<PAGE>










                                     EXHIBIT 13

                        1997 ANNUAL REPORT TO STOCKHOLDERS









































<PAGE>







                                 [GRAPHIC]
                             ANNUAL REPORT 1997




     Maryland Federal Bancorp


<PAGE>


<TABLE>
<CAPTION>
<S>                              <C>                           <C>
                                 LOAN                          BRANCH
                                 PRODUCTION                    OFFICES
                                 OFFICES
                                                               PRINCE GEORGE'S COUNTY

                                                               3505 Hamilton Street
                                 Columbia                      Hayattsville (301) 779-1200
                                 7130 Minstrel Way
                                 Suite 220                     6816 Race Track Road
                                 (301) 596-7880                Bowie (301) 464-5240

                                 Gaithersburg                  6901 Laurel-Bowie Road
                                 6 Montgomery Village Avenue   Bowie (301) 262-3707
                                 Suite 340
                                 (301) 590-3150                6309 Allentown Road
                                                               Camp Springs (301) 449-3838
                                 Waldorf
                                 3429 Leonardtown Road         11428 Cherry Hill Road
                                 (301) 870-4081                Beltsville (301) 595-7058
[GRAPHIC]
ANNUAL REPORT 1997               Landover                      9546 Livingston Road
                                 1400 Mercantile Lane          Ft. Washington (301) 248-4257
                                 Suite 120
                                 (301) 925-9191                8951 Edmonston Road
                                                               Greenbelt (301) 982-4525
                                 Edgewater
                                 3033 Solomons Island Road     10666 Campus Way South
                                 (301) 261-7970                Upper Marlboro (301) 336-6666

                                                               13600 Laurel-Bowie Road
                                                               Laurel (301) 490-1508

                                                               4277 Branch Avenue
CONTENTS                                                       Marlow Heights (301) 423-0021

Offices and                                                    8490 Annapolis Road
Location Map               1                                   New Carrollton (301) 459-4434

Financial Highlights       2                                   MONTGOMERY COUNTY

To Our Shareholders        3                                   7934 Wisconsin Avenue
                                                               Bethesda (301) 951-0767
Management's Discussion
and Analysis               6                                   16575 S. Frederick Avenue
                                                               Gaithersburg (301) 869-3350
Consolidated Financial
Statements                 15                                  10414 Auto Park Avenue
                                                               West Bethesda (301) 469-9195
Notes to Consolidated
Financial Statements       20                                  11200 Viers Mill Road
                                                               Wheaton (301) 933-4030
Directors and Officers     29
                                                               15421 New Hampshire Avenue
Shareholders' Information  29                                  Silver Spring (301) 384-7163

                                                               1470 Rockville Pike
                                                               Rockville (301) 230-8970

                                                               7945 MacArthur Boulevard
                                                               Cabin John (301) 263-0017

                                                               CHARLES COUNTY

                                                               211 East Charles Street
                                                               La Plata (301) 934-4811

                                                               11110 Mall Circle #1005
                                                               Waldorf (301) 870-4098

                                                               3425 Leonardtown Road
                                                               Waldorf (301) 843-3312

                                                               ANNE ARUNDEL COUNTY

                                                               5801 Deale-Churchton Road
                                                               Deale (410) 867-4198

                                                               3033 Solomons Island Road
                                                               Edgewater (410) 956-4401

                                                               1419 Forest Drive
                                                               Annapolis (410) 268-6635

                                                               2001 Davidsonville Road
                                                               Crofton (301) 261-3200

                                                               CALVERT COUNTY

                                                               571 N. Solomons Island Road
                                                               Prince Frederick (301) 855-1154
</TABLE>


<PAGE>






                                [MAP]
<PAGE>


FINANCIAL HIGHLIGHTS


<TABLE>
<CAPTION>

                                                            ----------------------------------------------------------------------

                                                                                          YEAR ENDED       
                                                            FEBRUARY 28,                  FEBRUARY 29,              FEBRUARY 28, 
                                                               1997                          1996                      1995     
                                                                                    (Dollars in Thousands)                      
<S>                                                         <C>                           <C>                       <C>         
TOTAL ASSETS                                                $1,128,483                    $1,143,338                 $1,058,781 
NET INCOME                                                       6,525                         8,739                      9,063 
RETURN ON EQUITY                                                  6.90%                         9.72%                     11.09% 
EQUITY TO ASSET RATIO                                             8.33%                         8.16%                      8.46% 
NON-PERFORMING ASSETS TO AVERAGE ASSETS                           0.52%                         0.49%                      0.44%
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>









[LOAN GRAPHICS]









                                                 [INTEREST INCOME GRAPHICS]
<PAGE>

                           TO OUR SHAREHOLDERS

    The substantial but nonrecurring events that took place during fiscal 
1997 make comparisons with previous years difficult; however, it was a year 
that saw both financial and corporate goals accomplished. Maryland Federal's 
net income for the fiscal year ended February 28, 1997, was $6,525,000 or 
$2.00 primary earnings per share and 

"... a year that saw 
both financial and 
corporate goals 
accomplished."

reflected a one-time assessment to recapitalize the Savings Association 
Insurance Fund (SAIF) of approximately $3.1 million, net of taxes, or $0.95 
per share. In addition, there was a $1.6 million decrease in income tax 
expense, or $0.49 per share, due to an adjustment to revise prior estimates 
in recording the tax provision. Without consideration of the above-mentioned 
two items, earnings for fiscal 1997 would have been approximately $8.0 
million or $2.46 per share.

    In comparison, net income for the fiscal year ended February 29, 1996 was
$8,739,000 or $2.63 primary earnings per share. Net income for fiscal 1996
included a nonrecurring gain of approximately $2.0 million, net of taxes, or
$0.60 per share, from the sale of 55% of your Company's holdings of Federal Home
Loan Mortgage Corporation (Freddie Mac) stock. Excluding the impact of this
event, Maryland Federal earned approximately $6.7 million or $2.03 per share
during fiscal 1996.
 
    Without consideration of the effects of the substantial but nonrecurring
events that took place during fiscal 1997 as well as the impact of the gain from
the sale of Freddie Mac stock during fiscal 1996, your Company's net income for
the fiscal year ended February 28, 1997 increased by approximately $1.3 million,
or 20 percent over the prior fiscal year.

                                       3

<PAGE>

    One key force behind this earnings momentum was our net interest income
which increased by $2.5 million, or 9.0 percent, during fiscal 1997 compared to
the prior fiscal year. Such increase reflects management's successful efforts to
increase home equity lines of credit outstanding, from $21.4 million as of
February 29, 1996 to $51.7 million as of February 28, 1997. Every 25 basis point
rise in the prime rate increases our gross interest income on these loans at an
annualized rate of $2,500 per $1 million in loans outstanding, thereby giving
the Company a valuable cushion during periods of rising interest rates such as
those we most likely will experience in the current fiscal year. At the same
time, we made important progress in growing our core accounts by increasing
checking account balances 14.4 percent and the number of accounts by 19.5
percent. Most of our growth has been in our basic checking accounts upon which
we pay no interest, and has directly contributed to the decrease in the
Company's cost of deposits, from 5.11 percent as of February 29, 1996 to 4.84
percent as of February 28, 1997.
 
    Complementing the increase in our net interest income was a 13.7 percent 
increase in noninterest income (excluding the gain on sale of Freddie Mac 
stock during fiscal 1996). Another positive development which is attributable 
to the growth in checking accounts was a 16.4 percent increase in banking 
service charges and fees. Also contributing to this increase was a new ATM 
usage fee for noncustomers using Maryland Federal ATMs, which came about as a 
result of rule changes for ATM fees. The revenues are meaningful and provide 
a source of new customers since consumers frequently decide to become 
Maryland Federal customers in order to access our convenient ATM network free 
of charge. The revenues from these machines will enable us to expand our 
network to more locations. Also contributing to the increase in noninterest 
income were loan sales which often continue to generate ser-

"We believe this
next fiscal year
will give us more 
opportunities to 
increase our
market share..."

vice fee income after the initial gain on the sale of the loan is recorded. 
In fiscal 1997, the Company sold approximately $77 million of loans to 
primarily private companies.

    One final force behind the earnings momentum was the low 2.7 percent 
increase in noninterest expense (excluding the SAIF recapitalization 
assessment during fiscal 1997). With the payment of the SAIF recapitalization 
assessment, our federal deposit insurance premiums were reduced from a prior 
annual rate of $.23 per $100 of insured deposits to a substantially lower 
annual rate of $.064 per $100 of insured deposits. Based upon Maryland 
Federal's level of deposits at February 28, 1997, this reduction is expected 
to amount to approximately $1.3 million of savings, before taxes, on an 
annual basis. There was also a 3.3 percent decrease in occupancy and 
equipment expense, which was the result of relocating certain branch and loan 
production offices to more suitable and less expensive locations as well as 
the closing of our Tysons Corner loan production office. While the level of 
compensation and benefits did increase by 13.2 percent, it was a direct 
result of our efforts to attract and retain qualified staff as well as 
additional funding required for our pension plans.
 
    Because the last fiscal year offered few opportunities for profitable 
asset growth, we had little need for growing our capital base, which is 
already safely above the industry average. During the fiscal year which ended 
February 28, 1997, the dividend to shareholders was increased from an annual 
rate of $.64 per share to an annual rate of $.80 per share, a 25 percent 
increase. Dividends to shareholders amounted to $2.2 million and the Company 
repurchased 212,050 shares of its common stock at a cost of $6.3 million. In 
addition, on November 21, 1996, the Board of Directors declared a 5 percent 
stock dividend which was payable on December 12, 1996, to the shareholders of 
record on December 2, 1996. On February 28, 1997, the closing price of the 
Company's common stock was $37.25, an increase of 23 percent from the price 
of $30.25 on the closing day of the previous fiscal year. The combination of 
increased stock price, cash dividends, and the 5 percent stock dividend 
produced a total an-

                                       4

<PAGE>


nual return of approximately 30 percent to shareholders in fiscal 1997.


    As of February 28, 1997, non-performing loans (loans ninety days or more
delinquent but still accruing, and nonaccrual loans) totaled $4.6 million and
represented 0.47 percent of total loans receivable. In our peer group, as
defined by the Office of Thrift Supervision, the average non-performing ratio
is 0.80 percent of total loans receivable. In fiscal 1997, the Company's
provision for loan losses totaled $275,000 and chargeoffs, net of recoveries,
amounted to approximately $150,000.
 
    In the loan area, we took a number of steps to keep our main source of
revenue healthy. During the year, we closed over 1,200 loans, representing
various first and second mortgage products, totalling approximately $152.9
million. In addition, we closed $60.7 million or 1,276 home equity lines of
credit, with almost 50 percent of those committed lines already having been
disbursed. "Money Magazine" rates our home equity line of credit as the best in
our market area. Our auto loans are often similarly rated. Over 42 percent of
our production was in our popular 7/23 and 5/25 adjustable-rate first mortgage
loans. We have been making these loans for a number of years and are beginning
to see a meaningful number of them adjust each month. The adjustments are
resulting in increases in interest income at the current interest rate level of
the market, so the effect is a positive one on our net interest margin.
 
    We continued to add to our product line in the past fiscal year. In
mid-summer, we created our web site (www.mdfed.com) and have used it as a source
of deposits by offering special rates available only through the Internet. The
site also gives investors and potential shareholders current information and a
means to communicate through e-mail. Further efforts to make the site more
interactive are being planned. Our new Maryland Federal debit card was initially
offered in November 1996. Originally provided in response to customer requests,
this service is also generating additional fee income for your Company. Our
approach has been cautious and has allowed us to avoid credit losses while
learning precisely how consumers want to use this new service. We have also
recently reintroduced our secured savings loan, which allows customers to use
their deposits as collateral for a low-cost installment loan.
 
    There continued to be further consolidation of financial institutions in our
market area during the past fiscal year. These mergers have benefitted your
Company greatly. Our Annapolis and Cloverly offices were relocated into better
facilities at a lower cost by occupying sites declared surplus by merger
survivors. Customers in large numbers have decided locally managed institutions,
like Maryland Federal, are the best sources of financial services. Also, we are
finding a new wealth of employees who bring with them fresh ideas and methods
and frequently, new customers.
 
    We believe this next fiscal year will give us more opportunities to 
increase our market share in both the deposit and loan communities. We plan 
to provide easier customer access in our expanding markets with new or 
relocated branch offices, including the opening of a new branch office in the 
Cabin John area of Montgomery County as well as the relocation of our Marlow 
Heights office into an adjacent, larger facility with a drive-in. In order to 
keep our customer service and performance at the highest possible levels, we 
are in the process of updating our technology, including the installation of 
a more user-friendly, higher-capacity, 24-hour telephone banking system. We 
will continue to focus on asset and liability management by stressing our 
home equity lines of credit and basic checking accounts. In addition, we are 
revisiting Maryland Federal's method of delivering alternative investments in 
order to determine how to best serve our customers' needs.
 
    On behalf of the Board of Directors, we would like to thank our staff for
their accomplishments during this past year and our shareholders for their
continued support. We also appreciate our customers and will work hard to make
this current fiscal year a more profitable one for all concerned.
 
