EXHIBIT 13
1998 ANNUAL REPORT TO STOCKHOLDERS
FINANCIAL HIGHLIGHTS
YEAR ENDED
---------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1998 1997 1996
------------ ------------ -------------
TOTAL ASSETS $1,192,046 $1,128,483 $1,143,338
NET INCOME 8,775 6,525 8,739
RETURN ON EQUITY 8.79% 6.90% 9.72%
EQUITY TO ASSET RATIO 8.61% 8.33% 8.16%
NON-PERFORMING ASSETS TO AVERAGE ASSETS 0.68% 0.52% 0.49%
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Maryland Federal Bancorp, Inc. (the "Company") is the unitary savings
and loan holding company of Maryland Federal Bank (the "Bank", which changed its
name from Maryland Federal Savings and Loan Association effective September 21,
1997) and its subsidiary. The Company and the Bank are sometimes collectively
referred to as "Maryland Federal". The Company currently owns 100% of the issued
and outstanding common stock of the Bank, which is the principal asset of the
Company. The Company does not presently own or operate any subsidiaries other
than the Bank and its subsidiary, MASSLA Corporation.
Unless otherwise indicated, information herein relating to the common
stock of the Company has been adjusted to give effect to a two-for-one stock
split effected on November 21, 1997.
The following analysis of the consolidated financial condition and
results of operations of Maryland Federal should be read together with the
consolidated financial statements and accompanying notes which are presented
elsewhere in this report.
MERGER ACTIVITY
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.
This transaction will more than double BB&T's presence in the
greater metropolitan Washington, D.C. area and is expected to provide
expanded products and services to Maryland Federal's existing customer base.
Under the Agreement, Maryland Federal will become part of BB&T Financial
Corporation of Virginia, one of BB&T's regional bank holding companies that
emphasize autonomy and local decision-making.
FINANCIAL CONDITION
Assets. Total assets increased by $63.6 million or 5.6% to $1.19
billion during fiscal 1998 versus a 1.3% decrease in total assets during fiscal
1997. The increase in fiscal 1998 was due primarily to increases of $7.9 million
or 310.6% in cash and due from banks, $42.8 million or 511.1% in
interest-bearing deposits with banks, $8.3 million or 11.9% in securities
available for sale, $10.5 million or 91.7% in securities held to maturity, and
$1.1 million or 9.9% in Federal Home Loan Bank of Atlanta ("FHLB") stock, at
cost, versus the prior fiscal year. These increases were partially offset by
decreases of $3.6 million or 20.6% in federal funds sold and securities
purchased under agreements to resell, $2.8 million or 0.3% in loans receivable,
net (including loans held for sale, at cost), and $1.4 million or 35.6% in other
assets. The increases in cash and due from banks, interest-bearing deposits with
banks and securities available for sale and held to maturity were due to
management's decision to increase Maryland Federal's liquidity in the form of
such assets.
Liabilities. Total liabilities increased by $54.4 million or 5.3% to
$1.09 billion during fiscal 1998 versus a 1.5% decrease during fiscal 1997. This
increase in fiscal 1998 was due to increases of $42.7 million or 5.4% in
deposits, $10.4 million or 4.6% in advances from the FHLB, $996,000 or 52.5% in
income taxes, and $762,000 or 10.8% in accrued expenses and other liabilities
versus the prior fiscal year. These increases were partially offset by a
decrease of $444,000 or 4.9% in advances from borrowers for taxes and insurance.
The increases in deposits and advances from the FHLB were necessitated by the
continued demand for home equity lines of credit, and by management's intent to
increase liquidity.
Stockholders' equity. Maryland Federal's total stockholders' equity
increased by $9.2 million or 9.6% during fiscal 1998 versus $1.3 million or 1.4%
during fiscal 1997. During fiscal 1998, such increase
6
reflects net income of $8.8 million, a $1.9 million increase related to the
issuance of shares under stock plans during the year, and a $2.1 million
increase recorded to recognize the net change in unrealized holding gains,
net, which were offset by dividends to shareholders of $2.8 million, and the
repurchase of 44,000 shares of the Company's common stock at a cost of
$804,000.
RESULTS OF OPERATIONS
Maryland Federal reported net income of $8.8 million ($1.36 basic
earnings per share and $1.32 diluted earnings per share) in fiscal 1998 versus
$6.5 million ($1.02 basic earnings per share and $.99 diluted earnings per
share) and $8.7 million ($1.35 basic earnings per share and $1.31 diluted
earnings per share) in fiscal 1997 and 1996, respectively. Net income reflects
the net interest income resulting from the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities,
and various other elements such as provision for loan losses, noninterest
income, noninterest expense and income tax expense. Included in noninterest
expense for fiscal 1997 was a one-time Savings Association Insurance Fund
("SAIF") recapitalization assessment of $5.1 million, or approximately $3.1
million, net of applicable tax benefits.
NET INTEREST INCOME
During the fiscal year ended February 28, 1998, net interest income
increased by $1.3 million or 4.4% versus the prior fiscal year. The increase was
primarily the result of a six basis point net increase in the yield earned on
interest-earning assets over the rate paid on interest-bearing liabilities
("interest rate spread"), coupled with a $2.5 million or 2.6% increase in the
relative amount of interest-earning assets over interest-bearing liabilities
during fiscal 1998 versus fiscal 1997. During the fiscal year ended February 28,
1997, net interest income increased by $2.5 million or 9.0% versus the prior
fiscal year. The increase was primarily the result of a 14 basis point net
increase in the interest rate spread, coupled with a $4.9 million or 5.3%
increase in the relative amount of interest-earning assets over interest-bearing
liabilities during fiscal 1997 versus fiscal 1996.
Interest Income
Loans receivable. For the fiscal year ended February 28, 1998,
interest earned on loans receivable (including loans held for sale) increased
by $1.4 million or 1.9% over the prior fiscal year. This increase resulted
from an $11.2 million or 1.1% increase in the average balance of loans
receivable, coupled with a six basis point increase in the average yield
earned on such assets to 7.54% during fiscal 1998 as compared to the prior
fiscal year. For the fiscal year ended February 28, 1997, interest earned on
loans receivable (including loans held for sale) increased by $2.1 million or
2.9% over the prior fiscal year. This increase resulted from a $35.9 million
or 3.7% increase in the average balance of loans receivable, which more than
offset a six basis point decrease in the average yield earned on such assets
during fiscal 1997 as compared to the prior fiscal year. The increase in the
average balance of loans receivable during both fiscal years was primarily
due to the increased demand in home equity lines of credit. Maryland Federal
continues to offer adjustable-rate mortgages and other rate sensitive loans,
such as home equity lines of credit and second mortgage loans. These loans
are retained in the loan portfolio, while the Company generally sells in the
secondary market its fixed-rate loans.
Mortgage-backed and related securities. For the fiscal year ended
February 28, 1998, interest earned on mortgage-backed and related securities
decreased by $231,000 or 5.4% as compared to the prior fiscal year. This
decrease was primarily due to a $3.1 million or 5.0% decrease in the average
balance of such assets, coupled with a three basis point decrease in the average
yield earned on such assets to 6.75% during fiscal 1998 versus the prior fiscal
year. For the fiscal year ended February 28, 1997, interest earned on
mortgage-backed and related securities decreased by $558,000 or 11.6% as
compared to the prior fiscal year. This decrease was primarily due to an $8.4
million or 11.8% decrease in the average balance of such assets, which more than
offset a one basis point increase in the average yield earned on such assets
during fiscal 1997 versus the prior fiscal year. The decrease in the average
balance of mortgage-backed and related securities during both fiscal years was
the result of principal repayments received which exceeded purchases,
- --------------------------------------------------------------------------------
The following table represents, for the periods indicated, the changes in
interest income and interest expense attributable to (i) changes in volume
(changes in volume multiplied by prior year rate) and (ii) changes in rate
(changes in rate multiplied by prior year volume). Changes in rate/volume
(determined by multiplying the change in rate by the change in volume) have
been allocated to the change in rate and the change in volume based upon the
respective percentages of combined totals.
Fiscal Year
--------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------------ ----------------------------------------
Volume Rate Net Volume Rate Net
------------- ------------ ------------ ------------ ------------ -----------
(In Thousands)
Interest income:
Loans receivable (1) $ 841 $ 599 $ 1,440 $ 2,690 $ (577) $ 2,113
Mortgage-backed and related securities (212) (19) (231) (565) 7 (558)
Investment securities and other interest-
earning assets 1,464 135 1,599 344 (128) 216
------- ----- ------- ------- ------- -------
Total interest income 2,093 715 2,808 2,469 (698) 1,771
------- ----- ------- ------- ------- -------
Interest expense:
Deposits:
Certificates of deposit 1,370 (188) 1,182 910 (1,640) (730)
Noncertificate accounts 46 (119) (73) (65) (311) (376)
Advances from FHLB and other interest-
bearing liabilities (2) 291 95 386 886 (465) 421
------- ----- ------- ------- ------- -------
Total interest expense 1,707 (212) 1,495 1,731 (2,416) (685)
------- ----- ------- ------- ------- -------
Increase in net interest income $ 386 $ 927 $ 1,313 $ 738 $ 1,718 $ 2,456
======= ===== ======= ======= ======= =======
(1) Includes loans held for sale.
(2) Includes interest expense on interest-bearing advances from borrowers for
taxes and insurance.
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The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amounts of interest income of Maryland Federal
from interest-earning assets and the resultant average yields: (ii) the total
dollar amounts of interest expense on interest-bearing liabilities and the
resultant average rates; (iii) net interest income and the interest rate
spread; (iv) net interest-earning assets and the net yield earned on
interest-earning assets; and (v) the ratio of total interest-earning assets
to total interest-bearing liabilities. Average balances are calculated on
a daily basis. Yields and rates at February 28, 1998, are also indicated.
Feb.28, Year Ended February 28, Year Ended February 28,
1998 (4) 1998 1997
-------- --------------------------------- --------------------------------
(Dollars in Thousands)
Yield/ Average Yield/ Average Yield/
Rate Balance Interest Rate Balance Interest Rate
-------- ---------- ---------- -------- --------- ---------- -------
Interest-earning assets:(1)
Loans receivable (2) 7.48% $1,004,402 $75,768 7.54% $ 993,218 $74,328 7.48%
Mortgage-backed and
related securities 6.90% 59,550 4,020 6.75% 62,663 4,251 6.78%
Investment securities
and other interest-
earning assets 5.55% 83,639 4,909 5.98% 57,685 3,310 5.74%
---------- ------- ---------- -------
Total interest-
earning assets 7.25% 1,147,591 84,697 7.39% 1,113,566 81,889 7.35%
------- -------
Noninterest-earning assets 23,349 14,392
---------- ----------
Total assets $1,170,940 $1,127,958
========== ==========
Interest-bearing liabilities:
Deposits:
Certificates of deposit 5.57% $ 645,638 35,511 5.50% $ 620,652 34,329 5.53%
Noncertificate accounts 2.52% 168,247 4,390 2.61% 166,477 4,463 2.68%
---------- ------- ---------- -------
Total deposits 4.93% 813,885 39,901 4.90% 787,129 38,792 4.93%
Advances from FHLB and
other interest-bearing
liabilities (3) 5.75% 234,137 13,799 5.89% 229,347 13,413 5.85%
---------- ------- ---------- -------
Total interest-bearing
liabilities 5.11% 1,048,022 53,700 5.12% 1,016,476 52,205 5.14%
------- -------
Noninterest-bearing liabilities 22,571 18,530
---------- ----------
Total liabilities 1,070,593 1,035,006
Stockholders' equity 100,347 92,952
---------- ----------
Total liabilities and
stockholders' equity $1,170,940 $1,127,958
========== ==========
Net interest income/
interest rate spread 2.14% $30,997 2.27% $29,684 2.21%
==== ======= ==== ======= ====
Net interest-earning
assets/net yield on
interest-earning assets $ 99,569 2.70% $ 97,090 2.67%
========== ==== ========== ====
Ratio of interest-earning
assets to interest-bearing
liabilities 1.10% 1.10%
==== ====
Year Ended February 29,
1996
-----------------------------------
(Dollars in Thousands)
Average Yield/
Balance Interest Rate
--------- ---------- -------
Interest-earning assets:(1)
Loans receivable (2) $ 957,320 $72,215 7.54%
Mortgage-backed and
related securities 71,042 4,809 6.77%
Investment securities
and other interest-
earning assets 51,758 3,094 5.98%
---------- -------
Total interest-
earning assets 1,080,120 80,118 7.42%
-------
Noninterest-earning assets 15,771
----------
Total assets $1,095,891
==========
Interest-bearing liabilities:
Deposits:
Certificates of deposit $ 604,892 35,059 5.80%
Noncertificate accounts 168,804 4,839 2.87%
---------- -------
Total deposits 773,696 39,898 5.16%
Advances from FHLB and
other interest-bearing
liabilities (3) 214,224 12,992 6.06%
---------- -------
Total interest-bearing
liabilities 987,920 52,890 5.35%
-------
Noninterest-bearing liabilities 20,751
----------
Total liabilities 1,008,671
Stockholders' equity 87,220
----------
Total liabilities and
stockholders' equity $1,095,891
==========
Net interest income/
interest rate spread $27,228 2.07%
======= ====
Net interest-earning
assets/net yield on
interest-earning assets $ 92,200 2.52%
========== ====
Ratio of interest-earning
assets to interest-bearing
liabilities 1.09%
====
(1) Interest-earning assets include all assets on which interest was
contractually due.
