SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 1997
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.
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(Exact name of registrant as specified in its charter)
MARYLAND 52-1640579
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3505 HAMILTON STREET
HYATTSVILLE, MARYLAND 20782
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(Address) (Zip Code)
Registrant's telephone number, including area code: (301) 779-1200
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock Purchase Rights
Common Stock (par value $.01 per share)
----------------------------------------
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
As of April 25, 1997, the aggregate value of the 3,002,373 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
202,112 shares held by all directors and officers of the Registrant as a
group, was approximately $105,083,055. This figure is based on the closing
price of $35.00 per share of the Registrant's Common Stock on April 25, 1997.
Number of shares of Common Stock outstanding as of April 25, 1997: 3,204,485
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year ended
February 28, 1997 are incorporated into Part II, Items 5-8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 1997 Annual Meeting
of Stockholders are incorporated into Part III, Items 10-13 of this Form 10-K.
PART I
Item 1. Business.
GENERAL
Maryland Federal Bancorp, Inc. ("MFB" or the "Company") was incorporated
under the laws of the State of Maryland in June 1989 and is the unitary savings
and loan holding company and sole stockholder of Maryland Federal Savings and
Loan Association ("Maryland Federal" or the "Association"). The Company does not
presently own or operate any subsidiary except for the Association. Maryland
Federal's business is conducted through 26 branch offices located in Prince
George's, Montgomery, Charles, Calvert and Anne Arundel counties, Maryland, five
loan production offices, and one wholly-owned subsidiary. The principal
executive offices of both the Company and the Association are located at 3505
Hamilton Street, Hyattsville, Maryland 20782, and their telephone number is
(301) 779-1200.
On a consolidated basis, at February 28, 1997, MFB had total assets of $1.13
billion, total liabilities of $1.03 billion and total stockholders' equity of
$95.3 million or $29.67 per share based on 3,210,150 shares of common stock
outstanding. MFB had net income of $6.5 million for the year ended February 28,
1997.
The Association is primarily engaged in the business of attracting deposits
from the general public and investing such deposits primarily in permanent loans
secured by first liens on one- to four-family residential properties and, to a
lesser extent, in commercial real estate located in the Association's market
area and in consumer loans. The Association also maintains a substantial
portfolio of mortgage-backed securities as well as United States Government
and agency securities and other permissible investments and, through a
subsidiary, engages in insurance agency activities to a limited extent.
The Company, as a registered savings and loan holding company, is subject to
examination and regulation by the Office of Thrift Supervision ("OTS"), a
department of the United States Treasury, and is subject to various reporting
and other requirements of the Securities and Exchange Commission ("SEC").
Maryland Federal, as a federally chartered savings and loan association, is
subject to examination and comprehensive regulation by the OTS, which became the
successor to the Federal Home Loan Bank Board ("FHLBB") pursuant to the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"),
which was enacted in August 1989, and by the Federal Deposit Insurance
Corporation ("FDIC"). Customer deposits with the Association are insured to the
maximum extent provided by law through the Savings Association Insurance Fund
("SAIF"), which is administered by the FDIC. Maryland Federal is a member of the
Federal Home Loan Bank of Atlanta ("FHLB of Atlanta"), which is one of 12
regional banks comprising the Federal Home Loan Bank System ("FHLB System").
Maryland Federal is further subject to regulations administered by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board") governing
reserves required to be maintained against deposits and certain other matters.
2
LENDING ACTIVITIES
Loan and Mortgage-backed Security Portfolio Composition. Maryland Federal's
net loan and mortgage-backed security portfolio totalled $1.06 billion at
February 28, 1997, representing 93.6% of the Company's $1.13 billion of total
assets at that date. The Association's total loan portfolio at February 28, 1997
consisted primarily of conventional mortgage loans, which are loans that are
neither insured by the Federal Housing Administration ("FHA") nor partially
guaranteed by the Department of Veterans Affairs ("VA"). In addition, the
Association maintains a portfolio of mortgage-backed securities, which consists
primarily of Government National Mortgage Association ("GNMA"), Federal Home
Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association
("FNMA") participation certificates. GNMA certificates are guaranteed by the
full faith and credit of the United States while FHLMC and FNMA certificates are
guaranteed by those quasi-governmental agencies.
At February 28, 1997, single-family residential loans comprised the largest
group of loans, amounting to $954.8 million or 89.5% of the gross loan and
mortgage-backed securities portfolio. The Association also had $64.4 million of
mortgage-backed securities, which accounted for 6.0% of the gross loan and
mortgage-backed securities portfolio at such date. Construction loans at such
date amounted to $6.8 million or 0.6% of the gross loan and mortgage-backed
securities portfolio. Commercial real estate loans accounted for substantially
all of the remainder of the loan portfolio, amounting to $34.8 million or 3.3%
of the gross loan and mortgage-backed securities portfolio at February 28, 1997.
In recent years, management of Maryland Federal has increased the
origination of adjustable-rate and/or short-term loans, which included primarily
adjustable-rate mortgage loans ("ARMs"). Since fiscal 1991, the Association has
focused on its origination of second mortgages and home equity lines of credit
due to the shorter terms and the low level of credit risk associated with such
loans. The origination of ARMs, commercial loans, consumer loans and
construction loans accounted for 77.7%, 50.7% and 65.7% of total loans
originated in fiscal 1995, 1996 and 1997, respectively.
Commercial real estate lending entails significant additional risks as
compared with single-family residential property lending. It is the
Association's policy to limit its origination of commercial real estate loans.
3
The following table sets forth the composition of the Association's loan
portfolio by type of loan at the dates indicated.
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
----------------------- ----------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------ --------- ------------ --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Real estate loans:
Permanent loans:
Single-family(1)............. $ 954,750 89.5% $ 947,995 88.8% $ 855,857 86.8%
Multi-family................. 2,081 0.2 2.472 0.2 2,662 0.3
Commercial(2)................ 34,833 3.3 41,824 3.9 40,731 4.1
Land......................... -- -- -- -- -- --
Construction loans:
Single-family................ 6,846 0.6 2,815 0.3 1,244 0.1
Other property............... -- -- 2,344 0.2 7,315 0.7
Mortgage-backed securities....... 64,415 6.0 66,491 6.2 75,804 7.7
Consumer and other loans......... 4,010 0.4 4,232 0.4 2,997 0.3
------------ --------- ------------ --------- ---------- ---------
Total gross loans and
mortgage-backed securities
receivable..................... 1,066,935 100.00% 1,068,173 100.00% 986,610 100.00%
========= ========= =========
Less:
Undisbursed portion of mortgage
loans........................ 3,240 1,722 2,728
Unamortized premiums and
discounts, net............... 653 783 1,010
Net deferred loan fees......... 2,356 3,815 4,284
Allowance for loan losses...... 4,599 4,474 4,424
------------ ------------ ----------
Total loans and mortgage-backed
securities receivable, net... $ 1,056,087 $ 1,057,379 $ 974,164
============ ============ ==========
FEBRUARY 28, FEBRUARY 28,
1994 1993
----------------- -----------
AMOUNT PERCENT AMOUNT PERCENT
---------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
Real estate loans:
Permanent loans:
Single-family(1)............. $ 656,833 86.5% $596,508 83.0%
Multi-family................. 2,740 0.4 2,807 0.4
Commercial(2)................ 36,548 4.8 39,252 5.5
Land......................... 1,542 0.2 1,583 0.2
Construction loans:
Single-family................ 6,485 0.9 11,581 1.6
Other property............... 7,849 1.0 8,447 1.2
Mortgage-backed securities....... 44,200 5.8 53,672 7.4
Consumer and other loans......... 2,788 0.4 5,113 0.7
---------- ----- --------- ---------
Total gross loans and
mortgage-backed securities
receivable..................... 758,985 100.0% 718,963 100.0%
===== =========
Less:
Undisbursed portion of mortgage
loans........................ 8,609 11,135
Unamortized premiums and
discounts, net............... 1,025 1,581
Net deferred loan fees......... 4,065 4,065
Allowance for loan losses...... 4,187 4,267
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Total loans and mortgage-backed
securities receivable, net..... $ 741,099 $ 697,915
========== =========
- ------------------------
(1) Includes $96.1 million, $69.7 million, $51.9 million, $40.9 million and
$40.6 million of second-mortgage loans and home equity lines of credit at
each of the respective dates.
(2) Includes $14.0 million, $13.6 million, $12.5 million, $10.8 million and $6.4
million of single-family, non-owner occupied rental properties at each of
the respective dates.
4
Contractual Maturities of Loans. The following table sets forth the
scheduled contractual maturities of the Association's loans and
mortgage-backed securities at February 28, 1997. Demand loans, loans having
no stated schedule of repayments and no stated maturity, and overdraft loans
are reported as due in one year or less. The amounts shown for each period do
not take into account loan prepayments and normal amortization of the
Association's loan portfolio.
AMOUNTS DUE
---------------------------
BALANCE AT AFTER ONE YEAR
FEBRUARY 28, IN ONE YEAR THROUGH FIVE AFTER FIVE
1997 OR LESS YEARS YEARS
---------------- ----------- -------------- ----------
(IN THOUSANDS)
Real estate loans(1)(2):
Fixed-rate...................................... $ 431,469 $ 6,238 $ 51,220 $ 374,011
Adjustable-rate................................. 620,659 1,067 4,771 614,821
Consumer and other loans.......................... 3,959 158 3,475 326
---------------- ----------- ------- ----------
Total loans and mortgage-backed securities, $ 1,056,087 $ 7,463 $ 59,466 $ 989,158
net(3)(4) ================ =========== ======= ==========
- ------------------------
(1) Includes single and multi-family residential mortgage loans, loans on
income-producing property secured by other real estate, construction and
commercial business loans secured by real estate and mortgage-backed
securities.
(2) Construction loans, net of undisbursed portion, totalled $3.6 million at
February 28, 1997, $1.1 million of which are scheduled to convert to
permanent loans in fiscal 1998.
(3) Net of undisbursed portion of mortgage loans, unamortized premiums and
discounts, net deferred loan fees and allowance for loan losses.
(4) Of the total loans due to mature after February 28, 1998, $429.0 million
have fixed rates of interest and $619.6 million have adjustable or floating
rates of interest.
Scheduled contractual maturities of loans and mortgage-backed securities do
not necessarily reflect the actual term of the Association's loan and
mortgage-backed securities portfolio. The average life of mortgage loans is
substantially less than their contractual terms because of loan prepayments and
because of enforcement of due-on-sale clauses, which grant the Association the
right to declare a loan immediately due and payable in the event, among other
things, that the borrower sells the real property subject to the mortgage and
the loan is not repaid. The average life of mortgage loans tends to increase,
however, when current market rates on mortgage loans substantially exceed rates
on existing mortgage loans and, conversely, decrease when current market rates
on mortgage loans decline below rates on existing mortgage loans.
5
Interest rates charged by Maryland Federal on loans are affected
principally by the demand for such loans and the supply of funds available
for lending purposes. These factors are, in turn, affected by general
economic conditions, monetary policies of the federal government, including
the Federal Reserve Board, legislative tax policies and government budgetary
matters.
Origination, Purchase and Sale of Loans. As a federally chartered savings
and loan association, the Association has general authority to originate and
purchase loans secured by real estate located throughout the United States.
However, in accordance with the Association's conservative lending practices,
all of the Association's mortgage loan portfolio is secured by real estate
located in the Washington, D.C. or Baltimore metropolitan areas.
Residential real estate loans are originated by the Association through its
branch offices as well as by a team of commissioned loan officers, working out
of the Company's five loan production offices. Loan approvals are the
responsibility of personnel who are compensated on a non-incentive basis.
Residential and commercial real estate loan originations have been attributable
to referrals from real estate brokers and builders, mortgage brokers, depositors
and walk-in customers. Consumer loan originations are primarily attributable to
walk-in customers.