CORDIALLY,

/s/ Richard B. Bland
--------------------
Richard B. Bland
Chairman of the Board


/s/ Robert H. Halleck
---------------------
Robert H. Halleck
President and Chief Executive Officer

                                       5

<PAGE>

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 Savings and Loan Association (the
"Association") and its subsidiary. The Company and the Association are sometimes
collectively referred to as "Maryland Federal". The Company currently owns 100%
of the issued and outstanding common stock of the Association, which is the
principal asset of the Company. The Company does not presently own or operate
any subsidiaries other than the Association and its subsidiary, MASSLA
Corporation.
 
    The following financial review presents management's analysis of the
consolidated financial condition and results of operations of Maryland Federal,
and should be read together with the consolidated financial statements and
accompanying notes which are presented elsewhere in this report.
 
<TABLE>
<CAPTION>
                                                                          REQUIRED                 ACTUAL          EXCESS
                                                                  -----------------------  --------------------  ---------
                                                                                     (DOLLARS IN THOUSANDS)
<S>                                                               <C>        <C>          <C>        <C>        <C>
Tangible capital                                                  $  17,020        1.50%  $  87,600       7.72% $  70,580
Core capital                                                         34,040        3.00%     87,600       7.72%    53,560
Risk-based capital                                                   48,184        8.00%     92,199      15.30%    44,015
</TABLE>
 
FINANCIAL CONDITION
 
    ASSETS. Total assets decreased by $14.9 million or 1.3% to $1.13 billion 
during fiscal 1997 versus an 8.0% increase in total assets during fiscal 
1996. The decrease in fiscal 1997 was due primarily to decreases of $4.6 
million or 64.4% in cash and due from banks, $7.3 million or 46.7% in 
interest-bearing deposits with banks, $5.4 million or 7.3% in securities 
available for sale, $1.2 million or 9.2% in Federal Home Loan Bank stock, at 
cost, and $791,000 or 37.8% in foreclosed real estate, net, versus the prior 
fiscal year. These decreases were partially offset by increases of $1.6 
million or 9.8% in federal funds sold and securities purchased under 
agreements to resell, $1.4 million or 13.7% in securities held to maturity, 
$768,000 or 0.1% in loans receivable, net (including loans held for sale, at 
cost), and $1.0 million or 35.3% in other assets. The decrease in securities 
available for sale was primarily due to normal principal repayments received 
on mortgage-backed and related securities which exceeded purchases. The 
decrease in cash and due from banks and interest-bearing deposits with banks 
was primarily the result of the payment of the one-time Federal Deposit 
Insurance Corporation ("FDIC") special assessment to recapitalize the Savings 
Association Insurance Fund ("SAIF"), and management's decision to reduce 
borrowings from the Federal Home Loan Bank of Atlanta ("FHLB") and repurchase 
shares of common stock of the Company.
 
    LIABILITIES.  Total liabilities decreased by $16.1 million or 1.5% to $1.03
billion during fiscal 1997 versus a 7.8% increase during fiscal 1996. This
decrease in fiscal 1997 was due primarily to decreases of $17.5 million or 7.2%
in advances from the FHLB, and $245,000 or 11.4% in income taxes versus the
prior fiscal year. These decreases were partially offset by an increase of $1.7
million or 30.8% in accrued expenses and other liabilities. The decrease in FHLB
advances was the result of management's decision to utilize the Association's
cash flow to reduce borrowings.
 
    STOCKHOLDERS' EQUITY. Maryland Federal's total stockholders' equity
increased by $1.3 million or 1.4% during fiscal 1997 versus $8.2 million or 9.5%
during fiscal 1996. During fiscal 1997, such increase reflects net income of
$6.5 million, a $2.8 million increase related to the issuance of shares under
stock plans during the year, and a $415,000 increase recorded to recognize the
net change in unrealized holding gains, net, which were offset by dividends to
shareholders of $2.2 million and the repurchase of 212,050 shares of the
Company's common stock at a cost of $6.3 million. There were no such stock
repurchases during fiscal 1996.
 
                                       6
<PAGE>

CAPITAL ADEQUACY
 
    The Association 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, 1997, the Association exceeded all of its
regulatory capital requirements. The prior table demonstrates the Association's
required and actual capital ratios at February 28, 1997.
 
    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 Association'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 February
28, 1997, the Association was considered to be "well capitalized." See Notes 13
and 14 of Notes to Consolidated Financial Statements.
 
RESULTS OF OPERATIONS
 
    Maryland Federal reported net income of $6.5 million ($2.00 primary earnings
per share) in fiscal 1997 versus $8.7 million ($2.63 primary earnings per share)
and $9.1 million ($2.70 primary earnings per share) in fiscal 1996 and 1995,
respectively. Primary earnings per share for fiscal 1996 and 1995 have been
adjusted to give retroactive effect of the 5% stock dividend paid on December
12, 1996. Net income reflects the net interest income re-

    The following table presents, 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 their combined totals.

<TABLE>
<CAPTION>
                                                                                        FISCAL YEAR
                                                               ----------------------------------------------------------------
                                                                        1997 VS. 1996                    1996 VS. 1995
                                                                 INCREASE (DECREASE) DUE TO     INCREASE (DECREASE) DUE TO
                                                               -------------------------------  -------------------------------
                                                                VOLUME      RATE        NET      VOLUME      RATE        NET
                                                               ---------  ---------  ---------  ---------  ---------  ---------
                                                                                        (IN THOUSANDS)
<S>                                                            <C>        <C>        <C>        <C>        <C>        <C>
Interest income:
 Loans receivable (1)                                          $   2,690  $    (577) $   2,113  $  11,206  $  --      $  11,206
 Mortgage-backed and related securities                             (565)         7       (558)       (41)        72         31
 Investment securities and other interest-earning assets             344       (128)       216       (854)       644       (210)
                                                               ---------  ---------  ---------  ---------  ---------  ---------
  Total interest income                                            2,469       (698)     1,771     10,311        716     11,027
                                                               ---------  ---------  ---------  ---------  ---------  ---------
Interest expense:
 Deposits:
 Certificates of deposit                                             910     (1,640)      (730)     6,460      4,957     11,417
 Noncertificate accounts                                             (65)      (311)      (376)    (1,435)      (314)    (1,749)
Advances from FHLB and other interest-bearing liabilities (2)        886       (465)       421      3,085      1,165      4,250
                                                               ---------  ---------  ---------  ---------  ---------  ---------
  Total interest expense                                           1,731     (2,416)      (685)     8,110      5,808     13,918
                                                               ---------  ---------  ---------  ---------  ---------  ---------
Increase (decrease) in net interest income                     $     738  $   1,718  $   2,456  $   2,201  $  (5,092) $  (2,891)
                                                               =========  =========  =========  =========  =========  =========
 
</TABLE>
 
------------------------
 
(1) Includes loans held for sale.
(2) Includes interest expense on interest-bearing advances from borrowers for
    taxes and insurance.

                                       7
<PAGE>

    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, 1997, are also indicated.

<TABLE><CAPTION>
                                                                                                        
                                                                                                                     
                                                                   
                                                                                              
                                                                                                                      YEAR ENDED
                              FEB. 28,           YEAR ENDED FEBRUARY 28,             YEAR ENDED FEBRUARY 29,         FEBRUARY 28,
                              1997 (4)                   1997                                1996                       1995
                              --------   ------- ------------------------------   -------------------------------    ------------
                                                                                       (DOLLARS IN THOUSANDS)

                               YIELD/       AVERAGE                               AVERAGE                              AVERAGE
                                RATE        BALANCE     INTEREST   YIELD/ RATE    BALANCE     INTEREST   YIELD/ RATE   BALANCE
                             -----------  ------------  ---------  -----------  ------------  ---------  ----------- ----------
                                                                                
<S>                          <C>          <C>           <C>        <C>          <C>           <C>        <C>          <C>
Interest-earning assets:(1)
 Loans receivable (2)              7.45%  $    993,218  $  74,328        7.48%  $    957,320  $  72,215        7.54%  $  809,647
 Mortgage-backed and related
  securities                       6.81%        62,663      4,251        6.78%        71,042      4,809        6.77%      71,664
 Investment securities and
  other interest-earning
  assets                           5.38%        57,685      3,310        5.74%        51,758      3,094        5.98%      67,400
                                          ------------  ---------               ------------  ---------               ----------
Total interest-earning
  assets                           7.31%     1,113,566     81,889        7.35%     1,080,120     80,118        7.42%     948,711
                                                        ---------                             ---------
Noninterest-earning assets                      14,392                                15,771                              19,971
``                                        ------------                          ------------                          ----------
  Total assets                            $  1,127,958                          $  1,095,891                          $  968,682
                                          ============                          ============                          ===========

Interest-bearing
  liabilities:
 Deposits:
 Certificates of deposit           5.45%  $    620,652     34,329        5.53%  $    604,892     35,059        5.80%  $  485,176
 Noncertificate accounts           2.63%       166,477      4,463        2.68%       168,804      4,839        2.87%     217,283
                                          ------------  ---------               ------------  ---------               ----------
  Total deposits                   4.84%       787,129     38,792        4.93%       773,696     39,898        5.16%     702,459
 Advances from FHLB and
  other interest-bearing
  liabilities (3)                  5.90%       229,347     13,413        5.85%       214,224     12,992        6.06%     161,850
                                          ------------  ---------               ------------  ---------               ----------
  Total interest-bearing                  
   liabilities                     5.08%     1,016,476     52,205        5.14%       987,920     52,890        5.35%     864,309
                                                        ---------                             ---------
Noninterest-bearing
  liabilities                                   18,530                                20,751                              23,366
                                          ------------                          ------------                          ----------
  Total liabilities                          1,035,006                             1,008,671                             887,675
Stockholders' equity                            92,952                                87,220                              81,007
                                          ------------                          ------------                          ----------
  Total liabilities and
   stockholders' equity                   $  1,127,958                          $  1,095,891                          $  968,682
                                          ============                          ============                          ==========

Net interest income/
  interest rate spread             2.23%                $  29,684        2.21%                $  27,228        2.07%
                                   ====                 =========        ====                 =========        ==== 
 
Net interest-earning
  assets/net yield on
  interest-earning assets                 $     97,090                   2.67%  $     92,200                   2.52%  $   84,402
                                          ============                   ====   ============                   ====   ==========

Ratio of interest-earning
  assets to
  interest-bearing
liabilities                                                              1.10%                                 1.09%          
                                                                         ====                                  ==== 
 
<CAPTION>
                             INTEREST   YIELD/ RATE
                             ---------     -----
<S>                          <C>        <C>
Interest-earning assets:(1)
 Loans receivable (2)        $  61,009        7.54%
 Mortgage-backed and related
  securities                     4,778        6.67%
Investment securities and
  other interest-earning
  assets                         3,304        4.90%
  Total interest-earning     ---------
   assets                       69,091        7.28%
Noninterest-earning assets
                             ---------
  Total assets
Interest-bearing
  liabilities:

Deposits:
 Certificates of deposit        23,558        4.86%
 Noncertificate accounts         6,672        3.07%
                             ---------
  Total deposits                30,230        4.30%
 Advances from FHLB and
  other interest-bearing
  liabilities (3)                8,742        5.40%
                             ---------
  Total interest-bearing
   liabilities                  38,972        4.51%
                             ---------
Noninterest-bearing
  liabilities
                     
  Total liabilities
Stockholders' equity
                         
  Total liabilities and
  stockholders' equity
                            
Net interest income/
  interest rate spread       $  30,119        2.77%
                             =========        ====

Net interest-earning
  assets/net yield on
  interest-earning assets                     3.17%
                                              ====

Ratio of interest-earning
  assets to
  interest-bearing
liabilities                                   1.10%
                                              ==== 
 
</TABLE>




------------------------
 
(1) Interest-earning assets include all assets on which interest was
    contractually due.
 
(2) Includes loans held for sale.
 
(3) Average balances include $0.9 million, $1.0 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, 1997. 

                                  8

<PAGE>

sulting 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 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, 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 yield
earned on interest-earning assets over the rate paid on interest-bearing
liabilities ("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. During
the fiscal year ended February 29, 1996, net interest income decreased by
$2.9 million or 9.6% versus the prior fiscal year. The decrease was
primarily the result of a 70 basis point net decrease in the interest rate
spread, which more than offset a $7.8 million or 9.2% increase in the
relative amount of interest-earning assets over interest-bearing liabilities
during fiscal 1996 versus fiscal 1995. 

Interest Income 

    LOANS RECEIVABLE. 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 6 basis point decrease in the average yield earned 
on such assets to 7.48% during fiscal 1997 as compared to the prior fiscal 
year. For the fiscal year ended February 29, 1996, interest earned on loans 
receivable (including loans held for sale) increased by $11.2 million or 
18.4% over the prior fiscal year. This increase resulted from a $147.7 
million or 18.2% increase in the average balance of loans receivable, while 
maintaining an average yield earned on such assets at 7.54% during fiscal 
1996 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 both first mortgage loans and home equity lines of 
credit. The Association continues to offer adjustable-rate mortgages and 
other rate sensitive loans, such as our Primeline Home Equity Lines of Credit 
and second trusts. These loans are generally retained in the loan portfolio, 
while those loans sold in the secondary market are primarily fixed-rate loans.
 
