UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 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
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MARYLAND FEDERAL BANCORP, INC.
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(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
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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
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Number of Shares of Common Stock Outstanding as of
January 10, 1997
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
-------------- ----------------------------
Common Stock ($.01 3,146,474 Shares
par value per share)
INDEX
PART I -- FINANCIAL INFORMATION: PAGE
Item 1. Financial Statements: PAGE
Consolidated Statements of Financial
Condition as of November 30, 1996
and February 29, 1996 1
Consolidated Statements of Income and
Retained Earnings for the nine and three
months ended November 30, 1996 and 1995 2
Consolidated Statements of Cash Flows for
the nine months ended November 30, 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)
November 30, February 29,
1996 1996
----------- ------------
(In Thousands)
ASSETS
Cash and cash equivalents $19,628 $27,963
Securities purchased under agreements to
resell 15,330 11,034
Securities available for sale 66,351 74,791
Securities held to maturity (fair value,
$11,472,000 and $10,007,000, respectively) 11,465 10,072
Loans held for sale, at cost 3,634 16,296
Loans receivable, net 984,784 974,888
Accrued interest receivable 5,994 6,009
Federal Home Loan Bank stock, at cost 11,277 12,514
Foreclosed real estate, net 1,888 2,090
Premises and equipment, net 4,766 4,829
Other assets 4,639 2,852
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Total assets $1,129,756 $1,143,338
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $802,099 $788,931
Advances from Federal Home Loan Bank of
Atlanta 222,030 243,780
Advances from borrowers for taxes and
insurance 4,131 9,124
Income taxes 2,348 2,143
Accrued expenses and other liabilities 6,830 5,378
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Total liabilities 1,037,438 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; 4,002,632 and 3,821,081
shares issued, respectively 40 38
Additional paid-in capital 40,556 34,917
Retained earnings, substantially restricted 65,398 67,492
Unrealized holding gains, net 3,089 2,420
Treasury stock, at cost; 871,426 and 671,376
shares, respectively (16,765) (10,885)
---------- ----------
Total stockholders' equity 92,318 93,982
---------- ----------
Total liabilities and stockholders'
equity $1,129,756 $1,143,338
---------- ----------
---------- ----------
See Notes to Consolidated Financial Statements.
- 1 -
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
Nine Months Ended November 30, Three Months Ended November 30,
------------------------------ -------------------------------
1996 1995 1996 1995
------------- --------------- ------------- ----------------
(In Thousands, Except Per Share Data)
Interest income:
Loans receivable:
First mortgage loans $50,589 $49,918 $16,743 $16,979
Consumer and other loans 5,160 3,641 1,867 1,332
Investment securities 1,965 1,930 580 597
Mortgage-backed and related securities 3,199 3,667 1,027 1,177
Other interest-earning assets 608 339 202 130
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Total interest income 61,521 59,495 20,419 20,215
------- ------- -------- --------
------- ------- -------- --------
Interest expense:
Deposits 29,258 29,868 9,685 10,146
Advances from Federal Home Loan
Bank of Atlanta 10,152 9,292 3,282 3,414
Advances from borrowers for taxes
and insurance 23 26 3 3
------- ------- ------- --------
Total interest expense 39,433 39,186 12,970 13,563
------- ------- ------- --------
Net interest income 22,088 20,309 7,449 6,652
Provision for loan losses 195 50 50 50
------- ------- ------- --------
Net interest income after provision for
loan losses 21,893 20,259 7,399 6,602
------- ------- ------- --------
Noninterest income:
Loan fees and service charges 257 198 83 66
Banking service charges and fees 1,213 1,116 461 410
Gain on sales of first mortgage loans 501 355 115 162
Gain on sales of investment and
mortgage-backed securities -- 3,312 -- 1,879
Other 78 94 5 23
------- ------- -------- --------
Total noninterest income 2,049 5,075 664 2,540
------- ------- -------- --------
Noninterest expense:
Compensation and benefits 7,474 6,531 2,511 2,139
Occupancy and equipment 2,271 2,374 770 821
SAIF deposit insurance premiums 6,371 1,304 5,466 448
Loss on foreclosed real estate, net 101 263 60 21
Advertising 434 404 108 131
Other 2,835 2,957 971 1,032
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Total noninterest expense 19,486 13,833 9,886 4,592
------- ------- -------- --------
Income (loss) before income taxes 4,456 11,501 (1,823) 4,550
Income tax expense (benefit) 151 4,448 (2,310) 1,747
------- ------- -------- --------
NET INCOME 4,305 7,053 487 2,803
Retained earnings, substantially restricted:
Balance, beginning of period 67,492 60,537 70,311 63,955
Stock dividend (4,884) -- (4,884) --
Cash dividends (1,515) (1,280) (516) (448)
------- ------- -------- --------
Balance, end of period $65,398 $66,310 $65,398 $66,310
------- ------- -------- --------
------- ------- -------- --------
Primary earnings per share $1.30 $2.09 $.16 $.83
------- ------- -------- --------
------- ------- -------- --------
See Notes to Consolidated Financial Statements.