(2) Includes loans held for sale.
(3) Average balances include $0.7 million, $0.9 million and $1.0 million of
interest-bearing advances from borrowers for taxes and insurance during
each of the respective years.
(4) Based on stated interest rates at February 28, 1998.
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as well as the sales of mortgage-backed and related securities during fiscal
1998.
Investment securities and other interest-earning assets. Interest
earned on investment securities and other interest-earning assets increased
by $1.6 million or 48.3% during fiscal 1998 versus the prior fiscal year.
This increase was primarily due to a $26.0 million or 45.0% increase in the
average balance of such assets, coupled with a 24 basis point increase in the
average yield earned on such assets to 5.98% during fiscal 1998 versus the
prior fiscal year. Interest earned on investment securities and other
interest-earning assets increased by $216,000 or 7.0% during fiscal 1997
versus the prior fiscal year. This increase was primarily due to a $5.9
million or 11.5% increase in the average balance of such assets, which more
than offset a 24 basis point decrease in the average yield earned on such
assets during fiscal 1997 versus the prior fiscal year.
Interest Expense
Deposits. Maryland Federal's interest expense on deposits increased by
$1.1 million or 2.9% to $39.9 million during fiscal 1998 versus the prior fiscal
year. This increase was primarily due to a $26.8 million or 3.4% increase in the
average balance of deposits to $813.9 million during fiscal 1998 versus the
prior fiscal year, which more than offset a three basis point decrease in the
average rate paid on deposits to 4.90%. Maryland Federal's interest expense on
deposits decreased by $1.1 million or 2.8% to $38.8 million during fiscal 1997
versus the prior fiscal year. This decrease was primarily due to a 23 basis
point decrease in the average rate paid on such deposits, which more than offset
an increase in the average balance of deposits of $13.4 million or 1.7% during
fiscal 1997 versus the prior fiscal year. Maryland Federal continues to offer
competitive interest rates on deposits, which helped to increase the average
balance of deposits during fiscal 1998 and 1997.
Borrowed funds. Interest expense on borrowed funds (consisting of FHLB
advances and advances from borrowers for taxes and insurance) increased by
$386,000 or 2.9% during fiscal 1998 versus fiscal 1997. This increase was
primarily due to a $4.8 million or 2.1% increase in the average balance of such
funds to $234.1 million, coupled with a four basis point increase in the average
rate paid on such funds to 5.89% during fiscal 1998 versus the prior fiscal
year. Interest expense on borrowed funds increased by $421,000 or 3.2% during
fiscal 1997 versus fiscal 1996. This increase was primarily due to a $15.1
million or 7.1% increase in the average balance of such funds, which more than
offset a 21 basis point decrease in the average rate paid on such funds during
fiscal 1997 versus the prior fiscal year. The increase in the average balance of
such funds during both fiscal years reflects management's decision to fund a
portion of its loan growth with borrowed funds.
PROVISION FOR LOAN LOSSES
Loan review procedures are utilized by Maryland Federal in order to
ensure that potential problem loans are identified early, thereby lessening
any potentially negative impact such problem loans may have on Maryland
Federal's earnings. During fiscal 1998, 1997 and 1996, Maryland Federal's
provision for loan losses totaled $310,000, $275,000, and $120,000,
respectively. See also Note 5 of Notes to Consolidated Financial Statements.
The allowance for loan losses is maintained at a level believed
adequate by management to absorb losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
loan portfolio, past loan loss experience, current economic conditions, volume,
growth and composition of the loan portfolio, and other relevant factors. The
allowance is increased by provisions for loan losses which are charged against
income. While management uses the best information available to make such
determinations, no assurance can be given as to whether future adjustments may
be necessary.
As of February 28, 1998, non-performing loans (loans ninety days or more
delinquent but still accruing, and non-accrual loans) totaled $6.6 million
($6,547,000 of which consisted of first mortgage loans, with the remaining
$24,000 consisting of consumer and other loans) and represented 0.66% of total
loans receivable. As of February 28, 1997 and February 29, 1996, non-performing
loans totaled $4.6 million ($4,595,000 of which consisted of first mortgage
loans, with the remaining $35,000 consisting of consumer and other loans) and
$3.4 million ($3,333,000 of which consisted of first mortgage loans, with the
remaining $53,000 consisting of consumer and other loans), respectively, and
represented 0.47% and 0.34%, respectively, of total loans receivable. During
fiscal 1998 and 1997, non-performing loans increased by $2.0 million and $1.2
million, respectively, versus the comparable prior fiscal years, due primarily
to an increase in non-performing residential first mortgage loans which resulted
from a number of individual borrowers seeking relief from excessive debt
obligations.
As of February 28, 1998, the allowance for loan losses amounted to $4.8
million and represented 72.8% of non-performing loans. As of February 28, 1997
and February 29, 1996, the allowance for loan losses amounted to $4.6 million
and $4.5 million, respectively, and represented 99.3% and 132.1%, respectively,
of non-performing loans.
NONINTEREST INCOME
Total noninterest income increased by $921,000 or 33.6% during
fiscal 1998 versus fiscal 1997. This increase included increases of $558,000
or 32.1% in banking service charges and fees, $142,000 or 41.3% in loan fees
and service charges, $40,000 or 7.0% in gain on sales of first mortgage
loans, $165,000 in gain on sales of securities and $16,000 or 16.8% in other
noninterest income, during fiscal 1998 versus the prior fiscal year. The
increase in banking service charges and fees was due primarily to increases
in administrative fees received on insurance services, service fees collected
on both commercial and noncommercial checking accounts, ATM service charges
and other miscellaneous fees charged on customer accounts during fiscal 1998
versus fiscal 1997. The increase in loan fees and service charges was due
primarily to increases in prepayment fees and late charges on loan payments
and service fee income from loans serviced for others. The increase in gain
on sales of first mortgage loans was due primarily to an increase in the
origination
9
of loans to be held for sale during fiscal 1998 versus the prior fiscal year.
The increase in gain on sales of securities was due primarily to the sale of
a portion of the securities available for sale during fiscal 1998 versus
fiscal 1997, when there were no sales of securities.
Total noninterest income decreased by $3.0 million or 52.1% during
fiscal 1997 versus fiscal 1996. This decrease was the result of a $3.3 million
decrease in gain on sales of securities and a $32,000 or 25.2% decrease in other
noninterest income, which more than offset increases of $244,000 or 16.4% in
banking service charges and fees, $70,000 or 25.6% in loan fees and service
charges and $48,000 or 9.2% in gain on sales of first mortgage loans during
fiscal 1997 versus the prior fiscal year. The increase in banking service
charges and fees was due primarily to increases in administrative fees collected
on ATM transactions for noncustomers and service fees collected on both
commercial and noncommercial checking accounts during fiscal 1997 versus fiscal
1996.
NONINTEREST EXPENSE
Total noninterest expense decreased by $4.7 million or 19.5% during
fiscal 1998 versus the prior fiscal year. Total noninterest expense increased by
$5.6 million or 30.0% during fiscal 1997 versus the prior fiscal year. Included
in noninterest expense for fiscal 1997 was a one-time SAIF recapitalization
assessment of $5.1 million, or approximately $3.1 million, net of applicable tax
benefits. The components of noninterest expense are discussed below.
Compensation and benefits. Compensation and benefits increased by
$410,000 or 4.1% and by $1.2 million or 13.2% during fiscal 1998 and fiscal
1997, respectively, versus the comparable prior fiscal years. The increase in
compensation and benefits in fiscal 1998 was due primarily to additional
staffing necessitated by the expansion of branch offices and annual salary
adjustments, which more than offset a decrease in retirement benefit expense as
compared to the prior fiscal year. The increase in compensation and benefits
during fiscal 1997 was due primarily to increases in retirement and other
employee benefit expenses, as well as annual salary adjustments, as compared to
the prior fiscal year.
Occupancy and equipment. Occupancy and equipment expense increased by
$62,000 or 2.0% during fiscal 1998 as compared to fiscal 1997. Costs incurred
with the relocation of two branch offices and with the opening of three new
branch offices contributed to the increase in occupancy and equipment expense
during fiscal 1998 as compared to fiscal 1997. Occupancy and equipment expense
decreased by $106,000 or 3.3% during fiscal 1997 as compared to fiscal 1996.
Such decrease was primarily the effect of relocating branch and loan production
offices to more suitable and less expensive locations and the closing of one
branch office during fiscal 1996.
SAIF recapitalization assessment. Deposits of Maryland Federal are
currently insured by the Federal Deposit Insurance Corporation ("FDIC") through
the SAIF. On September 30, 1996, legislation was enacted to address the
undercapitalization of the SAIF. As a result, the FDIC imposed a one-time
special assessment of $.657 for every $100 of assessable deposits as of March
31, 1995. Based on Maryland Federal's assessable deposits, its pro rata share of
the special recapitalization assessment was $5.1 million or approximately $3.1
million, net of applicable tax benefits.
Federal deposit insurance premiums. Federal deposit insurance premiums
paid to the FDIC decreased by $981,000 or 65.5% and by $255,000 or 14.6% during
fiscal 1998 and 1997, respectively, versus the comparable prior fiscal years.
Such decreases were primarily the result of the legislation discussed above,
which also reduced the Bank's insurance premium from 23 to 6.4 basis points
effective January 1, 1997.
Loss on foreclosed real estate, net. During fiscal 1998 and 1997,
loss on foreclosed real estate, net, decreased by $95,000 or 63.3% and by
$149,000 or 49.8%, respectively, versus the comparable prior fiscal years.
The decrease during fiscal 1998 was due primarily to a $53,000 decrease in
expenses related to such properties and an $82,000 increase in gain on sales
of foreclosed real estate, as compared to fiscal 1997. The decrease during
fiscal 1997 was due primarily to a $100,000 decrease in provision for
possible losses on foreclosed real estate, as well as an increase in the gain
on the sales of such properties. Foreclosed real estate, net, totaled $1.3
million, $1.3 million and $2.1 million at fiscal year-end 1998, 1997, and
1996, respectively. See also Note 6 of Notes to Consolidated Financial
Statements.
Advertising. Advertising expense increased by $17,000 or 2.9%
and by $41,000 or 7.6% during fiscal 1998 and 1997, respectively,
versus the comparable prior fiscal years.
Other. Other noninterest expense increased by $949,000 or 25.2% during
fiscal 1998 versus the prior fiscal year. The increase in other noninterest
expense was primarily due to $644,000 of expenses incurred in connection with
the Agreement with BB&T, as well as expenses incurred in connection with
relocating two branch offices and opening three new branch offices during fiscal
1998. Such expenses included new supplies, telephone, postage, courier and
special services. During the fiscal year ended February 28, 1997, other
noninterest expense decreased by $202,000 or 5.1% versus the prior fiscal year.
This decrease was primarily due to expenses incurred in connection with
relocating branch offices during fiscal 1996.
INCOME TAXES
Maryland Federal made provisions for income taxes of $6.2 million, $1.5
million and $5.5 million in fiscal 1998, 1997 and 1996, respectively. The $4.7
million or 312.2% increase during fiscal 1998 versus the prior fiscal year, and
the $4.0 million or 73.0% decrease during fiscal 1997 versus the prior fiscal
year were primarily a result of the one-time special assessment to recapitalize
the SAIF and a $1.6 million adjustment to revise prior estimates in recording
the tax provision, both of which occurred during fiscal 1997. The effective tax
rate for each of the three fiscal years was 41.2%, 18.6% and 38.8%,
respectively.