    MORTGAGE-BACKED AND RELATED SECURITIES. For the fiscal year ended 
February 28, 1997, interest earned on mortgage-backed and related securities 
decreased by $558,000 or 11.6% over 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 to 6.78%. For the fiscal year ended February 29, 
1996, interest earned on mortgage-backed and related securities increased by 
$31,000 or 0.6% over the prior fiscal year. This increase resulted from a 10 
basis point increase in the average yield earned on mortgage-backed and 
related securities to 6.77%, which more than offset a $622,000 or 0.9% 
decrease in the average balance of such assets during fiscal 1996 as compared 
to fiscal 1995. The decrease in the average balance of mortgage-backed and 
related securities during both fiscal years was the result of maturities and 
principal repayments as well as the sales of mortgage-backed and related 
securities during fiscal 1996.
 
    INVESTMENT SECURITIES AND OTHER INTEREST-EARNING ASSETS. 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 investment securities and other interest-earning assets, which 
more than offset a 24 basis point decrease in the average yield earned on 
such assets to 5.74% during fiscal 1997 versus the prior fiscal year. 
Interest earned on investment securities and other interest-earning assets 
decreased by $210,000 or 6.4% during fiscal 1996 versus the prior fiscal 
year. This decrease was primarily due to a $15.6 million or 23.2% decrease in 
the average balance of investment securities and other interest-earning 
assets, which more than offset a 108 basis point increase in the average 
yield earned on such assets to 5.98% during fiscal 1996 versus fiscal 1995.
 
INTEREST EXPENSE
 
    DEPOSITS. The Association'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% to $787.1 million 
during fiscal 1997 versus the prior fiscal year. During fiscal 1996, interest 
expense on deposits increased by $9.7 million or 32.0% as compared to the 
prior fiscal year. This increase was primarily due to a $71.2 million or 
10.1% increase in the average balance of deposits coupled with an 86 basis 
point increase in the average rate paid on such deposits during fiscal 1996 
versus the prior fiscal year. The Association continues to offer competitive 
interest rates on deposits which helped to increase the average balance of 
deposits during fiscal 1997 and 1996.
 
    BORROWED FUNDS.  Interest expense on borrowed funds (consisting of FHLB 
advances and advances from borrowers for taxes and insurance) 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 to $229.3 million, which more than offset a 21 basis point 
decrease in the average rate paid on such funds to 5.85% during fiscal 1997 
versus the prior fiscal year. Interest expense on borrowed funds increased by 
$4.3 million or 48.6% during fiscal 1996 versus fiscal 

                              9

<PAGE>

1995. This increase was primarily due to a $52.4 million or 32.4% increase in 
the average balance of such funds coupled with a 66 basis point increase in 
the average rate paid on such funds during fiscal 1996 versus the prior 
fiscal year. The increase in the average balance of such funds during fiscal 
1997 reflects management's decision during fiscal 1996 to fund a major 
portion of its loan growth with borrowed funds rather than deposits. However, 
during fiscal 1997, management made an effort to curtail advances whenever 
possible.
 
PROVISION FOR LOAN
LOSSES
 
    Loan review procedures are utilized by the Association in order to ensure
that potential problem loans are identified early, thereby lessening any
potentially negative impact such problem loans may have on the Association's
earnings. During fiscal 1997, 1996 and 1995, the Association's provision for
loan losses totaled $275,000, $120,000, and $300,000, respectively. See also
Note 4 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, 1997, non-performing loans (loans ninety days or more
delinquent but still accruing, and non-accrual loans) totaled $4.6 million
($4,595,000 of which consist of first mortgage loans, with the remaining $35,000
consisting of consumer and other loans) and represented 0.47% of total loans
receivable. At February 29, 1996, and February 28, 1995, non-performing loans
totaled $3.4 million ($3,333,000 of which consist of first mortgage loans, with
the remaining $53,000 consisting of consumer and other loans) and $1.6 million
($1,543,000 of which consist of first mortgage loans, with the remaining $13,000
consisting of consumer and other loans), respectively, and represented 0.34% and
0.17%, respectively, of total loans receivable. During fiscal 1997 and 1996,
non-performing loans increased by $1.2 million and $1.8 million, respectively,
as compared to the comparable prior fiscal years, due primarily to an increase
in non-performing residential first mortgage loans which resulted from the soft
economic conditions that existed in the local market area.
 
    As of February 28, 1997, the allowance for loan losses amounted to $4.6
million and represented 99.3% of non-performing loans. As of February 29, 1996,
and February 28, 1995, the allowance for loan losses amounted to $4.5 million
and $4.4 million, respectively, and represented 132.1% and 284.2%, respectively,
of non-performing loans. During fiscal 1995, $50,000 was transferred out of the
allowance for loan losses into the allowance for losses on foreclosed real
estate. No such transfers took place during fiscal 1997 and 1996.
 
Noninterest Income 

     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 or 100.0% decrease in gain on sales of securities and a $32,000 or 
25.2% decrease in other 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. There were no sales of 
securities during fiscal 1997. 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.
 
    Total noninterest income increased by $3.7 million or 180.2% during fiscal
1996 versus fiscal 1995. This increase included a $3.3 million gain on sales of
securities. There were no sales of securities during fiscal 1995. In addition,
noninterest income increased by $100,000 or 7.2% in banking service charges and
fees, and $388,000 or 289.6% in gain on sales of first mortgage loans, which
more than offset decreases of $28,000 or 9.3% in loan fees and service charges,
and $89,000 or 41.2% in other noninterest income during fiscal 1996 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,
and other miscellaneous fees charged on customer accounts during fiscal 1996
versus fiscal 1995. The increase in gain on sales of first mortgage loans was
due primarily to an increase in the origination of loans to be held for sale
during fiscal 1996 versus the prior fiscal year. The decrease in other
noninterest income was due primarily to decreased income earned by the
Association's subsidiary, MASSLA Corporation, which offers various insurance
products to the Association's customers and employees, during fiscal 1996 versus
fiscal 1995.
 
NONINTEREST EXPENSE
 
    Total noninterest expense increased by $5.6 million or 30.0% and $1.4 
million or 8.4% during fiscal 1997 and 1996, respectively, versus the 
comparable prior fiscal years. 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 $1.2
million or 13.2% and $436,000 or 5.2% during fiscal 1997 and fiscal 1996,
respectively, versus the comparable prior fiscal years. The increase in
compensation and benefits was due primarily 

                                  10

<PAGE>

to increases in retirement and other employee benefit expenses, as well as 
annual salary adjustments, during fiscal 1997 as compared to the prior fiscal 
year. The increase in compensation and benefits during fiscal 1996 was due 
primarily to additional staffing necessitated by the expansion of branch and 
loan production offices as well as the creation of a new proof-of-deposit 
department during fiscal 1995 which resulted in increased expenses during the 
1996 fiscal year, as compared to fiscal 1995.
 
    OCCUPANCY AND EQUIPMENT. 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. Occupancy and equipment expense increased by $399,000 or
14.3% during fiscal 1996 as compared to fiscal 1995. Costs incurred with the
relocation of two branch offices, the creation of a new proof-of-deposit
department, and new branch and loan production offices in fiscal 1995,
contributed to the increase in occupancy and equipment expense during fiscal
1996 as compared to fiscal 1995.
 
    SAIF RECAPITALIZATION ASSESSMENT.  Deposits of the Association are currently
insured by the 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 the Association's assessable deposits,
Maryland Federal's 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 $255,000 or 14.6% during fiscal 1997 as compared to
fiscal 1996. Such decrease was primarily the result of the legislation discussed
above which also reduced the Association's insurance premium from 23 to 6.4
basis points effective January 1, 1997. Based upon Maryland Federal's level of
deposits at February 28, 1997, this reduction in insurance premiums is expected
to amount to approximately $1.3 million of savings, before taxes, on an annual
basis. Federal deposit insurance premiums paid to the FDIC increased by $180,000
or 11.5% during fiscal 1996, versus the prior fiscal year, due primarily to an
increase in the average balance of deposits.
 
    LOSS ON FORECLOSED REAL ESTATE, NET. During the fiscal year ended February
28, 1997, loss on foreclosed real estate, net, decreased by $149,000 or 49.8%
versus the prior fiscal year, 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. During the fiscal year ended February 29,
1996, loss on foreclosed real estate, net, decreased by $65,000 or 17.9% versus
the prior fiscal year, due primarily to a decrease of $100,000 in provision for
possible losses on foreclosed real estate. Foreclosed real estate, net, totaled
$1.3 million, $2.1 million and $2.7 million at fiscal year-end 1997, 1996 and
1995, respectively. See also Note 5 of Notes to Consolidated Financial
Statements.
 
    ADVERTISING.  Advertising expense increased by $41,000 or 7.6% and $28,000
or 5.5% during fiscal 1997 and fiscal 1996, respectively, versus the comparable
prior fiscal years.
 
    OTHER.  During 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 for relocating branch offices
during fiscal 1996. Such expenses included new supplies, moving expense,
printing and postage. Other noninterest expense increased by $463,000 or 13.2%
during fiscal 1996 versus the prior fiscal year. During fiscal 1996, the
increase in other noninterest expense resulted from amortization of the cost in
excess of fair value of net assets acquired related to the acquisition of
certain branch offices during fiscal 1995. In addition, increases in regulatory
exam fees, postage and telephone expense, and losses due to two branch robberies
during fiscal 1996, contributed to the increase in other noninterest expense
versus the prior fiscal year.
 
INCOME TAXES
 
    Maryland Federal made provisions for income taxes of $1.5 million, $5.5 
million and $5.7 million in fiscal 1997, 1996 and 1995, respectively. The 
$4.0 million or 73.0% decrease during fiscal 1997 versus the prior fiscal 
year was due primarily to the one-time special assessment to recapitalize the 
SAIF, and a $1.6 million adjustment to revise prior estimates in recording 
the tax provision. The $145,000 or 2.6% decrease during fiscal 1996 versus 
the prior fiscal year was due to the decreased profitability of the 
Association. The effective tax rate for each of the three fiscal years was 
18.6%, 38.8% and 38.5%, respectively.
 
ASSET AND LIABILITY
MANAGEMENT
 
    GENERAL. The management of Maryland Federal recognizes that as a depository
institution it is subject to 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 the Association's interest rate spread and the relative amounts of
interest-earning assets and interest-bearing liabilities.
 
    The Association's primary objectives, with respect to asset and liability
management, 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 upon the market value of portfolio equity and
the level of net interest income on a monthly basis. This evaluation is
performed in compliance with OTS regulations and is

                                       11
<PAGE>

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.  The Association utilizes a variety of methods to achieve its
asset and liability 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, 1997,
the Association's interest rate spread increased to 2.21% as compared to 2.07%
during the prior fiscal year, reflecting a 21 basis point decrease in the
Association's rate paid on interest-bearing liabilities which more than offset a
7 basis point decrease in the yield earned on interest-earning assets.
 
    REPRICING.  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. As shown in the table, the ratio of
the Association's one-year gap to total assets was 32.5% as of February 28, 1997
versus 29.3% and 24.0% as of February 29, 1996 and February 28, 1995,
respectively. The deterioration in the one-year gap at February 28, 1997 versus
the prior fiscal year end is due primarily to increases of $40.2 million in
deposits and $8.3 million in advances from the FHLB and other interest-bearing
liabilities which more than offset increases of $13.8 million in loans and
mortgage-backed and related securities and $3.1 million in investment securities
and other interest-earning assets. These changes reflect management's decision
during fiscal 1996 and 1995 to fund loan growth through a combination of
short-term advances from the FHLB and longer-term certificates of deposits,
which are now approaching their scheduled maturities.
 
<TABLE>
<CAPTION>
                                                                          FEBRUARY 28,  FEBRUARY 29,  FEBRUARY 28,
                                                                              1997          1996          1995
                                                                          ------------  ------------  ------------
                                                                                   (DOLLARS IN THOUSANDS)
<S>                                                                       <C>           <C>           <C>
Interest-sensitive assets:
   Loans and mortgage-backed and related securities (1)                    $  266,478    $  252,629    $  216,868
  Investment securities and other interest-earning assets                      48,635        45,585        41,374
                                                                          ------------  ------------  ------------
Total interest-sensitive assets                                               315,113       298,214       258,242
                                                                          ------------  ------------  ------------
Interest-sensitive liabilities:
   Deposits                                                                   544,571       504,358       389,177
  Advances from FHLB and other interest-bearing liabilities (2)               136,847       128,579       123,464
                                                                          ------------  ------------  ------------
Total interest-sensitive liabilities                                          681,418       632,937       512,641
                                                                          ------------  ------------  ------------
Excess of interest-sensitive liabilities over interest-sensitive assets
  (Gap)                                                                    $  366,305    $  334,723    $  254,399
                                                                          ============  ============  ============

Ratio of Gap to total assets                                                     32.5%         29.3%         24.0%
                                                                          ============  ============  ============

</TABLE>
 
------------------------
 (1) Includes loans held for sale.
 
 (2) Includes $0.7 million, $0.8 million and $0.9 million of interest-bearing
    advances from borrowers for taxes and insurance for each of the respective
    years.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    The Association 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 Association to maintain liquid assets of not less than 5% of its net
withdrawable accounts plus short-term borrowings, of which short-term liquid
assets must consist of not less than 1%. The Association has consistently
maintained liquidity at or above the levels required by the regulations.
 
