<PAGE>
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996. Commission file number: 0-20516
MASON-DIXON BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
Maryland 52-1764929
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
45 W. Main Street, Westminster, Maryland 21157
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (410) 857-3401
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, Par Value $1.00 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 28, 1997 was $110,117,158.
As of February 28, 1997, Mason-Dixon Bancshares, Inc. had 5,306,851 shares
of common stock outstanding, par value $1.00.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Mason-Dixon Bancshares, Inc. Annual Report to Stockholders
for the year ended December 31, 1996 are incorporated by reference into Parts
II and IV.
Portions of the proxy statement for the annual stockholders meeting to be
held April 19, 1997 are incorporated by reference in Part III.
<PAGE>
ITEM 1. BUSINESS
GENERAL
Mason-Dixon Bancshares, Inc. ("Mason-Dixon") is a registered bank holding
company which was incorporated in 1991 in the State of Maryland. Mason-Dixon
is a legal entity, separate and distinct from its two subsidiaries, Carroll
County Bank and Trust Company ("Carroll County Bank") and Bank of Maryland.
Mason-Dixon's major activity since its inception has been to provide advisory
services and coordinate the general policies of its subsidiaries.
Prior to 1995, Mason-Dixon consisted of one bank subsidiary, Carroll
County Bank. On July 17, 1995, Mason-Dixon acquired all of the outstanding
stock of Bank Maryland Corp located in Towson, Maryland for a purchase price
of $26,800,000. This purchase price included 915,868 shares of Mason-Dixon
common stock and $13,100,000 cash. As a result of the acquisition, Bank of
Maryland, Bank Maryland Corp's principal subsidiary, became a wholly-owned
subsidiary of Mason-Dixon.
The acquisition was accounted for as a purchase; therefore, the results
of operations of Bank of Maryland were included in the consolidated statement
of income from the date of acquisition. Assets and liabilities of Bank of
Maryland were adjusted to market value as of the date of acquisition and were
included in the consolidated statement of condition subsequent to the
acquisition. The purchase price in excess of the net assets acquired was
considered goodwill and is being amortized over 15 years. Historical
financial data was not restated to include Bank of Maryland's historical data.
CARROLL COUNTY BANK AND TRUST COMPANY
The parent company's principal subsidiary is Carroll County Bank and
Trust Company, which accounts for approximately 71% of Mason-Dixon's
consolidated assets at December 31, 1996. Carroll County Bank, a Maryland
state-chartered bank since 1962, is a commercial bank and trust company with
eleven (11) offices in Carroll County, Maryland, and one banking office in
Howard County, Maryland.
Carroll County Bank operates two wholly-owned subsidiaries--Carrollco
Insurance, Inc. and Skylight Investment Corporation. Carrollco Insurance,
Inc., headquartered in Manchester, Maryland, is an insurance agency primarily
engaged in the sale of annuities. At December 31, 1996, Carrollco Insurance,
Inc. had total assets of $101 thousand. Skylight Investment Corporation,
headquartered in Wilmington, Delaware, is an investment company whose sole
activity is to manage and maintain the passive investments of its parent.
Skylight Investment Corporation had total assets exceeding $81 million at
December 31, 1996.
At year end 1996, Carroll County Bank employed 283 individuals, 256 of
which were full-time equivalent employees.
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BANK OF MARYLAND
Bank of Maryland, Mason-Dixon's most recently acquired subsidiary,
accounts for approximately 29% of Mason-Dixon's consolidated assets at
December 31, 1996. Bank of Maryland was chartered as a Maryland state bank in
1990. It is a commercial bank with ten (10) offices located throughout
central Maryland and Maryland's Eastern Shore.
At December 31, 1996, Bank of Maryland employed 129 individuals, 123 of
which were full-time equivalent employees.
SERVICES OFFERED
Through its bank subsidiaries, Mason-Dixon engages in commercial,
savings, and trust business, including the receiving of demand and time
deposits and the making of loans to individuals, associations, partnerships,
and corporations. Real estate financing comprises residential first and
second mortgages, construction and land development, home equity lines of
credit, and commercial mortgages. Consumer lending is direct to individuals
on both a secured and unsecured basis. Commercial loans include lines of
credit and term and demand loans for the purchase of equipment, inventory,
and accounts receivable financing.
Mason-Dixon offers traditional demand deposit accounts for individuals,
associations, partnerships, governments, and corporations. Also offered are
NOW, savings, and money market accounts, as well as certificates of deposit
and Individual Retirement Accounts. Deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC").
Carroll County Bank provides 24-hour access to customer information
through its XpressLine automated voice response system, and both bank
subsidiaries currently operate 24-hour automated teller machines. Safe
deposit facilities are available at most locations, as are after hour
depository services. Customers may also obtain travelers checks, money
orders, and cashier's and treasurer's checks at all locations. Additionally,
Carroll County Bank provides a full range of trust services to individuals,
corporations, and non-profit organizations under the name of Mason-Dixon
Trust Company. Services to individuals include investment management, living
and testamentary trusts, estate management, and custody of securities.
Corporate financial services and employee benefit plans are provided to
businesses. Services provided to non-profit organizations include management
of endowment trusts. Carroll County Bank also originates and services real
estate mortgage and construction loans as a principal and as an agent under
the name of Mason-Dixon Bancshares Mortgage Company, and sells annuities and
mutual funds under the name of Mason-Dixon Investment Services.
The bank subsidiaries are not dependent upon a single customer or small
group of customers, the loss of which would have a material adverse effect on
Mason-Dixon. Carroll County Bank and Bank of Maryland are not dependent on a
single product or small number of
2
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products, and do not experience any significant fluctuations in loan or
deposit activity which are seasonal in nature.
COMPETITION AND OTHER MARKET FACTORS
The banking and financial service businesses are intensely competitive.
Mason-Dixon competes with other commercial banks, savings banks, thrift
institutions, credit unions, finance companies, mortgage companies, and other
investment advisory companies located in Maryland.
Carroll County Bank's primary market is Carroll County, Maryland, which
is served by all of the various financial service companies listed above. Its
predominant commercial banking competitors are locally owned community banks,
followed by regional banks. Through its eleven (11) offices in Carroll
County, Carroll County Bank services the financial needs of communities
throughout its market. It serves primarily small to medium size businesses
and the financial needs of individuals. Carroll County Bank's market share
(as measured by the percentage of insured deposits held in its primary
market) has consistently approximated 25% for the last several years. It is
by far the market leader, having nearly twice the market share of its nearest
competitor. In order to maintain this market share, Carroll County Bank
relies on a high level of responsible, personalized service, and affordable
technology enhancements to keep up with customer needs for information and
services around the clock. Advertising consists of television, radio, print
media, and direct mail solicitations which emphasize specific product
promotions, community orientation, and convenience.
Bank of Maryland's primary market is central Maryland and Maryland's
Eastern Shore, where it mainly serves the needs of small and medium sized
businesses and professional organizations. Its predominant competitors are
large regional banks, which are able to finance extensive advertising
campaigns, make large commercial loans, and allocate their assets among
investments of the highest yield in geographic areas with the greatest
demand. Many of these major commercial banks offer services which are not
directly offered by Bank of Maryland. In order to compete with the other
financial institutions in its primary service areas, Bank of Maryland relies
upon personal contacts by officers, directors, Boards of Advisors, and
employees, as well as extended hours and highly personalized services. Bank
of Maryland's promotional activities emphasize the advantages of dealing with
a locally headquartered branch attuned to the particular needs of the
community.
SUPERVISION AND REGULATION
Mason-Dixon is a bank holding company subject to supervision and
regulation by the Federal Reserve Board under the Bank Holding Company Act of
1956, as amended (the "BHCA"). In general, the BHCA and regulations
promulgated by the Federal Reserve Board limit the business of bank holding
companies to owning or controlling banks and engaging in such other
activities as the Federal Reserve Board may determine to be so closely
related to banking or managing or controlling banks as to be a proper
incident thereto. With certain exceptions, the BHCA prohibits bank holding
companies from acquiring direct or indirect ownership or control of
3
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more than 5% of any class of voting shares in any company, including any
bank, without the prior approval of the Federal Reserve Board.
Mason-Dixon's two bank subsidiaries are Maryland state-chartered banks
regulated by the Maryland Bank Commissioner and the Federal Deposit Insurance
Corporation (the "FDIC"). Various consumer laws and regulations also affect
the operations of the subsidiaries.
LIMITS ON DIVIDENDS AND OTHER PAYMENTS
Both federal and state laws impose restrictions on the ability of the
bank subsidiaries to pay dividends to Mason-Dixon. In general, bank
regulatory agencies have the ability to prohibit proposed dividends by a bank
if the regulatory body determines that such distribution would constitute an
unsafe or unsound practice. For a Maryland state-chartered bank, dividends
may be paid out of undivided profits or, with the prior approval of the
Maryland Bank Commissioner, from surplus in excess of 100% of required
capital stock after providing for all expenses, losses, interest, and taxes
that are due or accrued.
There are also statutory limits on the transfer of funds to a holding
company and its nonbanking subsidiaries by its banking subsidiaries, whether
in the form of loans or other extensions of credit, investments, or asset
purchases. Such transfers by any banking subsidiary to a holding company or
to any such nonbanking subsidiary generally are limited in amount, and such
loans and extensions of credit are required to be collateralized in specified
amounts.
HOLDING COMPANY STRUCTURE
Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to its subsidiary banks and to make
capital injections into a troubled subsidiary bank, and the Federal Reserve
Board may charge the bank holding company with engaging in unsafe and unsound
practices for failure to commit resources to a subsidiary bank when required.
A required capital injection may be called for at a time when the holding
company does not have the resources to provide it. Any capital loans by a
holding company to its subsidiary bank would be subordinate in right of
payment to deposits and to certain other indebtedness of such subsidiary bank.
In addition, under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), depository institutions insured by the
FDIC can be held liable for any losses incurred by, or reasonably anticipated
to be incurred by, the FDIC in connection with (i) the default of a commonly
controlled FDIC-insured depository institution or (ii) any assistance
provided by the FDIC to a commonly controlled FDIC-insured depository
institution in danger of default. Accordingly, if an insured subsidiary of
Mason-Dixon causes a loss to the FDIC, other insured subsidiaries of
Mason-Dixon could be required to compensate the FDIC by reimbursing it for
the estimated amount of such loss.
4
<PAGE>
CAPITAL REQUIREMENTS
Bank holding companies are required to comply with risk-based capital
guidelines established by the Federal Reserve Board. The guidelines establish
a framework that is intended to make regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations and to
take off-balance sheet exposures into explicit account in assessing capital
adequacy. The risk-based ratios are determined by allocating assets and
specified off-balance sheet commitments into four risk-weight categories,
with higher levels of capital being required for categories perceived as
representing greater risk.
Generally, under the applicable guidelines, a banking organization's
capital is divided into two tiers. "Tier 1", or core capital, includes common
equity, perpetual preferred stock (excluding auction rate issues), and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangibles, subject to certain exceptions. "Tier 2", or
supplementary capital, includes, among other things, limited-life preferred
stock, hybrid capital instruments, mandatory convertible securities,
qualifying subordinated debt, and the allowance for loan and lease losses,
subject to certain limitations and less required deductions. "Total capital"
is the sum of Tier 1 and Tier 2 capital. The Tier 1 component must comprise
at least 50% of qualifying total capital. Banking organizations that are
subject to the guidelines are required to maintain a ratio of Tier 1 capital
to risk-weighted assets of at least 4% and a ratio of total capital to
risk-weighted assets of at least 8%. The appropriate regulatory authority may
set higher capital requirements when an organization's particular
circumstances warrant.
The Federal Reserve Board and the FDIC have also adopted leverage capital
guidelines to which Mason-Dixon and its bank subsidiaries are subject. The
guidelines provide for a minimum leverage ratio (Tier 1 capital to adjusted
total average assets) of 3% for financial institutions that have the highest
regulatory examination ratings and are not experiencing or anticipating
significant growth. Financial institutions not meeting these criteria are
required to maintain leverage ratios of at least one to two percentage points
higher.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on
its ability to pay dividends, the issuance by the applicable regulatory
authority of a capital directive to increase capital, and, in the case of
depository institutions, the termination of deposit insurance by the FDIC, as
well as to the measures described under "Federal Deposit Insurance
Corporation Improvement Act of 1991", as applicable to undercapitalized
institutions.
5
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The following table sets forth the capital ratios of Mason-Dixon and its
bank subsidiaries as of December 31, 1996:
<TABLE>
<CAPTION>
CARROLL BANK
COUNTY OF REGULATORY
MASON-DIXON BANK MARYLAND MINIMUM
----------- ------- -------- ----------
<S> <C> <C> <C> <C>
Tier 1 risk-based capital ratio 12.88% 13.92% 9.68% 4%
Total risk-based capital ratio 13.93% 14.76% 10.93% 8%
Leverage ratio 7.58% 7.47% 7.37% 3-5%
</TABLE>
Based upon the foregoing capital ratios, Mason-Dixon and its bank
subsidiaries are considered "well capitalized" within the meaning of the
regulations adopted by the Federal Reserve Board and the FDIC.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
In December, 1991, Congress enacted the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), which substantially revised
the bank regulatory and funding provisions of the Federal Deposit Insurance
Act and made significant revisions to several other federal banking statutes.
FDICIA provides for, among other things, (i) a recapitalization of the Bank
Insurance Fund of the FDIC (the "BIF") by increasing the FDIC's borrowing
authority and providing for adjustments in its assessment rates; (ii) annual
on-site examinations of federally-insured depository institutions by banking
regulators; (iii) publicly available annual financial condition and
management reports for financial institutions, including audits by
independent accountants; (iv) the establishment of uniform accounting
standards by federal banking agencies; and (v) the establishment of a "prompt
corrective action" system of regulatory supervision and intervention, based
on capitalization levels, with more scrutiny and restrictions placed on
depository institutions with lower levels of capital.
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements. Pursuant to
FDICIA, the federal bank regulatory authorities have adopted regulations
setting forth a five-tiered system for measuring the capital adequacy of the
depository institutions that they supervise. Under these regulations, a
depository institution is classified in one of the following capital
categories: "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized", and "critically undercapitalized." A
depository institution is "well capitalized" if it has (i) a total risk-based
capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6%
or greater, (iii) a leverage ratio of 5% or greater, and (iv) is not subject
to any order, regulatory agreement, or written directive to meet and maintain
a specific capital level for any capital measure. An "adequately capitalized"
institution is defined as one that has (i) a total risk-based capital ratio
of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater,
and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of
a bank with a composite CAMEL rating of 1).
6
<PAGE>
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a cash dividend) or paying any
management fees to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subject to growth limitations and are required to submit capital restoration
plans. For a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee (subject to certain
limitations) that the institution will comply with such capital restoration
plan.
Significantly undercapitalized depository institutions may be subject to
a number of other requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized and requirements to
reduce total assets and stop accepting deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator, generally within 90 days of the date such
institution is determined to be critically undercapitalized.
FDICIA provides the federal banking agencies with significantly expanded
powers to take enforcement action against institutions which fail to comply
with capital or other standards. Such action may include the termination of
deposit insurance by the FDIC or the appointment of a receiver or conservator
for the institution. FDICIA also limits the circumstances under which the
FDIC is permitted to provide financial assistance to an insured institution
before appointment of a conservator or receiver.
INTERSTATE BANKING LEGISLATION
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
was enacted into law on September 29, 1994. The law provides that, among
other things, substantially all state law barriers to the acquisition of
banks by out-of-state bank holding companies are eliminated effective
September 29, 1995. The law will also permit interstate branching by banks
effective as of June 1, 1997, subject to the ability of states to opt-out
completely or to set an earlier effective date. Mason-Dixon anticipates that
the effect of the new law will be to increase competition within the markets
in which Mason-Dixon now operates, although Mason-Dixon cannot predict the
extent to which competition will increase in such markets or the timing of
such increase.
EFFECTS OF MONETARY POLICY
Mason-Dixon and its bank subsidiaries are affected by the ongoing and
changing monetary policy set forth by the Federal Reserve Board. Through its
powers, the Federal Reserve Board can influence the supply of bank credit to
affect the level of economic activity. Changes in the discount rate and
reserve requirements are among the instruments used to influence the market.
The monetary policies of the Federal Reserve have in the past and will in
the future affect the operating results of financial institutions, including
Mason-Dixon and its bank subsidiaries.
7
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS: PAGE
- ------------------ -----
<S> <C>
Distribution of Assets, Liabilities and Stockholders' Equity 9
Interest Rates and Interest Differential 10
Investment Portfolio 11
Loan Portfolio 12
Non-Performing Loans 13
Summary of Loss Experience 13
Allocation of Allowance for Credit Losses 14
Rate Sensitivity Analysis 15
Deposits 16
Short-Term Borrowings 17
Return on Equity and Assets 18
Properties 19
Properties (continued) 20
Legal Proceedings 20
Submission of Matters to Vote of Securities Holders 20
Executive Officers 21
Parts II and III 22
Part IV and Index of Exhibits 23
Signatures 24
</TABLE>
8
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DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY:
The following table sets forth the amounts of the Corporation's daily
average assets, liabilities and stockholders' equity for the periods indicated,
the amounts of interest earned and the interest paid thereon, the average
interest rate earned for each type of earning asset and the average rate paid
for each type of interest bearing liability. Interest earned on non-accruing
loans is included in the interest earned only when collected. The average
balances of non-accruing loans are included in the average balances of loans.
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE AVERAGE
(IN 000'S) BALANCE INTEREST YIELD/ RATE BALANCE INTEREST YIELD/ RATE
- ------------------------------------- ---------- --------- ----- ---------- --------- -----
Assets
Interest Earning Assets:
Loans.............................. $ 365,778 $ 34,122 9.33% $ 260,511 $ 25,133 9.65%
Investments: taxable............... 66,504 4,353 6.55% 35,780 2,420 6.76%
mortgage-backed securities....... 221,624 15,315 6.91% 208,302 15,004 7.20%
tax-exempt....................... 72,394 6,029 8.33% 63,766 5,332 8.36%
Federal funds sold................. 21,826 1,176 5.39% 13,144 834 6.35%
Interest bearing deposits in
banks............................ 210 16 7.62% 149 12 8.05%
---------- --------- ---- ---------- --------- ----
Total Interest Earning Assets.... 748,336 61,011 8.15% 581,652 48,735 8.38%
Non-Interest Earning Assets:
Cash and due from banks............ 19,701 13,580
Premises and equipment............. 15,552 12,042
Other assets....................... 26,313 16,686
Allowance for credit losses........ (4,827) (3,822)
---------- ----------
Total Assets..................... $ 805,075 $ 620,138
---------- ----------
---------- ----------
Liabilities and Stockholders'
Equity
Interest Bearing Liabilities:
Interest bearing demand
deposits........................... $ 58,676 $ 1,514 2.58% $ 43,103 $ 1,115 2.59%
Savings deposits................... 182,857 5,628 3.08% 158,228 4,972 3.14%
Time deposits...................... 286,557 15,860 5.53% 200,883 11,568 5.76%
Borrowed funds..................... 115,919 6,242 5.38% 93,351 5,416 5.80%
---------- --------- ---- ---------- --------- ----
Total............................ 644,009 29,244 4.54% 495,565 23,071 4.66%
Non-Interest Bearing Liabilities:
Demand deposits.................... 83,825 63,072
Other.............................. 8,471 8,183
Stockholders' equity............... 68,770 53,318
---------- ----------
Total Liabilities and
Stockholders' Equity........... $ 805,075 $ 620,138
---------- ----------
---------- ----------
Net interest earnings................ $ 31,767 $ 25,664
---------- ----------
---------- ----------
Net interest spread.................. 3.61% 3.72%
Net yield on earning assets (Tax
equivalent)........................ 4.25% 4.41%
</TABLE>
<TABLE>
<CAPTION>
(IN 000'S) 1994
- --------------------------------- ---------------------------------
AVERAGE
BALANCE INTEREST YIELD/ RATE
- ------------------------------------- ---------- --------- -----
<S> <C> <C> <C>
Assets
Interest Earning Assets:
Loans............................ $ 194,711 $ 16,787 8.62%
Investments:..................... 19,915 1,490 7.48%
mortgage-backed securities..... 199,025 13,547 6.81%
tax-exempt..................... 54,909 4,643 8.46%
Federal funds sold............... 1,701 72 4.23%
Interest bearing deposits in
banks.......................... 271 9 3.32%
---------- --------- ------
Total Interest Earning Assets.. 470,532 36,548 7.77%
Non-Interest Earning Assets:
Cash and due from banks.......... 10,049
Premises and equipment........... 9,668
Other assets..................... 6,781
Allowance for credit losses...... (2,634)
----------
Total Assets................... $ 494,396
----------
----------
Liabilities and Stockholders'
Equity
Interest Bearing Liabilities:
Interest bearing demand
deposits......................... $ 39,834 $ 1,036 2.60%
Savings deposits................. 158,571 4,827 3.04%
Time deposits.................... 132,128 6,305 4.77%
Borrowed funds................... 71,392 3,224 4.52%
---------- --------- ------
Total.......................... 401,925 15,392 3.83%
Non-Interest Bearing Liabilities:
Demand deposits.................. 45,165
Other............................ 4,034
Stockholders' equity............. 43,272
----------
Total Liabilities and
Stockholders' Equity......... $ 494,396
----------
----------
Net interest earnings.............. $ 21,156
----------
----------
Net interest spread................ 3.94%
Net yield on earning assets (Tax
equivalent)...................... 4.50%
</TABLE>
Presented on a tax equivalent basis using the statutory Federal income tax
rate of 34%.
Non-accruing loans are included in average loan balances.
9
<PAGE>
INTEREST RATES AND INTEREST DIFFERENTIAL:
The following table sets forth for the periods indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rates. Interest earned on non-accruing loans is included in the
interest earned on loans only when collected, i.e. on a cash basis; but the
average balances of such loans are included in the average balance of loans.