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MARKET RISK MANAGEMENT
General. The effective management of market risk is essential to
achieving Maryland Federal's financial goals. As a financial institution,
Maryland Federal's primary market risk exposure is interest rate risk due to
timing differences in the repricing of its assets and liabilities. As a
result, Maryland Federal's earnings are largely dependent on its net interest
income, which is determined by Maryland Federal's interest rate spread and
the relative amounts of interest-earning assets and interest-bearing
liabilities.
Maryland Federal's primary objectives, with respect to minimizing
interest rate risk, are to (i) improve the rate sensitivity of its
interest-earning assets in relation to interest-bearing liabilities; and (ii)
increase the ratio of interest-sensitive assets to interest-sensitive
liabilities with like maturities.
Monitoring. Management presently monitors and evaluates the potential
impact of interest rate movements on the market value of portfolio equity and
the level of net interest income on a monthly basis. This evaluation is
performed in compliance with the Office of Thrift Supervision ("OTS")
regulations and is compared to Board established limits to ensure that interest
rate risk is maintained within these guidelines. Various strategies are employed
to further strengthen Maryland Federal's interest rate risk position.
Strategies. Maryland Federal utilizes a variety of methods to achieve
its interest rate risk objectives, including emphasis on origination of
adjustable first trust loans for its portfolio, second trusts and the sale of
fixed-rate mortgage loans in the secondary market. For the year ended February
28, 1998, Maryland Federal's interest rate spread increased to 2.27%, as
compared to 2.21% during the prior fiscal year, reflecting a four basis point
increase in Maryland Federal's yield earned on interest-earning assets coupled
with a two basis point decrease in the rate paid on interest-bearing
liabilities.
Repricing. As of February 28, 1998, Maryland Federal's interest-sensitive
liabilities exceeded interest-sensitive assets within a one-year period by
23.2% of total assets versus 32.5% and 29.3% as of February 28, 1997 and
February 29, 1996, respectively. These percentages indicate that Maryland
Federal will experience more liabilities than assets maturing or repricing
over the next twelve months, or a negative gap. The improvement in the
one-year gap at February 28, 1998 versus the prior fiscal year-end was
primarily due to an increase in adjustable and floating-rate mortgage loans
coupled with an increase in investment securities and other interest-earning
assets, which more than offset increases in deposits, FHLB advances and other
interest-bearing liabilities. These changes reflect the aging of the
adjustable-rate loan portfolio as well as management's decision to increase
liquidity.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required under certain federal regulations to maintain
specified levels of "liquid" investments, including United States Government and
federal agency securities and other investments. Regulations currently in effect
require the Bank to maintain liquid assets of not less than 4% of its net
withdrawable accounts plus short-term borrowings. The Bank has consistently
maintained liquidity at or above the levels required by the regulations.
The Bank's principal sources of funds are deposits, amortization and
prepayment of outstanding loans, borrowed funds and proceeds from the sale of
loans. During the past several years, the Bank has used such funds primarily to
maintain its required liquidity levels, meet its ongoing commitments to fund
maturing savings certificates and savings withdrawals and fund existing and
continuing loan commitments.
At February 28, 1998, the Bank had $5.4 million of undisbursed loan funds
and $72.6 million in approved loan commitments. These commitments were partially
offset by $37.1 million in forward commitments to sell. In addition, as of
February 28, 1998, the Bank had $153.3 million of approved home equity lines of
credit, of which $81.3 million had been drawn by borrowers. The Bank anticipates
that it will have the funds necessary to meet these obligations through the
sources of funds mentioned above. The amount of certificate accounts which are
scheduled to mature in fiscal 1999 is $518.6 million. Management believes that,
by evaluating competitive instruments and pricing in its market area, it can, in
most circumstances, manage and control maturing deposits so that a substantial
amount of such deposits are redeposited in the Bank.
During fiscal 1998, Maryland Federal experienced a net cash inflow from
financing activities of $50.7 million, consisting primarily of net increases in
deposits and borrowings. In addition, Maryland Federal experienced negative cash
flows from operating activities of $736,000 and a net cash inflow of $862,000
from investing activities during fiscal 1998.
Comparison of maturities of repricing interest-earning assets and
interest-bearing liabilities is illustrated in the following "Gap" table. This
table defines interest-sensitive assets and liabilities as those which mature or
reprice within one year or less.
February 28, February 28, February 29,
1998 1997 1996
-------------- -------------- ------------
Interest-sensitive assets:
Loans and mortgage-backed and related
securities (1) $349,372 $266,478 $252,629
Investment securities and other interest-earning
assets 114,758 48,635 45,585
-------- -------- --------
Total interest-sensitive assets 464,130 315,113 298,214
-------- -------- --------
Interest-sensitive liabilities:
Deposits 598,335 544,571 504,358
Advances from FHLB and other interest-bearing
liabilities (2) 142,689 136,847 128,579
-------- -------- --------
Total interest-sensitive liabilities 741,024 681,418 632,937
-------- -------- --------
Excess of interest-sensitive liabilities over
interest-sensitive assets (Gap) $276,894 $366,305 $334,723
======== ======== ========
Ratio of Gap to total assets 23.2% 32.5% 29.3%
======== ======== ========
(1) Includes loans held for sale.
(2) Includes $0.7 million, $0.7 million and $0.8 million of
interest-bearing advances from borrowers for taxes and insurance for
each of the respective years.
11
CAPITAL ADEQUACY
The Bank is required under certain federal regulations to maintain
minimum tangible capital equal to 1.5% of its adjusted total assets, minimum
core capital equal to 3.0% of its adjusted total assets and minimum total
capital (a combination of core and supplementary capital) equal to 8.0% of its
risk-weighted assets. At February 28, 1998, the Bank had tangible capital equal
to 8.24% of adjusted total assets, core capital equal to 8.24% of adjusted total
assets and total capital equal to 16.53% of risk-weighted assets.
In August 1993, the OTS issued a final rule which adds an interest rate
risk component to the existing 8% risk-based capital requirement. Under the
rule, a savings institution would be required to hold capital as a safeguard
against interest rate exposure in an amount equal to 50% of the decline in the
market value of the institution's portfolio equity (i.e., the net present value
of the institution's assets, liabilities and certain off-balance-sheet items)
that would result from a 200 basis point change in market interest rates. The
requirement would apply to those institutions considered to be carrying "above
normal" risk. "Above normal" risk is defined as occurring when the decline in
the market value of the portfolio equity, under a 200 basis point rate change,
exceeds 2% of the market value of the institution's assets.
However, in October 1994, the Director of the OTS indicated that it would
waive the capital deductions for institutions with a greater than "normal" risk
until the OTS publishes an appeals process. In August 1995, the OTS issued
Thrift Bulletin No. 67 which allows eligible institutions to request an
adjustment to their interest rate risk component as calculated by the OTS or to
request use of their own models to calculate their interest rate component. The
OTS also indicated that it will delay invoking its interest rate risk rule
requiring institutions with "above normal" interest rate risk exposure to adjust
their regulatory capital requirement until new procedures are implemented and
evaluated. The OTS has not yet established an effective date for the capital
deduction. Because of the Bank's strong capitalization, management does not
believe that compliance with the new rule would adversely affect its operations.
Pursuant to the Federal Deposit Insurance Corporation Improvement
Act of 1991, each federal banking agency established the following capital
levels for insured depository institutions: "well capitalized", "adequately
capitalized", "undercapitalized" and "critically undercapitalized". A
depository institution's capital adequacy is measured on the basis of its
total risk-based capital ratio, Tier 1 risk-based capital ratio and leverage
ratio. The degree of regulatory intervention is tied to the institution's
capital category, with increasing scrutiny and more stringent restrictions
being imposed as the institution's capital declines.
To be considered "well capitalized," an institution must generally have
a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital
ratio of at least 6% and a leverage capital ratio of at least 5%. At February
28, 1998, the Bank was considered to be "well capitalized."
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue has arisen as the result of computer programs that
use two digits rather than four to define the applicable year. Any computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions in operations, including, among other
things, a temporary inability to process transactions.
Maryland Federal has already begun the process of modifying or
replacing affected hardware and software as well as ensuring that external
service providers, significant vendors and customers are taking the appropriate
action to address their Year 2000 Issues. Management has targeted a completion
date of December 31, 1998 for Year 2000 project work on critical business
applications. System applications have been scheduled for modification based on
a riskadjusted priority to ensure that critical programs are adequately
completed in time to allow for extended testing.
Maryland Federal estimates that the total cumulative cost of the
project will be approximately $750,000, which includes both internal and
external personnel costs related to modifying the systems, as well as the cost
of purchasing or leasing hardware or software. Purchased hardware and software
will be capitalized in accordance with normal policy. Personnel and all other
costs related to the project are being expensed as incurred. These costs are
being funded through operating cash flows and are not expected to have a
material effect on the results of operations.
The costs of the project and the expected completion dates are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources and
other factors. The acquisition of Maryland Federal by BB&T is not expected to
materially change the cost estimates or time frame for addressing the Year 2000
Issue. However, there can be no guarantee that these estimates will be achieved,
and actual results could differ materially from those anticipated. Specific
factors that could influence the results may include, but are not limited to,
the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes and similar uncertainties.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented in
this report have been prepared in accordance with generally accepted accounting
principles, which typically require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
12
the relative purchasing power of money over time due to inflation. See Note 25
of Notes to Consolidated Financial Statements for estimated fair values of
certain assets and liabilities.
Virtually all of the assets and liabilities of Maryland Federal are
monetary in nature. As a result, interest rates have a more significant impact
on Maryland Federal's performance than the general level of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as
the prices of goods and services.
The following table summarizes the estimated maturities or repricing of
Maryland Federal's interest-earning assets and interest-bearing liabilities
at February 28, 1998. The weighted average rate of each category of assets and
liabilities is given below the respective dollar amounts. Management assumes,
based on the Bank's experience, that certain loans receivable and
mortgage-backed securities can be expected to experience prepayments of
principal and that a substantial amount of core deposits will have
significantly longer effective maturities in spite of being subject to
immediate withdrawal terms.
February 28, 1998
----------------------------------------------------------------------------
More than More than More than More than
1 Year 3 Years 5 Years 10 Years
1 Year to to to to
or Less 3 Years 5 Years 10 Years 20 Years
-------------- -------------- -------------- ------------- -------------
(Dollars in Thousands)
Interest-earning assets:
Fixed-rate mortgage loans (1) $ 83,757 $ 75,472 $ 52,957 $ 81,126 $51,048
8.53% 7.81% 7.72% 7.66% 7.56%
Adjustable and floating-rate
mortgage loans 239,790 243,655 106,272 42,292 --
7.44% 7.07% 7.12% 7.28% --
Consumer and other loans 1,805 2,427 1,079 -- --
8.94% 8.94% 8.94% -- --
Mortgage-backed and related
securities 24,020 9,881 6,229 10,575 6,290
6.66% 6.95% 7.03% 7.04% 7.22%
Investment securities and other
interest-earning assets 114,758 3,655 570 246 --
5.55% 5.82% 4.35% 4.15% --
-------- --------- ------- ------- ------
Total interest-earning assets 464,130 335,090 167,107 134,239 57,338
7.13% 7.23% 7.31% 7.49% 7.52%
-------- --------- ------- ------- ------
Interest-bearing liabilities:
Deposits 598,335 137,820 42,934 28,467 17,507
5.24% 4.72% 4.24% 2.28% 2.55%
Advances from FHLB and other
interest-bearing liabilities (2) 142,689 40,000 8,680 46,000 --
5.87% 6.21% 5.75% 5.01% --
-------- --------- ------- ------- ------
Total interest-bearing liabilities 741,024 177,820 51,614 74,467 17,507
5.36% 5.06% 4.50% 3.97% 2.55%
-------- --------- ------- ------- ------
Excess (deficiency) of interest-
earning assets over interest-
bearing liabilities $(276,894) $ 157,270 $ 115,493 $ 59,772 $ 39,831
======== ========= ======= ======= ======
Cumulative excess (deficiency)
of interest-earning assets
over interest-bearing liabilities $(276,894) $(119,624) $ (4,131) $ 55,641 $ 95,472
======== ========= ======= ======= ======
Cumulative excess (deficiency)
as a percentage of total assets (23.23)% (10.04)% (0.35)% 4.67% 8.01%
======== ========= ======= ======= ======
February 28, 1998
-----------------------------------
More
Than
20 Years Total
---------------- --------------
Interest-earning assets: $ 7,506 $ 351,866
Fixed-rate mortgage loans (1) 7.63% 7.89%
Adjustable and floating-rate -- 632,009
mortgage loans -- 7.23%
-- 5,311
Consumer and other loans -- 8.94%
Mortgage-backed and related 1,072 58,067
securities 7.95% 6.90%
Investment securities and other -- 119,229
interest-earning assets -- 5.55%
--------- ----------
8,578 1,166,482
Total interest-earning assets 7.67% 7.25%
--------- ----------
Interest-bearing liabilities: 6,527 831,590
Deposits 2.97% 4.93%
Advances from FHLB and other -- 237,369
interest-bearing liabilities (2) -- 5.75%
--------- ----------
6,527 1,068,959
Total interest-bearing liabilities 2.97% 5.11%
--------- ----------
Excess (deficiency) of interest-
earning assets over interest-
bearing liabilities $ 2,051 $ 97,523
========= ==========
Cumulative excess (deficiency)
of interest-earning assets
over interest-bearing liabilities $ 97,523 $ 97,523
========= ==========
Cumulative excess (deficiency)
as a percentage of total assets 8.18% 8.18%
========= ==========
(1) Includes loans held for sale.