- 2 -
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended November 30,
------------------------------
1996 1995
------------- -----------
(In Thousands)
OPERATING ACTIVITIES:
Net income $ 4,305 $ 7,053
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization:
Premises and equipment 660 827
Other (856) (700)
Loans originated for sale (54,529) (35,386)
Sale of loans originated for sale 67,191 34,211
Provision for losses on loans and foreclosed
real estate 235 250
Gain on sales of securities -- (3,312)
Gain on sales of foreclosed real estate (55) (27)
Deferred income taxes 309 (877)
Tax benefits relating to stock options 119 270
Decrease (increase) in:
Accrued interest receivable 15 (298)
Other assets (2,002) 1,807
Increase (decrease) in:
Current income taxes payable (525) 430
Accrued expenses and other liabilities 1,428 (1)
--------- ---------
Net cash provided by operating
activities 16,295 4,247
--------- ---------
INVESTING ACTIVITIES:
Loans originated (93,847) (129,211)
Loans purchased -- (1,006)
Principal collected on loans 83,749 53,388
Purchases of securities:
Available for sale (3,985) (971)
Held to maturity (12,870) --
Principal collected on mortgage-backed and
related securities 8,831 6,181
Proceeds from maturities of securities:
Available for sale 5,293 1,200
Held to maturity 11,000 12,130
Net decrease (increase) in securities purchased
under agreements to resell (4,296) 1,305
Decrease (increase) in Federal Home Loan Bank stock 1,237 (2,768)
Proceeds from sales of securities available for sale
and held to maturity -- 5,090
Proceeds from sales of foreclosed real estate 1,162 387
Purchases of premises and equipment (597) (491)
--------- ---------
Net cash used in investing activities (4,323) (54,766)
--------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 13,168 17,361
Proceeds from Federal Home Loan Bank advances 92,000 187,350
Principal payments on Federal Home Loan Bank
advances (113,750) (127,050)
Net decrease in advances from borrowers for
taxes and insurance (4,993) (5,650)
Proceeds from issuance of stock under stock plans 650 596
Purchase of treasury stock (5,880) --
Cash dividends paid (1,502) (1,212)
--------- ---------
Net cash provided by (used in)
financing activities (20,307) 71,395
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,335) 20,876
CASH AND CASH EQUIVALENTS:
Beginning of period 27,963 15,775
--------- ---------
End of period $19,628 36,651
--------- ---------
--------- ---------
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
November 30, 1996, and the results of its operations for the nine and three
months ended November 30, 1996, and 1995, and cash flows for the nine months
ended November 30, 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 November 30, 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 Maryland Federal Savings and Loan Association (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 paid 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 to SAIF-insured institutions
of approximately $4.5 billion, or $.657 for every $100 of assessable 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
was $5.1 million and was recognized and paid during the quarter ended November
30, 1996.
Effective January 1, 1997, assessment rates for SAIF-insured
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institutions will range from 0% of insured deposits for well-capitalized
institutions with minor supervisory concerns to .27% of insured deposits for
under-capitalized institutions with substantial supervisory concerns. In
addition, an additional assessment of 6.4 basis points will be added to the
regular SAIF-assessment until December 31, 1999 in order to cover Financing
Corporation debt service payments.
