SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 1998. 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.)
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 the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of the 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 March 1, 1999 was $222,126,935.
As of March 1, 1999 Mason-Dixon Bancshares, Inc. had 5,075,721 shares of common
stock outstanding with a par value of $1.00.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Mason-Dixon Bancshares, Inc. Annual Report to Stockholders for
the year ended December 31, 1998 are incorporated by reference into Parts II and
IV.
<PAGE>
Table of Contents: Page
- ------------------ ----
Part I - Business 3-8
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 19-21
Legal Proceedings 22
Submission of Matters to Vote of Securities Holders 22
Executive Officers 22
Part II 23
Part III -Directors and Executive Officers 24-25
Executive Compensation 26-32
Security Ownership of Certain Beneficial Owners and Management 33-35
Certain Relationships and Related Transactions 35
Part IV and Index of Exhibits 36-37
Signatures 38
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Part I
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 principal operating subsidiaries,
Carroll County Bank and Trust Company ("Carroll County Bank"), Bank of Maryland,
Rose Shanis Financial Services, LLC ("Rose Shanis") and Bay Insurance, LLC.
Mason-Dixon's major activity since its inception has been to provide advisory
services and coordinate the general policies of its subsidiaries.
Rose Shanis and Bay Insurance, LLC were acquired in February 1998 in an all
cash acquisition for $15.4 million. The acquisition was accounted for using the
purchase method of accounting; therefore, the results of operations were
included in the consolidated statement of income from the date of the
acquisition. Assets and liabilities of Rose Shanis and Bay Insurance, LLC were
adjusted to market value as of the date of acquisition and included in the
consolidated balance sheet subsequent to the acquisition.
Carroll County Bank and Trust Company
The parent company's principal subsidiary is Carroll County Bank, which
accounts for approximately 70% of Mason-Dixon's consolidated assets at December
31, 1998. 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, 1998, Carrollco Insurance, Inc. had
total assets of $255 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 of $107 million at December 31, 1998.
At December 31, 1998, Carroll County Bank employed 323 individuals.
Full-time equivalent employees were 296 as of year end.
Bank of Maryland
Bank of Maryland, acquired in 1995, accounts for approximately 26% of
Mason-Dixon's consolidated assets at December 31, 1998. Bank of Maryland was
chartered as a Maryland state bank in 1990. It is a commercial bank with nine
(9) offices located throughout central Maryland. In June 1998, Bank of Maryland
sold five of its branches located on Maryland's Eastern Shore as part of a
strategy to concentrate on deeper penetration into its core market, Central
Maryland. The sale of the branches included $87 million of deposits and $58
million in loans. To further the strategy of Central Maryland market
penetration, Bank of Maryland opened two branches in the fourth quarter of 1998
in Baltimore City and Reisterstown (Baltimore County). Additionally, through the
acquisition of Sterling Bank and Trust Co. (see recent developments), branches
in Timonium (Baltimore County) and Annapolis (Anne Arundel County) were added.
At December 31, 1998, Bank of Maryland employed 87 individuals. Full-time
equivalent employees were 86 as of year end.
Rose Shanis and Bay Insurance
The business conducted by Rose Shanis was established 66 years ago in
Baltimore by Rose Shanis Glick; the business was family owned and managed until
acquired by Mason-Dixon. Rose Shanis established a reputation as a successful
and dependable personal lender servicing second and even third generations of
borrowers. Rose Shanis' business is conducted through twelve (12) branches
located in the greater Baltimore area and in Annapolis, Bel Air, and Easton,
Maryland. Bay Insurance, LLC is engaged in the business of selling insurance
products that are directly
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related to extensions of credit by Rose Shanis.
The acquisition of the Rose Shanis business furthered Mason-Dixon's
strategy to expand its business by acquiring banks and other financial service
providers in its market area and to provide a range of financial services
offering the opportunity for larger net interest margins and a broader customer
base.
Rose Shanis and Bay Insurance, LLC comprise approximately 4% of
Mason-Dixon's consolidated total assets at December 31, 1998, and employed 87
employees, 84 on a full-time equivalent basis.
Services Offered
Through its bank subsidiaries, Mason-Dixon engages in commercial and
consumer lending, depository business, 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, bank subsidiaries provide a full range of
trust services to individuals, corporations, and non-profit organizations under
the name of Mason-Dixon Trust Company, which is a division of Carroll County
Bank. 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. Bank subsidiaries also originate and service real estate mortgage and
construction loans as a principal and as an agent under the name of Mason-Dixon
Bancshares Mortgage Company (also a division of Carroll County Bank).
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 products, and do not experience any
significant fluctuations in loan or deposit activity which are seasonal in
nature.
Rose Shanis offers consumer loans, sales finance, second mortgage loans,
and various related products through two main lines of business: the purchase of
credit sales contracts, and lending cash to consumers directly through its
branches. The credit sale contracts represent financed sales of a range of
products including health club memberships, household furniture and appliances,
used automobiles and boats. These contracts are purchased through a wide variety
of consumer dealers, both national and local, with which Rose Shanis has
relationships. Sales from furniture and automobile dealers are the primary
sources of the Rose Shanis installment sales portfolio. Credit sale contracts
have a maximum term of 60 months, and in some cases, a dealer reserve is held to
cover potentially doubtful accounts. The contracts either include pre-computed
finance charges or are interest-bearing.
Rose Shanis and Bay Insurance, LLC also offer credit related insurance
products. Bay Insurance, LLC sells single and joint credit life insurance,
single accident and health insurance, involuntary unemployment insurance, and
Vendors Single Interest Automobile insurance. Each Rose Shanis branch has at
least one licensed employee to sell insurance products.
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Rose Shanis and Bay Insurance, LLC 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. Rose Shanis and Bay Insurance are not dependent on a
single product or small number of 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, mutual funds, insurance
companies, mortgage companies, and brokerage and investment banking firms
located in Maryland and elsewhere.
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, 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 bank attuned to the particular needs of the
community.
The consumer finance business is also highly competitive. Rose Shanis
competes with many larger national finance companies, many of which have greater
resources. The profitability of Rose Shanis depends on its continued ability to
maintain its personalized business and quality service in its local market
areas, and to preserve its relationships with the third party dealer network
that indirectly sources prospective Rose Shanis borrowers.
Consumer finance companies differ from banks in several respects. Due to
the nature of lending to individuals with limited or impaired credit histories,
delinquencies and write-off levels are generally higher than those experienced
in the banking industry. In addition, consumer finance companies typically place
a lesser reliance on collateral as a repayment source. To mitigate these
characteristics, rates charged on loans by consumer finance companies are
typically higher than rates charged by banks, which results in higher interest
income to compensate for increased risk.
Supervision and Regulation
Bank holding companies and their subsidiaries operate in a highly regulated
environment and are subject to the supervision and examination by several
federal and state regulatory agencies. Mason-Dixon, as a bank holding company,
is 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 more than 5% of any class
of voting shares in any company,
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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 Division of Financial Regulation and the Federal Deposit
Insurance Corporation (the "FDIC"). Various consumer laws and regulations also
affect the operations of the subsidiaries. The banks are also members of the
Federal Home Loan Bank of Atlanta ("FHLB") and are subject to regulation
thereby.
Consumer finance companies and insurance agencies operate in a highly
regulated environment and are subject to supervision and examination by several
federal and state agencies. Rose Shanis is subject to regulation by the Maryland
Commissioner of Financial Regulation and Bay Insurance, LLC is subject to and
supervision by the Maryland Insurance Administration. Federal and state laws and
regulations govern matters ranging from permissible lending activities,
reserves, permissible types, amounts and terms of loans, the maximum rate of
interest that may be charged, and comprehensive disclosure obligations. These
and other restrictions limit the manner in which the consumer finance
subsidiaries conduct their business.
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.
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.
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
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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.
The following table sets forth the capital ratios of Mason-Dixon and its
bank subsidiaries as of December 31, 1998:
<TABLE>
<CAPTION>
Carroll County Bank of Regulatory
Mason-Dixon Bank & Trust Maryland Minimum
----------- -------------- -------- ----------
<S> <C> <C> <C> <C>
Tier 1 risk-based capital ratio 14.99% 12.04% 11.44% 4.00%
Total risk-based capital ratio 18.30% 12.75% 12.69% 8.00%
Leverage ratio 8.87% 6.39% 7.84% 3.00%
</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 regulatory rating of 1).
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
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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.
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.
Recent Developments
On January 5, 1999, Mason-Dixon acquired Sterling Bancorp, a privately held
bank holding company headquartered in Baltimore, Maryland. Sterling Bank & Trust
Co. ("Sterling"), Sterling Bancorp's principal subsidiary was merged into Bank
of Maryland on February 12, 1999. The acquisition added banking branches in
Timonium (Baltimore County) and Annapolis (Anne Arundel County). Two existing
branches of Sterling, Baltimore City and Pikesville, were closed as existing
branches of Bank of Maryland were nearby to service Sterlings customers. At the
date of acquisition, Sterling Bancorp had total assets of approximately $74
million and deposits of $67 million. Mason-Dixon paid $10.294 million in cash
for Sterling Bancorp. The acquisition was accounted for using the purchase
method of accounting.
On January 27, 1999, Mason-Dixon entered into an Agreement and Plan of
Reorganization with BB&T Corporation ("BB&T") of Winston-Salem, North Carolina.
The agreement allows for the acquisition of Mason-Dixon by BB&T. The terms of
the agreement call for stockholders of Mason-Dixon to receive 1.3 shares of BB&T
common stock for each common share of Mason-Dixon. The acquisition will be
structured as a tax-free exchange and accounted for as a pooling-of-interests.
The transaction is subject to various regulatory approvals and approval by
Mason-Dixon stockholders. In conjunction with the agreement, Mason-Dixon entered
into a Stock Option Agreement which grants BB&T the option to purchase up to
1,006,868 common shares of Mason-Dixon at a price per share of $40.00. Under the
conditions of the Agreement and Plan of Reorganization, Mason-Dixon is not
permitted to issue any new shares of common stock other than those shares which
can be exercised under option agreements and conversion of any unexchanged
shares relating to the Bank of Maryland acquisition shares without prior written
consent of BB&T. Additionally, Mason-Dixon may not issue any new debt, enter
into any long-term contracts, or operate outside its normal course of business
without written consent from BB&T.
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Distribution of Assets, Liabilities, and Stockholders' Equity
The following table sets forth the amounts of Mason-Dixon's daily average
assets, liabilities, and stockholders' equity for the period 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 on
non-accruing loans are included in the average balances on loans. Interest
income is presented on a tax equivalent basis using the statutory Federal and
state income tax rates. A significant portion of securities are exempt for state
income tax purposes and are presented on a tax equivalent basis.
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets
Loans $ 482,300 $ 48,812 10.12% $ 432,581 $ 39,175 9.06%
Interest bearing
deposits in banks 6,228 368 5.91% 634 23 3.63%
Federal funds sold 21,821 1,185 5.43% 19,725 1,110 5.63%
Investments:
Mortgage-backed securities(1) 251,388 16,936 6.74% 249,611 17,579 7.04%
U.S. Government(2) 135,173 8,934 6.61% 69,053 4,543 6.58%
Other securities(3) 27,813 2,044 7.35% 11,202 913 8.15%
State and municipal(4) 84,603 7,017 8.29% 81,902 6,833 8.34%
------------------------------------------------------------------------------------------
Total earning assets 1,009,326 85,296 8.45% 864,708 70,176 8.12%
----------- -----------
Non-interest earning assets
Cash and due from banks 18,803 20,294
Premises and equipment 15,171 15,427
Other assets 28,297 24,688
Allowance for credit losses (8,550) (5,320)
----------- -----------
Total assets $ 1,063,047 $ 919,797
=========== ===========
Interest bearing liabilities
Demand deposits $ 58,315 1,166 2.00% $ 58,169 1,336 2.30%
Savings deposits 174,830 5,158 2.95% 184,972 5,964 3.22%
Time deposits 317,714 17,841 5.62% 302,205 16,898 5.59%
Borrowings 332,649 20,026 6.02% 204,608 11,977 5.85%
------------------------------------------------------------------------------------------
Total interest bearing
liabilities 883,508 44,191 5.00% 749,954 36,175 4.82%
----------- -----------
Non-interest bearing liabilities
Demand deposits 90,666 89,488
Other 10,621 7,858
Stockholders' equity 78,252 72,497
----------- -----------
Total liabilities and
stockholders' equity $ 1,063,047 $ 919,797
=========== ===========
Net interest spread $ 41,105 3.45% $ 34,001 3.30%
=========== ===========
Net interest margin 4.07 3.93
<CAPTION>
(dollars in thousands) 1996
- -----------------------------------------------------------------------------------
Average Yield/
Balance Interest Rate
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Earning assets
Loans $ 365,778 $ 34,122 9.33%
Interest bearing
deposits in banks 210 16 7.62%
Federal funds sold 21,826 1,176 5.39%
Investments:
Mortgage-backed securities (1) 221,624 15,315 6.91%
U.S. Government(2) 61,575 4,128 6.70%
Other securities(3) 4,929 357 7.24%
State and municipal(4) 72,394 6,029 8.33%
--------------------------------------
Total earning assets 748,336 61,143 8.17%
---------
Non-interest earning assets
Cash and due from banks 19,701
Premises and equipment 15,552
Other assets 26,313
Allowance for credit losses (4,827)
---------
Total assets $ 805,075
=========
Interest bearing liabilities
Demand deposits $ 58,676 1,514 2.58%
Savings deposits 182,857 5,628 3.08%
Time deposits 286,557 15,860 5.53%
Borrowings 115,919 6,242 5.38%
--------------------------------------
Total interest bearing
liabilities 644,009 29,244 4.54%
---------
Non-interest bearing liabilities
Demand deposits 83,825
Other 8,471
Stockholders' equity 68,770
---------
Total liabilities and
stockholders' equity $ 805,075
=========
Net interest spread $ 31,899 3.63%
=========
Net interest margin 4.26%
</TABLE>
- ----------
(1) Interest income includes tax equivalent adjustments of $194,000 for 1998,
$164,000 for 1997, and $165,000 for 1996.
(2) Interest income includes tax equivalent adjustments of $589,000 for 1998,
$190,000 for 1997, and $132,000 for 1996.
(3) Interest income includes tax equivalent adjustments of $62,000 for 1998,
$61,000 for 1997, and $0 for 1996.
(4) Interest income includes tax equivalent adjustments of $2,385,000 for 1998,
$2,326,000 for 1997, and $2,050,000 for 1996.
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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.
<TABLE>
<CAPTION>
(dollars in thousands) 1998 compared to 1997 1997 compared to 1996
- -----------------------------------------------------------------------------------------------------------------
Increase Increase
(decrease) (decrease)
due to due to
---------------------------------- ----------------------------------
Volume Rate Total Volume Rate Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans $ 4,503 $ 5,134 $ 9,637 $ 6,232 $ (1,179) $ 5,053
Investments:
Mortgage-backed securities(1) 125 (768) (643) 1,934 330 2,264
U.S. Government 4,350 41 4,391 501 (86) 415
Other securities 1,354 (223) 1,131 454 102 556
State and municipal 226 (42) 184 792 12 804
Other earning assets 321 99 420 (81) 22 (59)
---------------------------------- ----------------------------------
Total interest income 10,879 4,241 15,120 9,832 (799) 9,033
Interest expense
Interest bearing demand deposits 3 (173) (170) (13) (165) (178)
Savings deposits (327) (479) (806) 65 271 336
Time deposits 867 76 943 866 172 1,038
Borrowings 7,495 554 8,049 4,776 959 5,735
---------------------------------- ----------------------------------
Total interest expense 8,038 (22) 8,016 5,694 1,237 6,931
---------------------------------- ----------------------------------
Net interest income $ 2,841 $ 4,263 $ 7,104 $ 4,138 $ (2,036) $ 2,102
================================== ==================================
</TABLE>
10
<PAGE>
Investment Portfolio
The following table sets forth the composition of investment securities at the
dates indicated:
<TABLE>
<CAPTION>
December 31
1998 1997 1996
-------------------- ---------------------- ---------------------
Available Held To Available Held To Available Held To
(dollars in thousands) 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 $139,693 $ 26,292 $ 50,318 $ 40,447 $ 9,563 $ 45,068
Mortgage-backed securities 221,615 52,269 186,947 77,793 150,829 70,106
State and political subdivisions -- 99,885 -- 84,490 -- 78,070
Other debt securities -- 6,920 -- -- -- --
Common and preferred stocks 20,204 -- 12,590 1,315 4,895 --
-------- -------- -------- -------- -------- --------
Total Investment Securities $381,512 $185,366 $249,855 $204,045 $165,287 $193,244
======== ======== ======== ======== ======== ========
</TABLE>
There were no state, county, or municipal securities whose book value, as to any
issuer, exceeded 10% of stockholders' equity at December 31, 1998, 1997, or
1996.
The following schedule sets forth the maturities of investment securities at
December 31, 1998 and the weighted average yields of such securities. Yields of
tax-exempt securities have been computed on a tax equivalent basis using
statutory Federal and state income tax rates. Available for sale securities
yields are based on fair value; held to maturity yields are based on amortized
cost. Mortgage-backed securities are grouped by final maturity.
