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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, 1998
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 May 4, 1998, the aggregate value of the 6,149,791 shares of Common Stock
of the Registrant issued and outstanding on such date, which excludes 415,963
shares held by all directors and officers of the Registrant as a group, was
approximately $245,222,916. This figure is based on the closing price of $39.875
per share of the Registrant's Common Stock on May 4, 1998.
Number of shares of Common Stock outstanding as of May 22, 1998: 6,571,961
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, 1998 are incorporated into Part II, Items 5 - 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 1998 Annual Meeting
of Stockholders are incorporated into Part III, Items 10 - 13 of this Form 10-K.
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PART I
Item 1. Business.
GENERAL
Maryland Federal Bancorp, Inc. (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 Bank ("Maryland
Federal" or the "Bank", which changed its name from Maryland Federal Savings and
Loan Association effective September 21, 1997). The Company does not presently
own or operate any subsidiary except for the Bank. Maryland Federal's business
is conducted through 28 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 Bank are located at 3505 Hamilton Street, Hyattsville,
Maryland 20782, and their telephone number is (301) 779-1200.
On February 25, 1998, the Company and BB&T Corporation ("BB&T") announced
that they had executed a definitive Agreement and Plan of Reorganization
("Agreement') pursuant to which the Company will be acquired by BB&T. BB&T is a
$32 billion multi-bank holding company based in Winston-Salem, North Carolina
with banking offices throughout North Carolina, South Carolina and Virginia.
Based upon BB&T's closing stock price of $62.00 on February 24, 1998, the
transaction is valued at $37.05 per share or a total consideration to be paid to
the Company's shareholders of $265.3 million. Under the Agreement, BB&T will
acquire all of the issued and outstanding common stock of the Company in
exchange for no less than .5975 and no greater than .6102 of a share (subject to
possible upward adjustment under certain circumstances) of BB&T's common stock.
Pricing will be based on the average of BB&T's closing prices for a specific
period prior to closing the transaction. The acquisition, which will be
accounted for as a purchase, is expected to be completed during the third
quarter of calendar 1998.
On a consolidated basis, at February 28, 1998, the Company had total assets
of $1.19 billion, total liabilities of $1.09 billion and total stockholders'
equity of $104.5 million or $16.07 per share based on 6,500,824 shares of common
stock outstanding. The Company had net income of $8.8 million for the year ended
February 28, 1998.
The Bank 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 Bank's market area and
in consumer loans. The Bank also maintains a substantial portfolio of
mortgage-backed securities as well as United States Government and
2
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 Bank 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.
LENDING ACTIVITIES
Loan and Mortgage-backed Security Portfolio Composition. Maryland Federal's
net loan and mortgage-backed security portfolio totalled $1.05 billion at
February 28, 1998, representing 87.9% of the Company's $1.19 billion of total
assets at that date. The Bank's total loan portfolio at February 28, 1998
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 Bank
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, 1998, single-family residential loans comprised the largest
group of loans, amounting to $949.6 million or 89.7% of the gross loan and
mortgage-backed securities portfolio. The Bank also had $58.0 million of
mortgage-backed securities, which accounted for 5.5% of the gross loan and
mortgage-backed securities portfolio at such date. Construction loans at such
date amounted to $13.8 million or 1.3% of the gross loan and mortgage-backed
securities portfolio. Commercial real estate loans accounted for
3
substantially all of the remainder of the loan portfolio, amounting to $29.3
million or 2.8% of the gross loan and mortgage-backed securities portfolio at
February 28, 1998.
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"). In addition, the Bank 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 50.7%, 65.7% and 69.5% of total loans originated in fiscal 1996,
1997 and 1998, respectively.
Commercial real estate lending entails significant additional risks as
compared with single-family residential property lending. It is the Bank's
policy to limit its origination of commercial real estate loans.
4
The following table sets forth the composition of the Bank's loan portfolio
by type of loan at the dates indicated.
February 28, February 28, February 29,
1998 1997 1996
-------------------------- ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
Real estate loans:
Permanent loans:
Single-family(1) $ 949,627 89.7% $ 954,750 89.5% $ 947,995 88.8%
Multi-family 2,007 0.2 2,081 0.2 2.472 0.2
Commercial(2) 29,258 2.8 34,833 3.3 41,824 3.9
Land -- -- -- -- -- --
Construction loans:
Single-family 11,641 1.1 6,846 0.6 2,815 0.3
Other property 2,200 0.2 -- -- 2,344 0.2
Mortgage-backed securities 58,027 5.5 64,415 6.0 66,491 6.2
Consumer and other loans 5,389 0.5 4,010 0.4 4,232 0.4
---------- ------ ---------- ------- ---------- --------
Total gross loans and
mortgage-backed
securities receivable 1,058,149 100.00% 1,066,935 100.00% 1,068,173 100.00%
======= ======= =======
Less:
Undisbursed portion of
mortgage loans 5,360 3,240 1,722
Unamortized premiums and
discounts, net 172 653 783
Net deferred loan fees 582 2,356 3,815
Allowance for loan
losses 4,782 4,599 4,474
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Total loans and mortgage-
backed securities
receivable, net $ 1,047,253 $ 1,056,087 $ 1,057,379
=========== ============ ===========
February 28, February 28,
1995 1994
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Amount Percent Amount Percent
(Dollars in Thousands)
Real estate loans:
Permanent loans:
Single-family(1) $ 855,857 86.8% $ 656,833 86.5%
Multi-family 2,662 0.3 2,740 0.4
Commercial(2) 40,731 4.1 36,548 4.8
Land -- -- 1,542 0.2
Construction loans:
Single-family 1,244 0.1 6,485 0.9
Other property 7,315 0.7 7,849 1.0
Mortgage-backed securities 75,804 7.7 44,200 5.8
Consumer and other loans 2,997 0.3 2,788 0.4
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Total gross loans and
mortgage-backed
securities receivable 986,610 100.00% 758,985 100.0%
======= =======
Less:
Undisbursed portion of
mortgage loans 2,728 8,609
Unamortized premiums and
discounts, net 1,010 1,025
Net deferred loan fees 4,284 4,065
Allowance for loan
losses 4,424 4,187
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Total loans and mortgage
backed securities
receivable, net $ 974,164 $ 741,099
========== ============
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(1) Includes $120.8 million, $96.1 million, $69.7 million, $51.9 million and
$40.9 million of second-mortgage loans and home equity lines of credit at
each of the respective dates.
