UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
Commission File Number 0-18107
MARYLAND FEDERAL BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1640579
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3505 Hamilton Street, Hyattsville, MD. 20782
- -------------------------------------------- ------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number,
including area code: (301) 779-1200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO_____
Number of Shares of Common Stock Outstanding as of
July 7, 1998
Title of Class Number of Shares Outstanding
-------------- ----------------------------
Common Stock ($.01 6,578,933 Shares
par value per share)
INDEX
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PART I - FINANCIAL INFORMATION: PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial
Condition as of May 31, 1998 and
February 28, 1998 1
Consolidated Statements of Income for the
three months ended May 31, 1998 and 1997 2
Consolidated Statements of Stockholders'
Equity for the three months ended May 31,
1998 and 1997 3
Consolidated Statements of Cash Flows for
the three months ended May 31, 1998 and
1997 4
Notes to Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8-16
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 16
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security
Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
May 31, February 28,
1998 1998
----------- -----------
(In Thousands)
ASSETS
Cash and due from banks $ 10,484 $ 10,504
Interest-bearing deposits with banks 57,865 51,213
Federal funds sold and securities purchased
under agreements to resell 17,170 14,030
Securities available for sale 73,408 77,623
Securities held to maturity (fair value,
$33,929,000 and $21,989,000, respectively) 33,927 21,946
Loans held for sale, at cost 9,918 13,461
Loans receivable, net 958,244 975,725
Accrued interest receivable 6,198 6,482
Federal Home Loan Bank stock, at cost 12,172 12,484
Foreclosed real estate, net 1,388 1,281
Premises and equipment, net 4,732 4,813
Other assets 2,615 2,484
----------- -----------
Total assets $1,188,121 $1,192,046
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 832,699 $ 831,590
Advances from Federal Home Loan
Bank of Atlanta 224,430 236,680
Advances from borrowers for taxes and insurance 12,420 8,630
Income taxes 3,321 2,894
Accrued expenses and other liabilities 7,890 7,799
----------- -----------
Total liabilities 1,080,760 1,087,593
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock; 10,000,000 shares
authorized; none issued -- --
Common stock; $.01 par value; 15,000,000 shares
authorized; 8,382,813 and 8,311,676 shares
issued, respectively 84 83
Additional paid-in capital 45,905 44,497
Retained earnings, substantially restricted 74,664 72,969
Accumulated other comprehensive income:
Unrealized holding gains, net of deferred
income taxes of $2,972,000 and $3,096,000,
respectively 4,728 4,924
Treasury stock, at cost; 1,810,852 shares (18,020) (18,020)
----------- -----------
Total stockholders' equity 107,361 104,453
----------- -----------
Total liabilities and stockholders'
equity $1,188,121 $1,192,046
----------- -----------
----------- -----------
See Notes to Consolidated Financial Statements.
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended May 31,
1998 1997
---- ----
(In Thousands, Except Per Share Data)
Interest income:
Loans receivable:
First mortgage loans $15,812 $16,777
Consumer and other loans 2,664 2,180
Securities available for sale and held
to maturity 1,514 1,283
Other interest-earning assets 1,377 634
------- -------
Total interest income 21,367 20,874
------- -------
Interest expense:
Deposits 10,269 9,757
Advances from Federal Home Loan Bank
of Atlanta 3,351 3,411
Advances from borrowers for taxes and insurance 6 8
------- -------
Total interest expense 13,626 13,176
------- -------
Net interest income 7,741 7,698
Provision for loan losses -- 70
------- -------
Net interest income after provision for
loan losses 7,741 7,628
------- -------
Noninterest income:
Banking service charges and fees 632 507
Loan fees and service charges 131 89
Gain on sales of first mortgage loans 351 60
Other 23 25
------- -------
Total noninterest income 1,137 681
------- -------
Noninterest expense:
Compensation and benefits 2,830 2,403
Occupancy and equipment 794 758
Federal deposit insurance premiums 128 129
Loss on foreclosed real estate, net 18 40
Advertising 151 155
Other 959 996
------- -------
Total noninterest expense 4,880 4,481
------- -------
Income before income taxes 3,998 3,828
Income tax expense 1,564 1,480
------- -------
NET INCOME $ 2,434 $ 2,348
------- -------
------- -------
Earnings per share:
Basic $.37 $.37
------- -------
------- -------
Diluted $.36 $.36
------- -------
------- -------
See Notes to Consolidated Financial Statements.
