UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Number 0-20516
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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)
(410) 857-3401
----------------------
Registrant's telephone number including area code:
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 preceeding 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
----- -----
The number of shares outstanding of the registrant's common stock on
June 30, 1998: Common Stock, $1.00 Par Value --- 5,079,235
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MASON-DIXON BANCSHARES, INC.
<TABLE>
CONSOLIDATED BALANCE SHEET
<CAPTION>
June 30, December 31,
(Dollars in thousands) 1998 1997
- -------------------------------------------------- ---------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 19,698 $ 20,245
Interest bearing deposits in other banks 535 482
Federal funds sold 34,302 17,236
Investment securities available for sale (AFS) - at fair value 282,622 249,855
Investment securities held to maturity (HTM) - at amortized cost 176,700 204,045
(fair value $178,856 and $206,515 respectively)
Loans held for sale 2,622 4,439
Loans (net of unearned income of $125 and $341) 457,497 460,391
Less: Allowance for credit losses (9,384) (5,231)
-------- --------
Loans, net 448,113 455,160
Bank premises and equipment 13,961 15,530
Other real estate owned 395 685
Deferred tax assets 6,433 6,089
Mortgage sub-servicing rights 2,367 3,412
Intangible assets 6,979 2,956
Accrued interest receivable and other assets 12,626 12,046
-------- --------
Total Assets $ 1,007,353 $ 992,180
======== ========
LIABILITIES
Non-interest bearing deposits $ 87,387 $ 89,692
Interest bearing deposits 517,927 561,557
-------- --------
Total Deposits 605,314 651,249
Short-term borrowings 64,605 97,203
Long-term borrowings 248,069 160,889
Accrued expenses and other liabilities 10,273 7,390
-------- --------
Total Liabilities 928,261 916,731
STOCKHOLDERS' EQUITY
Common stock - $1.00 par value, authorized:
10,000,000 shares, issued and outstanding;
5,079,235 shares (1998) and 5,077,468 shares (1997) 5,079 5,077
Surplus 36,016 35,948
Retained earnings 36,396 32,275
Accumulated other comprehensive income 1,601 2,149
-------- --------
Total Stockholders' Equity 79,092 75,449
Total Liabilities & Stockholders' Equity $ 1,007,353 $ 992,180
======== ========
Note: The balance sheet at December 31, 1997 has been derived from the audited financial statement at that date.
See notes to the consolidated financial statements.
</TABLE>
MASON-DIXON BANCSHARES, INC.
<TABLE>
CONSOLIDATED INCOME STATEMENT
<CAPTION>
Three Months Endin Six Months Ending
June 30, June 30,
(Dollars in thousands, except per sh 1998 1997 1998 1997
- ---------------------------------------------- -------- ---------- --------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $ 12,999 $ 9,507 $ 24,958 $ 18,612
Interest on deposits in other bank 23 37 38 50
Interest on federal funds sold 529 331 813 582
Interest and dividends on investment securities:
Taxable interest on mortgage-bac 4,087 4,213 8,491 8,317
Other taxable interest and divid 2,076 933 3,920 1,847
Tax exempt interest and dividend 1,222 1,104 2,394 2,212
-------- -------- -------- --------
Total interest income ##### ##### ##### #####
Interest Expense:
Interest on deposits:
Time certificates of deposit of 669 555 1,093 948
Other deposits 5,729 5,443 11,497 10,806
-------- -------- -------- --------
Total interest on deposits 6,398 5,998 ##### #####
Interest on short-term borrowings 777 1,023 2,358 1,743
Interest on long-term borrowings 3,878 1,335 6,551 2,619
-------- -------- -------- --------
Total interest expense ##### 8,356 ##### #####
-------- -------- -------- --------
Net interest income 9,883 7,769 ##### #####
Provision for credit losses 3,172 51 3,489 108
-------- -------- -------- --------