(2) Includes $14.1 million, $14.0 million, $13.6 million, $12.5 million and
$10.8 million of single-family, non-owner occupied rental properties at
each of the respective dates.
5
Contractual Maturities of Loans. The following table sets forth the
scheduled contractual maturities of the Bank's loans and mortgage-backed
securities at February 28, 1998. 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 Bank's loan portfolio.
Amounts Due
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After One Year
Balance at In One Year through Five After Five
February 28, 1998 Or Less Years Years
----------------- ----------- --------------- -----------
(In Thousands)
Real estate loans(1)(2):
Fixed-rate $ 393,142 $ 8,438 $ 40,071 $ 344,633
Adjustable-rate 648,800 4,997 5,263 638,540
Consumer and other loans 5,311 173 4,889 249
---------- ---------- ---------- ----------
Total loans and mortgage-
backed securities, net(3)(4) $1,047,253 $ 13,608 $ 50,223 $ 983,422
========== ========== ========== ==========
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(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 $8.5 million at
February 28, 1998, $5.0 million of which are scheduled to convert to
permanent loans in fiscal 1999.
(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, 1999, $389.8 million
have fixed rates of interest and $643.8 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 Bank'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 Bank 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
6
and, conversely, decrease when current market rates on mortgage loans decline
below rates on existing mortgage loans.
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 Bank has general authority to originate and purchase
loans secured by real estate located throughout the United States. However, in
accordance with the Bank's conservative lending practices, all of the Bank'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 Bank 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 Bank sold $54.5 million, $78.6
million and $79.5 million of such loans during fiscal 1996, 1997 and 1998,
respectively, exclusive of loans exchanged for mortgage-backed securities. The
Bank was servicing approximately $57.1 million of loans for others at February
28, 1998. As of February 28, 1998, the Bank had commitments to sell loans
totalling approximately $37.1 million.
The Bank 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 Bank 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 Bank, are secured by
properties located in the Washington, D.C., Maryland and Virginia metropolitan
areas. Whole loan purchases amounted to $1.0 million during fiscal 1996. No such
purchases were made during fiscal 1997 and 1998. During fiscal 1996, 1997 and
1998, the Bank also purchased $-0-, $9.9 million and $10.4 million,
respectively, of mortgage-backed securities. The purchase of mortgage-backed
securities is intended to supplement the Bank's investment in loans receivable.
7
The following table sets forth the Bank's loan and mortgage-backed security
originations, purchases, sales and principal repayments during the periods
indicated.
Year Ended
---------------------------------------------
February 28, February 28, February 29,
1998 1997 1996
------------ ------------ ------------
(In Thousands)
Gross loans and mortgage-backed
securities at beginning of period $ 1,066,935 $ 1,068,173 $ 986,610
------------ ------------ ------------
Loans originated:
Real estate loans:
Permanent loans:
Single-family (adjustable-rate) 153,075 118,693 103,341
Single-family (fixed-rate) 73,424 65,615 109,825
Commercial 695 -- 5,435
Construction loans 9,516 5,100 941
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Total real estate loans originated 236,710 189,408 219,542
Consumer and other loans 3,867 1,759 3,331
------------ ------------ ------------
Total loans originated 240,577 191,167 222,873
------------ ------------ ------------
Loans and mortgage-backed securities purchased:
Whole loans -- -- 1,006
FHLMC participation certificates -- 1,980 --
GNMA participation certificates 10,426 7,945 --
------------ ------------ ------------
Total loans and mortgage-backed
securities purchased 10,426 9,925 1,006
------------ ------------ ------------
Total loans and mortgage-backed
securities originated and
purchased 251,003 201,092 223,879
------------ ------------ ------------
Loans transferred to foreclosed real estate 2,374 1,229 281
Loans sold 79,494 78,615 54,521
Loans repaid 177,921 122,486 87,514
------------ ------------ ------------
Total loans transferred to foreclosed
real estate, sold and repaid 259,789 202,330 142,316
------------ ------------ ------------
Net loan activity (8,786) (1,238) 81,563
------------ ------------ ------------
Gross loans and mortgage-backed
securities at the end of period 1,058,149 1,066,935 1,068,173
Less:
Undisbursed portion of mortgage loans 5,360 3,240 1,722
Unamortized premiums and discounts, net 172 653 783
Net deferred loan fees 582 2,356 3,815
Allowance for loan losses 4,782 4,599 4,474
------------ ------------ ------------
Net loans and mortgage-backed securities
at the end of period $ 1,047,253 $ 1,056,087 $ 1,057,379
============ ============ ============
8
Loan Underwriting Policies. The Board of Directors has authorized the Loan
Committee of the Bank (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 Bank 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 $227,150 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
Bank's Board of Directors, the lending decision is made in accordance with the
underwriting guidelines of the Bank.
