UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 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
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MARYLAND FEDERAL BANCORP, INC.
- --------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1640579
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3505 Hamilton Street, Hyattsville, MD. 20782
- --------------------------------------- ---------
(Address of principal executive office) (Zip Code)
Registrant's telephone number,
including area code: (301) 779-1200
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
---- ----
Number of Shares of Common Stock Outstanding as of
October 9, 1997
Title of Class Number of Shares Outstanding
- --------------------- -----------------------------
Common Stock ($.01 3,237,081 Shares
par value per share)
INDEX
PART I - FINANCIAL INFORMATION: PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial
Condition as of August 31, 1997 and
February 28, 1997 1
Consolidated Statements of Income and
Retained Earnings for the six and three
months ended August 31, 1997 and 1996 2
Consolidated Statements of Cash Flows for
the six months ended August 31, 1997 and
1996 3
Notes to Consolidated Financial Statements 4-5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 6-13
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security
Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
AUGUST 31, FEBRUARY 28,
1997 1997
--------------------------- ------------
(IN THOUSANDS)
ASSETS
Cash and due from banks............................ $10,396 $ 2,558
Interest-bearing deposits with banks............... 33,473 8,381
Federal funds sold and securities purchased under
agreements to resell............................. 14,417 17,665
Securities available for sale...................... 61,070 69,360
Securities held to maturity (fair value,
$18,430,000 and $11,417,000, respectively) 18,449 11,448
Loans held for sale, at cost....................... 8,149 2,679
Loans receivable, net.............................. 1,001,103 989,273
Accrued interest receivable........................ 6,077 6,021
Federal Home Loan Bank stock, at cost.............. 11,472 11,364
Foreclosed real estate, net........................ 1,225 1,299
Premises and equipment, net........................ 4,715 4,576
Other assets....................................... 4,460 3,859
--------------------------- ------------
Total assets....................................... $1,175,006 $ 1,128,483
--------------------------- ------------
--------------------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits........................................... $823,183 $ 788,933
Advances from Federal Home Loan Bank of Atlanta.... 224,430 226,280
Advances from borrowers for taxes and insurance.... 15,270 9,074
Income taxes....................................... 2,237 1,898
Accrued expenses and other liabilities............. 10,189 7,037
--------------------------- ------------
Total liabilities.................................. 1,075,309 1,033,222
--------------------------- ------------
STOCKHOLDERS' EQUITY
Preferred stock; 10,000,000 shares authorized; none
issued Common stock; $.01 par value; 15,000,000 shares
authorized; 4,139,121 and 4,093,576 shares
issued, respectively............................. 41 41
Additional paid-in capital......................... 43,982 42,625
Retained earnings, substantially restricted........ 70,435 66,976
Unrealized holding gains, net...................... 3,259 2,835
Treasury stock, at cost; 905,426 shares and 883,426
shares, respectively............................. (18,020) (17,216)
--------------------------- ------------
Total stockholders' equity......................... 99,697 95,261
--------------------------- ------------
Total liabilities and stockholders' equity......... $1,175,006 $ 1,128,483
--------------------------- ------------
--------------------------- ------------
See Notes to Consolidated Financial Statements.