NOTE 3 -- DIVIDENDS:
On November 21, 1996, the Board of Directors declared a 5% stock dividend
which was payable on December 12, 1996, to the shareholders of record on
December 2, 1996. Stockholders' equity as of November 30, 1996, has been
adjusted for this dividend. Per share amounts in the accompanying
consolidated financial statements are also based on the increased number of
shares giving retroactive effect to the stock dividend. The Board also
declared a $.165 per share cash dividend for the quarter payable on December
20, 1996, to the shareholders of record on December 12, 1996.
NOTE 4 -- EARNINGS PER SHARE:
Primary earnings per share for the nine months ended November 30, 1996
and 1995 are computed based on the weighted average number of shares actually
outstanding, as adjusted for the stock dividend referred to above, 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 3,322,209 and 3,378,728 for the nine months ended November 30,
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 5 -- COMMON STOCK ISSUED:
During the nine months ended November 30, 1996, 10,880, 15,000 and 2,332
shares were issued at $14.43, $22.125 and $24.00 per share ($156,998,
$331,875 and $55,968), respectively, as a result of stock options being
exercised. During the nine months ended November 30, 1995, 15,050, 10,825
and 21,300 shares were issued at $7.50, $9.96 and $14.43 per share ($112,875,
$107,817 and $307,359), 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
the Association's Employee Stock Purchase Plan during the nine months ended
November 30, 1996 and 1995, respectively.
- 5 -
NOTE 6 -- TREASURY STOCK:
During the nine months ended November 30, 1996, the Company acquired
200,050 shares of its $.01 par value common stock for a total cost of
approximately $5.9 million.
NOTE 7 -- INCOME TAXES:
During the third quarter of the current fiscal year, the Association
recorded a $1.6 million adjustment to revise prior estimates in recording the
tax provision.
NOTE 8 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Nine Months Ended November 30,
------------------------------
1996 1995
---- ----
(In Thousands)
Cash paid for:
Interest $38,476 $38,761
Income taxes 1,482 3,597
NOTE 9 -- 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.
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, as amended
by SFAS 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125", supersedes SFAS 122 and provides accounting and reporting
standards for transfers 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 10 -- RECLASSIFICATIONS:
Certain amounts for the nine and three months ended November 30, 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 November 30, 1996 decreased $13.6 million or
1.2% to $1.13 billion as compared to February 29, 1996. This decrease was
primarily due to decreases of $8.3 million or 29.8% in cash and cash
equivalents, $8.4 million or 11.3% in securities available for sale, $2.8
million or 0.3% in loans receivable, net (including loans held for sale, at
cost), and $1.2 million or 9.9% in Federal Home Loan Bank stock, at cost.
These decreases were partially offset by increases of $4.3 million or 38.9%
in securities purchased under agreements to resell, $1.8 million or 62.7% in
other assets, and $1.4 million or 13.8% 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 liquidity to invest in
securities purchased under agreements to resell, pay the one-time FDIC
special assessment to recapitalize the SAIF, and reduce borrowings from the
Federal Home Loan Bank of Atlanta ("FHLB").
Liabilities. Total liabilities as of November 30, 1996 decreased $11.9
million or 1.1% to $1.04 billion as compared to February 29,
- 7 -
1996. This decrease was primarily due to decreases of $21.8 million or 8.9%
in advances from FHLB and $5.0 million or 54.7% in advances from borrowers
for taxes and insurance. These decreases were partially offset by increases
of $13.2 million or 1.7% in deposits and $1.5 million or 27.0% in accrued
expenses and other liabilities. The decrease in FHLB advances was the result
of management's decision to utilize the Association's cash flow to reduce
borrowings during the nine months ended November 30, 1996. The decrease in
advances from borrowers for taxes and insurance was the result of real estate
taxes paid, during the quarter ended November 30, 1996, on behalf of
borrowers for properties pledged against mortgage loans.