It is the Bank's policy to obtain a title insurance policy insuring that the
Bank 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 Bank 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 Bank 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 Bank's lending policy requires private
mortgage insurance when the loan-to-value ratio exceeds 80%. The Bank 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 Bank estimates that approximately 16.2% of its
gross loan portfolio at February 28, 1998 is covered by private mortgage
insurance. The Bank 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.
9
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 Bank could have made to any one borrower, including
related entities, was, with certain exceptions, limited to the lesser of 10% of
the Bank's net withdrawable deposits or 100% of its regulatory capital. The Bank
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
10
institutions. The national bank standard generally does not permit loans-to-one
borrower to exceed 15% of the Bank's unimpaired capital and surplus. Loans 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 Bank could have loaned to one borrower and the borrower's
related entities at February 28, 1998 was approximately $15.5 million. At such
date, the largest aggregate amount of loans by the Bank to any one borrower,
including related entities, consisted of $4.7 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 Bank offers ARMs when market conditions
and certain competitive market pressures in the Bank's primary market area have
permitted and continues to emphasize their origination rather than that of
long-term, fixed-rate loans. The origination of ARMs represented 48.5%, 64.4%
and 67.6% of the Bank's total originations of conventional single-family
residential mortgages in fiscal 1996, 1997 and 1998, respectively. ARMs
(including mortgage-backed securities) accounted for approximately $648.8
million or 62.0% of the Bank's net loan portfolio (including mortgage-backed
securities) at February 28, 1998.
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 Bank will usually
sell such loan into the secondary market. The Bank does not offer ARMs with
negative amortization. Since fiscal 1992, the Bank 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 Bank 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 Bank's cost of funds.
11
Fixed-rate residential mortgage loans currently originated generally have
30-year terms, although some have 15-year terms with commensurately lower
interest rates. The Bank estimates that its residential mortgage loans generally
remain outstanding for an average of approximately four years. At February 28,
1998 approximately $393.1 million or 37.5% of the Bank's net loan portfolio
consisted of long-term, fixed-rate residential mortgage loans (including
mortgage-backed securities).
The Bank 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 Bank 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 Bank 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, 1998, $39.5
million or 3.7% of the Bank's gross loan and mortgage-backed securities
portfolio consisted of second mortgage loans, compared to $44.4 million or 4.2%
at February 28, 1997. At February 28, 1998, $81.3 million or 7.7% of the Bank's
gross loan and mortgage-backed securities portfolio consisted of home equity
loans compared to $51.7 million or 4.8% at February 28, 1997.
Construction Lending. The Bank 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 Bank's inspector. Most construction loans are
floating-rate balloon loans. Construction loans are usually made only when the
Bank will provide the permanent financing. In all cases, there must be permanent
financing before the loan is originated. The Bank 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, 1998, $13.8
million or 1.3% of Maryland Federal's gross loan and mortgage-backed securities
portfolio consisted of construction loans, approximately 85% of which
represented loans on one- to four-family residential properties. The remaining
15% represented a loan on office condominiums.
12
The Bank continues to offer construction loans because of the short terms
and higher interest rates associated with such loans. During fiscal 1998, the
Bank's origination of construction loans amounted to $9.5 million, as compared
to $5.1 million during fiscal 1997 and $900,000 during fiscal 1996. At February
28, 1998, the Bank's construction loans varied in size from $100,000 to $3.7
million. The Bank's construction loans have been for the construction of small
shopping centers, office buildings and small residential subdivisions in the
Bank's market area. As of February 28, 1998, the Bank's construction loan
portfolio was comprised of 12 loans to nine borrowers in the aggregate amount of
$13.8 million, of which the Bank had undisbursed funds of $5.4 million. As of
February 28, 1998, the largest loan consisted of a $3.7 million loan for the
construction of residential townhouses located in Prince George's County,
Maryland. The Bank may make additional loans to such borrowers in the future.
The underwriting criteria used by the Bank are designed to evaluate and
minimize the risks of each construction loan. Among other things, the Bank
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, 1998, the Bank had $29.3
million or 2.8% of its gross loan and mortgage-backed securities portfolio
invested in commercial real estate loans, substantially all of which are
short-term loans. The Bank 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 Bank 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.
13
There were no originations of commercial real estate loans during fiscal
1997 compared to $695,000 during fiscal 1998 and $5.4 million during fiscal
1996. As of February 28, 1998, the Bank's largest commercial real estate loan
consisted of a $3.3 million loan secured by a recreational vehicle park located
in Beltsville, Maryland. It is the present intention of management that all such
loans will be secured by properties in the Bank's market area and that
commercial real estate loans will not exceed 10% of the total loan portfolio.
Although FIRREA reduced the limit on loans to any one borrower to an amount
generally equal to 15% of the Bank's unimpaired capital and surplus, subject to
certain limited exceptions, which limit was approximately $15.5 million at
February 28, 1998, the Bank 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 Bank's capital
(subject to certain exceptions), which limit was $414.3 million at February 28,
1998. 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
Bank 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 Bank's assets, provided that any amounts in excess of 10% of
the Bank'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 Bank may use any or all of the 35% consumer category described
below for inventory and floor plan financing. As of February 28, 1998, the Bank
did not have any commercial business loans outstanding. However, the Bank may
consider 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, 1998,
consumer loans accounted for $5.4 million or 0.5% of the Bank's gross loan and
mortgage-backed securities portfolio.
14
In past years, the Bank 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 Bank maintain a
profitable spread between its average loan yield and its cost of funds. The Bank
currently offers automobile loans, overdraft lines of credit, loans secured by
savings accounts and unsecured personal loans. Consumer loan originations during
fiscal years 1996, 1997 and 1998 were $3.3 million, $1.8 million and $3.9
million, respectively, of which automobile loan originations amounted to $1.5
million, $1.3 million and $2.5 million, respectively, during such periods.