Net interest income after provision 6,711 7,718 ##### #####
-------- -------- -------- --------
Other Operating Income:
Service charges on deposit account 540 554 1,077 1,100
Trust Division income 449 373 830 716
Gain on sale of securities 46 87 357 308
Gain on sale of mortgage loans 557 370 993 661
Gain on sale of branches 6,717 0 6,717 0
Other income 813 505 1,576 930
-------- -------- -------- --------
Total other operating income 9,122 1,889 ##### 3,715
-------- -------- -------- --------
Other Operating Expenses:
Salaries and employee benefits 5,349 3,866 10,254 7,584
Net occupancy expense of bank prem 655 625 1,347 1,248
Furniture and equipment expenses 488 487 971 925
Legal and professional fees 351 445 571 665
FDIC insurance expense 22 19 42 38
Outside data processing expense 333 301 674 562
Amortization of mortgage sub-servi 943 103 1,047 207
Amortization of other intangibles 195 124 299 247
Other expenses 2,108 750 3,201 1,649
-------- -------- -------- --------
Total other operating expenses ##### 6,720 ##### #####
-------- -------- -------- --------
Income before income taxes 5,389 2,887 8,770 5,986
Income tax expense 2,052 738 2,922 1,562
-------- -------- -------- --------
Net Income $ 3,337 $ 2,149 $ 5,848 $ 4,424
======== ======== ======== ========
Per Share Data:
Cash Dividend Paid $ 0.17 $ 0.15 $ 0.34 $ 0.30
Net Income (Basic) $ 0.66 $ 0.41 $ 1.15 $ 0.84
Net Income (Diluted) $ 0.66 $ 0.41 $ 1.15 $ 0.84
Average Shares Outstanding (Basic)5,079,806 5,286,543 5,079,567 5,297,207
Average Shares Outstanding (Dilute5,084,960 5,287,126 5,084,721 5,297,496
</TABLE>
MASON-DIXON BANCSHARES, INC.
<TABLE>
<CAPTION>
For the Period Ended
June 30,
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,848 $ 4,424
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 808 815
Amortization of mortgage sub-servicing rights 1,047 207
Amortization of intangibles 299 246
Net accretion of purchase accounting adjustments (206) (312)
Provision for credit losses 3,489 108
Provision for deferred taxes 0 318
Proceeds from sales of investment securities - Trading 20 3,177
Purchases of investment securities - Trading 0 (3,152)
Originations of loans held for sale (27,891) (24,067)
Proceeds from sales of loans held for sale 30,701 24,119
Net gain on sale of assets/liabilities (8,027) (994)
Net (increase) decrease in accrued interest receivable and other (138) (782)
Net increase (decrease) in accrued expenses and other liabilitie 636 (1,939)
Other - net (157) 307
------- -------
Net cash provided by operating activities 6,429 2,475
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities - HTM 36,867 7,409
Purchases of investment securities - HTM (20,682) (13,629)
Proceeds from maturities of investment securities - AFS 46,252 12,427
Proceeds from sales of investment securities - AFS 53,568 48,880
Purchases of investment securities - AFS (122,102) (123,342)
Net (increase) decrease in loans (12,610) (37,150)
Capital expenditures (1,102) (716)
Proceeds from sale of assets/liabilities 9,928 0
Sale of branches (28,882) 0
Acquisitions of subsidiaries, net of cash acquired (14,993) 0
------- -------
Net cash used by investing activities (53,756) (106,121)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 41,317 27,614
Net (decrease) increase in short-term borrowings (62,941) 55,863
Proceeds from long-term borrowings 89,350 109,402
Repayments of long-term borrowings (2,170) (63,056)
Issuance of additional shares of common stock 304 231
Repurchase of common stock (234) (5,163)
Dividends paid (1,727) (1,594)
------- -------
Net cash provided by financing activities 63,899 123,297
------- -------
Net increase (decrease) in cash and cash equivalents 16,572 19,651
Cash and cash equivalents at beginning of year 37,963 46,346
------- -------
Cash and cash equivalents at end of period $ 54,535 $ 65,997
======= =======
See notes to the consolidated financial statements.