-1-
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
SIX MONTHS ENDED THREE MONTHS ENDED
AUGUST 31, AUGUST 31,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income:
Loans receivable:
First mortgage loans....................................... $ 33,524 $ 33,846 $ 16,747 $ 16,836
Consumer and other loans................................... 4,535 3,293 2,355 1,730
Securities available for sale and held to maturity......... 2,521 2,709 1,238 1,357
Other interest-earning assets.............................. 1,524 1,254 890 522
--------- --------- --------- ---------
Total interest income...................................... 42,104 41,102 21,230 20,445
--------- --------- --------- ---------
Interest expense:
Deposits................................................... 19,860 19,573 10,103 9,612
Advances from Federal Home Loan
Bank of Atlanta............................................ 6,801 6,870 3,390 3,379
Advances from borrowers for taxes and insurance............ 17 20 9 11
--------- --------- --------- ---------
Total interest expense..................................... 26,678 26,463 13,502 13,002
--------- --------- --------- ---------
Net interest income........................................ 15,426 14,639 7,728 7,443
Provision for loan losses.................................. 130 145 60 60
--------- --------- --------- ---------
Net interest income after provision for loan losses........ 15,296 14,494 7,668 7,383
--------- --------- --------- ---------
Noninterest income:
Banking service charges and fees........................... 1,075 752 568 385
Loan fees and service charges.............................. 189 174 100 98
Gain on sales of first mortgage loans...................... 169 386 109 140
Gain on sales of securities................................ 165 -- 165 --
Other...................................................... 49 73 24 26
--------- --------- --------- ---------
Total noninterest income................................... 1,647 1,385 966 649
--------- --------- --------- ---------
Noninterest expense:
Compensation and benefits.................................. 4,982 4,963 2,579 2,480
Occupancy and equipment.................................... 1,518 1,501 760 785
Federal deposit insurance premiums......................... 257 905 128 456
Loss (gain) on foreclosed real estate, net................. 34 41 (6) 36
Advertising................................................ 322 326 167 145
Other...................................................... 2,042 1,864 1,046 927
--------- --------- --------- ---------
Total noninterest expense.................................. 9,155 9,600 4,674 4,829
--------- --------- --------- ---------
Income before income taxes................................. 7,788 6,279 3,960 3,203
Income tax expense......................................... 3,011 2,461 1,531 1,283
--------- --------- --------- ---------
NET INCOME................................................. 4,777 3,818 2,429 1,920
Retained earnings, substantially restricted:
Balance, beginning of period............................... 66,976 67,492 68,685 68,884
Cash dividends............................................. (1,318) (999) (679) (493)
--------- --------- --------- ---------
Balance, end of period..................................... $ 70,435 $ 70,311 $ 70,435 $ 70,311
--------- --------- --------- ---------
--------- --------- --------- ---------
Primary earnings per share................................. $ 1.44 $ 1.14 $ .72 $ .58
--------- --------- --------- ---------
--------- --------- --------- ---------
See Notes to Consolidated Financial Statements
-2-
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF
CASH FLOWS (Unaudited)
SIX MONTHS ENDED
AUGUST 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income.............................................................. $ 4,777 $ 3,818
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization:
Premises and equipment.................................................. 390 428
Other................................................................... (524) (584)
Loans originated for sale............................................... (29,616) (39,671)
Sale of loans originated for sale....................................... 24,146 50,267
Provision for losses on loans and foreclosed real estate................ 190 145
Gain on sales of securities............................................. (165) --
Gain on sales of foreclosed real estate................................. (84) (37)
Deferred income taxes................................................... (378) (438)
Tax benefits relating to stock options.................................. 268 86
Decrease (increase) in:
Accrued interest receivable............................................. (56) (34)
Other assets............................................................ (745) 119
Increase in:
Current income taxes payable............................................ 718 1,304
Accrued expenses and other liabilities.................................. 2,884 1,396
--------- ---------
Net cash provided by operating activities............................... 1,805 16,799
--------- ---------
INVESTING ACTIVITIES:
Loans originated........................................................ (97,071) (66,417)
Principal collected on loans............................................ 84,743 56,075
Purchases of securities:
Available for sale...................................................... (3,024) (2,085)
Held to maturity........................................................ (6,984) (9,867)
Principal collected on mortgage-backed and related securities........... 5,676 6,146
Proceeds from maturities of securities:
Available for sale...................................................... 620 5,292
Held to maturity........................................................ -- 3,000
Proceeds from sales of securities....................................... 5,902 --
Net decrease (increase) in federal funds sold and securities purchased
under agreements to resell............................................ 3,248 (3,427)
Decrease (increase) in Federal Home Loan Bank stock..................... (108) 1,050
Proceeds from sales of foreclosed real estate........................... 1,053 449
Purchases of premises and equipment..................................... (529) (401)
--------- ---------
Net cash used in investing activities................................... (6,474) (10,185)
--------- ---------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits..................................... 34,250 (1,751)
Proceeds from Federal Home Loan Bank advances........................... 52,100 43,250
Principal payments on Federal Home Loan Bank advances................... (53,950) (59,500)
Net increase in advances from borrowers for taxes and insurance......... 6,196 6,393
Proceeds from issuance of stock under stock plans....................... 1,089 503
Purchase of treasury stock.............................................. (804) (5,503)
Cash dividends paid..................................................... (1,282) (1,010)
--------- ---------
Net cash provided by (used in) financing activities..................... 37,599 (17,618)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ 32,930 (11,004)
CASH AND CASH EQUIVALENTS:
Beginning of period..................................................... 10,939 22,905
--------- ---------
End of period........................................................... $ 43,869 $ 11,901
--------- ---------
--------- ---------
See Notes to Consolidated Financial Statements.