Automobile 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 $3.5 million at February 28, 1998.
The weighted average interest rate on automobile loans was 7.74% at February 28,
1998.
During fiscal 1995, the Bank began originating unsecured personal loans in
amounts up to $10,000. At February 28, 1998, unsecured personal loans amounted
to $1.1 million. During fiscal 1997, the Bank reintroduced secured savings
loans. At February 28, 1998, secured savings loans amounted to $516,000.
Consumer lending 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 Bank 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 1998, 1997 and 1996 amounted to approximately $111,000,
$131,000 and $25,000, respectively.
Loan Fees and Service Charges. In addition to interest earned on loans, the
Bank 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.
15
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 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 Bank attempts to cure the default by
contacting the borrower. In general, contacts with borrowers are made by the
Bank 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 Bank's normal collection procedures, or
an acceptable arrangement is not worked out with the borrower, the Bank 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 Bank may participate as a bidder. If the Bank is the successful
bidder, the acquired real estate property is then included in the Bank'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 Bank 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 Bank's underwriting guidelines. As of
February 28, 1998, the Bank's participation in loans to facilitate the purchase
of foreclosed real estate amounted to $23,000.
16
The following table sets forth information regarding non-accrual loans,
loans which are 90 days or more delinquent but on which the Bank was accruing
interest and foreclosed real estate at the dates indicated. The Bank 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 28, February 29, February 28, February 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
Total non-performing loans:(1)
Non-accrual loans $5,814 $2,990 $ --- $ 20 $2,748
Accruing loans which are 90
days or more overdue 757 1,640 3,386 1,536 3,155
------------ ------------ ------------ ------------ ------------
Total non-performing loans $6,571 $4,630 $3,386 $1,556 $5,903
============ ============ ============ ============ ============
Total non-performing loans to
total loans receivable-net 0.7% 0.5% 0.3% 0.2% 0.8%
============ ============ ============ ============ ============
Total foreclosed real estate $1,281 $1,299 $2,090 $2,695 $3,210
============ ============ ============ ============ ============
Total non-performing loans and
foreclosed real estate to
total assets 0.7% 0.5% 0.5% 0.4% 1.04%
============ ============ ============ ============ ============
- ----------
(1) Consists of residential, commercial real estate loans and consumer loans.
The $6.6 million of non-accrual loans and accruing loans which were 90 days
or more overdue at February 28, 1998 consisted of 53 first mortgage and 14
consumer loans with average principal balances of approximately $124,000 and
$2,000, respectively. It is believed that these delinquencies are reflective of
current economic conditions. The $1.3 million of foreclosed real estate at
February 28, 1998 consisted primarily of a condominium/office complex located in
Hyattsville, Maryland and an industrial park located in Forestville, Maryland,
which had carrying values of $536,000 and $186,000, respectively. At February
28, 1998, the Bank also held four single-family residential properties with an
aggregate carrying value of approximately $559,000. 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
$397,000, $224,000, and $-0- for fiscal 1998, 1997 and 1996, respectively. The
amount of interest income that was recorded on these loans was $294,000, $52,000
and $-0- for fiscal 1998, 1997 and 1996, 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 Bank - Classification of Assets."
As of February 28, 1998, the Bank had approximately $10.2 million of classified
assets, which includes $7.9 million of the non-performing assets shown in the
table above. Of this total,
17
approximately $10.1 million was classified as substandard and $88,000 was
classified as doubtful.
Allowance for Loan Losses. During fiscal 1998, the Bank made provisions for
loan losses of $310,000 in recognition of the general risks of credit loss in
the portfolio and the general economic conditions in the Bank's market area.
During fiscal 1996 and 1997, the Bank made provisions for losses on loans of
$120,000 and $275,000, respectively. During fiscal 1996, 1997 and 1998, the Bank
made net charges to the allowance for loan losses of $70,000, $150,000 and
$127,000, respectively. During fiscal 1996, 1997 and 1998, 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 Bank 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."
18
The following table presents information concerning the Bank's allowance for
loan losses, charge-offs and recoveries during the periods indicated.
Year Ended
-----------------------------------------------------------------------------------------
February 28, February 28, February 29, February 28, February 28,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
Balance, beginning of period $4,599 $4,474 $4,424 $4,187 $4,267
------------ ------------ ------------ ------------ ------------
Provision:
Real estate-residential -- (50) 50 300 662
Consumer loans 310 325 70 -- ---
------------ ------------ ------------ ------------ ------------
Total provision 310 275 120 300 662
------------ ------------ ------------ ------------ ------------
Transfer to allowance for losses on
foreclosed real estate --- --- --- 50 739
------------ ------------ ------------ ------------ ------------
Charge-offs, net:
Real estate-residential 16 19 45 9 ---
Consumer loans 111 131 25 4 3
------------ ------------ ------------ ------------ ------------
Total charge-offs, net 127 150 70 13 3
------------ ------------ ------------ ------------ ------------
Balance, end of period $4,782 $4,599 $4,474 $4,424 $4,187
============ ============ ============ ============ ============
Ratio of charge-offs, net to
average loans and
mortgage-backed securities
outstanding 0.012% 0.014% 0.007% 0.001% ---%
============ ============ ============ ============ ============
The Bank also maintains an allowance for losses on foreclosed real estate.
At February 28, 1998, the Bank's allowance for losses on foreclosed real estate
amounted to $1.4 million. For additional information, see Notes 5 and 6 of the
Notes to Consolidated Financial Statements.
19
The following table sets forth the amount of the Bank'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.