Stockholders' equity. Stockholders' equity decreased by $1.7 million or
1.8% to $92.3 million at November 30, 1996, versus $94.0 million at February
29, 1996. Such decrease primarily reflects the repurchase of shares of the
Company's common stock for $5.9 million, which more than offset net income of
$4.3 million earned during the nine months ended November 30, 1996, and a
$669,000 increase in unrealized holding gains, net, on securities available
for sale.
RESULTS OF OPERATIONS
Maryland Federal reported net income of $4.3 million and $7.1 million
during the nine months ended November 30, 1996 and 1995, respectively. Net
income decreased by $2.7 million or 39.0% during the nine months ended
November 30, 1996, as compared to the same period in 1995. This decrease was
the result of a $3.0 million decrease in noninterest income, and increases of
$5.7 million in noninterest expense and $145,000 in provision for loan
losses, which more than offset an increase of $1.8 million in net interest
income, and a decrease of $4.3 million in income tax expense, during the nine
months ended November 30, 1996 as compared to the same period in 1995.
During the three months ended November 30, 1996 and 1995, Maryland
Federal reported net income of $487,000 and $2.8 million, respectively. Net
income decreased by $2.3 million or 82.6% during the three months ended
November 30, 1996 as compared to the same period in 1995. This decrease was
the result of a $1.9 million decrease in noninterest income and a $5.3
million increase in noninterest expense, which more than offset a $797,000
increase in net interest income and a $4.1 million decrease in income tax
expense, during the three months ended November 30, 1996, as compared to the
same period in 1995.
Net Interest Income
Net interest income increased by $1.8 million or 8.8% and $797,000 or
12.0% for the nine and three months ended November 30, 1996, respectively, as
compared to the same periods in 1995, respectively. The increase for the
nine months ended November 30, 1996 was primarily the result of a $7.4
million increase in the average balance of interest-earning assets over
interest-bearing
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liabilities, as compared to the same period in 1995, coupled with a 12 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 November 30, 1996 was
primarily the result of a $2.9 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 28 basis point net increase in the
interest rate spread.
Interest Income
Loans receivable. During the nine months ended November 30, 1996,
interest earned on loans receivable increased by $2.2 million or 4.1%, as
compared to the same period in 1995. This increase was primarily the result
of a $48.1 million or 5.1% increase in the average balance of loans
receivable, which more than offset a 7 basis point decrease in the average
yield earned thereon to 7.49%. During the three months ended November 30,
1996, interest earned on loans receivable increased by $299,000 or 1.6%, as
compared to the same period in 1995. This increase was the result of a $21.0
million or 2.2% increase in the average balance of loans receivable, which
more than offset a 4 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 nine and three months
ended November 30, 1996, interest earned on mortgage-backed and related
securities decreased by $468,000 or 12.8% and $150,000 or 12.7%,
respectively, as compared to the same periods in 1995. These decreases were
the result of a $9.5 million or 13.2% and a $9.0 million or 12.9% decrease in
the average balance of mortgage-backed and related securities, respectively,
during the nine and three months ended November 30, 1996 as compared to the
same periods in 1995, which more than offset a 3 and 1 basis point increase
in the average yield earned thereon to 6.79% for both the nine and three
months ended November 30, 1996. 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 $304,000
or 13.4% during the nine months ended November 30, 1996, as compared to the
same period in 1995. This increase was primarily the result of a $9.6
million or 19.1% increase in the average balance of investment securities and
other interest-earning assets, which more than offset a 29 basis point
decrease in the average yield earned on such assets during the nine months
ended November 30, 1996, as compared to the same period in 1995. During the
three months ended November 30, 1996, interest earned on investment
securities and other interest-earning assets increased by $55,000 or
- 9 -
7.6%, as compared to the same period in 1995. This increase was primarily
the result of a $4.0 million or 8.1% increase in the average balance of
investment securities and other interest-earning assets, which more than
offset a 2 basis point decrease in the average yield earned on such assets,
during the three months ended November 30, 1996, as compared to the same
period in 1995. The increase in the average balance of investment securities
and other interest-earning assets reflects management's decision to utilize
the Association's liquidity to invest in securities purchased under
agreements to resell and securities held to maturity during both the nine and
three months ended November 30, 1996 as compared to the same periods in 1995.