<TABLE>
<CAPTION>
(dollars in thousands) Maturity Distribution - Available For Sale Portfolio
-----------------------------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
--------------------- --------------------- ------------------------ ------------------------
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 $ 5,315 5.58% $ 24,039 6.12% $110,339 6.83% $ -- --
State and political
subdivisions -- -- -- -- -- -- -- --
Mortgage-backed securities -- -- -- -- 4,254 5.79% 217,361 6.67%
Equity securities 19,233 6.87% -- -- -- -- 971 8.65%
-------- -------- -------- --------
At Fair Value $ 24,548 6.59% $ 24,039 6.12% $114,593 6.80% $218,332 6.68%
-------- -------- -------- --------
At Amortized Cost $ 24,802 $ 23,653 $114,081 $216,053
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) Maturity Distribution - Held to Maturity Portfolio
-----------------------------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
--------------------- --------------------- ------------------------ ------------------------
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 $ 5,015 7.00% $ 8,994 6.73% $ 12,283 6.80% $ -- --
State and political
subdivisions 2,300 9.28% 4,551 9.18% 28,808 8.20% 64,226 7.83%
Mortgage-backed securities -- -- 107 8.71% 3,683 7.96% 48,479 6.13%
Other debt securities -- -- -- -- -- -- 6,920 8.27%
-------- -------- -------- --------
At Amortized Cost $ 7,315 7.72% $ 13,652 7.56% $ 44,774 7.80% $119,625 7.17%
-------- -------- -------- --------
At Fair Value $ 7,368 $ 14,037 $ 45,791 $120,306
-------- -------- -------- --------
</TABLE>
11
<PAGE>
Loan Portfolio
The following table shows Mason-Dixon's loan distribution at the end of each of
the last five years:
<TABLE>
<CAPTION>
December 31
(dollars in thousands) 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Construction and land development $ 41,262 $ 31,427 $ 24,202 $ 17,286 $ 12,543
Residential real estate - mortgage 151,003 186,978 164,656 137,372 100,941
Commercial real estate - mortgage 127,825 136,194 111,724 93,504 56,280
Commercial 87,166 88,669 77,579 88,531 15,447
Consumer 55,303 17,464 20,575 17,399 11,249
--------- --------- --------- --------- ---------
Total Loans 462,559 460,732 398,736 354,092 196,460
Unearned income on loans (2) (341) (572) (1,142) (948)
--------- --------- --------- --------- ---------
Loans (net of unearned income) $ 462,557 $ 460,391 $ 398,164 $ 352,950 $ 195,512
========= ========= ========= ========= =========
</TABLE>
The following table shows the amounts of loans outstanding as of December 31,
1998 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, 1998 for loans due after one year.
<TABLE>
<CAPTION>
Within After 1 But After
(dollars in thousands) 1 Year Within 5 Yrs 5 Yrs Total
------ ------------ ----- -----
<S> <C> <C> <C> <C>
Construction and land development $ 13,476 $ 23,183 $ 4,603 $ 41,262
Commercial 25,203 25,551 36,412 87,166
-------- -------- -------- --------
Total 38,679 48,734 41,015 128,428
</TABLE>
Sensitivity of loans due after one year to changes in interest rates:
Loans at predetermined interest rates $ 58,124
Loans at floating or adjustable rates 31,625
--------
Total $ 89,749
12
<PAGE>
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) foreclosed property.
<TABLE>
<CAPTION>
(dollars in thousands) December 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis $ 6,018 $ 3,189 $ 2,821 $ 1,560 $ 211
Accruing loans past due 90 days or more 60 597 214 277 62
Restructured loans 826 221 214 -- --
-------- -------- -------- -------- --------
Total nonperforming loans 6,904 4,007 3,249 1,837 273
Foreclosed property 191 488 304 250 --
-------- -------- -------- -------- --------
Total nonperforming assets $ 7,095 $ 4,495 $ 3,553 $ 2,087 $ 273
Nonperforming loans to year-end loans 1.49% 0.87% 0.82% 0.52% 0.14%
Nonperforming assets to year-end loans and
foreclosed property 1.53% 0.98% 0.89% 0.59% 0.14%
Year-end allowance for credit losses times
Nonperforming loans 1.29 x 1.31 x 1.59 x 2.57 x 9.62 x
Year-end allowance for credit losses times
Nonperforming assets 1.25 x 1.16 x 1.45 x 2.27 x 9.62 x
Interest income which would have been recognized
under original term 278 229 443 220 236
Interest income recognized 95 142 29 93 222
</TABLE>
Summary of Loss Experience
The following table summarizes Mason-Dixon's loan loss experience for the five
years ended December 31:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Daily Average Loans (net of unearned income) $482,300 $432,581 $365,778 $260,511 $194,711
Balance of allowance for credit losses at
beginning of the year $ 5,231 $ 5,167 $ 4,729 $ 2,627 $ 2,686
Allowance applicable to loans of purchased company 2,881 -- -- 2,355 --
Loans charged-off:
Construction and Land Development -- -- -- -- --
Residential Real Estate - Mortgage 216 73 117 40 78
Commercial Real Estate - Mortgage -- 33 106 -- --
Commercial 167 197 336 314 25
Consumer 3,092 274 177 56 132
-------- -------- -------- -------- --------
Total charged-offs 3,475 577 736 410 235
Recoveries of loans previously charged-off:
Construction and Land Development -- -- -- -- --
Residential Real Estate - Mortgage 3 2 4 7 2
Commercial Real Estate - Mortgage -- 27 116 -- --
Commercial 134 343 144 43 1
Consumer 442 131 74 107 173
-------- -------- -------- -------- --------
Total recoveries 579 503 338 157 176
Net loans charged-off 2,896 74 398 253 59
Additions to allowance charged to expense 3,677 138 836 -- --
Balance of allowance for credit losses at
end of the year $ 8,893 $ 5,231 $ 5,167 $ 4,729 $ 2,627
Ratio of net charge-offs during period to average
loans outstanding 0.60% 0.02% 0.11% 0.10% 0.03%
</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 collectability of loans. The
allowance is increased by provisions charged to operating expense and reduced by
net charge-offs.
The allocations do not necessarily reflect the expected future charge-offs
applicable to each category.
<TABLE>
<CAPTION>
December 31
(dollars in thousands) 1998 1997 1996 1995 1994
--------------- -------------- ---------------- -------------- ---------------
As a As a As a As a As a
% of % of % of % of % of
Reserve Loans Reserve Loans Reserve Loans Reserve Loans Reserve Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Construction and Land Development,
Commercial Real Estate -
Mortgage, and Commercial(1) $2,953 55% $3,189 56% $4,062 54% $3,353 56% $1,866 43%
Residential Real Estate - Mortgage 727 33% 527 40% 553 41% 857 39% 242 51%
Consumer 3,105 12% 251 4% 133 5% 193 5% 293 6%
Not Allocated 2,108 N/A 1,264 N/A 419 N/A 326 N/A 226 N/A
-------------- --------------- --------------- --------------- ---------------
Total Allowance for Credit
Losses $8,893 100% $5,231 100% $5,167 100% $4,729 100% $2,627 100%
-------------- --------------- --------------- --------------- ---------------
</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.
14
<PAGE>
Rate Sensitivity Analysis
<TABLE>
<CAPTION>
December 31, 1998 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
Federal funds sold $ 2,363 $ -- $ -- $ -- $ -- $ 2,363
Interest bearing deposits in banks 638 -- -- -- -- 638
Investment securities 101,482 99,957 265,821 99,618 -- 566,878
Loans (including loans held for sale) 175,120 52,588 194,444 48,050 -- 470,202
Interest sensitivity hedges on assets 15,000 -- (5,000) (10,000) -- --
Non-interest earning assets -- -- -- -- 62,161 62,161
--------------------------------------------------------------------------------------
Total Assets $ 294,603 $ 152,545 $ 455,265 $ 137,668 $ 62,161 $1,102,242
----------------------------------------------------------------------------==========
Liabilities and Stockholders' Equity
Interest bearing deposits $ 71,499 $ 205,888 $ 242,629 $ 25,387 $ -- $ 545,403
Short-term borrowings 41,816 -- -- -- -- 41,816
Long-term borrowings 142,885 52,143 73,285 60,034 -- 328,347
Interest sensitivity hedges on liabilities (22,000) -- 22,000 -- -- --
Non-interest bearing liabilities
and stockholders' equity -- -- -- -- 186,676 186,676
--------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 234,200 $ 258,031 $ 337,914 $ 85,421 $ 186,676 $1,102,242
----------------------------------------------------------------------------==========
Interest rate sensitivity gap $ 60,403 $ (105,486) $ 117,351 $ 52,247 $ (124,515)
Cumulative interest rate sensitivity gap 60,403 (45,083) 72,268 124,515 --
Cumulative ratio of interest sensitive
assets to interest sensitive liabilities 1.26 0.91 1.09 1.14 1.00
</TABLE>
Assumptions:
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, noncallable investments are grouped by final maturity
date. Fixed rate callable investments are grouped based on management's
estimates of call probability. 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. Long-term borrowings with call provisions are
grouped based on management's estimates of call probability.
15
<PAGE>
Deposits
The following schedule presents daily average amounts of deposits by type:
(dollars in thousands) December 31,
1998 1997 1996
-------- ------------ --------
Non-interest bearing demand deposits $ 90,666 $ 89,488 $ 83,825
Interest bearing demand deposits 58,315 58,169 58,676
Savings deposits 174,830 184,972 182,857
Time deposits 317,714 302,205 286,557
======== ======== ========
Total Deposits $641,525 $634,834 $611,915
======== ======== ========
The following schedule presents daily average rates paid on deposits by type:
(dollars in thousands) December 31,
1998 1997 1996
-------- ------------ --------
Non-interest bearing demand deposits -- -- --
Interest bearing demand deposits 2.00% 2.30% 2.58%
Savings deposits 2.95% 3.22% 3.08%
Time deposits 5.62% 5.59% 5.53%
---- ---- ----
Total Deposits 4.39% 4.44% 4.36%
---- ---- ----
At December 31, the maturity distribution for time deposits issued in amounts of
$100,000 or more was:
(dollars in thousands)
3 months or less $17,306
Over 3 months through 6 months 1,534
Over 6 months through 12 months 20,152
Over 12 months 11,909
-------
Total $50,901
=======
16
<PAGE>
Short-Term Borrowings
Short-term borrowings were as follows:
(dollars in thousands) December 31
1998 1997 1996
-------- -------- --------
Average amount outstanding during year $ 68,729 $ 87,173 $ 45,823
Weighted average interest rate during year 5.50% 5.60% 5.48%
Amount outstanding at year end $ 41,816 $ 97,203 $ 53,734
Weighted average interest rate at year end 4.70% 5.73% 5.42%
Maximum amount at any month end $107,529 $119,774 $ 67,607
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,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Percentage of net income to:
Average stockholders' equity 13.82% 12.63% 12.27%
Daily average total assets 1.02% 1.00% 1.05%
Percentage of tangible net income to:
Average tangible stockholders' equity 16.41% 14.51% 14.02%
Daily average tangible total assets 1.11% 1.08% 1.12%
Percentage of dividends declared per share to net income
Per common share 32.85% 35.10% 32.60%
Percentage of average stockholders' equity to daily
average total assets 7.36% 7.88% 8.54%
</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
Main Office Finksburg Office *
45 West Main Street 3000 Gamber Road
Westminster, MD 21157 Finksburg, MD 21048
Englar Road Office Heartlands Office **
401 Englar Road 3004 North Ridge Road
Westminster, MD 21157 Ellicott City, MD 21043
East Main Street Office Mount Airy Office *
193 East Main Street 1001 Twin Arch Road
Westminster, MD 21157 Mt. Airy, MD 21771
Manchester Office Operations Center
3200 Main Street 200 Baltimore Boulevard
Manchester, MD 21102 Westminster, MD 21157
Manchester Drive-in
3068 Westminster Street Mason-Dixon Bancshares
Manchester, MD 21102 Mortgage Company
Eldersburg Office 1643 Liberty Road **
1300 Liberty Road Suite 202
Sykesville, MD 21784 Eldersburg, MD 21784
Hampstead Office 502 Washington Avenue **
999 South Main Street 3rd Floor
Hampstead, MD 21074 Towson, MD 21204
Melrose Office 309 East Main Street **
4501 Hanover Pike Suite 100
Manchester, MD 21102 Salisbury, MD 21801
Taneytown Office
4345 Old Taneytown Road
Taneytown, MD 21787
* Properties are subject to land leases
** Properties are leased
19
<PAGE>
Item 2: Properties (continued)
Bank of Maryland
Executive Offices ** Parole Office**
502 Washington Avenue Route 2 and MD 665
Towson, MD 21204 Annapolis, MD 21401
B & O Office ** Perry Hall Office **
2 North Charles Street 9650 Belair Road
Baltimore, MD 21202 Perry Hall, MD 21236
Annapolis Office ** Pikesville Office **
2661 Riva Road 44 E. Sudbrook Lane
Annapolis, MD 21401 Baltimore, MD 21208
Cherryvale Plaza Office ** Towson Office **
11700 Reisterstown Road 600 Washington Avenue
Reisterstown, MD 21136 Towson, MD 21204
Harford County Office ** Timonium Office **
333 Baltimore Pike 2045 York Road
Bel Air, MD 21014 Timonium, MD 21093
** Properties are leased
20
<PAGE>
Item 2: Properties (continued)
Rose Shanis Financial Services, LLC
Executive Offices ** Catonsville Office **
11419 Cronridge Drive 924 Frederick Road
Suite 10 P.O. Box 21197
Owings Mills, MD 21117 Baltimore, MD 21228
Highlandtown Office ** Glen Burnie Office **
3605 Eastern Avenue 7566 Ritchie Highway
P.O. Box 12059 Glen Burnie, MD 21061
Baltimore, MD 21281
Essex Office **
Dundalk Office ** 136 Eastern Boulevard
1713 Poplar Place Baltimore, MD 21221
P.O. Box 21795
Baltimore, MD 21222 Randallstown Office **
8519 Liberty Road
Howard Street Office ** Randallstown, MD 21133
313 North Howard Street
P.O. Box 296 Bel Air Office **
Baltimore, MD 21203 136 Office Street
Bel Air, MD 21014
Light Street Office **
1103 Light Street Easton Office **
Baltimore, MD 21230 218 North Washington Street
Suite 17
Parkville Office ** Easton, MD 21601
8301 Harford Road
Baltimore, MD 21234 Annapolis Office **
2621 Riva Road
P.O. Box 6357
Annapolis, MD 21401
** Properties are leased
Mason-Dixon's subsidiaries lease properties from other parties and, during 1998,
incurred rental expense of $1,151,000 on these properties. See Note 6 (Premises
and Equipment) of 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 financial
services facilities. Neither the location of any particular office nor the
unexpired term of any lease is deemed material to Mason-Dixon's business.
21
<PAGE>
Item 3: Legal Proceedings
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.
Item 4: Submission of Matters to a Vote of Securities Holders
None
Item 4A: Executive Officers
Mason-Dixon Bancshares, Inc.:
<TABLE>
<CAPTION>
NAME AGE HIRE DATE CURRENT POSITION
- ---- --- --------- ----------------
<S> <C> <C> <C>
William B. Dulany 71 April, 1970 Chairman of the Board for the last five years.
Thomas K. Ferguson 56 September 13, 1965 President and Chief Executive Officer for the last five
years.
Michael L. Oster 46 September 2, 1986 President and Chief Executive Officer of Carroll County Bank
for the previous two years, held various executive positions
for prior three years.
Hunter F. Calloway 50 April 8, 1996 President of Bank of Maryland. Senior Vice President of
Commercial Lending the past three years. Senior Vice
President - Real Estate lending with NationsBank for the
prior two years.
A. Gary Rever 46 January 28, 1991 President of Mason Dixon Business Services, LLC, a recently
formed operations subsidiary. Chief Financial Officer of
Bank of Maryland for previous five years.
Mark A. Keidel 37 August 17, 1987 Held various accounting positions for Carroll County Bank
since 1987 and has been Senior Vice President/Chief
Financial Officer for the last four years. Also, Vice
President/Chief Financial Officer for Mason-Dixon for the
last four years.
Gerald G. Alsentzer 51 June 26, 1989 Senior Vice President and Director of the Human Resources
Division for the last five years.
M. Lee Primm 57 May 13, 1974 Senior Vice President and Director of Retail Operations for
Carroll County Bank for the last five years.
</TABLE>
22
<PAGE>
Part II
Item 5: Market for Registrant's Common Stock and Related Stockholders Matters
Common Stock Data -- Annual Stockholders Report, page 20, incorporated herein by
reference.
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 Division of Financial
Regulation, 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.
Item 6: Selected Financial Data
Five Year Comparative Summary -- Annual Stockholders Report, page 5,
incorporated herein by reference.
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Annual Stockholders Report, pages 6-20, incorporated herein by reference. See
also recent developments in Item 1.
Item 7a: Quantitative and Qualitative Disclosures About Market Risk
Annual Stockholders Report, pages 12-14, incorporated herein by reference.
Item 8: Financial Statements and Supplementary Data
Financial Statements and related notes are included in the Annual Stockholders
Report, pages 21-43, incorporated herein by reference.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
23
<PAGE>
Part III
Item 10: Directors and Executive Officers of the Registrant
Directors
The following table provides certain information regarding each Director of
Mason-Dixon:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DIRECTOR
NAME DURING PAST FIVE YEARS AGE SINCE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS I DIRECTORS (TERM EXPIRES IN 1999)
MIRIAM F. BECK Retired Administrator - Carroll County Board of 67 1991
Education; Officer-Director - Highland View Cemetery
Assoc., Inc.; Director and Treasurer - Carroll
County Health Services Corporation; Director -
Carroll Community College Foundation; Trustee -
Carroll Hospice; Director - Carroll County Bank.
THOMAS K. FERGUSON President and Chief Executive Officer of Mason-Dixon. 56 1991
EDWIN W. SHAUCK Retired April 1990 as Executive Vice President 73 1991
Carroll County Bank; Director - Carroll County
Health Services Corporation; Director - Carroll
County Bank.
STEVENSON B. YINGLING President/Owner - Yingling General Tire Service, 57 1992
Inc.; Director - Carroll County Bank.
CLASS II DIRECTORS (TERM EXPIRES IN 2000)
DAVID S. BABYLON, JR. Retired Accountant - Tax Consultant; 75 1991
Vice Chairman of the Board of Directors - Carroll
County Bank.
R. NEAL HOFFMAN Managing Partner - Hoffman, Comfort, Galloway & 56 1995
Offutt, LLP, Attorneys-At-Law; Board of Trustees -
Carroll Lutheran Village; Director - Carroll County
Bank; Board of Trustees, Carroll County General
Hospital Foundation, Inc.
J. WILLIAM MIDDELTON Chairman - Middelton, Limberg & Co., Inc., a 67 1998
business consulting firm; Director - Medical Group
Holdings, Inc.; Director - Medical Mutual Liability
Insurance Society of Maryland; Director - ProAd
Medical Insurance Company; Director - Bank of
Maryland.
DONALD H. CAMPBELL President and CEO - First State Packaging, Inc., 62 1995
Salisbury, MD; Director - Bank of Maryland.