February 28, 1998 February 28, 1997 February 29, 1996 February 28, 1995
---------------------- ----------------------- --------------------- ---------------------
Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
-------- ----------- ----------- ------------ -------- ----------- -------- -----------
(Dollars in Thousands)
Real estate loans(1) $4,153 99.5% $4,169 99.6% $4,238 99.6% $4,233 99.7%
Consumer and other loans 629 0.5 430 0.4 236 0.4 191 0.3
------ ----- ------ ----- ------ ----- ------ -----
Total $4,782 100.0% $4,599 100.0% $4,474 100.0% $4,424 100.0%
====== ===== ====== ===== ====== ===== ====== =====
February 28, 1994
------------------------
Percent of
Loans to
Amount Total Loans
--------- -------------
(Dollars in Thousands)
Real estate loans(1) $3,991 99.6%
Consumer and other loans 196 0.4
------ -----
Total 4,187 100.0%
====== =====
- ----------
(1) Includes residential and commercial real estate loans and construction
loans.
20
INVESTMENT ACTIVITIES
The Bank 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 Bank - 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 Bank'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 28, February 29,
1998 1997 1996
-------------------- -------------------- ------------------
(In thousands)
United States Government and
agency obligations $ 20,473 $9,974 $ 7,997
State and County Government
obligations 1,473 1,474 1,476
Equity securities 19,556 5,225 8,577
Interest-bearing deposits 51,213 8,381 15,711
Federal funds sold 8,625 15,406 5,058
Securities purchased under
agreements to resell 5,405 2,259 11,034
Federal Home Loan Bank stock 12,484 11,364 12,514
-------- -------- --------
Total $119,229 $ 54,083 $62,367
======== ======== ========
As of February 28, 1998, no investment securities of any single issuer were
held by the Bank where the aggregate carrying value of such securities exceeded
10% of the Company's stockholders' equity, other than United States Government
and agency obligations, interest-bearing deposits with the Federal Home Loan
Bank, Federal Home Loan Bank stock and an asset management fund portfolio
invested in adjustable rate mortgages.
21
The following table sets forth at February 28, 1998 the amount of each
category of the Bank'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, 1998 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 $ 7,483 5.25% $12,990 6.15% $ -- --% $ -- --%
State and County
Government obligations -- -- 1,473 4.50 -- -- -- --
Equity securities 19,556 4.21 -- -- -- -- -- --
Interest-bearing deposits 51,213 5.56 -- -- -- -- -- --
Federal funds sold 8,625 5.62 -- -- -- -- -- --
Securities purchased under
agreements to resell 5,405 5.35 -- -- -- -- -- --
Federal Home Loan
Bank stock -- -- -- -- -- -- 12,484 7.25
-------- -------- ------ --------
Total $92,282 5.24 $14,463 5.98 $ -- -- $ 12,484 7.25
======== ======== ====== ========
22
SOURCES OF FUNDS
General. Deposits are the primary source of the Bank's funds for use in
lending and for other general business purposes. In addition to deposits, the
Bank derives funds from loan amortizations and prepayments, advances from the
FHLB of Atlanta and, to a lesser extent, sales of loans. It is the Bank'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 Bank's borrowings
have primarily consisted of advances from the FHLB of Atlanta. See "Borrowings."
Deposits. Due to regulatory and economic conditions, the Bank has
increasingly relied upon deregulated fixed-rate certificate accounts and other
authorized types of deposits. The Bank 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
Bank 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, 1998, Maryland Federal operated 27 automated teller machines
("ATMs") in addition to participating in the HONOR(R)/MOST(R) ATM network.
The Bank 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 Bank's
primary market area. The Bank also offers jumbo certificates of deposit in
denominations of $100,000 or more. The Bank'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.
23
The following table shows the distribution of, and certain other information
relating to, the Bank's deposits by type of deposit at the dates indicated.
February 28, February 28, February 29,
1998 1997 1996
----------------------------- --------------------------- ---------------------------
Amount Percent Amount Percent Amount Percent
------------ ------------ ------------ ---------- ------------- ---------
(Dollars in Thousands)
Regular savings accounts $70,870 8.5% $74,488 9.4% $76,514 9.7%
Checking accounts 63,366 7.6 53,937 6.8 44,497 5.6
MMDAs 40,495 4.9 42,385 5.4 45,315 5.7
Fixed-rate certificates 296,247 35.6 307,303 39.0 274,266 34.9
Money market certificates:
91 day 5,042 0.6 6,469 0.8 6,632 0.8
6 month 23,973 2.9 20,895 2.7 23,171 2.9
12 month 152,334 18.3 113,871 14.4 146,177 18.5
Variable-rate certificates 14,626 1.8 15,869 2.0 21,166 2.7
Jumbo certificates 95,384 11.5 88,620 11.2 116,313 14.7
Mini-jumbo certificates 44,718 5.4 36,043 4.6 12,284 1.6
IRA certificates 24,535 2.9 29,053 3.7 22,596 2.9
------------ ------------ ------------ ---------- ------------- ---------
Total $831,590 100.0% $788,933 100.0% $788,931 100.0%
============ ============ ============ ========== ============= =========
24
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 28, February 29,
1998 1997 1996
----------------------- ---------------------- ---------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Regular savings
accounts $72,753 3.21% $ 75,417 3.22% $80,731 3.33%
Checking accounts 54,215 1.39 48,156 1.52 42,158 1.80
MMDAs 41,279 3.14 42,904 3.04 45,915 3.03
Fixed-rate certificates 294,561 5.59 308,184 5.57 243,810 5.81
Money market
certificates:
91 day 7,253 4.66 6,764 4.75 5,370 4.39
6 month 27,204 4.91 23,922 5.03 21,439 4.70
12 month 142,325 5.39 122,119 5.44 166,130 5.88
18 month -- -- --- --- 4 3.50
Variable-rate
certificates 15,027 5.12 17,034 5.12 27,019 5.24
Jumbo certificates 92,225 5.66 92,367 5.75 110,989 6.04
Mini-jumbo certificates 40,094 5.58 23,643 5.50 8,823 5.28
IRA certificates 26,949 5.44 26,619 5.74 21,308 6.10
--------- -------- --------
Total $813,885 4.90 $787,129 4.93 $773,696 5.16
========= ======== ========
The large variety of deposit accounts offered by the Bank has increased the
Bank'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 Bank 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 Bank to attract and
retain deposits and the Bank's cost of funds have been, and will continue to be,
significantly affected by money market conditions.