2
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Retained Accumulated
Additional Earnings, Other Total
Common Paid-in Substantially Comprehensive Treasury Stockholders'
Stock Capital Restricted Income Stock Equity
------ ---------- ------------- ------------- -------- -------------
(In Thousands)
Balance, February 28,1997 $82 $42,584 $66,976 $2,835 $(17,216) $95,261
------------
Comprehensive income:
Net income -- -- 2,348 -- -- 2,348
Unrealized holding gains,
net of deferred income
taxes -- -- -- 218 -- 218
------------
Total comprehensive income -- -- -- -- -- 2,566
------------
Issuance of 43,734 shares of
common stock under stock
plans and related tax
benefits -- 622 -- -- -- 622
Purchase of 44,000 shares of
treasury stock -- -- -- -- (804) (804)
Cash dividends ($.10 per
share) -- -- (639) -- -- (639)
------ ---------- ------------- ------------- -------- -------------
Balance, May 31,1997 $82 $43,206 $68,685 $3,053 $(18,020) $97,006
------ ---------- ------------- ------------- -------- -------------
------ ---------- ------------- ------------- -------- -------------
Balance, February 28, 1998 $83 $44,497 $72,969 $4,924 $(18,020) $104,453
------------
Comprehensive income:
Net income -- -- 2,434 -- -- 2,434
Unrealized holding
gains, net of deferred
income taxes -- -- -- (196) -- (196)
------------
Total comprehensive income -- -- -- -- -- 2,238
------------
Issuance of 71,137 shares of
common stock under stock
plans and related tax
benefits 1 1,408 -- -- -- 1,409
Cash dividends ($.1125 per
share) -- -- (739) -- -- (739)
------ ---------- ------------- ------------- -------- -------------
Balance, May 31,1998 $84 $45,905 $74,664 $4,728 $(18,020) $107,361
------ ---------- ------------- ------------- -------- -------------
------ ---------- ------------- ------------- -------- -------------
See Notes to Consolidated Financial Statements.
3
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended May 31,
--------------------------
1998 1997
---------- ----------
(In Thousands)
OPERATING ACTIVITIES:
Net income $ 2,434 $ 2,348
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization:
Premises and equipment 228 187
Other (231) (256)
Loans originated for sale (35,281) (12,781)
Sale of loans originated for sale 38,824 10,183
Provision for losses on loans and foreclosed
real estate -- 100
Gain on sales of foreclosed real estate (4) (20)
Deferred income taxes (93) (145)
Tax benefits relating to stock options 519 96
Decrease (increase) in:
Accrued interest receivable 284 15
Other assets (203) (287)
Increase in:
Current income taxes payable 644 1,517
Accrued expenses and other liabilities 86 477
---------- ----------
Net cash provided by operating activities 7,207 1,434
---------- ----------
INVESTING ACTIVITIES:
Loans originated (51,523) (36,016)
Principal collected on loans 68,928 23,006
Purchases of securities:
Available for sale (171) (3,018)
Held to maturity (19,948) --
Principal collected on mortgage-backed and related
securities 4,057 3,247
Proceeds from maturities of securities:
Held to maturity 8,000 --
Net increase in federal funds sold and
securities purchased under agreements to resell (3,140) (924)
Decrease (increase) in Federal Home Loan Bank stock 312 (108)
Proceeds from sales of foreclosed real estate 252 212
Purchases of premises and equipment (147) (274)
---------- ----------
Net cash provided by (used in) investing
activities 6,620 (13,875)
---------- ----------
FINANCING ACTIVITIES:
Net increase in deposits 1,109 18,429
Proceeds from Federal Home Loan Bank advances 62,000 19,600
Principal payments on Federal Home Loan Bank advances (74,250) (17,450)
Net increase in advances from borrowers for taxes
and insurance 3,790 4,653
Proceeds from issuance of stock under stock plans 890 526
Purchase of treasury stock -- (804)
Cash dividends paid (734) (639)
---------- ----------
Net cash provided by (used in) financing
activities (7,195) 24,315
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 6,632 11,874
CASH AND CASH EQUIVALENTS:
Beginning of period 61,717 10,939
---------- ----------
End of period $68,349 $22,813
---------- ----------
---------- ----------
See Notes to Consolidated Financial Statements.