Maryland Federal sells whole loans and participations in loans to other
financial institutions and institutional investors. All of such loans have
consisted of long-term, fixed-rate mortgages. The Association sold $39.2
million, $54.5 million and $78.6 million of such loans during fiscal 1995, 1996
and 1997, respectively, exclusive of loans exchanged for mortgage-backed
securities. The Association was servicing approximately $34.7 million of loans
for others at February 28, 1997. As of February 28, 1997, the Association had
commitments to sell loans totalling approximately $6.8 million.
The Association has also purchased whole loans in the secondary market in
order to increase the diversity of its portfolio and provide it with assets
which are consistent with its asset and liability management goals. The
Association buys both fixed-rate and adjustable-rate mortgages from mortgage
bankers on a servicing released basis, depending on the market at the time of
purchase. These loans, each of which is individually underwritten by the
Association, are secured by properties located in the Washington, D.C., Maryland
and Virginia metropolitan areas. Whole loan purchases amounted to $71.5 million,
$1.0 million and $-0- during fiscal 1995, 1996 and 1997, respectively. During
fiscal 1995, 1996 and 1997, the Association also purchased $41.7 million, $-0-,
and $9.9 million, respectively, of mortgage-backed securities. The purchase of
mortgage-backed securities is intended to supplement the Association's
investment in loans receivable.
6
The following table sets forth the Association's loan and mortgage-backed
security originations, purchases, sales and principal repayments during the
periods indicated.
YEAR ENDED
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FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
Gross loans and mortgage-backed securities at beginning of period....... $ 1,068,173 $ 986,610 $ 758,985
------------ ------------ ------------
Loans originated:
Real estate loans:
Permanent loans:
Single-family (adjustable-rate)...................................... 118,693 103,341 169,867
Single-family (fixed-rate)........................................... 65,615 109,825 52,713
Commercial........................................................... -- 5,435 9,803
Construction loans.................................................... 5,100 941 2,614
------------ ------------ ------------
Total real estate loans originated.................................. 189,408 219,542 234,997
Consumer and other loans............................................... 1,759 3,331 1,785
------------ ------------ ------------
Total loans originated............................................... 191,167 222,873 236,782
------------ ------------ ------------
Loans and mortgage-backed securities purchased:
Whole loans............................................................ -- 1,006 71,535
FHLMC participation certificates....................................... 1,980 -- 10,100
GNMA participation certificates........................................ 7,945 -- 10,196
FNMA participation certificates........................................ -- -- 21,364
------------ ------------ ------------
Total loans and mortgage-backed securities purchased................. 9,925 1,006 113,195
------------ ------------ ------------
Total loans and mortgage-backed securities originated and purchased.. 201,092 223,879 349,977
------------ ------------ ------------
Loans transferred to foreclosed real estate............................. 1,229 281 632
Loans sold.............................................................. 78,615 54,521 14,219
Loans repaid............................................................ 122,486 87,514 107,501
Total loans transferred to foreclosed real estate, sold and repaid... 202,330 142,316 122,352
------------ ------------ ------------
Net loan activity....................................................... (1,238) 81,563 227,625
------------ ------------ ------------
Gross loans and mortgage-backed securities at the end of period......... 1,066,935 1,068,173 986,610
Less:
Undisbursed portion of mortgage loans.................................. 3,240 1,722 2,728
Unamortized premiums and discounts, ne................................. 653 783 1,010
Net deferred loan fees................................................. 2,356 3,815 4,284
Allowance for loan losses.............................................. 4,599 4,474 4,424
------------ ------------ ------------
Net loans and mortgage-backed securities at the end of period........... $ 1,056,087 $ 1,057,379 $ 974,164
============ ============ ============
7
Loan Underwriting Policies. The Board of Directors has authorized the Loan
Committee of the Association (comprised of the President and Chief Executive
Officer (Chairman), Executive Vice President, Senior Vice President and Chief
Loan Officer) to approve any real estate secured loan or investment of $500,000
or less. All actions of the Loan Committee are promptly reported to and ratified
by the Board of Directors. The President of the Association has the authority to
approve any other loan up to $500,000 which is secured by collateral other than
real estate. Residential loans will generally be originated in amounts up to the
limits established from time to time by the FNMA and FHLMC for secondary market
resale purposes. This amount is presently $214,600 for single-family, fixed-rate
residential loans.
Detailed loan applications are obtained to determine the borrower's ability
to repay, and the more significant items on these applications are verified
through the use of credit reports, financial statements and confirmations. After
analysis of the loan application and the property or collateral involved,
including an appraisal of the property by independent appraisers approved by the
Association's Board of Directors, the lending decision is made in accordance
with the underwriting guidelines of the Association.
It is the Association's policy to obtain a title insurance policy insuring
that the Association has a valid first lien on the mortgaged real estate and
that the property is free of encroachments. Borrowers must also obtain paid
hazard insurance policies prior to closing and, when the property is in a flood
plain as designated by the Department of Housing and Urban Development, paid
flood insurance policies. Most borrowers are also required to advance funds on a
monthly basis together with each payment of principal and interest to a mortgage
escrow account from which the Association makes disbursements for items such as
real estate taxes, hazard insurance premiums and private mortgage insurance
premiums as they become due.
Maryland Federal is permitted to lend up to 100% of the appraised value of
the real property securing a loan; however, if the amount of a residential loan
originated or refinanced exceeds 90% of the appraised value, the Association is
required by federal regulations to obtain private mortgage insurance on the
portion of the principal amount of the loan that exceeds 80% of the appraised
value of the security property. The Association's lending policy requires
private mortgage insurance when the loan-to-value ratio exceeds 80%. The
Association generally lends up to 95% of the appraised value of single-family
residential dwellings when the required private mortgage insurance is obtained.
Management believes, however, that a substantial portion of its portfolio is
significantly below an 80% loan-to-value ratio. The Association estimates that
approximately 16% of its gross loan portfolio at February 28, 1997 is covered by
private mortgage insurance. The Association generally lends up to 75% of the
appraised value of the properties securing its commercial real estate and
multi-family residential loans and 70% of the appraised value for construction
loans.
8
Real Estate Lending Standards. Effective March 19, 1993, all financial
institutions were required to adopt and maintain comprehensive written real
estate lending policies that are consistent with safe and sound banking
practices. These lending policies must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies adopted by the federal banking
agencies, including the OTS, in December 1992 ("Guidelines"). The Guidelines set
forth uniform regulations prescribing standards for real estate lending. Real
estate lending is defined as extensions of credit secured by liens on interests
in real estate or made for the purpose of financing the construction of a
building or other improvements to real estate, regardless of whether a lien has
been taken on the property.
The policies must address certain lending considerations set forth in the
Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also be
appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the institution's board of
directors at least annually. The LTV ratio framework, with a LTV ratio being the
total amount of credit to be extended divided by the appraised value of the
property at the time the credit is originated, must be established for each
category of real estate loans. If not a first lien, the lender must combine all
senior liens when calculating this ratio. The Guidelines, among other things,
establish the following supervisory LTV limits: raw land (65%); land development
(75%); construction (commercial, multifamily and nonresidential) (80%); improved
property (85%); and one-to-four family residential (owner occupied) (no maximum
ratio; however any LTV ratio in excess of 90% should require appropriate
insurance or readily marketable collateral).
Certain institutions can make real estate loans that do not conform with the
established LTV ratio limits up to 100% of the institution's total capital.
Within this aggregate limit, total loans for all commercial, agricultural,
multifamily and other non-one-to-four family residential properties should not
exceed 30% of total capital. An institution will come under increased
supervisory scrutiny as the total of such loans approaches these levels. Certain
loans are exempt from the LTV ratios (e.g. those guaranteed by a government
agency, loans to facilitate the sale of real estate owned and loans renewed,
refinanced or restructured by the original lender(s) to the same borrower(s)
where there is no advancement of new funds, etc.).
Under federal regulations prior to the enactment of FIRREA, the aggregate
amount of loans that the Association could have made to any one borrower,
including related entities, was, with certain exceptions, limited to the lesser
of 10% of the Association's net withdrawable deposits or 100% of its regulatory
capital. The Association was in compliance with this regulation. As a result of
FIRREA, the permissible amount of loans-to-one borrower now follows the national
bank standard for all loans made by savings institutions, as compared to the
pre-FIRREA rule that applied only to commercial loans made by federally
chartered institutions. The national bank standard generally does not permit
loans-to-one borrower to exceed 15% of the Association's unimpaired capital and
surplus. Loans
9
in an amount equal to an additional 10% of unimpaired capital and
surplus also may be made to a borrower if the loans are fully secured by readily
marketable securities.
Based on the 15% of unimpaired capital and surplus standard, the maximum
amount which the Association could have loaned to one borrower and the
borrower's related entities at February 28, 1997 was approximately $13.8
million. At such date, the largest aggregate amount of loans by the Association
to any one borrower, including related entities, consisted of $5.1 million of
permanent loans secured by rental townhouses and single-family homes located in
Prince George's and Montgomery Counties, Maryland and Northern Virginia.
Residential Real Estate Lending. The Association has offered ARMs since
1978 and, when market conditions and certain competitive market pressures in the
Association's primary market area have permitted, has emphasized their
origination rather than that of long-term, fixed-rate loans. The origination of
ARMs represented 76.3%, 48.5% and 64.4% of the Association's total originations
of conventional single-family residential mortgages in fiscal 1995, 1996 and
1997, respectively. ARMs (including mortgage-backed securities) accounted for
approximately $620.7 million or 58.8% of the Association's net loan portfolio
(including mortgage-backed securities) at February 28, 1997.
Some ARMs currently offered by Maryland Federal have up to 30-year terms and
interest rates which adjust every one or three years based upon changes in an
index based on the weekly average yield on United States Treasury securities
adjusted to a constant maturity of one or three years, respectively, as made
available by the Federal Reserve Board, plus a margin. The amount of any
increase or decrease in the interest rate is limited to 2% per year, with a
limit of 6% over the life of the loan. No downward adjustments below the
interest rate at the time of origination are permitted. These loans currently
contain provisions permitting them to be converted to fixed-rate loans at the
first adjustment date. If the borrower converts the loan, the Association will
usually sell such loan into the secondary market. The Association does not offer
ARMs with negative amortization. Since fiscal 1992, the Association has also
originated adjustable-rate mortgage loans which adjust to a fixed-rate loan upon
either the fifth or seventh year at a rate based on a margin of 5/8ths of one
percent over the FHLMC's 60-day delivery rate for conventional single-family
home loans. The rate then remains constant for the remaining life of the loan.
Upon repricing, these loans, in addition to those originated or acquired with
the intent to sell, may also be sold and will be recorded at the lower of cost
or fair value at such time. The Association has experienced changing demands for
ARMs as a result of fluctuations in interest rates, but expects to continue to
emphasize ARMs as market conditions permit in order to reduce the impact on its
operations of rapid increases in market rates of interest. Such loans, however,
generally do not adjust as rapidly as changes in the Association's cost of
funds.
Fixed-rate residential mortgage loans currently originated generally have
30-year terms, although some have 15-year terms with commensurately lower
interest rates. The Association estimates that its residential mortgage loans
generally remain outstanding for
10
an average of approximately eight years. At February 28, 1997 approximately
$431.5 million or 40.9% of the Association's net loan portfolio consisted of
long-term, fixed-rate residential mortgage loans (including mortgage-backed
securities).
The Association also occasionally originates loans on multi-family
residential properties and will continue to do so if and when favorable lending
opportunities are presented. Multi-family residential mortgage loans are
primarily secured by multi-family rental units. Generally, such loans are
originated with fixed-rates of interest set at specified margins above the one-
and three-year treasury bill yields, and with 25- or 30-year amortization
schedules. The Association generally will not originate such loans with a loan-
to-value ratio of greater than 75%. The majority of the loans include a one or
five year balloon payment provision. In addition, such loans are usually
required to have a minimum debt service coverage of 1.15% at the time of
origination.