CLASS III DIRECTORS (TERM EXPIRES IN 2001)
WILLIAM B. DULANY Managing Partner - Dulany & Leahy, LLP, 71 1991
Attorneys-At-Law; Chairman of the Board and Director
- Mutual Fire Insurance Company of Carroll County;
Trustee and Member Executive Committee - Western
Maryland College; Chairman of Board and Director -
Episcopal Ministries To The Aging, Inc. (Fairhaven,
Copper Ridge,
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
and related entities), Sykesville, MD; Trustee -
Maryland Historical Society; Chairman of the Board
of Directors - Mason-Dixon and Carroll County
Bank.
S. RAY HOLLINGER Chairman - W. H. Davis Co. t/a Davis Buick-GMC 68 1991
Truck; President - Davis Library, Inc.; Director -
Community Foundation of Carroll County, Inc.;
Director - Carroll County Bank.
JAMES C. SNYDER Retired. Previously engaged in manufacturing and 68 1991
distribution of truck equipment; Director - Carroll
County Bank.
HENRY S. BAKER, JR. Self-employed management consultant; Chairman of the 72 1995
Board of Directors of Bank of Maryland; Chairman,
AAA Maryland; Chairman, Keswick Multi Care Center;
Director, AAA MidAtlantic, Keystone Insurance Co.,
and Keystone Insurance Company of New Jersey.
</TABLE>
Executive Officers
The list of Executive Officers described under Part I, Item 4A, under the
heading "Executive Officers", is incorporated herein by reference.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 (a) of the Securities and Exchange Act of 1934, as amended,
requires that Mason-Dixon's directors and executive officers and persons who own
more than 10% of Mason-Dixon's Common Stock file with the Securities and
Exchange Commission ("SEC") an initial report of beneficial ownership and
subsequent reports of changes in beneficial ownership of the Common Stock. To
Mason-Dixon's knowledge, all reports required to be filed by such persons have
been filed on a timely basis. Mason-Dixon believes that all of its directors and
executive officers complied with all filing requirements applicable to them with
respect to transactions during the fiscal year ended December 31, 1998.
25
<PAGE>
Item 11: Executive Compensation
The following table summarizes the remuneration earned in 1998 and the
prior two years by the Chief Executive Officer ("CEO") of Mason-Dixon and by any
other executive officer whose total remuneration in the last fiscal year
exceeded $100,000 and who performed a policy-making function for Mason-Dixon.
<TABLE>
<CAPTION>
===========================================================================================================================
SUMMARY COMPENSATION TABLE
===========================================================================================================================
Long-Term Compensation All Other
Annual Compensation Awards Compensation(c)
------------------------------------------- --------------------------------------------
Restricted Securities
Name and Other Annual Stock Underlying
Principal Position Year Salary(a) Bonus Compensation(b) Awards(c) Options/SARs(d)
- ------------------ ---- --------- ----- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas K. Ferguson 1998 $183,753 $ 0 $ 5,308 $ 0 7,259 $ 31,685
President and CEO of 1997 $170,872 $ 14,744 $ 5,633 $ 0 2,547 $ 0
Mason-Dixon 1996 $170,366 $ 16,107 $ 4,629 $ 32,193 4,500 $ 0
Michael L. Oster 1998 $162,719 $ 5,138 $ 5,528 $ 8,712 1,108 $ 14,989
President and CEO 1997 $137,875 $ 3,237 $ 4,716 $ 4,918 953 $ 0
of Carroll County Bank 1996 $114,781 $ 0 $ 3,750 $ 0 0 $ 0
H. David Shumpert 1998 $216,145 $ 36,017 $ 18,008 $ 11,088 1,408 $ 455,180
President and CEO of 1997 $180,350 $ 110,000 $ 6,095 $ 0 0 $ 0
Bank of Maryland 1996 $166,528 $ 95,000 $ 5,411 $ 0 0 $ 0
A. Gary Rever 1998 $133,800 $ 3,515 $ 7,138 $ 5,973 760 $ 12,133
Executive Vice President, 1997 $ 95,127 $ 46,600 $ 1,087 $ 0 0 $ 0
CFO and Secretary of 1996 $ 89,159 $ 45,000 $ 1,065 $ 0 0 $ 0
Bank of Maryland
Mark A. Keidel 1998 $105,771 $ 3,358 $ 3,578 $ 5,742 728 $ 8,196
Vice President and CFO 1997 $89,558 $ 0 $ 3,078 $ 3,022 581 $ 0
of Mason-Dixon 1996 $77,577 $ 0 $ 2,986 $ 0 0 $ 0
NOTES:
(a) Includes base salary plus amounts deferred under the Management Deferred Compensation Plan. Mr. Ferguson deferred the
following amounts during the years shown: 1998 - $27,000; 1997 - $18,000; 1996 - $54,450; Mr. Oster deferred $8,702 in
1998, $4,918 in 1997, and $1,515 in 1996; Mr. Keidel deferred $6,346 in 1998.
(b) For 1998, includes $4,702, $5,036, $5,694, $3,969,and $3,255, reflecting matching contributions to Mr. Ferguson,
Mr. Oster, Mr. Shumpert, Mr. Rever, and Mr. Keidel, respectively, to each of their ESIP accounts. For 1997, includes
$5,028, $4,270, $3,566, $926, and $2,745, reflecting matching contributions to Mr. Ferguson, Mr. Oster, Mr. Shumpert,
Mr. Rever, and Mr. Keidel, respectively, to each of their ESIP accounts. For 1996, includes $3,748, $3,398, $3,350,
$880, and $2,704, reflecting matching contributions to Mr. Ferguson, Mr. Oster, Mr. Shumpert, Mr. Rever, and Mr.
Keidel, respectively, to each of their ESIP accounts. Also includes, for 1998, $12,000, representing the value of the
use of a company automobile for Mr. Shumpert, and $3,000 representing an automobile allowance for Mr. Rever. Remaining
amounts are attributable to the group term life insurance coverage premiums paid for each named executive officer.
(c) For Mr. Ferguson, for shares awarded in 1996, represents 1,533 restricted shares of Common Stock, valued at $21.00 per share as
of December 27, 1996, the date of grant, all of which are vested. For Mr. Oster, for shares awarded in 1997, represents 249
restricted shares of Common Stock, valued at $19.75 per share as of February 12, 1997, the date of grant, with a four year
vesting term; for shares awarded in 1998, represents 264 restricted shares of Common Stock, valued at $33.00 per share as of
January 27, 1998, the date of grant, with a 1 year vesting term. For Mr. Shumpert, for shares awarded in 1998, represents 336
restricted shares of Common Stock, valued at $33.00 per share as of January 27, 1998, the date of grant, with a 1 year vesting
term. For Mr. Rever, for shares awarded in 1998, represents 181 restricted shares of Common Stock, valued at $33.00 per share
as of January 27, 1998, the date of grant, with a 1 year vesting term. For Mr. Keidel, for shares awarded in 1998, represents
174 restricted shares of Common Stock, valued at $33.00 per share as of January 27, 1998, the date of grant, with a three year
vesting term; for shares awarded in 1997, represents 152 restricted shares of Common Stock, valued at $19.75 per share as of
February 12, 1997, the date of grant, with a four year vesting term. Restricted stock holders are entitled to exercise the
voting rights associated with, and to collect any dividends on, all such shares. The value of the aggregate restricted stock
holdings (whether or not vested) as of December 31, 1998 is $44,840, $15,122, $9,974, $5,294, and $5,090, for Mr. Ferguson, Mr.
Oster, Mr. Shumpert, Mr. Rever and Mr. Keidel, respectively.
(d) The exercise price for options awarded is $33.00, $19.75 and $21.00 per share, for 1998, 1997, and 1996 respectively, a
price equal to the mid-point of the bid and ask prices on NASDAQ as of the grant date.
(e) Represents amounts contributed in 1998 for fiscal year 1997 by Mason-Dixon under the Supplemental Executive Retirement
Plan (SERP), for Mr. Shumpert, also includes a one-time severance payment.
===========================================================================================================================
</TABLE>
26
<PAGE>
The following table sets forth information regarding stock options to
purchase Mason-Dixon's Common Stock granted to the named executives during 1998:
<TABLE>
<CAPTION>
================================================================================================================
Option Grants in Fiscal Year 1998
- ----------------------------------------------------------------------------------------------------------------
Individual Grants
---------------------------------------------------------
Percent of Total
Number of Securities Options Granted Exercise
Underlying Options to Employees in or Base Expiration Grant Date
Name Granted (1) Fiscal Year Price ($/Sh) Date Present Value $(2)
- ---- -------------------- ---------------- ----------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Thomas K. Ferguson 7,259 55.9% $33.00 1-27-08 $90,738
Michael L. Oster 1,108 8.5% $33.00 1-27-08 $13,850
H. David Shumpert 1,408 10.8% $33.00 1-27-08 $17,600
A. Gary Rever 760 5.9% $33.00 1-27-08 $ 9,500
Mark A. Keidel 728 5.6% $33.00 1-27-08 $ 9,100
NOTES:
(1) Options were granted on January 27, 1998, at a price equal to the mid-point of the bid and ask prices on
NASDAQ as of the grant date and are exercisable in three increments on January 27, 1998, 1999, and 2000.
(2) This value, calculated by utilizing the Modified Black-Scholes American option-pricing model, assumes a
5.69% risk-free interest rate, 10-year expected life, 30% expected volatility of the stock, and 2.06%
expected dividend yield on the stock.
================================================================================================================
</TABLE>
The following table sets forth information regarding the number and value
of underlying unexercised stock options held by the named executives as of
December 31, 1998.
<TABLE>
<CAPTION>
================================================================================================================
Aggregated Option Exercises in 1998 and 1998 Year End Option Values
- ----------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year-End In-the-Money Options at
(#) Fiscal Year-End ($)(1)
------------------------------ ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Thomas K. Ferguson 9,467 4,839 $ 61,321 $ 8,065
Michael L. Oster 1,005 1,056 $ 6,042 $ 3,011
H. David Shumpert 469 939 $ 0 $ 0
A. Gary Rever 253 507 $ 0 $ 0
Mark A. Keidel 631 678 $ 3,686 $ 1,833
NOTES:
(1) Represents the total gain which would be realized if all in-the-money options held at December 31, 1998
were exercised, determined by multiplying the number of shares underlying the options by the difference
between the per share option exercise price and the fair market value of the shares at December 31, 1998 of
$29.25 per share.
================================================================================================================
</TABLE>
27
<PAGE>
Severance, Key Employee Retention and Supplemental Executive Retirement Plans
Effective November 1, 1997, Mason-Dixon adopted an updated, uniform
severance plan for Mason-Dixon and its banking subsidiaries. The plan was
restated in its entirety and represents a continuation of the prior Carroll
County Bank and Trust Company Severance Plan with the Bank of Maryland adopting
this restated plan as well, on the effective date. The Mason-Dixon Severance
Plan now reflects updated eligibility criteria allowing for increased coverage
and flexibility of use by the individual participating employer, while providing
for a common schedule of severance benefits using a formula based on the number
of full years of service.
Under the plan, eligible employees who are not officers are eligible for
one week of base pay for each full year of service, but in no event less than
eight weeks nor more than 13 weeks; appointed/elected officers (bank and
corporate secretaries, assistant vice presidents, officers, and senior officers)
are eligible for one week of base pay for each full year of service with a
minimum of 13 weeks and a maximum of 26 weeks; vice presidents and managing
directors are eligible for two weeks of base pay for each full year of service
with a minimum of 26 weeks and a maximum of 39 weeks; and other elected officers
(senior vice presidents, executive vice president, president/CEO) are eligible
for a flat 52 weeks of base pay. Effective July 1998, the plan was amended by
the Board of Directors to provide 104 weeks of base pay for any bank or
corporate president or CEO who has been employed in that position for at least 5
years. All participants are also eligible to continue to receive the same group
term life and health insurance benefits until the termination of the severance
payments or the employee becomes eligible under another group plan.
In addition, in July 1996, Mason-Dixon's Board of Directors adopted a Key
Employee Retention Plan (the "Retention Plan"). Mason-Dixon adopted and modified
Carroll County Bank's Retention Plan to provide certain incentives to attract
and retain key employees of Mason-Dixon and all of its participating
subsidiaries.
The Retention Plan provides severance benefits (including health insurance)
in the event a participant's employment is terminated or if the participant
resigns for good cause as a result of a change in control of Mason-Dixon. The
Retention Plan provides that participants with less than five years of service
may receive 12 months of base salary; participants with five to 10 years of
service may receive 24 months of base salary; and participants with more than 10
years of service may receive 36 months of base salary; provided that 50% of
these benefits are reduced by any amount the participant may be eligible for
under any other severance plan of or similar benefit from Mason-Dixon. The
remaining 50% of the separation payments will be reduced by any amount which the
participant receives, or is entitled to receive, from other employment,
including self employment, during the time that the employee is receiving
benefits from the Retention Plan. Finally, the amounts payable under the
Retention Plan are limited so that the aggregate present value of all payments
to be received by the participant upon termination may not exceed 2.99 times the
participant's average annual compensation for the preceding five years.
Effective October 23, 1996, Mason-Dixon's Board of Directors adopted a
Supplemental Executive Retirement Plan (SERP), administered by Mason-Dixon's
Compensation Committee, which has discretionary authority over the plan. The
plan is performance based and directly linked to Mason-Dixon and its subsidiary
banks attaining or exceeding their respective pre-established annual goals.
Effective for 1998, the ratio of actual to budgeted earnings per share
attributable to Mason-Dixon's banking affiliates is the key factor in
determining the SERP contribution. The SERP was established to provide
supplemental income to the participant at an estimated rate of 10% of the
participant's final base pay at age 65, assuming 30 years of service. Any
amounts credited to a participant's SERP account are deferred through a rabbi
trust; such amounts are restricted during the term of the participant's
employment.
28
<PAGE>
Pension Plan
Carroll County Bank sponsors a non-contributory defined benefit Pension
Plan and Trust (the "Pension Plan") which covers eligible employees of Carroll
County Bank. The Pension Plan also covers employees of Mason-Dixon who are
covered by the Pension Plan as employees of Carroll County Bank at the time they
become employees of Mason-Dixon.
The Pension Plan provides a pension benefit value that is calculated by
multiplying years of credited service by a percentage multiplier (ranging from
7% to 11% per year of service), the result of which is multiplied by final
average compensation. The pension benefit value is then converted into a monthly
benefit. No participant's monthly benefit will be less than his/her accrued
benefit as of June 1, 1997.
Benefits eligibility is as follows: normal retirement at age 65; early
retirement after completing 10 years of service and attaining age 55; vested
benefits after completing five years of service; and actuarial reduction of
benefits for commencement before age 65.
The Pension Plan Table below shows estimated annual benefits payable upon
retirement to qualified persons in the specified remuneration and
years-of-service categories if such retirement had occurred on December 31,
1998. The benefits listed are calculated as a life annuity and are not
integrated with Social Security or subject to other offsets. Compensation, as
defined in the Pension Plan, reflects each participant's total compensation,
including overtime, incentives and bonuses, as well as pre-tax contributions
through payroll deductions to Sections 401(k) and 125 Plans as provided by the
Internal Revenue Code of 1986 ("Code").
================================================================================
ESTIMATED ANNUAL BENEFITS
Years of Service
FAC* 10 15 20 25
------- ------ ------ ------ ------
$20,000 $1,301 $2,081 $2,948 $3,902
30,000 1,975 3,121 4,422 5,852
40,000 2,909 4,623 6,511 8,572
50,000 3,906 6,184 8,678 11,390
60,000 4,903 7,744 10,846 14,208
70,000 5,900 9,305 13,013 17,025
80,000 6,897 10,866 15,181 19,843
90,000 7,894 12,426 17,349 22,661
100,000 8,891 13,987 19,516 25,479
110,000 9,888 15,547 21,684 28,297
120,000 10,885 17,108 23,851 31,114
130,000 11,882 18,669 26,019 33,932
140,000 12,879 20,229 28,186 36,750
150,000 13,876 21,790 30,354 39,568
160,000 14,873 23,350 32,521 42,385
* Final Average Compensation, computed as the average of annual compensation
for the five consecutive years (out of the most recent ten years) for which
compensation is the highest.
================================================================================
Covered compensation under the Pension Plan includes those amounts shown in
the Summary Compensation Table as to Mason-Dixon's President and CEO, with the
exception of amounts deferred through the Management Deferred Compensation Plan.
Covered compensation for 1998 is limited to $160,000. As of December 31, 1998,
Mr. Ferguson had accumulated 25 years of credited service toward retirement.
29
<PAGE>
Compensation Committee Report
The fundamental philosophy of Mason-Dixon's executive compensation program
is to provide competitive compensation opportunities for its executive officers
which is based both on the individual's contribution and on Mason-Dixon's
performance. Compensation levels are designed to attract, retain, and reward
executive officers who are capable of leading Mason-Dixon in achieving its
business objectives in an industry characterized by complexity, competitiveness,
and constant change. The compensation of Mason-Dixon's key executives is
established by and reviewed regularly for continued relevance by the
Compensation Committee, and actions taken are reported in summary form to the
full Board of Directors.
Annual compensation for Mason-Dixon's President/CEO, and other executive
officers, consists of two elements: 1) base salary, and 2) both annual and
long-term incentives or bonuses. These are awarded in the form of cash and/or
stock, are variable in amount, fluctuate in value annually, and are linked
directly to individual and Mason-Dixon's corporate goals attainment.
For Mr. Ferguson, Mason-Dixon's President/CEO, cash incentives provided
during 1996 represented 9.4% of base salary. In 1997 and 1998, no cash incentive
was provided; however, consistent with the Committee's executive compensation
strategy, stock options were awarded reflecting an amount to help make up the
difference in value for a base pay gap, compared to a selected external banking
peer group, and to reflect a performance bonus award, in lieu of cash. These
stock grants represent, in aggregate, 53% of Mr. Ferguson's base salary as of
year end 1997, and 51% of his 1998 base salary, which was increased by 4%. The
Committee determined that this compensation was warranted in view of
Mason-Dixon's and its subsidiaries meeting or exceeding certain business goals
during 1997. For example, key profitability goals were met or exceeded for the
year, including return on equity and earnings per share. Return on assets, net
income, and net interest margin were less than goal for the year, primarily
because of management's emphasis on increasing earnings per share and return on
equity, as well as volatility of pricing, and strong regional competition for
quality loans. Compared on a year to year basis, return on equity, earnings per
share, and net income increased significantly while return on assets and net
interest margin decreased somewhat.
