to the same period in 1995. This decrease was the result of
a $1.2 million decrease in noninterest income, a $359,000 increase in
noninterest expense, and a $145,000 increase in provision for loan losses,
which more than offset an increase of $982,000 in net interest income, and a
decrease of $240,000 in income tax expense, during the six months ended
August 31, 1996 as compared to the same period in 1995. During the three
months ended August 31, 1996 and 1995, Maryland Federal reported net income
of $1.9 million and $2.4 million, respectively. Net income decreased by
$500,000 or 20.7% during the three months ended August 31, 1996 as compared
to the same period in 1995. This decrease was the result of a decrease of
$1.4 million in noninterest income, and increases of $44,000 and $60,000 in
noninterest expense and provision for loan losses, respectively, which more
than offset a $678,000 increase in net interest income, and a decrease of
$290,000 in income tax expense, during the three months ended August 31, 1996
as compared to the same period in 1995.
Net Interest Income
Net interest income increased by $982,000 or 7.2% and $678,000 or 10.0%
for the six and three months ended August 31, 1996, as compared to the
increase for the six months ended August 31, 1996 was primarily the result of
a $9.7 million increase in the average balance of interest-earning assets
over interest-bearing liabilities, as compared to the same period in 1995,
coupled with a 3 basis point net increase in the average yield earned on
interest-earning assets over the average rate paid on interest-bearing
liabilities ("interest rate spread"). The increase for the three months
ended August 31, 1996 was primarily the result of
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a $6.7 million increase in the average balance of interest-earning assets
over interest-bearing liabilities, as compared to the same period in 1995,
coupled with a 15 basis point net increase in the interest rate spread.
Interest Income
Loans receivable. During the six months ended August 31, 1996, interest
earned on loans receivable increased by $1.9 million or 5.4%, as compared to
the same period in 1995. This increase was primarily the result of a $61.7
million or 6.6% increase in the average balance of loans receivable, which
more than offset a 10 basis point decrease in the average yield earned
thereon to 7.49%. During the three months ended August 31, 1996, interest
earned on loans receivable increased by $680,000 or 3.8%, as compared to the
same period in 1995. This increase was the result of a $49.9 million or 5.3%
increase in the average balance of loans receivable, which more than offset
an 12 basis point decrease in the average yield earned thereon to 7.48%. 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. During the six and three months
ended August 31, 1996, interest earned on mortgage-backed and related
securities decreased by $318,000 or 12.8% and $140,000 or 11.5%,
respectively, as compared to the same periods in 1995. These decreases were
the result of a $9.8 million or 13.3% and a $9.0 million or 12.4% decrease in
the average balance of mortgage-backed and related securities, respectively,
during the six and three months ended August 31, 1996 as compared to the same
periods in 1995, which more than offset a 5 and 7 basis point increase in the
average yield earned thereon to 6.80% and 6.81%, respectively. The decrease
in the average balance of such securities reflects principal repayments
received on such securities.
Investment securities and other interest-earning assets. Interest on
investment securities and other interest-earning assets increased by $249,000
or 16.1% during the six months ended August 31, 1996, as compared to the same
period in 1995. This increase was primarily the result of a $12.4 million or
24.5% increase in the average balance of investment securities and other
interest-earning assets, which more than offset a 41 basis point decrease in
the average yield earned on such assets during the six months ended August
31, 1996, as compared to the same period in 1995. During the three months
ended August 31, 1996, interest earned on investment securities and other
interest-earning assets increased by $68,000 or 9.3%, as compared to the same
period in 1995. This increase was primarily the result of a $5.4 million or
10.8% increase in the average balance of investment securities and other
interest-earning assets, which more than offset a 9 basis point decrease in
the average yield earned on such assets during the three months ended August
31, 1996, as compared to the same period in 1995.
- 9 -
Interest Expense
Deposits. Interest expense on deposits during the six and three months
ended August 31, 1996, decreased by $149,000 or 0.8% and $385,000 or 3.9%,
respectively, as compared to the same periods in 1995. These decreases,
during the six and three months ended August 31, 1996, were primarily the
result of a 14 and 27 basis point decrease in the average rate paid on such
deposits, respectively, which more than offset increases of a $13.2 million
or 1.7% and $8.4 million or 1.1%, respectively, in the average balance of
such deposits as compared to the same periods in 1995.
Borrowed funds. During the six and three months ended August 31, 1996,
interest expense on borrowed funds (including advances from borrowers for
taxes and insurance) increased by $989,000 or 16.8% and $315,000 or 10.2%,
respectively, as compared to the same periods in 1995. These increases were
primarily due to a $41.3 million or 21.4% and a $31.1 million or 15.6%
increase in the average balance of such funds, which more than offset a 25
and 31 basis point decrease in the average rate paid on such funds during the
six and three months ended August 31, 1996, respectively, as compared to the
same periods in 1995.