<TABLE>
<CAPTION>
1996 COMPARED TO 1995 1995 COMPARED TO 1994
------------------------------- -----------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------- ------------------------------------
(IN 000'S) VOLUME RATE NET VOLUME RATE NET
- --------------------------------------------------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans............................................ 10,156 (1,167) 8,989 5,673 2,673 8,346
Investments: taxable............................. 2,078 (145) 1,933 1,187 (257) 930
mortgage-backed securities..................... 960 (649) 311 631 826 1,457
tax-exempt..................................... 721 (24) 697 749 (60) 689
Other earning assets............................. 556 (210) 346 480 285 765
--------- --------- --------- ----- -------- ---------
Total Interest Income.......................... 14,471 (2,195) 12,276 8,720 3,467 12,187
Interest Bearing Liabilities:
Interest bearing demand deposits................. 403 (4) 399 85 (6) 79
Savings deposits................................. 774 (118) 656 (10) 155 145
Time deposits.................................... 4,934 (642) 4,292 3,280 1,984 5,264
Borrowed funds................................... 1,309 (483) 826 993 1,198 2,191
--------- --------- --------- ----- -------- ---------
Total Interest Expense......................... 7,420 (1,247) 6,173 4,348 3,331 7,679
--------- --------- --------- ----- -------- ---------
Change in Net Interest Income...................... 7,051 (948) 6,103 4,372 136 4,508
--------- --------- --------- ----- -------- ---------
</TABLE>
Tax equivalent adjustments of $2,050,000 and $1,805,000 are included in the
calculation of the tax-exempt rate variances.
Tax equivalent adjustments of $165,000 and $193,000 are included in the
calculation of the loan rate variances.
10
<PAGE>
INVESTMENT PORTFOLIO
The following table sets forth the composition of investment securities at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995 1994
---------------------- ---------------------- ---------------------
AVAILABLE HELD TO AVAILABLE HELD TO AVAILABLE HELD TO
($ IN 000'S) FOR SALE MATURITY FOR SALE MATURITY FOR SALE MATURITY
- --------------------------------------------------- ---------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury and other U. S. Government agencies
and corporations................................ $ 9,563 $ 45,068 $ 21,205 $ 40,196 $ 1,925 $ 20,024
Mortgage-backed securities........................ 150,829 70,106 149,940 58,916 86,207 109,028
States and political subdivisions................. -- 78,070 -- 67,265 -- 62,418
Common and preferred stocks....................... 4,895 -- 2,990 -- 2,600 --
---------- ---------- ---------- ---------- --------- ----------
Total Investment Securities..................... $ 165,287 $ 193,244 $ 174,135 $ 166,377 $ 90,732 $ 191,470
---------- ---------- ---------- ---------- --------- ----------
</TABLE>
There were no state, county, or municipal securities whose book value, as to
any issuer, exceeded 10% of stockholders' equity at December 31, 1996, 1995, or
1994.
The following schedule sets forth the maturities of investment securities at
December 31, 1996 and the weighted average yields of such securities. Yields of
tax-exempt securities have been computed on a tax equivalent basis using a tax
rate of 34%. Available For Sale Securities yields are based on fair value; Held
To Maturity Securities yields are based on amortized cost.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION--AVAILABLE FOR SALE PORTFOLIO
-------------------------------------------------------------------------------
WITHIN AFTER ONE BUT AFTER FIVE BUT AFTER
ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS TEN YEARS
---------------- ----------------- ---------------- ----------------
($ IN 000'S) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ----------------------------------------------- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government
agencies..................................... -- -- $6,061 7.48% $3,502 6.92% $ -- --
States and political subdivisions.............. -- -- -- -- -- -- -- --
Mortgage backed securities..................... -- -- -- -- 1,882 8.22% 148,947 7.02%
Equity securities.............................. 4,895 7.36% -- -- -- -- -- --
------ ------ ------ -------
Total Available For Sale:
At Fair Value................................ $4,895 7.36% $6,061 7.48% $5,384 7.37% $148,947 7.02%
------ ----- ------ --------
At Amortized Cost............................ $4,894 $6,022 $5,272 $148,275
------ ------ ------ --------
</TABLE>
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION--HELD TO MATURITY PORTFOLIO
-------------------------------------------------------------------------------
WITHIN AFTER ONE BUT AFTER FIVE BUT AFTER
ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS TEN YEARS
---------------- ----------------- ---------------- ----------------
($ IN 000'S) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ---------------------------------------- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government
agencies.............................. $3,718 6.86% $29,753 6.19% $11,597 7.01% $ -- --
States and political subdivisions....... 1,802 10.91% 7,341 9.38% 17,199 8.07% 51,728 8.20%
Mortgage backed securities.............. 526 7.97% 935 8.35% 2,646 8.79% 65,999 6.89%
------ ------- ------- --------
Total Held To Maturity:
At Amortized Cost..................... $6,046 8.16% $38,029 6.86% $31,442 7.74% $117,727 7.15%
------ ------- ------- --------
At Fair Value......................... $6,105 $38,368 $31,662 $118,122
------ ------- ------- --------
</TABLE>
The maturities listed for mortgage backed securities are based on final
maturity dates, no estimates have been included for any normal principal
repayment or any prepayment of principal of these securities.
11
<PAGE>
LOAN PORTFOLIO
The following table shows the Company's loan distribution at the end of each
of the last five years:
<TABLE>
<CAPTION>
DECEMBER 31
($ IN 000'S) 1996 1995 1994 1993 1992
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Construction and Land Development.................... $ 24,202 $ 20,085 $ 12,543 $ 13,095 $ 16,300
Residential Real Estate--Mortgage.................... 164,695 137,120 100,941 113,469 98,431
Commercial Real Estate--Mortgage..................... 135,410 123,142 56,280 42,011 42,795
Commercial........................................... 54,556 55,781 15,447 13,859 13,648
Consumer............................................. 19,873 17,964 11,249 17,446 31,975
---------- ---------- ---------- ---------- ----------
Total Loans........................................ 398,736 354,092 196,460 199,880 203,149
Unearned Income on Loans........................... (572) (1,142) (948) (1,414) (2,232)
---------- ---------- ---------- ---------- ----------
Loans (Net of Unearned Income)................... $ 398,164 $ 352,950 $ 195,512 $ 198,466 $ 200,917
---------- ---------- ---------- ---------- ----------
</TABLE>
The following table shows the amounts of loans outstanding as of December 31,
1996 which, based on the remaining scheduled repayments of principal, are due
in the periods indicated. Also included is the sensitivity of loans to
interest rate fluctuations at December 31, 1996 for loans due after one year.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION
-----------------------------------------------
WITHIN AFTER 1 BUT AFTER
($ IN 000'S) 1 YEAR WITHIN 5 YRS 5 YEARS TOTAL
- --------------------------------------------------------------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Construction and Land Development............................... $ 13,896 $ 7,682 $ 2,624 $ 24,202
Residential Real Estate--Mortgage............................... 41,467 55,912 67,316 164,695
Commercial Real Estate--Mortgage................................ 29,415 96,644 9,351 135,410
Commercial...................................................... 31,106 14,176 9,274 54,556
Consumer........................................................ 11,693 6,866 1,314 19,873
---------- ------------ --------- ----------
Total Loans................................................... 127,577 181,280 89,879 398,736
Unearned Income on Loans...................................... (356) (216) 0 (572)
---------- ------------ --------- ----------
Loans (Net of Unearned Income).............................. $ 127,221 $ 181,064 $ 89,879 $ 398,164
---------- ------------ --------- ----------
Sensitivity of loans due after one year to changes in interest
rates:
Loans at predetermined interest rates......................... $ 146,326
Loans at floating or adjustable rates......................... 124,617
------------
Total........................................................... $ 270,943
------------
</TABLE>
RISK ELEMENTS
NON-PERFORMING LOANS
The following table presents information concerning the aggregate amount of
risk elements for the past five years. Risk elements comprise 1) loans accounted
for on a non-accrual basis, 2) loans contractually past due ninety days or more
as to interest or principal payments, and 3) other loans whose terms have
12
<PAGE>
been negotiated to provide a reduction or deferral of interest or principal
because of a deterioration in the financial position of the borrower.
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
($ IN 000'S) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------- --------- --------- --------- --------- ---------
Loans accounted for on a non-accrual basis........................... $ 2,821 $ 1,560 $ 211 $ 1,015 $ 233
Accruing loans past due 90 days or more.............................. 214 277 62 270 395
Loans whose terms have been negotiated to provide a reduction or
deferral of interest or principal because of a deterioration in the
financial position of the borrower................................. 0 0 0 0 0
--------- --------- --------- --------- ---------
Totals............................................................... $ 3,035 $ 1,837 $ 273 $ 1,285 $ 628
--------- --------- --------- --------- ---------
Interest income which would have been recorded at original terms..... $ 414 $ 127 $ 14 $ 57 $ 25
--------- --------- --------- --------- ---------
</TABLE>
Loans, other than those secured by marketable collateral, are put on a
non-accrual status when principal or interest becomes 90 days delinquent.
Placing a loan on non-accrual is a determination that interest may not be
collected in the current period and ,therefore, should be reported only when
collected. Interest is included in income only to the extent received in cash.
Summary of Loss Experience
The following table summarizes the Company's loan loss experience for the
five years ended:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(IN 000'S) 1996 1995 1994 1993 1992
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Daily Average (net of unearned income)............... $ 365,778 $ 260,511 $ 194,711 $ 200,121 $ 208,260
Balance of allowance for credit losses at beginning
of the year........................................ $ 4,729 $ 2,627 $ 2,686 $ 2,411 $ 2,310
Allowance applicable to loans of purchased company... 0 2,355 0 0 0
Loans charged-off:
Construction and Land Development.................. 0 0 0 0 0
Residential Real Estate--Mortgage.................. 117 40 78 42 75
Commercial Real Estate--Mortgage................... 106 0 0 0 0
Commercial......................................... 336 314 25 0 0
Consumer........................................... 177 56 132 247 809
---------- ---------- ---------- ---------- ----------
Total Charged-offs................................ 736 410 235 289 884
Recoveries of loans previously charged-off:
Construction and Land Development.................. 0 0 0 0 0
Residential Real Estate--Mortgage.................. 4 7 2 18 0
Commercial Real Estate--Mortgage................... 116 0 0 0 0
Commercial......................................... 144 43 1 2 0
Consumer........................................... 74 107 173 215 173
---------- ---------- ---------- ---------- ----------
Total Recoveries.................................. 338 157 176 235 173
Net loans charged-off................................ 398 253 59 54 711
Additions to allowance charged to expense............ 836 -- -- 329 812
Balance of allowance for credit losses at end of the
year............................................... $ 5,167 $ 4,729 $ 2,627 $ 2,686 $ 2,411
Ratio of net charge-offs during period to average
loans outstanding.................................. 0.11% 0.10% 0.03% 0.03% 0.34%
</TABLE>
13
<PAGE>
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is based on management's evaluation of
historical and anticipated net charge-offs, analysis of non-performing loans,
prevailing and anticipated economic conditions, and bank industry standards. In
the opinion of management, the allowance is considered adequate based upon its
evaluation of the various factors affecting the collectibility of loans. The
allowance is increased by provisions charged to operating expense and reduced by
net charge-offs.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993
-------------------- -------------------- -------------------- --------------------
AS A % OF AS A % OF AS A % OF AS A % OF
(IN 000'S) RESERVE LOANS RESERVE LOANS RESERVE LOANS RESERVE LOANS
- ----------------------------------------
Construction and Land Development,
Commercial Real Estate--Mortgage, and
Commercial (1)........................ 4,062 54% 3,353 56% 1,866 43% 1,312 35%
Residential Real Estate--Mortgage....... 553 41% 857 39% 242 51% 233 57%
Consumer................................ 133 5% 193 5% 293 6% 280 9%
Not Allocated........................... 419 N/A 326 N/A 226 N/A 861 N/A
--------- --------- --------- --------- --------- --------- --------- ---------
Total Allowance for Credit Losses....... $ 5,167 100% $ 4,729 100% $ 2,627 100% $ 2,686 100%
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
<S> <C> <C>
1992
--------------------
AS A % OF
(IN 000'S) RESERVE LOANS
- ----------------------------------------
Construction and Land Development,
Commercial Real Estate--Mortgage, and
Commercial (1).......................... 1,110 35%
Residential Real Estate--Mortgage....... 273 40%
Consumer................................ 230 25%
Not Allocated........................... 798 N/A
--------- ---------
Total Allowance for Credit Losses....... $ 2,411 100%
--------- ---------
</TABLE>
(1) These categories have been consolidated and the reserve amount is based on a
detailed analysis of the estimated credit risk for these loan types. The
reserve amount is established by evaluating various factors including
current economic conditions, the financial condition of the borrower, and
the risk elements which may pertain to certain types of loans. The
allocations do not necessarily reflect the expected future charge-offs
applicable to each category.
14
<PAGE>
RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
AFTER 3 AFTER 1 NON-
MONTHS- YEAR- INTEREST
DECEMBER 31, 1996 WITHIN WITHIN WITHIN AFTER SENSITIVE
(IN 000'S) 3 MONTHS 1 YEAR 5 YEARS 5 YEARS FUNDS TOTAL
- ------------------------------------------------ ---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold.............................. $ 19,364 -- -- -- -- $ 19,364
Interest bearing deposits in other banks........ 90 -- -- -- -- 90
Investment securities........................... 56,737 51,887 111,163 138,744 -- 358,531
Loans (including loans held for sale)........... 161,338 51,919 156,487 31,562 -- 401,306
Non-interest earning assets..................... -- -- -- -- 61,783 61,783
Interest sensitivity hedges on assets........... (12,000) (3,000) 15,000 -- -- --
---------- ---------- ---------- ---------- ----------- ----------
Total Assets.................................... $ 225,529 $ 100,806 $ 282,650 $ 170,306 $ 61,783 $ 841,074
Liabilities and Stockholders' Equity
Interest bearing deposits....................... 90,335 185,410 214,244 36,086 -- 526,075
Short-term borrowings........................... 53,734 -- -- -- -- 53,734
Long-term borrowings............................ 75,924 1 9,350 -- -- 85,275
Non-interest bearing liabilities and
stockholders' equity.......................... -- -- -- -- 175,990 175,990
---------- ---------- ---------- ---------- ----------- ----------
Total Liabilities and Stockholders' Equity...... $ 219,993 $ 185,411 $ 223,594 $ 36,086 $ 175,990 $ 841,074
---------- ---------- ---------- ---------- ----------- ----------
Interest rate sensitivity gap................... $ 5,536 ($ 84,605) $ 59,056 $ 134,220 ($ 114,207)
Cumulative interest rate sensitivity gap........ $ 5,536 ($ 79,069) ($ 20,013) $ 114,207 --
Cumulative ratio of interest sensitive assets to
interest sensitive liabilities................ 1.03 0.80 0.97 1.17 1.00
</TABLE>
Rate Sensitivity Analysis indicates the sensitivity to fluctuations in
interest rates by providing information regarding the maturity and repricing
information for selected categories of assets and liabilities. Federal funds
sold are assigned to an immediately repricable category as this is an overnight
investment. Mortgage-backed investments are categorized based on the estimated
amortization of these securities using recent prepayment histories. Fixed rate
investments are grouped by final maturity date. Variable rate investments are
categorized according to the next available repricing opportunity. Fixed rate
loans are grouped in the appropriate category based on normal scheduled
amortization. Variable rate loans are categorized based on the next available
repricing opportunity. Interest bearing deposits without a contractual maturity
are estimated based on management's estimates of deposit withdrawals. Interest
bearing deposits with contractual maturities are categorized based on the
effective maturity of the deposit.
15
<PAGE>
DEPOSITS
The following schedule presents daily average amounts of deposits by type:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
<S> <C> <C> <C>
($ IN 000'S) 1996 1995 1994
- ----------------------------------------------------------------------------- ---------- ---------- ----------
Non-interest bearing demand deposits......................................... $ 83,825 $ 63,072 $ 45,165
Interest bearing demand deposits............................................. 58,676 43,103 39,834
Savings deposits............................................................. 182,857 158,228 158,571
Time deposits................................................................ 286,557 200,883 132,128
---------- ---------- ----------
Total Deposits............................................................... $ 611,915 $ 465,286 $ 375,698
---------- ---------- ----------
</TABLE>
The following schedule presents daily average rates paid on deposits by
type:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Non-interest bearing demand deposits........................................................ -- -- --
Interest bearing demand deposits............................................................ 2.58% 2.59% 2.60%
Savings deposits............................................................................ 3.08% 3.14% 3.04%
Time deposits............................................................................... 5.53% 5.76% 4.77%
--- --- ---
Total Deposits.............................................................................. 4.36% 4.39% 3.68%
--- --- ---
</TABLE>
At December 31, 1996, the maturity distribution for time deposits issued in
amounts of $100,000 or more was:
(in 000's)
<TABLE>
<S> <C>
3 months or less $23,328
Over 3 months through 6 months..................................... 4,938
Over 6 months through 12 months.................................... 5,649
Over 12 months..................................................... 9,078
-------
Total.............................................................. $42,993
-------
</TABLE>
16
<PAGE>
SHORT-TERM BORROWINGS
Short-term borrowings were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
($ IN 000'S) 1996 1995 1994
- ------------------------------------------------------------------------------ ------------ --------- ---------
<S> <C> <C> <C>
Maximum amount at any month-end............................................... $ 67,607 $ 86,535 $ 61,500
Average amount outstanding during the year.................................... $ 45,823 $ 68,571 $ 44,824
Amount outstanding at year-end................................................ $ 53,734 $ 49,451 $ 54,927
Weighted average interest rate during the year................................ 5.48% 5.89% 4.25%
Weighted average interest rate at year-end.................................... 5.42% 5.56% 5.82%
</TABLE>
17
<PAGE>
RETURN ON EQUITY AND ASSETS
The following table shows net income as a percent of average stockholders'
equity and average total assets, as well as certain other ratios for the periods
indicated:
<TABLE>
<CAPTION>
DECEMBER 31
<S> <C> <C> <C>
1996 1995 1994
------------ --------- ---------
Percentage of net income to:
Average stockholders' equity..................................................... 12.27% 13.69% 15.28%
Daily average total assets....................................................... 1.05% 1.18% 1.34%
Percentage of dividends declared
per common share to net income
per common share................................................................. 32.60% 31.83% 29.71%
Percentage of average stockholders'
equity to daily average total assets............................................. 8.54% 8.60% 8.75%
</TABLE>
18
<PAGE>
ITEM 2: PROPERTIES
Mason-Dixon Bancshares, Inc.
Corporate Office
45 West Main Street
Westminster, MD 21157
Carroll County Bank and Trust Company
Community Banking Center Melrose Branch
45 West Main Street 4501 Hanover Pike
Westminster, MD 21157 Manchester, MD 21102
Englar Road Branch Taneytown Branch
401 Englar Road 4345 Old Taneytown Road
Westminster, MD 21157 Taneytown, MD 21787
East Main Street Branch Finksburg Branch *
193 East Main Street 3000 Gamber Road
Westminster, MD 21157 Finksburg, MD 21048
Manchester Branch Heartlands Branch **
3200 Main Street 3004 North Ridge Road
Manchester, MD 21102 Ellicott City, MD 21043
Manchester Drive-in Mount Airy Branch *
3068 Westminster Street 1001 Twin Arch Road
Manchester, MD 21102 Mt. Airy, MD 21771
Eldersburg Branch Operations Center
1300 Liberty Road 200 Baltimore Boulevard
Sykesville, MD 21784 Westminster, MD 21157
Hampstead Branch
999 South Main Street
Hampstead, MD 21074
Fairhaven Branch **
7200 Third Avenue
Sykesville, MD 21784
Mason-Dixon Bancshares Mortgage Company--a division of Carroll County Bank
and Trust Company
Eldersburg Production Office **
1643 Liberty Road, Suite A-2
Sykesville, MD 21784
Millersville Production Office **
8334 Veterans Highway
Millersville, MD 21108
* Properties are subject to land leases
** Properties are leased
19
<PAGE>
ITEM 2: PROPERTIES (CONTINUED)
Bank of Maryland
Executive Offices **
502 Washington Avenue
Towson, MD 21204
Towson Branch ** Salisbury Branch
600 Washington Avenue 1300 Salisbury Boulevard
Towson, MD 21204 Salisbury, MD 21801
Annapolis Branch ** Bishopville Branch
2661 Riva Road 10657 Bishopville Road
Annapolis, MD 21401 Bishopville, MD 21813
Harford County Branch ** Crisfield Branch
333 Baltimore Pike 257 North Somerset Avenue
Bel Air, MD 21014 Crisfield, MD 21817
Perry Hall Branch ** Federalsburg Branch
9650 Belair Road 102 South Main Street
Perry Hall, MD 21236 Federalsburg, MD 21632
Pikesville Branch ** Princess Anne Branch
44 E. Sudbrook Lane 12136 Elm Street
Baltimore, MD 21208 Princess Anne, MD 21853
Bethesda Production Office **
4720 Montgomery Lane, Suite 420
Bethesda, MD 20814 ** Properties are leased
Mason-Dixon's subsidiaries lease properties from other parties and,
during 1996, incurred rental expense of $1,009,608 on these properties. See
Note 6 (Premises and Equipment) to the Consolidated Financial Statements.
The premises occupied or leased by Mason-Dixon and its subsidiaries are
considered to be well located and suitably equipped to serve as banking
facilities. Neither the location of any particular office nor the unexpired
term of any lease is deemed material to Mason-Dixon's business.