Interest Expense
Deposits. Interest expense on deposits during the nine and three months
ended November 30, 1996, decreased by $610,000 or 2.0% and $461,000 or 4.5%,
respectively, as compared to the same periods in 1995. These decreases,
during the nine and three months ended November 30, 1996, were primarily the
result of a 20 and 34 basis point decrease in the average rate paid on such
deposits, respectively, which more than offset increases of $13.1 million or
1.7% and $13.0 million or 1.7%, respectively, in the average balance of such
deposits as compared to the same periods in 1995.
Borrowed funds. During the nine months ended November 30, 1996, interest
expense on borrowed funds (including advances from borrowers for taxes and
insurance) increased by $857,000 or 9.2%, as compared to the same period in
1995. This increase was primarily due to a $27.6 million or 13.6% increase
in the average balance of such funds, which more than offset a 25 basis point
decrease in the average rate paid on such funds during the nine months ended
November 30, 1996, as compared to the same period in 1995. During the three
months ended November 30, 1996, interest expense on borrowed funds decreased
by $132,000 or 3.9% as compared to the same period in 1995. This decrease
was primarily due to a 26 basis point decrease in the average interest rate
paid on such funds, which more than offset an increase of $201,000 or 0.1% in
the average balance of such funds during the three months ended November 30,
1996, as compared to the same period 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 nine and three months ended November 30, 1996, the
Association's provision for loan losses totaled $195,000 and $50,000,
respectively, as compared to the $50,000 provision for loan losses made
during the nine and three months ended November 30, 1995.
The allowance for loan losses is maintained at a level believed
- 10 -
adequate by management to absorb losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of
the loan portfolio, past loan loss experience, current economic conditions,
volume, growth and composition of the loan portfolio, and other relevant
factors. The allowance is increased by provisions for loan losses which are
charged against income. While management uses the best information available
to make such determinations, no assurance can be given as to whether future
adjustments may be necessary.
As of November 30, 1996, non-performing loans (loans ninety days or more
delinquent but still accruing interest, and non-accrual loans) totaled $3.9
million ($3,807,000 of which consist of first mortgage loans, with the
remaining $44,000 consisting of consumer and other loans) and represented
0.39% 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 loans receivable. As of November 30, 1996, the
allowance for loan losses amounted to $4.6 million and represented 118.5% 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 decreased by $3.0 million or 59.6% and $1.9
million or 73.9% during the nine and three months ended November 30, 1996,
respectively, as compared to the same periods in 1995. During the nine
months ended November 30, 1996, the decrease was the result of a $3.3 million
or 100.0% decrease in gain on sales of investment and mortgage-backed
securities and a decrease of $16,000 or 17.0% in other noninterest income,
which more than offset increases of $146,000 or 41.1% in gain on sales of
first mortgage loans, $97,000 or 8.7% in banking service charges and fees,
and $59,000 or 29.8% in loan fees and service charges, as compared to the
same period in 1995.
During the three months ended November 30, 1996, the decrease was the
result of a $1.9 million or 100.0% decrease in gain on sales of investment
and mortgage-backed securities, a $47,000 or 29.0% decrease in gain on sales
of first mortgage loans, and an $18,000 or 78.3% decrease in other
noninterest income, which more than offset increases of $51,000 or 12.4% in
banking service charges and fees, and $17,000 or 25.8% in loan fees and
service charges, as compared to the same period in 1995. There were no sales
of securities during the nine and three months ended November 30, 1996.
Noninterest Expense
Total noninterest expense increased by $5.7 million or 40.9% and $5.3
million or 115.3% for the nine and three months ended November 30, 1996,
respectively, as compared to the same periods in 1995. The
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components of noninterest expense are discussed below.
Compensation and benefits. During the nine and three months ended
November 30, 1996, compensation and benefits increased by $943,000 or 14.4%
and $372,000 or 17.4%, 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
$103,000 or 4.3% and $51,000 or 6.2%, during the nine and three months ended
November 30, 1996, respectively, as compared to the same periods in 1995.
Such decreases were primarily the effect of relocating branch and loan
production offices to more suitable and less expensive locations and the
closing of one branch office during the previous fiscal year.