    The Association'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 Association 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, 1997, the Association had $3.2 million of undisbursed loan
funds, $51.5 million in approved loan commitments and $2.0 million in
commitments to purchase mortgage-backed and related securities. These
commitments were partially offset by $6.8 million in forward commitments to
sell. The Association 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 1998 is $465.8
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 Association.

                                    12

<PAGE>

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. See Note 23
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, 1997. The weighted average rate of each category of assets and
liabilities is given below the respective dollar amounts. Management assumes,
based on the Association'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.

<TABLE>
<CAPTION>
                                                   FEBRUARY 28, 1997
              -------------------------------------------------------------------------------------------
<S>           <C>          <C>          <C>         <C>         <C>                 <C>        <C>         
                            MORE THAN   MORE THAN   MORE THAN       MORE THAN
                             1 YEAR      3 YEARS     5 YEARS         10 YEARS         MORE
                1 YEAR         TO           TO          TO              TO            THAN
                OR LESS      3 YEARS     5 YEARS     10 YEARS        20 YEARS       20 YEARS     TOTAL
              -----------  -----------  ----------  ----------  ------------------  ---------  ----------

                                               (DOLLARS IN THOUSANDS)
<S>           <C>          <C>          <C>         <C>         <C>                 <C>        <C>         
Interest-
  earning
  assets:
Fixed-rate
  mortgage
  loans (1)   $    70,393  $    85,909  $   55,437  $   89,233  $  70,403           $  11,979  $  383,354
                     8.37%        8.04%       7.78%       7.73%      7.79%               7.71%       7.94%
Adjustable
and
floating-rate
mortgage loans     170,375     256,145     134,522      43,597         --                  --     604,639
                     7.51%        6.86%       7.00%       7.44%        --                  --        7.12%
Consumer and
  other
  loans             1,341        1,813         805          --         --                  --       3,959
                     9.40%        9.40%       9.40%         --         --                  --        9.40%
Mortgage-
  backed and
  related
  securities       24,369       12,071       6,917      12,485      8,017                 276      64,135
                     6.54%        6.89%       7.01%       7.00%      7.02%               8.06%       6.81%
Investment
  securities
  and other
  interest-
  earning
  assets           48,635        3,096       2,107         245         --                 --       54,083
                     5.37%        5.24%       5.89%       4.15%        --                 --         5.38%
              -----------  -----------  ----------  ----------  ------------------  ---------  ----------
Total
  interest-
  earning
  assets          315,113      359,034     199,788     145,560     78,420              12,255   1,110,170
                     7.30%        7.14%       7.21%       7.57%      7.71%               7.72%       7.31%
              -----------  -----------  ----------  ----------  ------------------  ---------  ----------  
Interest-
  bearing
liabilities:
Deposits          544,571      158,778      31,223      29,005     18,369               6,987     788,933
                     5.03%        5.19%       3.64%       2.48%      2.70%               3.01%       4.84%
Advances
  from FHLB
  and
  other
  interest-
  bearing
 liabilities
  (2)             136,847       89,500          --         680         --                 --      227,027
                     5.81%        6.03%         --        6.50%        --                 --         5.90%
              -----------  -----------  ----------  ----------  ------------------  ---------  ----------  
Total
  interest-
  bearing
 liabilities      681,418      248,278      31,223      29,685     18,369              6,987   1,015,960
                     5.19%        5.49%       3.64%       2.57%      2.70%              3.01%       5.08%
              -----------  -----------  ----------  ----------  ------------------  ---------  ----------
Excess
(deficiency)
  of
  interest-
  earning
  assets
  over
  interest-
  bearing
 liabilities  $  (366,305) $   110,756  $  168,565  $  115,875  $ 60,051          $   5,268   $ 94,210
              ===========  ===========  ==========  ==========  ========          ==========  ========= 
 
Cumulative
  excess
(deficiency)
  of
  interest-
  earning
  assets
  over
  interest-
  bearing
 liabilities  $  (366,305) $  (255,549) $  (86,984) $   28,891  $   88,942         $94,210    $  94,210
              ===========  ===========  ==========  ==========  ==========        =========  ========== 
  
Cumulative
  excess
(deficiency)
  as a
  percentage
  of total
  assets           (32.46)%     (22.65)%     (7.71)%      2.56%       7.88%            8.35%       8.35%
              ===========  ===========  ==========  ==========  ==========        =========  ========== 
 
 
<CAPTION>
 
</TABLE>
 
------------------------
 
(1) Includes loans held for sale.
 
(2) Includes $0.7 million of interest-bearing advances from borrowers for taxes
    and insurance.
 
                                       13
<PAGE>
Selected Consolidated 
Financial and Operating Data
 
<TABLE>
<CAPTION>
                                                                                         FEBRUARY 28,
                                                   FEB. 28,      FEB. 29,     -----------------------------------
                                                   ------        ------- 
                                                    1997          1996          1995         1994        1993
                                                 ------------  ------------  ------------  ----------  ----------
                                                          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                              <C>           <C>           <C>           <C>         <C>

AT YEAR END:
Total assets                                     $  1,128,483  $  1,143,338  $  1,058,781  $  872,167  $  814,789
Loans receivable (1)                                  991,952       991,184       898,728     696,993     644,329
Mortgage-backed and related securities                 64,135        66,195        75,436      44,106      53,586
Investment securities and other interest-
  earning assets (2)                                   54,083        62,367        60,765     105,100      92,835
Deposits                                              788,933       788,931       763,754     678,050     666,232
Borrowed funds                                        226,280       243,780       190,730     103,180      65,680
Stockholders' equity                                   95,261        93,982        85,796      77,623      69,196

FOR THE YEAR ENDED:
Total interest income                                  81,889        80,118        69,091      63,250      67,722
Total interest expense                                 52,205        52,890        38,972      32,411      38,598
                                                 ------------  ------------  ------------  ----------  ----------
Net interest income                                    29,684        27,228        30,119      30,839      29,124
Provision for loan losses                                 275           120           300         662       1,940
                                                 ------------  ------------  ------------  ----------  ----------
Net interest income after provision for loan
  losses                                               29,409        27,108        29,819      30,177      27,184
Banking service charges and fees                        1,736         1,492         1,392       1,594       1,087
Gain on sales of interest-earning assets                  570         3,834           134         566         665
Other noninterest income                                  439           401           518         792         636
SAIF recapitalization assessment                        5,077            --            --          --          --
Other noninterest expense                              19,058        18,566        17,125      14,320      12,707
                                                 ------------  ------------  ------------  ----------  ----------
Income before income taxes and cumulative
  effect of accounting change                           8,019        14,269        14,738      18,809      16,865
Income tax expense                                      1,494         5,530         5,675       7,097       6,485
                                                 ------------  ------------  ------------  ----------  ----------
Income before cumulative effect of accounting
  change                                                6,525         8,739         9,063      11,712      10,380
Cumulative effect of change in accounting for
  income taxes                                             --            --            --         547          --
                                                 ------------  ------------  ------------  ----------  ----------
Net income                                       $      6,525  $      8,739  $      9,063  $   12,259  $   10,380
                                                 ============  ============  ============  ==========  ==========

Primary earnings per share (3)                   $       2.00  $       2.63  $       2.70  $     3.54  $     3.02
                                                 ============  ============  ============  ==========  ==========

Return on equity                                          6.9%          9.7%         11.1%       16.7%       16.0%
Equity-to-assets                                          8.3%          8.2%          8.5%        8.7%        7.9%
Cash dividends declared per share (3)            $       .675  $       .548  $       .438  $     .376  $     .242
Dividend payout ratio                                    33.8%         20.8%         16.2%       10.6%        8.0%

Number of full service facilities                          25            25            26          21          21
</TABLE>
 
------------------------
 
(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 5% stock dividend declared on November 21, 1996.
 
                                       14
<PAGE>


                                                        Financial Statements


 
<TABLE>

<S>                                                                      <C>
----------------------------------------------
Consolidated Statements of Financial Condition                            16
----------------------------------------------
Consolidated Statements of Income                                         17
----------------------------------------------
Consolidated Statements of Stockholders' Equity                           18
----------------------------------------------
Consolidated Statements of Cash Flows                                     19
----------------------------------------------
Notes to Consolidated Financial Statements                                20
----------------------------------------------

</TABLE>
 
                                       15
<PAGE>
                 MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
<TABLE>
<CAPTION>
                                                                                  FEBRUARY 28,          FEBRUARY 29,
                                                                                      1997                  1996
                                                                            ------------------------    ------------
<S>                                                                         <C>                         <C>
                                                                                        (IN THOUSANDS)
ASSETS
Cash and due from banks................................................     $    2,558                    $    7,194
Interest-bearing deposits with banks...................................          8,381                        15,711
Federal funds sold and securities purchased under agreements to resell.         17,665                        16,092
Securities available for sale..........................................         69,360                        74,791
Securities held to maturity (fair value, 1997--$11,417,000 and
  1996--$10,007,000)...................................................         11,448                        10,072
Loans held for sale, at cost...........................................          2,679                        16,296
Loans receivable, net..................................................        989,273                       974,888
Accrued interest receivable............................................          6,021                         6,009
Federal Home Loan Bank stock, at cost..................................         11,364                        12,514
Foreclosed real estate, net............................................          1,299                         2,090
Premises and equipment, net............................................          4,576                         4,829
Other assets...........................................................          3,859                         2,852
                                                                            ----------                 ------------
     Total assets......................................................     $1,128,483                    $1,143,338
                                                                            ==========                 ============

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits...............................................................     $  788,933                   $   788,931
Advances from Federal Home Loan Bank of Atlanta........................        226,280                       243,780
Advances from borrowers for taxes and insurance........................          9,074                         9,124
Income taxes...........................................................          1,898                         2,143
Accrued expenses and other liabilities.................................          7,037                         5,378
                                                                            ----------                  ------------
     Total liabilities.................................................      1,033,222                     1,049,356
                                                                            ----------                  ------------
COMMITMENTS AND CONTINGENCIES (Notes 16 and 20)

STOCKHOLDERS' EQUITY
Preferred stock; 10,000,000 shares authorized, none issued.............             --                           --
Common stock; $.01 par value; 15,000,000 shares authorized; shares
  issued, 1997--4,093,576 and 1996--3,821,081..........................             41                           38
Additional paid-in capital.............................................         42,625                       34,917
Retained earnings, substantially restricted............................         66,976                       67,492
Unrealized holding gains, net..........................................          2,835                        2,420
Treasury stock, at cost; 1997--883,426 shares and 1996--671,376 shares.        (17,216)                     (10,885)
                                                                            -----------                ------------
     Total stockholders' equity........................................         95,261                       93,982
                                                                            -----------                ------------
       Total liabilities and stockholders' equity......................     $1,128,483                   $1,143,338
                                                                            ==========                 ============


See Notes to Consolidated Financial Statements.

</TABLE>
 
                                       16
<PAGE>
                 MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                                           YEAR ENDED    YEAR ENDED    YEAR ENDED
                                                                          FEBRUARY 28,  FEBRUARY 29,  FEBRUARY 28,
                                                                              1997          1996          1995
                                                                          ------------  ------------  ------------
<S>                                                                       <C>           <C>           <C>
                                                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income:
  Loans receivable:
    First mortgage loans.......................................            $   67,196    $   67,093    $   56,960
    Consumer and other loans...................................                 7,132         5,122         4,049
  Securities available for sale and held to maturity...........                 5,154         5,921         6,361
  Other interest-earning assets................................                 2,407         1,982         1,721
                                                                          ------------  ------------  ------------
    Total interest income......................................                81,889        80,118        69,091
                                                                          ------------  ------------  ------------
Interest expense:
  Deposits.....................................................                38,792        39,898        30,230
  Advances from Federal Home Loan Bank of Atlanta..............                13,385        12,962         8,714
  Advances from borrowers for taxes and insurance..............                    28            30            28
                                                                          ------------  ------------  ------------
    Total interest expense.....................................                52,205        52,890        38,972
                                                                          ------------  ------------  ------------
Net interest income............................................                29,684        27,228        30,119
Provision for loan losses......................................                   275           120           300
                                                                          ------------  ------------  ------------
Net interest income after provision for loan losses............                29,409        27,108        29,819
                                                                          ------------  ------------  ------------
Noninterest income:
  Banking service charges and fees.............................                 1,736         1,492         1,392
  Loan fees and service charges................................                   344           274           302
  Gain on sales of first mortgage loans........................                   570           522           134
  Gain on sales of securities..................................                    --         3,312            --
  Other........................................................                    95           127           216
                                                                          ------------  ------------  ------------
    Total noninterest income...................................                 2,745         5,727         2,044
                                                                          ------------  ------------  ------------
Noninterest expense:
  Compensation and benefits....................................                 9,991         8,828         8,392
  Occupancy and equipment......................................                 3,084         3,190         2,791
  SAIF recapitalization assessment.............................                 5,077            --            --
  Federal deposit insurance premiums...........................                 1,497         1,752         1,572
  Loss on foreclosed real estate, net..........................                   150           299           364
  Advertising..................................................                   577           536           508
  Other........................................................                 3,759         3,961         3,498
                                                                          ------------  ------------  ------------
    Total noninterest expense..................................                24,135        18,566        17,125
                                                                          ------------  ------------  ------------
Income before income taxes.....................................                 8,019        14,269        14,738
Income tax expense.............................................                 1,494         5,530         5,675
                                                                          ------------  ------------  ------------
NET INCOME.....................................................            $    6,525    $    8,739    $    9,063
                                                                          ============  ============  ============

Primary earnings per share.....................................            $     2.00    $     2.63    $     2.70
                                                                          ============  ============  ============

</TABLE>
See Notes to Consolidated Financial Statements.
 