4
MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
In the opinion of the management of Maryland Federal Bancorp, Inc.
("Maryland Federal" or the "Company"), the accompanying unaudited consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
financial condition as of May 31, 1998, and the results of its operations for
the three months ended May 31, 1998 and 1997, and cash flows for the three
months ended May 31, 1998 and 1997. These financial statements should be read in
conjunction with the consolidated financial statements and notes included in
Maryland Federal Bancorp, Inc. and Subsidiary's annual report for the fiscal
year ended February 28, 1998. The results of operations for the period ended May
31, 1998 are not necessarily indicative of the operating results which may be
achieved for the full fiscal year.
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. 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.
5
NOTE 3 - EARNINGS PER SHARE:
During fiscal 1998, Maryland Federal adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share". This statement establishes
standards for computing and presenting earnings per share. Basic earnings per
share is based on the weighted average number of common shares outstanding,
excluding any dilutive effects of stock options. Diluted earnings per share is
based on the weighted average number of common and common equivalent shares,
including dilutive stock options outstanding during the period. Earnings per
share amounts for the three months ended May 31, 1997, 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 6,555,280 and 6,406,853 for the
three months ended May 31, 1998 and 1997, respectively. The weighted average
number of common shares outstanding, including dilutive stock options, used in
the computation of diluted earnings per share was 6,843,280 and 6,550,157 for
the three months ended May 31, 1998 and 1997, respectively. Stock options for
80,400 common shares have been excluded from the computation of diluted earnings
per share for the three months ended May 31, 1997, as their effect would be
antidilutive.
NOTE 4 - COMPREHENSIVE INCOME:
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, are accumulated with net income in
determining comprehensive income. Maryland Federal adopted the provisions of the
statement effective March 1, 1998, including retroactive application to prior
periods. The standard does not address issues of recognition or measurement for
comprehensive income and its components; therefore, the implementation of the
statement did not have a material impact on Maryland Federal's consolidated
financial statements.
6
NOTE 5 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Three Months Ended May 31,
---------------------------------------
1998 1997
------------------ -----------------
(In Thousands)
Cash paid for:
Interest $13,306 $12,840
Income taxes -- 16
NOTE 6 - RECLASSIFICATIONS:
Certain amounts for the three months ended May 31, 1997 have been
reclassified for comparative purposes.
NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS:
The Company adopted Statement of Financial Accounting Standards No.
131 and No. 132, effective March 1, 1998. The adoption of these statements
did not have a material impact on the consolidated financial statements.
7
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Maryland Federal Bancorp, Inc. (the "Company") is the unitary savings
and loan holding company of Maryland Federal Bank (the "Bank") and its
subsidiary. The Company and the Bank are sometimes collectively referred to as
"Maryland Federal." The Company currently owns 100% of the issued and
outstanding common stock of the Bank, which is the principal asset of the
Company. The Company does not presently own or operate any subsidiaries other
than the Bank and its subsidiary.
Maryland Federal's earnings are primarily dependent upon its net
interest income, which is determined by the Bank's interest rate spread (i.e.,
the difference between the yields earned on its interest-earning assets and the
rates paid on its interest-bearing liabilities) and the relative amounts of its
interest-earning assets and interest-bearing liabilities. The Bank's net income
is also affected by the level of its noninterest income, provision for estimated
losses on loans and noninterest expense.
Deposit flows and the cost of funds are influenced by interest rates on
competing investments and general market rates of interest. Lending activities
are affected by consumer demand, the interest rate environment, and the
availability of funds.
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 0.5975 and no greater than 0.6102 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
8
base. Under the Agreement, Maryland Federal will become part of BB&T
Corporation, a company known for emphasizing autonomy and local
decision-making.