The Association makes second mortgage loans and home equity loans only where
the first plus these mortgages in the aggregate do not exceed 90% of the value
of the property securing the loan. Maryland Federal's standard underwriting
procedures are used in evaluating these loans. At February 28, 1997, $44.4
million or 4.2% of the Association's gross loan and mortgage-backed securities
portfolio consisted of second mortgage loans, compared to $48.3 million or 4.6%
at February 29, 1996. At February 28, 1997, $51.7 million or 4.8% of the
Association's gross loan and mortgage-backed securities portfolio consisted of
home equity loans compared to $21.4 million or 2.0% at February 29, 1996.
Construction Lending. The Association provides both fixed-rate and
floating-rate residential and commercial construction loans. Generally,
construction loans are made with terms not exceeding 24 months. Interest rates
on construction loans are currently set at floating rates above The Wall Street
Journal prime rate for either a residential or commercial real estate loan. The
interest rate adjusts monthly. Advances are made on a percentage of completion
basis usually consisting of four draws after receipt of an architect's or
engineer's certification and approval by the Association's inspector. Most
construction loans are floating-rate balloon loans. Construction loans are
usually made only when the Association will provide the permanent financing. In
all cases, there must be permanent financing before the loan is originated. The
Association reclassifies construction loans as either residential or commercial
real estate loans at the time of completion of the construction project,
depending upon the nature of the property which will secure the permanent loan.
As of February 28, 1997, $6.8 million or 0.6% of Maryland Federal's gross loan
and mortgage-backed securities portfolio consisted of construction loans, 100%
of which consisted of loans on one- to four-family residential properties.
The Association continues to offer construction loans because of the short
terms and higher interest rates associated with such loans. During fiscal 1997,
the Association's origination of construction loans amounted to $5.1 million, as
compared to $900,000 during fiscal 1996 and $2.6 million during fiscal 1995. At
February 28, 1997, the Association's construction loans varied in size from
$100,000 to $4.4 million. The Association's
11
construction loans have been for the construction of small shopping centers,
office buildings and small residential subdivisions in the Association's market
area. As of February 28, 1997, the Association's construction loan portfolio was
comprised of 9 loans to separate borrowers in the aggregate amount of
$6.8 million, of which the Association had undisbursed funds of $3.2 million. As
of February 28, 1997, the largest loan consisted of a $4.4 million loan for the
construction of residential townhouses located in Prince George's County,
Maryland. The Association may make additional loans to such borrowers in the
future.
The underwriting criteria used by the Association are designed to evaluate
and minimize the risks of each construction loan. Among other things, the
Association generally considers an appraisal of the project, the reputation of
the borrower and the contractor, the amount of the borrower's equity in the
project, independent valuations and review of cost estimates, plans and
specifications, preconstruction sale and leasing information, current and
expected economic conditions in the area of the project, cash flow projections
of the borrower, and, to the extent available, guarantees by the borrower and/or
third parties.
Construction financing is generally considered to involve a higher degree of
risk of loss than long-term financing on improved, occupied real estate. Risk of
loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. Also,
these types of loans generally have larger balances and greater risks than
residential mortgage loans because their repayment is dependent on successful
project completion as well as general and local economic conditions and are
generally less predictable and more difficult to evaluate and monitor.
Commercial Real Estate Lending. At February 28, 1997, the Association had
$34.8 million or 3.3% of its gross loan and mortgage-backed securities portfolio
invested in commercial real estate loans, substantially all of which are
short-term loans. The Association rarely has originated, and does not intend to
emphasize in the future, the origination of land acquisition and development
loans. The commercial real estate loans originated by the Association are
primarily secured by small strip shopping centers, motels, mini-warehouses,
townhouse office units and apartment buildings. These loans are generally three-
to five-year balloon loans, amortized over 30 years, and require a 1.15% debt
service coverage at the time of origination. Commercial real estate loans are
not originated with more than a 75% loan-to-value ratio and personal guarantees
are obtained to the extent possible.
There were no originations of commercial real estate loans during fiscal
1997 compared to $5.4 million during fiscal 1996 and $9.8 million during fiscal
1995. As of February 28, 1997, the Association's largest commercial real estate
loan consisted of a $5.0 million loan secured by three office park buildings
located in Riverdale, Maryland. It is the present intention of management that
all such loans will be secured by properties in the Association's market area
and that commercial real estate loans will not exceed 10% of the total loan
portfolio.
12
Although FIRREA reduced the limit on loans to any one borrower to an amount
generally equal to 15% of the Association's unimpaired capital and surplus,
subject to certain limited exceptions, which limit was approximately $13.8
million at February 28, 1997, the Association typically has not originated loans
to any one borrower or project in excess of $5.0 million for its own portfolio.
FIRREA also reduced the amount which a federally chartered savings institution
may invest in loans secured by non-residential real estate to four times the
Association's capital (subject to certain exceptions), which limit was $366.9
million at February 28, 1997. This limit is not expected to have any effect on
Maryland Federal's commercial real estate lending activities.
Commercial real estate lending entails significant additional risks as
compared with single-family residential property lending. Commercial real estate
loans typically involve large loan balances to single borrowers or groups of
related borrowers. The payment experience on such loans is typically dependent
on the successful operation of the real estate project. The success of such
projects is sensitive to changes in supply and demand conditions in the market
for commercial real estate as well as economic conditions. All of such loans are
secured by properties located in Maryland or the Washington, D.C. metropolitan
area.
Commercial Business Lending. Federal laws and regulations also authorize
the Association to make secured or unsecured loans for commercial, corporate,
business and agricultural purposes. The aggregate amount of such loans
outstanding may not exceed 20% of the Association's assets, provided that any
amounts in excess of 10% of the Association's assets be used only for small
business loans. In addition, another 10% of total assets may be invested in
commercial equipment and consumer leasing, and the Association may use any or
all of the 35% consumer category described below for inventory and floor plan
financing. As of February 28, 1997, the Association did not have any commercial
business loans outstanding and the Association has no present plans with respect
to engaging in such lending in the future.
Consumer Lending. Federal laws and regulations permit a federally chartered
thrift institution to make secured and unsecured consumer loans in an aggregate
amount of up to 35% of the institution's total assets. At February 28, 1997,
consumer loans accounted for $4.0 million or 0.4% of the Association's gross
loan and mortgage-backed securities portfolio.
In past years, the Association has originated consumer loans in order to
provide a range of financial services to its customers and because the shorter
terms and typically higher interest rates on such loans help the Association
maintain a profitable spread between its average loan yield and its cost of
funds. The Association currently offers automobile loans, overdraft lines of
credit, loans secured by savings accounts and unsecured personal loans. Consumer
loan originations during fiscal years 1995, 1996 and 1997 were $1.8 million,
$3.3 million and $1.8 million, respectively, of which automobile loan
13
originations amounted to $1.0 million, $1.5 million and $1.3 million,
respectively, during such periods.
In 1985, the Association began originating automobile loans. Such loans are
generally originated with terms of four years for up to 90% of the purchase
price of a new car or 80% of the "Blue Book" value or purchase price, whichever
is less, in the case of a used car. Automobile loan rates are determined based
upon general market conditions and competition in the market for such loans.
Such loans amounted to $2.4 million at February 28, 1997. The weighted average
interest rate on automobile loans was 7.76% at February 28, 1997.
During fiscal 1995, the Association began originating unsecured personal
loans in amounts up to $10,000. At February 28, 1997, unsecured personal loans
amounted to $1.3 million. During fiscal 1997, the Association reintroduced
secured savings loans. At February 28, 1997, secured savings loans amounted to
$137,000.
The Association does not intend to continue its emphasis on consumer
lending. Such lending, when it involves loans on automobiles, can entail greater
risks than single-family residential lending due to the nature of the collateral
and, in certain cases, the absence of collateral. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness,
personal bankruptcy and adverse economic conditions. In most cases, any
repossessed collateral for a defaulted consumer loan will not provide an
adequate source of repayment of the outstanding loan balance because of improper
repair and maintenance of the underlying security. The remaining deficiency
often does not warrant further substantial collection efforts against the
borrower. However, the Association believes its use of detailed loan and credit
applications and investigations reduces this risk and the generally higher
yields earned on consumer loans compensate for the increased credit risk
associated with such loans. Net charge-offs of consumer loans during fiscal
1997, 1996 and 1995 amounted to approximately $131,000, $25,000 and $4,000,
respectively.
Loan Fees and Service Charges. In addition to interest earned on loans, the
Association receives income through servicing of loans and loan fees charged in
connection with loan originations (which are calculated as a percentage of the
amount loaned), loan modifications, loan commitments, late payments,
prepayments, repayments, changes of property ownership and for miscellaneous
services related to its loans. Income from these activities varies from period
to period with the volume and type of loans made.
SFAS 91 requires that loan origination fees and certain related direct loan
origination costs be offset and that the resulting net amount be deferred and
amortized over the life of the related loans as an adjustment to the yield of
such related loans. In addition, commitment fees are required to be offset
against related direct costs and recognized over the life of the related loans
as an adjustment of yield, if the commitment is exercised, or if
14
the commitment expires unexercised, recognized in income upon expiration of the
commitment.
Non-performing Loans and Foreclosed Real Estate. When a borrower fails to
make a required loan payment, the Association attempts to cure the default by
contacting the borrower. In general, contacts with borrowers are made by the
Association after a payment is more than 30 days past due, at which time a late
charge is assessed. In most cases, defaults are cured promptly. If the
delinquency is not rectified within 90 days through the Association's normal
collection procedures, or an acceptable arrangement is not worked
out with the borrower, the Association will institute measures to remedy the
default, including commencing a foreclosure action or, in special circumstances,
accepting from the mortgagor a voluntary deed of the secured property in lieu of
foreclosure.
Loans are placed on non-accrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income. Under federal
regulations, consumer loans which are more than 120 days delinquent are required
to be written-off.
If foreclosure is effected, the property is sold at a public auction in
which the Association may participate as a bidder. If the Association is the
successful bidder, the acquired real estate property is then included in the
Association's "foreclosed real estate" account until it is sold. When property
becomes foreclosed real estate, it is recorded at the lower of cost or fair
value at the date of acquisition and any writedown resulting therefrom is
charged to the allowance for loan losses. Interest accrual ceases on the date of
acquisition and all costs incurred from that date in maintaining the property
are expensed. Costs incurred for the improvement or development of such property
are capitalized. An allowance, if necessary, is provided to reduce the carrying
value to its fair value less estimated selling costs. The Association is
permitted under OTS regulations to finance sales of foreclosed real estate by
"loans to facilitate," which may involve more favorable interest rates and terms
than generally would be granted under the Association's underwriting guidelines.
As of February 28, 1997, the Association's participation in loans to facilitate
the purchase of foreclosed real estate amounted to $24,000.
15
The following table sets forth information regarding non-accrual loans,
loans which are 90 days or more delinquent but on which the Association was
accruing interest and foreclosed real estate at the dates indicated. The
Association had $2.8 million of troubled debt restructurings at February 28,
1995 and there were no troubled debt restructurings at any other period shown.