                                       17
<PAGE>
              MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
             CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                               Retained    Unrealized
                                                                Additional    Earnings,      Holding                   Total
                                                    Common        Paid-in    Substantially   Gains,      Treasury   Stockholders'
                                                     Stock        Capital     Restricted       Net        Stock        Equity
                                                 -------------  -----------  ------------  -----------  ----------  ------------
                                                                                 (In Thousands)
<S>                                              <C>            <C>          <C>           <C>          <C>         <C>
Balance, February 28, 1994......................         $36       $32,134       $52,890      $    --      $(7,437)      $77,623
 Net income.....................................          --            --         9,063           --           --        9,063
 Issuance of 69,172 shares of common stock under
  stock plans and related tax benefits..........           1         1,057            --           --           --        1,058
 Purchase of 140,475 shares of treasury stock...          --            --            --           --       (3,448)      (3,448)
 Cash dividends ($.438 per share)...............          --            --        (1,416)          --           --       (1,416)
 Change in unrealized holding gains, net........          --            --            --        2,916           --        2,916
                                                         ---    -----------  ------------  -----------  ----------  ------------
Balance, February 28, 1995......................          37        33,191        60,537        2,916      (10,885)      85,796
 Net income.....................................          --            --         8,739           --           --        8,739
 Issuance of 108,657 shares of common stock
  under stock plans and related tax benefits....           1         1,726            --           --           --        1,727
 Cash dividends ($.548 per share)...............          --            --        (1,784)          --           --       (1,784)
 Change in unrealized holding gains, net........          --            --            --         (496)          --         (496)
                                                         ---    -----------  ------------  -----------  ----------  ------------
Balance, February 29, 1996......................          38        34,917        67,492        2,420      (10,885)      93,982
 Net income.....................................          --            --         6,525           --           --        6,525
 Issuance of 123,466 shares of common stock
  under stock plans and related tax benefits....           1         2,837            --           --           --        2,838
 Stock dividend, 149,029 shares at $32.75 per
  share.........................................           2         4,871        (4,873)          --           --           --
 Cash paid in lieu of stock dividend for
  fractional shares.............................          --            --           (11)          --           --          (11)
 Purchase of 212,050 shares of treasury stock...          --            --            --           --       (6,331)      (6,331)
 Cash dividends ($.675 per share)...............          --            --        (2,157)          --           --       (2,157)
Change in unrealized holding gains, net.........          --            --            --          415           --          415
                                                         ---    -----------  ------------  -----------  ----------  ------------
Balance, February 28, 1997......................         $41       $42,625       $66,976       $2,835     $(17,216)     $95,261
                                                         ===    ===========  ============  ===========  ==========  ============

</TABLE>

See Notes to Consolidated Financial Statements.

                                    18

<PAGE>

            MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                           Year Ended    Year Ended    Year Ended
                                                                          February 28,  February 29,  February 28,
                                                                              1997          1996          1995
                                                                          ------------  ------------  ------------
                                                                                       (In Thousands)
<S>                                                                       <C>           <C>           <C>
OPERATING ACTIVITIES:
 Net income............................................................    $    6,525    $    8,739    $    9,063
 Adjustments to reconcile net income to net cash provided by (used in)
    operating activities:
   Depreciation and amortization:
    Premises and equipment.............................................           916         1,123           884
    Other..............................................................        (1,021)         (722)       (1,547)
   Loans originated for sale...........................................       (63,723)      (67,152)      (15,454)
   Sale of loans originated for sale...................................        77,340        53,727        13,967
   Provision for losses on loans and foreclosed real estate............           375           320           600
   Gain on sales of securities.........................................            --        (3,312)           --
   Gain on sales of foreclosed real estate.............................          (102)          (27)          (74)
   Deferred income taxes...............................................           181          (970)         (211)
   Tax benefits relating to stock options..............................           661           603           315
   Decrease (increase) in:
    Accrued interest receivable........................................           (12)         (398)         (783)
    Other assets.......................................................        (1,331)        1,725        (2,283)
   Increase (decrease) in:
    Current income taxes payable.......................................          (649)         (622)          409
    Accrued expenses and other liabilities.............................         1,521           (85)        1,683
                                                                          ------------  ------------  ------------
     Net cash provided by (used in) operating activities...............        20,681        (7,051)        6,569
                                                                          ------------  ------------  ------------
INVESTING ACTIVITIES:
  Loans originated.....................................................      (120,104)     (149,152)     (225,562)
  Loans purchased......................................................            --        (1,006)      (71,535)
  Principal collected on loans.........................................       105,379        71,825        97,445
  Purchases of securities:
   Available for sale..................................................       (10,950)       (3,364)         (619)
   Held to maturity....................................................       (13,852)           --       (54,796)
  Principal collected on mortgage-backed and related securities........        11,265         8,361        10,056
  Proceeds from maturities of securities:
   Available for sale..................................................         6,411            --         2,557
   Held to maturity....................................................        12,000        14,130        17,000
  Proceeds from sales of securities:
   Available for sale..................................................            --         3,423            --
   Held to maturity....................................................            --         1,909            --
  Net decrease (increase) in federal funds sold and
   securities purchased under agreements to resell.....................        (1,573)       (6,469)       19,395
  Decrease (increase) in Federal Home Loan Bank stock..................         1,150        (2,730)       (1,633)
  Proceeds from sales of foreclosed real estate........................         2,022           713           871
  Purchases of premises and equipment..................................          (663)         (563)       (2,762)
                                                                          ------------  ------------  ------------
     Net cash used in investing activities.............................        (8,915)      (62,923)     (209,583)
                                                                          ------------  ------------  ------------
FINANCING ACTIVITIES:
  Net increase in deposits.............................................             2        25,177        35,202
  Proceeds from acquisitions of deposits...............................            --            --        50,502
  Proceeds from Federal Home Loan Bank advances........................       151,000       249,350       178,800
  Principal payments on Federal Home Loan Bank advances................      (168,500)     (196,300)      (91,250)
  Net increase (decrease) in advances from borrowers for taxes and
   insurance...........................................................           (50)         (587)        1,060
  Proceeds from issuance of stock under stock plans....................         2,177         1,124           743
  Cash paid in lieu of stock dividend for fractional shares............           (11)           --            --
  Purchase of treasury stock...........................................        (6,331)           --        (3,448)
  Cash dividends paid..................................................        (2,019)       (1,660)       (1,363)
                                                                          ------------  ------------  ------------
     Net cash provided by (used in) financing activities...............       (23,732)       77,104       170,246
                                                                          ------------  ------------  ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................       (11,966)        7,130       (32,768)

CASH AND CASH EQUIVALENTS:
   Beginning of year...................................................        22,905        15,775        48,543
                                                                          ------------  ------------  ------------
   End of year.........................................................    $   10,939    $   22,905    $   15,775
                                                                          ============  ============  ============

</TABLE>

See Notes to Consolidated Financial Statements.



                                    19
<PAGE>

                 MARYLAND FEDERAL BANCORP, INC. AND SUBSIDIARY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Savings and 
Loan Association (the "Association"). The Company does not presently own or 
operate any subsidiary except for the Association. The Association operates 
25 branches located in Prince George's, Montgomery, Charles, Calvert and Anne 
Arundel Counties in Maryland.
 
The Association 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 Association, 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 Association 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:
 
Effective March 1, 1994, Maryland Federal adopted Statement of Financial 
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and 
Equity Securities" ("SFAS 115"). 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.
 
The adoption of SFAS 115, which has not been applied retroactively to prior 
years' financial statements, resulted in an increase in stockholders' equity 
by an after-tax amount of $2.7 million as of March 1, 1994. Prior to March 1, 
1994, equity securities were stated at cost and debt securities, including 
mortgage-backed and related securities, were stated at cost, adjusted for 
amortization of premiums and discounts.

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 the Association'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:
 
The Association services mortgage loans for investors 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 
adoption of SFAS 125 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 $1,281,000 
and $1,568,000 as of February 28, 1997 and February 29, 1996, 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.

                                       20


<PAGE>

INCOME TAXES:
 
The Company files a consolidated Federal income tax return with its 
subsidiary. 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. 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.
 
EARNINGS PER SHARE:
 
Primary earnings per share are computed based on the weighted average number 
of shares actually outstanding, as adjusted for applicable stock dividends, 
plus the shares that would be outstanding assuming exercise of dilutive stock 
options, all of which are considered to be common stock equivalents. The 
number of shares that would be issued from the exercise of stock options has 
been reduced by the number of shares that could have been purchased from the 
proceeds at the average market price of the Company's stock during the year. 
The number of shares used in the computations of primary earnings per share 
was 3,263,344, 3,325,845, and 3,356,401 in fiscal 1997, 1996 and 1995, 
respectively. Maryland Federal has not separately reported fully diluted 
earnings per share since the amounts are not materially different from 
primary earnings per share.
 
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 18 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 16, 20 and 23 to Consolidated Financial 
Statements.
 
NEW ACCOUNTING PRONOUNCEMENTS:
 
Statement of Financial Accounting Standards No. 127, "Deferral of the 
Effective Date of Certain Provisions of FASB Statement No. 125" was issued in 
December 1996. This statement defers the effective date until January 1, 1998 
for certain provisions of SFAS 125 dealing with secured borrowings and 
repurchase agreements, dollar-roll, and securities lending. This statement is 
not expected to have a significant impact on Maryland Federal.

Statement of Financial Accounting Standards No. 128, "Earnings per Share" was 
issued in February 1997. This statement replaces the presentation of primary 
earnings per share with a presentation of basic earnings per share and also 
requires dual presentation of basic and diluted earnings per share on the 
face of the income statement. Basic earnings per share exclude dilution and 
are computed by dividing income available to common stockholders by the 
weighted-average number of shares outstanding for the period. Diluted 
earnings per share reflect the potential dilution that could occur if 
securities or other contracts to issue common stock were exercised. This 
statement will be effective for financial statements issued for periods 
ending after December 15, 1997, and requires restatement of all prior-period 
earnings per share data presented.

Statement of Financial Accounting Standards No. 129, "Disclosure of 
Information about Capital Structure" was issued in February 1997. This 
statement establishes standards for disclosing information about an entity's 
capital structure. This statement is effective for financial statements for 
periods ending after December 15, 1997.
 
RECLASSIFICATIONS:
 
Certain amounts for fiscal 1996 and 1995 have been reclassified to conform to 
the presentation for fiscal 1997.
 
NOTE 2--FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO
RESELL:
 
Federal funds sold and securities purchased under agreements to resell are 
summarized as follows:
 
<TABLE>
<CAPTION>
                                                                    FEBRUARY 28,  FEBRUARY 29,
                                                                        1997          1996
                                                                    ------------  ------------
                                                                          (IN THOUSANDS)
<S>                                                                 <C>           <C>

Federal funds sold                                                   $   15,406    $    5,058
    Securities purchased under agreements to resell:
    Mortgage-backed securities                                               --        11,034
    U.S. Government securities                                            2,259            -- 
                                                                    ------------  ------------
        Total                                                        $   17,665    $   16,092
                                                                    ============  ============

</TABLE>
 
The Association 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 the Association under a written 
custodial agreement that explicitly recognizes the Association's interest in 
the securities. At February 28, 1997, these agreements mature within ninety 
days. All of the agreements were to resell the identical securities. 
Securities purchased under agreements to resell averaged approximately 
$5,300,000 and $6,800,000 during fiscal 1997 and 1996, respectively, and the 
maximum amounts outstanding at any month-end during fiscal 1997 and 1996 were 
approximately $15,400,000 and $11,000,000, respectively.

NOTE 3--SECURITIES:
 
A summary of securities is as follows:
 
<TABLE>
<CAPTION>
                                                                                             GROSS         GROSS
                                                                              AMORTIZED   UNREALIZED    UNREALIZED      FAIR
                                                                                COST         GAINS        LOSSES        VALUE
                                                                             -----------  -----------  -------------  ---------
                                                                                               (IN THOUSANDS)
<S>                                                                          <C>          <C>          <C>            <C>

Securities available for sale:
  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
                                                                             ===========  ===========        =====    =========

  February 29, 1996:
    Federal Home Loan Mortgage Corporation                                    $     152    $   3,050     $      --    $   3,202
    Mortgage-backed and related securities                                       64,704        1,062           170       65,596
    Other                                                                         5,993           --            --        5,993
                                                                             -----------  -----------        -----    ---------
      Total                                                                   $  70,849    $   4,112     $     170    $  74,791
                                                                             ===========  ===========        =====    =========

Securities held to maturity:
  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
                                                                             ===========  ===========        =====    =========

  February 29, 1996:
    United States government and agency obligations                           $   7,997    $       9     $      81    $   7,925
    State and municipal securities                                                1,476           15            --        1,491
    Mortgage-backed and related securities                                          599           --             8          591
                                                                             -----------  -----------        -----    ---------
      Total                                                                   $  10,072    $      24     $      89    $  10,007
                                                                             ===========  ===========        =====    =========

</TABLE>
 
Gross realized gains on sales of securities available for sale were 
$3,231,000 in fiscal 1996. 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 and 1995.