-3-
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
In the opinion of the management of Maryland Federal Bancorp, Inc.
(the "Company"), the accompanying unaudited consolidated financial statements
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the Company's financial condition as of
August 31, 1997, and the results of its operations for the six and three
months ended August 31, 1997 and 1996, and cash flows for the six months
ended August 31, 1997 and 1996. These financial statements should be read in
conjunction with the consolidated financial statements and notes included in
Maryland Federal Bancorp, Inc. and Subsidiary's annual report for the fiscal
year ended February 28, 1997. The results of operations for the period ended
August 31, 1997 are not necessarily indicative of the operating results which
may be achieved for the full fiscal year.
NOTE 2 - EARNINGS PER SHARE:
Primary earnings per share for the six months ended August 31, 1997 and
1996 are computed based on the weighted-average number of shares actually
outstanding, as adjusted for applicable stock dividends, plus the shares that
would be outstanding assuming exercise of dilutive stock options, all of
which are considered to be common stock equivalents. The number of shares
that would be issued from the exercise of stock options has been reduced by
the number of shares that could have been purchased from the proceeds at the
average market price of the Company's stock during the period. The number of
shares used in the computations of primary earnings per share was 3,312,845
and 3,345,786 for the six months ended August 31, 1997 and 1996, respectively.
The Company has not separately reported fully diluted earnings
per share since the amounts are not materially different from primary
earnings per share.
In February 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"). SFAS 128 specifies the
computation, presentation, and disclosure requirements for earnings
per share ("EPS") for entities with publicly-held common stock,
effective for periods ending after December 15, 1997. It replaces
Primary EPS and Fully Diluted EPS with Basic EPS and Diluted EPS,
respectively. The impact of implementation is not quantified;
however, the Company expects upon adoption, Basic EPS will be slightly
higher than Primary EPS and Diluted EPS will be approximately the same
as Fully Diluted EPS.
-4-
NOTE 3 - COMMON STOCK ISSUED:
During the six months ended August 31, 1997, 10,034, 4,530,
19,137, 7,500 and 922 shares were issued at $21.07, $22.86, $23.92,
$25.13 and $30.48 per share ($211,416, $103,556, $457,757, $188,475
and $28,103), respectively, as a result of stock options being
exercised. During the six months ended August 31, 1996, 8,730, 11,400
and 833 shares were issued at $14.43, $22.125 and $24.00 per share
($125,974, $252,225 and $19,992), respectively, as a result of stock
options being exercised. In addition, 3,422 shares were issued at
$29.32 per share ($100,333) and 4,310 shares were issued at $24.33 per
share ($104,862) through Maryland Federal Bank's (which changed its
name from Maryland Federal Savings and Loan Association effective
September 21, 1997) Employee Stock Purchase Plan during the six months
ended August 31, 1997 and 1996, respectively.
NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") and
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131").
SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. SFAS 131 specifies the
presentation and disclosure of operating segment information reported
in the annual report and interim reports issued to stockholders. The
provisions of both statements will be effective for fiscal years
beginning after December 15, 1997. The management of the Company
believes that the adoption of these statements will not have a
material impact on the Company's financial position, results of
operations, or liquidity.