Provision for Loan Losses
Loan review procedures are utilized by the Association in order to ensure
that potential problem loans are identified early, thereby lessening any
potentially negative impact such problem loans may have on the Association's
earnings. During the six and three months ended August 31, 1996, the
Association's provision for loan losses totaled $145,000 and $60,000,
respectively. There was no provision for loan losses made during the six and
three months ended August 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 ecn 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 August 31, 1996, non-performing loans (loans ninety days or more
delinquent but still accruing interest, and non-accrual loans) totaled $3.5
million ($3,457,000 of which consist of first mortgage loans, with the
remaining $17,000 consisting of consumer and other loans) and represented
0.35% of total loans receivable. At February 29, 1996, non-performing loans
totaled $3.4 million ($3,333,000 of which consist of first mortgage loans,
with the remaining $53,000 consisting of consumer and other loans) and
represented 0.34% of total
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loans receivable. As of August 31, 1996, the allowance for loan losses
amounted to $4.6 million and represented 131.3% 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 decreased by $1.2 million or 45.4% and $1.4
million or 67.8% during the six and three months ended August 31, 1996,
respectively, as compared to the same periods in 1995. During the six months
ended August 31, 1996, the decrease was the result of a $1.4 million decrease
in gain on sales of investment and mortgage-backed and related securities,
which more than offset increases of $193,000 or 100.0% in gain on sales of
first mortgage loans, $46,000 or 6.5% in banking service charges and fees,
and $42,000 or 31.8% in loan fees and service charges, as compared to the
same period in 1995. During the three months ended August 31, 1996, the
decrease was the result of a $1.4 million decrease in gain on sales of
investment and mortgage-backed and related securities, which more than offset
increases of $31,000 or 28.4% in gain on sales of first mortgage loans,
$11,000 or 2.9% in banking service charges and fees, and $34,000 or 53.1% in
loan fees and service charges, as compared to the same period in 1995. There
was no sale of securities during the six and three months ended August 31,
1996.
Noninterest Expense
Total noninterest expense increased by $359,000 or 3.9% and $44,000 or
0.9% for the six and three months ended August 31, 1996, respectively, as
compared to the same periods in 1995. The components of noninterest expense
are discussed below.
Compensation and benefits. During the six and three months ended August
31, 1996, compensation and benefits increased by $571,000 or 13.0% and
$245,000 or 11.0%, respectively, as compared to the same periods 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
$52,000 or 3.3% and $22,000 or 2.7%, during the six and three months ended
August 31, 1996, respectively, as compared to the same periods in 1995. Such
decreases were the effect of relocating branch and loan production offices to
more suitable and less expensive locations during the previous fiscal year.
SAIF deposit insurance premiums. During the six and three months ended
August 31, 1996, SAIF deposit insurance premiums paid to the FDIC increased
$49,000 or 5.7% and $20,000 or 4.6%, respectively, as compared to the same
periods in 1995, due primarily to an increase in the average balance of
deposits. SAIF deposit insurance premiums are
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a function of the size of the Association's deposit base. See Note 2 of
Notes to Consolidated Financial Statements for a discussion of a $3.1 million
special assessment which will be paid and recognized during the nine months
ended November 30, 1996.
Loss on foreclosed real estat, 1996, loss on foreclosed real estate, net,
decreased by $201,000 or 83.1% and $38,000 or 51.4%, respectively, as
compared to the same periods in 1995. These decreases were primarily the
result of $200,000 and $50,000 in provisions made for possible losses on
foreclosed real estate recorded during the six and three months ended August
31, 1995, respectively. There were no such provisions made during the same
periods in 1996.
Advertising. During the six months ended August 31, 1996, advertising
expense increased by $53,000 or 19.4% as compared to the same period in 1995.
During the three months ended August 31, 1996, advertising expense decreased
by $18,000 or 11.0% as compared to the same period in 1995.
Other. During the six and three months ended August 31, 1996, other
noninterest expense decreased by $61,000 or 3.2% and $143,000 or 13.4%,
respectively, as compared to the same periods in 1995. These decreases were
primarily due to expenses incurred for relocating branch offices during the
six and three months ended August 31, 1995. Such expenses include new
supplies, moving expense, printing, postage and telephone expense. No such
branch offices were relocated during the comparable period in 1996.
Income Taxes
During the six and three months ended August 31, 1996, the Company made
provisions for income taxes of $2.5 million and $1.3 million, respectively,
as compared to $2.7 million and $1.6 million during the six and three months
ended August 31, 1995, respectively. The $240,000 or 8.9% and $290,000 or
18.4% decreases during the six and three months ended August 31, 1996,
respectively, were due primarily to the decreased profitability of the
Company as compared to the same periods in 1995.