ITEM 3: LEGAL PROCEEDINGS
On December 9, 1996, Mason-Dixon filed suit in the United States
District Court for the District of Maryland against Anthony Investments,
Inc., Barbara S. Floyd, Alvie G. Spencer, and their stockholder group
("Defendants") seeking preliminary and permanent injunctive and declaratory
relief against the Defendants for violations of the SEC proxy solicitation
rules, violation of the Exchange Act beneficial ownership reporting rules,
violation of laws requiring approval of the Maryland Commissioner of
Financial Regulation for acquisition of a block of bank holding company
stock, and for making false and misleading statements in connection with
their proxy solicitation. The Defendants thereafter filed a counterclaim
against Mason-Dixon and third party claims against the Board of Directors
alleging that the directors breached their fiduciary duty by not reporting
inquiries regarding possible interest in the acquisition of Mason-Dixon, and
have engaged in corporate waste by bringing the lawsuit, adopting alleged
golden parachute plans and retaining Alex. Brown as Mason-Dixon's financial
advisor. The Defendants asked the court to require Mason-Dixon to take the
actions described in the Stockholder Proposal set forth in the proxy
statement, and to terminate the lawsuit, reimburse the legal fees, and to
terminate the relationship with Alex. Brown and the alleged golden parachute
plans. On February 28 1997, the Court ruled that certain statements made by
Defendants regarding Mason-Dixon's financial performance were misleading, and
their failure to disclose their acquisition of 5.1% of the stock without a
report to the Commissioner of Financial Regulations may have violated a State
banking acquisition law. The Court ordered the issuance of a corrective
letter to be promptly distributed to all stockholders, and the rescission of
all proxies or powers of attorney obtained by the Defendants not already
terminated by the Defendants. On March 13, the Defendants filed a motion with
the Court for leave to amend their counterclaim and third party claims. The
proposed amendment to the third party claims seeks to add a claim against
William Dulany and Thomas K. Ferguson, the Chairman and Pesident of
Mason-Dixon, respectively, alleging breach of fiduciary duty in not reporting
to the Board acquisition inquiries or overtures, and asking for the removal
of Dulany and Ferguson from the Board and damages in the amount of over $97
million. Mason-Dixon is opposing Defendants' claims vigorously. Meanwhile, on
March 13, the Defendants filed another action against Mason-Dixon asking that
the Court issue a temporary restraining order to prohibit Mason-Dixon from
mailing its proxy statement to its stockholders, claiming that management's
statement in opposition to Defendant's stockholder proposal was false and
misleading; at the hearing, Mason-Dixon volunteered to change certain
statements and the Court denied the Defendants' request for a restraining
order. On March 24, 1997, Defendants filed an action against Mason-Dixon
seeking preliminary injunctive relief alleging additional false and
misleading statements in Mason-Dixon's proxy statement. Once again,
Mason-Dixon is opposing Defendants' claims vigorously.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS: NONE
20
<PAGE>
ITEM 4A: EXECUTIVE OFFICERS
Mason-Dixon Bancshares, Inc.
<TABLE>
<CAPTION>
NAME AGE HIRE DATE
- ----------------------------------------- --- ----------------------
<S> <C> <C> <C>
Thomas K. Ferguson 54 August 27, 1991 President and Chief Executive Officer for
the last five years.
William B. Delaney 69 August 27, 1991 Chairman of the Board for the last five years.
</TABLE>
Carroll County Bank and Trust Company:
<TABLE>
<CAPTION>
NAME AGE HIRE DATE
- ----------------------------------------- --- ----------------------
<S> <C> <C> <C>
Thomas K. Ferguson 54 September 13, 1965 President and Chief Executive Officer for
the last five years.
Michael L. Oster 44 September 2, 1986 Executive Vice President/Chief Operating
Officer for the past year. Director of
Lending/Operations for the prior four
years.
Gerald G. Alsentzer 49 June 26, 1989 Senior Vice President and Director of the
Human Resources Division for the last
five years.
William J. Gering 51 April 22, 1986 Senior Vice President and Director of the
Trust Division for the last five years.
Marcus L. Primm 55 May 13, 1974 Senior Vice President and Director of
Retail Operations for the last five
years.
Louna S. Primm 49 December 31, 1974 Senior Vice President and Chief Lending
Officer for the past year. Manager of
Commercial Loan Department for the prior
four years.
Mark A. Keidel 35 August 17, 1987 Held various accounting positions for the
bank and has been Senior Vice President/
Chief Financial Officer for the last two
years. Also, Vice President/Chief Financial
Officer for Mason-Dixon for the last two years.
Christine L. Whiteleather 46 May 2, 1984 Worked in various capacities for the bank
and has been Senior Vice President/Chief
Investment Officer for the last two
years.
</TABLE>
Bank of Maryland:
<TABLE>
<CAPTION>
NAME AGE HIRE DATE
- ----------------------------------------- --- ----------------------
<S> <C> <C> <C>
H. David Shumpert 52 August 15, 1991 President and Chief Executive Officer for
the last five years.
A. Gary Rever 44 January 28, 1991 Executive Vice President, Secretary,
Chief Financial Officer and Treasurer for
the last five years.
W. Bruce McPherson 56 December 29, 1995 Executive Vice President--
Commercial/Real Estate Lending and
Credit. President of McPherson & Co. Inc.
and Executive Vice President/Chief Credit
Officer for MNC Financial Inc. for the prior
four years.
Robert D. Lockard 58 May 1, 1989 Worked in various operations positions at
the bank and has been Senior Vice
President -Retail Banking and Compliance
for the past two years.
Hunter F. Calloway 49 April 8, 1996 Senior Vice President--Commercial
Lending/ Southern Region. Commerial Real
Estate Lender with NationsBank for the
prior four years.
Ellen R. Fish 35 November 25, 1991 Worked in various commercial lending
positions in the bank and has been Senior
Vice President-- Commercial
Lending/Northern Region for the past
year.
</TABLE>
21
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS
MATTERS
Common Stock Data--Annual Stockholders Report, page 15, incorporated herein
by reference.
ITEM 6: SELECTED FINANCIAL DATA
Five Year Comparative Summary--Annual Stockholders Report, page 1,
incorporated herein by reference.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Annual Stockholders Report, pages 6 through 15, incorporated herein by
reference.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and related notes are included in the Annual
Stockholders Report, pages 16 through 39, incorporated herein by reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors are listed in the Annual Proxy Statement, dated March 17, 1997,
pages 3, 4, and 5, incorporated herein by reference. Executive officers are
included in Part I, Item 4A.
ITEM 11: EXECUTIVE COMPENSATION
Proxy Statement, dated March 17, 1997, pages 6 through 11,
incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Proxy Statement, dated March 17, 1997, pages 2 and 3, incorporated
herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Proxy Statement, dated March 17, 1997, pages 9 and 11, incorporated
herein by reference. Executive officers are included in Part I, Item 4A.
22
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES , AND REPORTS ON 8-K
(a) Documents filed as part of this report:
(1) The following financial statements of the Registrant, included on
pages 16 through 40 of the Registrants 1996 Annual Report to
Stockholders, are incorporated herein by reference in item 8:
Consolidated Balance Sheets--December 31, 1996 and 1995
Consolidated Statements of Income-- Years ended December 31,
1996, 1995, and 1994
Consolidated Statements of Stockholders' Equity--Years ended
December 31, 1996 1995, and 1994
Notes to Consolidated Financial Statements--Years ended
December 31, 1996, 1995, and 1994
Report of Independent Auditors for the year ending
December 31, 1996
(2) Financial statement schedules are omitted from this 10-K since
the required information is not applicable to the Registrant.
(3) Listing of Exhibits:
The following documents are attached as Exhibits to this Form 10-K as
indicated by the Exhibit number or are incorporated by reference to the prior
filings of the Registrant with the Commission.
FORM 10-K EXHIBIT # EXHIBIT
- ------------------------------------------ ---------------------------------
Exhibit A................................. Certificate of Incorporation
Exhibit 3................................. Bylaws of the Corporation
Exhibit 13................................ Annual Report to Shareholders
Exhibit 21................................ List of Registrant's Subsidiary
Exhibit 23................................ Consent of Independent Auditors
Exhibit 27................................ Financial Data Schedule
* Exhibit A is incorporated herein by reference to the identically numbered
exhibit to the Form S-4 Registration Statement filed by the Company with the
Securities and Exchange on October 15, 1991.
Item 14 (b)
No reports have been filed on Form 8-K during the last quarter of the
period covered by this report.
Item 14 (c)
See Item 14 (A) (3) above.
Item 14 (d)
See Item 14 (A) (2) above.
23
<PAGE>
SIGNATURES
Pursuant to the registration requirements of section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
MASON-DIXON BANCSHARES, INC.
(Registrant)
Date: March 12, 1997 By /s/ Thomas K. Ferguson
---------------------
Thomas K. Ferguson
President and
Chief Executive Officer
Date: March 12, 1997 By /s/ Mark A. Keidel
-------------
Mark A. Keidel
Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Miriam F. Beck Director Date: March 12, 1997
- -------------------------
Miriam F. Beck
/s/ James C. Snyder Director Date: March 12, 1997
- -------------------------
James C. Snyder
/s/ William B. Dulany Director Date: March 12, 1997
- -------------------------
William B. Dulany
/s/ Stevenson B. Yingling Director Date: March 12, 1997
- --------------------------
Stevenson B. Yingling
/s/ David S. Babylon, Jr. Director Date: March 12, 1997
- -------------------------
David S. Babylon, Jr.
/s/ Edwin W. Shauck Director Date: March 12, 1997
- -------------------------
Edwin W. Shauck
/s/ S. Ray Hollinger Director Date: March 12, 1997
- -------------------------
S. Ray Hollinger
/s/ Patricia A. Dorsey Director Date: March 12, 1997
- -------------------------
Patricia A. Dorsey
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MASON-DIXON BANCSHARES, INC.
BYLAWS
ARTICLE I
Stockholders
SECTION I. Annual Meeting. The annual meeting of stockholders shall be held
on such date and time in the month of April in each year as may be fixed by
resolution of the Board of Directors at which the stockholders shall elect
Directors whose term of office has expired, shall consider reports of the
affairs of the Corporation, and shall transact such other business as may
properly be brought before the meeting.
SECTION II. Special Meetings. Special meetings of the stockholders may be
called at any time for any purpose or purposes by the Chairman of the Board, by
the President, or by a majority of the Board of Directors, and shall be called
by the Chairman, President or Secretary of the Corporation upon the request in
writing of the holders of at least 50% of all the shares outstanding and
entitled to vote on the business to be transacted at such meeting. Such request
shall state the purpose or purposes of the meeting. Unless requested by
stockholders entitled to cast a majority of all votes entitled to be cast at the
meeting, however, a special meeting need not be called to consider any matter
which is substantially the same as a matter voted on at any special meeting of
the stockholders held during the preceding 12 months.
SECTION III. Place of Holding Meetings. All meetings of stockholders shall
be held at the principal office of the Corporation or elsewhere in the United
States as designated by the Board of Directors.
SECTION IV. Notice of Meetings. Written notice of each meeting of the
stockholders shall be mailed, postage pre-paid by the Secretary, to each
stockholder entitled to vote thereat at his post office address as it appears
upon the books of the Corporation at least ten (10) days, but not more than
ninety (90) days, before the meeting. Each such notice shall state the place,
day, and hour at which the meeting is to be held and, in the case of any special
meeting, shall state briefly the purpose or purposes thereof.
SECTION V. Quorum. The presence in person or by proxy of the holders of
record of a majority of the shares of the capital stock of the Corporation
issued and outstanding and entitled to vote thereat shall constitute a quorum at
all meetings of the stockholders, except as otherwise provided by law, by the
Articles of Incorporation or by these Bylaws. If less than a quorum shall be in
attendance at the time for which the meeting shall have been called, the meeting
may be adjourned from time to time by a majority vote of the stockholders
present or represented, without any notice other than by announcement at the
meeting, until a quorum shall attend. At any adjourned meeting at
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which a quorum shall attend, any business may be transacted which might have
been transacted if the meeting had been held as originally called.
SECTION VI. Conduct of Meetings. Meetings of stockholders shall be presided
over by the Chairman of the Board, or if he or she is not present, by the Vice
Chairman, or if he or she is not present, the President of the Corporation or,
if he or she is not present, by a Vice President, or, if none of said officers
is present, by a chairman to be elected at the meeting. The Secretary of the
Corporation, or if he or she is not present, any Assistant Secretary shall act
as Secretary of such meetings; in the absence of the Secretary and any Assistant
Secretary, the presiding officer may appoint a person to act as Secretary of the
meeting.
SECTION VII. Voting. At all meetings of stockholders, every stockholder
entitled to vote thereat shall have one (l) vote for each share of stock
standing in his or her name on the books of the Corporation on the date for the
determination of stockholders entitled to vote at such meeting. Such vote may be
either in person or by proxy appointed by an instrument in writing subscribed by
such stockholder or his or her duly authorized attorney, bearing a date not more
than eleven (11) months prior to said meeting, unless said instrument provides
for a longer period. Such proxy shall be dated, but need not be sealed,
witnessed or acknowledged. All elections shall be held and all questions shall
be decided by a majority of the votes cast at a duly constituted meeting, except
as otherwise provided by law, in the Articles of Incorporation or by these
Bylaws.
If the chairman of the meeting shall so determine, a vote by ballot may be
taken upon any election or matter, and the vote shall be so taken upon request
of the holders of a majority of the stock entitled to vote on such election or
matter. In either of such events, the proxies and ballots shall be received and
be taken in charge and all questions touching the qualification of voters and
the validity of proxies and the acceptance or rejection of votes shall be
decided by the tellers. Such tellers shall be appointed by the chairman of the
meeting.
ARTICLE II
Board of Directors
SECTION 1. General Powers. The property and business of the Corporation
shall be managed by the Board of Directors of the Corporation.
SECTION 2. Number and Qualification of Directors. The authorized number of
Directors shall be no less than twelve (12) nor more than fourteen (14) until
changed by amendment to the Articles of Incorporation. In accordance with
Article VII of these bylaws, the exact number of Directors shall be fixed within
the limits specified above by a resolution adopted by the Board of Directors.
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Directors must be stockholders of the Corporation and must own, free and
clear of all liens, pledges and other encumbrances, a minimum of 100 shares of
Corporation stock (par value $1.00 per share) at the date of election as a
Director. Within a five-year period from the date of initial election as
Director, such Director must acquire and maintain, free and clear of all liens,
pledges and other such encumbrances, a minimum of 500 shares of Corporation
stock (par value $1.00 per share). Notwithstanding the foregoing, the minimum
number of shares of the Corporation's stock required to be held by Directors
shall be not less than the number required by Section 3-403 of the Financial
Institutions Article of the Annotated Code of Maryland (or any successor
provision) or otherwise required by law.
Nomination for election of members of the Board of Directors may be made by
the Board of Directors or by any stockholder of any outstanding class of capital
stock of the Corporation entitled to vote for the election of Directors. Notice
by a stockholder of intention to make any nominations shall be made in writing
and shall be delivered or mailed to the President of the Corporation not less
than 120 days nor more than 150 days prior to any meeting of stockholders called
for the election of Directors. Such notification shall contain the following
information to the extent known by the notifying stockholder: (a) the name and
address of each proposed nominee; (b) the principal occupation of each proposed
nominee; (c) the number of shares of capital stock of the Corporation owned by
each proposed nominee; (d) the name and residence address of the notifying
stockholder; (e) the number of shares of capital stock of the Corporation owned
by the notifying stockholder; and (f) the consent in writing of the proposed
nominee as to the proposed nominee's name being placed in nomination for
Director. Nominations not made in accordance herewith may, in the discretion of
the chairman of the meeting, be disregarded and upon the chairman's
instructions, the tellers can disregard all votes cast for each such nominee.
Directors shall be residents for at least one year of a county (or a county
contiguous to such county) in which the Corporation or any subsidiary of the
Corporation maintains its principal office or principal banking office.
An individual may not serve as a Director of the Corporation if such
individual also serves as a director or employee of any financial institution
(other than a subsidiary of the Corporation), or corporation which maintains as
a principal subsidiary one or more financial institutions, or if such service
otherwise would violate the federal Depository Institution Management Interlocks
Act. The term "financial institution" means a credit union, savings and loan, or
commercial bank. The term "principal subsidiary" is defined to mean one or more
financial institutions whose total assets constitute twenty-five percent (25%)
or more of such corporation's consolidated total assets.
No more than three (3) Directors shall be "insiders" of the Corporation. The
term, "insiders," means an employee of the Corporation or any financial
institution
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subsidiary of the Corporation, and also means any beneficial owner (as
defined under Section 13(d) of the Securities Exchange Act of 1934) of ten
percent (10%) or more of the Corporation's stock. For purposes of the ten
percent (10%) beneficial ownership test, Corporation stock owned by such
individual's spouse, lineal descendants (i.e., parents and children), any
entity in which the individual owns a controlling interest (i.e., 20% or more
interest), and any group of which the owner is a member will be attributed to
such individual.
SECTION 3. Election and Term of Office. The terms of the initial Board of
Directors shall be set so as to implement staggered terms, with the terms of one
third (or as near one-third as possible) of the Directors being one year, the
terms of one-third being two years and the terms of one third being three years.
Thereafter, one-third of the Directors shall be elected by a majority of the
votes cast at each annual meeting of stockholders or by similar vote at any
special meeting called for the purpose, to serve three-year terms. Each Director
shall hold office until the expiration of the term for which he or she is
elected, except as otherwise stated in these Bylaws, and thereafter until his or
her successor has been elected and qualified. Election of Directors need not be
by written ballot, unless required by Article I of these Bylaws.
SECTION 4. Filling of Vacancies. Any and all vacancies on the Board of
Directors, including those created by increase in the number of Directors or by
removal of Directors, shall be filled by individuals who are not currently
serving as Directors of the Corporation and who are elected by the Board of
Directors to serve the remainder of the vacant Director's term of office.
SECTION 5. Removal. A Director of the Corporation may only be removed during
his or her term of office for cause, which means criminal conviction of a
felony, unsound mind, adjudication of bankruptcy, non-acceptance of office or
conduct prejudicial to the interest of the Corporation, by the affirmative vote
of a majority of the entire Board of Directors of the Corporation (exclusive of
the Director being considered for removal) or by the affirmative vote of not
less than sixty-seven percent (67%) of the outstanding voting stock of the
Corporation. Stockholders shall not have the right to remove Directors without
such cause. Stockholders may only attempt to remove a Director for cause after
service of specific charges, adequate notice and full opportunity to refute the
charges.
SECTION 6. Place of Meeting. The Board of Directors may hold their meetings
and have one or more offices, and keep the books of the Corporation, at such
place or places as they may from time to time determine by resolution or by
written consent of all the directors, either within or outside the State of
Maryland. The Board of Directors may hold their meetings by conference telephone
or other similar electronic communications equipment in accordance with the
provisions of Maryland Corporate Law.
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SECTION 7. Regular Meetings. The Board of Directors shall hold regular
quarterly meetings on such dates as shall be fixed by the Board. Following each
annual stockholder's meeting, the Board of Directors shall hold its annual
meeting of the Board to elect officers, and transact other business. Notice of
regular meetings shall not be required.
SECTION 8. Special Meetings. Special meetings of the Board of Directors for
any purpose may be called at any time by the Chairman of the Board of Directors,
the President, the Secretary, or by twenty-five (25%) percent or more of the
number of Directors then holding office.
Special meetings of the Board of Directors shall be held upon two days
notice by mail or four (4) hours notice delivered personally or by telephone or
telefax. If notice is by telephone or telefax, it shall be complete when the
person calling the meeting believes in good faith that the notified person (or a
person acting on behalf of or as agent for the notified person) has heard and
acknowledged the notice or received transmission of the facsimile. If the notice
is by mail, it shall be complete when deposited in the U.S. Mail, charges
prepaid and addressed to the notified person at such person's address appearing
on the corporate records or, if such address is not on these records or is not
readily ascertainable, at the place where the regular Board of Directors meeting
is held.
SECTION 9. Quorum. A majority of the whole number of Directors shall
constitute a quorum for the transaction of business at all meetings of the
Board of Directors, but, if at any meeting less than a quorum shall be
present, a majority of those present may adjourn the meeting from time to
time, and the act of a majority of the Directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by law or by the Corporation's
Articles of Incorporation or by these Bylaws.
SECTION 10. Compensation of Directors. Directors and members of committees
shall receive neither compensation for their services nor reimbursement for
their expenses unless these payments are fixed by resolution of the Board of
Directors.
SECTION 11. Committees. The Board of Directors, by resolution passed by a
majority of the whole Board, may designate the following standing committees:
(1) An Investment Committee, which shall have the power to discount,
purchase and sell bills, notes and other evidences of debt; and
(2) An Audit Committee which shall consist of at least three members of
the Board of Directors none of whom shall be officers or employees of the
Corporation or any subdivisions of the Corporation
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and each of whom shall be independent of management of the Corporation.
The duties of this committee shall be to make suitable examinations every
12 months of the affairs of the Corporation. The result of such
examination shall be reported, in writing, to the Board of Directors
stating whether the Corporation is in sound and solvent condition,
whether adequate internal audit controls and procedures are being
maintained, and recommending to the Board of Directors such changes in
the manner of doing business, etc., as shall be deemed advisable. The
Audit Committee, upon its own recommendation and with the approval of the
Board of Directors, may employ a qualified firm of Certified Public
Accountants to make a suitable examination and audit of the Corporation. If
such procedure is followed, the one annual examination and audit of such
firm of accountants and the presentation of its report to the Board of
Directors will be deemed sufficient to comply with this section of these
Bylaws.
The Board of Directors, by resolution adopted by a majority of the
authorized number of Directors, also may designate one or more additional
standing committees, including, but not limited to, an Executive Committee
consisting of two or more Directors who shall be appointed by, and hold office
at, the pleasure of the Board of Directors. The Board of Directors may, except
as hereinafter limited, delegate the Executive Committee any of the powers and
authorities of the Board of Directors. Other additional standing committees may
include the Nominating Committee, consisting of two or more Directors and
charged with the responsibility of recommending to the Board of Directors
nominees to Board vacancies, and the Compensation Committee, consisting of two
or more Directors, neither of whom is also an officer of the Corporation, whose
responsibility it is to recommend to the Board of Directors the compensation
arrangements for senior management.
The appointment of members or alternate members of a committee requires the
vote of a majority of the authorized number of Directors.
The Board of Directors shall designate one or more Directors as alternate
members of any committee who may replace any absent members at any meeting of
the committee. Any such committee, to the extent provided in the resolution of
the Board of Directors creating it, shall have the authority of the Board,
except with respect to:
(1) The approval of any action for which stockholder approval is also
required,
(2) The filling of vacancies on the Board or in any committee,
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(3) The fixing of compensation of the Directors for serving on the Board
or on any committee,
(4) The amendment or repeal of bylaws or the adoption of new bylaws,
(5) The amendment or repeal of any resolution of the Board which by its
express terms is not so amendable or repealable,
(6) A distribution to stockholders of the Corporation as defined under
Maryland Corporate Law, except at a rate or in a periodic amount or within a
price range determined by the Board, and permitted by law,
(7) The appointment of members of other committees of the Board,
(8) The authorization or approval of the reacquisition of Corporation
stock (unless pursuant to a general formula or method specified by the Board
of Directors and permitted by law), and
(9) The authorization or approval of the issuance or sale or contract
for sale of Corporation stock.
