Market Ignores Maryland Federal's Strength

Even among traditional thrift institutions that have avoided the problems ravaging the industry, Maryland Federal Bancorp. can boast an exceptional record.

Not that the stock market has noticed.

Although the company has outperformed the American Banker thrift stock index since May, Maryland Federal has underperformed most bank stocks.

Maryland Federal stock was available late Thursday for $12.75, or just 64% of its Aug. 31 book value of $20.01.

Investors are keeping clear of the nation's capital, where a depressed real estate market has tarred Maryland Federal along with other local banks and thrifts. But the Hyattsville thrift supplies evidence that a well managed thrift can flourish in a dreadful economic climate.

"There are good houses to be found even in bad neighborhoods," says Robert A. Halleck, the bullish chief executive.

Right now, Maryland Federal resembles a good house in a bad neighborhood. Nonperforming loans represent a microscopic 0.1% of total loans. And, in five years, Maryland Federal has not taken a single chargeoff related to real estate.

Moreover, it is a house whose owners are well treated. Dividends have been raised on average every two quarters since the thrift went public in 1987, and this year it is repurchasing about 10% of its shares outstanding.

Maryland Federal's fixed rate mortgage activity takes advantage of a home refinancing boom. By preselling these loans into the secondary mortgage market, it can sustain a strong pace of originations.

"We contend Maryland Federal's shares are not being adequately rewarded by the market for the company's outstanding credit quality," said James H. Weber, an analyst at Johnston, Lemon & Co., a securities firm in Washington. He thinks the stock could appreciate to $15 in 18 months.

Both Mr. Weber and thrift industry analyst Gary Gordon of PaineWebber Inc., New York, recently raised their earnings estimates after profits in the firm's second fiscal quarter, ended Aug. 31, came in slightly above expectations.

Mr. Weber advanced his estimate to $1.75 a share from $1.55 previously for the thrift's 1992 fiscal year, which will begin next March. Mr. Gordon elevated his to $1.85 from $1.65 a share.

There is risk, of course. The thrift's shares are thinly traded and it has a small market cap -- only about $30 million -- leaving a minimum of market liquidity for investors' purposes.

Also, Mr. Gordon noted that "interest rate risk is a two-edged sword. If short-term interest rates began to climb, Maryland Federal's earnings would very likely decline.

Mr. Weber projects "essentially flat" earnings of $1.70 for the thrift in its 1993 fiscal year because "we expect interest rates to begin to rise in 1992 as the U.S. economy expands, thereby limiting the bank's ability to extend earnings growth."

Maryland Federal has dodged the bullets that have struck down so many other thrifts by sticking to the traditional role of a savings and loan association. Single-family home mortgages make up 89% of its total loans, while commercial real estate and construction loans, much have crippled both banks and thrifts, amount to just 9% of the portfolio.

"We've had a few go bad," Mr. Halleck acknowledged. "We aren't perfect, don't own a crystal ball, and don't know what George Bush or [Federal Reserve chairman] Alan Greenspan may do. But we have good loan underwriters here and when their recommendation is no, it stays no."

In addition, the thrift has not strayed from its own backyard. "We only make loans within 50 miles of the head office," Mr. Halleck said.

Maryland Federal has 19 offices in four counties around Washington and Annapolis. It recently bought several offices of a defunct thrift from the Resolution Trust Corp. to fill in its franchise and plans similar expansion in the future.

Banking stocks regained upward momentum on Thursday as investors savored the lowest level of interest rates in nearly two decades in the wake of the Federal Reserve Board's rate-cutting moves this week.

Wells Fargo & Co., which had been among the weakest major bank stocks in the past few weeks, was up $3.25 to $65.125 in late afternoon trading. Bankers Trust New York Corp. was ahead $1.50 to $64.875 and Bank of New York Co. was up $1.50 to $34.25.

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