</TABLE>
MASON-DIXON BANCSHARES, INC.
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Accumulated
Other
Common Retained Comprehensive
(Dollars in thousands) Stock Surplus Earnings Income
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 5,303 $ 40,560 $ 26,331 $ 505
Net income (1st six months 1997) 0 0 4,424 -
Issuance of additional shares of common stock 11 220 0 -
Repurchase of shares of common stock (239) (4,924) 0 -
Cash dividend @ $.30 per share 0 0 (1,594) -
Net unrealized losses on available-for-sale
securities (net of tax) 0 0 0 73
------- ------- ------- -------
Balance at June 30, 1997 5,075 35,856 29,161 578
Net income (3rd and 4th quarters 1997) 0 0 4,735 -
Issuance of additional shares of common stock 13 331 0 -
Repurchase of shares of common stock (11) (239) 0 -
Cash dividend @ $.30 per share 0 0 (1,621) -
Net unrealized gains on available-for-sale
securities (net of tax) 0 0 0 1,571
------- ------- ------- -------
Balance at December 31, 1997 5,077 35,948 32,275 2,149
Net income (1st six months 1998) 0 0 5,848 -
Issuance of additional shares of common stock 9 295 0 -
Repurchase of shares of common stock (7) (227) 0 -
Cash dividend @ $.34 per share 0 0 (1,727) -
Unrealized holding (losses)/gains on available-for
sale securities arising during the period (net of ta 0 0 0 (225)
Less: Reclassification adjustment for losses
realized in net income 0 0 0 (323)
------- ------- ------- -------
Balance at June 30, 1998 $ 5,079 $ 36,016 $ 36,396 $ 1,601
======= ======= ======= =======
</TABLE>
MASON-DIXON BANCSHARES, INC.
<TABLE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The foregoing financial statements are unaudited, however, in the opinion of Management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of the financial statements have been
included. Certain amounts for prior periods have been reclassified to conform to current period presentation.
These statements should be read in conjunction with the financial statements and notes thereto included in the
Company's 1997 Annual Report on Form 10-K.
Note 3. Investment Securities
<CAPTION>
Available-for-Sale Held-to-Maturity
June 30, June 30, June 30, June 30,
(Dollars in thousands) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and agency notes $ 88,396 $ 45,142 $ 18,013 $ 32,998
Obligations of U.S. government agencies 103,032 16,214 12,531 132,215
Obligations of states and political subdivisio 0 83,317 85,223 0
Collateralized mortgage obligations 70,546 54,475 53,170 54,653
Other securities 18,050 268 7,763 6,802
Unrealized gains(losses) 2,598 0 0 942
-------- -------- -------- --------
Total Investment Securities $ 282,622 $ 199,416 $ 176,700 $ 227,610
======== ======== ======== ========
</TABLE>
<TABLE>
Note 4. Loans (Net of Unearned Income)
<CAPTION>
June 30, June 30,
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Construction and Land Development $ 35,488 $ 25,656
Residential Real Estate - Mortgages 151,074 179,520
Commercial Real Estate - Mortgages 132,455 122,487
Commercial 84,779 85,308
Consumer 53,701 22,624
-------- --------
Total Loans $ 457,497 $ 435,595
======== ========
</TABLE>
<TABLE>
Note 4. Allowance for Credit Losses
<CAPTION>
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at January 1 $ 5,231 $ 5,167
Provision for the year 3,489 108
Recoveries on loans 252 306
------- -------
Total 8,972 5,581
Less loans charged off 2,511 119
Allowance of purchased company 2,923 0
------- -------
Balance at June 30 $ 9,384 $ 5,462
======= =======
The appropriateness of the allowance for possible credit losses is determined based on a quarterly detailed
review of the loan portfolio, off-balance sheet commitments, and recent economic projections.