The Bank controls the flow of deposits by having the senior officers of the
Bank meet frequently to determine the interest rates which the Bank will offer
to the general public. Such officers consider the amount of funds needed by the
Bank on both a short and
25
long-term basis, the rates being offered by the Bank's 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 Bank during the
periods indicated.
Year Ended
-----------------------------------------------------------
February 28, February 28, February 29,
1998 1997 1996
------------ ------------ ------------
(In thousands)
Increase (decrease)
before interest credited $17,117 $ (25,102) $ (337)
Interest credited 25,540 25,104 25,514
------------ ------------ ------------
Net deposit increase $42,657 $ 2 $25,177
============ ============ ============
The following table sets forth the amount of certificates of deposit in the
amount of $100,000 or more at February 28, 1998 which mature during each of the
periods indicated.
Amounts at February 28, 1998 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 $51,369 $36,461 $40,588 $25,354
======== ============ ==========
26
The following table presents certain information concerning Maryland
Federal's deposits at February 28, 1998 and the scheduled quarterly maturities
of its certificates of deposit.
Weighted
Average
Percentage of Nominal
Amount Total Deposits Rate
------------ ----------------- ------------
(Dollars in Thousands)
Regular savings accounts $70,870 8.52% 3.21%
Checking accounts 63,366 7.62 1.31
MMDAs 40,495 4.87 3.15
-------- -------
Total 174,731 21.01 2.51
-------- -------
Certificate accounts maturing
by quarter:
May 31, 1998 171,271 20.60 5.19
August 31, 1998 155,428 18.69 5.72
November 30, 1998 109,619 13.18 5.67
February 28, 1999 82,250 9.89 5.63
May 31, 1999 27,344 3.29 5.76
August 31, 1999 33,681 4.05 5.80
November 30, 1999 10,777 1.30 5.79
February 29, 2000 11,540 1.39 5.77
May 31, 2000 14,329 1.72 5.76
August 31, 2000 9,511 1.14 5.74
November 30, 2000 4,162 0.50 5.72
February 28, 2001 3,108 0.37 5.70
Thereafter 23,839 2.87 5.88
-------- -------
Total certificate accounts 656,859 78.99 5.57
-------- -------
Total deposits $831,590 100.00% 4.93
======== ========
27
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, 1998 which mature during the periods
indicated.
Amounts at February 28, 1998 Maturing in the Year
Balance at Ending
-------------------------- -----------------------------------------------------------
February 28, February 28, February 28, February 29, February 28,
Interest Rate: 1998 1997 1999 2000 2001 Thereafter
- -------------- ------------ ------------ ------------ ------------ ------------ ----------
(In Thousands)
4.00% or less $ 1,306 $ 2,711 $ 1,205 $ 101 $ -- $ --
4.01% to 6.00% 529,198 527,148 426,545 59,219 25,928 17,506
6.01% to 8.00% 125,911 86,964 90,650 23,771 5,157 6,333
8.01% to 10.00% 440 1,292 164 251 25 --
10.01% to 12.00% 4 8 4 -- -- --
-------- -------- -------- -------- --------- ---------
Total $656,859 $618,123 $518,568 $ 83,342 $ 31,110 $ 23,839
======== ======== ======== ======== ========= =========
The Bank 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 Bank currently meets all of its capital
requirements and is not subject to this prohibition.
Borrowings. The Bank 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
Bank - Federal Home Loan Bank System." At February 28, 1998, advances mature as
follows:
Weighted
Average
Fiscal Year Amount Rate
- ------------------ ---------------- -------------
(Dollars in Thousands)
1999 $118,000 5.92%
2000 50,000 6.02
2001 14,000 5.98
2003 8,680 5.75
After 2003 46,000 5.01
---------
Total $236,680 5.76
=========
28
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 Bank'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 Bank at the dates indicated.
February 28, 1998 February 28, 1997 February 29, 1996
-------------------- -------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Balance Rate Balance Rate Balance Rate
------- -------- ------- -------- ------- --------
(Dollars in Thousands)
Advances from FHLB $236,680 5.76% $226,280 5.91% $243,780 5.88%
The following table sets forth certain information concerning the borrowings
of the Bank for the periods indicated, which is based on daily average balances.
Year Ended
-------------------------------------------------
February 28, February 28, February 29,
1998 1997 1996
------------ ------------ ------------
(Dollars in Thousands)
Advances from FHLB:
Average balance outstanding $233,395 $228,479 $213,176
Maximum amount outstanding at
any month-end during the period $246,930 $237,780 $251,030
Weighted average interest rate
during the period 5.90% 5.86% 6.08%
Total short-term borrowings at
end of period $118,000 $136,100 $127,750
SUBSIDIARIES
OTS regulations permit the Bank 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
29
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
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 Bank 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, 1998, the Bank was authorized to have a maximum investment
of approximately $24 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 Bank 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 Bank'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. The labor
market is tighter now than it has been in many years.
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 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.