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Total non-performing loans:(1)
Non-accrual loans......................... $ 2,990 $ -- $ 20 $ 2,748 $ 464
Accruing loans which are 90 days or more
overdue................................. 1,640 3,386 1,536 3,155 1,155
------ ------ ------ ------ ------
Total non-performing loans.............. $ 4,630 $ 3,386 $ 1,556 $ 5,903 $ 1,619
====== ====== ====== ====== ======
Total non-performing loans to total loans
receivable-net............................ 0.5% 0.3% 0.2% 0.8% 0.3%
====== ====== ====== ====== ======
Total foreclosed real estate................ $ 1,299 $ 2,090 $ 2,695 $ 3,210 $ 4,032
====== ====== ====== ====== ======
Total non-performing loans and foreclosed
real estate to total assets............... 0.5% 0.5% 0.4% 1.04% 0.7%
====== ====== ====== ====== ======
- ------------------------
(1) Consists of residential, commercial real estate loans and consumer loans.
The $4.6 million of non-accrual loans and accruing loans which were 90
days or more overdue at February 28, 1997 consisted of 45 first mortgage and
11 consumer loans with average principal balances of approximately $102,000
and $3,000, respectively. It is believed that these delinquencies are
reflective of current economic conditions. The $1.3 million of foreclosed
real estate at February 28, 1997 consisted primarily of a condominium/office
complex located in Hyattsville, Maryland and an industrial park located in
Forestville, Maryland, which had carrying values of $580,000 and $440,000,
respectively. At February 28, 1997, the Association also held three
single-family residential properties and one additional commercial property
with aggregate carrying values of approximately $220,000 and $60,000,
respectively. All properties are currently being marketed for sale. The
amount of interest income that would have been recorded on the nonaccrual
loans in accordance with their original terms was $224,000, $-0- and $4,000
for fiscal 1997, 1996 and 1995, respectively. The amount of interest income
that was recorded on these loans was $52,000, $-0- and $2,000 for fiscal
1997, 1996 and 1995, respectively.
Under current federal regulations, an institution's problem assets are
subject to classification according to one of three categories:
"substandard", "doubtful", and "loss." In addition, assets not currently
requiring classification but having potential weaknesses or risk
characteristics that could result in future problems may be subject to
classification as "special mention." See "Regulation--Regulation of the
Association--Classification of Assets." As of February 28, 1997, the
Association had approximately $9.8 million of classified assets,
16
which includes $5.9 million of the non-performing assets shown in the table
above. Of this total, approximately $9.8 million was classified as
substandard and $28,000 was classified as doubtful.
ALLOWANCE FOR LOAN LOSSES. During fiscal 1997, the Association made
provisions for loan losses of $275,000 in recognition of the general risks of
credit loss in the portfolio and the general economic conditions in the
Association's market area. During fiscal 1995 and 1996, the Association made
provisions for losses on loans of $300,000 and $120,000, respectively. During
fiscal 1995, 1996 and 1997, the Association made net charges to the allowance
for loan losses of $13,000, $70,000 and $150,000, respectively. During fiscal
1995, 1996 and 1997, such provisions and charge-offs primarily reflected
estimated losses with respect to consumer and other loans which were
adversely affected by market conditions. In the future, the Association will
make additions to the allowance by charges to operations to reflect the
amount management determines is necessary based on its monthly risk analysis
of the loan portfolio.
The allowance for loan losses is maintained at a level believed adequate
by management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on a monthly
evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio, and other
relevant factors. The allowance is increased by provisions for loan losses
charged against income. Although management believes that it has used the
best information available to it in making such determinations, future
provisions may be necessary and net income could be significantly affected if
circumstances differ substantially from the assumptions used in making the
initial determinations.
Effective December 21, 1993, the OTS, in connection with the Office of
the Comptroller of the Currency, the FDIC and the Federal Reserve Board,
issued an Interagency Policy Statement on the Allowance for Loan and Lease
Losses ("Policy Statement"). The Policy Statement, which effectively
supersedes the proposed guidance issued on September 1, 1992, includes
guidance (i) on the responsibilities of management for the assessment and
establishment of an adequate allowance and (ii) for the agencies' examiners
to use in evaluating the adequacy of such allowance and the policies utilized
to determine such allowance. The Policy Statement also sets forth
quantitative measures for the allowance with respect to assets classified
substandard and doubtful and with respect to the remaining portion of an
institution's loan portfolio. Specifically, the Policy Statement sets forth
the following quantitative measures which examiners may use to determine the
reasonableness of an allowance: (i) 50% of the portfolio that is classified
doubtful; (ii) 15% of the portfolio that is classified substandard; and (iii)
for the portions of the portfolio that have not been classified (including
loans designated special mention), estimated credit losses over the upcoming
twelve months based on facts and circumstances available on the evaluation
date. While the Policy Statement sets forth this quantitative measure, such
guidance is not intended as a "floor" or "ceiling."
17
The following table presents information concerning the Association's
allowance for loan losses, charge-offs and recoveries during the periods
indicated.
YEAR ENDED
-------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Balance, beginning of period................ $ 4,474 $ 4,424 $ 4,187 $ 4,267 $ 2,348
------ ------ ------ ------ ------
Provision:
Real estate-residential................... (50) 50 300 662 1,940
Consumer loans............................ 325 70 -- -- --
------ ------ ------ ------ ------
Total provision......................... 275 120 300 662 1,940
------ ------ ------ ------ ------
Transfer to allowance for losses on
foreclosed real estate.................... -- -- 50 739 --
------ ------ ------ ------ ------
Charge-offs, net:
Real estate-residential................... 19 45 9 -- 13
Consumer loans............................ 131 25 4 3 8
------ ------ ------ ------ ------
Total charge-offs, net.................. 150 70 13 3 21
------ ------ ------ ------ ------
Balance, end of period...................... $ 4,599 $ 4,474 $ 4,424 $ 4,187 $ 4,267
====== ====== ====== ====== ======
Ratio of charge-offs to average loans and
mortgage-backed securities outstanding.... 0.014% 0.007% 0.001% ---% .003%
====== ====== ====== ====== ======
The Association also maintains an allowance for losses on foreclosed real
estate. At February 28, 1997, the Association's allowance for losses on
foreclosed real estate amounted to $1.3 million. For additional information,
see Notes 4 and 5 of the Notes to Consolidated Financial Statements.
18
The following table sets forth the amount of the Association's allowance for
loan losses attributable to each type of loan indicated and the percent of such
type of loans to total loans (including mortgage-backed securities) and
participations of each at the dates indicated.
Year Ended
-------------------------------------------------------------------------------------------------------
FEBRUARY 28, 1997 FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994 FEBRUARY 28, 1993
--------------------- --------------------- -------------------- -------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ----------- --------- ----------- -------- ----------- -------- ----------- -------- ------------
(DOLLARS IN THOUSANDS)
Real estate
loans(1)..... $4,169 99.6% $4,238 99.6% $4,233 99.7% $3,991 99.6% $4,068 99.3%
Consumer and
other loans.. 430 0.4 236 0.4 191 0.3 196 0.4 199 0.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total...... $4,599 100.0% $4,474 100.0% $4,424 100.0% $4,187 100.0% $4,267 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
- ------------------------
(1) Includes residential and commercial real estate loans and construction
loans.
19
INVESTMENT ACTIVITIES
The Association is required under OTS regulations to maintain certain
liquidity ratios and does so by investing in securities that qualify as
liquid assets. See "Regulation--Regulation of the Association--Federal Home
Loan Bank System" for a description of such regulations. Such securities
include obligations issued or fully guaranteed by the United States
government, certain federal agency obligations, certain time deposits and
negotiable certificates of deposit issued by commercial banks and other
specified investments, including commercial paper and corporate debt
securities.
The Association's investment portfolio has primarily consisted of
obligations of the United States government and federal agencies, federal
funds sold, certificates of deposit and securities purchased under agreements
to resell.
The following table sets forth the carrying value of Maryland Federal's
investment securities and certain other interest-earning assets at the dates
indicated.
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
United States Government and agency obligations......................... $ 9,974 $ 7,997 $ 21,918
State and County Government obligations................................. 1,474 1,476 1,658
Equity securities....................................................... 5,225 8,577 7,103
Interest-bearing deposits............................................... 8,381 15,711 9,271
Federal funds sold...................................................... 15,406 5,058 1,408
Securities purchased under agreements to resell......................... 2,259 11,034 9,623
Federal Home Loan Bank stock............................................ 11,364 12,514 9,784
------------ ------------ ------------
Total................................................................ $ 54,083 $ 62,367 $ 60,765
============ ============ ============
As of February 28, 1997, no investment securities of any single issuer
were held by the Association where the aggregate carrying value of such
securities exceeded 10% of the Company's stockholders' equity, other than
United States Government and agency obligations, federal funds sold and
Federal Home Loan Bank stock.
20
The following table sets forth at February 28, 1997 the amount of each
category of the Association's investment securities and certain other
interest-earning assets which mature during each of the periods indicated and
the weighted average yield for each range of maturities.
AMOUNTS AT FEBRUARY 28, 1997 WHICH MATURE
-----------------------------------------------------------------------------------------------
IN AFTER ONE YEAR AFTER FIVE YEARS
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS
---------------------- ---------------------- -------------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------- ----------- --------- ----------- ----------- ------------- --------- ---------
(DOLLARS IN THOUSANDS)
United States government and
agency obligations............. $ 6,000 5.50% $ 3,973 5.80% $ -- ---% $ -- --%
State and County Government --
obligations.................... -- -- 1,230 4.56 245 4.15 -- --
Equity securities................ 5,225 1.70 -- -- -- -- -- --
Interest-bearing deposits........ 8,381 5.37 -- -- -- -- -- --
Federal funds sold............... 15,406 5.26 -- -- -- -- --
Securities purchased under
agreements to resell........... 2,259 4.80 -- -- -- -- -- --
Federal Home Loan Bank stock..... -- -- -- -- -- -- 11,364 7.25
--------- ------- ----- ---------
Total........................ $ 37,271 4.79 $ 5,203 5.50 $ 245 4.15 $ 11,364 7.25
========= ======= ====== =========
21
SOURCES OF FUNDS
General. Deposits are the primary source of the Association's funds for use
in lending and for other general business purposes. In addition to deposits, the
Association derives funds from loan amortizations and prepayments, advances from
the FHLB of Atlanta and, to a lesser extent, sales of loans. It is the
Association's policy to utilize the source of funds which has the lowest
available cost. Loan repayments are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general market
interest rates and economic conditions. Borrowings may be used on a short-term
basis to compensate for seasonal or other reductions in normal sources of funds
or for deposit inflows at less than projected levels. Borrowings may also be
used on a longer term basis to support expanded activities. Historically, the
Association's borrowings have primarily consisted of advances from the FHLB of
Atlanta. See "Borrowings."
Deposits. Due to changes in regulatory and economic conditions during the
1980's, the Association has increasingly relied upon deregulated fixed-rate
certificate accounts and other authorized types of deposits. The Association has
established a number of different programs designed to attract both short-term
and long-term savings of the general public by providing a wide assortment of
accounts and rates consistent with OTS regulations. These programs include
regular savings accounts, checking accounts, money market deposit accounts
("MMDAs") and variable and fixed-rate certificates. Also included among these
programs are individual retirement accounts ("IRAs") and Keogh retirement
accounts.
Maryland Federal's deposits are obtained primarily from residents of the
five counties in the State of Maryland in which Maryland Federal is located. The
Association does not utilize brokered deposits. The principal methods used by
Maryland Federal to attract deposit accounts include offering a wide variety of
services and accounts, competitive interest rates and convenient office
locations. At February 28, 1997, Maryland Federal operated 23 automated teller
machines ("ATMs") in addition to participating in the
HONOR-Registered Trademark-/MOST-Registered Trademark- ATM network.
The Association currently offers certificates of deposit with minimum
balance requirements beginning at $100, with the rates set as appropriate based
on a review of the rates offered by other financial institutions in the
Association's primary market area. The Association also offers jumbo
certificates of deposit in denominations of $100,000 or more. The Association's
MMDAs currently have a $1,000 minimum deposit, no regulatory interest rate
ceiling and limited check-writing privileges. The interest rate on the account
is reviewed frequently based on money market conditions.