NOTE 5 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Six Months Ended August 31,
---------------------------
1997 1996
------------ -------------
(In Thousands)
Cash paid for:
Interest $26,080 $25,539
Income taxes 3,329 1,482
NOTE 6 - RECLASSIFICATIONS:
Certain amounts for the six and three months ended August 31,
1996 have been reclassified for comparative purposes.
-5-
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Maryland Federal Bancorp, Inc. (the "Company") is the unitary
savings and loan holding company of Maryland Federal Bank (the "Bank",
which changed its name from Maryland Federal Savings and Loan
Association effective September 21, 1997) and its subsidiary. The
Company and the Bank are sometimes collectively referred to as
"Maryland Federal." The Company currently owns 100% of the issued and
outstanding common stock of the Bank, which is the principal asset of
the Company. The Company does not presently own or operate any
subsidiaries other than the Bank and its subsidiary.
Maryland Federal's earnings are primarily dependent upon its net
interest income, which is determined by the Bank's interest rate
spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing
liabilities) and the relative amounts of its interest-earning assets
and interest-bearing liabilities. The Bank's net income is also
affected by the level of its noninterest income, provision for
estimated losses on loans and noninterest expense.
Deposit flows and the cost of funds are influenced by interest
rates on competing investments and general market rates of interest.
Lending activities are affected by consumer demand, the interest rate
environment, and the availability of funds.
FINANCIAL CONDITION
Assets. Total assets as of August 31, 1997 increased $46.5
million or 4.1% to $1.18 billion as compared to February 28, 1997.
This increase was primarily due to increases of $17.3 million or 1.7%
in loans receivable, net (including loans held for sale), $25.1
million or 299.4% in interest-bearing deposits with banks, $7.8
million or 306.4% in cash and due from banks, and $7.0 million or
61.2% in securities held to maturity. These increases were partially
offset by decreases of $8.3 million or 12.0% in securities available
for sale, and $3.2 million or 18.4% in Federal funds sold and
securities purchased under agreements to resell. The increases in
cash and due from banks and interest-bearing deposits with banks were
due to management's decision to grow the Bank's short-term liquidity
in the form of such assets.
Liabilities. Total liabilities as of August 31, 1997 increased
$42.1 million or 4.1% to $1.08 billion as compared to February 28,
1997. This increase was primarily due to a $34.3 million or 4.3%
increase in deposits, a $6.2 million or 68.3% increase in advances
from borrowers for taxes and insurance, and a $3.2 million or 44.8%
increase in accrued expenses and other liabilities. These increases
-6-
were partially offset by the decrease of $1.9 million or 0.8% in
advances from the Federal Home Loan Bank of Atlanta ("FHLB"). The
increase in deposits was necessitated by the continued demand for
consumer and other loans, including home equity lines of credit, and
management's intent to grow short-term liquidity. The increase in
advances from borrowers for taxes and insurance was the result of the
accumulation of such funds for the payment of taxes and insurance
applicable to mortgage loans to be paid during the third quarter of
fiscal 1998.
Stockholders' Equity. Stockholders' equity increased $4.4
million or 4.7% to $99.7 million at August 31, 1997, versus $95.3
million at February 28, 1997. During the six months ended August 31,
1997, such increase primarily reflects net income of $4.8 million, a
$1.4 million increase related to the issuance of shares under Maryland
Federal's stock plans, and a $424,000 increase recorded to recognize
the net change in unrealized holding gains, net, which were offset by
dividends to shareholders of $1.3 million and the repurchase of 22,000
shares of the Company's common stock at a cost of $804,000.