FINANCIAL CONDITION
Assets. Total assets as of May 31, 1998 decreased $3.9 million or 0.3%
to $1.19 billion as compared to February 28, 1998. This decrease was primarily
due to decreases of $21.0 million or 2.1% in loans receivable, net (including
loans held for sale), and $4.2 million or 5.4% in securities available for sale
which more than offset increases of $12.0 million or 54.6% in securities held to
maturity, $6.7 million or 13.0% in interest-bearing deposits with banks and $3.1
million or 22.4% in federal funds sold and securities purchased under agreements
to resell. The decrease in loans receivable, net, and increases in securities
held to maturity and interest-bearing deposits with banks, were due primarily to
management's decision to sell new fixed-rate mortgage loans in the secondary
market and keep short-term liquidity in the form of such assets. The Bank
recently experienced a high volume of loan refinancing activity due to the lower
loan rates offered as a result of the current interest rate environment.
Liabilities. Total liabilities as of May 31, 1998 decreased by $6.8
million or 0.6% to $1.08 billion as compared to February 28, 1998. This decrease
was primarily due to a $12.3 million or 5.2% decrease in advances from the
Federal Home Loan Bank of Atlanta ("FHLB"), which more than offset increases of
$1.1 million or 0.1% in deposits, $3.8 million or 43.9% in advances from
borrowers for taxes and insurance and $427,000 or 14.8% in income taxes payable.
Cash proceeds resulting from the sale and repayment of mortgage loans were
utilized in retiring advances from the FHLB. The increase in advances from
borrowers for taxes and insurance was the result of the accumulation of such
funds for the payment of taxes and insurance applicable to mortgage loans to be
paid during the third quarter of fiscal 1999.
Stockholders' Equity. Stockholders' equity increased $2.9 million or
2.8% to $107.4 million at May 31, 1998, versus $104.5 million at February 28,
1998. During the three months ended May 31, 1998, such increase primarily
reflects net income of $2.4 million and a $1.4 million increase related to the
issuance of shares under stock plans during the period, which were offset by a
$196,000 decrease recorded to recognize the net change in unrealized holding
gains, net, and dividends to shareholders of $739,000.
RESULTS OF OPERATIONS
Maryland Federal reported net income of $2.4 million and $2.3 million
during the three months ended May 31, 1998 and 1997, respectively. Net income
increased by $86,000 or 3.7% during the three months ended May 31, 1998, as
compared to the same period in
9
1997. The increase in net income was the result of a $43,000 increase in net
interest income, a $456,000 increase in noninterest income, and a $70,000
decrease in provision for loan losses, which more than offset increases of
$399,000 in noninterest expense and $84,000 in income tax expense, during the
three months ended May 31, 1998, as compared to the same period in 1997.
Net Interest Income
Net interest income increased by $43,000 or 0.6% for the three months
ended May 31, 1998, as compared to the same period in 1997. The increase for the
three months ended May 31, 1998 was primarily the result of an $8.4 million or
8.6% increase in the average balance of interest-earning assets over
interest-bearing liabilities, which more than offset an 11 basis point net
decrease in the yield earned on interest-earning assets over the rate paid on
interest-bearing liabilities ("interest rate spread"), as compared to the same
period in 1997.
Interest Income
Loans receivable. During the three months ended May 31, 1998, interest
earned on loans receivable decreased by $481,000 or 2.5%, as compared to the
same period in 1997. This decrease was primarily the result of a $27.7 million
or 2.8% decrease in the average balance of loans receivable, which more than
offset a one basis point increase in the average yield earned thereon to 7.55%.
The decrease in the average balance of loans receivable reflects management's
decision to sell new fixed-rate mortgage loans in the secondary market.
Mortgage-backed and related securities. Interest earned on
mortgage-backed and related securities decreased by $163,000 or 14.8% during the
three months ended May 31, 1998, as compared to the same period in 1997. The
decrease during the three months ended May 31, 1998 was primarily due to a four
basis point decrease in the average yield earned on mortgage-backed and related
securities to 6.76%, coupled with a $9.2 million or 14.3% decrease in the
average balance of such assets, as compared to the same period in 1997. The
decrease in the average balance of mortgage-backed and related securities was
the result of principal repayments on such securities during the three months
ended May 31, 1998.