22
The following table shows the distribution of, and certain other information
relating to, the Association's deposits by type of deposit at the dates
indicated.
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
-------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Regular savings accounts...................... $ 74,488 9.4% $ 76,514 9.7% $ 94,104 12.3%
Checking accounts............................. 53,937 6.8 44,497 5.6 39,994 5.2
MMDAs......................................... 42,385 5.4 45,315 5.7 51,398 6.7
Fixed-rate certificates....................... 307,303 39.0 274,266 34.9 239,977 31.4
Money market certificates:
91 day 6,469 0.8 6,632 0.8 4,208 0.6
6 month 20,895 2.7 23,171 2.9 19,256 2.5
12 month 113,871 14.4 146,177 18.5 139,686 18.3
18 month --- --- --- --- 13 ---
Variable-rate certificates.................... 15,869 2.0 21,166 2.7 42,742 5.6
Jumbo certificates............................ 88,620 11.2 116,313 14.7 101,350 13.3
Mini-jumbo certificates....................... 36,043 4.6 12,284 1.6 9,456 1.3
IRA certificates.............................. 29,053 3.7 22,596 2.9 21,570 2.8
----------- --------- ---------- --------- ---------- ---------
Total......................................... $ 788,933 100.0% $ 788,931 100.0% $ 763,754 100.0%
=========== ========= ========== ========= ========= =========
23
The following table presents the average balance of each type of deposit and
the average rate paid on each type of deposit for the periods indicated.
YEAR ENDED
--------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
---------------------- --------------------- ---------------------
AVERAGE AVERAGE AVERAGE
AVERAGE RATE AVERAGE RATE AVERAGE RATE
BALANCE PAID BALANCE PAID BALANCE PAID
----------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Regular savings accounts....................... $ 75,417 3.22% $ 80,731 3.33% $123,019 3.40%
Checking accounts.............................. 48,156 1.52 42,158 1.80 37,915 1.78
MMDAs.......................................... 42,904 3.04 45,915 3.03 56,349 3.20
Fixed-rate certificates........................ 308,184 5.57 243,810 5.81 220,975 5.04
Money market certificates:
91 day 6,764 4.75 5,370 4.39 5,729 3.28
6 month 23,922 5.03 21,439 4.70 20,738 3.43
12 month 122,119 5.44 166,130 5.88 80,774 4.77
18 month -- -- 4 3.50 251 4.12
Variable-rate certificates..................... 17,034 5.12 27,019 5.24 63,774 4.43
Jumbo certificates............................. 92,367 5.75 110,989 6.04 61,967 5.43
Mini-jumbo certificates........................ 23,643 5.50 8,823 5.28 5,777 5.14
IRA certificates............................... 26,619 5.74 21,308 6.10 25,191 4.61
----------- --------- ---------- --------- ---------- ---------
Total.......................................... $787,129 4.93 $773,696 5.16 $702,459 4.30
=========== ========= ========== ========= ========== =========
The large variety of deposit accounts offered by the Association has
increased the Association's ability to retain deposits and has allowed it to be
competitive in obtaining new funds, but has not eliminated the threat of
disintermediation (the flow of funds away from savings institutions into direct
investment vehicles such as government and corporate securities). However, these
accounts have been more costly than traditional accounts during periods of high
interest rates. In addition, the Association has become increasingly vulnerable
to short-term fluctuations in deposit flows as customers have become more
rate-conscious and willing to move funds into higher yielding accounts. The
ability of the Association to attract and retain deposits and the Association's
cost of funds have been, and will continue to be, significantly affected by
money market conditions.
The Association controls the flow of deposits by having the senior officers
of the Association meet frequently to determine the interest rates which the
Association will offer to the general public. Such officers consider the amount
of funds needed by the Association on both a short and long-term basis, the
rates being offered by the Association's
24
competitors, alternative sources of funds, and the projected level of interest
rates in the future. Maryland Federal does not necessarily seek to match the
highest rates paid by competing institutions.
The following table sets forth the net deposit flows of the Association
during the periods indicated.
YEAR ENDED
----------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
Increase (decrease)
before interest credited............................................... $ (25,102) $ (337) $ 64,754(1)
Interest credited....................................................... 25,104 25,514 20,950
------------ ------------ ------------
Net deposit increase.................................................... $ 2 $ 25,177 $ 85,704
============ ============ ============
- ------------------------
(1) Reflects approximately $50.5 million of deposit inflows as a result
of the acquisition of deposits of various savings institutions during
fiscal 1995.
The following table sets forth the amount of certificates of deposit in the
amount of $100,000 or more at February 28, 1997, which mature during each of the
periods indicated.
AMOUNTS AT FEBRUARY 28, 1997 WHICH MATURE
----------------------------------------------
AFTER THREE AFTER
IN THREE MONTHS SIX MONTHS
MONTHS THROUGH THROUGH AFTER 12
OR LESS SIX MONTHS 12 MONTHS MONTHS
--------- ----------- ----------- ---------
(IN THOUSANDS)
Certificates of deposit........................................... $ 55,437 $ 23,548 $ 33,986 $ 23,450
========= =========== =========== =========
25
The following table presents certain information concerning Maryland
Federal's deposits at February 28, 1997 and the scheduled quarterly maturities
of its certificates of deposit.
Weighted
Percentage of Average
Total Nominal
Amount Deposits Rate
---------- ------------- -----------
(DOLLARS IN THOUSANDS)
Regular savings accounts.................................................... $ 74,488 9.44% 3.22%
Checking accounts........................................................... 53,937 6.84 1.45
MMDAs....................................................................... 42,385 5.37 3.10
---------- ------
Total..................................................................... 170,810 21.65 2.63
---------- ------
Certificate accounts maturing by quarter:
May 31, 1997.............................................................. 196,687 24.93 5.19
August 31, 1997........................................................... 94,525 11.98 5.35
November 30, 1997......................................................... 90,322 11.45 5.35
February 28, 1998......................................................... 84,291 10.69 5.53
May 31, 1998.............................................................. 25,633 3.25 5.65
August 31, 1998........................................................... 39,120 4.96 6.15
November 30, 1998......................................................... 16,441 2.08 6.28
February 28, 1999......................................................... 10,192 1.29 5.69
May 31, 1999.............................................................. 11,916 1.51 5.78
August 31, 1999........................................................... 22,254 2.82 5.90
November 30, 1999......................................................... 9,018 1.14 5.89
February 29, 2000......................................................... 6,365 0.81 5.82
Thereafter................................................................ 11,359 1.44 5.68
---------- ------
Total certificate accounts............................................... 618,123 78.35 5.45
---------- ------
Total deposits........................................................... $ 788,933 100.00% 4.84
========== ======
26
The following table presents, by various interest rate categories, the
amounts of certificate accounts at the dates indicated and the amounts of
certificate accounts at February 28, 1997 which mature during the periods
indicated.
Amounts at February 28, 1997 Maturing in the Year
Balance at Ending
-------------------------------- -----------------------------------------------------
February 28, February 29, February 28, February 28, February 29,
Interest Rate: 1997 1996 1998 1999 2000 Thereafter
- --------------------------- ------------------ ------------ ------------ ------------ ------------ -----------
(In Thousands)
4.00% or less.............. $ 2,711 $ 1,547 $ 2,685 $ 26 $ -- $ --
4.01% to 6.00%............. 527,148 407,702 438,624 52,600 27,930 7,994
6.01% to 8.00%............. 86,964 211,282 23,642 38,602 21,387 3,333
8.01% to 10.00%............ 1,292 1,756 874 150 236 32
10.01% to 12.00%........... 8 318 -- 8 -- --
------------------ ------------ ------------ ------------ ------------ -----------
Total.................. $618,123 $ 622,605 $ 465,825 $ 91,386 $ 49,553 $ 11,359
================== ============ ============ ============ ============ ===========
The Association does not utilize brokered deposits. FIRREA prohibits any
savings institution not meeting minimum capital requirements from accepting,
directly or indirectly, brokered deposits or from offering higher than
prevailing rates in the institution's market area. The Association currently
meets all of its capital requirements and is not subject to this prohibition.
BORROWINGS. The Association obtains advances from the FHLB of Atlanta upon
the security of its capital stock in the FHLB of Atlanta and a portion of its
first mortgages and participation certificates. See "Regulation--Regulation of
the Association--Federal Home Loan Bank System." At February 28, 1997, advances
mature as follows:
Weighted
Average
Fiscal Year Amount Rate
- ------------------------ ----------------------- --------------------
(Dollars in Thousands)
1998 $ 136,100 5.83%
1999 78,500 5.99
2000 11,000 6.23
After 2002............. 680 6.50
----------
Total............... $ 226,280 5.91
==========
27
FHLB advances are made pursuant to several different credit programs, each
of which has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on either a fixed
percentage of assets or the FHLB of Atlanta's assessment of the Association's
creditworthiness. FHLB advances are generally available to meet seasonal and
other withdrawals of deposit accounts and to expand lending.
The following table sets forth certain information regarding the borrowings
of the Association at the dates indicated.
February 28, 1997 February 29, 1996 February 28, 1995
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ----------- ---------- ----------- ---------- -----------
(Dollars in Thousands)
Advances from FHLB.................................... $ 226,280 5.91% $ 243,780 5.88% $ 190,730 5.98%
The following table sets forth certain information concerning the borrowings
of the Association for the periods indicated, which is based on daily average
balances.
Year Ended
----------------------------------------------------
February 28, February 29, February 28,
1997 1996 1995
---------------- ---------------- ----------------
(Dollars in Thousands)
Advances from FHLB:
Average balance outstanding.............................. $ 228,479 $ 213,176 $ 160,877
Maximum amount outstanding at any month-end during the
period.................................................. $ 237,780 $ 251,030 $ 195,680
Weighted average interest rate during the period......... 5.86% 6.08% 5.42%
Total short-term borrowings at end of period.............. $ 136,100 $ 127,750 $ 122,550
SUBSIDIARIES
OTS regulations permit the Association to invest up to 2% of its assets in
capital stock of, and secured and unsecured loans to, subsidiary service
corporations and an additional 1% of its assets when the additional funds are
utilized for community or inner-city purposes. In addition, federally chartered
savings institutions which are in compliance with their regulatory capital
requirements also may make conforming loans to service corporations in which the
institution owns or holds more than 10% of the capital stock in an aggregate
amount of up to 50% of the institution's regulatory capital. A savings
28
institution meeting its regulatory requirements also may make, subject to the
loans-to-one borrower limitations, conforming loans to service corporations in
which the institution does not own or hold more than 10% of the capital stock
and certain other corporations meeting specified requirements. Federally
chartered savings institutions also are authorized to invest up to 30% of their
assets in finance subsidiaries whose sole purpose is to issue debt or equity
securities that the Association is authorized to issue directly, subject to
certain limitations. OTS regulations also limit the aggregate amount of direct
investments, including loans, by a SAIF-insured institution in real estate,
service corporations, operating subsidiaries and equity securities as defined
therein.
At February 28, 1997, the Association was authorized to have a maximum
investment of approximately $22.5 million in its subsidiaries, exclusive of the
1% of assets permitted for community or inner-city purposes and the ability to
make conforming loans. As of such date, the Association had invested
approximately $45,000 in its sole subsidiary.
Maryland Federal currently operates one wholly-owned service corporation
subsidiary, MASSLA Corporation ("MASSLA"). MASSLA, incorporated in December
1971, provides various types of insurance products. MASSLA offers group
homeowners and accidental death insurance policies to the Association's
customers and employees.