                                       21

<PAGE>
 
The amortized cost and fair value of debt securities at February 28, 1997, 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.

<TABLE>
<CAPTION>
                                                                            SECURITIES              SECURITIES
                                                                        AVAILABLE FOR SALE       HELD TO MATURITY
                                                                      ----------------------  ----------------------
                                                                       AMORTIZED     FAIR      AMORTIZED     FAIR
                                                                         COST        VALUE       COST        VALUE
                                                                      -----------  ---------  -----------  ---------
                                                                                       (IN THOUSANDS)
<S>                                                                   <C>          <C>        <C>          <C>

Due in one year or less                                                $      --   $      --   $   6,000   $   5,984
Due after one year through five years                                         --          --       5,203       5,182
Due after five years through ten years                                        --          --         245         251
Mortgage-backed and related securities                                    63,985      64,135          --          --
                                                                      -----------  ---------  -----------  ---------
      Total                                                            $  63,985   $  64,135   $  11,448   $  11,417
                                                                      ===========  =========  ===========  =========

</TABLE>
 
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 4--LOANS RECEIVABLE:
 
Loans receivable consist of the following:
 
<TABLE>
<CAPTION>
                                                                    FEBRUARY 28,  FEBRUARY 29,
                                                                        1997          1996
                                                                    ------------  ------------
                                                                          (IN THOUSANDS)
<S>                                                                 <C>           <C>

First mortgage loans:
  Conventional, permanent                                            $  888,027    $  899,907
  Conventional, construction                                              6,846         5,159
  VA and FHA                                                              3,401         4,362
  Participations                                                          1,461         2,028
                                                                    ------------  ------------
      Total first mortgage loans                                        899,735       911,456
                                                                    ------------  ------------
Consumer and other loans:
  Second trust and home improvement                                      44,413        48,343
  Home equity                                                            51,683        21,355
  Installment and other                                                   4,010         4,232
                                                                    ------------  ------------
  Total consumer and other loans                                        100,106        73,930
                                                                    ------------  ------------
      Total loans                                                       999,841       985,386
Less:
  Undisbursed portion of mortgage loans                                   3,240         1,722
  Unamortized premiums and discounts, net                                   373           487
  Net deferred loan fees                                                  2,356         3,815
  Allowance for loan losses                                               4,599         4,474
                                                                    ------------  ------------
Loans receivable, net                                                $  989,273    $  974,888
                                                                    ============  ============

</TABLE>

Nonaccrual loans totaled $2,990,000 at February 28, 1997. There were no 
nonaccrual loans at February 29, 1996. The amount of interest income that 
would have been recorded on nonaccrual loans in accordance with their 
original terms was $224,000 and $4,000 for fiscal 1997 and 1995, 
respectively. The amount of interest income that was recorded on nonaccrual 
loans was $52,000 and $2,000 for fiscal 1997 and 1995, respectively.
 
The following is a summary of the changes in the allowance for loan losses:
 
<TABLE>
<CAPTION>
                                                                         Year Ended
                                                            --------------------------------------------
                                                            FEBRUARY 28,    FEBRUARY 29,    FEBRUARY 28,
                                                               1997             1996            1995
                                                            -----------     -----------      -----------
                                                                                  (IN THOUSANDS)
<S>                                                         <C>              <C>              <C>

Balance at beginning of year                                 $   4,474        $   4,424        $   4,187
  Provision for losses                                             275              120              300
  Charge-offs                                                     (166)             (76)             (16)
  Recoveries                                                        16                6                3
  Transfer to allowance for losses on foreclosed real
    estate                                                          --               --              (50)
                                                            -----------     -----------      -----------
Balance at end of year                                       $   4,599        $   4,474        $   4,424
                                                            ===========     ===========      ===========

</TABLE>
 
NOTE 5--FORECLOSED REAL ESTATE:
 
Foreclosed real estate consists of the following:
 
<TABLE>
<CAPTION>
                                                                    FEBRUARY 28,   FEBRUARY 29,
                                                                        1997           1996
                                                                    -------------  -------------
                                                                           (IN THOUSANDS)
<S>                                                                 <C>            <C>

Acquired in foreclosure or by deed in lieu of foreclosure:
  Residential properties                                              $     232      $     122
  Nonresidential properties                                               1,425          1,829
  Commercial land                                                           983          1,421
                                                                         ------         ------
      Total foreclosed real estate                                        2,640          3,372
          Less allowance for losses                                       1,341          1,282
                                                                         ------         ------
Foreclosed real estate, net                                           $   1,299      $   2,090
                                                                         ======         ======

</TABLE>
 
The following is a summary of the changes in the allowance for losses on 
foreclosed real estate:

<TABLE>
<CAPTION>
                                                                                          YEAR ENDED
                                                                          -------------------------------------------
                                                                          FEBRUARY 28,   FEBRUARY 29,   FEBRUARY 28,
                                                                              1997           1995           1996
                                                                          -------------  -------------  -------------
                                                                                       (IN THOUSANDS)

<S>                                                                       <C>            <C>            <C>
Balance at beginning of year                                                $   1,282      $   1,082      $     739
  Provision for losses                                                            100            200            300
  Charge-offs                                                                     (41)            --             (7)
  Transfer from allowance for loan losses                                          --             --             50
                                                                               ------         ------         ------
Balance at end of year                                                      $   1,341      $   1,282      $   1,082
                                                                               ======         ======         ======

</TABLE>
 
The following is a summary of loss on foreclosed real estate, net:
 
<TABLE>
<CAPTION>
                                                                                            YEAR ENDED
                                                                        ---------------------------------------------------
                                                                         FEBRUARY 28,      FEBRUARY 29,      FEBRUARY 28,
                                                                             1997              1996              1995
                                                                        ---------------  -----------------  ---------------
                                                                                          (IN THOUSANDS)
<S>                                                                     <C>              <C>                <C>

Holding costs                                                              $     152         $     126         $     138
Provision for losses                                                             100               200               300
Gain on sales                                                                   (102)              (27)              (74)
                                                                               -----             -----             -----
                                                                           $     150         $     299         $     364
                                                                               =====             =====             =====

</TABLE>
 
NOTE 6--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 $35,000,000, $28,400,000 and $28,000,000 
as of February 28, 1997, February 29, 1996 and February 28, 1995, 
respectively, and represent primarily mortgage loans underlying FHLMC 
pass-through securities. Custodial escrow balances maintained in connection 
with the foregoing loan servicing were approximately $700,000 at both 
February 28, 1997 and February 29, 1996.
 
NOTE 7--ACCRUED INTEREST RECEIVABLE:
 
Accrued interest receivable is summarized as follows:
 
<TABLE>
<CAPTION>
                                                                    FEBRUARY 28,   FEBRUARY 29,
                                                                        1997           1996
                                                                    -------------  -------------
                                                                           (IN THOUSANDS)
<S>                                                                 <C>            <C>

Securities                                                            $     787      $     709
Loans receivable                                                          5,234          5,300
                                                                         ------         ------
    Total                                                             $   6,021      $   6,009
                                                                         ======         ======

</TABLE>
 
NOTE 8--PREMISES AND EQUIPMENT:
 
Premises and equipment consist of the following:
 
<TABLE>
<CAPTION>
                                                                    FEBRUARY 28,   FEBRUARY 29,
                                                                        1997           1996
                                                                    -------------  -------------
                                                                           (IN THOUSANDS)
<S>                                                                 <C>            <C>

Land                                                                  $   1,237      $   1,237
Buildings and improvements                                                2,767          2,746
Furniture and equipment                                                   7,977          7,554
Leasehold improvements                                                    1,123          1,123
Automobiles                                                                 105             98
                                                                         ------         ------
      Total premises and equipment                                       13,209         12,758
          Less accumulated depreciation and amortization                  8,633          7,929
                                                                         ------         ------
Premises and equipment, net                                           $   4,576      $   4,829
                                                                         ======         ======

</TABLE>

                                       22

<PAGE>

NOTE 9 - DEPOSITS:

The following is a summary of deposits:

<TABLE>
<CAPTION>
                                             WEIGHTED    
                                              AVERAGE    
                                              RATE AT      FEBRUARY 28, 1997     FEBRUARY 29, 1996         
                                           FEBRUARY 28,   --------------------  --------------------       
                                               1997        AMOUNT     PERCENT    AMOUNT     PERCENT        
                                           ------------   --------   ---------  --------   ---------       
                                                             (DOLLARS IN THOUSANDS)
<S>                                        <C>            <C>        <C>        <C>        <C>
Demand and checking 
 accounts, including 
 noninterest-bearing  
 deposits of $16,814,000 
 and $11,382,000 at 
 February 28, 1997 and
 February 29, 1996, 
 respectively                                   1.45%     $ 53,937      6.84%   $ 44,497      5.64%
Money market                                    3.10%       42,385      5.37%     45,315      5.74%
Statement savings                               3.22%       74,488      9.44%     76,514      9.70%
                                                          --------   ---------  --------   ---------
                                                           170,810     21.65%    166,326     21.08%
                                                          --------   ---------  --------   ---------

Certificates of deposit:
 6.00% or less                                             529,859     67.16%    409,249     51.87%
 6.01% to 8.00%                                             86,964     11.02%    211,282     26.78%
 8.01% to 10.00%                                             1,292       .16%      1,756       .22%
 10.01% to 12.00%                                                8       .01%        318       .05%
                                                          --------   ---------  --------   ---------
                                                5.45%      618,123     78.35%    622,605     78.92%
                                                          --------   ---------  --------   ---------

     Total                                      4.84%     $788,933    100.00%   $788,931    100.00%
                                                          ========   =========  ========   =========

</TABLE>

The aggregate amount of short-term jumbo certificates of deposit with a 
minimum denomination of $100,000 was approximately $88,600,000 and 
$116,300,000 at February 28, 1997 and February 29, 1996, respectively.

At February 28, 1997, 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)


1998              $441,309    $23,642      $  874        $--      $465,825
1999                52,626     38,602         150          8        91,386
2000                27,930     21,387         236         --        49,553
2001                 7,441      3,173          32         --        10,646
2002                   536         26          --         --           562
Thereafter              17        134          --         --           151
                 ---------  ----------  ----------  -----------  ---------
Total             $529,859    $86,964      $1,292        $ 8      $618,123
                 =========  ==========  ==========  ===========  =========



The following is a summary of interest expense on deposits:



                                             YEAR ENDED
                          --------------------------------------------
                          FEBRUARY 28,    FEBRUARY 29,    FEBRUARY 28,
                              1997            1996            1995
                          ------------    ------------    ------------
                                         (IN THOUSANDS)
Checking                     $   730         $   760         $   840
Money market                   1,304           1,393           1,698
Statement savings              2,429           2,686           4,134
Certificates of deposit       34,329          35,059          23,558
                          ------------    ------------    ------------
 Total                       $38,792         $39,898         $30,230
                          ============    ============    ============




NOTE 10 - ADVANCES FROM FEDERAL HOME LOAN BANK OF ATLANTA:

At February 28, 1997, advances from the Federal Home Loan Bank of Atlanta 
(the "FHLB") are collateralized by a blanket agreement covering all 
qualifying first mortgage loans and all the Association's stock in the FHLB. 
Advances mature as follows as of February 28, 1997:


                                         WEIGHTED
            FISCAL                       AVERAGE
             YEAR         AMOUNT         RATE
            ------       --------        -------
                          (DOLLARS IN THOUSANDS)

            1998         $136,100        5.83%
            1999           78,500        5.99%
            2000           11,000        6.23%
            After 2002        680        6.50%
                         --------
              Total      $226,280        5.91%
                         ========



The Association, 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 11 - 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 29,
                                                   1997          1996
                                               ------------   ------------
                                                     (IN THOUSANDS)

Deferred tax liabilities:
  Federal Home Loan Bank stock dividends           $1,317         $1,317
  Allowance for losses on loans and
   foreclosed real estate                              --             50
  Unrealized holding gains                          1,782          1,559
                                               ------------   ------------
    Total deferred tax liabilities                  3,099          2,926
                                               ------------   ------------

Deferred tax assets:
  Loan fees                                           216            848
  Allowance for losses on loans and
   foreclosed real estate                             408             --
  Other                                               633            640
                                               ------------   ------------
    Total deferred tax assets                       1,257          1,488
                                               ------------   ------------
      Net deferred tax liabilities                 $1,842         $1,438
                                               ============   ============



Pursuant to legislation enacted in 1996, the Association 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, the Association 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. The Association 
has previously provided for deferred taxes on its post 1987 tax bad debt 
reserves; therefore, this legislation will not affect the Association's net 
income.