</TABLE>
<TABLE>
MASON-DIXON BANCSHARES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
<S><C><C>
Note 1. Per Share Amounts
On December 31, 1997, the Company adopted FASB Statement No. 128, "Earnings Per Share." Statement 128
establishes standards for computing and presenting earnings per share ("EPS") that simplify the standards previously
followed in Accounting Principals Board Opinion No.15. It replaces the former presentation of primary EPS with a
presentation of basic EPS and, where applicable, requires the dual presentation of basic and diluted EPS on the face
of the income statement. Basic EPS is generally computed by dividing net income by the weighted average number of
common shares outstanding for the period, whereas diluted EPS essentially reflects the potential dilution in basic EPS
that could occur if other contracts to issue stock were exercised. Per share amounts are based on the weighted average
number of shares outstanding during the year.
Note 6. Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." Comprehensive income, as defined by Statement 130, is the change in equity of a business
enterprise during a reporting period from transactions and other events and circumstances from non-owner sources.
In addition to an enterprise's net income, change in equity components under comprehensive income reporting would
also include such items as the net change in unrealized gain or loss on available-for-sale securities and foreign
currency translation adjustments. Statement 130 requires disclosure of comprehensive income and its components
with the same prominence as the Company's other financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MASON-DIXON BANCSHARES, INC.
FORWARD LOOKING STATEMENTS
This section of the report may contain forward looking statements within
the meaning of the Private Securities Litigation Act of 1995. Certain
statements are included which may relate to management's beliefs,
expectations, anticipations and plans concerning, among other things,
economic trends, interest rates, and other matters. Such statements are
subject to numerous uncertainties including the effects of monetary
policies, regulatory changes, levels of inflation, unemployment, consumer
confidence and the health of commercial and residential real estate values
in Mason-Dixon's market area. There can be no assurance that future events
will develop in accordance with any forward looking statements contained
herein.
SUMMARY
Mason-Dixon Bancshares, Inc., reported net income from continuing
operations of $2.386 million for the second quarter ended June 30, 1998, an
increase of 11% from the same period last year. Earnings per share (basic
and diluted) from core earnings were $.47, a 15% increase over second
quarter 1997. Including the effects of the gain from the sale of branches
and several non-recurring charges, total net income was $3.337 million or
$.66 per fully diluted share, an increase of 55% over second quarter 1997.
For the six months ended June 30, 1998 net income from continuing
operations totaled $4.897 million, up 11% from the same period in 1997, and
diluted earnings per share totaled $.96 (+14%). Including the net effects
of the sale of branches and non-recurring items, net income totaled $5.848
million, increasing 32% from the same period in 1997. Diluted earnings per
share were $1.15 compared to $.84 for 1997.
Reported results for the second quarter and the year included several
significant events. On June 19, 1998 the sale of five branches on
Maryland's Eastern Shore was completed and added after tax net income of
$3.687 million ($.73 per share). Offsetting the gain on the sale of the
branches were after tax charges to recognize the company's estimated year
2000 costs ($430 thousand or $.08 per share), a write-down of mortgage sub-
servicing rights ($516 thousand or $.10 per share) and increases in the
provision for credit losses which was largely driven by changes in charge-
off policy for the recently acquired consumer finance receivables ($1.791
million or $.35 per share). Excluding the effects of the gain and
significant charges core net income totaled $2.386 million an increase of
$237 thousand (+11%) and diluted earnings per share totaled $.47 (+15%).