SAIF deposit insurance premiums. During the nine and three months ended
November 30, 1996, SAIF deposit insurance premiums paid to the FDIC increased
$5.1 million and $5.0 million, respectively, as compared to the same periods
in 1995, due primarily to a $5.1 million special assessment recognized and
paid during the quarter ended November 30, 1996, to recapitalize the SAIF.
Effective January 1, 1997, the Association's SAIF insurance assessment rate
will be reduced from 23 to 6.4 basis points. Based upon the approximate $800
million of assessable deposits at November 30, 1996, the Association would
expect to pay approximately $1.3 million less in insurance premiums during
1997.
Loss on foreclosed real estate, net. During the nine months ended
November 30, 1996, loss on foreclosed real estate, net, decreased by $162,000
or 61.6%, as compared to the same period in 1995. This decrease was
primarily the result of a $160,000 decrease in provisions made for possible
losses on foreclosed real estate as compared to the same period in 1995.
During the three months ended Novemebr 30, 1996, loss on foreclosed real
estate increased by $39,000 or 185.7% as compared to the same period in 1995.
This increase was primarily the result of an increase of $40,000 in the
provisions made for possible losses on foreclosed real estate during the
three months ended November 30, 1996, as compared to the same period in 1995.
Advertising. During the nine months ended November 30, 1996, advertising
expense increased by $30,000 or 7.4% as compared to the same period in 1995.
During the three months ended November 30, 1996, advertising expense
decreased by $23,000 or 17.6% as compared to the same period in 1995.
Other. During the nine and three months ended November 30, 1996, other
noninterest expense decreased by $122,000 or 4.1% and $61,000 or 5.9%,
respectively, as compared to the same periods in 1995. These decreases were
primarily due to expenses incurred for relocating branch offices during the
nine and three months ended November 30,
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1995. Such expenses include new supplies, moving expense, printing, postage
and telephone expense. No such branch offices were relocated during the
comparable periods in 1996.
Income Taxes
During the nine months ended November 30, 1996, the Company recognized a
provision for income taxes of $151,000 as compared to $4.4 million during the
same period in 1995. During the three months ended November 30, 1996, the
Company recognized an income tax benefit of $2.3 million as compared to an
income tax expense of $1.7 million during the same period in 1995. During
the nine and three months ended November 30, 1996, income tax expense
decreased by $4.3 million and $4.1 million, respectively, as compared to the
same periods in 1995. These decreases were primarily a result of the
one-time special assessment to recapitalize the SAIF, and a $1.6 million
adjustment to revise prior estimates in recording the tax provision, both of
which occurred during the third quarter of the current fiscal year.
CAPITAL ADEQUACY
The Association is required under certain federal regulations to maintain
minimum tangible capital equal to 1.5% of its adjusted total assets, minimum
core capital equal to 3.0% of its adjusted total assets and minimum total
capital (a combination of core and supplementary capital) equal to 8.0% of
its risk-weighted assets. At November 30, 1996, the Association had tangible
capital equal to 7.65% of adjusted total assets, core capital equal to 7.65%
of adjusted total assets and total capital equal to 15.17% 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 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
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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
November 30, 1996, the Association was considered to be "well capitalized."
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
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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 November 30, 1996, the Association had $1.6 million of undisbursed
loan funds and $48.3 million in approved loan commitments. These commitments
were partially offset by $9.3 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 November 30, 1997 is
$457.2 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 require the measurement of financial position and
operating results in terms of historical dollars without considering changes
in the relative purchasing power of money over time due to inflation.
Virtually all of the assets and liabilities of Maryland Federal are
monetary in nature. As a result, interest rates have a more significant
impact on Maryland Federal's performance than the general level of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.
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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
---------------------------------------------------
Not Applicable
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: JANUARY 14, 1997 By:/s/ Robert H. Halleck
--------------- ------------------------------
Robert H. Halleck, President
and Chief Executive Officer
Date: JANUARY 14, 1997 By:/s/ Lynn B. Hounslow
--------------- ------------------------------
Lynn B. Hounslow, Senior
Vice President, Treasurer,
Chief Financial Officer and
Principal Accounting Officer
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