The Board of Directors shall designate a chairman for each committee who
shall have the sole power to call any committee meeting other than a meeting set
by the Board. Except as otherwise established by the Board of Directors, the
provisions of this entire Article II shall apply to committees of the Board and
action by such committees, mutatis mutandis.
ARTICLE III
Officers
SECTION 1. Officers. The officers of the Corporation shall be a President, a
Secretary, and a Chief Financial Officer. The Corporation also may have, at the
discretion of the Board of Directors, a Chairman of the Board and Vice-Chairman
of the Board (both of whom shall be chosen from the Board of Directors), one or
more Vice Presidents, one or more Trust Officers, one or more Assistant
Secretaries, one or more Assistant Treasurers, and any other officers who may be
appointed under Section 3 of this Article III. Any two or more offices, except
those of President and Vice President, may be held by the same person.
Any officer of the Corporation may be excluded by resolution of the Board of
Directors or by a provision of these Bylaws from participation, other than in
the capacity of a Director, in major policy-making functions of the Corporation.
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The Corporation shall provide a fidelity bond in the amount required by law
to cover each Director and officer of the Corporation who has control over or
access to cash or securities of the Corporation.
SECTION 2. Election. The officers of the Corporation, except those appointed
under Section 3 of this Article III, shall be chosen annually by the Board of
Directors, and each shall hold his or her office until he or she resigns or is
removed or otherwise disqualified to serve, or his or her successor is elected
and qualified.
SECTION 3. Subordinate Officers. The Board of Directors may appoint, and may
authorize the President to appoint, any other officers that the Business of the
Corporation may require, each of whom shall hold office for the period, have the
authority, and perform the duties specified in a resolution of the Board of
Directors.
SECTION 4. Removal and Resignation. Any officer may be removed with or
without cause either by the Board at any regular or special Directors' meeting
or, except for an officer chosen by the Board, by an officer on whom the power
of removal may be conferred by the Board.
An officer may resign at any time by giving written notice to the Board of
Directors, the President or the Secretary of the Corporation. An officer's
resignation shall take effect when it is received or at any later time specified
in the resignation. Unless the resignation specifies otherwise, its acceptance
by the Corporation shall not be necessary to make it effective.
SECTION 5. Vacancies. A vacancy in any office because of death, resignation,
removal, disqualification, or any other cause shall be filled in the manner
prescribed in these Bylaws for regular appointments to the office.
SECTION 6. Chairman and Vice Chairman of the Board. The Board of Directors
may at its discretion elect a Chairman of the Board who shall preside at all
meetings of the Board of Directors and at all stockholders' meetings at which
the Chairman is present and who shall exercise and perform any other powers and
duties assigned to the Chairman by the Board or prescribed by these Bylaws.
Except where by law the signature of the President is required, the Chairman
shall possess the same power as the President to sign all certificates,
contracts and other instruments of the Corporation which may be authorized by
the Board of Directors. The Chairman of the Board shall be ex officio a member
of all committees.
The Board of Directors in its discretion may elect a Vice Chairman of the
Board, who in the absence of the Chairman, shall preside at all meetings of the
Board of Directors and stockholders.
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SECTION 7. President. Subject to any supervisory powers that may be given by
the Board of Directors or these Bylaws to the Chairman of the Board, the
President shall be the Corporation's chief executive officer and, subject to the
control of the Board of Directors, shall have general supervision, direction,
and control over the Corporation's business and officers. The President shall
preside as chairman at all stockholders' meetings and at all Directors meetings
not presided over by the Chairman or Vice Chairman of the Board. The President
shall be ex officio a member of all the standing committees, except the Audit
Committee and the Compensation Committee, shall have the general powers and
duties of management usually vested in presidents of Corporations; shall have
any other powers and duties that are prescribed by the Board of Directors or
these Bylaws; and shall be primarily responsible for carrying out all orders and
resolutions of the Board of Directors.
SECTION 8. Vice President. If the President is absent or is unable or
refuses to act, the Vice Presidents in order of their rank as fixed by the Board
of Directors or, if not ranked, the Vice President designated by the Board of
Directors, shall perform all duties of the President, and when so acting shall
have all of the powers of, and be subject to all the restrictions on, the
President. Each Vice President shall have any other powers and perform any other
duties that are prescribed for said Vice President by the Board of Directors or
these Bylaws.
SECTION 9. Secretary. The Secretary shall keep or cause to be kept and be
available at the principal office and any other place that the Board of
Directors specifies, a book of minutes of all Directors' and stockholders'
meetings. The minutes of each meeting shall state the time and place that it was
held; whether it was regular or special; if a special meeting, how it was
authorized; the notice given; the names of those present or represented at
stockholders' meetings; and the proceedings of the meetings. A similar minute
book shall be kept for each committee of the Board.
The Secretary shall keep, or cause to be kept, at the principal office or at
the office of the Corporation's transfer agent, a share register, or duplicate
share register, showing the stockholders' names and addresses, the number and
classes of shares held by each, the number and date of each certificate issued
for these shares, and the number and date of cancellation of each certificate
surrendered for cancellation.
The Secretary shall give or cause to be given notice of all Directors' and
stockholders' meetings required to be given under these Bylaws or by law, shall
keep the corporate seal in safe custody, and shall have any other powers and
perform any other duties that are prescribed by the Board of Directors or these
Bylaws.
The Secretary shall be deemed not to be an executive officer of the
Corporation and the Secretary shall be excluded from participation, other than
in the
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capacity of Director if the Secretary is also a Director, in major
policy-making functions of the Corporation.
SECTION 10. Chief Financial Officer. The Chief Financial Officer shall be
the Corporation's Treasurer and shall keep and maintain, or cause to be kept
and maintained, adequate and correct accounts of the Corporation's properties
and business transactions, including accounts of its assets, liabilities,
receipts, disbursements, gains, losses, capital, retained earnings and
shares. The books of account at all reasonable times shall be opened to
inspection by any Director.
The Chief Financial Officer shall deposit all money and other valuables in
the name and to the credit of the Corporation with the depositories designated
by the Board of Directors. The Chief Financial Officer shall disburse the
Corporation's funds as ordered by the Board of Directors and shall render to the
President and Directors, whenever they request it, an account of all the
transactions as Chief Financial Officer and of the Corporation's financial
condition; and shall have any other powers and perform any other duties that are
prescribed by the Board of Directors or these Bylaws.
ARTICLE IV
Capital Stock
SECTION 1. Issue of Certificates of Stock. The certificates for shares of
the stock of the Corporation shall be of such form not inconsistent with the
Certificate of Incorporation, or its amendments, as shall be approved by the
Board of Directors. All certificates shall be signed by the President or by the
Vice-President and counter-signed by the Secretary or by an Assistant Secretary,
and sealed with the seal of the Corporation. All certificates for each class of
stock shall be consecutively numbered. The name of the person owning the shares
issued and the address of the holder shall be entered in the Corporation's
books. All certificates surrendered to the Corporation for transfer shall be
canceled and no new certificates representing the same number of shares shall be
issued until the former certificate or certificates for the same number of
shares shall have been so surrendered, and canceled, unless a certificate of
stock is lost or destroyed, in which event the Board of Directors may authorize
the issuance of a new certificate replacing the old one on any terms and
conditions, including a reasonable arrangement for indemnification of the
Corporation, that the Board may specify.
SECTION 2. Transfer of Shares. Shares of the capital stock of the
Corporation shall be transferred on the books of the Corporation only by the
holder thereof in person or by his or her attorney upon surrender and
cancellation of certificates for a like number of shares as hereinbefore
provided.
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SECTION 3. Registered Stockholders. The Corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder in fact
thereof and accordingly shall not be bound to recognize any equitable or other
claim to or interest in such share in the name of any other person, whether or
not it shall have express or other notice thereof, save as expressly provided by
the Laws of Maryland.
SECTION 4. Closing Transfer Books. The Board of Directors may fix the
period, not exceeding twenty (20) days, during which time the books of the
Corporation shall be closed against transfers of stock, or, in lieu thereof, the
Board of Directors may fix a date not less than ten (10) days nor more than
sixty (60) days preceding the date of any meeting of stockholders or any
dividend payment date or any date for the allotment of rights, as a record date
for the determination of the stockholders entitled to notice of and to vote at
such meeting or to receive such dividends or rights. Only stockholders of record
on such date shall be entitled to notice of and to vote at such meeting or to
receive such dividends or rights.
ARTICLE V
Bank Accounts and Loans
SECTION 1. Bank Accounts. Officers or agents of the Corporation
designated by the Board of Directors shall have authority to deposit and
withdraw funds of the Corporation in financial institutions designated by the
Board of Directors. Each financial institution with which funds of the
Corporation are so deposited is authorized to accept, honor, cash and pay,
without limit as to amount, all checks, drafts or other instruments or orders
for the payment of money, when drawn, made or signed by officers or agents
designated by the Board of Directors until written notice of the revocation
of the authority of such officers or agents by the Board of Directors shall
have been received by such financial institutions. The signatures of these
officers or agents shall be certified to the financial institutions in which
the funds of the Corporation are deposited. If no such officers or agents are
designated by the Board of Directors, all of such checks, drafts and other
instruments or orders for the payment of money shall be signed by the
President or a Vice President and countersigned by the Secretary or Treasurer
or an Assistant Secretary or an Assistant Treasurer of the Corporation.
SECTION 2. Loans. Officers or agents of the Corporation designated by the
Board of Directors shall have authority to effect loans, advances or other forms
of credit for the Corporation from such financial institutions, corporations,
firms or persons as the Board of Directors shall designate. As security for the
repayment of such loans, advances, or other forms of credit, these officers or
agents may be authorized by the Board of Directors to assign, transfer, endorse,
and deliver, either originally or in addition or substitution, any or all stock,
bonds, rights, and interests of any kind in or to stocks or bonds, certificates
of such rights or interests, deposits, accounts, documents covering merchandise,
bills and accounts receivable and other commercial paper and evidences or
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debt at any time held by the Corporation. These officers or agents may be
authorized by the Board of Directors to execute and deliver one or more
notes, acceptances or written obligations of the Corporation on such terms,
and with such provisions as to the security or sale or disposition thereof as
such officers or agents shall deem proper. These officers or agents also may
be authorized by the Board of Directors to sell, discount or rediscount with
such financial institutions, corporations, firms or persons any and all
commercial paper, bills receivable, acceptances and other instruments and
evidences of debt at any time held by the Corporation, and to endorse,
transfer and deliver the same. The signatures of these officers and agents
shall be certified to each such financial institution, corporation, firm or
person. Each such financial institution, corporation, firm or person is
authorized to rely upon such certification until written notice of the
revocation by the Board of Directors of the authority of such officers or
agents shall be delivered to such financial institution, corporation, firm or
person.
ARTICLE VI
Miscellaneous Provisions
SECTION 1. Fiscal Year. The fiscal year of the Corporation shall begin on
the first day of January of each year.
SECTION 2. Notices. Whenever, under the provisions of these Bylaws, notice
is required to be given to any Director, officer or stockholder, unless
otherwise provided in these Bylaws, such notice shall be deemed given if in
writing, and personally delivered, or sent by telefax, or telegram, or by mail,
by depositing the same in a post office or letter box, in a postpaid sealed
wrapper, addressed to each stockholder, officer or Director, as the case may be,
at such address as appears on the books of the Corporation, and such notice
shall be deemed to have been given at the time the same is so personally
delivered, telefaxed, telegraphed or so mailed. Any stockholder, director or
officer may waive any notice required to be given under these Bylaws.
SECTION 3. Voting Upon Stocks. Unless otherwise ordered by the Board of
Directors, the President and the Vice President, or either of them, shall have
full power and authority on behalf of the Corporation to attend and to vote and
to grant proxies to be used at any meetings of stockholders of any corporation
in which the Corporation may hold stock.
ARTICLE VII
Amendment of Bylaws
Upon affirmative vote of the holders of not less than sixty-seven percent
(67%) of the outstanding stock of the Corporation, the stockholders may amend,
alter or repeal these Bylaws. Subject to the right of the stockholders under the
preceding sentence, Bylaws other than a Bylaw fixing or changing the authorized
number of Directors may
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be adopted, amended, or repealed by the Board of Directors. However, if the
Articles of Incorporation, or a Bylaw adopted by the stockholders, provide
for an indefinite number of Directors within specified limits, the Directors
may by resolution fix the exact number of Directors within those limits.
ARTICLE VIII
Indemnification
SECTION 1. Definitions. As used in this Article VIII, any word or words that
are defined in Section 2-418 of the Corporations and Associations Article of the
Annotated Code of Maryland (the "Indemnification Section"), as amended from time
to time, shall have the same meaning as provided in the Indemnification Section.
SECTION 2. Indemnification of Directors and Officers. The Corporation shall
indemnify and advance expenses to a Director or officer of the Corporation in
connection with a proceeding to the fullest extent permitted by and in
accordance with the Indemnification Section and federal law.
SECTION 3. Indemnification of Other Agents and Employees. With respect to an
employee or agent, other than a Director or officer of the Corporation, the
Corporation may, as determined by and in the discretion of the Board of
Directors of the Corporation, indemnify and advance expenses to such employees
or agents in connection with a proceeding to the extent permitted by and in
accordance with the Indemnification Section and federal law.
END OF BYLAWS
13
<PAGE>
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Interest income $ 58,796 $ 46,737 $ 34,790 $ 35,008 $ 37,794
Interest expense 29,244 23,071 15,392 15,217 18,468
----------- ----------- ----------- ----------- -----------
Net interest income 29,552 23,666 19,398 19,791 19,326
Provision for credit losses 836 -- -- 329 812
----------- ----------- ----------- ----------- -----------
Net interest income after provision for credit losses 28,716 23,666 19,398 19,462 18,514
Other operating income 7,481 4,159 3,245 4,031 4,410
Other operating expenses 24,758 17,944 13,806 13,793 13,998
----------- ----------- ----------- ----------- -----------
Income before income taxes and cumulative effect of
accounting changes 11,439 9,881 8,837 9,700 8,926
Applicable income taxes 3,003 2,582 2,225 3,082 3,154
----------- ----------- ----------- ----------- -----------
Income before cumulative effect of accounting changes 8,436 7,299 6,612 6,618 5,772
Cumulative effect of accounting change for:
Post-retirement benefits -- -- -- (482) --
Income taxes -- -- -- 471 --
----------- ----------- ----------- ----------- -----------
Net Income $ 8,436 $ 7,299 $ 6,612 $ 6,607 $ 5,772
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
PER SHARE DATA
Income before cumulative effect of accounting changes* $ 1.60 $ 1.54 $ 1.52 $ 1.52 $ 1.31
Cumulative effect of accounting change for:
Post-retirement benefits* -- -- -- (0.11) --
Income taxes* -- -- -- 0.11 --
----------- ----------- ----------- ----------- -----------
Net income* $ 1.60 $ 1.54 $ 1.52 $ 1.52 $ 1.31
Dividends paid * $ 0.52 $ 0.485 $ 0.45 $ 0.42 $ 0.34
Book value $ 13.71 $ 12.67 $ 9.89 $ 10.27 $ 8.66
Tangible book value $ 12.80 $ 11.66 $ 9.89 $ 10.27 $ 8.66
Shares outstanding 5,303,166 5,258,040 4,326,125 4,363,902 4,356,402
OTHER DATA
Total assets $ 841,074 $ 765,781 $ 507,572 $ 489,058 $ 460,143
Total deposits $ 620,735 $ 593,835 $ 383,058 $ 373,022 $ 370,601
Total loans-net $ 392,997 $ 348,221 $ 192,885 $ 195,779 $ 198,506
Total equity $ 72,699 $ 66,596 $ 42,773 $ 44,797 $ 37,744
KEY RATIOS
Return on average stockholders' equity 12.27% 13.69% 15.28% 16.53% 16.30%
Return on average total assets 1.05% 1.18% 1.34% 1.40% 1.26%
Dividends declared to net income 32.60% 31.83% 29.71% 27.71% 26.16%
Average stockholders' equity to average total assets 8.54% 8.60% 8.75% 8.50% 7.75%
</TABLE>
*BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES AFTER GIVING EFFECT TO THE
3-FOR-1 STOCK SPLIT IN 1994.
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following pages of this report present management's discussion and
analysis of the consolidated financial condition, results of operations, and
cash flows of Mason-Dixon Bancshares, Inc. ("Mason-Dixon"), including its
subsidiaries: Carroll County Bank and Trust Company ("Carroll County Bank") and
Bank of Maryland. Certain reclassifications have been made to amounts previously
reported to conform with classifications made in 1996.
Mason-Dixon is a two bank holding company headquartered in Westminster,
Maryland. Prior to 1995, Mason-Dixon consisted of one bank subsidiary, Carroll
County Bank. On July 17, 1995, Mason-Dixon acquired all of the outstanding stock
of Bank Maryland Corp located in Towson, Maryland for a combination of cash and
stock in a transaction accounted for as a purchase. As a result of the
acquisition, Bank of Maryland, Bank Maryland Corp's principal subsidiary, became
a wholly-owned subsidiary of Mason-Dixon.
The application of the purchase method of accounting requires that the
earnings of any newly acquired company be included in consolidated earnings
after the acquisition date. Assets and liabilities of the acquired company are
adjusted to market value as of the date of the acquisition and are included in
the consolidated statement of condition subsequent to the acquisition. Any
excess of the purchase price over the net assets acquired is considered goodwill
and is amortized over a period usually ranging from five to forty years.
As a result of applying the purchase method of accounting, historical
statements of earnings included in this Management Discussion and the
accompanying financial statements are not restated to include the historical
financial information of Bank Maryland Corp prior to the acquisition. Therefore,
results of operations include Bank of Maryland for a full year for 1996,
approximately half of the year for 1995, and not at all for 1994. Throughout
this Management Discussion, references are made to the effects of the
acquisition on the reported results of operations. In order to facilitate
comparisons from year to year, estimates of amounts attributable to the full
year impact of the acquisition are included where relevant. The estimated impact
was computed by annualizing the amounts in 1995's results of operations which
were contributed by Bank of Maryland.
PERFORMANCE OVERVIEW -- Mason-Dixon achieved a record level of earnings for
1996, marking the 12th consecutive year of higher profits. Net income for 1996
totaled $8,436,000, an increase of 16% over 1995's net income of $7,299,000. Net
income for 1994 was $6,612,000. On a per share basis, net income was $1.60 in
1996, up from $1.54 in 1995 and $1.52 in 1994. Factors contributing to the
increase in net income were the additional earnings added by the full year
impact of Bank of Maryland's earnings and higher levels of net interest income
and other operating income. The favorable impact of these items was partially
offset by a higher provision for credit losses and increased levels of other
operating expenses. Mason-Dixon's return on average assets was 1.05%, lower than
the 1.18% and 1.34% posted in 1995 and 1994, respectively. Return on average
stockholders' equity was 12.27%, down from 13.69% in 1995 and 15.28% in 1994.
Returns on average assets and average equity were affected by the merger with
Bank of Maryland. Results for 1996 reflect the full year impact, while 1995
results reflect the impact from the acquisition date. Ratios for 1994 do not
include any impact of the Bank of Maryland acquisition.
NET INTEREST INCOME -- Net interest income continues to be the principal
component of net income and totaled $29,552,000. Net interest income for 1995
and 1994 was $23,666,000 and $19,398,000, respectively. The increase in net
interest income was attributable to the effects of the acquisition and a full
year inclusion of net interest income pursuant to the acquisition of Bank of
Maryland.
A significant portion of earning assets are tax exempt instruments, therefore,
it is more appropriate to analyze net interest income on a tax equivalent basis.
Analyzing net interest income on a tax equivalent basis adjusts interest income
for the tax exempt status of certain loans and investment securities to an
amount approximating what would have been earned if the income were fully
taxable. The following table highlights the major components of net interest
income, adjusting for tax equivalency, for the past three years:
6
<PAGE>
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<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Earning assets
Loans $ 365,778 $ 34,122 9.33% $ 260,511 $ 25,133 9.65% $ 194,711 $ 16,787
Investments:
Taxable 66,504 4,353 6.55% 35,780 2,420 6.76% 19,915 1,490
Mortgage-backed securities 221,624 15,315 6.91% 208,302 15,004 7.20% 199,025 13,547
Tax-exempt 72,394 6,029 8.33% 63,766 5,332 8.36% 54,909 4,643
Federal funds sold 21,826 1,176 5.39% 13,144 834 6.35% 1,701 72
Interest bearing deposits in banks 210 16 7.62% 149 12 8.05% 271 9
--------------------------------- -------------------------------- ---------------------
Total earning assets 748,336 61,011 8.15% 581,652 48,735 8.38% 470,532 36,548
--------- --------- ---------
Non-interest earning assets
Cash and due from banks 19,701 13,580 10,049
Premises and equipment 15,552 12,042 9,668
Other assets 26,313 16,686 6,781
Allowance for credit losses (4,827) (3,822) (2,634)
----------- ---------- ----------
Total assets $ 805,075 $ 620,138 $ 494,396
----------- ---------- ----------
----------- ---------- ----------
Interest bearing liabilities
Demand deposits $ 58,676 $ 1,514 2.58% $ 43,103 $ 1,115 2.59% $ 39,834 $ 1,036
Savings deposits 182,857 5,628 3.08% 158,228 4,972 3.14% 158,571 4,827
Time deposits 286,557 15,860 5.53% 200,883 11,568 5.76% 132,128 6,305
Borrowings 115,919 6,242 5.38% 93,351 5,416 5.80% 71,392 3,224
--------------------------------- -------------------------------- ---------------------
Total interest bearing liabilities 644,009 29,244 4.54% 495,565 23,071 4.66% 401,925 15,392
--------- --------- ---------
Non-interest bearing liabilities
Demand deposits 83,825 63,072 45,165
Other 8,471 8,183 4,034
Stockholders' equity 68,770 53,318 43,272
----------- ---------- ----------
Total liabilities and stockholders'
equity $ 805,075 $ 620,138 $ 494,396
----------- ---------- ----------
----------- ---------- ----------
Net interest spread $ 31,767 3.61% $ 25,664 3.72% $ 21,156
--------- --------- ---------
--------- --------- ---------
Net interest margin 4.25% 4.41%
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
- ---------------------------------------
YIELD/
RATE
<S> <C>
- ---------------------------------------
Earning assets
Loans 8.62%
Investments:
Taxable 7.48%
Mortgage-backed securities 6.81%
Tax-exempt 8.46%
Federal funds sold 4.23%
Interest bearing deposits in banks 3.32%
Total earning assets 7.77%
Non-interest earning assets
Cash and due from banks
Premises and equipment
Other assets
Allowance for credit losses
Total assets
Interest bearing liabilities
Demand deposits 2.60%
Savings deposits 3.04%
Time deposits 4.77%
Borrowings 4.52%
Total interest bearing liabilities 3.83%
Non-interest bearing liabilities
Demand deposits
Other
Stockholders' equity
Total liabilities and stockholders'
equity
Net interest spread 3.94%
Net interest margin 4.50%
</TABLE>
Net interest income on a tax equivalent basis was $31,767,000, an increase of
24% from 1995's net interest income of $25,664,000. Net interest income for 1994
totaled $21,156,000.