Both base salary and the variable portion of compensation is closely linked
to Mason-Dixon's performance. The variable compensation element is directly
contingent upon Mason-Dixon's goal attainment, and provides the executive the
opportunity to make up the difference between their base salary and comparable
base salaries paid by similarly situated commercial and retail banking
organizations. Beginning in 1997 and updated for 1998, the Compensation
Committee of the Board formalized a system of paying incentives to Mason-Dixon's
CEO and other executive officers based on Mason-Dixon's performance, exclusive
of extraordinary events, in the following areas: return on assets, return on
equity, ratio of net overhead to average assets, efficiency ratio, net income,
net charge-offs and non-performing loans as a percentage of outstanding, and
regulatory ratings.
The Compensation Committee has implemented an executive salary structure
for executive officers which includes the assignment of salary grades for
individual officers. Additionally, the Committee has established a long-term
goal of compensating executive officers with a mix of base salary plus variable
compensation based upon Mason-Dixon's performance. The goal is to provide 60% of
compensation as base salary and 40% as variable or incentive based. The purpose
of this structure is to align the executives' pay opportunities with increased
values returned to stockholders. The executive salary structure was developed
through identification of and comparison with regional and local peer groups
consisting of commercial banks and holding companies having an asset size and
performance characteristics comparable to Mason-Dixon. Finally, various other
performance indicators are used to establish executive officer compensation,
including achievement of individual and divisional goals, satisfactory or better
audit and regulatory reviews and examinations, asset quality, and increases in
per share earnings, dividends and book value.
The performance of Mason-Dixon's Common Stock during the past fiscal year
is reflected in the following Performance Graph. The Compensation Committee
considers the performance of the common stock
30
<PAGE>
in determining compensation for Mason-Dixon's President/CEO but is not weighted
heavily in view of the historically limited trading activity.
BY THE COMPENSATION COMMITTEE:
Edwin W. Shauck
Miriam F. Beck
Henry S. Baker, Jr.
S. Ray Hollinger
Stevenson B. Yingling
Director Compensation
For 1998, Mason-Dixon paid its non-employee directors a fee of $5,000,
except for Mr. Dulany, the Chairman of the Board, who received a fee of $12,500.
Directors, whose ownership interest in Common Stock was less than .5% of all
outstanding shares, received 50% of the fee in cash other than Mr. Dulany, who
received 80% of his fee in cash. Messrs. Babylon, Hoffman, and Shauck elected to
receive their fees in cash since their ownership interest exceeded the minimum
.5% requirement. Each non-employee Mason-Dixon Director received in 1998 an
option to purchase 706 shares at an exercise price of $29.75 per share, the fair
market value at the time of grant, exercisable as follows: 236 shares on January
2, 1998, 235 shares on January 2, 1999, and 235 shares on January 2, 2000.
As of October 28, 1998 non-employee directors who attend special board
meetings are paid an additional $150.00 per meeting. Two special board meetings
were held in the last quarter of 1998.
Those directors who were also directors of Carroll County Bank received an
additional fee of $10,000 in that capacity, except for Messrs. Dulany and
Babylon, the Chairman and Vice Chairman, who received additional fees of $40,000
and $11,500 respectively. Mr. Baker, in his capacity as Chairman of the Board of
Bank of Maryland, received an additional $20,000. Mr. Middelton and Mr.
Campbell, in their capacities as directors of Bank of Maryland, received $400
per meeting attended, or $4,400 and $3,200 respectively. Any non-employee
director of Mason-Dixon and each participating subsidiary may defer all or a
portion of his or her director's fees.
In addition to meeting as a group, certain members of the Board of
Directors also devote their time to certain standing committees. The Board of
Directors has established two standing committees: The Compensation Committee
and the Audit Committee. Each member of the Compensation Committee received an
annual fee of $1,600. Audit Committee members do not receive any additional fee
for their service on the committee.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee currently serves as an officer of
Mason-Dixon or any of its subsidiaries. However, Mr. Edwin Shauck, currently a
Mason-Dixon and Carroll County Bank director, is a retired Executive Vice
President of Carroll County Bank.
31
<PAGE>
Performance Graph
The performance graph shown below compares the cumulative total return to
Mason-Dixon's stockholders over the most recent five-year period with the NASDAQ
Composite Index (reflecting overall stock market performance), the NASDAQ Bank
Index (reflecting changes in banking industry stocks), and a peer group selected
by Mason-Dixon. The peer group is made up of publicly traded bank holding
companies in Maryland, Virginia, Pennsylvania, Delaware, and the District of
Columbia with total assets between $500 million and $2.5 billion. This peer
group was added to facilitate stock performance comparisons between Mason-Dixon
and a comparable group based on asset size and geography. Returns are shown on a
total return basis, assuming the reinvestment of dividends. Mason-Dixon's Common
Stock was listed on the NASDAQ National Market System effective April 1, 1993.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN MASON-DIXON BANCSHARES, INC.,
NASDAQ COMPOSITE INDEX, NASDAQ BANK INDEX & PEER GROUP
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
- --------------------------------------------------------------------------------
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- --------------------------------------------------------------------------------
Mason-Dixon $100.00 $109.78 $137.71 $148.89 $220.00 $222.81
- --------------------------------------------------------------------------------
NASDAQ $100.00 $97.75 $138.26 $170.01 $208.58 $293.21
Composite
- --------------------------------------------------------------------------------
NASDAQ Bank $100.00 $99.64 $148.38 $195.91 $328.02 $324.90
Index
- --------------------------------------------------------------------------------
Peer Group* $100.00 $101.00 $127.00 $139.00 $222.00 $218.00
- --------------------------------------------------------------------------------
Assumes $100 invested on January 1, 1994 in Mason Dixon Bancshares, Inc., NASDAQ
Composite Index, NASDAQ Bank Index & Peer Group.
* Peer group includes bank holding companies in DC, DE, MD, PA and VA with
assets between $500 million and $2.5 billion.
32
<PAGE>
Item 12: Security Ownership of Certain Beneficial Owners and Management
The following tables reflect the beneficial ownership of Mason-Dixon Common
Stock, $1.00 par value, ("Common Stock") by directors and executive officers of
Mason-Dixon and by each person that, to the knowledge of management,
beneficially owns more than 5% of the Common Stock as of the February 26, 1999.
Unless otherwise indicated below, and except for shares described below held in
the Non-Employee Directors Deferred Compensation and Fee Plan (the "Directors
Plan") or the Management Deferred Compensation Plan (the "Management Plan")
which are voted by Mason-Dixon, each person specified below has sole investment
and voting power (or shares such power with his or her spouse) with regard to
the shares set forth in the following table. Shares of Common Stock subject to
options held by directors and executive officers that are exercisable within 60
days are included in such director's or executive officer's beneficial ownership
and in the beneficial ownership of the group. The address of each of the persons
named below is the address of Mason-Dixon.
Name Number of Shares Percent of Class
---- ---------------- ----------------
David S. Babylon, Jr. 44,425 (1) *
Henry S. Baker, Jr. 4,748 (2) *
Miriam F. Beck 17,836 (3) *
Donald H. Campbell 10,903 (4) *
William B. Dulany 20,180 (5) *
Thomas K. Ferguson 51,566 (6) 1.0%
R. Neal Hoffman 75,031 (7) 1.5%
S. Ray Hollinger 13,871 (8) *
J. William Middelton 745 (9) *
Edwin W. Shauck 45,000 (10) *
James C. Snyder 13,964 (11) *
Stevenson B. Yingling 8,126 (12) *
Named Executive Officers
Michael L. Oster 6,726 (13) *
H. David Shumpert 336 *
A. Gary Rever 6,510 (14) *
Mark A. Keidel 8,492 (15) *
All Directors and Executive
Officers as a group (22 persons) 349,616 7.0%
* Signifies less than 1% of the Common Stock
- ----------
(1) Includes 1,021 shares held in the Directors Plan.
(2) Includes 509 shares held in the Directors Plan and 471 shares that may be
purchased upon the exercise of stock options.
(3) Includes 3,639 shares held jointly with her husband, Edward R. Beck, 9,564
shares held in the Directors Plan, and 471 shares that may be purchased
upon the exercise of stock options.
(4) Includes 3,667 shares held by his wife, Isabelle T. Campbell, 914 shares
held by a company controlled by Mr. Campbell, 827 shares held in the
Directors Plan, and 471 shares that may be purchased upon the exercise of
stock options.
33
<PAGE>
(5) Includes 1,002 shares held by his wife, Winifred S. Dulany, 415 shares held
by his daughter, Anne French Dulany, 176 shares held in the Directors Plan,
and 471 shares that may be purchased upon the exercise of stock options.
Mr. Dulany disclaims beneficial ownership as to the Common Stock held by
his wife and daughter.
(6) Includes 4,303 shares held by his wife, Sandra L. Ferguson, 19,636 shares
held in the Employee Savings and Investment Plan, 15,768 shares that may be
purchased upon the exercise of stock options, and 6,931 shares held in the
Management Plan.
(7) Includes 1,575 shares held by his wife, Nancy L. Hoffman, 4,243 shares held
as trustee under a trust agreement, and 21,284 shares held as co-trustee
under the will of his father. Mr. Hoffman disclaims beneficial ownership as
to the Common Stock held by his wife.
(8) Includes 1,280 shares held by his wife, Joan R. Hollinger, 3,203 shares
held in the Directors Plan, and 471 shares that may be purchased upon the
exercise of stock options.
(9) Includes 74 shares held in the Directors Plan, and 471 shares that may be
purchased upon the exercise of stock options.
(10) Includes 43,500 shares held jointly with his wife, Mary Jane Shauck.
(11) Includes 1,168 shares held by his wife, Dolores J. Snyder, 4,632 shares
held in the Directors Plan, and 471 shares that may be purchased upon the
exercise of stock options.
(12) Includes 263 shares held jointly with his son, Edward R. Yingling, 263
shares held jointly with his daughter, Elizabeth A. Yingling, 263 shares
held jointly with his daughter, Stacy L. Yingling, 3,482 held in the
Directors Plan, and 471 shares that may be purchased upon the exercise of
stock options.
(13) Includes 2,530 shares that may be purchased upon the exercise of stock
options, 258 shares held in the Management Plan, and 2,923 shares held in
the Employee Savings and Investment Plan.
(14) Includes 3,507 shares held jointly with his wife, Mary Rever, 345 shares
held in the Management Plan, and 961 shares held in the Employee Savings
and Investment Plan, and 1,213 shares that may be purchased upon the
exercise of stock options.
(15) Includes 719 shares held jointly with his wife, Leslie J. Keidel, 445
shares held in the Management Plan, 2,979 shares held in the Employee
Savings and Investment Plan, 1,502 shares held by his wife, Leslie J.
Keidel, and 2,001 shares that may be purchased upon the exercise of stock
options.
Other Beneficial Owners
Name Number of Shares Percent of Class
---- ---------------- ----------------
Carroll County Bank and Trust Company 377,706 7.44%
Carroll County Bank holds shares of Common Stock in a fiduciary capacity
for numerous trusts and agency accounts and other fiduciary accounts. Carroll
County Bank may be deemed a "beneficial owner" of certain of these shares
because of its power to vote or direct the voting of, or to dispose or direct a
disposition of, such shares, even if these powers are shared with co-fiduciaries
and others. The full Board of Directors of Carroll County Bank, acting as the
Trust Committee, reviews quarterly the minutes and actions of the Trust
Investment Committee, which Committee reviews all individual trust accounts.
34
<PAGE>
The Board of Directors of Mason-Dixon has no power to directly or indirectly
vote Mason-Dixon Common Stock held in such accounts, except shares held under
the Directors Plan and the Management Plan; all other shares are voted by
Mason-Dixon Trust Company (a division of Carroll County Bank) in its sole
discretion. As of December 31, 1998, the Trust Company had sole voting power
with respect to approximately 128,595 shares of Mason-Dixon Common Stock, which
represents approximately 2.5% of the issued and outstanding shares of Common
Stock, and sole investment power with respect to approximately 115,381 shares of
Mason-Dixon Common Stock, which represents 2.3% of the issued and outstanding
shares of Common Stock.
BB&T Agreement
On January 27, 1999, Mason-Dixon entered into a definitive agreement to be
acquired by and merged into BB&T Corporation ("BB&T"), a North Carolina
corporation and bank holding company. The agreement is subject to various
regulatory approvals, and approval by Mason-Dixon's stockholders. Upon approval,
Mason-Dixon stockholders will receive 1.30 shares of BB&T common stock for each
share of Mason-Dixon common stock. As a condition to the definitive agreement,
Mason-Dixon granted an option which allows BB&T to purchase up to 1,006,868
shares of Mason-Dixon's common stock. The exercise price of the option is $40.00
per share. BB&T can exercise the option only if another party attempts to
acquire control of Mason-Dixon.
Item 13: Certain Relationships and Related Transactions
Mason-Dixon, through its subsidiaries, has had in the past, and expects to
have in the future, banking transactions in the ordinary course of business with
directors and executive officers on substantially the same terms, including
interest rates and collateral on loans, as those prevailing at the same time for
comparable transactions with other unaffiliated persons and, in the opinion of
management, these transactions do not and will not involve more than the normal
risk of collectability or present other unfavorable features.
35
<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 21 through 43 of the registrants 1998 Annual Report to
Stockholders, are incorporated herein by reference in item 8:
Consolidated Balance Sheets -- December 31, 1998 and 1997 Consolidated
Statements of Income -- Years ended December 31, 1998, 1997, and 1996
Consolidated Statements of Changes in Stockholders' Equity -- Years
ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows - Years ended December 31, 1998,
1997, and 1996 Notes to Consolidated Financial Statements -- Years
ended December 31, 1998, 1997, and 1996 Report of Independent Auditors
for the year ending December 31, 1998
(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 3(i)* Certificate of Incorporation
Exhibit 3(ii)** Bylaws of the Corporation
Exhibit 13 Annual Report to Stockholders
Exhibit 21 List of Registrant's Subsidiaries
Exhibit 23 Consent of Independent Auditors
Exhibit 27 Financial Data Schedule (Filed electronically)
Exhibit 99 Risk Factors
* Exhibit 3(i) is incorporated herein by reference to the
identically numbered exhibit to the Form S-4 Registration
Statement filed by Mason-Dixon with the Securities and
Exchange Commission on October 15, 1991.
** Exhibit 3(ii) is incorporated herein by reference to the
identically numbered exhibit to the 1997 Form 10-k filed by
Mason-Dixon with the Securities and Exchange Commission on
March 31, 1998.
Item 14(b)
On October 16, 1998, Mason-Dixon filed on Form 8-K its announcement that it
had entered into an agreement to acquire Sterling Bancorp, a privately held,
Baltimore-based bank holding company. This event was reported under Item 5 on
Form 8-K
On January 8, 1999, Mason-Dixon filed on Form 8-K its announcement that it
had completed its acquisition of Sterling Bancorp, a privately held,
Baltimore-based bank holding company. This event was reported under Item 5 on
Form 8-K.
On January 29, 1999, Mason-Dixon filed on Form 8-K its announcement that it
had entered into an Agreement and Plan of Reorganization with BB & T Corporation
of Winston-Salem, North Carolina. Under the terms of this agreement, Mason-Dixon
would be acquired by BB & T Corporation. This event was reported under Item 5 on
Form 8-K.
Item 14(c)
See Item 14(a)(3) above.
36
<PAGE>
Item 14(d)
See item 14(a)(2) above.
37
<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 24, 1999 By /s/ Thomas K. Ferguson
------------------------------
Date: March 24, 1999 By /s/ Mark A. Keidel
------------------------------
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/ David S. Babylon, Jr. Director Date: March 24, 1999
- --------------------------------
/s/ Miriam F. Beck Director Date: March 24, 1999
- --------------------------------
/s/ William B. Dulany Director Date: March 24, 1999
- --------------------------------
/s/ R. Neal Hoffman Director Date: March 24, 1999
- --------------------------------
/s/ S. Ray Hollinger Director Date: March 24, 1999
- --------------------------------
/s/ Edwin W. Shauck Director Date: March 24, 1999
- --------------------------------
/s/ Stevenson B. Yingling Director Date: March 24, 1999
- --------------------------------
38
[LOGO]
MASON-DIXON BANCSHARES, INC.
o COMMITTED TO THE TRADITION OF FINE BANKING SERVICES
[LOGO]
Rose Shanis
FINANCIAL SERVICES, LLC,
[LOGO]
CARROLL COUNTY BANK
AND TRUST COMPANY
[LOGO]
M
BANK OF MARYLAND
ANNUAL 1998 REPORT
<PAGE>
- --------------------------------------------------------------------------------
COMPANY PROFILE
Mason-Dixon Bancshares, Inc. is a multi-bank holding company organized in 1991
that provides a full range of consumer, commercial, trust, real estate and other
specialty banking services. The company is headquartered in Westminster,
Maryland and operates two bank subsidiaries, Carroll County Bank and Trust
Company and Bank of Maryland, which have a combined total of 21 retail banking
offices in central Maryland. Mason-Dixon also operates a consumer finance
subsidiary, Rose Shanis Financial Services, LLC.
Carroll County Bank and Trust Company and predecessor organizations span nearly
150 years. As a result, it is the market leader in the rapidly expanding region
located northwest of Baltimore, in contiguous proximity to both the dynamic
Baltimore-Washington business corridor and southern Pennsylvania. The bank's
location adjacent to these very different (but complementary) markets has
enabled significant opportunities and competitive advantages. The bank provides
primary banking services to over 25% of Carroll County residents, while
maintaining some form of relationship with nearly 40% of the population in the
county.
Operating divisions of Carroll County Bank and Trust Company include Mason-Dixon
Trust Company, which offers a variety of trust products and services to
individuals, corporations and non-profit organizations, and Mason-Dixon
Bancshares Mortgage Company, which originates and services residential real
estate mortgage and construction loans as a principal and as an agent.