(2) Includes $0.7 million of interest-bearing advances from borrowers
for taxes and insurance.
13
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
February 28, February 29, February 28,
------------------------------- ---------------- -----------------------------
1998 1997 1996 1995 1994
-------------- --------------- ---------------- --------------- ------------
(Dollars in Thousands, Except Per Share Data)
AT YEAR END:
Total assets $1,192,046 $1,128,483 $1,143,338 $1,058,781 $872,167
Loans receivable (1) 989,186 991,952 991,184 898,728 696,993
Mortgage-backed and related securities 58,067 64,135 66,195 75,436 44,106
Investment securities and other interest-
earning assets (2) 119,229 54,083 62,367 60,765 105,100
Deposits 831,590 788,933 788,931 763,754 678,050
Borrowed funds 236,680 226,280 243,780 190,730 103,180
Stockholders' equity 104,453 95,261 93,982 85,796 77,623
FOR THE YEAR ENDED:
Total interest income 84,697 81,889 80,118 69,091 63,250
Total interest expense 53,700 52,205 52,890 38,972 32,411
---------- ---------- ---------- ---------- --------
Net interest income 30,997 29,684 27,228 30,119 30,839
Provision for loan losses 310 275 120 300 662
---------- ---------- ---------- ---------- --------
Net interest income after provision for
loan losses 30,687 29,409 27,108 29,819 30,177
Banking service charges and fees 2,294 1,736 1,492 1,392 1,594
Gain on sales of interest-earning assets 775 570 3,834 134 566
Other noninterest income 597 439 401 518 792
SAIF recapitalization assessment - 5,077 - - -
Other noninterest expense 19,420 19,058 18,566 17,125 14,320
---------- ---------- ---------- ---------- --------
Income before income taxes and
cumulative effect
of accounting change 14,933 8,019 14,269 14,738 18,809
Income tax expense 6,158 1,494 5,530 5,675 7,097
---------- ---------- ---------- ---------- --------
Income before cumulative effect of
accounting change 8,775 6,525 8,739 9,063 11,712
Cumulative effect of change in
accounting for income taxes - - - - 547
---------- ---------- ---------- ---------- --------
Net income $ 8,775 $ 6,525 $ 8,739 $ 9,063 $ 12,259
========== ========== ========== ========== ========
Earnings per share: (3)
Basic $1.36 $1.02 $1.35 $1.40 $1.85
Diluted 1.32 .99 1.31 1.35 1.77
Return on equity 8.8% 6.9% 9.7% 11.1% 16.7%
Equity-to-assets 8.6% 8.3% 8.2% 8.5% 8.7%
Cash dividends declared per share (3) $.43 $.338 $.274 $.219 $.188
Dividend payout ratio 31.6% 33.1% 20.3% 15.6% 10.2%
Number of full service facilities 28 25 25 26 21
(1) Includes loans held for sale.
(2) Includes investment securities, federal funds sold, securities purchased
under agreements to resell and interest-bearing deposits with banks.
(3) As adjusted for stock dividends and stock splits.
14
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
February 28, February 28,
1998 1997
-------------- ----------------
(In Thousands)
ASSETS
Cash and due from banks $ 10,504 $ 2,558
Interest-bearing deposits with banks 51,213 8,381
Federal funds sold and securities purchased under agreements to resell 14,030 17,665
Securities available for sale 77,623 69,360
Securities held to maturity (fair value, 1998 - $21,989,000
and 1997 - $11,417,000) 21,946 11,448
Loans held for sale, at cost 13,461 2,679
Loans receivable, net 975,725 989,273
Accrued interest receivable 6,482 6,021
Federal Home Loan Bank stock, at cost 12,484 11,364
Foreclosed real estate, net 1,281 1,299
Premises and equipment, net 4,813 4,576
Other assets 2,484 3,859
---------- ----------
Total assets $1,192,046 $1,128,483
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 831,590 $ 788,933
Advances from Federal Home Loan Bank of Atlanta 236,680 226,280
Advances from borrowers for taxes and insurance 8,630 9,074
Income taxes 2,894 1,898
Accrued expenses and other liabilities 7,799 7,037
---------- ----------
Total liabilities 1,087,593 1,033,222
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 18 and 22)
STOCKHOLDERS' EQUITY
Preferred stock; 10,000,000 shares authorized, none issued - -
Common stock; $.01 par value; 15,000,000 shares
authorized; shares issued, 1998 - 8,311,676
and 1997 - 8,187,152 83 82
Additional paid-in capital 44,497 42,584
Retained earnings, substantially restricted 72,969 66,976
Unrealized holding gains, net 4,924 2,835
Treasury stock, at cost; 1998 -1,810,852 shares and
1997 - 1,766,852 shares (18,020) (17,216)
---------- ----------
Total stockholders' equity 104,453 95,261
---------- ----------
Total liabilities and stockholders' equity $1,192,046 $1,128,483
========== ==========
See Notes to Consolidated Financial Statements.
16
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended Year Ended Year Ended
February 28, February 28, February 29,
1998 1997 1996
------------ ----------- ------------
(In Thousands, Except Per Share Data)
Interest income:
Loans receivable:
First mortgage loans $66,142 $67,196 $67,093
Consumer and other loans 9,626 7,132 5,122
Securities available for sale and held to maturity 5,378 5,154 5,921
Other interest-earning assets 3,551 2,407 1,982
------- ------- -------
Total interest income 84,697 81,889 80,118
------- ------- -------
Interest expense:
Deposits 39,901 38,792 39,898
Advances from Federal Home Loan Bank of Atlanta 13,777 13,385 12,962
Advances from borrowers for taxes and insurance 22 28 30
------- ------- -------
Total interest expense 53,700 52,205 52,890
------- ------- -------
Net interest income 30,997 29,684 27,228
Provision for loan losses 310 275 120
------- ------- -------
Net interest income after provision for loan losses 30,687 29,409 27,108
------- ------- -------
Noninterest income:
Banking service charges and fees 2,294 1,736 1,492
Loan fees and service charges 486 344 274
Gain on sales of first mortgage loans 610 570 522
Gain on sales of securities 165 -- 3,312
Other 111 95 127
------- ------- -------
Total noninterest income 3,666 2,745 5,727
------- ------- -------
Noninterest expense:
Compensation and benefits 10,401 9,991 8,828
Occupancy and equipment 3,146 3,084 3,190
SAIF recapitalization assessment -- 5,077 --
Federal deposit insurance premiums 516 1,497 1,752
Loss on foreclosed real estate, net 55 150 299
Advertising 594 577 536
Other 4,708 3,759 3,961
------- ------- -------
Total noninterest expense 19,420 24,135 18,566
------- ------- -------
Income before income taxes 14,933 8,019 14,269
Income tax expense 6,158 1,494 5,530
------- ------- -------
NET INCOME $ 8,775 $ 6,525 $ 8,739
======= ======= =======
Earnings per share:
Basic $ 1.36 $ 1.02 $ 1.35
Diluted 1.32 .99 1.31
See Notes to Consolidated Financial Statements.
17
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Retained Unrealized
Additional Earnings, Holding Total
Common Paid-in Substantially Gains, Treasury Stockholders'
Stock Capital Restricted Net Stock Equity
------------ ----------- ------------- ------------ -------------- ----------------
(In Thousands)
Balance, February 28, 1995 $ 74 $ 33,154 $ 60,537 $ 2,916 $ (10,885) $ 85,796
Net income -- -- 8,739 -- -- 8,739
Issuance of 217,314 shares of
common stock under stock
plans and related tax benefits 2 1,725 -- -- -- 1,727
Cash dividends ($.274 per share) -- -- (1,784) -- -- (1,784)
Change in unrealized holding
gains, net -- -- -- (496) -- (496)
--------- --------- --------- --------- --------- ---------
Balance, February 29, 1996 76 34,879 67,492 2,420 (10,885) 93,982
Net income -- -- 6,525 -- -- 6,525
Issuance of 246,932 shares of
common stock under stock
plans and related tax benefits 2 2,836 -- -- -- 2,838
5% stock dividend, 298,058 shares 4 4,869 (4,873) -- -- --
Cash paid in lieu of stock dividend
for fractional shares -- -- (11) -- -- (11)
Purchase of 424,100 shares of
treasury stock -- -- -- -- (6,331) (6,331)
Cash dividends ($.338 per share) -- -- (2,157) -- -- (2,157)
Change in unrealized holding
gains, net -- -- -- 415 -- 415
--------- --------- --------- --------- --------- ---------
Balance, February 28, 1997 82 42,584 66,976 2,835 (17,216) 95,261
Net income -- -- 8,775 -- -- 8,775
Issuance of 124,524 shares of
common stock under stock
plans and related tax benefits 1 1,913 -- -- -- 1,914
Purchase of 44,000 shares of
treasury stock -- -- -- -- (804) (804)
Cash dividends ($.43 per share) -- -- (2,782) -- -- (2,782)
Change in unrealized holding
gains, net -- -- -- 2,089 -- 2,089
--------- --------- --------- --------- --------- ---------
Balance, February 28, 1998 $ 83 $ 44,497 $ 72,969 $ 4,924 $ (18,020) $ 104,453
========= ========= ========= ========= ========= =========
See Notes to Consolidated Financial Statements.
18
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
February 28, February 28, February 29,
1998 1997 1996
------------------ ------------------ -----------------
(In Thousands)
OPERATING ACTIVITIES:
Net income $ 8,775 $ 6,525 $ 8,739
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization:
Premises and equipment 909 916 1,123
Other (935) (1,021) (722)
Loans originated for sale (89,606) (63,723) (67,152)
Sale of loans originated for sale 78,824 77,340 53,727
Provision for losses on loans and
foreclosed real estate 450 375 320
Gain on sales of securities (165) - (3,312)
Gain on sales of foreclosed real estate (184) (102) (27)
Deferred income taxes (262) 181 (970)
Tax benefits relating to stock options 381 661 603
Decrease (increase) in:
Accrued interest receivable (461) (12) (398)
Other assets 868 (1,331) 1,725
Increase (decrease) in:
Current income taxes payable - (649) (622)
Accrued expenses and other liabilities 670 1,521 (85)
------- ------- -------
Net cash provided by (used in)
operating activities (736) 20,681 (7,051)
------- ------- -------
INVESTING ACTIVITIES:
Loans originated (148,244) (120,104) (149,152)
Loans purchased - - (1,006)
Principal collected on loans 160,413 105,379 71,825
Purchases of securities:
Available for sale (22,932) (10,950) (3,364)
Held to maturity (23,458) (13,852) -
Principal collected on mortgage-backed
and related securities 11,756 11,265 8,361
Proceeds from maturities of securities:
Available for sale 620 6,411 -
Held to maturity 13,000 12,000 14,130
Proceeds from sales of securities:
Available for sale 5,902 - 3,423
Held to maturity - - 1,909
Net decrease (increase) in federal funds sold and
securities purchased under agreements to resell 3,635 (1,573) (6,469)
Decrease (increase) in Federal Home Loan Bank stock (1,120) 1,150 (2,730)
Proceeds from sales of foreclosed
real estate 2,436 2,022 713
Purchases of premises and equipment (1,146) (663) (563)
------- -------- -------
Net cash provided by (used in)
investing activities 862 (8,915) (62,923)
------- -------- -------
FINANCING ACTIVITIES:
Net increase in deposits 42,657 2 25,177
Proceeds from Federal Home Loan
Bank advances 161,100 151,000 249,350
Principal payments on Federal Home
Loan Bank advances (150,700) (168,500) (196,300)
Net decrease in advances from
borrowers for taxes and insurance (444) (50) (587)
Proceeds from issuance of stock under
stock plans 1,533 2,177 1,124
Cash paid in lieu of 5% stock dividend for
fractional shares - (11) -
Purchase of treasury stock (804) (6,331) -
Cash dividends paid (2,690) (2,019) (1,660)
------- ------- -------
Net cash provided by (used in) financing
activities 50,652 (23,732) 77,104
------- -------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 50,778 (11,966) 7,130
CASH AND CASH EQUIVALENTS:
Beginning of year 10,939 22,905 15,775
------- ------- -------
End of year $ 61,717 $ 10,939 $ 22,905
======= ======= =======
See Notes to Consolidated Financial Statements.