RESULTS OF OPERATIONS
Maryland Federal reported net income of $4.8 million and $3.8
million during the six months ended August 31, 1997 and 1996,
respectively. Net income increased by $959,000 or 25.1% during the
six months ended August 31, 1997, as compared to the same period in
1996. The increase in net income was the result of a $787,000
increase in net interest income, a $262,000 increase in noninterest
income, a $445,000 decrease in noninterest expense, and a $15,000
decrease in provision for loan losses, which more than offset a
$550,000 increase in income tax expense, during the six months ended
August 31, 1997, as compared to the same period in 1996. Maryland
Federal reported net income of $2.4 million and $1.9 million during
the three months ended August 31, 1997 and 1996, respectively. Net
income increased by $509,000 or 26.5% during the three months ended
August 31, 1997, as compared to the same period in 1996. The increase
in net income was the result of a $285,000 increase in net interest
income, a $317,000 increase in noninterest income, and a $155,000
decrease in noninterest expense, which more than offset a $248,000
increase in income tax expense, during the three months ended August
31, 1997, as compared to the same period in 1996.
Net Interest Income
Net interest income increased by $787,000 or 5.4% and $285,000 or
3.8% for the six and three months ended August 31, 1997, respectively,
as compared to the same periods in 1996. The increase for the six
months ended August 31, 1997 was primarily the result of a 12 basis
point net increase in the yield earned on interest-earning assets over
the rate paid on interest-bearing liabilities ("interest rate
spread"), which more than offset a $2.4 million or 2.3% decrease in
the average balance of interest-earning assets over interest-bearing
-7-
liabilities, as compared to the same period in 1996. The increase for
the three months ended August 31, 1997 was primarily the result of a 4
basis point net increase in the interest rate spread, which more than
offset a $513,000 or 0.5% decrease in the average balance of
interest-earning assets over interest-bearing liabilities, as compared
to the same period in 1996.
Interest Income
Loans receivable. During the six months ended August 31, 1997,
interest earned on loans receivable increased by $920,000 or 2.5%, as
compared to the same period in 1996. This increase was primarily the
result of a $17.7 million or 1.8% increase in the average balance of
loans receivable coupled with a 5 basis point increase in the average
yield earned thereon to 7.54%. During the three months ended August
31, 1997, interest earned on loans receivable increased by $536,000 or
2.9%, as compared to the same period in 1996. This increase was
primarily the result of a $21.1 million or 2.1% increase in the
average balance of loans receivable coupled with a 5 basis point
increase in the average yield earned thereon to 7.54%. The increase
in the average balance of loans receivable during both six and three
month periods reflects the high demand in loan originations for
consumer and other loans.
Mortgage-backed and related securities. During the six and three
months ended August 31, 1997, interest earned on mortgage-backed and
related securities decreased by $49,000 or 2.3% and $52,000 or 4.8%,
respectively, as compared to the same periods in 1996. These
decreases were the result of a $1.2 million or 1.9% and a $2.4 million
or 3.7% decrease in the average balance of mortgage-backed and related
securities, respectively, coupled with a 3 and 8 basis point decrease
in the average yield earned on such securities to 6.77% and 6.73%,
respectively, during the six and three months ended August 31, 1997 as
compared to the same periods in 1996, respectively. The decrease in
the average balance of mortgage-backed and related securities reflects
the sale of a portion of such securities during the second quarter of
fiscal 1998.
Investment securities and other interest-earning assets.
During the six and three months ended August 31, 1997, interest earned
on investment securities and other interest-earning assets increased
by $131,000 or 7.3% and $301,000 or 37.5%, respectively, as compared
to the same periods in 1996. These increases during the six and three
months ended August 31, 1997, were primarily the result of a $1.8
million or 2.9% and an $18.9 million or 34.0% increase in the average
balance of investment securities and other interest-earning assets,
respectively, coupled with a 24 and 15 basis point increase in the
average yield earned on such assets to 5.92% and 5.93%, respectively,
as compared to the same periods in 1996.
-8-
Interest Expense
Deposits. Interest expense on deposits during the six and three
months ended August 31, 1997, increased by $287,000 or 1.5% and
$491,000 or 5.1%, respectively, as compared to the same periods in the
prior fiscal year. These increases during the six and three months
ended August 31, 1997, were primarily attributable to a $26.2 million
or 3.4% and a $41.1 million or 5.3% increase in the average balance of
deposits, respectively, which more than offset a nine and one basis
point decrease in the average rate paid on such deposits,
respectively, as compared to the same periods in 1996. The increase
in the average balance of deposits during the six and three months
ended August 31, 1997, as compared to the same periods in 1996, was
due primarily to the competitive interest rates offered on deposits by
the Bank.