30
EMPLOYEES
At February 28, 1998, the Company had unpaid executive officers, all of whom
serve in the same capacity with the Bank. At February 28, 1998, the Bank and its
subsidiary had 269 full-time employees, including its executive officers, as
well as 31 part-time employees. None of these employees are represented by a
collective bargaining agent, and the Bank 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 Bank. 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 Bank 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
Bank - Qualified Thrift Lender Test."
31
If the Company were to acquire control of another savings association, other
than through merger or other business combination with the Bank, the Company
would 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 Bank 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.
32
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
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, 1998 the Bank had 15 loans with an
aggregate balance of approximately $2.1 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
33
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.
Regulation of the Bank
General. The Bank 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 Bank is subject to broad federal
regulation and oversight by the OTS and the FDIC extending to all aspects of its
operations. The Bank 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 savings associations'
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 Bank 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
34
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 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 Bank'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 Bank'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
35
points. The Bank's insurance premiums, which had amounted to 23 basis points,
were thus reduced to 6.4 basis points effective January 1, 1997.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, 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 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 Bank'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, 1998, the Bank had no qualifying supervisory goodwill
36
or purchased mortgage servicing rights. In addition, as of such date, the Bank
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
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.
37
The following table sets forth certain information concerning Maryland
Federal's regulatory capital at February 28, 1998.
Tangible Core Risk-Based
Capital Capital Capital
--------- ----------- ----------
(Dollars in Thousands)
Capital under GAAP $103,587 $103,587 $103,587
Additional capital items:
Qualifying general loan loss
allowance -- -- 4,782
Other (5,918) (5,918) (5,917)
--------- ----------- ----------
Total regulatory capital 97,669 97,669 102,452
Minimum required capital 17,777 35,554 49,595
--------- ----------- ----------
Excess regulatory capital $ 79,892 $ 62,115 $ 52,857
========= =========== ==========
Regulatory capital as a
percentage(1) 8.24% 8.24% 16.53%
Minimum capital required as a
percentage (1) 1.50% 3.00% 8.00%
--------- ----------- ----------
Regulatory capital as a percentage
in excess of requirement 6.74% 5.24% 8.53%
========= =========== ==========
- ----------
(1) Tangible capital and core capital are computed as a percentage of adjusted
total assets of $1.19 billion. Risk-based capital is computed as a
percentage of adjusted risk-weighted assets of $619.9 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
38
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 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, 1998, the Bank 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
39
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 4%. The
Bank 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, 1998 the amount of the Bank's assets
which were invested in QTIs was 93.45%, which exceeded the percentage required
to qualify the Bank 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,
40
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 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 Bank from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
(or total) capital of the Bank would be reduced below the amount required to be
maintained for the liquidation account
41
established by it for certain depositors in connection with its conversion from
mutual to stock form in June 1987.
On January 7, 1998, the OTS published a notice of proposed rulemaking to
amend its capital distribution regulation. Under the proposal, a savings
institution that would remain at least "adequately capitalized" following the
capital distribution and that meets other specified requirements, would not be
required to provide any notice or application to the OTS for cash dividends
below a specified amount. A savings institution is "adequately capitalized" if
it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based
capital ratio of 4.0% or more, a Tier 1 leverage capital ratio of 4.0% or more
(or 3% or more if the savings institution is assigned a composite rating of 1),
and does not meet the definition of "well capitalized." Because the Bank is a
subsidiary of the Company, the proposal, however, would require the Bank to
provide notice to the OTS of its intent to make a capital distribution, unless
an application is otherwise required. The Bank 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 Bank 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, 1998, the Bank's advances from the FHLB of Atlanta amounted to $236.7
million.
As a member, the Bank 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, 1998, the Bank
had $12.5 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- 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, 1998,
dividends paid by the FHLB of Atlanta to the Bank totalled $847,000.
Interstate Branching. OTS policy permits interstate branching to the full
extent permitted by statute (which is essentially unlimited). Generally, federal
law prohibits federal
42
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, 1998, the Bank 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 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.
43
FEDERAL AND STATE TAXATION
General. The Company and the Bank 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 Bank.
Fiscal Year. The Company and the Bank 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 Company and the Bank maintain their 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
Company and the Bank maintain their books and records for financial reporting
purposes using the accrual method of accounting and have 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 Bank, 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 Bank's deduction with
respect to "qualifying loans," which are generally loans secured by certain
interests in real property, could be computed using an amount based on a
six-year moving average of the Bank's actual loss experience (the "Experience
Method"), or a percentage equal to 8.0% of the Bank'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.
44
Under the Small Business Act, the PTI Method was repealed and the Bank will
be required to use the Specific Charge-off Method of computing additions to its
bad debt reserve for taxable years beginning with the Bank's taxable year
beginning March 1, 1996. In addition, the Bank will be required to recapture
(i.e., take into taxable income) over a six-year period, beginning with the
Bank'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 Bank 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 Bank during
its six taxable years preceding March 1, 1996. The Bank has previously provided
for deferred taxes on the amount to be recaptured; therefore, the Small Business
Act will not further affect the Bank's net income.
The Bank 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 Bank amounted to approximately $11,000,000 with an
income tax effect of approximately $4,200,000 at February 28, 1998. This bad
debt reserve will become taxable for income tax purposes if the Bank does not
maintain certain qualified assets as defined or the reserve is charged for other
than bad debt losses.
Distributions. If the Bank 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 Bank 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.
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
45
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, 1994 have been closed for the purpose of
examination by the IRS.
Maryland Taxes. The Bank 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 Bank, net earnings are generally defined as net income of the
Bank 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.
46
Item 2. Properties.
The following table presents property owned and leased by the Bank at
February 28, 1998.