MARKET AREA AND COMPETITION
Maryland Federal's primary market area consists of Prince George's,
Montgomery, Charles, Anne Arundel and Calvert counties in the Maryland suburbs
of Washington, D.C. The Federal government accounts for about one-third of the
market area's gross regional product. The Federal sector is currently reducing
jobs. The slack is being picked up by the technology and education sectors but
the losses do hold down the expansion potential for the area economy.
Interest rates on deposits in the Washington area have traditionally been
among the highest in the nation. Recent surveys suggest this is still the case.
The Company has been able to expand its margins but it may not be able to in the
future.
Maryland Federal's competition for real estate loans comes primarily from
mortgage banking companies, commercial banks and other savings institutions.
Maryland Federal competes for loan originations primarily through the interest
rates and loan fees it charges and the efficiency and quality of services it
provides borrowers, real estate brokers and builders. Factors which affect
competition include the general and local economic conditions, current interest
rate levels and volatility in the mortgage markets.
29
EMPLOYEES
At February 28, 1997, MFB had unpaid executive officers, all of whom serve
in the same capacity with the Association. At February 28, 1997, the Association
and its subsidiary had 224 full-time employees, including its executive
officers, as well as 45 part-time employees. None of these employees are
represented by a collective bargaining agent, and the Association has enjoyed
harmonious relations with its personnel.
REGULATION
Set forth below is a brief description of certain laws and regulations which
relate to the regulation of the Company and the Association. The description of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to the applicable laws and regulations.
REGULATION OF THE COMPANY
GENERAL. The Company is a registered savings and loan holding company
within the meaning of the Home Owners' Loan Act, as amended ("HOLA"). As such,
the Company is subject to OTS regulations, examinations, supervision and
reporting requirements. As a SAIF-insured subsidiary of a savings and loan
holding company, the Association is subject to certain restrictions in its
dealings with the Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings association. However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association; (ii)
transactions between the savings association and its affiliates; and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet a qualified
thrift lender ("QTL") test, then such unitary holding company also shall become
subject to the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings association requalifies as a QTL
within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "--Regulation of the
Association--Qualified Thrift Lender Test."
If the Company were to acquire control of another savings association, other
than through merger or other business combination with the Association, the
Company would
30
thereupon become a multiple savings and loan holding company. Except where such
acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings association meets the QTL test as
set forth below, the activities of the Company and any of its subsidiaries
(other than the Association or other subsidiary savings associations) would
thereafter be subject to further restrictions. Among other things, no multiple
savings and loan holding company or subsidiary thereof which is not a savings
association shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof any
business activity, upon prior notice to, and no objection by the OTS, other
than: (i) furnishing or performing management services for a subsidiary savings
association; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings association; (iv) holding or managing properties used or occupied by a
subsidiary savings association; (v) acting as trustee under deeds of trust;
(vi) those activities authorized by regulation as of March 5, 1987 to be engaged
in by multiple savings and loan holding companies; or (vii) unless the Director
of the OTS by regulation prohibits or limits such activities for savings and
loan holding companies, those activities authorized by the Federal Reserve Board
as permissible for bank holding companies. Those activities described in (vii)
above also must be approved by the Director of the OTS prior to being engaged in
by a multiple savings and loan holding company.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
associations and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings association is any company or
entity which controls, is controlled by or is under common control with the
savings association. In a holding company context, the parent holding company of
a savings association (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings association.
In addition, Sections 22(h) and 22(g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings association, and certain
affiliated interests of either, may not exceed, together with all other
31
outstanding loans to such person and affiliated interests, the association's
loans to one borrower limit. Section 22(h) also requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
unless the loans are made pursuant to a benefit or compensation program that (i)
is widely available to employees of the association and (ii) does not give
preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
association. Section 22(h) also requires prior board approval for certain loans.
In addition, the aggregate amount of extensions of credit by a savings
association to all insiders cannot exceed the association's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers. At February 28, 1997, the Association had 14 loans with
an aggregate balance of approximately $1.5 million outstanding to its executive
officers and directors.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings association or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings association or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, also may acquire control of any savings association, other
than a subsidiary savings association, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office located in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by the state-chartered associations or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings associations).
Under the Bank Holding Company Act of 1956, the Federal Reserve Board is
authorized to approve an application by a bank holding company to acquire
control of a savings association. In addition, a bank holding company that
controls a savings association may merge or consolidate the assets and
liabilities of the savings association with, or transfer assets and liabilities
to, any subsidiary bank which is a member of the Bank Insurance Fund ("BIF")
with the approval of the appropriate federal banking agency and the Federal
Reserve Board. As a result of these provisions, there have been a number of
acquisitions of savings associations by bank holding companies in recent years.
32
Regulation of the Association
General. The Association is a federally chartered savings association, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, the Association is subject to
broad federal regulation and oversight by the OTS and the FDIC extending to all
aspects of its operations. The Association is a member of the FHLB of Atlanta
and is subject to certain limited regulation by the Federal Reserve Board.
Federal Regulation. The OTS has extensive authority over the operations of
savings associations. As part of this authority, savings associations are
required to file periodic reports with the OTS and are subject to periodic
examinations by the OTS and the FDIC to test the Association's compliance with
various regulatory requirements. The investment and lending authority of savings
associations are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally chartered savings associations and may also apply to state-chartered
savings associations. Such regulation and supervision is primarily intended for
the protection of depositors.
The OTS' enforcement authority over all savings associations and their
holding companies was substantially enhanced by FIRREA. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. FIRREA significantly
increased the amount of and grounds for civil money penalties.
Insurance of Accounts. The deposits of the Association are insured up to a
maximum extent permitted by SAIF, which is administered by the FDIC, and is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings associations, after giving the OTS an
opportunity to take such action.
Under current FDIC regulations, SAIF-institutions are assigned to one of
three capital groups which are based solely on the level of an institution's
capital--"well capitalized," "adequately capitalized," and
"undercapitalized"--which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the Federal
Deposit Insurance Act. See "--Prompt Corrective Regulatory Action." These three
groups are then divided into three subgroups which reflect varying levels of
supervisory concern, from those which are considered to be healthy to those
which are
33
considered to be of substantial supervisory concern. The matrix so
created results in nine assessment risk classifications.
On November 14, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to a $2,000 minimum) for
institutions in the lowest risk category, while holding deposit insurance
premiums for SAIF members at their then current levels (23 basis points for
institutions in the lowest risk category.) The reduction was effective with
respect to the semiannual premium assessment beginning January 1, 1996.
On September 30, 1996, President Clinton signed into law legislation which
eliminates the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio. The legislation required all SAIF member institutions pay a one-time
special assessment to recapitalize the SAIF, with the aggregate amount to be
sufficient to bring the reserve ratio in the SAIF to 1.25% of insured deposits.
The legislation also provides for the merger of the BIF and the SAIF, with such
merger being conditioned upon the prior elimination of the thrift charter.
FDIC regulations imposed a one-time special assessment equal to 65.7 basis
points for all SAIF-assessable deposits as of March 31, 1995, which was accrued
as an expense on September 30, 1996. The Association's one-time special
assessment amounted to $5.1 million. Net of related tax benefits, the one-time
special assessment amounted to $3.1 million. The payment of such special
assessment had the effect of immediately reducing the Association's capital by
such amount.
In the fourth quarter of 1996, the FDIC lowered the assessment rates for
SAIF members to reduce the disparity in the assessment rates paid by BIF and
SAIF members. Beginning October 1, 1996, effective SAIF rates generally range
from zero basis points to 27 basis points, except that during the fourth quarter
of 1996, the rates for SAIF members ranged from 18 basis points to 27 basis
points in order to include assessments paid to the Financing Corporation
("FICO"). From 1997 through 1999, SAIF members will pay 6.4 basis points to fund
the FICO, while BIF member institutions will pay approximately 1.3 basis points.
The Association's insurance premiums, which had amounted to 23 basis points,
were thus reduced to 6.4 basis points effective January 1, 1997. Based upon the
$798.8 million of assessable deposits at December 31, 1996, the Association
would expect to pay approximately $331,500 less in insurance premiums per
quarter during fiscal 1998.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Association, if it determines after a hearing that
the institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution
34
at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Association's deposit insurance.
Regulatory Capital Requirements. Federally insured savings associations are
required to maintain minimum levels of regulatory capital. Pursuant to FIRREA,
the OTS has established capital standards applicable to all savings
associations. These standards generally must be as stringent as the comparable
capital requirements imposed on national banks. The OTS also is authorized to
impose capital requirements in excess of these standards on individual
associations on a case-by-case basis.
Current OTS capital standards require savings associations to satisfy three
different capital requirements. Under these standards, savings associations must
maintain "tangible" capital equal to 1.5% of adjusted total assets, "core"
capital equal to 3% of adjusted total assets and "total" capital (a combination
of core and "supplementary" capital) equal to 8.0% of "risk-weighted" assets.
For purposes of the regulation, core capital generally consists of common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits and "qualifying supervisory goodwill." Core capital is generally
reduced by the amount of a savings association's intangible assets for which no
market exists. Limited exceptions to the deduction of intangible assets are
provided for purchased mortgage servicing rights and qualifying supervisory
goodwill. Tangible capital is given the same definition as core capital but does
not include qualifying supervisory goodwill and is reduced by the amount of all
the savings association's intangible assets, with only a limited exception for
purchased mortgage servicing rights.
Both core and tangible capital are further reduced by an amount equal to a
savings association's debt and equity investments in subsidiaries engaged in
activities not permissible to national banks (other than subsidiaries engaged in
activities undertaken as agent for customers or in mortgage banking activities
and subsidiary depository institutions or their holding companies). At February
28, 1997, the Association had no qualifying supervisory goodwill or purchased
mortgage servicing rights. In addition, as of such date, the Association had no
investments in or extensions of credit to subsidiaries engaged in activities not
permissible to national banks.
In determining compliance with the risk-based capital requirement, a savings
institution is allowed to include both core and supplementary capital in its
total capital, provided that the amount of supplementary capital does not exceed
the savings institution's core capital. Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt, and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory redeemable preferred stock, subject to an
35
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets. In determining the required
amount of risk-based capital, total assets, including certain off-balance sheet
items, are multiplied by a risk weight based on the risks inherent in the type
of assets. The risk weights assigned by the OTS for principal categories of
assets are (i) 0% for cash and securities issued by the U.S. Government or
unconditionally backed by the full faith and credit of the U.S. Government; (ii)
20% for securities (other than equity securities) issued by U.S. Government
sponsored agencies and mortgage-backed securities issued by, or fully guaranteed
as to principal and interest by, the FNMA or the FHLMC, except for those classes
with residual characteristics or stripped mortgage-related securities; (iii) 50%
for prudently underwritten permanent one-to-four family first lien mortgage
loans not more than 90 days delinquent and having a loan-to-value ratio of not
more than 80% at origination unless insured to such ratio by an insurer approved
by the FNMA or the FHLMC, and qualifying residential bridge loans made directly
for the construction of one-to-four family residences; (iv) 100% for all other
loans and investments, including consumer loans, commercial loans, and
single-family residential real estate loans more than 90 days delinquent, and
for repossessed assets.
The following table sets forth certain information concerning Maryland
Federal's regulatory capital at February 28, 1997.
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
--------- --------- -----------
(DOLLARS IN THOUSANDS)
Capital under GAAP.............................................................. $ 91,716 $ 91,716 $ 91,716
Additional capital items:
Qualifying general loan loss
allowance..................................................................... -- -- 4,599
Other........................................................................... (4,116) (4,116) (4,116)
--------- --------- -----------
Total regulatory capital........................................................ 87,600 87,600 92,199
Minimum required capital........................................................ 17,020 34,040 48,184
--------- --------- -----------
Excess regulatory capital....................................................... $ 70,580 $ 53,560 $ 44,015
========= ========= ===========
Regulatory capital as a
percentage(1)................................................................... 7.72% 7.72% 15.30%
Minimum capital required as a
percentage (1).................................................................. 1.50% 3.00% 8.00%
--------- --------- -----------
Regulatory capital as a percentage
in excess of requirement....................................................... 6.22% 4.72% 7.30%
========= ========= ===========
36
- ------------------------
(1) Tangible capital and core capital are computed as a percentage of adjusted
total assets of $1.1 billion. Risk-based capital is computed as a percentage
of adjusted risk-weighted assets of $602.3 million.