19
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Maryland Federal Bancorp, Inc. (the "Company") is the unitary savings and loan
holding company and sole stockholder of Maryland Federal Bank (the "Bank"),
formerly known as Maryland Federal Savings and Loan Association. The Company
does not presently own or operate any subsidiary except for the Bank. The Bank
operates 28 branches located in Prince George's, Montgomery, Charles, Calvert
and Anne Arundel counties in Maryland.
The Bank is primarily engaged in the business of attracting deposits from the
general public and investing such deposits in permanent loans secured by first
liens on one- to four-family residential properties located in the Washington,
DC area. The Bank, through a subsidiary, engages in insurance agency activities
to a limited extent.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company, the
Bank and its wholly-owned subsidiary, MASSLA Corporation (collectively,
"Maryland Federal"). All significant intercompany balances and transactions have
been eliminated in consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
For the purpose of presentation in the consolidated statements of cash flows,
cash and cash equivalents include cash and due from banks, and interest-bearing
deposits with banks.
SECURITIES:
Debt securities for which Maryland Federal has the positive intent and ability
to hold to maturity are classified as held to maturity and are reported at cost,
adjusted for premiums and discounts that are recognized in interest income using
a method which approximates the interest method. Debt securities not classified
as held to maturity and equity securities are classified as available for sale
and reported at fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of stockholders' equity, net of
the related tax effect.
Should any securities be sold, gains and losses would be recognized using the
specific-identification method. If there are declines in the fair value of
individual securities below their cost that are other than temporary, such
declines would be included in earnings as realized losses.
LOANS HELD FOR SALE:
Mortgage loans held for sale in the secondary market are carried at the lower of
aggregate cost or estimated fair value. Net unrealized losses, if any, are
recognized in a valuation allowance by charges to operations.
LOANS RECEIVABLE:
Loans receivable are stated at unpaid principal balances, less the allowance for
loan losses, and net deferred loan origination fees, costs and discounts.
Discounts and premiums on loans are amortized and reflected as an addition to or
reduction of income using the interest method over the remaining period to
contractual maturity.
Effective March 1, 1995, Maryland Federal adopted, on a prospective basis,
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" ("SFAS 114") and Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" ("SFAS 118"). These statements require creditors to
account for impaired loans, except for those loans that are accounted for at
fair value or at the lower of cost or fair value, at the present value of the
expected future cash flows discounted at the loan's effective interest rate, or
the fair value of the collateral if the loan is collateral dependent. A loan is
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all principal and interest amounts due
according to the contractual terms of the loan agreement. Neither the initial
adoption nor the ongoing effect to date of SFAS 114 and SFAS 118 has had a
significant impact on the consolidated financial statements of Maryland Federal.
The allowance for loan losses is increased by provisions charged to income and
decreased by charge-offs, net of recoveries. Management's periodic evaluation of
the adequacy of the allowance is based on Maryland Federal's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
Uncollectible interest on loans that are contractually past due is charged off
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
cash payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments is no longer in doubt,
in which case the loan is returned to accrual status.
LOAN ORIGINATION AND COMMITMENT FEES AND RELATED COSTS:
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amount is being amortized as an adjustment of the
related loan's yield over the life of the loan. When loans are sold or prepaid,
the related unamortized loan fees are recognized in income.
LOAN SERVICING:
Maryland Federal services mortgage loans that are not included in the
consolidated statements of financial condition. Fees earned for servicing loans
owned by investors are reported as income when the related mortgage loan
payments are collected. Loan servicing costs are charged to expense as incurred.
Effective January 1, 1997, Maryland Federal adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS 125"), which
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on the consistent
application of a financial-components approach that focuses on control. This
approach requires the recognition of financial assets and servicing assets that
are controlled by the reporting entity and the liabilities it has incurred, the
derecognition of financial assets when control is surrendered, and the
derecognition of liabilities when extinguished. This statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. The effective date of certain
provisions of SFAS 125 was deferred until January 1, 1998 by SFAS 127. The
adoption of these statements has not had a significant impact on the
consolidated financial statements of Maryland Federal.
FORECLOSED REAL ESTATE:
Real estate acquired through, or in lieu of, loan foreclosure is initially
recorded at the lower of cost or fair value at the date of acquisition. Losses
estimated at the time of acquisition are charged to earnings in the period in
which the property is acquired and reduced by any allowance for loss previously
provided against the related loan. Holding costs are charged to expense in the
period in which incurred. Gains or losses on the sale of foreclosed real estate
are recognized upon disposition of the property.
Management periodically evaluates the recoverability of the carrying value of
foreclosed real estate. An allowance, if necessary, is provided to reduce the
carrying value to its fair value less estimated selling costs.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided over the estimated useful lives of the
respective assets principally on the straight-line method. Leasehold
improvements are being amortized using the straight-line method over the terms
of the related leases.
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED:
Cost in excess of fair value of net assets acquired is being amortized using the
straight-line method over 7 years. The unamortized balance was $994,000 and
$1,281,000 as of February 28, 1998 and 1997, respectively, and is included in
other assets in the accompanying consolidated statements of financial condition.
LONG-LIVED ASSETS:
Long-lived assets to be held and those to be disposed of and certain other
intangibles are evaluated for impairment using the guidance of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"),
which was adopted by Maryland Federal on March 1, 1996. SFAS 121 establishes
when an impairment loss should be recognized and how an impairment loss should
be measured. The adoption of SFAS 121 did not have a significant impact on the
consolidated financial statements of Maryland Federal.
INCOME TAXES:
Deferred tax assets and liabilities 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. Maryland Federal provides a
valuation allowance for deferred tax assets when it is more likely than not that
such assets will not be realized. 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.
20
EARNINGS PER SHARE:
During fiscal 1998, Maryland Federal adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share". This statement replaces the calculation
of primary and fully diluted earnings per share. Unlike primary earnings per
share, basic earnings per share is based only on the weighted average number of
common shares outstanding, excluding any dilutive effects of stock options.
Diluted earnings per share is similar to the previously reported fully diluted
earnings per share and is based on the weighted average number of common and
common equivalent shares, including dilutive stock options outstanding during
the year. Earnings per share amounts for all periods presented have been
restated to conform to the requirements of this statement. The weighted average
number of common shares outstanding used in the computation of basic earnings
per share was 6,452,164, 6,420,772 and 6,478,198 in fiscal 1998, 1997 and 1996,
respectively. The weighted average number of common shares outstanding,
including dilutive stock options, used in the computation of diluted earnings
per share was 6,664,876, 6,582,994 and 6,672,068 in fiscal 1998, 1997 and 1996,
respectively.
Stock options for 39,649, 104,198 and 1,985 common shares have been excluded
from the computation of diluted earnings per share in fiscal 1998, 1997 and
1996, respectively, as their effects would be antidilutive.
STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") was issued in October 1995. This
statement encourages all entities to adopt a fair value based method of
accounting for their employee stock-based compensation plans. The statement
also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion 25"). Entities electing to remain with the
accounting in APB Opinion 25 must make pro forma disclosures of net income
and earnings per share, as if the fair value based method of accounting
defined in SFAS 123 had been applied. The accounting and disclosure
requirements of SFAS 123 are generally effective for transactions entered
into in fiscal years that begin after December 15, 1995, although they may be
adopted on issuance. Pro forma disclosures are required for entities that
elect to continue to measure compensation cost using APB Opinion 25, and must
include the effects of the awards granted in fiscal years that begin after
December 15, 1994. Maryland Federal applies APB Opinion 25 in accounting for
its stock compensation plans, as permitted by SFAS 123. Accordingly, no
compensation cost has been recognized. See Note 20 to Consolidated Financial
Statements.
DERIVATIVE FINANCIAL INSTRUMENTS:
Effective March 1, 1995, Maryland Federal adopted, on a prospective basis,
Statement of Financial Accounting Standards No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments". This
statement requires certain disclosures about financial derivatives, including
amounts, nature and terms of the instruments. All derivative financial
instruments held or issued by Maryland Federal are held or issued for purposes
other than trading. Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or received. See
disclosures in Notes 18, 22 and 25 to Consolidated Financial Statements.
NEW ACCOUNTING PRONOUNCEMENTS:
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" was issued in June 1997. This statement establishes requirements for the
disclosure and presentation of comprehensive income and its components in full
sets of financial statements. Comprehensive income is defined as transactions
and other occurrences which are the result of nonowner changes in equity.
Nonowner equity changes, such as unrealized gains or losses on certain debt
securities for example, will be accumulated with net income in determining
comprehensive income. This statement is effective for years beginning after
December 15, 1997 and reclassification of financial statements for earlier
periods provided for comparative purposes is required. Management does not
believe that the implementation of this statement will have a material impact on
the consolidated financial statements, but additional disclosures will be
required.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" was also issued in June 1997. This
statement provides standards for reporting information on the operating segments
of public businesses in their annual and interim reports to shareholders and
requires that selected financial information be provided for segments meeting
specific criteria. This statement becomes effective for periods beginning after
December 15, 1997. Management does not believe that the implementation of this
statement will have a material impact on the consolidated financial statements,
but additional disclosures may be required.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" was issued in February 1998.
This statement standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures that
are no longer considered useful. It does not change the measurement or
recognition of those plans. This statement is effective for fiscal years
beginning after December 15, 1997. Management does not believe that the
implementation of this statement will have a material impact on the consolidated
financial statements, but revised disclosures will be required.
NOTE 2 - PLAN OF REORGANIZATION:
On February 25, 1998, Maryland Federal entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement") and a related Plan of Merger
(the "Plan of Merger"), pursuant to which Maryland Federal will become a part of
BB&T Corporation ("BB&T") (the "Merger"). Under the terms of the Plan of Merger,
each share of common stock of Maryland Federal will be converted into the right
to receive 0.5975 of a share of common stock of BB&T, subject to possible
adjustment as set forth in the Reorganization Agreement and the Plan of Merger.
Consummation of the Merger is subject, among other things, to the approval of
the Reorganization Agreement and the Plan of Merger by the Maryland Federal
shareholders, approval of the Merger by various regulatory agencies, and
satisfaction or waiver of certain other contractual conditions. It is
anticipated that the Merger will be accounted for as a purchase under generally
accepted accounting principles.
In connection with the Reorganization Agreement, BB&T and Maryland Federal
entered into a stock option agreement whereby BB&T shall have the option to
purchase 1,290,000 shares of Maryland Federal's common stock at a price of
$30.50 per share, only upon the occurrence of certain specified events. These
options, which may have a potentially dilutive effect on earnings per share,
have been excluded from the weighted average number of shares computation, as
preconditions to the exercisability of such options were not satisfied.
Maryland Federal has agreed to pay a transaction fee in connection with the
Merger to a financial advisor. As of February 28, 1998, fees to the financial
advisor and other expenses in connection with the Merger totaled $644,000, which
are included in noninterest expense. Upon consummation of the Merger, an
additional fee of $1.3 million will be payable by Maryland Federal to the
financial advisor.
NOTE 3 - FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO
RESELL:
Federal funds sold and securities purchased under agreements to resell are
summarized as follows:
February 28, February 28,
1998 1997
------- -------
(In Thousands)
Federal funds sold $ 8,625 $15,406
Securities purchased under agreements to resell:
U.S. Government securities 5,405 2,259
------- -------
Total $14,030 $17,665
======= =======
Maryland Federal enters into purchases of securities under agreements to resell.
The amounts advanced under these agreements represent short-term loans and are
reflected as a receivable in the consolidated statements of financial condition.