Borrowed funds. Interest expense on borrowed funds (including
advances from borrowers for taxes and insurance) decreased by $72,000
or 1.0% during the six months ended August 31, 1997, as compared to
the same period in 1996. This decrease was primarily due to a
decrease of $5.6 million or 2.4% in the average balance of such funds,
which more than offset an 8 basis point increase in the average rate
paid on such funds during the six months ended August 31, 1997, as
compared to the same period in 1996. Interest expense on borrowed
funds (including advances from borrowers for taxes and insurance)
increased by $9,000 or 0.3% during the three months ended August 31,
1997, as compared to the same period in 1996. This increase was
primarily due to a 10 basis point increase in the average rate paid on
such funds, which more than offset a $3.0 million or 1.3% decrease in
the average balance of such funds during the three months ended August
31, 1997, as compared to the same period in 1996.
Provision for Loan Losses
Loan review procedures are utilized by the Bank in order to
ensure that potential problem loans are identified early, thereby
lessening any potentially negative impact such problem loans may have
on the Bank's earnings. During the six and three months ended August
31, 1997, the Bank's provision for loan losses totaled $130,000 and
$60,000, respectively, as compared to $145,000 and $60,000,
respectively, during the same respective prior periods in 1996.
The allowance for loan losses is maintained at a level believed
adequate by management to absorb losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based
on an evaluation of the loan portfolio, past loan loss experience,
current economic conditions, volume, growth and composition of the
loan portfolio, and other relevant factors. The allowance is
increased by provisions for loan losses which are charged against
income. While management uses the best information available to make
such determinations, no assurance can be given as to whether future
adjustments may be necessary.
-9-
As of August 31, 1997, non-performing loans (loans ninety days or
more delinquent but still accruing interest, and non-accrual loans)
totaled $4.3 million ($4,253,000 of which consist of first mortgage
loans, with the remaining $33,000 consisting of consumer and other
loans) and represented 0.42% of total loans receivable. At February
28, 1997, non-performing loans totaled $4.6 million ($4,595,000 of
which consist of first mortgage loans, with the remaining $35,000
consisting of consumer and other loans) and represented 0.47% of total
loans receivable. As of August 31, 1997, the allowance for loan
losses amounted to $4.7 million and represented 110.0% of
non-performing loans. At February 28, 1997, the allowance for loan
losses amounted to $4.6 million and represented 99.3% of
non-performing loans.
Noninterest Income
Total noninterest income increased by $262,000 or 18.9% and
$317,000 or 48.8% during the six and three months ended August 31,
1997, respectively, as compared to the same periods in 1996. During
the six months ended August 31, 1997, the increase was primarily the
result of a $323,000 or 43.0% increase in banking service charges and
fees, and a $165,000 or 100.0% increase in gain on sales of
securities, which more than offset a decrease of $217,000 or 56.2% in
gain on sales of first mortgage loans, as compared to the same period
in 1996. During the three months ended August 31, 1997, the increase
was primarily the result of a $183,000 or 47.5% increase in banking
service charges and fees, and a $165,000 or 100.0% increase in gain
on sales of securities, which more than offset a decrease of $31,000
or 22.1% in gain on sales of first mortgage loans, as compared to the
same period in 1996. There were no sales of securities during the six
and three months ended August 31, 1996.
Noninterest Expense
Total noninterest expense decreased by $445,000 or 4.6% and
$155,000 or 3.2% for the six and three months ended August 31, 1997,
respectively, as compared to the same periods in 1996. The components
of noninterest expense are discussed below.
Compensation and benefits. During the six and three months ended
August 31, 1997, compensation and benefits increased by $19,000 or
0.4% and $99,000 or 4.0%, respectively, as compared to the same
periods in 1996, due primarily to an increase in employee compensation
and related payroll tax expense, which more than offset a decrease in
retirement benefit expense.