The tax equivalent net interest margin decreased to 4.25% from 4.41% as
interest spreads tightened in 1996. For 1994, the tax equivalent net interest
margin was 4.50%. The decrease in the margin occurred as average rates on
earning assets decreased 23 basis points, while the average rates paid on
deposits and borrowings decreased by 12 basis points.
Changes in net interest income occur from year to year due to changes in both
the levels of earning assets and interest bearing liabilities, as well as the
average rates received on earning assets and average rates paid on deposits and
borrowings. Changes in the levels of earning assets and interest bearing
liabilities are referred to as volume-related variances, while changes in
average rates received on earning assets and average rates paid on
7
<PAGE>
- --------------------------------------------------------------------------------
deposits and borrowings are referred to as rate-related variances. The table
below summarizes the changes in tax equivalent net interest income due to volume
and rate variances:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 COMPARED TO 1995 1995 COMPARED TO 1994 1994 COMPARED TO 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
DUE TO DUE TO DUE TO
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------------------------ ---------------------- -----------------------
<CAPTION>
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------
Interest income
Loans $10,156 $(1,167) $8,989 $5,673 $2,673 $8,346 $ (471) $ (152) $ (623)
Investments:
Taxable 2,078 (145) 1,933 1,187 (257) 930 (53) 113 60
Mortgage-backed securities 960 (649) 311 631 826 1,457 103 (1,263) (1,160)
Tax-exempt 721 (24) 697 749 (60) 689 2,401 (208) 2,193
Other earning assets 556 (210) 346 480 285 765 (7) 22 15
------------------------ ---------------------- -----------------------
Total interest income 14,471 (2,195) 12,276 8,720 3,467 12,187 1,973 (1,488) 485
Interest expense
Interest bearing demand
deposits 403 (4) 399 85 (6) 79 98 (148) (50)
Savings deposits 774 (118) 656 (10) 155 145 8 (463) (455)
Time deposits 4,934 (642) 4,292 3,280 1,984 5,264 (67) (335) (402)
Borrowings 1,309 (483) 826 993 1,198 2,191 616 466 1,082
------------------------ ---------------------- -----------------------
Total interest expense 7,420 (1,247) 6,173 4,348 3,331 7,679 655 (480) 175
------------------------ ---------------------- -----------------------
Net interest income $ 7,051 $ (948) $6,103 $4,372 $ 136 $4,508 $1,318 $(1,008) $ 310
------------------------ ---------------------- -----------------------
------------------------ ---------------------- -----------------------
</TABLE>
Interest income on a tax equivalent basis totaled $61,011,000, an increase of
$12,276,000 from 1995. The increase was primarily attributable to higher levels
of average assets as a result of the acquisition. Average earning assets were
$166,684,000 higher for 1996 compared to 1995. The effects of the acquisition
added approximately $104,093,000, while other growth totaled $62,591,000.
Average yields declined 23 basis points due to a lower rate environment.
Interest expense totaled $29,244,000, up $6,173,000 from $23,071,000. Average
interest bearing deposits increased $125,876,000 and average borrowings
increased $22,568,000, resulting in higher interest expense. The weighted
average rates paid on interest bearing deposits decreased 3 basis points, as
rates paid on NOW and Savings accounts declined slightly and the mix of average
interest bearing deposits became more concentrated in higher yielding time
deposits. Average rates on borrowings declined 42 basis points, reflecting a
decline in short-term interest rates in 1996.
PROVISION AND ALLOWANCE FOR CREDIT LOSSES -- Mason-Dixon places a strong
emphasis on asset quality and performs a thorough analysis of the risks in its
loan portfolio and the allowance for credit losses. Each subsidiary maintains an
adequate allowance for credit losses and performs a regular overview to assure
that adequacy. Review of the loan portfolio and assessment of the adequacy of
the allowance for credit losses is a continuing process in light of changing
economic conditions and changes in the strength of borrowers. In management's
opinion, the allowance for credit losses is adequate as of December 31, 1996.
The provision for credit losses in 1996 totaled $836,000. No provision was
recognized in 1995 or 1994. The increase in the provision is largely due to
growth in loans, which grew by $45,214,000. While net chargeoffs increased by
$145,000 to total $398,000, net chargeoffs as a percentage of average loans was
only .11%. This compares to .10% in 1995 and .03% in 1994. Intensive collection
efforts continue after loans are charged off.
8
<PAGE>
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Recoveries as a percentage of prior year chargeoffs were 82% in 1996, 67% in
1995, and 61% in 1994. The allowance for credit losses was 1.30% of loans
outstanding at December 31, 1996 and 1.34% at December 31, 1995 and 1994.
Loans 90 days or more past due, secured by sufficient collateral and,
therefore, still accruing, were $214,000 (.05% of loans outstanding), compared
to $277,000 (.08% of loans outstanding) for 1995 and $62,000 (.03% of loans
outstanding) for 1994.
Non-accrual loans totaled $2,821,000 (.71% of loans outstanding), compared to
$1,560,000 (.44% of loans outstanding) at year end 1995 and $211,000 (.11% of
loans outstanding) at year end 1994. Non-performing loans, which consist of
non-accrual loans and loans 90 days past due, totaled $3,035,000 at year end
1996, compared to $1,837,000 for 1995 and $273,000 for 1994. Non-performing
loans as a percentage of total loans were .76% at year end 1996, compared to
.52% for 1995 and .14% for 1994. Coverage of non-performing loans (allowance for
credit losses divided by non-performing loans) equaled 1.70x, 2.57x, and 9.62x
at December 31, 1996, 1995, and 1994, respectively. Although levels of
non-performing loans increased, Mason-Dixon still compares favorably to national
industry peers. The average level of non-performing loans as a percentage of
loans for bank holding companies with assets between $500 million and $1 billion
was .97% at September 30, 1996.
OTHER OPERATING INCOME -- Other operating income consists of service charges
on deposit accounts, fees for trust services, gains on sales of loans and
securities, commissions received on sales of annuities and mutual funds, loan
servicing fees, and other miscellaneous income, such as safe deposit box rental
fees.
Total other operating income amounted to $7,481,000, up $3,322,000 or 80% from
1995. Approximately $561,000 of the increase was attributable to the full year
effect of the acquisition of Bank of Maryland. Also contributing was growth in
most other components of other operating income, as well as a gain recognized on
the sale of deposits.
Service charges increased $493,000, with the full year effect of the Bank of
Maryland acquisition approximating $449,000 of the increase. The remaining
increase in service charges of $44,000 was due to the increased volume of
overdrafts and Automated Teller Machine transactions. Pricing on most service
charges remained constant. Trust Division income continued to increase, up by
$294,000 or 26%. Trust assets under management grew by $14,777,000 or 10%, to
reach $161,307,000. Gains on sales of securities totaled $271,000, compared to
$107,000 and $192,000 in 1995 and 1994, respectively. Gains on sales of mortgage
loans increased to $584,000, compared to a $202,000 gain in 1995 and a $55,000
loss in 1994. The increase accompanied significant growth in mortgage loan
origination volume, as Mason-Dixon expanded its mortgage operation in the third
quarter of 1996. The expansion included the opening of two Maryland production
offices in Eldersburg and Millersville. A gain of $1,469,000 on the sale of
deposits was recognized in the fourth quarter of 1996 for the sale of the
Bethesda branch deposits of Bank of Maryland. All other sources of other
operating income increased by $520,000. Included in this increase is a $151,000
gain recognized from the sale of a former branch site which was relocated and
$144,000 in increased commissions from the sales of annuities and mutual funds.
OTHER OPERATING EXPENSES -- Total other operating expenses increased by
$6,814,000 or 38%. Much of this increase was attributable to the full year
impact of Bank of Maryland, which accounted for $4,473,000 of the increase.
Excluding the acquisition effects, expenses grew by $2,341,000 or 13%. All
components of other operating expenses increased with the exception of Federal
Deposit Insurance Corporation (FDIC) insurance.
Salaries and employee benefits increased by $3,958,000 or 38%. In addition to
Bank of Maryland's full year expense impact of $2,257,000, salaries and benefits
grew by $1,701,000 or 16%. This increase resulted from normal increases in
salaries and wages, increased staffing levels for expanded mortgage banking
operations, a restructuring charge for the consolidation of several back office
functions, severance costs related to the sale of the Bethesda branch, and the
addition of a new Bank of Maryland branch. Costs relating to employee benefits
increased from 1995, largely due to higher pension plan expenses.
Net occupancy expenses grew by $845,000, with Bank of Maryland's full year
expense impact adding $650,000 to the growth in this category. Excluding the
increased expenses attributable to the acquisition, net occupancy
9
<PAGE>
- --------------------------------------------------------------------------------
expenses increased by $195,000 or 13%, compared to 16% growth from 1994 to 1995.
Occupancy cost increases include approximately $79,000 related to severe winter
weather in 1996, which increased utility and maintenance expenses, and $53,000
for an additional branch office.
Equipment expenses increased by $310,000. Expenses added by the full year
impact of the acquisition totaled $387,000. Excluding the effects of the
acquisition, equipment expenses decreased by $77,000. Equipment expenses
increased just $8,000 from 1994 to 1995, net of the effects of the acquisition.
Equipment expenses in 1996 reflect the benefits of the transition of Bank of
Maryland's data processing platform to ALLTEL Information Services in the second
quarter, which resulted in lower equipment depreciation and maintenance
expenses. Prior to this date, Bank of Maryland performed its data processing
in-house.
FDIC insurance expenses declined $449,000. The significant decrease resulted
as the FDIC lowered insurance premiums dramatically. At the beginning of 1996,
premiums were reduced to the statutory minimum of $2,000 annually for well
capitalized institutions.
Outside data processing expenses increased by $85,000 or 9% due primarily to
the addition of Bank of Maryland to the ALLTEL Information Services data
processing platform. As previously mentioned, Bank of Maryland's data processing
was performed in-house prior to the transition. Also included in this increase
is a non-recurring charge of $30,000 for expenses related to the sale of branch
deposits.
Amortization of mortgage sub-servicing rights totaled $415,000 in 1996,
compared to $173,000 in 1995. This expense reflects the amortization of the
purchase price of mortgage sub-servicing rights acquired in the purchase of Bank
of Maryland. In 1996, a full year is included for Bank of Maryland compared to
five months in 1995. Mortgage sub-servicing rights permit the company to
maintain escrow and other deposits for loans serviced by a third party. These
rights are discussed in detail in the Balance Sheet Review of this Management
Discussion as well as in the notes to the consolidated financial statements.
Amortization of intangible assets totaled $493,000 in 1996, compared to
$210,000 in 1995. Intangible assets include goodwill created as a result of the
merger, as well as other intangible assets acquired in the merger. As with all
expenses of Bank of Maryland, 1996 includes a full year's amortization compared
to five months in 1995.
Other expenses increased by $1,540,000 or 52%. The full year impact of the
acquisition totaled $721,000.
Excluding the effects of the acquisition, other expenses grew $819,000 or 28%.
The increase includes $497,000 in non-recurring costs associated with Bank of
Maryland's Bethesda branch sale and data processing integration, and various
other professional and miscellaneous activities.
NET OVERHEAD -- Management continues to monitor two ratios which it believes
are effective measures of cost containment and efficiency. The first is the net
overhead ratio, which measures the level of net operating expenses (other
operating expenses less other operating income) as a percentage of average
assets. The net overhead ratio for 1996 was 2.18%, improving from 2.24% for
1995. The net overhead ratio for 1994 was 2.17%. The second ratio monitored by
management is known as the efficiency ratio. This ratio measures other operating
expenses as a percentage of operating income (tax equivalent net interest income
plus other operating income). For 1996, the efficiency ratio was 63.6%.
Efficiency ratios for 1995 and 1994 were 60.4% and 57.0%, respectively.
Contributing to the increase in the efficiency ratio was the full year effect of
the acquisition, with Bank of Maryland having higher overhead ratios than
Mason-Dixon prior to the transaction. Generally, net overhead ratios below 2.25%
and efficiency ratios below 63.0% are considered favorable.
INCOME TAXES -- Income tax expenses increased $421,000 from 1995, due to
higher levels of pretax net income. The effective tax rate for 1996 was 26.3%,
up slightly from 26.1% in 1995 and 25.2% in 1994. Note 17 to the consolidated
financial statements includes a reconciliation of Federal income tax expense
computed using the Federal statutory rate of 34%. See Notes 1 and 17 to the
consolidated statements for additional information relating to income tax
expense and tax benefits acquired in 1995.
10
<PAGE>
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LIQUIDITY AND INTEREST RATE RISK -- Liquidity describes the ability of
Mason-Dixon and its bank subsidiaries to meet financial obligations that arise
out of the ordinary course of business. Liquidity is primarily needed to meet
the borrowing and deposit withdrawal requirements of the banks' customers and to
fund current and planned expenditures. Through its bank subsidiaries,
Mason-Dixon derives liquidity from increased customer deposits, the maturity
distribution of the investment portfolio, loan repayments, and income from
earning assets. To the extent that deposits are not adequate to fund customer
loan demand, liquidity needs can be met utilizing short-term funds markets.
Longer-term funding requirements can be obtained through advances from the
Federal Home Loan Bank (FHLB). Mason-Dixon's bank subsidiaries maintain lines of
credit with the FHLB of $135,000,000. At December 31, 1996, Mason-Dixon's loan
to deposit ratio was 64%. Additionally, Mason-Dixon's securities classified as
available for sale, which totaled $165,287,000, were available for the
management of liquidity and interest rate risk. Mortgage-backed securities
classified as held to maturity, which totaled $70,106,000, provide significant
cash flow each month. Cash and cash equivalents at December 31, 1996 were
$46,346,000, up from $33,103,000 at year end 1995. Management is not aware of
any trends, demands, commitments, or uncertainties that are reasonably likely to
result in material changes in liquidity.
Interest rate sensitivity is an important factor in the management of the
composition and maturity configurations of earning assets and funding sources.
Asset/Liability Committees of the subsidiary banks manage the interest rate
sensitivity position in order to maintain an appropriate balance between the
maturity and repricing characteristics of assets and liabilities that is
consistent with liquidity, growth, and capital adequacy goals.
Mason-Dixon's interest rate sensitivity at December 31, 1996, on a
consolidated basis, is set forth in the table below:
<TABLE>
<CAPTION>
AFTER 3 AFTER 1 NON-
MONTHS- YEAR- INTEREST
WITHIN WITHIN WITHIN AFTER SENSITIVE
(DOLLARS IN THOUSANDS) 3 MONTHS 1 YEAR 5 YEARS 5 YEARS FUNDS TOTAL
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Assets
Investment securities $ 56,737 $ 51,887 $ 111,163 $ 138,744 $ -- $ 358,531
Loans (including loans held for sale) 161,338 51,919 156,487 31,562 -- 401,306
Other rate sensitive assets 19,454 -- -- -- -- 19,454
Interest sensitivity hedges on assets (12,000) (3,000) 15,000 -- -- --
Non-interest earning assets -- -- -- -- 61,783 61,783
---------- ---------- ---------- ---------- ----------- ----------
Total Assets $ 225,529 $ 100,806 $ 282,650 $ 170,306 $ 61,783 $ 841,074
---------- ---------- ---------- ---------- ----------- ----------
----------
Liabilities and Stockholders' Equity
Interest bearing deposits $ 90,335 $ 185,410 $ 214,244 $ 36,086 $ -- $ 526,075
Short-term borrowings 53,734 -- -- -- -- 53,734
Long-term borrowings 75,924 1 9,350 -- -- 85,275
Non-interest bearing liabilities and stockholders'
equity -- -- -- -- 175,990 175,990
---------- ---------- ---------- ---------- ----------- ----------
Total Liabilities and Stockholders' Equity $ 219,993 $ 185,411 $ 223,594 $ 36,086 $ 175,990 $ 841,074
---------- ---------- ---------- ---------- ----------- ----------
----------
Interest rate sensitivity gap $ 5,536 $ (84,605) $ 59,056 $ 134,220 $ (114,207)
Cumulative interest rate sensitivity gap $ 5,536 $ (79,069) $ (20,013) $ 114,207 --
Cumulative ratio of interest sensitive assets to
interest sensitive liabilities 1.03 0.80 0.97 1.17 1.00
</TABLE>
11
<PAGE>
- --------------------------------------------------------------------------------
The rate sensitivity analysis provided in the preceding table indicates the
sensitivity to fluctuations in interest rates by analyzing maturity and
repricing information for selected categories of assets and liabilities. Other
rate sensitive assets, consisting of Federal funds sold and interest bearing
deposits in banks, are assigned to an immediately repricable category, as these
are overnight investments. Mortgage-backed investments are categorized based on
the estimated amortization of these securities using recent prepayment
histories. Fixed rate investments are grouped by final maturity date. Variable
rate investments are categorized according to the next available repricing
opportunity. Fixed rate loans are grouped in the appropriate category based on
normal scheduled amortization. Variable rate loans are categorized based on the
next available repricing opportunity. Interest bearing deposits without a
contractual maturity are based on management's estimates of deposit withdrawals.
Interest bearing deposits with contractual maturities are categorized based on
the effective maturity of the deposit.
As a general rule, a positive GAP will have the effect of increasing net
interest income during periods of rising interest rates, as higher volumes of
rate sensitive earning assets will reprice at higher levels than rate sensitive
liabilities. A negative GAP will usually have the opposite effect, as more rate
sensitive liabilities will reprice at higher levels than rate sensitive assets,
resulting in lower net interest income. In falling rate environments, the
effects are reversed. A positive GAP will result in lower net interest income
and a negative GAP will result in higher net interest income.
At December 31, 1996, Mason-Dixon had a negative one year GAP (rate sensitive
liabilities in excess of rate sensitive assets) of $79,069,000, which was 9% of
assets. The negative GAP tightens to $20,013,000 or 2% of assets at five years.
At December 31, 1995, Mason-Dixon had a positive one year GAP of $4,186,000
and a negative five year GAP of $4,181,000. The change was due to significant
growth in earning assets in the one to five year category, while growth in
interest bearing deposits and borrowings was concentrated in categories under
one year. Management believes its overall rate sensitivity position is
appropriate for current rate conditions.
Mason-Dixon's bank subsidiaries employ the use of interest rate swaps to
manage the interest rate risks of certain transactions and manage overall levels
of interest rate risk. Interest rate swaps involve an agreement to exchange
fixed and variable rate interest payments based on a notional amount. The use of
interest rate swaps involves no exposure to loss of principal, as swaps do not
involve the exchange of notional amounts, only net interest payments. Any credit
risk is equal to the fair value of the instrument if a counterparty fails to
perform, which is normally a small percentage of the notional amount and
fluctuates with movements in interest rates. Counterparty risk is mitigated by
executing all transactions in national markets with highly rated counterparties
using International Derivatives Association Master Agreements. At December 31,
1996, the notional amount of all interest rate swaps totaled $48,000,000. The
risk of loss due to failure of the counterparty to perform was $119,000, which
is the total of all interest rate swaps in a gain position. The terms of all
interest rate swaps as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
INTEREST RATE SWAPS THAT MATURE WITHIN:
<S> <C> <C> <C> <C> <C>
ONE TWO THREE FOUR
(DOLLARS IN THOUSANDS) YEAR YEARS YEARS YEARS TOTAL
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
Pay fixed/receive floating:
Notional amount $ 3,000 $ 5,000 $ 5,000 $ 5,000 $ 18,000
Weighted average rates received 5.53% 5.57% 5.53% 5.59% 5.56%
Weighted average rates paid 5.99% 6.06% 5.11% 6.45% 5.89%
Receive fixed/pay floating:
Notional amount -- $ 20,000 $ 10,000 -- $ 30,000
Weighted average rates received -- 6.42% 5.30% -- 6.05%
Weighted average rates paid -- 5.60% 5.45% -- 5.55%
</TABLE>
12
<PAGE>
- --------------------------------------------------------------------------------
BALANCE SHEET REVIEW -- Total assets ended 1996 at $841,074,000, increasing
$75,293,000 or just under 10%. The growth in total assets reflects increased
levels of cash, loans, and investment securities. The increase in assets was
funded through increases in deposits, borrowed funds, and stockholders' equity.
Investment securities totaled $358,531,000, an increase of $18,019,000 or 5%.
Much of the increase occurred as deposits and borrowings grew more than loans,
resulting in an increase in investment securities. Securities classified as held
to maturity increased $26,867,000 or 16%. The market value of the held to
maturity investments was $194,257,000, a .5% unrealized appreciation over the
amortized cost of $193,244,000. Securities classified as available for sale
declined by $8,848,000, due to a significant increase in cash flows from
mortgage-backed securities and normal scheduled maturities. Management believes
that the available for sale portfolio, which totaled $165,287,000 at December
31, 1996, is more than sufficient to allow for prudent management of liquidity
and interest rate risk.