Bank of Maryland, acquired by Mason-Dixon Bancshares in mid-1995, was founded de
novo in 1985. Via the provision of a variety of commercial, real estate and
asset-based lending services, deposit acceptance, cash management and short-term
investing, the bank is one of the leading locally-managed institutions serving
small to mid-market businesses in the Baltimore metropolitan area and
surrounding sub-markets. Complementing the Bank of Maryland's business banking
focus is its retail network of offices, which draw customers from a combination
of urban, suburban and rural locations.
In February 1998, Mason-Dixon Bancshares acquired Baltimore based Rose Shanis
Financial Services, LLC, an old-line, family-owned consumer finance company
consisting of a network of 12 strategically located branch offices that are
positioned concentrically around the Baltimore Beltway and in the hub cities of
Annapolis, Bel Air and Easton, Maryland. In addition to originating basic
consumer loans through its proprietary branches, the company also finances
consumers' purchases of large ticket items, such as automobiles, appliances and
furniture through a network of dealers with whom Rose Shanis Financial Services
has developed strong, long-term relationships.
CORPORATE INFORMATION
MASON-DIXON BANCSHARES, INC.
Corporate Headquarters
45 West Main Street
P.O. Box 1100
Westminster, MD 21158-0199
410-857-3401
Stock Information
Mason-Dixon Bancshares, Inc. common stock is traded on the Nasdaq National
Market(R) under the symbol "MSDX".
Mason-Dixon Bancshares, Inc. preferred securities are traded on the Nasdaq
National Market(R) under the symbols "MSDXO" and "MSDXP".
Transfer Agent, Registrar, and Dividend Disbursing Agent
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
1-800-937-5449
Auditors
Stegman & Company
405 E. Joppa Road, Suite 200
Baltimore, MD 21286
General Counsel
Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC
The Garrett Building
233 East Redwood Street
Baltimore, MD 21202-3332
SEC Form 10-K
A copy of the Company's annual report on Form 10-K for the year ended December
31, 1998, as filed with the Securities and Exchange Commission, may be obtained
without charge upon written request to:
Corporate Secretary
Mason-Dixon Bancshares, Inc.
45 West Main Street
P.O. Box 1100
Westminster, MD 21158-0199
Dividend Reinvestment and Stock Purchase Plan
Mason-Dixon Bancshares, Inc. offers its stockholders a plan whereby they may
automatically invest their cash dividends in Mason-Dixon Bancshares, Inc. common
stock. Plan participants may also make additional cash payments to purchase
stock through the Plan at the market price. Mason-Dixon Bancshares, Inc. absorbs
all fees and transaction costs. Stockholders who wish to enroll in the Plan
should contact the Corporation's Transfer Agent.
Direct Deposit
Stockholders of Mason-Dixon Bancshares, Inc. may have their cash dividends
deposited directly into the account of their choice at any banking institution.
It will be deposited on the date it is payable, and a confirmation of payment
from the transfer agent will be sent. An enrollment card may be obtained by
contacting the Corporation's Transfer Agent.
Investor Information
The Company's 1998 Annual Report, recent quarterly reports, press releases, and
current stock and member bank information are available on the Internet at
www.msdx.com.
- --------------------------------------------------------------------------------
CORPORATE LOCATIONS
Carroll County Bank and Trust Company
Headquarters:
45 West Main Street
Westminster, MD 21157
Branch Locations:
Eldersburg
Ellicott City
Finksburg
Hampstead
Manchester
Melrose
Mt. Airy
Sykesville
Taneytown
Westminster (3)
Mason-Dixon Bancshares
Mortgage Company
Headquarters:
1643 Liberty Road
Eldersburg, MD 21784
Branch Locations:
Eldersburg
Salisbury
Towson
Bank of Maryland
Headquarters:
Towson Office
502 Washington Avenue
Towson, MD 21204
Branch Locations:
Annapolis (2)
Baltimore City
Bel Air
Perry Hall
Pikesville
Reisterstown
Timonium
Towson
Rose Shanis Financial Services, LLC
Headquarters:
11419 Cronridge Drive, Suite 10
Owings Mills, MD 21117
Branch Locations:
Annapolis
Baltimore City (3)
Bel Air
Catonsville
Dundalk
Easton
Essex
Glen Burnie
Parkville
Randallstown
[GRAPHIC]
- --------------------------------------------------------------------------------
<PAGE>
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FINANCIAL HIGHLIGHTS
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
1998 1997 % Change
- --------------------------------------------------------------------------------
For the Year
Net income $ 10,811 $ 9,159 18%
Common dividends paid $ 3,551 $ 3,215 10%
Per Common Share
Net income--basic $ 2.13 $ 1.77 20%
Net income--diluted $ 2.13 $ 1.77 20%
Dividends paid $ 0.70 $ 0.62 13%
Book value $ 16.20 $ 14.86 9%
Tangible book value $ 14.88 $ 14.28 4%
Market price--close $ 29.25 $ 29.50 (1%)
Price/earnings ratio 13.73 16.67 (18%)
Financial Ratios
Return on average assets (ROA) 1.02% 1.00% 2%
Return on average equity (ROE) 13.82% 12.63% 9%
Net interest margin (taxable equivalent) 4.07% 3.93% 4%
At December 31
Total assets $1,102,242 $ 992,180 11%
Total investments $ 566,878 $ 453,900 25%
Total loans--net $ 453,664 $ 455,160 --
Total deposits $ 640,349 $ 651,249 (2%)
Total stockholders' equity $ 82,139 $ 75,449 9%
Common shares outstanding 5,071,682 5,077,468 --
- --------------------------------------------------------------------------------
TABLE OF CONTENTS:
Financial Highlights 1
Stockholders' Letter 2
Economic Outlook 4
Selected Financial Data 5
Management Discussion and Analysis 6
Consolidated Balance Sheets 21
Consolidated Statements of Income 22
Consolidated Statements of Changes in Stockholders' Equity 23
Consolidated Statements of Cash Flows 24
Notes 25
Independent Auditors' Report 43
Corporate Information 44
- --------------------------------------------------------------------------------
Page 1
<PAGE>
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TO OUR STOCKHOLDERS:
We are pleased to report the 14th consecutive year of increased earnings for
Mason-Dixon Bancshares, Inc. complemented by the achievement during 1998 of a
series of major milestones that set the stage for our recent announcement in
January that, subject to stockholder and regulatory approval, we will merge with
BB&T Corporation of Winston-Salem, NC later in 1999.
We are equally pleased to report that the planned merger with BB&T is set at a
price that fully reflects the intrinsic value of the franchise we have built,
and also that the combination of the two companies will ensure that our people
and our organization can continue to grow and prosper in the markets in which we
have been the leader for many decades.
Net income for the year ended December 31, 1998 increased 18% from a year
earlier. Earnings per share also reached record levels and totaled $2.13, up 20%
from the prior year end.
Fundamental measures of performance were strong
We ended a busy and exciting year with very solid financial results, as core
earnings per share were up 13% for the year. We continued to make progress
toward improving our return on average stockholders' equity, which increased to
12.97% based on core earnings. We also improved our net interest margin to
4.07%.
Importantly, we were able to deliver continuing improvement in these key
underlying measures of our financial performance in an increasingly competitive
banking environment, while maintaining acceptable credit quality and focusing on
those businesses and geographic sub-markets where we have proven expertise.
Total assets were $1.102 billion at year end, up 11% over the prior year, loans
grew by 4% (excluding changes relating to branch sales and other acquisitions)
in an intensely competitive lending environment, deposits were up 12% (excluding
changes related to branch sales), and stockholders' equity totaled $82 million,
up 9%. Book value advanced by 9% to $16.20 per common share while market
capitalization remained stable. We continued to place a high priority on
maintaining a flexible balance sheet and strong capital position.
New activities reflected clear strategic direction
We have always strongly believed that strategically we should concentrate on
those activities and geographic areas where we have the most expertise, as the
most effective means to both solidify the intrinsic value of the organization
long-term and leverage our market share of the most profitable activities that
make sense for us to pursue in the short-term.
Consistent with this disciplined, focused approach and our determination to
deliver results accordingly, we acquired the Baltimore-based Rose Shanis
Companies and we completed the divestiture of five former Bank of Maryland
branches on the Eastern Shore of Maryland.
In late 1997 we signed a purchase agreement for Rose Shanis, the family-owned
consumer finance company with approximately $45 million in loans and 12 branch
offices. By mid-February of 1998 we had closed the transaction and, after a
one-time charge related to a change in charge-off policy, results were
immediately accretive. Earnings, credit quality, and growth at Rose Shanis have
exceeded the initial expectations we had set for this company. The addition of
this different, but truly complementary line of business reinforced our
commitment to find opportunities to diversify revenue streams and enhance
franchise value.
Double-digit growth experienced over the past several months with the Rose
Shanis organization has validated the strategy that led us to do the
transaction: it is a logical extension of the balance sheet, in a business line
where we already have considerable know-how and a favorable track record...and
we have been able to expand significantly our physical presence, locational
convenience, and ability to market to meaningful numbers of prospective new
customers.
Rose Shanis has a solid history dating to 1932, and had created a branch network
of 12 strategically located offices concentrically around the Baltimore Beltway,
and in the highly desirable centers of sub-market hubs; Annapolis (Anne Arundel
County), Bel Air (Harford County), and Easton (central Eastern Shore). In
addition to originating consumer loans, the company also finances purchases of
large ticket items such as cars, appliances, and furniture through a network of
dealers with whom strong, long-term relationships exist. We are firmly convinced
it is a unique opportunity that could not be replicated elsewhere in the
marketplace.
The move to sell our Eastern Shore network enabled us to redirect valuable
resources to our Central Maryland core market. Specifically, we completed the
acquisition of Sterling Bancorp in Baltimore in January 1999, which provided a
cost-effective and quantifiable way to improve the overall deposit base and
expand our presence in selected areas where we already had good experience and
an established customer following. Further, the acquisition enabled us to
increase our penetration in four highly desirable sub-markets: downtown
Baltimore, Pikesville, Timonium and Annapolis...all highly competitive areas in
which otherwise it would have been very difficult to grow market share at a
reasonable cost. In addition to the redirection of resources, the sale of the
Eastern Shore branches resulted in the realization of a substantial gain. In
fact, the premium received on the sale of branches exceeded the premium paid for
the entire Bank of Maryland franchise in 1995 and was nearly double the premium
paid for Sterling Bancorp, which was of comparable size to the branches sold.
The merger with Sterling was completed in early January 1999 at a final cash
purchase price of $10.294 million, adding about $74 million in total assets, $67
million in deposits, and $45 million in loans. Including Sterling, the scope of
our core market network amounted to 21 banking offices.
We successfully executed our basic business plan
There were a number of ongoing complex, time-consuming initiatives that the
organization worked on diligently throughout the past year, perhaps best
described as basic blocking and tackling. First and foremost, we continued to
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Page 2
<PAGE>
- --------------------------------------------------------------------------------
WHAT MAKES AN ORGANIZATION GREAT IS THE QUALITY OF ITS PEOPLE. IT IS THE PEOPLE
AT EVERY LEVEL WHO HAVE CREATED THE VALUE OUR STOCKHOLDERS WILL RECEIVE IN THE
MERGER. AND THE VALUE BB&T RECEIVES IN RETURN WILL BE THE SAME COMMITMENT,
SUPPORT, AND LOYALTY THAT HAS BEEN SO GRACIOUSLY GIVEN TO ME BY OUR EMPLOYEES.
excel at the basic business of making sound, profitable loans and gathering
deposits while delivering the consistent, unparalleled brand of customer service
that has garnered us the dominant (26.5+%) market share of deposits and a 40%
household penetration in our Carroll County home market.
Moreover, during the year we consolidated both our organizational structure and
a significant number of operational activities in the Executive, Retail Banking,
and Finance areas of the company to achieve permanent cost savings and greater
overall efficiency in running the business. The impact and energy involved in
implementing these changes tends to be somewhat under-appreciated, because we
try to make the process appear transparent to customers and outsiders.
Day-to-day activities were overshadowed at times by mergers and acquisitions.
This is a testament to our ability to integrate new businesses and successfully
manage change.
Along these lines, we opened de novo branches in Baltimore City and in
Reisterstown, filling gaps in market coverage in two important areas. The
organization continued to advance its Year 2000 readiness across a multitude of
applications and business lines under a thorough but necessary process that is a
clear example of our ability to execute the basics of our business.
We ensured our future viability and local focus
All of these successful activities during 1998 helped position Mason-Dixon
Bancshares as a highly attractive addition to BB&T Corporation's growing
franchise in this region and similarly enabled our company to command a
superlative valuation under the terms of the transaction. Clearly, Mason-Dixon
is an excellent strategic alignment with the BB&T community banking model, where
major customer decisions are made locally, where there is an intense
demonstrated focus on customer service, where there will be far broader and
longer-lasting opportunities for Mason-Dixon's existing employees, and where the
core values and culture of the surviving institution will be remarkably similar
to our own.
The decision to change our strategic plan from one of independence was not easy.
We arrived at this point only after your president and directors undertook a
thorough and extensive study of alternative strategies to determine how we could
best enhance stockholder value over the long-term. Each alternative strategy was
examined with an eye toward risk and reward opportunities for stockholders,
employees, customers, and the communities we serve.
We chose BB&T Corporation as our merger partner because of its demonstrated
commitment to enhancing stockholder value, the value it places upon employees,
the support it provides to the communities in which it does business, and the
extraordinary emphasis it places on superior customer service. These are the
same values we subscribe to. Simply stated, a merger with BB&T was so compelling
that it could not be ignored. We are proud of the objective, thoughtful, and
deliberative process the board undertook in reaching this decision. While not an
easy one, the board is confident that its decision is the right one.
A personal note from the President
I began my career with this company in 1965. At that time, its total assets were
$35 million and there were four branches. Today, total assets are over $1.1
billion with 21 banking offices and 12 consumer finance offices. Over these past
34 years, I have been blessed in so many ways. I have been associated with some
of the best professionals there are in this business and I have been privileged
to have had the opportunity to serve as president for 17 years. What makes an
organization great is the quality of its people. It is the people at every level
who have created the value our stockholders will receive in the merger. And the
value BB&T receives in return will be the same commitment, support, and loyalty
that has been so graciously given to me by our employees.
It is not the hard assets or the stockholders' equity that is of value to an
acquiror, for that comes with the transaction. The real value is the people and
their relationship with our customers and our communities. BB&T knows this full
well and it is committed to continuing that same legacy into the future. It is
our people who created the value we stockholders are receiving and it is they
who deserve our heartfelt thanks.
Thomas K. Ferguson
President and Chief Executive Officer
William B. Dulany
Chairman of the Board of Directors
[PHOTO]
standing: Thomas K. Ferguson
seated: WIlliam B. Dulany
- --------------------------------------------------------------------------------
Page 3
<PAGE>
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ECONOMIC OUTLOOK ACROSS MASON-DIXON'S MAJOR MARKETS
Home Market is Vibrant, Economically Diverse
The company's home market, Carroll County, is situated in the northwestern
quadrant of the Washington/Baltimore Common Market, which in its entirety is the
nation's fourth largest consumer market. This combined region supports 6.5
million people, 2.5 million households and produces a collective personal income
exceeding $131 billion in its entirety. In contrast, with a population of about
1.3 million, Carroll County is relatively small (450 square miles), but it is
growing at a rate over 20% faster than the state as a whole. Over 42% of county
residents are employed in managerial, professional and specialty occupations;
30% are in precision production, machine operation or craft and repair
operations; administrative and clerical workers comprise 17% of the workforce
and service industry accounts for 11%. Unlike other jurisdictions in which
Mason-Dixon has a strong presence, Carroll County consists of a substantial
agricultural base.
Carroll County lies 31 miles northwest of Baltimore and 56 miles north of
Washington, D.C., with the largest business clusters located in the central,
western and southern portions of the county. Nearly 4,000 businesses employ
34,600 workers and manufacturing accounts for 14% of total employment. Major
employers with facilities in the county include Random House, Londontown
Corporation, Black & Decker, Jos. A. Bank Clothiers, Knorr Brake, Lehigh
Portland Cement, English American Tailoring and Ingersoll-Dresser. The county's
strategic position on the Atlantic seaboard allows overnight truck and rail
access to one-third of the nation's population and manufacturing establishments.
[THE FOLLOWING TABLE WAS PRESENTED AS A BAR CHART IN THE PRINTED DOCUMENT]
BALTIMORE REGION
SECTOR EMPLOYMENT 1986 vs. 1996
Growth
Sector Employment 1986 1996 Rate
- ----------------- ---- ---- ----
Services 255,768 349,561 36.7
Retail Trade 192,878 200,310 3.9
Government 186,084 199,984 7.5
Manufacturing 134,359 100,930 -24.9
FIRE* 69,214 69,950 1.1
Construction 63,867 59,269 -7.2
Wholesale Trade 60,322 57,557 -4.6
TCPU** 49,548 53,635 8.2
* FIRE is finance, insurance and real estate.
** TCPU is transportation, communications and utilities.
Source: Maryland Department of Labor
[THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED DOCUMENT]
BALTIMORE REGION
TOTAL EMPLOYMENT BY SECTOR 1998
Services & Technology 33.3%
Wholesale & Retail 23.8%
Government 18.4%
Manufacturing 7.8%
Construction 6.1%
Finance 5.8%
Transportation 4.8%
Source: Bureau of Labor Statistics
[THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED DOCUMENT]
BALTIMORE REGION
TECHNOLOGY EMPLOYMENT BY SECTOR
Information Technology Services 42%
High Technology Research 29%
High Tech Machining & Instruments 13%
Biotech & Biomedical 9%
Defense & Aerospace 5%
Energy & Chemicals 2%
Source: Dun & Bradstreet Marketplace. 1997
- --------------------------------------------------------------------------------
EFFECTIVE BUYING INCOME*
Mason-Dixon's
Carroll County
Core Market Maryland U.S.
- --------------------------------------------------------------------------------
Median Household $ 42,068 $ 40,543 $ 33,482
Average Household 45,980 47,833 42,191
Per Capita 15,917 17,520 15,555
Total EBI (Millions) 2,313 89,147 4,161,512
* Effective Buying Income is money income less personal tax and nontax
payments. It is also known as "disposable income."