The Association has not provided a deferred tax liability on bad debt 
reserves for tax purposes that arose in fiscal years beginning before 
December 31, 1987. Such bad debt reserves for the Association amounted to 
approximately $11,000,000 with an income tax effect of approximately 
$4,200,000 at February 28, 1997. This bad debt reserve will become taxable 
for income tax purposes if the Association 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 29,   FEBRUARY 28,
                            1997           1996           1995
                         ------------   ------------   ------------
                                       (IN THOUSANDS)

Current                      $1,313         $6,500         $5,886
Deferred                        181           (970)          (211)
                         ------------   ------------   ------------
Total                        $1,494         $5,530         $5,675
                         ============   ============   ============



Income tax expense differs from that computed at the statutory Federal income 
tax rate as follows:


                                                    YEAR ENDED
                                    -------------------------------------------
                                     FEBRUARY 28,   FEBRUARY 29,   FEBRUARY 28,
                                         1997           1996           1995
                                     ------------   ------------   ------------
                                               (DOLLARS IN THOUSANDS)

Statutory Federal income tax rate           34%            35%            35%
Income tax expense at 
  statutory rate                        $2,726         $4,994         $5,158
Increase (decrease) in taxes:
  State taxes, net of Federal
    income tax benefit                     365            649            664
  Other                                 (1,597)          (113)          (147)
                                     ------------   ------------   ------------
      Total                             $1,494         $5,530         $5,675
                                     ============   ============   ============



Income tax expense for fiscal 1997 reflects a $1.6 million decrease to revise 
prior estimates in recording the income tax provision.


                                      23



<PAGE>

NOTE 12--OTHER NONINTEREST EXPENSE:

Other noninterest expense amounts are summarized as follows:

<TABLE>
<CAPTION>
                                                                                          YEAR ENDED
                                                                          -------------------------------------------
                                                                          FEBRUARY 28,   FEBRUARY 29,   FEBRUARY 28,
                                                                              1997           1996           1995
                                                                          -------------  -------------  -------------
                                                                                        (IN THOUSANDS)
<S>                                                                       <C>            <C>            <C>
Printing, postage, stationery and supplies                                  $   1,302      $   1,313      $   1,529
Professional fees                                                                 414            339            327
Telephone                                                                         332            314            273
Other                                                                           1,711          1,995          1,369
                                                                               ------         ------         ------
    Total                                                                   $   3,759      $   3,961      $   3,498
                                                                               ======         ======         ======

</TABLE>

NOTE 13--REGULATORY MATTERS:
 
The Association is subject to various regulatory capital requirements 
administered by federal regulatory agencies. Failure to meet minimum capital 
requirements can initiate certain regulatory actions that could have a direct 
material effect on the consolidated financial statements. Under capital 
adequacy guidelines and the regulatory framework for prompt corrective 
action, the Association must meet specific capital guidelines that involve 
quantitative measures of the Association's assets, liabilities, and certain 
off-balance-sheet items as calculated under regulatory accounting practices. 
The Association'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 Association to maintain minimum amounts and ratios (set forth in 
the following table) of total and Tier 1 capital (as defined in the 
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as 
defined) to adjusted total assets (as defined). Management believes, as of 
February 28, 1997, that the Association meets all capital requirements to 
which it is subject.
 
The most recent notification from the Office of Thrift Supervision ("OTS") 
categorized the Association as well capitalized under the regulatory 
framework for prompt corrective action. To be well capitalized under the 
prompt corrective action provisions, the Association must maintain capital 
ratios as set forth in the following table. There are no conditions or events 
since that notification that management believes have changed the 
Association's category.

The Association's capital amounts and ratios are as follows:


<TABLE>
<CAPTION>
                                                                                                              TO BE
                                                                                                               WELL
                                                                                                           CAPITALIZED
                                                                                                              UNDER
                                                                                                              PROMPT
                                                                                         FOR                CORRECTIVE
                                                                                     CAPITAL ADEQUACY         ACTION
                                                                  ACTUAL                PURPOSES             PROVISIONS
                                                           --------------------  ----------------------  ---------------------
                                                            AMOUNT      RATIO     AMOUNT       RATIO      AMOUNT      RATIO   
                                                           ---------  ---------  ---------     -----     ---------  --------- 
                                                                           (DOLLARS IN THOUSANDS)                   
<S>                                                        <C>        <C>        <C>        <C>          <C>        <C> 
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 

As of February 29, 1996:                                                                                                     
  Total capital (to risk-weighted assets)                     88,583      15.02%    47,195        8.00%     58,977    10.00%
  Tier 1 capital (to risk-weighted assets)                    84,159      14.27%       N/A        N/ A      35,386     6.00%
  Tier 1 capital (to adjusted total assets)                   84,159       7.37%    34,250        3.00%     57,096     5.00%
  Tangible capital (to adjusted total assets)                 84,159       7.37%    17,125        1.50%        N/A      N/A 

</TABLE>
 
In August 1993, the OTS issued a final rule which adds an interest rate risk 
component to the existing 8% risk-based capital requirement. The OTS has not 
yet established an effective date for this rule. Because of the Association's 
strong capitalization, management does not believe that compliance with the 
new rule would adversely affect its operations.
 
Legislation was enacted September 30, 1996, to mitigate the disparity between 
banks insured by the Bank Insurance Fund and thrifts 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. The Association'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 14 -STOCKHOLDERS' EQUITY:
 
Under Federal regulations, the Association may not declare or pay a cash 
dividend on its capital stock if the effect thereof would cause the 
Association'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 
Association 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, 1997, the Association 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 15 - EMPLOYEE RETIREMENT PLANS:

The Association 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:
 
<TABLE>
<CAPTION>
                                                                    FEBRUARY 28,  FEBRUARY 29,
                                                                        1997          1996
                                                                    ------------  ------------
<S>                                                                 <C>           <C>
                                                                          (IN THOUSANDS)
Actuarial present value of benefit obligations:
  Accumulated benefit obligation:
   Vested benefits                                                   $    4,131    $    3,476
   Nonvested benefits                                                       225           187
                                                                    ------------  ------------
                                                                          4,356         3,663
  Effect of projected future compensation                                 2,279         2,467
                                                                    ------------  ------------
Projected benefit obligation                                              6,635         6,130
Fair value of assets held in the plan                                     3,740         2,895
                                                                    ------------  ------------
Plan assets less than the projected benefit obligation                   (2,895)       (3,235)
Net unrecognized loss from past experience different from that
  assumed                                                                 1,737         1,674
Unrecognized prior service cost                                            (444)           43
Unrecognized net transition asset                                          (236)         (250)
                                                                    ------------  ------------
Accrued pension cost (included in accrued expenses and other
  liabilities)                                                       $   (1,838)   $   (1,768)
                                                                    ============  ============

</TABLE>

Components of net pension expense are as follows:

<TABLE>
<CAPTION>
                                                                                             YEAR ENDED
                                                                          -------------------------------------------------
                                                                           FEBRUARY 28,     FEBRUARY 29,     FEBRUARY 28,
                                                                               1997             1996             1995
                                                                          ---------------  ---------------  ---------------
                                                                                           (IN THOUSANDS)
<S>                                                                       <C>              <C>              <C>
Service cost-benefits earned                                                 $     610        $     571        $     484
Interest cost on projected benefit obligation                                      429              363              363
Actual return on assets held in the plan                                          (354)            (448)            (436)
Net amortization and deferral                                                       86               (7)             (12)
                                                                                 -----            -----            -----
Net pension expense                                                          $     771        $     479        $     399
                                                                                 =====            =====            =====

</TABLE>
 
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%.
 
The Association also maintains a contributory retirement 401k 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, the Association will also make a contribution to the plan 
equal to 50% of the first 5% contributed by the employees. The Association's 
expense for fiscal 1997, 1996 and 1995 was $121,000, $106,000 and $110,000, 
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.

                                     24



<PAGE>

NOTE 16--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 the Association'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 $1,111,000, $1,066,000 and 
$901,000 for fiscal 1997, 1996 and 1995, respectively.

The total commitments for future minimum annual rental payments for real 
property and equipment leases are as follows as of February 28, 1997:
 
<TABLE>
<CAPTION>

FISCAL YEAR                                        Amount
---------------                                --------------
                                               (In Thousands)
<S>                                             <C>
1998                                               $   1,115
1999                                                     867
2000                                                     448
2001                                                     337
2002                                                     236
Thereafter                                               154
                                                      ------
Total                                              $   3,157
                                                      ======

</TABLE>

Loan Commitments:

As of February 28, 1997 and February 29, 1996, the Association had 
commitments to originate and purchase loans totaling approximately 
$51,500,000 and $64,000,000, respectively. As of February 28, 1997 and 
February 29, 1996, the Association had commitments to sell loans totaling 
approximately $6,800,000 and $33,300,000, respectively.
 
NOTE 17--RELATED PARTY TRANSACTIONS:
 
In the normal course of business, the Association may make loans to directors 
and executive officers of Maryland Federal, their affiliates and members of 
their immediate families. The aggregate balances of these loans greater than 
$60,000 were $1,512,000 and $1,799,000 as of February 28, 1997 and February 
29, 1996, respectively. During fiscal 1997, $108,000 were advanced and 
$395,000 were repaid with respect to these loans. During fiscal 1996, 
$396,000 were advanced and $236,000 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 the Association in the ordinary course 
of business. For fiscal 1997, 1996 and 1995, the firm received fees of 
$410,000, $323,000 and $187,000, respectively, for services performed for the 
Association, in addition to fees which were paid by borrowers.
 
NOTE 18--STOCK PURCHASE AND STOCK OPTION PLANS:
 
The Board of Directors of the Company has adopted an Employee Stock Purchase 
Plan. The aggregate number of shares of common stock which may be purchased 
pursuant to the plan is 166,720 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 
4,310 shares at a price of $22.13 and 4,208 shares at a price of $24.33 in 
fiscal 1997, 4,006 shares at a price of $26.83 and 3,356 shares at a price of 
$20.19 in fiscal 1996, and 3,332 shares at a price of $22.53 per share and 
4,122 shares at a price of $20.19 in fiscal 1995. The total number of shares 
remaining at the end of fiscal 1997 amounted to 90,459 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 601,480 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, 1997, options have been 
granted to purchase 595,930 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 156,000 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 6,000 
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 5,000 shares. As of February 28, 
1997, options have been granted to purchase 103,500 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 160,160 
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, 1997, 
options have been granted to purchase 160,160 shares.

The following table summarizes information on these stock option plans:

<TABLE>
<CAPTION>
                                                  Weighted
                                                   Average
                                                    Price
                                                  Per Share     Shares
                                                 -----------  ----------
<S>                                              <C>          <C>
Outstanding at February 28, 1994                  $   14.05      321,271
  Granted                                             25.13      101,250
  Exercised                                            9.47      (61,718)
  Canceled                                            22.12       (5,210)
                                                               ----------
Outstanding at February 28, 1995                      17.88      355,593
  Granted                                             27.22      128,800
  Exercised                                            9.36     (101,295)
  Canceled                                            23.66      (10,100)
                                                              ----------
Outstanding at February 29, 1996                      23.26      372,998
  Adjustment for stock dividend                      --           17,765
  Granted                                             36.13       80,400
  Exercised                                           17.14     (114,948)
  Canceled                                            24.34       (9,482)
                                                              ----------
Outstanding at February 28, 1997                      27.05      346,733
                                                              ==========

Exercisable at February 28, 1997                      24.36      146,842
                                                              ==========

</TABLE>

Had compensation cost been determined on the basis of fair value pursuant to 
SFAS 123, net income and primary earnings per share would have been as 
follows:

<TABLE>
<CAPTION>
                                                                            Year Ended
                                                                    --------------------------
                                                                    February 28,  February 29,
                                                                        1997          1996
                                                                    ------------  ------------
                                                                      (Dollars in Thousands,
                                                                      Except Per Share Data)
<S>                                                                 <C>           <C>
Net income as reported                                               $    6,525    $    8,739
Pro forma net income                                                      6,338         8,650
Primary earnings per share as reported                                     2.00          2.63
Pro forma primary earnings per share                                       1.96          2.62
Weighted-average assumptions:
  Risk-free interest rate                                                  6.43%         5.65%
  Expected life                                                         8 years       5 years
  Expected volatility of stock price                                      12.50%        11.00%
  Expected dividends                                                       2.00%         2.00%

</TABLE>
 
The range of exercise prices for the stock options outstanding at February 
28, 1997, is $21.07 to $37.50, with a weighted-average contractual life of 
approximately six 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 1997 and 1996 is $9.65 and $4.84, 
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 19--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.

                                    25

<PAGE>

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 20--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
 
The Association 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 the Association has in 
particular classes of financial instruments.

The Association'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. The Association 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 the Association's exposure to 
off-balance-sheet risk is as follows:

<TABLE>
<CAPTION>
                                                                    February 28,  February 29,
                                                                        1997          1996
                                                                    ------------  ------------
                                                                          (In Thousands)
<S>                                                                 <C>           <C>
Financial instruments whose contract amounts represent credit
  risk:
  Commitments to extend credit                                       $  104,176    $   91,868
  Standby letters of credit                                               1,978         1,962

</TABLE>
 
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 the 
Association 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 21--SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

<TABLE>
<CAPTION>
                                                                                         Year Ended
                                                                          ----------------------------------------
                                                                          February 28,  February 29,  February 28,
                                                                              1997          1996          1995
                                                                          ------------  ------------  ------------
                                                                                       (In Thousands)
<S>                                                                       <C>           <C>           <C>
Cash paid for:
  Interest                                                                 $   52,328    $   52,144    $   38,480
  Income taxes                                                                  1,603         5,422         5,020
Transfer from loans to foreclosed real estate                                   1,229           281           632
Loans to finance sales of foreclosed real estate                                  544           208           360

</TABLE>

NOTE 22--SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK:

Most of the Association'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.