Any savings association that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on an association's operations,
termination of federal deposit insurance and the appointment of a conservator or
receiver. The OTS' capital regulation provides that such actions, through
enforcement proceedings or otherwise, could require one or more of a variety of
corrective actions.
In August 1993, the OTS and other federal banking agencies published a final
rule modifying their existing risk-based capital standards to provide for
consideration of interest rate risk when assessing capital adequacy of a bank.
Under the final rule, the OTS must explicitly include a bank's exposure to
declines in the economic value of its capital due to changes in interest rates
as a factor in evaluating a bank's capital adequacy. In addition, in August
1995, the OTS and the other federal banking agencies published a joint policy
statement for public comment that describes the process the banking agencies
will use to measure and assess the exposure of a bank's net economic value to
change in interest rates. Under the policy statement, the OTS will consider
results of supervisory and internal interest rate risk models as one factor in
evaluating capital adequacy. The OTS intends, at a future date, to incorporate
explicit minimum requirements for interest rate risk in its risk-based capital
standards through the use of a model developed from the policy statement, a
future proposed rule and the public comments received therefrom.
Prompt Corrective Regulatory Action. The FDIC Improvement Act requires each
appropriate agency and the FDIC to take prompt corrective action to resolve the
problems of insured depository institutions that fall below a certain capital
ratio. Such action must be accomplished at the least possible long-term cost to
the appropriate deposit insurance fund.
In September 1992, the federal banking agencies (including the OTS) adopted
substantially similar regulations which are intended to implement the system of
prompt corrective action established by the FDIC Improvement Act. These
regulations were effective December 19, 1992. Under the regulations, a savings
association shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure, (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital
ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0%
under certain circumstances) and does not
37
meet the definition of "well capitalized," (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. The FDIC Improvement Act and the regulations also
specify circumstances under which the OTS may reclassify a well capitalized
savings association as adequately capitalized and may require an adequately
capitalized savings association or an undercapitalized savings association to
comply with supervisory actions as if it were in the next lower category (except
that the OTS may not reclassify a significantly undercapitalized savings
association as critically undercapitalized). At February 28, 1997, the
Association was in the "well capitalized" category.
Liquidity Requirements. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required liquid
asset ratio is 5%. The Association has consistently complied with applicable
regulatory liquidity requirements and is currently in compliance with such
requirements.
Accounting Requirements. Applicable OTS accounting regulations and
reporting requirements apply the following standards: (i) regulatory reports
will incorporate generally accepted accounting principles when generally
accepted accounting principles are used by federal banking agencies; (ii)
savings association transactions, financial condition and regulatory capital
must be reported and disclosed in accordance with OTS regulatory reporting
requirements that will be at least as stringent as for national banks; and (iii)
the Director of the OTS may prescribe regulatory reporting requirements more
stringent than generally accepted accounting principles whenever the Director
determines that such requirements are necessary to ensure the safe and sound
reporting and operation of savings associations.
Qualified Thrift Lender Test. Under Section 2303 of the Economic Growth and
Regulatory Paperwork Reduction Act of 1996, a savings association can comply
with the QTL test by either meeting the QTL test set forth in the HOLA and
implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended ("Code"). The QTL test set forth in the HOLA requires a thrift
institution to maintain 65% of portfolio assets in Qualified Thrift Investments
("QTIs"). Portfolio assets are defined as total assets less intangibles,
property used by a savings institution in its business and liquidity investments
in an amount not exceeding 20% of assets. Generally, QTIs are residential
housing related assets. At February 28, 1997, the amount of the Association's
assets which were invested
38
in QTIs was 96.0%, which exceeded the percentage required to qualify the
Association under the QTL test. A savings association that does not meet the QTL
test set forth in the HOLA and implementing regulations must either convert to
a bank charter or comply with the following restrictions on its operations:
(i) the association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the association
shall be restricted to those of a national bank; (iii) the association shall not
be eligible to obtain any advances from its FHLB; and (iv) payment of dividends
by the association shall be subject to the rules regarding payment of dividends
by a national bank. Upon the expiration of three years from the date the
association ceases to be a QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).
Restrictions on Capital Distributions. OTS regulations govern capital
distributions by savings associations, which include cash dividends, stock
redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other transactions charged to the capital account of a
savings association. Generally, the regulations create a safe harbor for
specified levels of capital distributions from associations meeting at least
their minimum capital requirements, so long as such associations notify the OTS
and receive no objection to the distribution from the OTS. Associations and
distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Generally, Tier 1 associations, which are savings associations that before
and after the proposed distribution meet or exceed their fully phased-in capital
requirements, may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the association's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets. "Fully phased-in capital requirement" is defined to mean an
association's capital requirement under the statutory and regulatory standards
applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the association. See
"--Regulatory Capital Requirements."
Tier 2 associations, which are associations that before and after the
proposed distribution meet or exceed their minimum capital requirements, may
make capital distributions over the most recent four quarter period up to 75% of
their net income during that four quarter period.
In order to make distributions under these safe harbors, Tier 1 and Tier 2
associations must submit written notice to the OTS 30 days prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 association deemed
to be in need of more than
39
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination.
Tier 3 associations, which are associations that do not meet current minimum
capital requirements, or that have capital in excess of either their fully
phased-in capital requirement or minimum capital requirement but which have been
notified by the OTS that it will be treated as a Tier 3 association because they
are in need of more than normal supervision, cannot make any capital
distributions without obtaining OTS approval prior to making such distributions.
OTS regulations also prohibit the Association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
(or total) capital of the Association would be reduced below the amount required
to be maintained for the liquidation account established by it for certain
depositors in connection with its conversion from mutual to stock form in June
1987.
On December 5, 1994, the OTS published a notice of proposed rulemaking to
amend its capital distribution regulation. Under the proposal, savings
institutions would be permitted to only make capital distributions that would
not result in their capital being reduced below the level required to remain
"adequately capitalized," as defined above under "-Prompt Corrective Action."
Because the Association is a subsidiary of a holding company, the proposal would
require the Association to provide notice to the OTS of its intent to make a
capital distribution. The Association does not believe that the proposal will
adversely affect its ability to make capital distributions if it is adopted
substantially as proposed.
Federal Home Loan Bank System. The Association is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. Each FHLB is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. Each FHLB makes loans to members (i.e., advances) in accordance
with policies and procedures established by the Board of Directors of the FHLB.
At February 28, 1997, the Association's advances from the FHLB of Atlanta
amounted to $226.3 million.
As a member, the Association is required to purchase and maintain stock in
the FHLB of Atlanta in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of its outstanding advances. At February 28,
1997, the Association had $11.4 million in FHLB stock, which was in compliance
with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-
40
income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. These contributions also could have an adverse effect on the
value of FHLB stock in the future. For the year ended February 28, 1997,
dividends paid by the FHLB of Atlanta to the Association totalled $852,000.
Interstate Branching. OTS policy permits interstate branching to the full
extent permitted by statute (which is essentially unlimited). Generally, federal
law prohibits federal thrifts from establishing, retaining or operating a branch
outside the state in which the federal association has its home office unless
the association meets the Internal Revenue Service's domestic building and loan
test (generally, 60% of a thrift's assets must be housing-related) ("IRS Test").
The IRS Test requirement does not apply if, among other things, the law of the
state where the branch would be located would permit the branch to be
established if the federal association were chartered by the state in which its
home office is located. Furthermore, the OTS will evaluate a branching
applicant's record of compliance with the Community Reinvestment Act of 1977, as
amended ("CRA"). A poor CRA record may be the basis for denial of a branching
application.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts) and non-personal time deposits. At February
28, 1997, the Association was in compliance with applicable requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy applicable liquidity requirements.
Because required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, however, the effect of
this reserve requirement is to reduce an institution's earning assets.
Financial Reporting. Insured institutions are required to submit
independently audited annual reports to the FDIC and the appropriate agency (and
state supervisor when applicable). These publicly available reports must include
(a) annual financial statements prepared in accordance with generally accepted
accounting principles and such other disclosure requirements as required by the
FDIC or the appropriate agency and (b) a report signed by the Chief Executive
Officer and the Chief Financial Officer or Chief Accounting Officer of the
institution which contains a statement of the management's responsibilities for
(i) preparing financial statements; (ii) establishing and maintaining adequate
internal controls for financial reporting; and (iii) complying with the laws and
regulations relating to safety and soundness and an assessment as to the most
recent fiscal year of (aa) the effectiveness of its internal controls and (bb)
the institution's compliance with applicable laws and regulations relating to
safety and soundness. With respect to any internal control report, the
institution's independent public accountants must attest to, and report
separately on, assertions of the institution's management contained in such
report. Any attestation by
41
the independent accountant pursuant to this section would be made in accordance
with generally accepted auditing standards for attestation engagements.
Large insured institutions, as determined by the FDIC, are required to
monitor the above activities through an independent audit committee which has
access to independent legal counsel.
FEDERAL AND STATE TAXATION
General. The Company and the Association are subject to the generally
applicable corporate tax provisions of the Code, as well as certain additional
provisions of the Code which apply to thrifts and other types of financial
institutions. The following discussion of federal taxation is intended only to
summarize certain federal income tax matters, and is not a comprehensive
description of the tax rules applicable to the Company and the Association.
Fiscal Year. The Company and the Association and its subsidiary currently
file a consolidated federal income tax return on the basis of a fiscal year
ending on the last day in February.
Method of Accounting. The Association maintains its books and records for
federal income tax purposes using the accrual method of accounting. The accrual
method of accounting generally requires that items of income be recognized when
all events have occurred that establish the right to receive the income and the
amount of income can be determined with reasonable accuracy and that items of
expense be deducted at the later of (i) the time when all events have occurred
that establish the liability to pay the expense and the amount of such liability
can be determined with reasonable accuracy or (ii) the time when economic
performance with respect to the item of expense has occurred. The Association
maintains its books and records for financial reporting purposes using the
accrual method of accounting and has established deferred tax assets and
liabilities which are recognized for estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are recorded using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax laws or rates is recognized in income in the period that includes
the enactment date.
Bad Debt Reserves. Prior to the enactment, on August 20, 1996, of the Small
Business Job Protection Act of 1996 (the "Small Business Act"), for federal
income tax purposes, thrift institutions such as the Association, which met
certain definitional tests primarily relating to their assets and the nature of
their business, were permitted to establish tax reserves for bad debts and to
make annual additions thereto, which additions could, within specified
limitations, be deducted in arriving at their taxable income. The Association's
deduction with respect to "qualifying loans," which are generally loans secured
42
by certain interests in real property, could be computed using an amount based
on a six-year moving average of the Association's actual loss experience (the
"Experience Method"), or a percentage equal to 8.0% of the Association's taxable
income (the "PTI Method"), computed without regard to this deduction and with
additional modifications and reduced by the amount of any permitted addition to
the non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and the
Association will be required to use the Specific Charge-off Method of computing
additions to its bad debt reserve for taxable years beginning with the
Association's taxable year beginning March 1, 1996. In addition, the Association
will be required to recapture (i.e., take into taxable income) over a six-year
period, beginning with the Association's taxable year beginning March 1, 1996,
the excess of the balance of its bad debt reserves as of February 29, 1996 over
the balance of such reserves as of February 29, 1988 ("pre-1987 bad-debt
reserves"), adjusted downward for any decline in outstanding loans from February
29, 1988. However, under the Small Business Act such recapture requirements will
be suspended for each of the two successive taxable years beginning March 1,
1996 in which the Association originates a minimum amount of certain residential
loans during such years that is not less than the average of the principal
amounts of such loans made by the Association during its six taxable years
preceding March 1, 1996. The Association has previously provided for deferred
taxes on the amount to be recaptured; therefore, the Small Business Act will not
further affect the Association's net income.