Investment securities and other interest-earning assets. Interest
earned on investment securities and other interest-earning assets increased by
$1.1 million or 139.0% during the three months ended May 31, 1998, as compared
to the same period in 1997. This increase was primarily the result of a $79.9
million or 144.5% increase in the average balance of investment securities and
other interest-earning assets, which more than offset a 12 basis point decrease
in the average yield earned on such assets during the three months ended May 31,
1998, as compared to the same period in 1997.
10
Interest Expense
Deposits. Interest expense on deposits during the three months ended
May 31, 1998, increased by $512,000 or 5.2%, as compared to the same period in
1997. This increase was primarily attributable to a seven basis point increase
in the average rate paid on deposits, coupled with a $30.2 million or 3.8%
increase in the average balance of such deposits, during the three months ended
May 31, 1998 as compared to the same period in 1997. The increase in the average
balance of deposits during the three months ended May 31, 1998, as compared to
the same period in 1997, was due primarily to the competitive interest rates
offered on deposits by the Bank.
Borrowed funds. Interest expense on borrowed funds (including advances
from borrowers for taxes and insurance) decreased by $62,000 or 1.8% during the
three months ended May 31, 1998, as compared to the same period in 1997. This
decrease was primarily due to a 22 basis point decrease in the average rate paid
on such funds, which more than offset a $4.4 million or 1.9% increase in the
average balance of such funds during the three months ended May 31, 1998, as
compared to the same period in 1997.
Provision for Loan Losses
Loan review procedures are utilized by the Bank in order to ensure that
potential problem loans are identified early, thereby lessening any potentially
negative impact such problem loans may have on the Bank's earnings. Maryland
Federal made no provision for loan losses during the three months ended May 31,
1998, as compared to a $70,000 provision for loan losses during the three months
ended May 31, 1997.
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 May 31, 1998, non-performing loans (loans ninety days or more
delinquent but still accruing interest, and non-accrual loans) totaled $6.3
million ($6,321,000 of which consisted of first mortgage loans, with the
remaining $4,000 consisting of consumer and other loans) and represented 0.65%
of total loans receivable. At February 28, 1998, non-performing 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 May 31, 1998, the allowance for loan losses
11
amounted to $4.8 million and represented 75.5% of non-performing loans. At
February 28, 1998, the allowance for loan losses amounted to $4.8 million and
represented 72.8% of non-performing loans. Noninterest Income
Total noninterest income increased $456,000 or 67.0% during the three
months ended May 31, 1998, as compared to the same period in 1997. This increase
was the result of increases of $291,000 or 485.0% in gain on sales of first
mortgage loans, $125,000 or 24.7% in banking service charges and fees and
$42,000 or 47.2% in loan fees and service charges, which more than offset a
decrease of $2,000 or 8.0% in other noninterest income, during the three months
ended May 31, 1998, as compared to the same period in 1997.
Noninterest Expense
Total noninterest expense increased by $399,000 or 8.9% for the three
months ended May 31, 1998, as compared to the same period in 1997. The
components of noninterest expense are discussed below.
Compensation and benefits. During the three months ended May 31, 1998,
compensation and benefits increased by $427,000 or 17.8%, as compared to the
same period in 1997. The increase in compensation and benefits was due primarily
to additional staffing necessitated by the expansion of branch offices during
fiscal 1998, as well as annual salary adjustments occurring during the three
months ended May 31, 1998, which more than offset a reduction in retirement
benefit expense, as compared to the same period in 1997.
Occupancy and equipment. Occupancy and equipment expense increased
$36,000 or 4.7% during the three months ended May 31, 1998, as compared to the
same period in 1997. Costs incurred with the relocation and expansion of
branches during the previous fiscal year contributed to the increase in
occupancy and equipment expense during the three months ended May 31, 1998 as
compared to the same period in 1997.
Federal deposit insurance premiums. During the three months ended May
31, 1998, federal deposit insurance premiums paid to the FDIC decreased $1,000
or 0.8%, as compared to the same period in 1997.
Loss on foreclosed real estate, net. During the three months ended May
31, 1998, loss on foreclosed real estate, net, decreased by $22,000 or 55.0% as
compared to the same period in 1997. This decrease was primarily the result of a
$30,000 provision made for possible losses on foreclosed real estate during the
three months ended May 31, 1997. There was no such provision for possible losses
on foreclosed real estate made during the same period in 1998.