Overall, the securities portfolio was comprised mainly of U.S Treasury
securities and obligations of U.S. government agencies or sponsored agencies,
which totaled $249,875,000 (70%). Obligations of states and municipalities
totaled $78,070,000 (22%) at December 31, 1996. For several years, management
has increased the holdings of tax exempt securities. The increase has been
attributable to attractive tax equivalent yields compared to alternative high
quality securities with similar term structures. Continued growth in the level
of the tax exempt portfolio will be influenced by tax equivalent rates offered
on tax exempt securities compared to other investment alternatives, potential
changes in tax laws, and Alternative Minimum Tax considerations.
Loans increased by $45,214,000 or 13%. Growth in residential real estate
mortgages was spurred by the expansion of mortgage banking activities during
1996, which resulted in increased originations of adjustable rate mortgages.
These mortgages are generally retained and not sold due to a lower level of
interest rate risk associated with these types of loans. Also contributing to
growth in this category was an increase in home equity loans, which continue to
be popular with consumers. Growth was also realized in commercial real estate
loans and consumer loans.
Deferred income taxes decreased by $378,000. The decrease is primarily
attributable to the realization of a portion of Bank of Maryland's net operating
loss carryforwards of $718,000. Offsetting the decrease is a reduction in the
deferred tax liability related to available for sale securities. As the
unrealized gain on these securities declined in 1996, the related tax liability
declined, increasing deferred income taxes by $220,000.
Mortgage servicing and sub-servicing rights declined by $378,000, due to
normal scheduled amortization. Bank of Maryland holds mortgage sub-servicing
rights to maintain escrow and other deposits for mortgages serviced by
Greystone, a mortgage servicing company. These rights are valued much like a
core deposit intangible. The right to maintain these deposits, both interest
bearing and non-interest bearing, were purchased originally for $10,030,000. The
purchase price is being amortized using the higher of the straight-line or level
yield method. At year end, accumulated amortization reduced the book value to
$3,732,000. Valuations are performed to determine if there has been any
significant deterioration in value which would require a write-down in reported
book value. Carroll County Bank had unamortized mortgage servicing rights
totaling $88,000 at year end 1996.
Intangible assets at year end represent goodwill created as a result of the
Bank Maryland Corp acquisition and a core deposit intangible acquired. Goodwill
is typically created in acquisitions accounted for under the purchase method of
accounting, and represents the excess of the purchase price of Bank Maryland
Corp over the fair value of the net assets acquired. This $5,151,000 amount is
being amortized over 15 years using the straight-line method. The remaining book
value of goodwill was $4,702,000 at December 31, 1996. The unamortized portion
of the core deposit intangible asset totaled $97,000 at year end.
13
<PAGE>
- --------------------------------------------------------------------------------
Deposits grew by $26,900,000 or 5%. The overall growth was impacted by the
sale of the deposits of Bank of Maryland's Bethesda branch. Excluding the sale
of these deposits, which totaled $18,694,000, deposits increased $45,594,000 or
8%. The table below highlights the changes in deposit levels and the composition
of total deposits:
<TABLE>
<CAPTION>
PERCENT PERCENT
DECEMBER 31, OF TOTAL DECEMBER 31, OF TOTAL
(DOLLARS IN THOUSANDS) 1996 DEPOSITS 1995 DEPOSITS
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Non-interest bearing deposits $ 94,660 15% $ 89,118 15%
NOW accounts 58,363 10% 56,288 10%
Passbook and statement savings 95,108 15% 100,944 17%
Money market savings 85,043 14% 78,519 13%
Time deposits 287,561 46% 268,966 45%
------------- ----- ------------ -----
Total deposits $ 620,735 100% $ 593,835 100%
------------- ----- ------------ -----
------------- ----- ------------ -----
</TABLE>
With the exception of regular savings, all deposit types increased and the
composite shifted very little from 1995.
Short-term borrowings increased by $4,283,000 or 9%. Higher short-term
borrowings occurred as growth in earning assets exceeded growth in deposits and
long-term borrowings.
Long-term borrowings increased by $36,146,000 or 74%. Borrowings from the
Federal Home Loan Bank of Atlanta (FHLB) increased $41,333,000, as Mason-Dixon
increased its level of advances throughout 1996. The use of advances from the
FHLB has increased over the last several years. These advances often carry
longer term fixed rates and provide a funding source that minimizes interest
rate risk on long-term fixed rate loans. Variable rate advances are also
utilized to lower funding costs, as FHLB advances can be an alternative to
repurchase agreements or other short-term funding sources. Longer term
maturities available on variable rate FHLB advances provide a longer term source
of liquidity, compared to short-term funding sources. Some of the fixed rate
advances have call provisions, which may result in repayment of the advance
before the stated maturity. Several variable rate advances have interest rate
reset options, which may result in adjustments to stated rates of interest. In
addition to advances from the FHLB, Mason-Dixon is a party to a term loan with
an original amount of $6,500,000 to pay a portion of the cash consideration for
the acquisition of Bank Maryland Corp in 1995. The original term was for five
years with quarterly principal and interest payments, however, a $5,000,000
prepayment was made during 1996, which significantly reduced the outstanding
commitment at December 31, 1996. The prepayment was made in light of more
favorable borrowing rates available to Mason-Dixon during 1996. Based on the
remaining scheduled principal payments, the loan will be fully repaid in early
1998.
STOCKHOLDERS' EQUITY AND CAPITAL RESOURCES -- Total stockholders' equity ended
1996 at $72,699,000, up $6,103,000 from year end 1995. Most of the increase
occurred in retained earnings, which grew $5,686,000 as a result of $8,436,000
in net income less $2,750,000 in cash dividends paid. Stockholders' equity also
increased as a result of additional shares issued under the provisions of
benefit and dividend reinvestment plans. A total of 45,000 shares were issued
for both purposes and increased stockholders' equity by $798,000. Offsetting
these increases was a $381,000 decline in unrealized appreciation in certain
debt and equity securities, another component of stockholders' equity.
Various regulatory agencies have implemented capital adequacy guidelines which
are based on an individual institution's risk profile. By regulatory definition,
a "well capitalized" institution has a total capital ratio of 10% or more, a
Tier 1 capital ratio of 6% or more, and a capital leverage ratio of 5% or more.
Institutions which maintain ratios to qualify as well capitalized face fewer
regulatory hindrances in operations and qualify for the lowest deposit insurance
premiums. Minimum ratios of 8%, 4%, and 3% have been established for total
capital, Tier 1 capital, and capital leverage ratios, respectively. Tier 1
capital consists of stockholders' equity adjusted for unrealized gains and
losses on securities classified as available for sale, less intangible assets.
Deferred income tax assets which cannot be realized in the next 12 months are
also disallowed from Tier 1 capital. Total capital consists of Tier 1 capital
and the allowance for credit losses.
14
<PAGE>
- --------------------------------------------------------------------------------
The following table summarizes Mason-Dixon's capital adequacy for 1996 and
1995:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Tier 1 Capital:
Total Stockholders' Equity $ 72,699 $ 66,596
Less: Unrealized appreciation on certain debt and equity securities 505 886
Intangible assets 4,799 5,292
Disallowed deferred income taxes 4,125 4,844
----------- -----------
Total Tier 1 Capital 63,270 55,574
Total Capital:
Add: Allowance for credit losses 5,167 4,729
----------- -----------
Total Capital $ 68,437 $ 60,303
----------- -----------
----------- -----------
Risk-weighted assets $ 491,286 $ 406,923
Quarterly average assets $ 834,410 $ 743,073
Total Capital Ratio (1) 13.93% 14.82%
Tier 1 Capital Ratio (2) 12.88% 13.66%
Capital Leverage Ratio (3) 7.58% 7.48%
</TABLE>
(1) TOTAL CAPITAL DIVIDED BY RISK-WEIGHTED ASSETS
(2) TIER 1 CAPITAL DIVIDED BY RISK-WEIGHTED ASSETS
(3) TIER 1 CAPITAL DIVIDED BY QUARTERLY AVERAGE ASSETS
The Capital Leverage Ratio improved from 1995, as the percentage increase in
qualifying capital was greater than the increase in average quarterly assets.
Both Total Capital and Tier 1 Capital Ratios declined, as the rate of growth of
risk-weighted assets was greater than the rate of growth of qualifying capital.
The increase in risk-weighted assets reflects the higher levels of loans as a
percentage of assets. As a general rule, loans carry a higher risk-rating than
investment securities, and a higher percentage of loans to total assets will
increase risk-weighted assets. A portion of the increase in risk-weighted assets
is attributable to higher levels of certain off-balance sheet commitments to
extend credit, which are considered in the computation of risk-weighted assets.
Despite the decline in risk-weighted ratios, the levels of regulatory capital
are sufficient to support the future growth of Mason-Dixon, while maintaining a
"well-capitalized" regulatory status. See Note 12 to the consolidated financial
statements for more detailed information relating to capital adequacy ratios.
RECENT STOCK PRICES AND DIVIDENDS -- Mason-Dixon's common stock is traded on
the NASDAQ National Market System under the symbol "MSDX". The number of
stockholders of record as of December 31, 1996 and 1995 was 1,914 and 1,900,
respectively. The table below indicates the range of stock prices and cash
dividends paid in 1996 and 1995:
<TABLE>
<CAPTION>
MARKET PRICE
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
<CAPTION>
1996
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
<CAPTION>
HIGH LOW HIGH LOW CASH
ASK ASK BID BID DIVIDEND
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
1st Quarter $ 19.75 $ 19.00 $ 19.00 $ 18.25 $ 0.125
2nd Quarter $ 19.25 $ 18.50 $ 18.50 $ 17.50 $ 0.125
3rd Quarter $ 18.50 $ 17.50 $ 17.50 $ 16.75 $ 0.13
4th Quarter $ 22.25 $ 17.75 $ 21.50 $ 16.75 $ 0.14
- ----------------------------------------------------------------------------------------------------
<CAPTION>
1995
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
<CAPTION>
HIGH LOW HIGH LOW CASH
ASK ASK BID BID DIVIDEND
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
1st Quarter $ 17.25 $ 15.25 $ 16.25 $ 14.50 $ 0.12
2nd Quarter $ 15.75 $ 15.25 $ 15.00 $ 14.75 $ 0.12
3rd Quarter $ 16.75 $ 15.75 $ 16.00 $ 15.00 $ 0.12
4th Quarter $ 20.00 $ 16.50 $ 19.00 $ 16.00 $ 0.125
</TABLE>
15
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 26,892 $ 16,102
Interest bearing deposits in other banks 90 413
Federal funds sold 19,364 16,588
Investment securities held to maturity (HTM)--at amortized cost
--fair value of $194,257 (1996) and $168,370 (1995) 193,244 166,377
Investment securities available for sale (AFS)--at fair value 165,287 174,135
Loans held for sale 3,142 1,662
Loans (net of unearned income) 398,164 352,950
Less: Allowance for credit losses (5,167) (4,729)
------------- ------------
Loans, net 392,997 348,221
Premises and equipment 15,471 15,588
Other real estate owned 501 447
Deferred income taxes 6,274 6,652
Mortgage servicing and sub-servicing rights 3,820 4,198
Intangible assets 4,799 5,292
Accrued interest receivable and other assets 9,193 10,106
------------- ------------
Total Assets $ 841,074 $ 765,781
------------- ------------
------------- ------------
Liabilities
Non-interest bearing deposits $ 94,660 $ 89,118
Interest bearing deposits 526,075 504,717
------------- ------------
Total deposits 620,735 593,835
Short-term borrowings 53,734 49,451
Long-term borrowings 85,275 49,129
Accrued expenses and other liabilities 8,631 6,770
------------- ------------
Total Liabilities 768,375 699,185
------------- ------------
Stockholders' Equity
Common stock--$1.00 par value, authorized:
10,000,000 shares, issued and outstanding:
5,303,166 shares (1996) and 5,258,040 (1995) 5,303 5,258
Surplus 40,560 39,807
Retained earnings 26,331 20,645
Unrealized appreciation in certain debt and equity securities 505 886
------------- ------------
Total Stockholders' Equity 72,699 66,596
------------- ------------
Total Liabilities And Stockholders' Equity $ 841,074 $ 765,781
------------- ------------
------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. MASON-DIXON BANCSHARES, INC.
16
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1996 1995 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Interest Income
Interest and fees on loans $ 33,957 $ 24,940 $ 16,607
Interest on deposits in other banks 16 12 9
Interest on Federal funds sold 1,176 834 72
Interest and dividends on investment securities:
Taxable interest on mortgage-backed securities 15,315 15,004 13,547
Other taxable interest and dividends 4,353 2,420 1,490
Tax exempt interest and dividends 3,979 3,527 3,065
------------ ------------ ------------
Total interest income 58,796 46,737 34,790
------------ ------------ ------------
Interest Expense
Interest on deposits:
Time certificates of deposit of $100,000 or more 1,466 1,410 877
Other deposits 21,536 16,245 11,291
------------ ------------ ------------
Total interest on deposits 23,002 17,655 12,168
Interest on short-term borrowings 2,511 4,165 2,030
Interest on long-term borrowings 3,731 1,251 1,194
------------ ------------ ------------
Total interest expense 29,244 23,071 15,392
------------ ------------ ------------
Net interest income 29,552 23,666 19,398
Provision For Credit Losses 836 -- --
------------ ------------ ------------
Net interest income after provision for credit losses 28,716 23,666 19,398
------------ ------------ ------------
Other Operating Income
Service charges on deposit accounts 2,128 1,635 1,208
Trust Division income 1,407 1,113 949
Gain on sale of securities 271 107 192
Gain(loss) on sale of mortgage loans 584 202 (55)
Gain on sale of deposits 1,469 -- --
Other income 1,622 1,102 951
------------ ------------ ------------
Total other operating income 7,481 4,159 3,245
------------ ------------ ------------
Other Operating Expenses
Salaries and employee benefits 14,433 10,475 8,219
Net occupancy expenses 2,319 1,474 798
Equipment expenses 1,604 1,294 976
FDIC insurance expense 4 453 834
Outside data processing expense 1,008 923 863
Amortization of mortgage sub-servicing rights 415 173 --
Amortization of other intangible assets 493 210 --
Other expenses 4,482 2,942 2,116
------------ ------------ ------------
Total other operating expenses 24,758 17,944 13,806
------------ ------------ ------------
Income Before Taxes 11,439 9,881 8,837
Applicable Income Taxes 3,003 2,582 2,225
------------ ------------ ------------
Net Income $ 8,436 $ 7,299 $ 6,612
------------ ------------ ------------
------------ ------------ ------------
Per Share Data*
Net Income Per Common Share $ 1.60 $ 1.54 $ 1.52
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
* BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES AFTER GIVING EFFECT TO THE
3-FOR-1 STOCK SPLIT IN 1994.
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. MASON-DIXON BANCSHARES, INC.
17
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
IN CERTAIN
DEBT
COMMON RETAINED AND EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) STOCK SURPLUS EARNINGS SECURITIES
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 1994 $ 14,546 $ 14,161 $ 13,904 $ 2,186
Net income -- -- 6,612 --
Cash dividends ($0.45 per share) -- -- (1,964) --
Redemption and retirement of shares (150) (486) -- --
Issuance of additional shares of common stock 19 87 -- --
Decrease in par value from $10.00 to $1.00 (12,972) 12,972 -- --
Increase in shares related to 3 for 1 stock split 2,883 -- (2,883) --
Decrease in unrealized appreciation in certain debt and equity
securities--net of income taxes -- -- -- (6,142)
------------ ------------ ------------ ------------
Balances at December 31, 1994 4,326 26,734 15,669 (3,956)
Net income -- -- 7,299 --
Cash dividends ($0.485 per share) -- -- (2,323) --
Issuance of additional shares of common stock 16 251 -- --
Acquisition of Bank Maryland Corp 916 12,822 -- --
Increase in unrealized appreciation in certain debt and equity
securities--net of income taxes -- -- -- 4,842
------------ ------------ ------------ ------------
Balances at December 31, 1995 5,258 39,807 20,645 886
Net income -- -- 8,436 --
Cash dividends ($0.52 per share) -- -- (2,750) --
Issuance of additional shares of common stock 45 753 -- --
Decrease in unrealized appreciation in certain debt and equity
securities--net of income taxes -- -- -- (381)
------------ ------------ ------------ ------------
Balances at December 31, 1996 $ 5,303 $ 40,560 $ 26,331 $ 505
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. MASON-DIXON BANCSHARES, INC.
18
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1996 1995 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net Income $ 8,436 $ 7,299 $ 6,612
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,392 967 763
Amortization of mortgage sub-servicing rights 415 173 --
Amortization of intangibles 493 210 --
Net accretion of purchase accounting adjustments (702) (386) --
Provision for credit losses 836 -- --
Provision for deferred taxes 598 381 215
Proceeds from sales of investment securities--Trading 4,002 4,345 --
Purchases of investment securities--Trading (4,000) (4,329) --
Originations of loans held for sale (22,485) (7,482) (14,578)
Proceeds from sales of loans held for sale 21,590 6,452 28,644
Net gain on sale of assets (846) (308) (166)
Gain on sale of deposits (1,469) -- --
Net decrease (increase) in accrued interest receivable and other assets 913 (2,352) (1,893)
Net increase (decrease) in accrued expenses and other liabilities 1,861 1,966 (136)
Other--net 299 (1) 84
------------ ------------ ------------
Net cash provided by operating activities 11,333 6,935 19,545
------------ ------------ ------------
Cash Flows From Investing Activities
Proceeds from maturities of investment securities--HTM 29,915 19,621 14,621
Proceeds from sales of investment securities--HTM -- -- 3,319
Purchases of investment securities--HTM (56,759) (20,366) (58,026)
Proceeds from maturities of investment securities--AFS 46,137 13,446 29,442
Proceeds from sales of investment securities--AFS 71,249 42,007 32,281
Purchases of investment securities--AFS (109,518) (76,436) (53,331)
Net increase in loans (45,065) (24,376) (8,866)
Capital expenditures (1,873) (3,826) (940)
Purchase of mortgage servicing rights (15) (29) --
Proceeds from sales of assets 709 279 205
Sale of deposits (18,694) -- --
Acquisitions of subsidiaries, net of cash acquired -- 24,621 --
------------ ------------ ------------
Net cash used by investing activities (83,914) (25,059) (41,295)
------------ ------------ ------------
Cash Flows From Financing Activities
Net increase in deposits 47,347 23,067 10,036
Net increase (decrease) in short-term borrowings 4,283 (8,365) 14,624
Proceeds from long-term borrowings 42,819 35,500 8,500
Repayments of long-term borrowings (6,673) (9,485) (12,486)
Issuance of additional shares of common stock 798 267 106
Repurchase of common stock -- -- (636)
Dividends paid (2,750) (2,323) (1,964)
------------ ------------ ------------
Net cash provided by financing activities 85,824 38,661 18,180
------------ ------------ ------------
Net Increase (Decrease) In Cash And Cash Equivalents 13,243 20,537 (3,570)
Cash And Cash Equivalents At Beginning Of Year 33,103 12,566 16,136
------------ ------------ ------------
Cash And Cash Equivalents At End Of Year $ 46,346 $ 33,103 $ 12,566
------------ ------------ ------------
------------ ------------ ------------
Supplemental Cash Flow Information
Interest payments $ 28,306 $ 22,478 $ 15,255
Income tax payments $ 1,406 $ 2,922 $ 1,826
Noncash Investing Activities
Transfers from loans to other real estate owned $ 170 $ -- $ 176
Transfers from loans to loans held for sale $ -- $ -- $ 11,718
Transfers from investments AFS to investments HTM $ -- $ -- $ 40,934
Transfers from investments HTM to investments AFS $ -- $ 52,873 $ --
</TABLE>
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. MASON-DIXON BANCSHARES, INC.
19
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Mason-Dixon
Bancshares, Inc. ("Mason-Dixon") and its subsidiaries Carroll County Bank and
Trust Company ("Carroll County Bank") and Bank of Maryland with all significant
intercompany transactions eliminated. The accounting and reporting policies of
Mason-Dixon conform to generally accepted accounting principles (GAAP) and to
general practices in the banking industry. Certain reclassifications have been
made to amounts previously reported to conform with the classifications made in
1996.
NATURE OF OPERATIONS -- Mason-Dixon, through its bank subsidiaries, conducts
domestic financial services business in Central Maryland and on Maryland's
Eastern Shore. The primary financial services provided include real estate,
commercial, and consumer lending, as well as offering demand deposits, savings
products, trust services, and retail investment products. Products and services
are offered to individuals, partnerships, corporations, governments, and
associations.
USE OF ESTIMATES -- The preparation of financial statements in conformity with
GAAP 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. These estimates and
assumptions also affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PURCHASE METHOD OF ACCOUNTING -- Net assets of companies acquired in purchase
transactions are recorded at the fair value at the date of acquisition. The
excess of purchase price over the fair value of net assets acquired (goodwill)
is amortized on a straight-line basis over 15 years.
INVESTMENT SECURITIES HELD TO MATURITY -- Investment securities held to
maturity are stated at cost adjusted for amortization of premiums and accretion
of discounts. Mason-Dixon has the ability and intent to hold these securities
until maturity. Sales from the held to maturity classification are rare
occurrences. The amortized cost of the specific security sold is used to compute
gains or losses on the sale of these securities.
INVESTMENT SECURITIES AVAILABLE FOR SALE -- Investment securities designated
as available for sale are stated at fair value based on quoted market prices.
Securities available for sale represent those securities which management may
sell as part of its asset/liability management or in response to changing
interest rates, prepayment risk, or liquidity needs. The cost of securities sold
is determined by the specific identification method.
TRADING ACCOUNT SECURITIES -- Investment securities designated for the trading
account are carried at market value. Gains and losses on trading account
securities are included in other operating income.
LOANS HELD FOR SALE -- Loans held for sale are carried at the lower of
aggregate cost or fair value. Gains and losses on sales of these loans are shown
as a separate component of other operating income. Loans held for sale are
originated and sold without recourse. Retention of the servicing rights to these
loans for the collection of principal and interest payments and escrow account
management is elected by the customer at the time of origination. The income
derived from servicing these loans is included in other operating income.
In May of 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for
Mortgage Servicing Rights". This Statement amends SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities", to require the recognition of a separate
asset for the rights to service mortgage loans for others, however the servicing
rights are acquired. Institutions that acquire mortgage servicing rights through
either the purchase or origination of mortgage loans and that sell or securitize
those loans with servicing rights retained should allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values.