The Association has not provided a deferred tax liability on bad debt
reserves for tax purposes that arose in fiscal years beginning before December
31, 1987. Such bad debt reserves for the Association amounted to approximately
$11,000,000 with an income tax effect of approximately $4,200,000 at February
28, 1997. This bad debt reserve will become taxable for income tax purposes if
the Association does not maintain certain qualified assets as defined or the
reserve is charged for other than bad debt losses.
Distributions. If the Association distributes cash or property to its
stockholders, and the distribution is treated as being from its pre-1987 bad
debt reserves, the distribution will cause the Association to have additional
taxable income. A distribution is deemed to have been made from pre-1987 bad
debt reserves to the extent that (a) the reserves exceed the amount that would
have been accumulated on the basis of actual loss experience, and (b) the
distribution is a "non-qualified distribution." A distribution with respect to
stock is a non-dividend distribution to the extent that, for federal income tax
purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case of a current distribution,
together with all other such distributions during the taxable year, it exceeds
the institution's current and post-1951 accumulated earnings and profits. The
amount of additional taxable income created by a non-dividend distribution is an
amount that when reduced by the tax attributable to it is equal to the amount of
the distribution.
43
Minimum Tax. In addition to the regular federal income tax, for taxable
years beginning after December 31, 1986, the former corporate add-on minimum tax
has been replaced with an alternative minimum tax generally equal to 20% of
alternative minimum taxable income. The alternative minimum tax will be imposed
in lieu of the regular corporate income tax, if the regular corporate income tax
is less than the alternative minimum tax. Alternative minimum taxable income
essentially consists of regular taxable income increased by certain tax
preference items and other adjustments, including, among other items, 75% of the
excess of "adjusted current earnings" of a corporation (including members of a
group filing a consolidated tax return) over alternative minimum taxable income
(determined without regard to this adjustment and the deduction for alternative
tax net operating losses).
Audit by IRS. The Company's consolidated federal income tax returns for
taxable years through February 28, 1993 have been closed for the purpose of
examination by the IRS.
Maryland Taxes. The Association and the Company are subject to Maryland
taxation at a rate of 7% of their net earnings. For the purpose of the 7%
franchise tax imposed on the Association, net earnings are generally defined as
net income of the Association as determined for state corporate income tax
purposes, plus (i) interest income from obligations of the United States, of any
state, including Maryland, and of any county, municipal or public corporation
authority, special district or political subdivision of any state, including
Maryland, and (ii) any profit realized from the sale or exchange of bonds issued
by the State of Maryland or any of its political subdivisions.
44
Item 2. Properties.
- ------------------
The following table presents property owned and leased by the Association
at February 28, 1997.
Net Book
Value of
Property or
Owned Lease Leasehold
or Expiration Improvements at
Leased Date February 28, 1997
--------- ----------- ------------------
Location:
Main Office:
3505 Hamilton Street Owned
Hyattsville, MD 20782 -- $ 263,750
Branch and Loan Production
Offices:
4277 Branch Avenue, Leased 7/31/97 688
Marlow Heights
7934 Wisconsin Avenue, Owned -- 99,657
Bethesda
211 East Charles Street, Owned -- 586,614
La Plata
10666 Campus Way South, Leased 7/31/98 666
Upper Marlboro
8951 Edmonston Road, Leased 1/31/99 951
Greenbelt
6309 Allentown Road, Leased 1/31/98 930
Camp Springs
8490 Annapolis Road, Leased 5/4/99 7,263
New Carrolton
7130 Minstrel Way, Suite 220 Leased 4/30/01 ---
Columbia
45
Net Book
Value of
Property or
Owned Lease Leasehold
or Expiration Improvements at
Leased Date February 28, 1997
--------- ----------- ------------------
571 N. Solomons Island Road Leased 3/31/99 $ 25,310
Prince Frederick
3033 Solomons Island Road Owned -- 263,155
Edgewater
1400 Mercantile Lane, Suite 120 Leased 9/30/99 ---
Landover
6 Montgomery Village Avenue, Leased 8/31/98 461
Suite 340
Gaithersburg
6816 Race Track Road, Leased 8/31/02 5,449
Bowie
15421 New Hampshire Avenue, Leased 1/31/02 640
Cloverly
11200 Viers Mill Road, Leased 11/30/01 565
Wheaton
3425 Leonardtown Road, Owned -- 378,623
Waldorf
16575 South Frederick Avenue, Leased 6/30/00 7,916
Gaithersburg
10414 Auto Park Drive, Leased 7/31/97 --
West Bethesda
13600 Laurel--Bowie Road, Leased 8/31/01 13,771
Laurel
46
Net Book
Value of
Property or
Owned Lease Leasehold
or Expiration Improvements at
Leased Date February 28, 1997
--------- ----------- ----------------
6901 Laurel-Bowie Road, Owned -- $316,389
Bowie
11428 Cherry Hill Road, Leased 7/31/98 2,080
Cherry Hill
5801 Deale-Churchton Road, Leased 8/14/02 423
Deale
1419 Forest Drive Leased 12/31/01 3,215
Annapolis
1470 Rockville Pike Owned -- 557,289
Rockville
2001 Davidsonville Road Owned -- 276,768
Crofton
9546 Livingston Road Leased 11/30/97 985
Fort Washington
11110 Mall Circle Leased 1/31/05 41,076
St. Charles
Administrative Offices:
9200 Edmonston Road Leased 10/31/98 39,290
Greenbelt
3321 Toledo Terrace #203 & 204 Owned -- 215,859
Toledo Terrace
47
Item 3. Legal Proceedings.
- --------------------------
The Company is not involved in any pending legal proceedings other than
routine, non-material legal proceedings occurring in the ordinary course of
business.
Item 4. Submission of Matters to a Vote of Security Holders.
- -----------------------------------------------------------
Not applicable.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- -----------------------------------------------------------------------------
The information required herein is incorporated by reference from page 29
of the Company's 1997 Annual Report to Stockholders attached hereto as
Exhibit 13 ("Annual Report").
Item 6. Selected Financial Data.
- -------------------------------
The information required herein is incorporated by reference from page 14
of the Company's Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations.
---------------------
The information required herein is incorporated by reference from pages 6
to 13 of the Company's Annual Report.
Item 8. Financial Statements and Supplementary Data.
- ---------------------------------------------------
The information required herein is incorporated by reference from pages
16 to 28 of the Company's Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure.
--------------------
Not applicable.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
- ------------------------------------------------------------
The information required herein is incorporated by reference from pages 2
to 4 of the definitive proxy statement of the Company for the Company's
Annual Meeting of Stockholders to be held on June 18, 1997 ("Proxy
Statement").
48
Item 11. Executive Compensation.
- ---------------------------
The information required herein is incorporated by reference from pages
6 to 12 of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficiary Owners and Management.
- ------------------------------------------------------------------------
The information required herein is incorporated by reference from pages 5
and 6 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
- -------------------------------------------------------
The information required herein is incorporated by reference from page
12 of the Proxy Statement.
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------------------------------------------------------------------------
(a) Documents filed as part of this Report
(1) The following financial statements are incorporated by reference
from Item 8 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statements of Financial Condition at February 28, 1997 and
February 29, 1996
Consolidated Statements of Income for the Years Ended February 28,
1997, February 29, 1996 and February 28, 1995
Consolidated Statements of Stockholders' Equity for the Years Ended
February 28, 1997, February 29, 1996 and February 28, 1995
Consolidated Statements of Cash Flows for the Years Ended February 28,
1997, February 29, 1996 and February 28, 1995
Notes to Consolidated Financial Statements
(2) All other schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the absence of
conditions under which they are required or because the required information
is included in the consolidated financial statements and related notes
thereto.
49
(3) The following exhibits are filed as part of this Form 10-K and this
list includes the Exhibit Index.
No. Exhibits
--------- ---------------------------------------------------------------------------------------------
3.1 Articles of Incorporation*
3.2 Bylaws*
4.1 Specimen Common Stock Certificate*
4.2 Rights Agreement Dated as of January 18, 1990**
10.1(a) Key Employee Stock Compensation Program***
10.1(b) 1988 Employee Stock Purchase Plan***
10.1(c) 1989 Stock Option and Stock Appreciation Rights Plan***
10.2 Employment Agreement with Robert H. Halleck (see "--Employment
Agreements" in Item 11 of this Report for a list of Maryland
Federal employees who have employment agreements which are
substantially identical in all material respects, except as described
therein as to salary and term, to the employment agreement
with Robert H. Halleck)****
10.3 1992 Stock Incentive Plan*****
10.4 1993 Directors' Stock Option Plan*****
10.5 1995 Stock Option Plan*******
10.6 Non-Qualified Executive Deferred Compensation Plan for Robert
H. Halleck
13 1997 Annual Report to Stockholders
21 Subsidiaries--Reference is made to Item 1, "Business--General" for
the required information
23 Consent of Independent Auditors
27 Financial Data Schedule
- ------------------------
* Incorporated by reference to the Form 8-B Registration Statement
filed by the Company with the SEC on November 8, 1989.
** Incorporated by reference to the Form 8-A Registration Statement
filed by the Company with the SEC on January 28, 1990.
*** Incorporated by reference to the Form S-4 Registration Statement
(No. 33-29945) filed by the Company with the SEC on July 13, 1989.
**** Incorporated by referenced to the Annual Report on Form 10-K for
the fiscal year ended February 29, 1992 filed by the Company
with the SEC on May 29, 1992.
50
- -------------------------
***** Incorporated by reference to the Annual Report on Form 10-K for
the fiscal year ended February 28, 1993 filed by the Company with
the SEC on May 28, 1993.
****** Incorporated by reference to the Annual Report on Form 10-K for
the fiscal year ended February 28, 1994 filed by the Company with
the SEC on May 27, 1994.
******* Incorporated by reference to the Company's definitive proxy
statement for its 1995 Annual Meeting of Stockholders filed by
the Company with the SEC on May 24, 1995.
(b) The Company did not file any Current Reports on Form 8-K during
the fiscal quarter ended February 28, 1997.
(c) See (a)(3) above for all exhibits filed herewith and the exhibit
index.
(d) There are no other financial statements and financial statement
schedules which were excluded from the Annual Report which are required to be
included herein.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MARYLAND FEDERAL BANCORP, INC.
May 22, 1997 By: /S/ Robert H. Halleck
-------------------------------
Robert H. Halleck
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Richard B. Bland
- --------------------------------- May 22, 1997
Richard B. Bland, Chairman of
the Board
/s/ Robert H. Halleck
- ---------------------------------- May 22, 1997
Robert H. Halleck, Director,
President and Chief Executive
Officer (principal executive
officer)
/s/ Lynn B. Hounslow
- ---------------------------------- May 22, 1997
Lynn B. Hounslow
Senior Vice President, Treasurer
and Chief Financial Officer
(principal financial officer and
principal accounting officer)
/s/ A. William Blaker, Jr.
- ----------------------------------- May 22, 1997
A. William Blake, Jr., Director
and Executive Vice President
/s/ Richard R. Mace
- ----------------------------------- May 22, 1997
Richard R. Mace, Director
52
/s/ David A. McNamee
- ------------------------------------ May 22, 1997
David A. Mcnamee, Director
/s/ Thomas H. Welsh, III
- ------------------------------------ May 22, 1997
Thomas H. Welsh, III, Director