12
Advertising. During the three months ended May 31, 1998,
advertising expense decreased by $4,000 or 2.6%, as compared to the same
period in 1997.
Other. During the three months ended May 31, 1998, other noninterest
expense decreased by $37,000 or 3.7%, as compared to the same period in 1997.
This decrease was primarily due to decreases in legal fees, special services and
courier expense, and expenses for books, manuals and publications.
Income Taxes
The Company made provisions for income taxes of $1.6 million and $1.5
million during the three months ended May 31, 1998 and 1997, respectively. The
$84,000 or 5.7% increase was due primarily to the increased profitability of the
Company.
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 May 31, 1998, the Bank had tangible capital equal to
8.49% of adjusted total assets, core capital equal to 8.49% of adjusted total
assets and total capital equal to 17.04% 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
13
are implemented and evaluated. The OTS has not yet established an effective
date for the capital deduction. Because of the Bank's strong capitalization,
management does not believe that compliance with the new rule would adversely
affect its operations.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act
of 1991, each federal banking agency is also required to establish capital
levels for insured depository institutions including "well capitalized",
"adequately capitalized", "undercapitalized" and "critically undercapitalized".
A depository institution's capital adequacy will be measured on the basis of its
total risk-based capital ratio, Tier 1 risk-based capital ratio and leverage
ratio. The degree of regulatory intervention is tied to the institution's
capital category, with increasing scrutiny and more stringent restrictions being
imposed as the institution's capital declines.
To be considered "well capitalized," an institution must generally have
a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital
ratio of at least 6% and a leverage capital ratio of at least 5%. At May 31,
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 risk-adjusted 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.
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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.
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 May 31, 1998, the Bank had $6.1 million of undisbursed loan funds
and $56.3 million in approved loan commitments. These commitments were partially
offset by $27.6 million in forward commitments to sell. In addition, as of May
31, 1998, the Bank had $160.0 million of approved home equity lines of credit,
of which $83.4 million had been drawn by borrowers. The Bank anticipates that it
will have the funds necessary to meet these obligations through the sources of
funds mentioned above. The amount of certificate accounts which are scheduled to
mature by May 31, 1999 is $515.4 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 the three months ended May 31, 1998, Maryland Federal
experienced net cash inflows from operating activities and investing activities
of $7.2 million and $6.6 million, respectively. In addition, Maryland Federal
experienced negative cash flows from financing activities of $7.2 million during
the three months ended May 31, 1998.
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IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented in
this report have been prepared in accordance with generally accepted
accounting principles, which typically require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due
to inflation.
Virtually all of the assets and liabilities of Maryland Federal are
monetary in nature. As a result, interest rates have a more significant impact
on Maryland Federal's performance than the general level of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as
the prices of goods and services.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
In addition to historical information, forward-looking statements are
contained herein that are subject to risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from current
expectations, include, but are not limited to, the impact of economic conditions
(both generally and more specifically in the markets in which the Company
operates), the impact of competition for the Company's customers from other
providers of financial services, the impact of government legislation and
regulation (which changes from time to time and over which the Company has no
control), and other risks detailed in this Form 10-Q and in the Company's other
Securities and Exchange Commission ("SEC") filings. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements, to reflect
events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the SEC.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are
presented at February 28, 1998 in Item 7A of the Company's Annual Report on Form
10-K, filed with the SEC on May 29, 1998. Management believes there have been no
material changes in the Company's market risk since February 28, 1998.
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PART II - OTHER INFORMATION:
Item 1 - Legal Proceedings
The Company is not involved in any pending legal proceedings other
than routine, nonmaterial legal proceedings occurring in the ordinary
course of business.
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibit 27: Financial Data Schedule.
b. Form 8-K - On March 3, 1998, the Company filed a Form
8-K to report entering into the Reorganization Agreement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARYLAND FEDERAL BANCORP, INC.
Date: July 15, 1998 By:/s/ Robert H. Halleck
------------- ----------------------------
Robert H. Halleck, President
and Chief Executive Officer
Date: July 15, 1998 By:/s/ Lynn B. Hounslow
------------- ----------------------------
Lynn B. Hounslow, Senior
Vice President, Treasurer,
Chief Financial Officer and
Principal Accounting Officer
18