NOTE 23--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 
the Association 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:

<TABLE>
<CAPTION>
                                                                         February 28, 1997       February 29, 1996
                                                                       ----------------------  ----------------------
                                                                                   Estimated               Estimated
                                                                       Carrying      Fair      Carrying      Fair
                                                                        Amount       Value      Amount       Value
                                                                       ---------  -----------  ---------  -----------
                                                                                       (In Thousands)
<S>                                                                    <C>        <C>          <C>        <C>
Financial assets:
  Cash and cash equivalents                                            $  10,939   $  10,939   $  22,905   $  22,905
  Federal funds sold and securities purchased under agreements to
    resell                                                                17,665      17,665      16,092      16,092
  Securities available for sale                                           69,360      69,360      74,791      74,791
  Securities held to maturity                                             11,448      11,417      10,072      10,007
  Loans held for sale                                                      2,679       2,697      16,296      16,399
  Loans receivable, net                                                  989,273     978,464     974,888     976,105
Financial liabilities:
  Deposits                                                               788,933     764,973     788,931     778,970
  Advances from FHLB                                                     226,280     225,582     243,780     243,612
Off-balance-sheet instruments:
  Commitments to extend credit                                                --       1,053          --         557
  Standby letters of credit                                                   --          40          --          39

</TABLE>

                                    26

<PAGE>

NOTE 24--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)

<TABLE>
<CAPTION>
                                                                    February 28,  February 29,
                                                                        1997          1996
                                                                    ------------  ------------
                                                                          (In Thousands)
<S>                                                                 <C>           <C>
ASSETS:
 Cash                                                                $    3,838    $      792
 Investment in subsidiary                                                91,716        88,147
 Securities available for sale                                              512         5,604
 Other assets                                                               505            --
                                                                    ------------  ------------
    Total assets                                                     $   96,571    $   94,543
                                                                    ============  ============


LIABILITIES:                                                         $    1,310    $      561
                                                                    -----------   -----------

STOCKHOLDERS' EQUITY:
 Preferred stock                                                             --            --
 Common stock                                                                41            38
 Additional paid-in capital                                              42,625        34,917
 Retained earnings                                                       66,976        67,492
 Unrealized holding gains, net                                            2,835         2,420
 Treasury stock, at cost                                                (17,216)      (10,885)
                                                                    ------------  ------------
  Total stockholders' equity                                             95,261        93,982
                                                                    ------------  ------------
    Total liabilities and stockholders' equity                       $   96,571    $   94,543
                                                                    ============  ============

</TABLE>

Condensed Statements of Income 
(Parent Company Only)

<TABLE>
<CAPTION>
                                                                                          Year Ended
                                                                          -------------------------------------------
                                                                          February 28,   February 29,   February 28,
                                                                              1997           1996           1995
                                                                          -------------  -------------  -------------
                                                                                        (In Thousands)
<S>                                                                       <C>            <C>            <C>
 Advisory fee income                                                        $     160      $     160      $     160
 Interest income                                                                  120             92             74
 General and administrative expenses                                              228             87             97
                                                                               ------         ------         ------
 Income before income taxes and equity in net income of subsidiary                 52            165            137
 Income tax expense                                                                19             58             53
                                                                               ------         ------         ------
 Income before equity in net income of subsidiary                                  33            107             84
 Equity in net income of subsidiary                                             6,492          8,632          8,979
                                                                               ------         ------         ------
 NET INCOME                                                                 $   6,525      $   8,739      $   9,063
                                                                               ======         ======         ======

</TABLE>

Condensed Statements of Cash Flows 
(Parent Company Only)

<TABLE>
<CAPTION>
                                                                                          Year Ended
                                                                          -------------------------------------------
                                                                          February 28,   February 29,   February 28,
                                                                              1997           1996           1995
                                                                          -------------  -------------  -------------
                                                                                        (In Thousands)
<S>                                                                       <C>            <C>            <C>
OPERATING ACTIVITIES:
 Net income                                                                 $   6,525      $   8,739      $   9,063
 Adjustments to reconcile net income to net cash provided by operating
  activities:
   Equity in net income of subsidiary, net of distributions                    (2,492)        (3,632)        (5,979)
   Decrease (increase) in other assets                                           (505)            31            (20)
   Increase (decrease) in liabilities                                             610             15            (14)
                                                                               ------         ------         ------
    Net cash provided by operating activities                                   4,138          5,153          3,050
                                                                               ------         ------         ------
INVESTING ACTIVITIES:
 Purchases of securities available for sale                                    (1,020)        (4,541)          (319)
 Proceeds from maturities of securities available for sale                      6,112             --          1,635
                                                                               ------         ------         ------
  Net cash provided by (used in) investing activities                           5,092         (4,541)         1,316
                                                                               ------         ------         ------
FINANCING ACTIVITIES:
 Proceeds from issuance of stock under stock plans                              2,177          1,124            943
 Cash paid in lieu of stock dividend for fractional shares                        (11)            --             --
 Purchase of treasury stock                                                    (6,331)            --         (3,448)
 Cash dividends paid                                                           (2,019)        (1,660)        (1,363)
                                                                               ------         ------         ------
  Net cash used in financing activities                                        (6,184)          (536)        (3,868)
                                                                               ------         ------         ------
INCREASE IN CASH                                                                3,046             76            498
CASH:
  Beginning of year                                                               792            716            218
                                                                               ------         ------         ------
  End of year                                                               $   3,838      $     792      $     716
                                                                               ======         ======         ======

</TABLE>

                                    27

<PAGE>

NOTE 25--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

The following table presents selected quarterly financial data for the years 
ended February 28, 1997 and February 29, 1996:

<TABLE>
<CAPTION>
                                                                               Year Ended February 28, 1997
                                                                        ------------------------------------------
                                                                          First     Second      Third     Fourth
                                                                         Quarter    Quarter    Quarter    Quarter
                                                                        ---------  ---------  ---------  ---------
                                                                          (In Thousands, Except Per Share Data)
<S>                                                                     <C>        <C>        <C>        <C>
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
                                                                        =========  =========  =========  =========

Primary earnings per share                                              $     .56  $     .58  $     .16  $     .70
                                                                        =========  =========  =========  =========

</TABLE>

<TABLE>
<CAPTION>

                                                                               Year Ended February 29, 1996
                                                                        ------------------------------------------
                                                                          First     Second      Third     Fourth
                                                                         Quarter    Quarter    Quarter    Quarter
                                                                        ---------  ---------  ---------  ---------
                                                                          (In Thousands, Except Per Share Data)
<S>                                                                     <C>        <C>        <C>        <C>
Interest income                                                         $  19,443  $  19,837  $  20,215  $  20,623
Interest expense                                                           12,551     13,072     13,563     13,704
                                                                        ---------  ---------  ---------  ---------
Net interest income                                                         6,892      6,765      6,652      6,919
Provision for loan losses                                                      --         --         50         70
                                                                        ---------  ---------  ---------  ---------
Net interest income after provision for loan losses                         6,892      6,765      6,602      6,849
Gain on sales of securities                                                    --      1,433      1,879         --
Other noninterest income                                                      522        580        661        652
Noninterest expense                                                         4,456      4,785      4,592      4,733
                                                                        ---------  ---------  ---------  ---------
Income before income taxes                                                  2,958      3,993      4,550      2,768
Income tax expense                                                          1,128      1,573      1,747      1,082
                                                                        ---------  ---------  ---------  ---------
Net income                                                              $   1,830  $   2,420  $   2,803  $   1,686
                                                                        =========  =========  =========  =========

Primary earnings per share                                              $     .55  $     .71  $     .83  $     .54
                                                                        =========  =========  =========  =========

</TABLE>

                           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, 
1997 and February 29, 1996, 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, 1997. 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, 1997 and February 29, 
1996, and the results of their operations and their cash flows for each of 
the years in the three-year period ended February 28, 1997, in conformity 
with generally accepted accounting principles.

STOY, MALONE & COMPANY, P.C.

Bethesda, Maryland
April 7, 1997

                                    28
<PAGE> 

<TABLE>
<CAPTION>
<S>                                                                          <C>
Directors and Officers                                                       General  
                                                                             Information For   
Board of Directors                                                           Shareholders

Richard B. Bland                                                             Annual Meeting
  Chairman of the Board, General Counsel to the                              The Annual Meeting of Shareholders of
  Association and Senior Partner of Lancaster, Bland,                        Maryland Federal Bancorp, Inc. will be
  Eisele & Herring                                                           held at La Fontaine Bleu, 7963 Annapolis
                                                                             Road, Lanham, Maryland, on June 18
Robert H. Halleck                                                            1997.  A formal notice of the Meeting,
  President, Maryland Federal Bancorp, Inc. and                              together with a proxy statement and a
  Maryland Federal Savings and Loan Association                              proxy form, will be mailed to shareholders.
                                                                              

A. William Blake, Jr.                                                        Transfer Agent and Registrar
  Executive Vice President,                                                  Registrar and Transfer Company 
  Maryland Federal Bancorp, Inc. and                                         10 Commerce Drive
  Maryland Federal Savings and Loan Association                              Cranford, New Jersey 07016

Richard R. Mace                                                              Independent Auditors
  Self-employed as a sporting goods dealer                                   Stoy, Malone & Company, P.C.
                                                                             7315 Wisconsin Avenue
David A. McNamee                                                             Bethesda, Maryland 20814 
  President, McNamee, Hosea, Jernigan and Kim, P.A.
                                                                             General Counsel
Thomas H. Welsh, III                                                         Lancaster, Bland, Eisele & Herring
  Self-employed as a real estate developer and builder                       9450 Pennsylvania Avenue - Unit 20
                                                                             Upper Marlboro, Maryland 20772  
</TABLE>

<TABLE>
<S>                        <C>                        <C>                    <C>
Corporate                  Senior Vice Presidents     Assistant Secretaries  Special Counsel
Officers                   David E. Baker             Margaret R. Campbell   Elias, Matz, Tiernan & Herrick, L.L.P.
Maryland Federal           Nancy B. Cohen             Carol J. Downs         734 15th Street, N.W.
Bancorp, Inc.              Ronald R. O'Brien          Elfrieda Y. McDaniel   Washington, D.C.  20005
                           J. Diane Stevenson         Janet L. Norris
President                                                                    Shareholder and General Inquiries      
Robert H. Halleck          Secretary                  Assistant Treasurers   Mr. Robert H. Halleck
                           Sarah M. Costlow           James P. Baker         President
Executive Vice President                              Wilhelma L. Christian  Maryland Federal Bancorp, Inc.
A. William Blake, Jr.      Vice Presidents            Lawrence E. DeHof      3505 Hamilton Street
                           Lorraine H. Blancke        Dolores M. Dubich      Hyattsville, MD  20782
Senior Vice President and  Charlotte P. Krintz        Susie L. Edwards       (301) 779-1200
Chief Financial Officer    Dennis C. McAdoo           Linda Ericksen
Lynn B. Hounslow           Marvette M. Monroe         Stephanie T. Jones     Stock Listing
                           Belinda G. Norton          Keith C. Loughery      The common stock of Maryland Federal
Secretary                  Ann C. Wiltbank            Debbie L. Mancuso      Bancorp, Inc. is listed on the over-the-
Sarah M. Costlow           Mark J. Woolson            Donna L. McGehee       counter market and quoted on the
                                                      Jamie R. Murdock       NASDAQ National Market System under
Maryland Federal Savings   Assistant Vice Presidents  Bonita J. Pieper       the symbol "MFSL".  As of April 5, 1997,
and Loan Association       Cynthia A. Brentlinger     Megan J. Stevens       there were 4,109,911 shares issued, of
                           Phillip Burrows            Michael J. Thompson    which 3,204,485 were outstanding.
President                  Vivian E. Davis            Leroy T. Tillery II
Robert H. Halleck          William T. Evinger                                The following table sets forth market price
                           Patricia Garcia            Auditor                information for the common stock of the
Executive Vice President   B. Gwen Henderson          Laurie A. Zebrowski    Company for the periods indicated.
A. William Blake, Jr.      Perry A. Johnson           
                           Hilde H. Kochanek                                 Fiscal Quarter Ended        High          Low
Senior Vice President      William O'Rourke                                  May 31, 1995                35            23-5/8
 and Treasurer             Mark A. Weber                                     August 31, 1995             34-7/8        30-1/4
Clarice M. George          Amy Woreta                                        November 30, 1995           33-1/4        29
                                                                             February 29, 1996           32-1/2        30

Senior Vice President and                                                    Fiscal Quarter Ended        High          Low
     Comptroller                                                             May 31, 1996                30-3/8        29-1/4
Lynn B. Hounstow                                                             August 31, 1996             30-1/2        28
                                                                             November 30, 1996           34-5/8        29-1/2
                                                                             February 28, 1997           38-3/4        32-3/4

                                                                             As of April 25, 1997, 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 14 of the Notes to
                                                                             Consolidated Financial Statements.

                                                                             Annual and Other Reports
                                                                             Additional copies of this Annual Report to
                                                                             shareholders, and copies of the Company's
                                                                             10-K statements and quarterly reports,
                                                                             may be obtained without charge by
                                                                             contacting the Company.
</TABLE>

                                          29