Occupancy and equipment. During six months ended August 31,
1997, occupancy and equipment expense increased $17,000 or 1.1%, as
compared to the same period in 1996. The Bank relocated two branch
offices and opened one new branch office during the first quarter of
the fiscal year ending February 28, 1998. During the three months
ended August 31, 1997, occupancy and equipment expense decreased by
-10-
$25,000 or 3.2%, as compared to the same period in 1996. No such
offices were relocated or opened during the same periods in 1996.
Federal deposit insurance premiums. During the six and three
months ended August 31, 1997, federal deposit insurance premiums to
the FDIC decreased $648,000 or 71.6% and $328,000 or 71.9%,
respectively, as compared to the same periods in 1996. These
decreases were due primarily to legislation enacted to recapitalize
the Savings Association Insurance Fund during calendar year 1996,
which also reduced the insurance premium rates payable by the Bank
from 23 to 6.4 basis points on every $100 of assessable deposits
effective January 1, 1997. Federal deposit insurance premiums are a
function of the size of the Bank's deposit base.
Loss (gain) on foreclosed real estate, net. During the six and
three months ended August 31, 1997, loss (gain) on foreclosed real
estate, net, decreased by $7,000 or 17.1% and $42,000 or 116.7%,
respectively, as compared to the same periods in 1996.
Advertising. During the six months ended August 31, 1997,
advertising expense decreased by $4,000 or 1.2%, as compared to
the same period in 1996. During the three months ended August 31,
1997, advertising expense increased by $22,000 or 15.2%, as compared
to the same period in 1996.
Other. During the six and three months ended August 31, 1997,
other noninterest expense increased by $178,000 or 9.5% and $119,000
or 12.8%, respectively, as compared to the same periods in 1996.
These increases were primarily due to increases in legal fees, special
services and courier expense, and expenses such as telephone and
postage.
Income Taxes
During the six and three months ended August 31, 1997, the
Company made provisions for income taxes of $3.0 million and $1.5
million, respectively, as compared to $2.5 million and $1.3 million
during the six and three months ended August 31, 1996, respectively.
The $550,000 or 22.3% and $248,000 or 19.3% increases during the six
and three months ended August 31, 1997, respectively, were due
primarily to the increased profitability of the Company as compared to
the same periods in 1996.
CAPITAL ADEQUACY
The Bank is required under certain federal regulations to maintain
minimum tangible capital equal to 1.5% of its adjusted total assets,
minimum core capital equal to 3.0% of its adjusted total assets and
minimum total capital (a combination of core and supplementary
capital) equal to 8.0% of its risk-weighted assets. At August 31,
1997, the Bank had tangible capital equal to 7.90% of adjusted total
assets, core capital equal to 7.90% of adjusted total assets and total
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capital equal to 15.61% of risk-weighted assets.
In August 1993, the OTS issued a final rule which adds an
interest rate risk component to the existing 8% risk-based capital
requirement. Under the rule, a savings institution would be required
to hold capital as a safeguard against interest rate exposure in an
amount equal to 50% of the decline in the market value of the
institution's portfolio equity (i.e., the net present value of the
institution's assets, liabilities and certain off-balance-sheet items)
that would result from a 200 basis point change in market interest
rates. The requirement would apply to those institutions considered
to be carrying "above normal" risk. "Above normal" risk is defined as
occurring when the decline in the market value of the portfolio
equity, under a 200 basis point rate change, exceeds 2% of the market
value of the institution's assets.
However, in October 1994, the Director of the OTS indicated that
it would waive the capital deductions for institutions with a greater
than "normal" risk until the OTS publishes an appeals process. In
August 1995, the OTS issued Thrift Bulletin No. 67 which allows
eligible institutions to request an adjustment to their interest rate
risk component as calculated by the OTS or to request use of their own
models to calculate their interest rate component. The OTS also
indicated that it will delay invoking its interest rate risk rule
requiring institutions with "above normal" interest rate risk exposure
to adjust their regulatory capital requirement until new procedures
are implemented and evaluated. The OTS has not yet established an
effective date for the capital deduction. Because of the Bank's
strong capitalization, management does not believe that compliance
with the new rule would adversely affect its operations.