CAPITAL ADEQUACY
The Association is required under certain federal regulations to maintain
minimum tangible capital equal to 1.5% of its adjusted total assets, minimum
core capital equal to 3.0% of its adjusted total assets and minimum total
capital (a comb to 8.0% of its risk-weighted assets. At August 31, 1996, the
Association had tangible capital equal to 7.57% of adjusted total assets,
core capital equal to 7.57% of adjusted total assets and total capital equal
to 15.17% of risk-weighted assets.
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The Office of Thrift Supervision ("OTS") has proposed to modify the
minimum core capital leverage ratio requirement in the same manner as has
been done by the Office of the Comptroller of the Currency for national
banks. Under the OTS proposal, only savings associations rated a composite 1
under the OTS CAMEL rating system will be permitted to operate at or near the
regulatory minimum leverage ratio of 3%. For all other savings associations,
the minimum core capital leverage ratio will be 3% plus at least an
additional 100 to 200 basis points. The OTS has not taken final action on
the proposal, however, it has reserved the right to apply this higher
standard to any insured financial institution when considering an
institution's capital adequacy.
In August 1993, the OTS issued a final rule which adds an interest rate
risk component to the existing 8% risk-based capital requirement. Under the
rule, a savings institution would be required to hold capital as a safeguard
against interest rate exposure in an amount equal to 50% of the decline in
the market value of the institution's portfolio equity (i.e., the net present
value of the institution's assets, liabilities and certain off-balance-sheet
items) that would result from a 200 basis point change in market interest
rates. The requirement would apply to those institutions considered to be
carrying "above normal" risk. "Above normal" risk is defined as occurring
when the decline in the market value of the portfolio equity, under a 200
basis point rate change, exceeds 2% of the market value of the institution's
assets.
However, in October 1994, the Director of the OTS indicated that it
would waive the capital deductions for institutions with a greater than
"normal" risk until the OTS publishes an appeals process. In August 1995,
the OTS issued Thrift Bulletin No. 67 which allows eligible institutions to
request an adjustment to their interest rate risk component as calculated by
the OTS or to request use of their own models to calculate their interest
rate component. The OTS also indicated that it will delay invoking its
interest rate risk rule requiring institutions with "above normal" interest
rate risk exposure to adjust their regulatory capital requirement until new
procedures are implemented and evaluated. The OTS has not yet established an
effective date for the capital deduction. Because of the Association's
strong capitalization, management does not believe that compliance with the
new rule would adversely affect its operations.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, each federal banking agency is also required to establish capital
levels for insured depository institutions including "well capitalized",
"adequately capitalized", "undercapitalized" and "critically
undercapitalized". A depository institution's capital adequacy will be
measured on the basis of its total risk-based capital ratio, Tier 1
risk-based capital ratio and leverage ratio. The degree of regulatory
intervention is tied to the institution's capital category, with increasing
scrutiny and more stringent restrictions being imposed as the institution's
capital declines.
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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 August
31, 1996, the Association was considered to be "well capitalized." It is
management's strong belief that even after making payment of the one-time
SAIF deposit insurance premium, the Association will still be considered
"well capitalized."(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 meet its ongoing commitments to fund maturing savings
certificates and savings withdrawals, fund existing and continuing loan
commitments and maintain its required liquidity.
At August 31, 1996, the Association had $1.1 million of undisbursed loan
funds and $50.5 million in approved loan commitments. These commitments were
partially offset by $15.1 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 August 31, 1997 is
$443.0 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 prepnting 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
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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.
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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
The 1996 Annual meeting of Stockholders of Maryland Federal
Bancorp, Inc. was held on June 19, 1996. Present at the meeting
in person or by proxy were 2,719,863 shares or 86.1% of the
Company's 3,160,068 outstanding shares. The stockholders voted to
approve the re-election of two directors for three year terms by
85.8% of the outstanding shares, and to ratify the appointment of
Stoy, Malone & Company, P.C. as the Company's independent auditors
by 85.8% of the outstanding shares.
Item 5 - OTHER INFORMATION
Not Applicable
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
Not Applicable
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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: OCTOBER 15, 1996 By: /s/ Robert H. Halleck
---------------- ----------------------------
Robert H. Halleck, President
and Chief Executive Officer
Date: OCTOBER 15, 1996 By: /s/ Lynn B. Hounslow
---------------- ----------------------------
Lynn B. Hounslow, Senior
Vice President, Treasurer,
Chief Financial Officer and
Principal Accounting Officer
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