20
<PAGE>
- --------------------------------------------------------------------------------
The Statement also requires the assessment of capitalized mortgage servicing
rights for impairment based on the fair value of those rights. Any impairment
should be recognized through a valuation allowance.
SFAS No. 122 applies prospectively in fiscal years after December 15, 1995,
with earlier adoption permitted. Mason-Dixon adopted SFAS No. 122 on January 1,
1996. The adoption of the new standard did not have a material effect on the
financial statements of Mason-Dixon.
LOANS -- Loans are stated at the amount of unpaid principal reduced by
unearned income. Interest on commercial loans, real estate mortgages, and
certain installment loans is accrued at the contractual rate on the principal
amounts outstanding. Income on certain other installment loans is recognized on
a declining balance method. When scheduled principal or interest payments are
past due 90 days or more on any loan not fully secured by collateral and not in
the process of collection, the accrual of interest income is discontinued and
recognized only as collected. The loan is restored to an accruing status when
all amounts past due have been paid and the borrower has demonstrated the
ability to service the debt on a current basis. Loan fees and related direct
costs of loan origination are deferred and recognized over the life of the loan
as a component of interest income.
ALLOWANCE FOR CREDIT LOSSES -- The determination of the balance of the
allowance for credit losses is based on an analysis of the loan portfolio,
current economic conditions, and off-balance sheet commitments. The allowance
reflects an amount which, in management's judgment, is adequate to provide for
potential loan losses; however, future additions may be necessary based on
changes in economic conditions. Provisions for credit losses are charged to
operating expenses.
Effective January 1, 1995, Mason-Dixon adopted SFAS Nos. 114 and 118,
"Accounting by Creditors for Impairment of a Loan" and "Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosures", respectively.
These Standards define a loan as impaired when current information and events
deem it probable that a creditor will be unable to collect all amounts due
according to the loan's contractual terms. If the value of the impaired loan is
less than its recorded investment, a valuation allowance should be created for
the difference. Adoption of these Standards did not have a material impact on
Mason-Dixon's financial statements.
LONG-LIVED ASSETS -- Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization of
physical properties are computed on the straight-line method over the estimated
useful lives of the properties. Expenditures for maintenance, repairs, and minor
renewals are charged to operating expenses; expenditures for betterments are
charged to the property accounts. Upon retirement or other disposition of
properties, the carrying value and the related accumulated depreciation are
removed from the accounts.
Intangible assets, consisting of goodwill and a core deposit intangible, are
amortized using the straight-line method. Goodwill is being amortized over 15
years, while the core deposit intangible is being amortized over 10 years.
Mortgage servicing rights, including those purchased as well as originated,
are amortized in proportion to and over the estimated period of the related net
servicing revenues. Mortgage sub-servicing rights to maintain escrow and other
deposits for mortgages serviced by a mortgage servicing company are amortized
using the higher of straight-line or level yield method.
Long-lived assets are evaluated regularly for other-than-temporary impairment.
If circumstances suggest that their value may be impaired and the write-down
would be material, an assessment of recoverability is performed prior to any
write-down of the asset. SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ", was adopted on
January 1, 1996. Implementation of this Standard did not have a significant
impact on the financial condition or results of operations of Mason-Dixon.
21
<PAGE>
- --------------------------------------------------------------------------------
OTHER REAL ESTATE OWNED -- Real estate acquired in foreclosure of loans is
carried at cost or fair value, less estimated costs of disposal, whichever is
lower. Fair value is based on independent appraisals and other relevant factors.
At the time of acquisition, any excess of loan balance over fair value is
charged to the allowance for credit losses. Any subsequent reduction in value,
as well as any operating expenses, are included in other operating expenses.
PENSION PLAN -- Carroll County Bank has a defined benefit pension plan
covering substantially all of its employees. The benefits are based on years of
service and the employee's average compensation during the final five years of
employment. The funding policy is to contribute the maximum amount that can be
deducted for Federal income tax purposes. Contributions are intended to provide
not only for benefits attributed to service to date, but also for those expected
to be earned in the future.
POST-RETIREMENT BENEFITS -- Carroll County Bank provides health care benefits
for its retired employees. Certain currently active employees who meet
established age and service criteria will also be eligible for health care
benefits upon retirement. Carroll County Bank also provides life insurance
benefits for retirees. Current employees may become eligible for these benefits
if they satisfy specific plan criteria. These benefits are accounted for in
accordance with SFAS No. 106, "Employers' Accounting for Post-Retirement
Benefits Other Than Pensions". This Standard establishes the accounting for
post-retirement benefits on an accrual basis.
INCOME TAXES -- Deferred income taxes reflect the future years' tax
consequences of differences between the tax and financial accounting bases of
assets and liabilities.
NET INCOME PER COMMON SHARE -- Net income per common share is based on the
weighted average number of shares outstanding after giving retroactive effect to
stock splits and dividends. The number of weighted average shares used in the
calculation was 5,285,268 in 1996, 4,753,185 in 1995, and 4,337,916 in 1994.
TRUST ASSETS AND INCOME -- Assets (other than cash deposits) held for others
under fiduciary and agency relationships are not included in the accompanying
balance sheets. Trust Division income is accounted for on a cash basis.
Recognition of such income on an accrual basis would not materially affect
reported income.
CASH FLOWS -- Mason-Dixon has defined cash and cash equivalents as those
amounts included in the balance sheet captions "Cash and due from banks",
"Interest bearing deposits in other banks", and "Federal funds sold".
FINANCIAL INSTRUMENTS -- Interest rate swaps used in asset/liability
management activities are accounted for using the accrual method. Net interest
income (expense) resulting from the differential between exchanging floating and
fixed rate interest payments is recorded on a current basis.
FAIR VALUE DISCLOSURE -- SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments", requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value. 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. Certain financial instruments and all
nonfinancial instruments are excluded from disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of Mason-Dixon.
CASH AND CASH EQUIVALENTS -- The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
22
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES) -- Fair values
for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
LOANS HELD FOR SALE -- The fair value of loans held for sale is based upon
secondary market quotations for similar instruments.
LOANS -- For all variable rate loans that reprice frequently with no
significant change in credit risk, fair values are based on carrying
values. The fair values for certain mortgage loans are based on quoted
market prices of similar loans, adjusted for some differences in loan
characteristics. The fair values for fixed rate commercial, consumer, and
some mortgage loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms
to borrowers of similar credit quality.
DEPOSIT LIABILITIES -- The fair values disclosed for demand deposits (e.g.,
interest and non-interest bearing checking), savings, and certain types of
money market accounts are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts for variable rate money market accounts and certificates of deposit
approximate their fair values at the reporting date. Fair values for fixed
rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
SHORT-TERM AND LONG-TERM BORROWINGS -- The fair values of short-term and
long-term borrowings are estimated using discounted cash flow analyses,
based on the Banks' current incremental borrowing rates for similar types
of borrowing arrangements.
OFF-BALANCE SHEET INSTRUMENTS -- Fair values for loan commitments are based
on fees currently charged to enter into similar agreements, taking into
account remaining terms of the agreements and the counterparties' credit
standards. The fair value of interest rate swaps is based upon secondary
market quotations for similar contracts with like terms and conditions.
PROSPECTIVE ACCOUNTING CHANGES -- On January 1, 1997, Mason-Dixon adopted the
provisions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". This Statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The adoption of this pronouncement did
not have a material impact on the financial position of Mason-Dixon.
2. ACQUISITION
On July 17, 1995, Mason-Dixon completed the acquisition of Bank Maryland Corp
of Towson, Maryland for a purchase price of $26,800,000, which included 915,868
shares of Mason-Dixon common stock and $13,100,000 in cash. The transaction was
accounted for as a purchase and, therefore, results of operations of Bank of
Maryland are included in the consolidated statements of income and cash flows
from the date of acquisition. The excess of the cost over the estimated fair
value of the tangible net assets acquired (goodwill) was $5,151,000 and is being
amortized on a straight-line basis over 15 years.
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Federal Reserve requires banks to maintain certain minimum cash balances
consisting of vault cash and deposits in the Federal Reserve Bank or in other
commercial banks. The amounts of such reserves are based on percentages of
certain deposit types and totaled $5,274,000 at December 31, 1996.
23
<PAGE>
- --------------------------------------------------------------------------------
4. INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities held to
maturity are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. government
agencies $ 45,068 $ 125 $ 328 $ 44,865
Obligations of states and political subdivisions 78,070 1,410 181 79,299
Mortgage-backed securities 70,106 593 606 70,093
------------ ------------ ------------ ------------
Total investment securities held to maturity $ 193,244 $ 2,128 $ 1,115 $ 194,257
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. government
agencies $ 40,196 $ 280 $ 180 $ 40,296
Obligations of states and political subdivisions 67,265 1,841 101 69,005
Mortgage-backed securities 58,916 753 600 59,069
------------ ------------ ------------ ------------
Total investment securities held to maturity $ 166,377 $ 2,874 $ 881 $ 168,370
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The amortized cost and estimated fair values of investment securities
available for sale are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. government
agencies $ 9,462 $ 101 $ -- $ 9,563
Mortgage-backed securities 150,107 1,357 635 150,829
------------ ------------ ------------ ------------
Total debt securities available for sale 159,569 1,458 635 160,392
Equity securities available for sale 4,894 1 -- 4,895
------------ ------------ ------------ ------------
Total investment securities available for sale $ 164,463 $ 1,459 $ 635 $ 165,287
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. government
agencies $ 21,155 $ 50 $ -- $ 21,205
Mortgage-backed securities 148,730 1,698 488 149,940
------------ ------------ ------------ ------------
Total debt securities available for sale 169,885 1,748 488 171,145
Equity securities available for sale 2,807 183 -- 2,990
------------ ------------ ------------ ------------
Total investment securities available for sale $ 172,692 $ 1,931 $ 488 $ 174,135
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
24
<PAGE>
- --------------------------------------------------------------------------------
The amortized cost and fair value of debt securities at December 31, 1996, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
(DOLLARS IN THOUSANDS) HELD TO MATURITY PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Due in one year $ 5,520 $ 5,578 $ -- $ --
Due after one year through five years 37,094 37,406 6,021 6,061
Due after five years through ten years 28,796 28,934 3,441 3,502
Due after ten years 51,728 52,246 -- --
Mortgage-backed securities 70,106 70,093 150,107 150,829
------------ ------------ ------------ ------------
Total debt securities $ 193,244 $ 194,257 $ 159,569 $ 160,392
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Proceeds from sales of investments in debt securities and associated gross
gains and losses are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of debt securities $ 75,251 $ 42,007 $ 35,600
Gross gains $ 431 $ 345 $ 585
Gross losses $ 160 $ 238 $ 393
</TABLE>
Included in the 1994 totals above is the sale of investment securities held to
maturity. The amortized cost of these securities was $3,316,000, the gross
proceeds were $3,319,000, and the gross realized gains were $3,000. Sales from
the held to maturity category, while rare, are permissible under current
accounting rules. These securities were sold in light of favorable market
conditions and were sold within 90 days of their contractual maturity.
Investment securities held to maturity with a book value of $40,917,000 and
investment securities available for sale with a book value of $80,510,000 at
December 31, 1996, were pledged as collateral for certain liabilities as
required or permitted by law.
During 1995, securities classified as held to maturity with an amortized cost
of $52,873,000 and an unrealized loss of $932,000 were transferred to investment
securities available for sale. The transfer was initiated in light of
pronouncements from the FASB in the fourth quarter of 1995, permitting a
one-time review and reclassification of investment securities. Mason-Dixon
transferred securities into available for sale in response to the FASB
announcement, to increase the size of the available for sale portfolio, and to
allow for increased flexibility for liquidity and interest rate risk management.
There were no state, county, and municipal securities whose book value, as to
any issuer, exceeded 10% of stockholders' equity at December 31, 1996 or 1995.
25
<PAGE>
- --------------------------------------------------------------------------------
5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
At December 31, loans were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Construction and land development $ 24,202 $ 20,085
Residential real estate--mortgage 164,695 137,120
Commercial real estate--mortgage 135,410 123,142
Commercial 54,556 55,781
Consumer 19,873 17,964
------------ ------------
Total loans 398,736 354,092
Unearned income on loans (572) (1,142)
------------ ------------
Loans (net of unearned income) $ 398,164 $ 352,950
------------ ------------
------------ ------------
</TABLE>
Proceeds from sales of loans in 1996 and 1995 were $21,590,000 and $6,452,000,
respectively.
The following table presents information concerning non-accrual loans and
loans 90 days or more past due and still accruing interest as of December 31:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Non-accrual loans $ 2,821 $ 1,560
------------ ------------
------------ ------------
Interest income which would have been recorded under original terms $ 443 $ 220
Less: Interest income recognized 29 93
------------ ------------
Interest income not recognized $ 414 $ 127
------------ ------------
------------ ------------
Accruing loans 90 days or more past due $ 214 $ 277
------------ ------------
------------ ------------
</TABLE>
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Balance at January 1 $ 4,729 $ 2,627 $ 2,686
Allowance applicable to loans of acquired bank -- 2,355 --
Provision charged to operating expense 836 -- --
Recoveries 338 157 176
Loans charged off (736) (410) (235)
------------ ------------ ------------
Balance at December 31 $ 5,167 $ 4,729 $ 2,627
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
26
<PAGE>
- --------------------------------------------------------------------------------
In accordance with SFAS Nos. 114 and 118, "Accounting By Creditors for
Impairment of a Loan" and "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures", Mason-Dixon has identified certain
loans as impaired. The following table presents information relating to impaired
loans as of December 31:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Actual recorded investment $ 2,310 $ 946
------------ ------------
------------ ------------
Average recorded investment $ 2,455 $ 1,360
------------ ------------
------------ ------------
Allowance for credit losses relating to all impaired loans $ 662 $ 450
------------ ------------
------------ ------------
Cash payments:
Applied to principal $ 633 $ 8
Applied to interest 131 113
------------ ------------
Totals $ 764 $ 121
------------ ------------
------------ ------------
</TABLE>
6. PREMISES AND EQUIPMENT
At December 31, premises and equipment consisted of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Land $ 3,309 $ 3,344
Buildings and leasehold improvements 14,623 15,076
Equipment 9,572 8,975
Construction-in-process 16 1
------------ ------------
27,520 27,396
Accumulated depreciation and amortization 12,049 11,808
------------ ------------
Premises and equipment--net $ 15,471 $ 15,588
------------ ------------
------------ ------------
</TABLE>
Depreciation expense on premises, equipment, and leasehold improvements
totaled $1,392,000, $967,000, and $763,000, for 1996, 1995, and 1994,
respectively. Capitalized interest totaled $0 for 1996, $68,000 for 1995, and $0
for 1994.
Total rental expenses for premises and equipment were $1,060,000 for 1996,
$612,000 for 1995, and $239,000 for 1994. At December 31, 1996, the aggregate
minimum rental commitments under all noncancelable operating leases for premises
are indicated below. There were no rental commitments for equipment.
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1997 $ 1,012
1998 1,031
1999 1,059
2000 871
2001 830
Thereafter 3,526
----------
Total $ 8,329
----------
----------
</TABLE>
In addition to minimum rentals, certain leases have escalation clauses and
include provisions for additional payments to cover taxes, insurance, and
maintenance.
27
<PAGE>
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7. MORTGAGE SERVICING AND SUB-SERVICING RIGHTS
Bank of Maryland retains the mortgage sub-servicing rights to maintain escrow
and other deposits for mortgages currently serviced by Greystone, a mortgage
servicing company. Prior to October 29, 1996, the mortgages were serviced by
USGI, Inc. As of December 31, the total amounts of these deposits included in
the consolidated statements of financial condition were $18,468,000 for 1996 and
$21,251,000 for 1995. The $10,030,000 purchase price is reduced by $6,298,000 in
accumulated amortization and write-down costs as of December 31, 1996.
Carroll County Bank retains servicing on many of the loans it sells into the
secondary market. At December 31, 1996, Carroll County Bank's servicing
portfolio totaled $106,880,000. The servicing portfolio totaled $113,516,000 and
$112,402,000 at December 31, 1995 and 1994, respectively. Escrow balances
relating to the servicing portfolio were $1,310,000, $1,263,000, and $1,748,000,
for the years ended December 31, 1996, 1995, and 1994, respectively. The amounts
capitalized in connection with acquiring the right to service mortgage loans
were $50,000 in 1996, $52,000 in 1995, and $28,000 in 1994.
8. INTANGIBLE ASSETS
Intangible assets represent goodwill created as a result of the Bank Maryland
Corp acquisition and a core deposit intangible acquired in the merger. Goodwill
totaled $4,702,000 and $5,048,000, net of accumulated amortization, at December
31, 1996 and 1995, respectively, and represents the amount of the purchase price
which exceeded the fair value of the net assets acquired. The net core deposit
intangible totaled $97,000 at year end 1996 and $244,000 at year end 1995.
Accumulated amortization was $489,000 for goodwill and $1,299,000 for the core
deposit intangible as of December 31, 1996.
9. DEPOSITS
At December 31, deposits were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
<S> <C> <C>
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Non-interest bearing deposits $ 94,660 $ 89,118
Interest bearing deposits:
Passbook and statement savings 95,108 100,944
Money market savings 85,043 78,519
Time deposits:
$100,000 or more 42,993 48,494
Less than $100,000 244,568 220,472
---------- ----------
Total time deposits 287,561 268,966
NOW accounts 58,363 56,288
---------- ----------
Total interest bearing deposits 526,075 504,717
---------- ----------
Total deposits $ 620,735 $ 593,835
---------- ----------
---------- ----------
</TABLE>
10. SHORT-TERM BORROWINGS
Short-term borrowings, which consist primarily of securities sold under
agreements to repurchase and the U.S. Treasury demand note, were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
<S> <C> <C> <C>
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Average amount outstanding during year $ 45,823 $ 68,571 $ 44,824
Weighted average interest rate during year 5.48% 5.89% 4.25%
Amount outstanding at year end $ 53,734 $ 49,451 $ 54,927
Weighted average interest rate at year end 5.42% 5.56% 5.82%
Maximum amount at any month end $ 67,607 $ 86,535 $ 61,500
</TABLE>
28
<PAGE>
- --------------------------------------------------------------------------------
11. LONG-TERM BORROWINGS
Long-term borrowings consisted of the following as of December 31:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank of Atlanta (FHLB):
5.41% Advance due January 23, 1997 $ 4,000
5.47% Advance due March 27, 1997 8,000
5.45% Advance due March 25, 1998 1,439
6.48% Advance due September 6, 1998 2,000
5.38% Advance due September 12, 1998 7,000
4.56% Advance due September 20, 1998 1,200
4.56% Advance due October 21, 1998 1,200
5.30% Advance due January 18, 1999 3,980
5.00% Advance due September 20, 2000 1,143
4.95% Advance due December 1, 2000 25,000
5.23% Advance due July 18, 2001 29,000
------------
83,962
NationsBank, N.A.:
7.99% Promissory note due July 26, 2000 1,313
------------
Total $ 85,275
------------
------------
</TABLE>
The contractual annual maturities on the FHLB advances over the next five
years are as follows: 1997-- $12,000,000; 1998--$12,839,000; 1999--$3,980,000;
2000--$26,143,000; 2001--$29,000,000. Actual principal payments on the advances
may vary, as Mason-Dixon has the option of prepaying principal on several
advances. Some advances have interest rate reset provisions, which may result in
changes to interest rates from the rates included in the table above.
Mason-Dixon has pledged $60,953,000 of residential mortgage loans and
$57,748,000 of investment securities as collateral for the advances.
In July of 1995, Mason-Dixon borrowed $6,500,000 from NationsBank, N.A. to
secure a portion of the cash necessary to complete the acquisition of Bank
Maryland Corp. Interest and principal on NationsBank, N.A.'s promissory note are
payable quarterly. The original term was for five years, however, Mason-Dixon
elected to prepay $5,000,000 of the note during 1996. The remaining contractual
annual principal payments over the next two years are as follows: 1997--$950,000
and 1998--$363,000. The promissory note is governed by a financing agreement
whose covenants are considered usual and customary. Mason-Dixon has pledged
stock of Carroll County Bank as collateral for the note.
12. STOCKHOLDERS' EQUITY
DIVIDEND RESTRICTION -- Under Maryland banking law, the Boards of Directors of
Mason-Dixon subsidiary banks may declare cash dividends to Mason-Dixon from
undivided profits and, with the prior consent and approval of the Bank
Commissioner, from each individual bank's excess surplus after providing for
expenses, losses, interest, and taxes accrued or due. The amount of cash
dividends that Mason-Dixon's subsidiaries could have paid without approval from
the Bank Commissioner totaled $15,693,000 at December 31, 1996.
CAPITAL ADEQUACY -- Mason-Dixon and its subsidiary banks ("the Banks") are
subject to various regulatory capital requirements administered by the Federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could
29
<PAGE>
- --------------------------------------------------------------------------------
have a direct material effect on the Banks' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Banks must meet specific capital guidelines that involve quantitative
measures of the Banks' assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Banks' capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk-weightings, and other factors.
Quantitative measures defined by regulation to ensure capital adequacy require
the Banks to maintain the amounts and ratios of total and Tier I capital to
risk-weighted assets and of capital leverage to average assets as set forth in
the following table. As of December 31, 1996, management believes that the Banks
meet all capital adequacy requirements to which they are subject.