STATEMENT OF CONDITION
Total assets as of June 30, 1998 were $1.007 billion, up 2% from
December 31, 1997 and up 4% from June 30, 1997. The percentage changes
reflect the purchase of Rose Shanis Financial Services, LLC which added
approximately $48 million in total assets, and the sale of five branches
which reduced total assets by approximately $80 million. Both of these
transactions occurred in 1998. Loans outstanding have decreased $3 million
(1%) since December 31, 1997 and increased $22 million (5%) since June 30,
1997. Changes in loans outstanding include to purchase of approximately $43
million in loans related to the Rose Shanis acquisition, and the sale of
approximately $59 million for the sale of branches. Excluding these
events, loans outstanding have increased 9% since June 30, 1997 and 3%
since December 31, 1997. Investment securities increased by $5 million (1%)
from year end 1997 and $32 million (8%) since June 30, 1997. Deposits have
decreased $46 million (7%) from year end, and $43 million (7%) compared to
June 30, 1997 due to the sale of the branches which held approximately $89
million in total deposits. Excluding the sale of the branches, deposits
increased 8% from year end and June 30, 1997. Borrowing increased $55
million (21%) since year end, with borrowings associated with the
acquisition of Rose Shanis adding $28 million. Since June 30, 1997,
borrowings increased by $71 million, which includes the $28 million
associated with the acquisition. Stockholders' equity increased $3.6
million from year end 1997. Earnings added $5.8 million to stockholders
equity, while cash dividends have reduced equity by $1.8 million.
Decreases in accumulated comprehensive income were $500 thousand since year
end.
INCOME STATEMENT - FIRST QUARTER
Net interest income increased by $2.114 million (27%) due to normal
growth in earning assets as well as the acquisition of the consumer finance
company. The net interest margin on earning assets increased 14 basis
points to 4.23% for the quarter. The increased spread was primarily
attributable to the acquisition of Rose Shanis, which has higher overall
interest spreads. Average earning assets increased $181 million (22%) while
interest bearing liabilities increased $177 million (25%).
The provision for credit losses totaled $3.172 million for the quarter
compared to $51 thousand for the second quarter of 1997. The significant
increase resulted from increased chargeoffs for consumer finance
receivables ($2.0 million) and additional provisions ($900 thousand)
recorded in recognition of potential credit risks relating to loans with
Year 2000 exposure. The increase in chargeoffs was related to a change in
chargeoff policy for consumer finance receivables. The former policy called
for a loan to be charged off at 270 days delinquent. The policy was
changed during the quarter to chargeoff loans at 180 days delinquent. The
change was made to align the policy with more conservative practices. As a
result of the change, delinquency levels and coverage ratios of the
consumer finance receivables improved significantly.
Total other operating income increased $7.233 million, which included
the net gain on the sale of branches of $6.717 million. Excluding the
gain, total other operating income grew by $516 thousand (27%). Service
charge income decreased by $14 thousand. Gains on sales of mortgage loans
grew by $187 thousand or 51% due to expansion of the Mortgage Banking
Division of Carroll County Bank and Trust Company (Mason-Dixon Bancshares
Mortgage Company) and higher levels of refinance activity. Trust Division
income grew by $76 thousand or 20% due to growth in accounts under
management. Securities gains decreased by $41 thousand. All other sources
of operating income increased by $308 thousand or 61% which reflect
increased revenue from the sales of annuities and mutual funds, as well as
fee income generated from consumer finance activities.
Total other operating expenses increased by $3.724 million or 55% due to
two non-recurring charges ($1.541 million), additional expenses of the
consumer finance company ($1.624 million), and higher expenses of the
Mortgage Banking Division ($91 thousand). Excluding the non-recurring
items, the additional expenses of the new subsidiary and expansion of
mortgage banking, expenses grew by $468 thousand (7%). The non-recurring
items included a $700 thousand (pretax) charge for estimated costs for the
company to remedy operating issues surrounding the Year 2000 issue. Mason-
Dixon elected to recognize this expense during the quarter due to the
increased certainty of these expenses and the greater accuracy in the
projections of the actual costs. Non-recurring items also reflected a
charge of $841 thousand (pretax) related to a change in valuation method of
mortgage sub-servicing rights. This method change more closely aligns the
carrying value of these rights to current market rates of interest as well
as recently quoted market values. All areas of other operating expenses
increased with the exception of legal and professional fees. 1997's legal
fees included costs for stockholder related litigation.