Net Book
Value of
Property or
Owned Lease Leasehold
or Expiration Improvements at
Leased Date February 28, 1998
-------- ----------- -----------------
Location:
Main Office:
3505 Hamilton Street Owned -- $258,652
Hyattsville, MD 20782
Branch and Loan Production
Offices:
4283 Branch Avenue, Leased 7/31/02 62,780
Marlow Heights
7934 Wisconsin Avenue, Owned -- 115,822
Bethesda
211 East Charles Street, Owned -- 575,369
LaPlata
10666 Campus Way South, Leased 7/31/98 --
Upper Marlboro
8951 Edmonston Road, Leased 1/31/99 6,967
Greenbelt
6309 Allentown Road, Leased 3/31/03 1,496
Camp Springs
8490 Annapolis Road, Leased 5/4/99 7,894
New Carrollton
47
Net Book
Value of
Property or
Owned Lease Leasehold
or Expiration Improvements at
Leased Date February 28, 1998
-------- ----------- -----------------
7130 Minstrel Way, Suite 220 Leased 4/30/01 ---
Columbia
571 N. Solomons Island Road Leased 3/31/99 $15,186
Prince Frederick
3033 Solomons Island Road Owned --- 258,340
Edgewater
1400 Mercantile Lane, Suite 120 Leased 9/30/99 ---
Landover
6 Montgomery Village Avenue, Leased 8/31/98 276
Suite 340
Gaithersburg
6816 Race Track Road, Leased 8/31/02 7,389
Bowie
15421 New Hampshire Avenue, Leased 1/31/02 5,600
Cloverly
11200 Viers Mill Road, Leased 11/30/01 9,327
Wheaton
3425 Leonardtown Road, Owned --- 368,386
Waldorf
16575 South Frederick Avenue, Leased 6/30/00 18,910
Gaithersburg
10414 Auto Park Drive, Leased 7/31/98 1,241
West Bethesda
48
Net Book
Value of
Property or
Owned Lease Leasehold
or Expiration Improvements at
Leased Date February 28, 1998
-------- ----------- -----------------
13600 Laurel - Bowie Road, Leased 8/31/01 $ 9,836
Laurel
6901 Laurel-Bowie Road, Owned --- 324,325
Bowie
11428 Cherry Hill Road, Leased 7/31/98 3,973
Cherry Hill
5801 Deale-Churchton Road, Leased 8/14/02 11,533
Deale
1419 Forest Drive Leased 12/31/01 63,824
Annapolis
1470 Rockville Pike Owned --- 553,467
Rockville
2001 Davidsonville Road Owned --- 270,946
Crofton
9546 Livingston Road, Leased 12/31/98 10,331
Fort Washington
11110 Mall Circle Leased 1/31/05 29,340
St. Charles
11140 New Hampshire Avenue Leased 12/31/02 --
Silver Spring
13621 Georgia Avenue Leased 12/31/04 8,848
Silver Spring
7945 MacArthur Blvd. Leased 4/31/02 4,030
Cabin John
49
Net Book
Value of
Property or
Owned Lease Leasehold
or Expiration Improvements at
Leased Date February 28, 1998
-------- ----------- -----------------
Administrative Offices: Leased 10/31/98 $ 24,718
9200 Edmonston Road
Greenbelt
3321 Toledo Terrace #203 & 204 Owned -- 211,154
Toledo Terrace
Item 3. Legal Proceedings.
The Company and the Bank are 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 1998 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 six
to 13 of the Company's Annual Report.
50
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required herein is incorporated by reference from pages 11
and 13 of the Company's Annual Report.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from pages two
and 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-Prospectus.
The information required herein is incorporated by reference from the
definitive proxy statement-prospectus of the Company to be filed with the SEC
within 120 days from the Company's fiscal year end ("Definitive Proxy
Statement-Prospectus").
Item 11. Executive Compensation.
The information required herein is incorporated by reference from the
Definitive Proxy Statement-Prospectus.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference from the
Definitive Proxy Statement-Prospectus.
Item 13. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference from the
Definitive Proxy Statement-Prospectus.
51
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, 1998 and
February 28, 1997
Consolidated Statements of Income for the Years Ended February 28, 1998,
February 28, 1997 and February 29, 1996
Consolidated Statements of Stockholders' Equity for the Years Ended February
28, 1998 February 28, 1997 and February 29, 1996
Consolidated Statements of Cash Flows for the Years Ended February 28, 1998,
February 28, 1997 and February 29, 1996
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.
52
(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 1998 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.
53
***** 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.
******** Incorporated by reference to the Annual Report on Form 10-K for the
fiscal year ended February 28, 1997 filed by the Company with the SEC
on May 29, 1997.
(b) The Company did not file any Current Reports on Form 8-K during the
fiscal quarter ended February 28, 1998.
(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.
54
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 28, 1998 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 28, 1998
- ----------------------------------
Richard B. Bland, Chairman of
the Board
/s/ Robert H. Halleck May 28, 1998
- ----------------------------------
Robert H. Halleck, Director,
President and Chief Executive
Officer (principal executive
officer)
/s/ Lynn B. Hounslow May 28, 1998
- ----------------------------------
Lynn B. Hounslow Senior Vice President, Treasurer
and Chief Financial Officer
(principal financial officer and
principal accounting officer)
/s/ A. William Blake, Jr. May 28, 1998
- ----------------------------------
A. William Blake, Jr., Director
and Executive Vice President
55
/s/ Willie L. Harkless, Sr. May 28, 1998
- ----------------------------------
Willie L. Harkless, Sr., Director
/s/ Richard R. Mace May 28, 1998
- ----------------------------------
Richard R. Mace, Director
/s/ David A. McNamee May 28, 1998
- ----------------------------------
David A. McNamee, Director
/s/ Thomas H. Welsh, III May 28, 1998
- ----------------------------------
Thomas H. Welsh, III, Director