The securities underlying the agreements are book-entry securities. The
securities were delivered by appropriate entry into a third-party custodian's
account designated by Maryland Federal under a written custodial agreement that
explicitly recognizes Maryland Federal's interest in the securities. At February
28, 1998, these agreements mature within ninety days. All of the agreements were
to resell the identical securities. Securities purchased under agreements to
resell averaged approximately $5,000,000 and $5,300,000 during fiscal 1998 and
1997, respectively, and the maximum amounts outstanding at any month-end during
fiscal 1998 and 1997 were approximately $7,700,000 and $15,400,000,
respectively.
21
NOTE 4 - SECURITIES:
A summary of securities is as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------- ----------------- ---------------- -------------------
(In Thousands)
Securities available for sale:
February 28, 1998:
Federal Home Loan Mortgage
Corporation $ 152 $ 7,184 $ - $ 7,336
Mortgage-backed and related
securities 57,208 959 100 58,067
Other 12,243 - 23 12,220
------- ------- ------- -------
Total $ 69,603 $ 8,143 $ 123 $ 77,623
======= ======= ======= =======
February 28, 1997:
Federal Home Loan Mortgage
Corporation $ 152 $ 4,467 $ - $ 4,619
Mortgage-backed and related
securities 63,985 722 572 64,135
Other 606 - - 606
------- ------- ------- -------
Total $ 64,743 $ 5,189 $ 572 $ 69,360
======= ======= ======= =======
Securities held to maturity:
February 28, 1998:
United States government and
agency obligations $ 20,473 $ 37 $ 10 $ 20,500
State and municipal securities 1,473 16 - 1,489
------- ------- ------- -------
Total $ 21,946 $ 53 $ 10 $ 21,989
======= ======= ======= =======
February 28, 1997:
United States government and
agency obligations $ 9,974 $ 11 $ 49 $ 9,936
State and municipal securities 1,474 7 - 1,481
------- ------- ------- -------
Total $ 11,448 $ 18 $ 49 $ 11,417
======= ======= ======= =======
Gross realized gains on sales of securities available for sale were $165,000 and
$3,231,000 in fiscal 1998 and 1996, respectively. Gross realized gains and gross
realized losses on sales of securities held to maturity were $89,000 and $8,000,
respectively, in fiscal 1996, which were considered as maturities under the
provisions of SFAS 115. There were no sales of securities during fiscal 1997.
The amortized cost and fair value of debt securities at February 28, 1998, by
contractual maturity, are shown below. Maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalties. Securities not due at a single maturity date are
presented separately.
Securities Securities
Available for Sale Held to Maturity
------------------------------------------- ----------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------- -------------------- ------------------- -----------------
(In Thousands)
Due in one year or less $ - $ - $ 7,483 $ 7,483
Due after one year through
five years - - 14,463 14,506
Mortgage-backed and related
securities 57,208 58,067 - -
--------- --------- -------- --------
Total $ 57,208 $ 58,067 $ 21,946 $ 21,989
========= ========= ======== ========
During fiscal 1996, Maryland Federal transferred $66,200,000 of securities from
held to maturity to available for sale as a result of guidance published by the
Financial Accounting Standards Board on the implementation of SFAS 115. The net
unrealized gain on these securities at the date of transfer was $526,000.
NOTE 5 - LOANS RECEIVABLE:
Loans receivable consist of the following:
February 28, February 28,
1998 1997
--------------- ---------------
(In Thousands)
First mortgage loans:
Conventional, permanent $ 842,893 $ 888,027
Conventional, construction 13,841 6,846
VA and FHA 2,746 3,401
Participations 1,035 1,461
------- -------
Total first mortgage loans 860,515 899,735
------- -------
Consumer and other loans:
Second trust and home improvement 39,490 44,413
Home equity 81,267 51,683
Installment and other 5,389 4,010
------- -------
Total consumer and other loans 126,146 100,106
------- -------
Total loans 986,661 999,841
Less:
Undisbursed portion of mortgage loans 5,360 3,240
Unamortized premiums and discounts, net 212 373
Net deferred loan fees 582 2,356
Allowance for loan losses 4,782 4,599
------- -------
Loans receivable, net $ 975,725 $ 989,273
======= =======
Nonaccrual loans totaled $5,814,000 and $2,990,000 at February 28, 1998 and
1997, respectively. The amount of interest income that would have been recorded
on nonaccrual loans in accordance with their original terms was $397,000 and
$224,000 for fiscal 1998 and 1997, respectively. The amount of interest income
that was recorded on nonaccrual loans was $294,000 and $52,000 for fiscal 1998
and 1997, respectively.
The following is a summary of the changes in the allowance for loan losses:
Year Ended
-------------------------------------------------------
February 28, February 28, February 29,
1998 1997 1996
---------- ---------- ----------
(In Thousands)
Balance at beginning of year $ 4,599 $ 4,474 $ 4,424
Provision for losses 310 275 120
Charge-offs (144) (166) (76)
Recoveries 17 16 6
------- ------- -------
Balance at end of year $ 4,782 $ 4,599 $ 4,474
======= ======= =======
NOTE 6 - FORECLOSED REAL ESTATE:
Foreclosed real estate consists of the following:
February 28, February 28,
1998 1997
------- -------
(In Thousands)
Acquired in foreclosure or by deed in lieu of foreclosure:
Residential properties $ 559 $ 232
Nonresidential properties 1,195 1,425
Commercial land 896 983
------- -------
Total foreclosed real estate 2,650 2,640
Less allowance for losses 1,369 1,341
------- -------
Foreclosed real estate, net $ 1,281 $ 1,299
======= =======
The following is a summary of the changes in the allowance for losses on
foreclosed real estate:
Year Ended
------------------------------------------------
February 28, February 28, February 29,
1998 1997 1996
------------ ------------ ------------
(In Thousands)
Balance at beginning of year $ 1,341 $ 1,282 $ 1,082
Provision for losses 140 100 200
Charge-offs (112) (41) --
--------- --------- ---------
Balance at end of year $ 1,369 $ 1,341 $ 1,282
========= ========= =========
22
The following is a summary of loss on foreclosed real estate, net:
Year Ended
---------------------------------------------------------------------------------
February 28, February 28, February 29,
1998 1997 1996
------------------------ ------------------------- -------------------------
(In Thousands)
Holding costs $ 99 $ 152 $ 126
Provision for losses 140 100 200
Gain on sales (184) (102) (27)
---------- --------- ---------
$ 55 $ 150 $ 299
========== ========= =========
NOTE 7 - LOAN SERVICING:
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans totaled approximately $57,100,000, $35,000,000 and $28,400,000 as of
February 28, 1998, 1997 and February 29, 1996, respectively. Custodial escrow
balances maintained in connection with the foregoing loan servicing were
approximately $800,000 and $700,000 at February 28, 1998 and 1997, respectively.
NOTE 8 - ACCRUED INTEREST RECEIVABLE:
Accrued interest receivable is summarized as follows:
February 28, February 28,
1998 1997
--------------- --------------
(In Thousands)
Securities $ 1,413 $ 787
Loans receivable 5,069 5,234
--------- ---------
Total $ 6,482 $ 6,021
========= =========
NOTE 9 - PREMISES AND EQUIPMENT:
Premises and equipment consist of the following:
February 28, February 28,
1998 1997
------- -------
(In Thousands)
Land $ 1,237 $ 1,237
Buildings and improvements 2,833 2,767
Furniture and equipment 8,744 7,977
Leasehold improvements 1,334 1,123
Automobiles 119 105
--------- ---------
Total premises and equipment 14,267 13,209
Less accumulated depreciation
and amortization 9,454 8,633
--------- ---------
Premises and equipment, net $ 4,813 $ 4,576
========= =========
NOTE 10 - DEPOSITS:
The following is a summary of deposits:
Weighted
Average
Rate at February 28, 1998 February 28, 1997
February 28, --------------------------------- -----------------------------
1998 Amount Percent Amount Percent
------------ ------------ -------------- ------------ -----------
(Dollars in Thousands)
Demand and checking
accounts, including
noninterest-bearing
deposits of $24,329,000
and $16,814,000 at
February 28, 1998 and
1997, respectively 1.31% $ 63,366 7.62% $ 53,937 6.84%
Money market 3.15% 40,495 4.87% 42,385 5.37%
Statement savings 3.21% 70,870 8.52% 74,488 9.44%
---------- ------ ----------- ------
174,731 21.01% 170,810 21.65%
---------- ------ ----------- ------
Certificates of deposit:
6.00% or less 530,504 63.79% 529,859 67.16%
6.01% to 8.00% 125,911 15.14% 86,964 11.02%
8.01% to 10.00% 440 .05% 1,292 .16%
10.01% to 12.00% 4 .01% 8 .01%
---------- ------ ----------- ------
5.57% 656,859 78.99% 618,123 78.35%
---------- ------ ----------- ------
Total 4.93% $ 831,590 100.00% $ 788,933 100.00%
========== ====== =========== ======
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $95,400,000 and $88,600,000 at
February 28, 1998 and 1997, respectively.
At February 28, 1998, scheduled maturities of certificates of deposit are as
follows:
6.00% 6.01% to 8.01% to 10.01% to
Fiscal Year or Less 8.00% 10.00% 12.00% Total
- ----------- --------- -------- -------- --------- --------
(In Thousands)
1999 $427,750 $ 90,650 $ 164 $ 4 $518,568
2000 59,320 23,771 251 - 83,342
2001 25,928 5,157 25 - 31,110
2002 15,535 5,604 - - 21,139
2003 1,902 601 - - 2,503
Thereafter 69 128 - - 197
-------- -------- ------ ------ --------
Total $530,504 $125,911 $ 440 $ 4 $656,859
======== ======== ====== ====== ========
The following is a summary of interest expense on deposits:
Year Ended
----------------------------------------
February 28, February 28, February 29,
1998 1997 1996
------------ ------------ ------------
(In Thousands)
Checking $ 755 $ 730 $ 760
Money market 1,296 1,304 1,393
Statement savings 2,339 2,429 2,686
Certificates of deposit 35,511 34,329 35,059
-------- -------- --------
Total $39,901 $38,792 $39,898
======== ======== ========
NOTE 11 - ADVANCES FROM FEDERAL HOME LOAN BANK OF ATLANTA:
At February 28, 1998, advances from Federal Home Loan Bank of Atlanta (the
"FHLB") are collateralized by a blanket agreement covering all qualifying first
mortgage loans and all Maryland Federal's stock in the FHLB. Advances mature as
follows, excluding call provisions, as of February 28, 1998:
Weighted
Fiscal Average
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%
==========
Maryland Federal, as a member of the FHLB System, is required to maintain an
investment in capital stock of the FHLB in an amount equal to the greater of 1%
of its total mortgage assets or 5% of its outstanding advances.
NOTE 12 - INCOME TAXES:
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
February 28, February 28,
1998 1997
----------- -----------
(In Thousands)
Deferred tax liabilities:
Federal Home Loan Bank stock dividends $ 1,317 $ 1,317
Unrealized holding gains 3,096 1,782
-------- --------
Total deferred tax liabilities 4,413 3,099
-------- --------
Deferred tax assets:
Loan fees - 216
Allowance for losses on loans and
foreclosed real estate 812 408
Reorganization expenses 255 -
Other 707 633
-------- --------
1,774 1,257
Less valuation allowance 255 -
-------- --------
Total deferred tax assets 1,519 1,257
-------- --------
Net deferred tax liabilities $ 2,894 $ 1,842
======== ========
23
Pursuant to legislation enacted in 1996, Maryland Federal is not permitted to
use the reserve method previously available to thrift institutions to compute
its tax bad debt deduction for tax years beginning after December 31, 1995.
Under the provisions of this legislation, Maryland Federal will recapture its
post 1987 tax bad debt reserves in excess of actual specific bad debts ratably
over a six-year period beginning with fiscal 1997. Maryland Federal has
previously provided for deferred taxes on its post 1987 tax bad debt reserves;
therefore, this legislation will not affect Maryland Federal's net income.
Maryland Federal 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 Maryland Federal 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
Maryland Federal does not maintain certain qualified assets as defined or the
reserve is charged for other than bad debt losses.
The components of income tax expense are as follows:
Year Ended
----------------------------------------
February 28, February 28, February 29,
1998 1997 1996
------------ ------------ ------------
(In Thousands)
Current $ 6,420 $ 1,313 $ 6,500
Deferred (262) 181 (970)
------- ------- -------
Total $ 6,158 $ 1,494 $ 5,530
======= ======= =======
Income tax expense differs from that computed at the statutory Federal income
tax rate as follows:
Year Ended
----------------------------------------
February 28, February 28, February 29,
1998 1997 1996
------------- ------------- ------------
(In Thousands)
Statutory Federal income tax rate 35% 34% 35%
Income tax expense at
statutory rate $ 5,227 $ 2,726 $ 4,994
Increase (decrease) in taxes:
State taxes, net of Federal
income tax benefit 679 365 649
Other 252 (1,597) (113)
------- ------- -------
Total $ 6,158 $ 1,494 $ 5,530
======= ======= =======
Income tax expense for fiscal 1997 reflects a $1.6 million decrease to revise
prior estimates in recording the income tax provision.
