Why this bankers' bank is throwing in the towel

Maryland Financial Bank in Towson is waving a white flag.

The $42 million-asset correspondent bank is voluntarily liquidating and dissolving itself. Shareholders voted to call it quits after the bank was unable to find a buyer.

“In recent years MFB has experienced capital erosion and diminished profitability and growth prospects, in part due to reduced demand for the services provided by financial institutions with MFB’s profile,” the bank said in its October proxy statement.

Maryland Financial has been losing money for several years, including a $585,000 loss last year. It has also been operating under a consent order with the Federal Deposit Insurance Corp. and Maryland’s bank commissioner tied to declining capital ratios and significant operating losses in 2016 and 2017.

Voluntary liquidations are rare in the banking industry. Members of Mount Gilead Savings and Loan in North Carolina voted to liquidate in 2014. Greystone Bank in Raleigh, N.C., voluntarily liquidated and turned in its charter in 2011 and Universal Savings Bank in Milwaukee voluntarily liquidated in 2008.

“This typically happens when there is significant trouble at the bank,” said Greyson Tuck, an investment banking adviser at Gerrish Smith Tuck.

"At the end of the day this was a community bank that lost its community," said Jonathan Hightower, a lawyer at Bryan Cave Leighton Paisner. "I salute them for being self aware and rational."

Maryland Financial had lost the majority of its clients, which are local community banks, due to industry consolidation, said Richard Hook, the lender's chairman, President and CEO. The number of banks based in Maryland has fallen from 116 in 2004, when the bank was formed, to 46 on Dec. 6, based on FDIC data.

“This reduction in the potential customer pool of MFB, together with a lack of fee income, regulatory oversight expenses and the bank’s asset size, affected the board and MFB management’s efforts to improve MFB’s financial performance,” Maryland Financial said in its proxy statement.

Maryland Financial’s shareholders approved the liquidation late last month, according to a shareholder letter. A total of 101 shareholders were present for the vote, which accounted for nearly three-fourths of eligible votes.

Of the voting shareholders present, 99.4% approved the plan. Most of Maryland Financial’s shareholders are other community banks. The bank needed approval from investors that own at least two thirds of the bank’s stock.

If shareholders had not approved the plan, Maryland Financial would have continued to reduce its assets as funding from deposits diminished, while continuing to look for a buyer.

The bank hopes to have the liquidation process completed by the second or third quarter, Hook said.

“It’s not a great outcome, but we think it’s the best outcome we see for our stockholders,” Hook said.

Maryland Financial had agreed last year to sell itself but the deal was terminated in June after it became clear that regulators would not approve a sale to MFB Acquisition, Hook said. MFB Acquisition was a group created with the purpose of buying the bank.

Maryland Financial explored opportunities with four other potential buyers between 2005 and 2015. The company said in its proxy statement that the significant time and expenses incurred pursuing the potential deal resulted in a more limited pool of options for the bank’s future.

The board hired Olsen Palmer as its financial adviser in late 2016. After connecting with about 50 different parties, Olsen Palmer helped Maryland Financial's board narrow down its merger options and ultimately the board decided to negotiate the transaction with MFB Acquisition that fell through earlier this year.

Maryland Financial has also been shrinking its balance sheet to improve capital levels and follow the consent order.

With that in mind, the bank’s board decided that liquidation would maximize shareholder value within a reasonable time period and with greater certainty than selling or remaining independent, the proxy statement said.

MFB put the liquidation plan in motion in September, and gave itself until Oct. 15 to continue other alternatives. The board approved the liquidation plan later in October.

The bank must sell its assets or convert them to cash and pay off its liabilities. It could create a reserve fund or transfer assets to a liquidating trust to pay contingent liabilities and ongoing expenses, the proxy said. Maryland Financial must pay shareholders with whatever is left after addressing its liabilities.

Robert Chafey, Maryland Financial’s previous president and CEO, left the bank shortly after November's shareholder vote to pursue another opportunity in the industry, Hook said. It is unclear where Chafey ended up.

The Maryland Office of the Commissioner of Financial Regulation, which approved the liquidation and dissolution, and the FDIC, which needs to issue the bank a receipt of an order of termination of deposit insurance, declined to comment.

“We're just trying to do the best we can for our shareholders at this point and that has been the focus,” Hook said.