INCOME STATEMENT - YEAR-TO-DATE
Net interest income increased $3.611 million (23%) due to growth in
earning assets and increased interest spreads. Average year-to-date
earning assets grew by $172 million (21%) while interest bearing
liabilities increased $164 million (24%). The net interest margin for the
first six months of 1998 was 4.17%, an increase of 3 basis points compared
to the same period of 1997. Margins increased as a result of the
acquisition of Rose Shanis.
The provision for credit losses totaled $3.489 million compared to $108
thousand for the first six months of 1997. The increase was primarily
attributable to the special issues discussed in the quarterly income
statement discussion above.
Total other operating income was $11.550 million, an increase of $7.835
million. Excluding the one time gain on sale of branches, the increase
totaled $1.118 million (30%). Service charges decreased $23 thousand.
Trust division revenue increased $114 thousand (16%) due to increases in
accounts under management. Gains on sales of mortgage loans increased $332
thousand 50% due to the expansion of the mortgage banking division of
Carroll County Bank and Trust Company and increased refinance activities.
Gains on sales of securities were $357 thousand versus $308 thousand for
the six months of 1997. All other sources of operating income increased
$646 thousand (69%) due to increased income from the acquired consumer
finance company, as well as increased sales of mutual funds and annuities.
Total other operating expenses increased $5.281 million. Included in
the increase are non-recurring items incurred during the second quarter
($1.541 million), higher expenses due to the acquisition of the consumer
finance company ($2.551 million), and increased costs of expanded mortgage
banking operations ($308 thousand). Excluding these increases, other
operating expenses increased $881 thousand (7%).
CAPITAL ADEQUACY
At the end of the quarter, the Company's capital leverage ratio was
8.63%, down from 8.74% at the end of the year. Tier 1 and Total Risk-based
ratios were 14.89% and 18.47% respectively compared to 14.74% and 15.64% at
December 31, 1997. Regulatory minimums to qualify as "well capitalized"
are 5% for capital leverage, 6% for Tier 1 Risk-based, and 10% for Total
Risk-based capital. In April of 1998, Mason-Dixon completed a $20 million
offering of Trust Preferred securities. These instruments were issued to
pay off a portion of the short-term borrowings of the consumer finance
company. Of the $20 million issued, approximately $5 million qualified at
June 30, 1998 as Tier 1 capital, and the remaining $15 million qualified as
Tier 2 capital. Trust Preferred securities that qualify as Tier 1 capital
are limited by regulatory definition to a maximum of one-third of total
Tier 1 capital elements.
MARKET RISK DISCLOSURES - INTEREST RATE SENSITIVITY
At the end of the quarter, Mason-Dixon had an estimated one year
positive gap of $75.0 million on a consolidated basis, which totaled about
7% of assets. The positive one year gap at the end of the last quarter was
$16 million or 2% of total assets. The increase is attributable to the
payoff of a variable rate line of credit used to finance consumer finance
receivables which was replaced with permanent fixed rate borrowings (Trust
Preferred securities), as well as other long-term borrowing which have
funded shorter term investments. This position also reflects the current
low level of interest rates, with most securities with call features
assumed to be called and prepayment assumptions on mortgage backed
securities accelerated. An increase in interest rates would change
assumptions relating to callable securities and likely slow assumed
prepayments on mortgage backed securities. Management believes the overall
rate sensitivity position is appropriate for current rate conditions.
Mason-Dixon tests its interest rate sensitivity through the deployment
of simulation analysis. An earnings simulation model is used to estimate
what effects specific interest rate changes would have on one year of net
interest income. Derivative financial instruments, such as interest rate
swaps, are included in the analysis. Interest rate caps and floors on
certain products are included to the extent they become effective within
one year. Changes in prepayment assumptions have been included where
changes in payment behavior pattern is assumed to be different to the
simulation. Call features on certain securities are based on their
projected call probability in view of the assumed rate environment. At June
30, 1998 Mason-Dixon's estimated earnings profile reflected a modest
sensitivity to interest rate changes. Based on an assumed 100 basis point
immediate increase in interest rates, Mason-Dixon's pretax net interest
income would increase by $718 thousand (2%) if rates were to increase by
100 basis points, and decline by $1.144 million (3%) should rates fall by
100 basis points.