NOTE 13 - OTHER NONINTEREST EXPENSE:
Other noninterest expense amounts are summarized as follows:
Year Ended
---------------------------------------------
February 28, February 28, February 29,
1998 1997 1996
-------------- -------------- ------------
(In Thousands)
Printing, postage, stationery
and supplies $1,352 $1,302 $1,313
Professional fees 1,018 414 339
Telephone 364 332 314
Other 1,974 1,711 1,995
------ ------ ------
Total $4,708 $3,759 $3,961
====== ====== ======
NOTE 14 - REGULATORY MATTERS:
The Bank is subject to various regulatory capital requirements administered by
federal regulatory agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possible additional discretionary actions by
regulators, that if undertaken, could have a direct material effect on the
consolidated financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to quantitative judgments by the regulators regarding components, risk
weightings, and other factors. Quantitative measures established by regulation
to ensure capital adequacy require the Bank to maintain minimum amounts and
ratios as set forth in the following table.
The most recent notification from the Office of Thrift Supervision ("OTS")
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be well capitalized under the prompt corrective
action provisions, the Bank must maintain minimum capital ratios as set forth in
the following table. Management believes, as of February 28, 1998, that the Bank
meets all capital requirements to which it is subject. There are no conditions
or events since that notification that management believes have changed the
Bank's category.
The Bank's actual capital amounts and ratios are as follows:
To Be Well Capitalized
Under Prompt
For Capital Adequacy Corrective Action
Actual Purposes Provisions
---------------------------- --------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- --------- ---------- ----------- ----------- ---------
(Dollars in Thousands)
As of February 28, 1998:
Total Capital (to Risk-
Weighted Assets) $102,452 16.53% $ 49,595 8.00% $ 61,994 10.00%
Tier 1 Capital (to Risk-
Weighted Assets) 97,669 15.75% N/A N/A 37,196 6.00%
Tier 1 Capital (to Adjusted
Total Assets) 97,669 8.24% 35,554 3.00% 59,256 5.00%
Tangible Capital (to
Adjusted Total Assets) 97,669 8.24% 17,777 1.50% N/A N/A
As of February 28, 1997:
Total Capital (to Risk-
Weighted Assets) 92,199 15.30% 48,184 8.00% 60,260 10.00%
Tier 1 Capital (to Risk-
Weighted Assets) 87,600 14.54% N/A N/A 36,156 6.00%
Tier 1 Capital (to Adjusted
Total Assets) 87,600 7.72% 34,040 3.00% 56,736 5.00%
Tangible Capital (to
Adjusted Total Assets) 87,600 7.72% 17,020 1.50% N/A N/A
Legislation was enacted September 30, 1996, to mitigate the disparity between
institutions insured by the Bank Insurance Fund and those insured by the Savings
Association Insurance Fund ("SAIF"), which were required to pay substantially
higher deposit insurance premiums. This legislation recapitalized the SAIF
through a one-time special assessment. Maryland Federal's pro-rata share of this
one-time special assessment was $5.1 million before taxes and was recognized in
fiscal 1997. This legislation also provides for a reduction in deposit insurance
premiums in subsequent periods and other regulatory reforms.
NOTE 15 - STOCKHOLDERS' EQUITY:
Under Federal regulations, the Bank may not declare or pay a cash dividend on
its capital stock if the effect thereof would cause the Bank's regulatory
capital to be reduced below the amount required for the regulatory capital
requirements imposed by the OTS.
Under the OTS regulations, the ability of thrift institutions such as the Bank
to make "capital distributions" (defined to include payment of dividends, stock
repurchases, cash-out mergers, and other distributions charged against the
capital accounts of an institution) varies depending primarily on the
institution's regulatory capital level. Institutions are divided into three
tiers for purposes of these regulations.
At February 28, 1998, the Bank was a Tier 1 institution (an institution with
capital in excess of its fully phased-in capital requirements), and consequently
was eligible to pay dividends. The OTS retains general discretion to prohibit
any otherwise permitted capital distributions on general safety and soundness
grounds and must be given 30 days advance notice of all capital distributions.
NOTE 16 - STOCK SPLIT:
The Company's Board of Directors declared a two-for-one common stock split on
October 16, 1997. The additional shares were distributed on November 21, 1997 to
shareholders of record as of November 7, 1997. The consolidated financial
statements have been restated to reflect the effects of the impact of the common
stock split for all periods presented.
24
NOTE 17 - EMPLOYEE RETIREMENT PLANS:
Maryland Federal has a qualified, noncontributory defined benefit retirement
plan. Full-time employees are eligible to participate in the plan when they
attain age 25 with one year of service. Amendments to the plan have established
the 100% vesting period at five years. Plan assets consist primarily of
investments in mutual funds.
The following sets forth the funded status of the plan and the amounts shown in
the accompanying consolidated statements of financial condition:
February 28, February 28,
1998 1997
------------------- ----------------
(In Thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested benefits $ 4,533 $ 4,131
Nonvested benefits 168 225
-------- --------
4,701 4,356
Effect of projected future compensation 2,310 2,652
-------- --------
Projected benefit obligation 7,011 7,008
Fair value of assets held in the plan 5,102 3,740
-------- --------
Plan assets less than the projected benefit
obligation (1,909) (3,268)
Net unrecognized loss from past experience
different from that assumed 919 1,737
Unrecognized prior service cost (64) (71)
Unrecognized net transition asset (222) (236)
-------- --------
Accrued pension cost (included in
accrued expenses and other liabilities) $ (1,276) $ (1,838)
======== ========
Components of net pension expense are as follows:
Year Ended
-------------------------------------
February 28, February 28, February 29,
1998 1997 1996
----------- ----------- ------------
(In Thousands)
Service cost-benefits earned $ 475 $ 610 $ 571
Interest cost on projected benefit
obligation 491 429 363
Actual return on assets held in the plan (642) (354) (448)
Net amortization and deferral 322 86 (7)
----- ----- -----
Net pension expense $ 646 $ 771 $ 479
===== ===== =====
The weighted average discount rate used to measure the projected benefit
obligation is 7%, the rate of increase in future compensation levels is 5.5%,
and the expected long-term rate of return on assets is 9%.
Maryland Federal also maintains a contributory retirement 401(k) savings plan
for its employees. Employees who meet the length of service and age requirements
can contribute from 1% to 15% of their eligible compensation to the plan, up to
a maximum established by law. For eligible employees electing to participate,
Maryland Federal will also make a contribution to the plan equal to 50% of the
first 5% contributed by the employees. The Maryland Federal's expense for fiscal
1998, 1997 and 1996 was $140,000, $121,000 and $106,000, respectively.
During fiscal 1997, the Board of Directors approved a deferred compensation plan
for certain management personnel. Amounts deferred under this plan are expensed
as earned, but are payable only after employment has ended.
NOTE 18 - COMMITMENTS AND CONTINGENCIES:
In the ordinary course of business, Maryland Federal has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, Maryland Federal
occasionally is a defendant in certain claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to
have a material adverse effect on the consolidated financial position of
Maryland Federal.
LEASE COMMITMENTS:
A number of Maryland Federal's branch and loan production office sites are
occupied under noncancelable leases which expire on various dates through 2005.
Management expects that, in the normal course of business, leases that expire
will be renewed or replaced by other leases. Total rent expense, including
equipment leases, was approximately $1,310,000, $1,111,000 and $1,066,000, for
fiscal 1998, 1997 and 1996, respectively.
The total commitments for future minimum annual rental payments for real
property and equipment leases are as follows as of February 28, 1998:
Fiscal Year Amount
----------- ---------
(In Thousands)
1999 $ 1,080
2000 641
2001 535
2002 439
2003 203
Thereafter 146
---------
Total $ 3,044
=========
LOAN COMMITMENTS:
As of February 28, 1998 and 1997, Maryland Federal had commitments to originate
and purchase loans totaling approximately $72,600,000 and $51,500,000,
respectively. As of February 28, 1998 and 1997, Maryland Federal had commitments
to sell loans totaling approximately $37,100,000 and $6,800,000, respectively.
NOTE 19 - RELATED PARTY TRANSACTIONS:
In the normal course of business, Maryland Federal may make loans to directors
and executive officers, their affiliates and members of their immediate
families. The aggregate balances of these loans greater than $60,000 were
$2,092,000 and $1,512,000 as of February 28, 1998 and 1997, respectively. During
fiscal 1998, $1,122,000 were advanced and $542,000 were repaid with respect to
these loans. During fiscal 1997, $108,000 were advanced and $395,000 were repaid
with respect to these loans.
The law firm in which the Chairman of the Board of the Company is a senior
partner, performs legal services for Maryland Federal in the ordinary course of
business. For fiscal 1998, 1997 and 1996, the firm received fees of $418,000,
$410,000 and $323,000, respectively, for services performed for Maryland
Federal, in addition to fees which were paid by borrowers.
NOTE 20 - STOCK PURCHASE AND STOCK OPTION PLANS:
The Board of Directors has adopted an Employee Stock Purchase Plan. The
aggregate number of shares of common stock which may be purchased pursuant to
the plan is 333,440 shares. Eligible employees are able to purchase stock at not
less than 85% of the lesser of the fair market value of the shares on the first
day or the last day of the offering period. Common stock purchases are made
through periodic payroll deductions of no less than 2% nor more than 10% of
eligible compensation. Employee purchases amounted to 6,844 shares at a price of
$14.66 and 5,812 shares at a price of $21.04 in fiscal 1998, 8,620 shares at a
price of $11.07 and 8,416 shares at a price of $12.17 in fiscal 1997, and 8,012
shares at a price of $13.42 and 6,712 shares at a price of $10.10 in fiscal
1996. The total number of shares remaining to be purchased at the end of fiscal
1998 amounted to 168,262 shares.
The Board of Directors has adopted a key employee stock compensation program, a
stock option and stock appreciation rights plan and a stock incentive plan.
Options may be granted to purchase up to an aggregate of 1,202,960 shares of
common stock at the fair market value of the shares at the time the options are
granted. These options may be exercised after three but no later than five years
after date of granting. As of February 28, 1998, options have been granted to
purchase 1,191,860 shares.
In March, 1993, the Board of Directors adopted a Directors' stock option plan.
Options may be granted to purchase up to an aggregate of 312,000 shares of
common stock at the fair market value of the shares at the time the options are
granted. These options may be exercised after six months but no later than ten
years after date of granting. During fiscal 1994, each nonemployee director of
the Company was granted compensatory options to purchase 12,000 shares of common
stock, and thereafter, on the anniversary of the effective date of the plan for
the next four years, each nonemployee director will receive compensatory options
to purchase 10,000 shares. As of February 28, 1998, options have been granted to
purchase 247,000 shares.
In March 1995, the Board of Directors adopted the 1995 stock option plan.
Options may be granted to employees to purchase up to an aggregate of 320,320
shares of common stock at the fair value of the shares at the time the options
are granted. These options may be exercised 33-1/3% per year over a three-year
period commencing on the first anniversary of the granting date, but no later
than ten years after date of granting. As of February 28, 1998, options have
been granted to purchase 320,320 shares.
25
The following table summarizes information on these stock option plans:
Weighted
Average
Price
Per Share Shares
------------------ -------------------
Outstanding at February 28, 1995 $ 8.94 711,186
Granted 13.61 257,600
Exercised 4.68 (202,590)
Canceled 11.83 (20,200)
--------
Outstanding at February 29, 1996 11.63 745,996
Granted 18.07 160,800
Exercised 8.57 (229,896)
Canceled 12.17 (18,964)
Adjustment for 5% stock dividend - 35,530
--------
Outstanding at February 28, 1997 13.52 693,466
Granted 18.75 40,000
Exercised 11.65 (111,367)
Canceled 18.35 (3,095)
--------
Outstanding at February 28, 1998 14.17 619,004
========
Exercisable at February 28, 1998 13.53 471,732
========
Had compensation cost been determined on the basis of fair value pursuant to
SFAS 123, net income and earnings per share would have been as follows:
Year Ended
------------------------------------
February 28, February 28,
1998 1997
---------------- ----------------
(Dollars in Thousands,
Except Per Share Data)
Net income:
As reported $ 8,775 $ 6,525
Pro forma 8,422 6,338
Basic earnings per share:
As reported 1.36 1.02
Pro forma 1.31 .99
Diluted earnings per share:
As reported 1.32 .99
Pro forma 1.26 .96
Weighted-average assumptions:
Risk-free interest rate 6.59% 6.43%
Expected life 8 years 8 years
Expected volatility of stock price 13.00% 12.50%
Expected dividends 2.00% 2.00%
The range of exercise prices for the stock options outstanding at February 28,
1998 was $10.54 to $18.75, with a weighted-average remaining contractual life of
approximately five years.