Source: U.S. Bureau of Economic Analysis--12/97 Data
- --------------------------------------------------------------------------------
Key Contiguous Counties Show Good Growth
To the east, Baltimore County firmly anchors the northern segment of the Common
Market, and represents the most important contiguous natural market adjacent to
Mason-Dixon's home territory. This jurisdiction features an extremely diverse
economic base, ranging from heavy concentrations in primary industries to a
large presence in a spectrum of high-technology sectors. Complementing and
supporting this broad base is a highly skilled workforce, several
national-recognized universities, unique transportation access to national and
international markets, and headquarters of 6 Fortune 500 companies. The county's
19,300 businesses employ 284,000 workers.
In the heart of the corridor between Baltimore and Washington, D.C. lies Anne
Arundel County, which is also a natural extension of Mason-Dixon's home
territory providing a spectrum of complementary dynamics to add balance and
solid opportunity for future growth. The county's economy is grounded in
high-technology communications, distribution and computerized support services.
Over 11,000 businesses employ 138,500 workers, in a rapidly growing environment.
Broader Region served by Mason-Dixon is Strong
Most economists agree that the company's multi-county market area should
continue to outperform the rest of the state (and the nation), in terms of
leading indicators such as low unemployment, personal income growth, new housing
starts, improving commercial occupancy rates, and the ongoing fundamental
migration of the area's economic base towards technology and service sectors as
the principal drivers of new growth and diversification.
- --------------------------------------------------------------------------------
DEMOGRAPHICS OF MASON-DIXON'S
PRIMARY MARKETS
Est. 5-yr. Est. 5-yr.
Growth Per Capita Growth
Area Households Rate Income Rate
- --------------------------------------------------------------------------------
Counties
Carroll 50,602 11.4% $20,744 18.9%
Baltimore 282,991 2.9% 23,102 16.6%
Harford 75,725 10.3% 19,558 12.4%
Howard 85,323 13.3% 27,078 13.5%
Anne Arundel 166,662 6.2% 22,483 15.0%
Maryland 1,878,523 4.3% 21,922 16.3%
U.S. 98,741,200 4.9% 18,885 21.7%
Average of the the 50 states and the District of Columbia
Source: U.S. Dept. of Commerce--6/97 Data
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Total Households Total Employment
- ------------------------------------------------------------------------------------------------------------------------------------
Jurisdiction 1995 2000 2005 CAGR (%) 1995 2000 2005 CAGR (%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Baltimore City 268,000 268,900 270,800 .11% 452,500 457,200 461,800 .20%
Anne Arundel 162,700 176,100 188,500 1.48% 258,300 274,300 289,800 1.16%
Baltimore 289,000 299,700 309,900 .70% 409,600 429,100 446,400 .86%
Carroll 48,400 53,300 58,200 1.86% 57,400 61,800 65,800 1.38%
Harford 73,600 81,700 88,100 1.81% 80,500 89,200 96,000 1.78%
Howard 81,200 94,900 108,600 2.95% 123,600 138,800 153,100 2.16%
Total Region 922,900 974,600 1,024,100 1.04% 1,381,900 1,450,400 1,512,900 .91%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Source: Baltimore Metropolitan Council
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Page 4
<PAGE>
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SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income $ 82,066 $ 67,435 $ 58,796 $ 46,737 $ 34,790
Interest expense 44,191 36,175 29,244 23,071 15,392
--------------------------------------------------------------------------
Net interest income 37,875 31,260 29,552 23,666 19,398
Provision for credit losses 3,677 138 836 -- --
--------------------------------------------------------------------------
Net interest income after provision
for credit losses 34,198 31,122 28,716 23,666 19,398
Other operating income 17,014 7,990 7,481 4,159 3,245
Other operating expenses 36,113 26,791 24,758 17,944 13,806
--------------------------------------------------------------------------
Income before taxes 15,099 12,321 11,439 9,881 8,837
Applicable income taxes 4,288 3,162 3,003 2,582 2,225
--------------------------------------------------------------------------
Net income $ 10,811 $ 9,159 $ 8,436 $ 7,299 $ 6,612
==========================================================================
Per Share Data
Net income (basic)* $ 2.13 $ 1.77 $ 1.60 $ 1.54 $ 1.52
Net income (diluted)* $ 2.13 $ 1.77 $ 1.60 $ 1.54 $ 1.52
Dividends paid* $ 0.70 $ 0.62 $ 0.52 $ 0.485 $ 0.45
Book value $ 16.20 $ 14.86 $ 13.71 $ 12.67 $ 9.89
Tangible book value $ 14.88 $ 14.28 $ 12.80 $ 11.66 $ 9.89
Shares outstanding 5,071,682 5,077,468 5,303,166 5,258,040 4,326,125
Other Data
Total assets $1,102,242 $ 992,180 $ 841,074 $ 765,781 $ 507,572
Total investments $ 566,878 $ 453,900 $ 358,531 $ 340,512 $ 282,202
Total loans--net $ 453,664 $ 455,160 $ 392,997 $ 348,221 $ 192,885
Total deposits $ 640,349 $ 651,249 $ 620,735 $ 593,835 $ 383,058
Total stockholders' equity $ 82,139 $ 75,449 $ 72,699 $ 66,596 $ 42,773
Key Ratios
Return on average stockholders' equity 13.82% 12.63% 12.27% 13.69% 15.28%
Return on average total assets 1.02% 1.00% 1.05% 1.18% 1.34%
Dividends declared to net income 32.85% 35.10% 32.60% 31.83% 29.71%
Average stockholders' equity to average
total assets 7.36% 7.88% 8.54% 8.60% 8.75%
</TABLE>
* Based on the weighted average number of shares after giving effect to the
3-for-1 stock split in 1994.
- --------------------------------------------------------------------------------
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<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") and subsidiaries,
including its principal operating subsidiaries: Carroll County Bank and Trust
Company ("Carroll County Bank"), Bank of Maryland, Rose Shanis Financial
Services, LLC ("Rose Shanis") and Bay Insurance, LLC. Certain reclassifications
have been made to amounts previously reported to conform with classifications
made in 1998.
Mason-Dixon is a multi-entity bank-holding company headquartered in
Westminster, Maryland. On February 11, 1998, Mason-Dixon acquired substantially
all of the assets and assumed certain liabilities of Rose Shanis Companies, a
consumer finance company located in Baltimore, Maryland. Mason-Dixon paid $15.4
million in cash in a transaction accounted for as a purchase. As a result of the
acquisition, Rose Shanis 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 Rose Shanis prior to the acquisition. Therefore,
results of operations include Rose Shanis for approximately 11 months for 1998
and not at all in 1997 or 1996.
Portions of this annual report contain forward-looking statements within
the meaning of The Private Securities Litigation Reform Act of 1995. Such
statements are not historical facts and include expressions about the Company's
confidence, policies, and strategies, the Year 2000 issue, provisions and
allowance for credit losses, adequacy of capital levels, and liquidity. Such
forward-looking statements involve certain risks and uncertainties, including
general economic conditions, competition in the geographic and business areas in
which the Company and its affiliates operate, inflation, fluctuations in
interest rates, legislation, and governmental regulations. These risks and
uncertainties are described in more detail in Mason-Dixon's Form 10-K, Exhibit
99, under the heading "Risk Factors." Actual results may differ materially from
such forward-looking statements. Mason-Dixon assumes no obligation to update
forward-looking statements at any time.
Performance Overview
Mason-Dixon achieved a record level of earnings for 1998, marking the 14th
consecutive year of higher profits. Net income for 1998 totaled $10,811,000, an
increase of 18% over 1997's net income of $9,159,000. Basic and diluted earnings
per share were $2.13 in 1998, up 20% from $1.77 in 1997. Mason-Dixon's return on
average assets was 1.02%, compared to 1.00% posted in 1997. Return on average
stockholders' equity was 13.82%, increasing from 12.63% in 1997.
Several significant non-recurring items affected net income in 1998. The
table below highlights the various non-recurring gains and expenses and their
effects on reported net income. Core net income (excludes non-recurring gains
and expenses of $665,000) for 1998 totaled $10,146,000, an increase of 11% over
$9,159,000 reported in 1997. Basic and diluted earnings per share on core
earnings totaled $2.00, an increase of 13% compared to $1.77 for 1997.
Mason-Dixon's return on average assets based on core earnings was .95%, lower
than the 1.00% posted in 1997. Return on average stockholders' equity was
12.97%, increasing from 12.63% in 1997. Contributing to the rise in core
earnings were increased levels of net interest income of $6,615,000 and higher
levels of fee income which grew by $2,307,000. Offsetting these increases were
increased non-interest expenses of $7,316,000.
(dollars in thousands, except per share data) 1998
- --------------------------------------------------------------------------------
Reported net income $ 10,811
Non-recurring items
Gain on sale of branches (6,717)
Special loan loss provision for loans
with Year 2000 risk 918
Special loan loss provision for change in
chargeoff policy 2,000
Reorganization costs 465
Year 2000 costs 700
Impairment loss on mortgage
sub-servicing rights 841
Income tax expense on the non-recurring
items above 1,128
--------
Core net income $ 10,146
========
The acquisition of Rose Shanis in 1998, as well as the acquisition of Bank
of Maryland in 1995, required the application of the purchase method of
accounting, which created significant levels of goodwill. The recorded goodwill
is a non-cash charge to earnings being amortized over a 10 year period for Rose
Shanis and 15 years for Bank of Maryland, using the straight-line method. The
amortization of goodwill and other non-cash items created as a result of the
application of purchase accounting has significant effects on Mason-Dixon's
reported earnings and operating ratios. The introduction of these non-cash items
affects the comparability of
- --------------------------------------------------------------------------------
Page 6
<PAGE>
- --------------------------------------------------------------------------------
Mason-Dixon's earnings and operating ratios for periods subsequent to these
acquisitions. To assist in the comparison of earnings and operating ratios, the
table below adjusts reported earnings and operating ratios to "cash" or
"tangible" results, which negates the effects of purchase accounting on earnings
and operating ratios. The reporting of tangible results for comparative purposes
has become more important to stockholders over recent years due to the increase
in acquisitions being accounted for under the purchase method of accounting.
(dollars in thousands, except per share data) 1998 1997
- --------------------------------------------------------------------------------
Reported net income $ 10,811 $ 9,159
Purchase method adjustments
Tax-deductible goodwill amortization 188 --
Non-deductible goodwill amortization 268 346
Other purchase accounting
adjustments (net of income taxes) (126) (250)
Acquired net operating loss
income tax benefits 609 609
------------------------
Tangible net income $ 11,750 $ 9,864
========================
Tangible operating ratios
Tangible basic earnings per share (1) $ 2.32 $ 1.90
Tangible return on average assets (2) 1.11% 1.08%
Tangible return on average equity (3) 16.41% 14.51%
(1) Tangible net income divided by average shares outstanding.
(2) Tangible net income divided by average total assets, less average goodwill.
(3) Tangible net income divided by average equity, less average goodwill.
Tangible net income totaled $11,750,000 for 1998, compared to $9,864,000 in
1997; an increase of 19%. Tangible earnings per share increased 22% to $2.32 for
1998, compared to $1.90 for 1997. Tangible return on average assets and return
on average equity were 1.11% and 16.41%, respectively, for 1998, compared to
1.08% and 14.51% in 1997.
Adjusting for the various non-recurring items discussed earlier, tangible
net income from core earnings totaled $11,084,000 for 1998, increasing by 12%,
compared to $9,864,000 in 1997. Tangible earnings per share (basic and diluted)
equaled $2.18, an increase of 15% compared to the $1.90 recorded in 1997.
Tangible return on average assets and return on average equity based on core
earnings were 1.05% and 15.48%, respectively, for 1998, compared to 1.08% and
14.51% in 1997.
Net Interest Income
Net interest income continues to be the principal component of net income
and totaled $37,875,000. Net interest income for 1997 was $31,260,000. The
increase in net interest income was primarily attributable to the growth in
earning assets and the acquisition of Rose Shanis.
- --------------------------------------------------------------------------------
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<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 which 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:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets
Loans (1) $ 482,300 $48,812 10.12% $432,581 $39,175 9.06% $365,778 $34,122 9.33%
Interest bearing deposits in banks 6,228 368 5.91% 634 23 3.63% 210 16 7.62%
Federal funds sold 21,821 1,185 5.43% 19,725 1,110 5.63% 21,826 1,176 5.39%
Investments:
Mortgage-backed securities 251,388 16,936 6.74% 249,611 17,579 7.04% 221,624 15,315 6.91%
U.S. Government (2) 135,173 8,934 6.61% 69,053 4,543 6.58% 61,575 4,128 6.70%
Other securities (3) 27,813 2,044 7.35% 11,202 913 8.15% 4,929 357 7.24%
State and municipal (4) 84,603 7,017 8.29% 81,902 6,833 8.34% 72,394 6,029 8.33%
-------------------------------------------------------------------------------------------
Total earning assets 1,009,326 85,296 8.45% 864,708 70,176 8.12% 748,336 61,143 8.17%
------ ------ ------
Non-interest earning assets
Cash and due from banks 18,803 20,294 19,701
Premises and equipment 15,171 15,427 15,552
Other assets 28,297 24,688 26,313
Allowance for credit losses (8,550) (5,320) (4,827)
---------- -------- --------
Total assets $1,063,047 $919,797 $805,075
========== ======== ========
Interest bearing liabilities
Demand deposits $ 58,315 $ 1,166 2.00% $ 58,169 $ 1,336 2.30% $ 58,676 $ 1,514 2.58%
Savings deposits 174,830 5,158 2.95% 184,972 5,964 3.22% 182,857 5,628 3.08%
Time deposits 317,714 17,841 5.62% 302,205 16,898 5.59% 286,557 15,860 5.53%
Borrowings 332,649 20,026 6.02% 204,608 11,977 5.85% 115,919 6,242 5.38%
-------------------------------------------------------------------------------------------
Total interest bearing liabilities 883,508 44,191 5.00% 749,954 36,175 4.82% 644,009 29,244 4.54%
------ ------ ------
Non-interest bearing liabilities
Demand deposits 90,666 89,488 83,825
Other 10,621 7,858 8,471
Stockholders' equity 78,252 72,497 68,770
---------- -------- --------
Total liabilities and
stockholders' equity $1,063,047 $919,797 $805,075
========== ======== ========
Net interest spread $41,105 3.45% $34,001 3.30% $31,899 3.63%
======= ======= =======
Net interest margin 4.07% 3.93% 4.26%
</TABLE>
(1) Interest income includes tax equivalent adjustment of $194,000 for 1998,
$164,000 for 1997 and $165,000 for 1996.
(2) Interest income includes tax equivalent adjustment of $589,000 for 1998,
$190,000 for 1997 and $132,000 for 1996.
(3) Interest income includes tax equivalent adjustment of $62,000 for 1998,
$61,000 for 1997 and $0 for 1996.
(4) Interest income includes tax equivalent adjustment of $2,385,000 for 1998,
$2,326,000 for 1997 and $2,050,000 for 1996.
- --------------------------------------------------------------------------------
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<PAGE>
- --------------------------------------------------------------------------------
Net interest income on a tax equivalent basis was $41,105,000, an increase
of 21% from 1997's net interest income of $34,001,000. The tax equivalent net
interest margin increased to 4.07% from 3.93%. The increase in the margin
occurred as average rates on earning assets increased 33 basis points, while the
average rates paid on deposits and borrowings increased by 18 basis points.
Yields on loans increased 106 basis points, primarily due to the addition of
Rose Shanis.
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 deposits and
borrowings are referred to as rate-related variances. The following table
summarizes the changes in tax equivalent net interest income due to volume and
rate variances:
(dollars in thousands) 1998 compared to 1997
- --------------------------------------------------------------------------------
Increase
(decrease)
due to
- --------------------------------------------------------------------------------
Volume Rate Total
- --------------------------------------------------------------------------------
Interest income
Loans $ 4,503 $ 5,134 $ 9,637
Investments:
Mortgage-backed securities 125 (768) (643)
U.S. Government 4,350 41 4,391
Other securities 1,354 (223) 1,131
State and municipal 226 (42) 184
Other earning assets 321 99 420
-----------------------------------
Total interest income 10,879 4,241 15,120
Interest expense
Interest bearing demand deposits 3 (173) (170)
Savings deposits (327) (479) (806)
Time deposits 867 76 943
Borrowings 7,495 554 8,049
-----------------------------------
Total interest expense 8,038 (22) 8,016
-----------------------------------
Net interest income $ 2,841 $ 4,263 $ 7,104
===================================
(dollars in thousands) 1997 compared to 1996
- --------------------------------------------------------------------------------
Increase
(decrease)
due to
- --------------------------------------------------------------------------------
Volume Rate Total
- --------------------------------------------------------------------------------
Interest income
Loans $ 6,232 $(1,179) $ 5,053
Investments:
Mortgage-backed securities 1,934 330 2,264
U.S. Government 501 (86) 415
Other securities 454 102 556
State and municipal 792 12 804
Other earning assets (81) 22 (59)
-----------------------------------
Total interest income 9,832 (799) 9,033
Interest expense
Interest bearing demand deposits (13) (165) (178)
Savings deposits 65 271 336
Time deposits 866 172 1,038
Borrowings 4,776 959 5,735
-----------------------------------
Total interest expense 5,694 1,237 6,931
-----------------------------------
Net interest income $ 4,138 $(2,036) $ 2,102
===================================
Interest income on a tax equivalent basis totaled $85,296,000, an increase
of $15,120,000 or 22%, from 1997. The increase was attributable to higher levels
of average earning assets which grew $144,618,000 or 17%, compared to 1997, as
well as higher yields on loans. The mix of average earning assets changed little
from 1997, while average yields increased 33 basis points due to higher yields
on loans added in the Rose Shanis acquisition.
Interest expense totaled $44,191,000, up $8,016,000 or 22%, from
$36,175,000 in 1997. Average interest bearing deposits increased $5,513,000 and
average borrowings increased $128,041,000, resulting in higher interest expense.
The mix of interest bearing liabilities shifted to more costly borrowings and
time deposits and resulted in an overall increase in average rates paid for
interest bearing liabilities of 18 basis points. Included in the increase in
borrowings is the issuance of $20,000,000 of Preferred Securities issued by
Mason-Dixon Capital Trust II, which carry an annual dividend rate of 8.40% and a
$20,000,000, 10-year subordinated note with an annual cost of 7.48%. The Trust
Preferred Securities and the notes were issued to raise cash for the acquisition
of Rose Shanis and to payoff an existing line of credit maintained by Rose
Shanis which had a higher overall cost. The Trust Preferred Securities and the
note are discussed further in the Balance Sheet Review of this Management
Discussion, as well as in Note 11 of the consolidated financial statements.