YEAR 2000 PREPAREDNESS
Mason-Dixon continued its progress in preparing for the Year 2000 during
the second quarter of 1998. The Year 2000 Issue is the result of computer
programs and equipment which are dependent on using two digits rather than
four to define any particular year. Any of Mason-Dixon's computer programs
or other equipment that are date dependent may recognize a date using "00"
as the year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, a temporary
inability to process transactions, send invoices, or engage in similar
normal business activity.
During the quarter, critical processing applications continued to be
reviewed to identify potential problems in any customized computer code,
test scripts were developed for processing critical software, and a formal
review continued relating to credit relationships which may present risks
due to customers' inability to remedy their own Year 2000 issues. Test
scripts will be processed over the next quarter.
Based on assessments made through the second quarter, Mason-Dixon has
determined that it will likely be required to modify or replace portions of
its software and other equipment which cannot be made Year 2000 compliant.
The expected cost of modifications and replacements is currently estimated
at $700,000 and is being funded through operating cash flows. The charge to
earnings for these estimated costs was recognized during the second quarter
of 1998. It is expected that all critical remedies will be in place not
later than March 31, 1999. The assessment of any credit risk that may be
attributable to the Year 2000 Issue continued during the second quarter of
1998, and resulted in an increase in the allowance for credit losses of
approximately $900,000.
The costs of the project and projected completion dates are based on
management's best estimates, which were derived using numerous assumptions
of future events. There can be no guarantee that these estimates will be
achieved and actual results could materially differ from the estimates.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MASON-DIXON BANCSHARES, INC.
August 13, 1998 /s/ Thomas K. Ferguson
By: Thomas K. Ferguson
President/Chief Executive Officer
August 13, 1998 /s/ Mark A. Keidel
By: Mark A. Keidel
Vice President/Chief Financial Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the Mason-Dixon
Bancshares, Inc. June 30, 1998 financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 19,698,000
<INT-BEARING-DEPOSITS> 535,000
<FED-FUNDS-SOLD> 34,302,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 176,700,000
<INVESTMENTS-CARRYING> 282,622,000
<INVESTMENTS-MARKET> 461,478,000
<LOANS> 457,497,000
<ALLOWANCE> (9,384,000)
<TOTAL-ASSETS> 1,007,353,000
<DEPOSITS> 605,314,000
<SHORT-TERM> 64,605,000
<LIABILITIES-OTHER> 10,273,000
<LONG-TERM> 248,069,000
0
0
<COMMON> 5,079,000
<OTHER-SE> 1,673,289
<TOTAL-LIABILITIES-AND-EQUITY> 1,007,353,000
<INTEREST-LOAN> 24,958,000
<INTEREST-INVEST> 2,406,411
<INTEREST-OTHER> 813,038
<INTEREST-TOTAL> 40,614,000
<INTEREST-DEPOSIT> 12,590,000
<INTEREST-EXPENSE> 21,499,000
<INTEREST-INCOME-NET> 19,115,000
<LOAN-LOSSES> 3,489,000
<SECURITIES-GAINS> 357,000
<EXPENSE-OTHER> 18,406,000
<INCOME-PRETAX> 5,848,000
<INCOME-PRE-EXTRAORDINARY> 5,848,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,848,000
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.15
<YIELD-ACTUAL> 4.17
<LOANS-NON> 5,755,694
<LOANS-PAST> 262,000
<LOANS-TROUBLED> 213,000
<LOANS-PROBLEM> 13,081,541
<ALLOWANCE-OPEN> 5,231,000
<CHARGE-OFFS> 2,511,000
<RECOVERIES> 252,000
<ALLOWANCE-CLOSE> 9,384,000
<ALLOWANCE-DOMESTIC> 9,384,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