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes option-pricing model. The weighted-average fair value of
stock options granted during fiscal 1998 and 1997 was $5.32 and $4.83,
respectively. The method of accounting for options prescribed by SFAS 123 does
not apply to options granted prior to January 1, 1995, and accordingly, the
resulting pro forma compensation costs may not be representative of that to be
expected in future years.
NOTE 21 - STOCKHOLDERS' RIGHTS PLAN:
On January 18, 1990, the Board of Directors of the Company declared a dividend
distribution of one right for each outstanding share of common stock of the
Company to stockholders of record at the close of business on February 12, 1990.
Each right entitles the registered holder to purchase from the Company a unit
consisting of one one-hundredth of a share (a "Unit") of Series A Junior
Participating Preferred Stock, par value $.10 per share, at a purchase price of
$45.00 per Unit. The description and terms of the rights are set forth in a
rights agreement between the Company and the rights agent.
The rights may be exercised only if a person or group acquires beneficial
ownership of 20% or more of the Company's common stock or announces a tender
offer or exchange offer that would result in ownership of 20% or more of the
common stock (the "Acquirer"). The Company generally may redeem the rights for
one cent each at any time before any person or group acquires beneficial
ownership of 20% or more of the common stock.
In the event that any person acquires beneficial ownership of 20% or more of the
Company's common stock, all rights holders, except the Acquirer and affiliates
and associates thereof, will be entitled to purchase common stock from the
Company at 50% of the market price. If the Company is acquired in a merger,
statutory share exchange or other business combination after the acquisition of
beneficial ownership of 20% or more of the common stock, rights holders, other
than the Acquirer and its affiliates and associates, will be entitled to
purchase the Acquirer's shares at a similar discount.
These rights, which may have a potentially dilutive effect on earnings per
share, have been excluded from the weighted average number of shares
computation, as preconditions to the exercisability of such rights were not
satisfied.
NOTE 22 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
Maryland Federal is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated statements of financial condition. The contract amounts of those
instruments reflect the extent of involvement Maryland Federal has in particular
classes of financial instruments.
Maryland Federal's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit written is represented by the contractual amount of
those instruments. Maryland Federal uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
A summary of the contract amount of Maryland Federal's exposure to
off-balance-sheet risk is as follows:
February 28, February 28,
1998 1997
------------------------ -----------------------
(In Thousands)
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $ 145,702 $ 104,176
Standby letters of credit 5,047 1,978
Commitments to extend credit are agreements to lend to a customer so long as
there is no violation of any condition established in the contract. Commitments
usually have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
Standby letters of credit are conditional commitments issued by Maryland Federal
to guarantee the performance of contractual obligations by a customer to a third
party. The majority of these guarantees extend until satisfactory completion of
the customer's contractual obligations.
NOTE 23 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Year Ended
--------------------------------------------------------
February 28, February 28, February 29,
1998 1997 1996
----------------- ------------------ -----------------
(In Thousands)
Cash paid for:
Interest $ 52,952 $ 52,328 $ 52,144
Income taxes 6,219 1,603 5,422
Transfer from loans to
foreclosed real estate 2,374 1,229 281
Loans to finance sales of
foreclosed real estate 186 544 208
NOTE 24 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK:
Most of Maryland Federal's business activities are with customers located in the
metropolitan Washington, DC area. Service industries and Federal, state and
local governments employ a significant portion of the Washington area labor
force. Adverse changes in economic conditions could have a direct impact on the
timing and amount of payments by borrowers.
26
NOTE 25 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
Fair value information which pertains to Maryland Federal's financial
instruments is based on the requirements set forth in Statement of Financial
Accounting Standards No. 107 ("SFAS 107"). In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of Maryland Federal.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents, and Federal Funds Sold and Securities Purchased Under
Agreements to Resell: The carrying amount is a reasonable estimate of fair
value.
Securities: Fair values for securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are estimated
using quoted market prices for similar securities.
Loans Receivable and Loans Held for Sale: For certain homogeneous categories of
loans, such as some residential mortgages and consumer loans, fair value is
estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics. The fair value of other types
of loans is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
Deposits: The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank of Atlanta: Rates currently available to
Maryland Federal for debt with similar terms and remaining maturities are used
to estimate fair value of existing debt.
Off-Balance-Sheet Instruments: The fair values of off-balance-sheet lending
commitments are estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties.
The estimated fair values of Maryland Federal's financial instruments are as
follows:
February 28, 1998 February 28, 1997
------------------------------------------- --------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------- -------------------- ------------------- --------------
(In Thousands)
Financial assets:
Cash and cash equivalents $ 61,717 $ 61,717 $ 10,939 $ 10,939
Federal funds sold and securities
purchased under agreements
to resell 14,030 14,030 17,665 17,665
Securities available for sale 77,623 77,623 69,360 69,360
Securities held to maturity 21,946 21,989 11,448 11,417
Loans held for sale 13,461 13,589 2,679 2,697
Loans receivable, net 975,725 982,277 989,273 978,464
Financial liabilities:
Deposits 831,590 813,251 788,933 764,973
Advances from FHLB 236,680 233,081 226,280 225,582
Off-balance-sheet instruments:
Commitments to extend credit - 2,914 - 1,053
Standby letters of credit - 101 - 40
NOTE 26 - PARENT COMPANY ONLY FINANCIAL INFORMATION:
The condensed financial statements of the parent company only are presented
below:
Condensed Statements of Financial Condition
(Parent Company Only)
February 28, February 28,
1998 1997
-------------- --------------
(In Thousands)
ASSETS:
Cash $ 1,835 $ 3,838
Investment in subsidiary 103,587 91,716
Securities available for sale -- 512
Other assets 683 505
--------- --------
Total assets $ 106,105 $ 96,571
========= ========
LIABILITIES $ 1,652 $ 1,310
--------- --------
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock 83 82
Additional paid-in capital 44,497 42,584
Retained earnings 72,969 66,976
Unrealized holding gains, net 4,924 2,835
Treasury stock, at cost (18,020) (17,216)
--------- --------
Total stockholders' equity 104,453 95,261
--------- --------
Total liabilities and stockholders' equity $ 106,105 $ 96,571
========= ========
Condensed Statements of Income
(Parent Company Only)
Year Ended
-----------------------------------------------------------------------------
February 28, February 28, February 29,
1998 1997 1996
----------------------- ------------------------- -------------------------
(In Thousands)
Advisory fee income $ 187 $ 160 $ 160
Interest income 12 120 92
General and administrative expenses 815 228 87
------- ------- -------
Income (loss) before income taxes and
equity in net income of subsidiary (616) 52 165
Income tax expense 11 19 58
------- ------- -------
Income (loss) before equity in net
income of subsidiary (627) 33 107
Equity in net income of subsidiary 9,402 6,492 8,632
------- ------- -------
NET INCOME $ 8,775 $ 6,525 $ 8,739
======= ======= =======
Condensed Statements of Cash Flows
(Parent Company Only)
Year Ended
-----------------------------------------------------
February 28, February 28, February 29,
1998 1997 1996
---------------- ----------------- ----------------
(In Thousands)
OPERATING ACTIVITIES:
Net income $ 8,775 $ 6,525 $ 8,739
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in net income of subsidiary,
net of distributions (9,402) (2,492) (3,632)
Decrease (increase) in other assets (178) (505) 31
Increase in liabilities 251 610 15
------- ------- -----
Net cash provided by (used in)
operating activities (554) 4,138 5,153
------- ------- -----
INVESTING ACTIVITIES:
Purchases of securities available
for sale (12) (1,020) (4,541)
Proceeds from maturities of securities
available for sale 524 6,112 -
------- ------- -----
Net cash provided by (used in)
investing activities 512 5,092 (4,541)
------- ------- -----
FINANCING ACTIVITIES:
Proceeds from issuance of stock
under stock plans 1,533 2,177 1,124
Cash paid in lieu of stock dividend for
fractional shares - (11) -
Purchase of treasury stock (804) (6,331) -
Cash dividends paid (2,690) (2,019) (1,660)
------- ------- -----
Net cash used in financing activities (1,961) (6,184) (536)
------- ------- -----
INCREASE (DECREASE) IN CASH (2,003) 3,046 76
CASH:
Beginning of year 3,838 792 716
------- ------- -----
End of year $ 1,835 $ 3,838 $ 792
======= ======= =====
27
NOTE 27 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following table presents selected quarterly financial data for the years
ended February 28, 1998 and 1997:
Year Ended February 28, 1998
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------
(In Thousands, Except Per Share Data)
Interest income $20,874 $21,230 $21,495 $21,098
Interest expense 13,176 13,502 13,590 13,432
------ ------ ------ ------
Net interest income 7,698 7,728 7,905 7,666
Provision for loan losses 70 60 30 150
------ ------ ------ ------
Net interest income after provision for
loan losses 7,628 7,668 7,875 7,516
Noninterest income 681 966 1,024 995
Noninterest expense 4,481 4,674 4,767 5,498
------ ------ ------ ------
Income before income taxes 3,828 3,960 4,132 3,013
Income tax expense 1,480 1,531 1,606 1,541
------ ------ ------ ------
Net income $ 2,348 $ 2,429 $ 2,526 $ 1,472
====== ====== ====== ======
Earnings per share:
Basic $ .37 $ .38 $ .39 $ .23
Diluted .36 .36 .38 .22
Year Ended February 28, 1997
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ---------- ---------- ---------
(In Thousands, Except Per Share Data)
Interest income $20,657 $20,445 $ 20,419 $20,368
Interest expense 13,461 13,002 12,970 12,772
------ ------ ------ ------
Net interest income 7,196 7,443 7,449 7,596
Provision for loan losses 85 60 50 80
------ ------ ------ ------
Net interest income after provision for
loan losses 7,111 7,383 7,399 7,516
Noninterest income 736 649 664 696
SAIF recapitalization assessment -- -- 5,077 --
Other noninterest expense 4,771 4,829 4,809 4,649
------ ------ ------ ------
Income (loss) before income taxes 3,076 3,203 (1,823) 3,563
Income tax expense (benefit) 1,178 1,283 (2,310) 1,343
------ ------ ------ ------
Net income $ 1,898 $ 1,920 $ 487 $ 2,220
====== ====== ====== ======
Earnings per share:
Basic $ .29 $ .30 $ .08 $ .35
Diluted .28 .29 .08 .34
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Maryland Federal Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Maryland Federal Bancorp, Inc. and Subsidiary as of February 28, 1998 and
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended February 28,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Maryland Federal
Bancorp, Inc. and Subsidiary as of February 28, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended February 28, 1998, in conformity with generally accepted accounting
principles.
STOY, MALONE & COMPANY, P.C.
/s/ Stoy, Malone & Company, P.C.
Bethesda, Maryland
April 10, 1998
28
STOCK LISTING
The common stock of Maryland Federal Bancorp, Inc. is listed on the
over-the-counter market and quoted on the NASDAQ National Market System under
the symbol "MFSL". As of May 22, 1998, there were 8,376,606 shares issued, of
which 6,571,961 were outstanding.
The following table sets forth market price information for the common stock of
the Company for the periods indicated.
High Low
---------------- ---------------
Fiscal Quarter Ended
May 31, 1996 15 1/8 14 5/8
August 31, 1996 15 1/4 14
November 30, 1996 17 1/4 14 3/4
February 28, 1997 19 3/8 16 3/8
Fiscal Quarter Ended
May 31, 1997 19 1/4 17 1/4
August 31, 1997 25 1/2 19 1/8
November 30, 1997 27 1/4 21 1/2
February 28, 1998 35 15/16 25 1/2
As of May 22, 1998, the approximate number of shareholders of record was 2,400.
For a description of certain restrictions upon the Company's ability to pay
dividends see Note 15 of the Notes to Consoldiated Financial Statements.
29