Pursuant to the Federal Deposit Insurance Corporation Improvement
Act of 1991, each federal banking agency is also required to establish
capital levels for insured depository institutions including "well
capitalized", "adequately capitalized", "undercapitalized" and
"critically undercapitalized". A depository institution's capital
adequacy will be measured on the basis of its total risk-based capital
ratio, Tier 1 risk-based capital ratio and leverage ratio. The degree
of regulatory intervention is tied to the institution's capital
category, with increasing scrutiny and more stringent restrictions
being imposed as the institution's capital declines.
To be considered "well capitalized," an institution must
generally have a total risk-based capital ratio of at least 10%, a
Tier 1 risk-based capital ratio of at least 6% and a leverage capital
ratio of at least 5%. At August 31, 1997, the Bank was considered to
be "well capitalized."
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required under certain federal regulations to
maintain specified levels of "liquid" investments including United
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States Government and federal agency securities and other investments.
Regulations currently in effect require the Bank to maintain liquid
assets of not less than 5% of its net withdrawable accounts plus
short-term borrowings, of which short-term liquid assets must consist
of not less than 1%. The Bank has consistently maintained liquidity
at or above the levels required by the regulations.
The Bank's principal sources of funds are deposits,
amortization and prepayment of outstanding loans, borrowed funds and
proceeds from the sale of loans. During the past several years, the
Bank has used such funds primarily to maintain its required liquidity
levels, meet its ongoing commitments to fund maturing savings
certificates and savings withdrawals, and fund existing and continuing
loan commitments.
At August 31, 1997, the Bank had $5.7 million of undisbursed loan
funds and $57.2 million in approved loan commitments. These
commitments were partially offset by $28.0 million in forward
commitments to sell. In addition, as of August 31, 1997, the Bank had
$134.1 million of approved home equity lines of credit, of which $69.6
million had been drawn by borrowers. The Bank anticipates that it
will have the funds necessary to meet these obligations through the
sources of funds mentioned above. The amount of certificate accounts
which are scheduled to mature by August 31, 1998 is $496.7 million.
Management believes that, by evaluating competitive instruments and
pricing in its market area, it can, in most circumstances, manage and
control maturing deposits so that a substantial amount of such
deposits are redeposited in the Bank.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented
in this report have been prepared in accordance with generally
accepted accounting principles, which typically requires the
measurement of financial position and operating result in terms of
historical dollars without considering changes in the relative
purchasing power of money over time due to inflation.
Virtually all of the assets and liabilities of Maryland Federal
are monetary in nature. As a result, interest rates have a more
significant impact on Maryland Federal's performance than the general
level of inflation. Interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and
services.
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PART II - OTHER INFORMATION:
Item 1 - Legal Proceedings
The Company is not involved in any pending legal proceedings
other than routine, nonmaterial legal proceedings occurring in
the ordinary course of business.
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
The 1997 Annual meeting of Stockholders of Maryland Federal
Bancorp, Inc. was held on June 18, 1997. Present at the
meeting in person or by proxy were 2,799,731 shares or 87.4%
of the Company's 3,204,485 outstanding shares. The
stockholders voted to approve the re-election of two
directors for three year terms by 99.1% of the outstanding
shares, and to ratify the appointment of Stoy, Malone &
Company, P.C. as the Company's independent auditors by 98.9%
of the outstanding shares.
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
Not Applicable
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MARYLAND FEDERAL BANCORP, INC.
Date: October 15, 1997 By:/s/ Robert H. Halleck
---------------------------
Robert H. Halleck, President
and Chief Executive Officer
Date: October 15, 1997 By:/s/ Lynn B. Hounslow
---------------------------
Lynn B. Hounslow, Senior
Vice President, Treasurer,
Chief Financial Officer and
Principal Accounting Officer
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