The most recent notification from the Federal Deposit Insurance Corporation
categorized the Banks as well capitalized under the regulatory framework for
prompt corrective action as of December 31, 1996. To be categorized as well
capitalized, the Banks must maintain minimum total capital, Tier I capital, and
capital leverage ratios as indicated in the table. There are no conditions or
events since that notification that management believes have changed the Banks'
category. The Banks' actual capital amounts and ratios are also presented as of
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996
Total Capital (to Risk-Weighted Assets):
Mason-Dixon $ 68,437 13.93% $ 39,303 8.00% $ 49,129 10.00%
Carroll County Bank $ 45,515 14.76% $ 24,669 8.00% $ 30,836 10.00%
Bank of Maryland $ 19,200 10.93% $ 14,057 8.00% $ 17,571 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Mason-Dixon $ 63,270 12.88% $ 19,651 4.00% $ 29,477 6.00%
Carroll County Bank $ 42,920 13.92% $ 12,334 4.00% $ 18,501 6.00%
Bank of Maryland $ 17,004 9.68% $ 7,028 4.00% $ 10,542 6.00%
Capital Leverage (to Average Assets):
Mason-Dixon $ 63,270 7.58% $ 25,032 3.00% $ 41,721 5.00%
Carroll County Bank $ 42,920 7.47% $ 17,242 3.00% $ 28,737 5.00%
Bank of Maryland $ 17,004 7.37% $ 6,925 3.00% $ 11,542 5.00%
As of December 31, 1995
Total Capital (to Risk-Weighted Assets):
Mason-Dixon $ 60,303 14.82% $ 32,554 8.00% $ 40,692 10.00%
Carroll County Bank $ 44,682 16.89% $ 21,162 8.00% $ 26,452 10.00%
Bank of Maryland $ 15,541 10.31% $ 12,056 8.00% $ 15,070 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Mason-Dixon $ 55,574 13.66% $ 16,277 4.00% $ 24,415 6.00%
Carroll County Bank $ 42,030 15.89% $ 10,581 4.00% $ 15,871 6.00%
Bank of Maryland $ 13,655 9.06% $ 6,028 4.00% $ 9,042 6.00%
Capital Leverage (to Average Assets):
Mason-Dixon $ 55,574 7.48% $ 22,292 3.00% $ 37,154 5.00%
Carroll County Bank $ 42,030 7.92% $ 15,919 3.00% $ 26,532 5.00%
Bank of Maryland $ 13,655 6.48% $ 6,320 3.00% $ 10,533 5.00%
</TABLE>
30
<PAGE>
- --------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN--During 1995, Mason-Dixon introduced a Dividend
Reinvestment and Stock Purchase Plan. This plan provides for 125,000 shares of
Mason-Dixon's common stock to be reserved for issuance under the plan. The plan
allows for participating shareholders to purchase additional shares by
reinvesting the dividends paid on shares registered in their name, by making
optional cash purchases, or both. Shares reinvested or purchased are acquired in
the open market at fair market value (average high and low sale price on the
investment date as quoted on NASDAQ). Optional cash purchases are limited to a
maximum of $2,500 per calendar quarter. Mason-Dixon reserves the right to amend,
modify, suspend, or terminate the plan at its discretion, at any time.
13. PENSION AND PROFIT SHARING PLANS
Carroll County Bank sponsors a defined benefit pension plan which covers
substantially all employees. Benefits are based on years of service and the
employee's average compensation. The funding policy is to contribute the maximum
amount deductible for Federal income tax purposes. Contributions provide not
only for benefits attributed to service to date, but also for those expected to
be earned in the future. Net pension cost includes the following components:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Service cost--benefits earned during year $ 373 $ 287 $ 320
Interest cost on projected benefit obligation 475 426 401
Actual return on plan assets (807) (828) (99)
Net amortization and deferral 267 292 (382)
------------ ------------ ------------
Net pension cost $ 308 $ 177 $ 240
------------ ------------ ------------
------------ ------------ ------------
Weighted average discount rate used in
determining the actuarial present value
of the projected benefit obligation 7.5% 7.3% 8.0%
Rate of increase in future compensation 5.5% 5.5% 5.5%
Long-term rate of return on assets 9.0% 9.0% 9.0%
</TABLE>
The following table sets forth the plan's funded status and amounts recognized
in the balance sheet at December 31:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $5,107 (1996) and $4,890 (1995) $ 5,161 $ 4,962
------------ ------------
Projected benefit obligation for service rendered to date 6,987 6,676
Plan assets at fair value, primarily listed stocks
and fixed income securities 6,829 5,760
------------ ------------
Projected benefit obligation in excess of plan assets (158) (916)
Unrecognized net (gain)/loss from past experience different from that assumed
and effects of changes in assumptions (14) 550
Prior service cost not yet recognized in net periodic pension cost 276 306
Unrecognized net obligation at January 1, 1987 being recognized over 15 years (211) (263)
------------ ------------
Accrued pension cost included in other liabilities $ (107) $ (323)
------------ ------------
------------ ------------
</TABLE>
Mason-Dixon sponsors an employee savings and investment plan under the
provisions of Section 401(k) of the Internal Revenue Code. The plan covers
substantially all employees meeting age and service requirements and
31
<PAGE>
- --------------------------------------------------------------------------------
provides for both employee and employer matching contributions and additional
unmatched discretionary contributions. Participants in either the matching or
unmatched contributions may be required to invest a portion in common stock of
Mason-Dixon. Contributions to the plan totaled $352,000 for 1996, $256,000 for
1995, and $275,000 for 1994.
14. STOCK OPTIONS
During 1996, Mason-Dixon awarded employee stock options at a price equal to
the fair market value of the stock on the grant date. These options were
exercisable beginning December 27, 1996 and will expire December 27, 2006. At
December 31, 1996, 4,500 options at an exercise price of $21 per share were
outstanding.
Mason-Dixon elected to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Under its provisions, the intrinsic
value measurement method was applied and no compensation cost was recognized in
income during 1996.
As required by SFAS No. 123, "Accounting for Stock-Based Compensation", the
estimated fair value of the options awarded was $33,000, calculated on the
Modified Black-Scholes American option-pricing model. This value assumes a 6.29%
risk-free interest rate, a 10-year expected life, 30% expected volatility of the
stock, and 2.73% expected dividends on the stock. If the fair value measurement
method had been applied, net income on a pro forma basis would have been
$8,403,000 and earnings per share would have been $1.59 for the year ended
December 31, 1996.
15. POST-RETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
Post-retirement benefits are accounted for in accordance with SFAS No. 106,
"Employers' Accounting for Post-Retirement Benefits Other Than Pensions". Under
SFAS No. 106, the expected cost of providing post-retirement benefits is
recognized in the financial statements during the employee's active service
period.
Post-retirement benefit expense for the years ended December 31 follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Service cost $ 6 $ 5 $ 6
Interest cost on projected benefit obligation 66 71 65
Amortization of unrecognized net (gain)/loss (1) 1 4
------------ ------------ ------------
Net post-retirement benefit cost $ 71 $ 77 $ 75
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Mason-Dixon's post-retirement benefit plan is not funded. The status of the
plan as of December 31 was as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated post-retirement benefit obligations--
Retirees $ (487) $ (756)
Fully eligible active plan participants (51) (66)
Other active plan participants (34) (35)
------------ ------------
(572) (857)
Unrecognized prior service cost (253) --
Unrecognized net (gain)/loss from the effect of change of assumption (11) 26
------------ ------------
Accrued post-retirement benefit costs included in other liabilities $ (836) $ (831)
------------ ------------
------------ ------------
</TABLE>
32
<PAGE>
- --------------------------------------------------------------------------------
The assumed health care cost trend rate used in measuring the accumulated
post-retirement obligation was 8.9% for 1996, gradually declining to 5.5% by the
year 2007 and remaining at that level thereafter. A one percentage-point
increase in the assumed health care cost trend rate for each year would increase
the accumulated post-retirement obligation as of December 31, 1996 by 9%. The
assumed discount rate in determining the accumulated post-retirement benefit
obligation was 8% for 1996, 1995, and 1994.
16. DEFERRED COMPENSATION
Mason-Dixon, Carroll County Bank, and Bank of Maryland have entered into
deferred compensation agreements with former executive officers, certain members
of senior management, and Boards of Directors. Under the terms of the
agreements, certain portions of officers' base salaries and the directors' fees
have been deferred. The plan is entirely contributory by the participant and,
therefore, no benefit expense is included in the consolidated statements of
income for 1996, 1995, and 1994.
17. INCOME TAXES
Applicable income taxes were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 2,089 $ 1,837 $ 1,681
State 316 364 329
------------ ------------ ------------
Total current 2,405 2,201 2,010
------------ ------------ ------------
Deferred:
Federal 490 312 176
State 108 69 39
------------ ------------ ------------
Total deferred 598 381 215
------------ ------------ ------------
Total income tax expense $ 3,003 $ 2,582 $ 2,225
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Components of deferred income tax expense for the three years ended December
31 were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Provision for loan losses $ (257) $ (758) $ 23
Pension expense 83 (67) 82
Depreciation 18 111 (1)
Loan fees (23) 64 49
Loan costs (43) (12) (5)
Deferred compensation (114) (77) (30)
Post-retirement benefits (3) (7) (5)
Mortgage sub-servicing rights 85 56 --
Net operating loss carryforwards 718 985 --
Purchase accounting adjustments 271 123 --
Other (137) (37) 102
------------ ------------ ------------
Total deferred income tax expense $ 598 $ 381 $ 215
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
33
<PAGE>
- --------------------------------------------------------------------------------
At December 31, 1996 and 1995, net deferred income taxes totaled $6,274,000
and $6,652,000, respectively, as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for credit losses $ 1,686 $ 1,429
Mortgage sub-servicing rights 642 727
Acquisition valuations 236 507
Deferred compensation 507 393
Post-retirement benefits 323 320
Pension plan 36 119
Deferred loan fees and costs 447 381
Other 135 --
Tax loss carryforwards 4,141 4,859
------------ ------------
Gross deferred tax assets 8,153 8,735
Valuation allowance (1,400) (1,400)
------------ ------------
Total deferred tax assets 6,753 7,335
------------ ------------
Deferred tax liabilities:
Depreciation 146 128
Other 15 17
Unrealized gain on securities available for sale 318 538
------------ ------------
Total deferred tax liabilities 479 683
------------ ------------
Net deferred income taxes $ 6,274 $ 6,652
------------ ------------
------------ ------------
</TABLE>
Total tax expense of $3,003,000, $2,582,000, and $2,225,000, for 1996, 1995,
and 1994, was 26.3%, 26.1%, and 25.2%, respectively, of income before taxes as
compared to the maximum statutory rate for Federal income taxes, reconciled as
follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERCENT PERCENT PERCENT
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Computed at statutory rate $ 3,889 34.0% $ 3,360 34.0% $ 3,005 34.0%
Increases (decreases) in taxes
resulting from:
Tax exempt interest income (1,521) (13.3) (1,316) (13.3) (1,150) (13.0)
Dividend exclusion (1) -- (4) -- (3) --
State income taxes, net of Federal
income tax benefit 307 2.7 277 2.8 243 2.8
Nondeductible interest expense 197 1.7 177 1.8 127 1.4
Nondeductible goodwill and merger
expenses 173 1.5 68 0.6 -- --
Other--net (41) (0.3) 20 0.2 3 --
------------ ----- ------------- ------ ------------- ------
Actual tax expense $ 3,003 26.3% $ 2,582 26.1% $ 2,225 25.2%
------------ ----- ------------- ------ ------------- ------
------------ ----- ------------- ------ ------------- ------
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
Net operating loss carryforwards obtained through the acquisition of Bank
Maryland Corp totaled approximately $10,722,000 for tax purposes at December 31,
1996, and expire at various times beginning in 2002. Under Section 382 of the
Internal Revenue Code, Mason-Dixon's utilization of these loss carryforwards is
limited to an annual maximum amount of $1,575,000, which can only be applied to
the taxable income of Bank of Maryland. In light of the uncertainty of fully
realizing the net operating loss carryforwards, a valuation allowance of
$1,400,000 was established at December 31, 1996 and 1995.
18. RELATED PARTY TRANSACTIONS
During the ordinary course of business, Mason-Dixon's subsidiaries make loans
to many of their directors and their associates and several of their policy
making officers on substantially the same terms, including interest rates and
collateral, as those prevailing for comparable transactions with other
customers. Loans outstanding, both direct and indirect, to directors, their
associates, and policy making officers totaled $4,579,000 and $4,710,000 at
December 31, 1996 and 1995, respectively. During 1996, $3,931,000 of new loans
were made and repayments totaled $4,062,000. In 1995, $3,500,000 of new loans
were made and repayments totaled $985,000.
19. COMMITMENTS AND CONTINGENCIES
Mason-Dixon is a party to litigation related to its business. In the opinion
of management, the ultimate liability, if any, resulting from these matters
would not have a significant effect on Mason-Dixon's consolidated financial
position, results of operations, or liquidity.
20. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Mason-Dixon is a party to financial instruments with off-balance sheet risk in
the normal course of business. These financial instruments may include
commitments to extend credit, standby letters of credit, interest rate swaps,
and purchase commitments. Mason-Dixon uses these financial instruments to meet
the financing needs of its customers and reduce its own exposure to fluctuations
in interest rates. Financial instruments involve, to varying degrees, elements
of credit, interest rate, and liquidity risk. These do not represent unusual
risks and management does not anticipate any losses which would have a material
effect on the accompanying financial statements.
The following is a summary of the contract or notional amount of significant
commitments and contingent liabilities:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Commitments to extend credit $ 111,279 $ 85,105
Standby letters of credit $ 8,586 $ 4,572
Interest rate swaps $ 48,000 $ 28,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Mason-Dixon
generally requires collateral to support financial instruments with credit risk
on the same basis as it does for on-balance sheet instruments. The collateral is
based on management's credit evaluation of the counterparty. Commitments
generally 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 amount does not necessarily
represent future cash requirements. Each customer's credit-worthiness is
evaluated on a case-by-case basis.
Standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers.
35
<PAGE>
- --------------------------------------------------------------------------------
Interest rate swaps involve an agreement to exchange fixed and variable rate
interest payments based on a notional principal amount and maturity date. The
differential between the fixed and variable rate is included as interest income
or expense of the asset or liability being hedged. These derivative financial
instruments are used for asset/liability management. Entering into swaps
involves the risk of dealing with counterparties and their ability to meet the
terms of outstanding contracts and risks related to movements in interest rates.
The credit risk of interest rate swap contracts is controlled through credit
approvals, limits, and monitoring procedures. The principal or notional amounts
are used to compute the volume of interest obligations, but the amounts
potentially subject to risk are much smaller. With regard to these agreements,
the risk of loss is estimated as $119,000 at December 31, 1996, representing the
current cost of replacing only those swaps in a gain position in the event of
counterparty failure.
Mason-Dixon entered into a five-year agreement for outside computer processing
services expiring June, 2001. There is a minimum monthly processing fee of
$70,000, plus additional amounts based on the number and types of transactions.
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of Mason-Dixon's financial instruments at December 31, were as
follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
- --------------------------------------------------------------------------------------------------------------------------
Financial Assets
Cash and due from banks $ 26,892 $ 26,892 $ 16,102 $ 16,102
Interest bearing deposits in other banks $ 90 $ 90 $ 413 $ 413
Federal funds sold $ 19,364 $ 19,364 $ 16,588 $ 16,588
Investment securities--HTM $ 193,244 $ 194,257 $ 166,377 $ 168,370
Investment securities--AFS $ 165,287 $ 165,287 $ 174,135 $ 174,135
Loans held for sale $ 3,142 $ 3,217 $ 1,662 $ 1,667
Loans $ 398,164 $ 400,119 $ 352,950 $ 352,485
Financial Liabilities
Deposits $ 620,735 $ 621,445 $ 593,835 $ 590,611
Short-term borrowings $ 53,734 $ 53,736 $ 49,451 $ 49,452
Long-term borrowings $ 85,275 $ 85,161 $ 49,129 $ 48,647
Off-Balance Sheet Items
Commitments to extend credit $ -- $ -- $ -- $ --
Standby letters of credit $ -- $ 172 $ -- $ 90
Interest rate swaps $ -- $ (80) $ -- $ 366
</TABLE>
36
<PAGE>
- --------------------------------------------------------------------------------
22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of Mason-Dixon's unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1996
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
THREE MONTHS ENDED: 12/31 9/30 6/30 3/31
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Interest income $ 15,179 $ 15,065 $ 14,505 $ 14,047
Interest expense 7,732 7,503 7,131 6,878
------------ ------------ ------------ ------------
Net interest income 7,447 7,562 7,374 7,169
Provision for credit losses 612 35 189 --
Other operating income 2,950 1,394 1,357 1,509
Gain on sales of securities 4 92 55 120
Operating expenses 6,794 6,278 5,789 5,897
------------ ------------ ------------ ------------
Income before taxes 2,995 2,735 2,808 2,901
Applicable income taxes 803 631 743 826
------------ ------------ ------------ ------------
Net income $ 2,192 $ 2,104 $ 2,065 $ 2,075
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income per common share $ 0.42 $ 0.40 $ 0.39 $ 0.39
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1995
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
THREE MONTHS ENDED: 12/31 9/30 6/30 3/31
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Interest income $ 14,266 $ 13,310 $ 9,716 $ 9,445
Interest expense 7,042 6,546 4,872 4,611
------------ ------------ ------------ ------------
Net interest income 7,224 6,764 4,844 4,834
Provision for credit losses (51) 25 21 5
Other operating income 1,225 1,133 942 752
Gain (loss) on sales of securities 48 31 (23) 51
Operating expenses 5,774 5,138 3,494 3,538
------------ ------------ ------------ ------------
Income before taxes 2,774 2,765 2,248 2,094
Applicable income taxes 787 765 546 484
------------ ------------ ------------ ------------
Net income $ 1,987 $ 2,000 $ 1,702 $ 1,610
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income per common share $ 0.38 $ 0.40 $ 0.39 $ 0.37
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
37
<PAGE>
- --------------------------------------------------------------------------------
23. PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial information for Mason-Dixon Bancshares, Inc. (Parent
Company Only) is as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31,
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CONDENSED BALANCE SHEETS 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 808 $ 1,141
Interest bearing deposits in subsidiaries 1,388 --
Investment securities held to maturity--at amortized cost--
fair value of $960 (1996) and $984 (1995) 1,000 1,000
Investment in subsidiaries 73,186 70,970
Advances to subsidiaries and other assets 562 729
------------ ------------
Total Assets $ 76,944 $ 73,840
------------ ------------
------------ ------------
Liabilities
Long-term borrowings $ 3,312 $ 6,500
Other liabilities 933 744
------------ ------------
Total Liabilities 4,245 7,244
------------ ------------
Stockholders' Equity
Common stock 5,303 5,258
Surplus 40,560 39,807
Retained earnings 26,331 20,645
Unrealized appreciation in certain debt and equity securities 505 886
------------ ------------
Total Stockholders' Equity 72,699 66,596
------------ ------------
Total Liabilities and Stockholders' Equity $ 76,944 $ 73,840
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31,
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CONDENSED STATEMENTS OF INCOME FOR THE PERIOD ENDED 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Cash dividends from subsidiaries $ 6,372 $ 9,617 $ 3,601
Interest income 131 64 54
Other income 60 60 60
------------ ------------ ------------
Total Income 6,563 9,741 3,715
Interest expense on long-term borrowings 490 183 --
Operating expenses 498 202 143
------------ ------------ ------------
Income before income tax benefit and equity in undistributed
income of subsidiaries 5,575 9,356 3,572
Income tax benefit (264) (86) (11)
------------ ------------ ------------
Income before equity in undistributed income of subsidiaries 5,839 9,442 3,583
Equity in undistributed income of subsidiaries 2,597 (2,143) 3,029
------------ ------------ ------------
Net Income $ 8,436 $ 7,299 $ 6,612
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
38
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31,
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS FOR THE PERIOD ENDED 1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net Income $ 8,436 $ 7,299 $ 6,612
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income of subsidiaries (2,597) 2,143 (3,029)
Net decrease (increase) in other assets 167 (668) 6
Net increase in other liabilities 189 725 20
------------ ------------ ------------
Net Cash Provided by Operating Activities 6,195 9,499 3,609
------------ ------------ ------------
Cash Flows From Investing Activities
Advances to subsidiaries (60) (60) (60)
Repayment of advances to subsidiaries 60 60 118
Cash payment for acquisition -- (13,053) --
Purchases of investment securities -- -- (1,000)
------------ ------------ ------------
Net Cash Used by Investing Activities -- (13,053) (942)
------------ ------------ ------------
Cash Flows From Financing Activities
Proceeds from long-term borrowings 2,000 6,500 --
Repayment of long-term borrowings (5,188) -- --
Repurchase of common stock -- -- (636)
Issuance of additional shares of common stock 798 267 105
Dividends paid (2,750) (2,323) (1,964)
------------ ------------ ------------
Net Cash (Used) Provided by Financing Activities (5,140) 4,444 (2,495)
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 1,055 890 172
Cash and Cash Equivalents at Beginning of Year 1,141 251 79
------------ ------------ ------------
Cash and Cash Equivalents at End of Year $ 2,196 $ 1,141 $ 251
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
39
<PAGE>
Stockholders and Board of Directors
Mason-Dixon Bancshares, Inc.
Westminster, Maryland
We have audited the accompanying consolidated balance
sheets of Mason-Dixon Bancshares, Inc. and Subsidiaries
as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. 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 consolidated financial position of
Mason-Dixon Bancshares, Inc. and Subsidiaries as of
December 31, 1996 and 1995, and the consolidated results
of their operations and cash flows for each of the three
years in the period ended December 31, 1996, in
conformity with generally accepted accounting
principles.
Towson, Maryland
January 17, 1997
40
<PAGE>
Exhibit 21--Subsidiaries
SUBSIDIARIES OF THE REGISTRANT
Carroll County Bank and Trust Company is a wholly owned subsidiary of
Mason-Dixon Bancshares, Inc.
Mason-Dixon Merger Sub, Inc. is a wholly owned subsidiary of Mason-Dixon
Bancshares, Inc.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Mason-Dixon Bancshares, Inc.
We hereby consent to the incorporation by reference in the prospectuses
included in Registration Statement No. 33-80039, 333-07943, 33-07945, each
on Form S-8, and Registration Statements No. 333-94686 on Form S-3, and in
the Annual Report on Form 10-K of Mason-Dixon Bancshares, Inc. for the year
ended December 31, 1996, of our report dated January 17, 1997, relating to
the consolidated financial statements of Mason-Dixon Bancshares, Inc.
/s/ Stegman & Company
---------------------
Stegman & Company
Towson, Maryland
March 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MASON
DIXON BANCSHARES, INC. DECEMBER 31, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 26,892,000
<INT-BEARING-DEPOSITS> 90,000
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0
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