- --------------------------------------------------------------------------------
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<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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, 1998.
The provision for credit losses in 1998 totaled $3,677,000, compared to
$138,000 in 1997. The increase in the provision is largely due to two
significant provisions recognized in 1998. Concurrent with the acquisition of
Rose Shanis, the chargeoff policy for the consumer finance receivables purchased
was changed to align write-offs of these receivables more closely with industry
standards. As a result, consumer finance receivables are now generally charged
off when they become 180 days delinquent on a contractual basis. Prior to the
acquisition, Rose Shanis charged off receivables at 270 days delinquent on a
contractual basis and 90 days on a recency basis. This change in policy resulted
in a one-time increase in net chargeoffs approximating $2,000,000. Also during
1998, Mason-Dixon's banking affiliates performed necessary due diligence of
loans with possible risks related to the Year 2000 issue. The resultant analysis
of these loans resulted in a special provision of $918,000. Net chargeoffs
increased by $2,822,000 to total $2,896,000. As a percentage of average loans,
net chargeoffs were .60%, compared to .02% in 1997. Excluding the chargeoffs
associated with the change in chargeoff policy for Rose Shanis (approximately
$2,000,000), net chargeoffs as a percentage of average loans totaled .19%. This
increase resulted due to higher net chargeoffs at banking affiliates, as well as
chargeoffs associated with Rose Shanis. The table below shows net chargeoffs of
banking affiliates, and Rose Shanis individually. Loss levels increased during
1998 primarily as a result of losses associated with Rose Shanis. Mason-Dixon
will likely experience higher net chargeoffs in the future due to the somewhat
higher risk associated with consumer finance receivables. The effects of these
losses are significantly mitigated by the higher margins associated with the
consumer finance receivables and higher reserve levels which exist for Rose
Shanis.
Net Chargeoffs Analysis
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Net chargeoffs
Banking affiliates $ 493 $ 74
Rose Shanis 2,403 --
--------------------------
Total $ 2,896 $ 74
==========================
Average loans
Banking affiliates $444,361 $432,581
Rose Shanis 37,939 --
--------------------------
Total $482,300 $432,581
==========================
Net chargeoffs as a percentage
of average loans
Banking affiliates 0.11% 0.02%
Rose Shanis 6.33% --
Total 0.60% 0.02%
The allowance for credit losses was 1.92% of loans outstanding at December
31, 1998 and 1.14% at December 31, 1997. The significant increase is associated
with the higher reserves of Rose Shanis, as well as increased reserves for the
banking affiliates. The table below highlights the reserve levels for banking
affiliates and Rose Shanis.
Allowance for Credit Losses Analysis
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Allowance for credit losses
Banking affiliates $ 5,853 $ 5,231
Rose Shanis 3,040 --
--------------------------
Total $ 8,893 $ 5,231
==========================
Period end loans
Banking affiliates $418,719 $460,391
Rose Shanis 43,838 --
--------------------------
Total $462,557 $460,391
==========================
Allowance as a percentage of
period end loans
Banking affiliates 1.40% 1.14%
Rose Shanis 6.93% --
Total 1.92% 1.14%
- --------------------------------------------------------------------------------
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<PAGE>
- --------------------------------------------------------------------------------
In addition to the stated reserves, Rose Shanis further mitigates losses
through reserves established by dealers who sell notes to Rose Shanis. These
reserves are held to absorb losses on notes purchased from dealers and are
classified as liabilities on the balance sheet, since the reserves are
refundable to the dealer if the notes are paid off as agreed. The total amount
of dealer reserves at December 31, 1998 included in other liabilities totaled
$331,000.
Accruing loans 90 days past due and non-accrual loans (non-performing
loans) totaled $6,078,000 (1.31% of loans outstanding), compared to $3,786,000
(.82% of loans outstanding) at year end 1997. Coverage of non-performing loans
(allowance for credit losses divided by non-performing loans) equaled 1.46x at
December 31, 1998, compared to 1.38x at December 31, 1997. As with other credit
quality statistics, Mason-Dixon's level of non-performing loans has been
materially increased as a result of the Rose Shanis acquisition. Again, this
risk is mitigated by substantially higher net interest margins and significant
reserves. The table below highlights levels of non-performing loans and coverage
ratios for banking affiliates and Rose Shanis separately.
Non-Performing Loans Analysis
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Non-performing loans
Banking affiliates $ 4,030 $ 3,786
Rose Shanis 2,048 --
--------------------------
Total $ 6,078 $ 3,786
==========================
Period end loans
Banking affiliates $418,719 $460,391
Rose Shanis 43,838 --
--------------------------
Total $462,557 $460,391
==========================
Non-performing loans as a
percentage of period end loans
Banking affiliates 0.96% 0.82%
Rose Shanis 4.67% --
- --------------------------------------------------------------------------------
Total 1.31% 0.82%
Allowance coverage of
non-performing loans
Banking affiliates 1.45x 1.38x
Rose Shanis 1.48x --
- --------------------------------------------------------------------------------
Total 1.46x 1.38x
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 retail investment products and credit related insurance
products, loan servicing fees and other miscellaneous income, such as safe
deposit box rental fees and sales of assets.
Total other operating income amounted to $17,014,000, up $9,024,000 or
113%, from 1997. Other operating income in 1998 included a one-time gain on the
sale of branches of $6,717,000. Excluding the one-time gain, other operating
income increased by $2,307,000, or 29%. Contributing to the increase was
significant growth in mortgage banking revenue, commission income of Rose Shanis
and Bay Insurance, as well as increases in most other components of other
operating income.
Service charges decreased $183,000 due to the loss of service charge income
associated with the demand deposit accounts of the branches which were sold in
June of 1998. Trust Division income continued to increase, up by $195,000, or
13%. Trust assets under management grew by $20,100,000 to reach $224,000,000.
Gains on sales of securities totaled $792,000, compared to $554,000 in 1997.
Gains on sales of mortgage loans increased to $2,140,000, compared to gains of
$1,843,000 in 1997. The increase accompanied continued growth in mortgage loan
origination volume. All other sources of other operating income increased by
$1,760,000, or 93%. Most of the increase resulted from commissions from the
sales of credit related insurance products from Rose Shanis and Bay Insurance
which added $1,566,000. Fees on debit card transactions increased $66,000, while
commissions from the sales of mutual funds increased $58,000.
Other Operating Expenses
Total other operating expenses increased by $9,322,000 or 35%. Most
components of other operating expenses increased. Total operating expenses added
through the acquisition of Rose Shanis totaled $5,746,000. Non-recurring items
included in the overall increase in operating expenses include reorganization
costs of $465,000, Year 2000 expenses totaling $700,000 and an impairment
recognition in value of mortgage sub-servicing rights of $841,000. Excluding the
effects of Rose Shanis and the various non-recurring items, expenses increased
$1,570,000, or 6%.
Salaries and employee benefits increased by $5,127,000 or 32%. Salary costs
related to Rose Shanis added approximately $3,386,000, while reorganization
costs added $465,000. Otherwise, salaries and benefits increased by $1,276,000,
or 8%. This increase resulted from normal increases in salaries, as well as
higher incentive compensation paid from increased mortgage and mutual fund
volume.
Net occupancy expenses grew by $175,000 or 7%. Occupancy costs associated
with Rose Shanis added $244,000. Excluding Rose Shanis, occupancy declined
$69,000, reflecting the decrease in occupancy costs associated with the sale of
the branches.
Equipment expenses increased by $340,000. This increase is attributable to
added costs of Rose Shanis of
- --------------------------------------------------------------------------------
Page 11
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
$152,000, as well as higher depreciation expenses associated with several
technology related initiatives.
Legal and other professional fees decreased by $71,000. Expenses in 1997
were higher as a result of litigation expenses associated with a group of
dissident stockholders, as well as increased consulting fees.
Outside data processing expenses increased by $22,000 or 2%. Normal
inflationary increases in this category were mitigated somewhat by the sale of
the branches which decreased average account volumes for 1998.
Amortization of mortgage sub-servicing rights totaled $1,198,000 in 1998,
increasing $783,000 when compared to 1997. The increase in expense reflects the
write-down of the book value of mortgage sub-servicing rights of $841,000.
Mortgage sub-servicing rights permit the company to maintain escrow and other
deposits for loans serviced by a third party. The impairment recognition
resulted from a change in valuation method which more closely aligns the
carrying value of these rights to current market rates of interest as well as
recently quoted market values. Decreases in market interest rates and increases
in prepayments of the underlying pools have both contributed to the underlying
valuation. Decreases in market interest rates result in lower potential
investment income from investing the deposits, while higher prepayments reduce
the projected remaining life of the income stream generated by investing the
deposits. Mortgage sub-servicing 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 $643,000 in 1998, compared to
$444,000 in 1997. Intangible assets being amortized included goodwill created as
a result of purchase acquisitions, as well as a core deposit intangible acquired
in the Bank of Maryland merger. Amortization for 1998 reflects increases for the
goodwill associated with the Rose Shanis acquisition of $436,000. Intangible
amortization relating to the acquisition of Bank of Maryland decreased $237,000
due to a core deposit amortization which was fully amortized in the fourth
quarter of 1997, as well as a reduction in goodwill associated with the branches
which were sold during 1998, thereby reducing amortization expense beginning in
June 1998. The adjustment in the goodwill for the sale of the branches is
discussed in more detail in the Balance Sheet section of this Management
Discussion.
Other expenses increased by $2,749,000 or 81%. Other expenses of Rose
Shanis added $1,965,000, while costs associated with remedying Year 2000 issues
approximated $700,000. Excluding these items, other expenses increased by
$84,000, or 2%.
Income Taxes
Income tax expenses increased $1,126,000 from 1997, and the effective tax
rate for 1998 was 28.4%, up from 25.7% in 1997. The increase is attributable to
increased taxable income and the non-deductibility of the goodwill reduction
associated with the sale of branches, which more than offset higher levels of
tax exempt income. Note 17 of the consolidated financial statements includes a
reconciliation of Federal income tax expense computed using the Federal
statutory rate of 35%. See Notes 1 and 17 of the consolidated statements for
additional information relating to income tax expense and deferred tax benefits.
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
$315,000,000, with a remaining availability of $45,449,000. At December 31,
1998, Mason-Dixon's loan-to-deposit ratio was 72%. Additionally, Mason-Dixon's
securities classified as available for sale, which totaled $381,512,000, were
available for the management of liquidity and interest rate risk.
Mortgage-backed securities classified as held to maturity, which totaled
$52,269,000, provide significant cash flow each month. Cash and cash equivalents
at December 31, 1998 were $25,643,000, down from $37,963,000 at year end 1997,
primarily due to a decline in Federal funds sold. 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.
- --------------------------------------------------------------------------------
Page 12
<PAGE>
- --------------------------------------------------------------------------------
Mason-Dixon's interest rate sensitivity at December 31, 1998, 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 $101,482 $ 99,957 $265,821 $ 99,618 $ -- $ 566,878
Loans (including loans held for sale) 175,120 52,588 194,444 48,050 -- 470,202
Other rate sensitive assets 3,001 -- -- -- -- 3,001
Interest sensitivity hedges on assets 15,000 -- (5,000) (10,000) -- --
Non-interest earning assets -- -- -- -- 62,161 62,161
---------------------------------------------------------------------
Total Assets $294,603 $ 152,545 $455,265 $137,668 $ 62,161 $1,102,242
=====================================================================
Liabilities and Stockholders' Equity
Interest bearing deposits $ 71,499 $ 205,888 $242,629 $ 25,387 $ -- $ 545,403
Short-term borrowings 41,816 -- -- -- -- 41,816
Long-term borrowings 142,885 52,143 73,285 60,034 -- 328,347
Interest sensitivity hedges on liabilities (22,000) -- 22,000 -- -- --
Non-interest bearing liabilities
and stockholders' equity -- -- -- -- 186,676 186,676
---------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $234,200 $ 258,031 $337,914 $ 85,421 $ 186,676 $1,102,242
=====================================================================
Interest rate sensitivity gap $ 60,403 $(105,486) $117,351 $ 52,247 $(124,515)
Cumulative interest rate sensitivity gap $ 60,403 $ (45,083) $ 72,268 $124,515 $ --
Cumulative ratio of interest sensitive
assets to interest sensitive liabilities 1.26 0.91 1.09 1.14 1.00
</TABLE>
Assumptions:
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, noncallable investments are grouped by final maturity
date. Fixed rate callable investments are grouped based on management's
estimates of call probability. 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. Long-term borrowings with call provisions are grouped based on
management's estimates of call probability.
At December 31, 1998, Mason-Dixon had a negative one year GAP (rate
sensitive liabilities in excess of rate sensitive assets) of $45,083,000, which
was 4% of total assets. At five years, Mason-Dixon has a positive GAP (rate
sensitive assets in excess of rate sensitive liabilities) of $72,268,000, or 7%
of total assets.
At December 31, 1997, Mason-Dixon had a positive one year GAP of
$42,252,000 and a positive five year GAP of $85,069,000. The change in
cumulative GAP position at one-year was due to increases in investment
securities with maturities beyond one year, and increases in interest bearing
deposits and long-term borrowings which are assumed to reprice within one year.
These changes were the result of balance sheet strategies employed after the
sale of branches. Securities with longer maturities were purchased to replace
the loans sold, while borrowings with somewhat shorter repricing opportunities
replaced a portion of the deposits sold.
Mason-Dixon tests its interest rate sensitivity through the deployment of
simulation analysis. Earnings simulation models are used to estimate what effect
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 all products are included to the
extent they become effective within a one year period. Changes in prepayments
have been included where changes in payment behavior pattern are assumed to be
significant to the simulation. Call features on certain securities are based on
their projected call probability in view of the assumed rate environment. At
December 31, 1998, Mason-Dixon's estimated earnings sensitivity profile
reflected a modest sensitivity to interest rate changes. Based on an assumed
- --------------------------------------------------------------------------------
Page 13
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
100 basis point immediate increase in interest rates, Mason-Dixon's pretax net
interest income would increase by $576,000 (1%) if rates were to increase by 100
basis points, and decline by $1,097,000 (3%) should rates fall 100 basis points.
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,
1998, the notional amount of all interest rate swaps totaled $82,000,000. The
risk of loss due to failure of the counterparty to perform was $112,000, which
is the total of all interest rate swaps in a gain position. The terms of all
interest rate swaps as of December 31, 1998 were as follows:
Interest Rate Swaps that mature within:
One Two Five Ten
(dollars in thousands) Year Years Years Years Total
- ------------------------------------------------------------------------------
Pay fixed/receive floating:
Notional amount $5,000 $15,000 $10,000 $32,000 $62,000
Weighted average rates received 5.19% 5.45% 5.69% 5.36% 5.42%
Weighted average rates paid 5.11% 6.44% 5.24% 5.36% 5.58%
Receive fixed/pay floating:
Notional amount $ -- $20,000 $ -- $ -- $20,000
Weighted average rates received -- 5.55% -- -- 5.55%
Weighted average rates paid -- 5.38% -- -- 5.38%
Balance Sheet Review
Total assets ended 1998 at $1,102,242,000, eclipsing $1 billion for the
first time and increasing $110,062,000, or 11%. The growth in total assets
reflects increased levels of loans and investment securities. The increase in
assets was funded through increases in borrowed funds and stockholders' equity.
Investment securities totaled $566,878,000, an increase of $112,978,000 or
25%. Much of the increase occurred due to the purchase of $60,000,000 of
investment securities to replace loans sold in the branch sale. Securities
classified as held to maturity decreased $18,679,000, or 9%, as maturities and
prepayments exceeded purchases in this portfolio. The market value of the held
to maturity investments was $188,522,000, a 2% unrealized appreciation over the
amortized cost of $185,366,000. Securities classified as available for sale
increased by $131,657,000, driven by the securities purchased to replace sold
loans, as well as more aggressive management of Federal funds sold. Management
believes that the available for sale portfolio, which totaled $381,512,000 at
December 31, 1998, 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 $339,311,000 (60%). Obligations of states and political
subdivisions totaled $99,885,000 (18%) at December 31, 1998. 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.
- --------------------------------------------------------------------------------
Page 14
<PAGE>
- --------------------------------------------------------------------------------
Loans increased by $2,166,000. In June of 1998, approximately $58,370,000
of loans were included in the sale of the Eastern Shore branches. In February
1998, approximately $44,366,000 of loans were added with the acquisition of Rose
Shanis. Excluding the sale and acquisition, loans increased $16,170,000 or 4%.
Changes in loans outstanding resulting from the branch sale, the acquisition of
Rose Shanis, and other activity are presented in the table below:
<TABLE>
<CAPTION>
Rose Shanis Branch
December 31, Loans Loans Other December 31,
(dollars in thousands) 1997 Acquired Sold Activity 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Construction and land development $ 31,427 $ -- $ -- $ 9,835 $ 41,262
Residential real estate--mortgage 186,978 423 (42,452) 6,054 151,003
Commercial real estate--mortgage 136,194 -- (4,308) (4,061) 127,825
Commercial 88,669 -- (6,850) 5,347 87,166
Consumer 17,464 44,619 (4,760) (2,020) 55,303
--------------------------------------------------------------------------------
Total loans 460,732 45,042 (58,370) 15,155 462,559
Unearned income on loans (341) (676) -- 1,015 (2)
--------------------------------------------------------------------------------
Loans (net of unearned income) $ 460,391 $ 44,366 $ (58,370) $ 16,170 $ 462,557
================================================================================
</TABLE>
Construction and land development loans increased $9,835,000, or 31%.
Residential real estate mortgages decreased by $35,975,000, or 19%. Residential
loans sold with the branch sale totaled $42,452,000. While the volume of
portfolio mortgage loans increased in 1998, maturities and prepayments
accelerated. These effects resulted in a net gain in outstandings of $6,054,000,
or 3%, excluding the effects of the branch sale and Rose Shanis acquisition.
Commercial real estate mortgage loans decreased with loans divested in the
branch sale totaling $4,308,000. Commercial loans also decreased ($1,503,000, or
2%) with total commercial loans sold equaling $6,850,000. Prepayment activity
accelerated in commercial mortgages and regular commercial loans. Consumer loans
increased $37,839,000, primarily due to the acquisition of Rose Shanis, bringing
consumer loans to 12% of total loans outstanding. As a result of activity during
1998, the mix in the portfolio is more evenly balanced compared to December 31,
1997.
Deferred income taxes decreased by $392,000. Utilization of net operating
loss carryforwards totaled $609,000. This decline in deferred taxes was offset
by the increase in deferred taxes related to the available for sale investment
portfolio. The unrealized gain on available for sale securities decreased by
$579,000, increasing deferred income taxes by $223,000.
Mortgage servicing and sub-servicing rights declined by $1,199,000, due to
normal scheduled amortization, as well as the recognition of an impairment loss
of $841,000. The valuation method of these rights was changed in light of recent
declines in market interest rates and declines in approximate market value of
the sub-servicing rights. 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, with the value of the rights to place the deposits driven by current
market rates of interest and expected life of the mortgages being serviced.
Recent declines in market interest rates and increasing prepayments of the
underlying mortgages resulted in a reduced value. 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
straight-line method. At year end, accumulated amortization had reduced the book
value to $2,119,000. Valuations are performed regularly to determine if there
has been any significant deterioration in value which would require an
adjustment in reported book value. Carroll County Bank had unamortized mortgage
servicing rights totaling $94,000 at year end 1998, compared to $95,000 on
December 31, 1997.
Intangible assets at December 31, 1998 represent goodwill created as a
result of the Bank of Maryland and Rose Shanis acquisitions. Goodwill is
typically created in acquisitions accounted for under the purchase method of
accounting and represents the excess of the purchase price over the fair value
of the net assets acquired. This amount is being amortized over 15 years for the
Bank of Maryland acquisition and 10 years for the Rose Shanis acquisition using
the straight-line method. Goodwill was also reduced by $1,128,000 to recognize
the proportionate decrease in unamortized goodwill associated with the Eastern
Shore branches sold. The proportionate goodwill reduction amount was based on
the estimated net income produced by these branches as a percentage of total net
income for Bank of Maryland. This reduction of goodwill is governed by Statement
of Financial Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of," which requires the
- --------------------------------------------------------------------------------
Page 15
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
immediate recognition of any impairment in long-lived assets. The remaining book
value of Bank of Maryland goodwill was $1,640,000 at December 31, 1998. Goodwill
attributable to the acquisition of Rose Shanis of $5,450,000 was recorded in
February of 1998. The remaining unamortized goodwill totaled $5,014,000 at
December 31, 1998.
Total deposits decreased by $10,900,000, or 2%. Most deposit types
decreased due to the sale of branches. The following table highlights the
changes in overall deposit levels and the amounts attributable to the sale of
the branches:
Branch
December 31, Deposits Other December 31,
(dollars in thousands) 1997 Sold Activity 1998
- --------------------------------------------------------------------------------
Non-interest
bearing
deposits $ 89,692 $ (8,553) $ 13,807 $ 94,946
NOW accounts 63,782 (8,292) 9,182 64,672
Regular savings 94,248 (8,010) 2,942 89,180
Money market
savings 89,106 (5,655) (9,008) 74,443
Time deposits 314,421 (56,742) 59,429 317,108
----------------------------------------------------
Total deposits $651,249 $(87,252) $ 76,352 $640,349
====================================================
Deposits balances sold totaled $87,252,000. Excluding the sale of deposits,
deposits increased $76,352,000 or 12%. Trends continued toward growth in
non-interest demand deposits accounts and higher cost certificates of deposits.
Most of the growth in deposits (excluding the deposits sold) occurred in time
deposits which grew by $59,429,000, or 19%. Non-interest bearing deposits
increased $13,807,000, or 15%. NOW accounts also grew by 14%, to $64,672,000 at
year end 1998. Money market accounts decreased 10%, while regular savings
accounts decreased by 3%.
Short-term borrowings decreased by $55,387,000. The decrease resulted as a
significant amount of short-term borrowings were converted to long-term FHLB
advances. These increased advances were utilized to achieve lower overall cost
or to realize other beneficial features of a longer-term maturity structure.
Long-term borrowings increased by $167,458,000 or 104%. Borrowings from the
FHLB increased $128,075,000, which supported growth in earning assets, replaced
a portion of the deposits sold and converted several short-term borrowings to
long-term borrowings. 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 increases in FHLB borrowings, Mason-Dixon completed the
issuance of $20,000,000 of Preferred Securities of Mason-Dixon Capital Trust II,
a Trust established by Mason-Dixon for financing purposes. The issuance was
completed in April of 1998. Mason-Dixon also completed in April of 1998 the
placement of $20,000,000 of long-term fixed rate senior notes with a 10-year
maturity. The proceeds from the issuance of the Preferred Securities and the
notes were used to pay for the cash acquisition of Rose Shanis, as well as to
repay a line of credit Rose Shanis maintained with a financial institution. The
repayment of the variable rate line of credit with the fixed rate notes and
Preferred Securities provided Rose Shanis with a fixed rate source of funding,
thereby insulating Rose Shanis from any interest rate risk on its fixed rate
loan portfolio. The Preferred Securities issued during 1998 have a fixed
dividend yield of 8.40%, redemption date of June 30, 2028 and are subject to
varying call provisions beginning April 22, 2003. The stated value of the
Preferred Securities is unconditionally guaranteed on a subordinated basis by
Mason-Dixon. Issuance costs associated with the Preferred Securities are being
amortized to maturity using the straight-line method. The senior notes carry a
fixed interest rate of 7.48% and a redemption date of April 22, 2008.
Stockholders' Equity and Capital Resources
Total stockholders' equity ended 1998 at $82,139,000, up $6,690,000 from
year end 1997. Retained earnings grew $7,260,000 as a result of $10,811,000 in
net income, less $3,551,000 in cash dividends paid. Accumulated other
comprehensive income, consisting solely of unrealized appreciation in certain
debt and equity securities, decreased by $355,000, as market values ended 1998
somewhat lower than year end 1997. The market value, net of tax effect, is
included as a separate component of stockholders' equity. Net reduction in
common stock and surplus totaled $215,000, reflecting several small share
repurchases and issuances during 1998.
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
- --------------------------------------------------------------------------------
Page 16
<PAGE>
- --------------------------------------------------------------------------------
total capital, Tier 1 capital and capital leverage ratios, respectively. Tier 1
capital consists of stockholders' equity and qualifying Trust Preferred
Securities, less unrealized gains on securities classified as available for sale
and 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, plus any portion of Trust Preferred Securities which
do not qualify as Tier 1 capital, and the qualifying amount of the allowance for
credit losses. Trust Preferred Securities are limited by regulation for
inclusion as Tier 1 capital to a maximum of one-third of "core capital
elements." Any amount in excess of one-third of core capital elements qualifies
for inclusion as total capital. Core Capital Elements are defined as total
stockholders' equity adjusted for any unrealized gain or loss on securities
classified as available for sale. The amount of the allowance for credit losses
which is included as total capital is limited to a maximum of 1.25% of
risk-adjusted assets.
The following table summarizes Mason-Dixon's capital adequacy for 1998 and
1997:
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Tier 1 Capital:
Total stockholders' equity $ 82,139 $ 75,449
Qualifying trust preferred
securities (1) 26,782 20,000
Less: Unrealized appreciation
on certain debt and equity
securities 1,794 2,149
Intangible assets 6,654 2,956
Disallowed deferred
income taxes 4,208 4,771
----------------------------
Total Tier 1 Capital 96,265 85,573
Total Capital:
Add: Qualifying trust preferred
securities (1) 13,218 --
Qualifying allowance for
credit losses (2) 8,025 5,231
----------------------------
Total Capital $ 117,508 $ 90,804
============================
Risk-weighted assets $ 642,007 $ 580,693
Quarterly average assets $1,084,984 $ 979,160
Total Capital Ratio (3) 18.30% 15.64%
Tier 1 Capital Ratio (4) 14.99% 14.74%
Capital Leverage Ratio (5) 8.87% 8.74%
(1) Trust Preferred Securities qualifying as Tier 1 Capital are limited to
one-third of core capital elements. Remainder qualify as Total Capital.
(2) Allowance for credit losses qualifying for Total Capital is limited to
1.25% of risk-weighted assets.
(3) Total Capital divided by risk-weighted assets.
(4) Tier 1 Capital divided by risk-weighted assets.
(5) Tier 1 Capital divided by quarterly average assets.
All measures of capital adequacy improved significantly in 1998 primarily
due to growth in stockholders' equity and the issuance of additional Trust
Preferred Securities. The issuance of Trust Preferred Securities in 1998 added
$6,782,000 to eligible Tier 1 and $20,000,000 to Total Capital of Mason-Dixon.
The Capital Leverage Ratio improved from 1997 as the percentage increase in
qualifying capital was greater than the increase in average quarterly assets.
Both Total Capital and Tier 1 Capital Ratios increased as the rate of growth of
qualifying capital was greater than the rate of growth of risk-weighted assets.
Management believes the increased 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.
1997 Compared to 1996
The following discussion and analysis provides a comparison of
Mason-Dixon's results of operations for the years ended December 31, 1997 and
1996. This discussion should be read in conjunction with the consolidated
financial statements and related notes included in this report.
Performance Overview
Mason-Dixon's net income of $9,159,000 represented a 9% increase over
1996's net income of $8,436,000. Basic and diluted earnings per share were $1.77
and $1.60 for 1997 and 1996, respectively; an increase of 11%. Return on average
stockholders' equity was 12.63%, increasing from 12.27% in 1996. Return on
average assets for 1997 was 1.00%, down from 1.05% in 1996. Factors contributing
to the increase in profits were higher levels of net interest income, which
increased $1,708,000, and other operating income which grew by $509,000.
Tangible net income was $9,864,000, an increase of 10% over 1996 tangible
net income of $8,960,000. Tangible return on average assets was 1.08% for 1997,
compared to 1.12% for 1996. Tangible return on average equity equaled 14.51%, up
from 14.02% for 1996.
Net interest income totaled $31,260,000, compared to $29,552,000 for 1996,
with most of the increase attributable to growth in average earning assets,
which increased by 16%. The tax equivalent net interest margin decreased to
3.93% in 1997, down from 4.26% in 1996. The decrease occurred as average rates
earned on earning assets decreased 5 basis points, while average rates on
deposits and borrowings increased by 28 basis points.
The provision for credit losses in 1997 totaled $138,000, compared to
$836,000 recognized in 1996. The decrease in the provision was largely
attributable to the decrease in net chargeoffs. Net chargeoffs totaled $74,000
in 1997, compared
- --------------------------------------------------------------------------------
Page 17
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
to $398,000 in 1996. Net losses as a percentage of average total loans was .02%
in 1997, compared to .11% in 1996.
Other operating income increased $509,000 or 7% from 1996. Service charges
increased $100,000 due to increased volume of overdrafts and Automated Teller
Machine transactions. Trust Division income continued to increase, up by 5%, or
$64,000. Trust assets under management grew by $42,645,000 to reach
$203,900,000. Gains on sales of securities totaled $554,000, compared to
$271,000 for 1996. Gains on sales of mortgage loans increased to $1,843,000,
compared to $584,000 for 1996, due to a significant increase in the volume of
loan originations and subsequent sales. 1996's other operating income included a
gain on the sale of branch deposits of $1,469,000. All remaining sources of
other operating income for 1997 increased by $272,000, largely due to increased
commissions from sales of mutual funds and annuities.
Total other operating expenses increased by $2,033,000 or 8%. All
components of other operating expenses increased, with the exception of
amortization expense of other intangible assets.
Salaries and employee benefits increased by $1,676,000 or 12%. Salary costs
related to mortgage banking activities increased approximately $826,000.
Otherwise, salaries and benefits increased by $850,000, or 6%. This increase
resulted from normal increases in salaries, as well as staff increases.
Retirement plan expenses decreased by $168,000.
Net occupancy expenses grew by $214,000 or 9%. Increases in maintenance and
repairs, as well as additional rental expenses for the opening of additional
mortgage offices, contributed to the increase.
Equipment expenses increased by $50,000. This increase is primarily
attributable to higher depreciation expenses associated with several technology
related initiatives.
Federal Deposit Insurance Corporation (FDIC) insurance expenses increased
to $78,000. Congress enacted legislation in 1996 resulting in the merger of the
Bank Insurance Fund (BIF) with the Savings Association Insurance Fund (SAIF).
Pursuant to the recapitalization and merger of the insurance funds, annual
assessments for banks were increased by the FDIC beginning in 1997.
Outside data processing expenses increased by $60,000 or 6%, due primarily
to additional account volume.
Amortization of mortgage sub-servicing rights totaled $415,000 in 1997,
equal to 1996. This expense reflects the amortization of the purchase price of
mortgage sub-servicing rights acquired in the purchase of Bank of Maryland.
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 $444,000 in 1997, compared to
$493,000 in 1996. Intangible assets being amortized included goodwill created as
a result of the merger, as well as a core deposit intangible acquired in the
merger. The lower amortization amount for 1997 reflects a reduction in
amortization for the core deposit intangible, which was fully amortized at
November 30, 1997.
Other expenses decreased by $380,000 or 10%. Expenses in 1996 included
$256,000 for costs associated with the disposition of the Bethesda branch of
Bank of Maryland.
Income tax expenses increased $159,000 from 1996, due to higher levels of
pretax net income. The effective tax rate for 1997 was 25.7%, down slightly from
26.3% in 1996. Note 17 to the consolidated financial statements includes a
reconciliation of Federal income tax expense computed using the Federal
statutory rate of 35%. See Notes 1 and 17 to the consolidated statements for
additional information relating to income tax expense and deferred tax benefits.
Year 2000
This is a Year 2000 Readiness Disclosure under the Year 2000 Information
and Readiness Disclosure Act of 1998. Mason-Dixon continued its progress in
preparing for the Year 2000 throughout 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.
Mason-Dixon has had in place a task force which has been preparing
information technology (IT) systems, as well as non-IT systems for over a year.
Representatives of the task force regularly update Mason-Dixon's Senior
Management and Board of Directors with progress reports which outline progress
and future timetables for completion of critical phases of the Year 2000
project. Mason-Dixon adopted a Year 2000 plan developed by its task force in
accordance with guidelines set forth by the Federal Financial Institutions
Examination Council (FFIEC). Mason-Dixon expects that all phases of its Year
2000 plan will be completed by the deadlines established by the FFIEC.
- --------------------------------------------------------------------------------
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<PAGE>
- --------------------------------------------------------------------------------
The initial "assessment" phase of the Year 2000 project began in 1997 and
included an inventory of all systems (IT and non-IT) with potential Year 2000
risk. Critical IT systems, which include item processing, communications with
the Federal Reserve ("Fedline") and core loan and deposit processing systems
were identified. Critical non-IT systems which include telephone and internal
communications systems, ATM's and payroll were also identified. Vendors who
provide various systems were contacted to assess their Year 2000 readiness.
Mason-Dixon has completed its review of customized computer code included in the
data processing system provided by its primary supplier of data processing
services. The assessment phase is complete, although it is updated periodically
as necessary.
During the most recent quarter, the project progressed with the renovation
and/or replacement of systems to achieve Year 2000 readiness and the testing of
all critical and noncritical systems.
Test scripts were completed for testing critical software during the most
recent quarter. Mason-Dixon has completed testing of a significant number (48%)
of systems as of December 31, 1998 and expects to complete testing all critical
applications by March 31, 1999. Mason-Dixon expects to complete testing all
systems (critical and non-critical) by September 30, 1999. From vendor responses
and/or certifications of Year 2000 compliance, Mason-Dixon has determined that
several critical IT and non-IT systems will have to be modified to achieve Year
2000 readiness or be replaced with Year 2000 compliant systems. Mason-Dixon does
not perform in-house programming, and thus is dependent on external vendors to
modify customized software code. Mason-Dixon's primary supplier of data
processing services had adopted a Year 2000 plan and timetable and has provided
written assurances to Mason-Dixon of its progress and intention to achieve Year
2000 readiness of both its standard system and customized computer code by March
31, 1999. Mason-Dixon expects that non-compliant systems will be replaced or
renovated prior to January 1, 2000.
The contingency planning phase of Mason-Dixon's Year 2000 project began
during the third quarter of 1998 and was completed by the end of January 1999.
This process incorporates both Business Redemption Plans and Business Resumption
Plans. Business Redemption Plans identify alternative vendors with the capacity
to convert systems which are not Year 2000 compliant to compliant systems prior
to the end of 1999. Business Resumption Plans establish manual procedures
capable of processing critical systems where transactions or volumes are limited
in the event normal business operations are disrupted.
The expected cost of modifications and replacements to non-compliant
systems is currently estimated to be between $700,000 and $1,000,000 and is
being funded through operating cash flows. To date, direct expenses related to
the Year 2000 issue have been $387,000 and does not include any internal
personnel costs. In the second quarter of 1998, Mason-Dixon recorded a charge to
earnings of $700,000 for these estimated costs.
During the second quarter of 1998, Mason-Dixon completed a review of the
Year 2000 readiness of all significant borrowers. Mason-Dixon has determined
that the ability of some of Mason-Dixon's customers to repay their obligations
to Mason-Dixon may be impaired by their inability to remedy their own Year 2000
issues. Mason-Dixon does not anticipate that such impairment will materially
impact its financial position. Mason-Dixon's monitoring of credit risk
attributable to the Year 2000 issue continued through the remainder of 1998 and
resulted in a year-to-date increase in the allowance for credit losses of
approximately $918,000.
Mason-Dixon has distributed surveys to determine the Year 2000 readiness of
significant funds providers to Mason-Dixon. Responses have been received from a
significant number of these providers, however, since Mason-Dixon's assessment
process is not yet complete, the potential for unplanned reductions in the
availability of funds from significant funding sources that have not taken
appropriate steps to manage their own Year 2000 problems exists. Most of the
significant funds providers are banks or bankers' banks which are subject to
regulatory oversight relating to the Year 2000 issue. Follow-up and assessment
of the Year 2000 readiness of significant funds providers will continue until
determination of Year 2000 readiness is made. Contingency plans will be
developed to provide alternative funding sources should funds providers fail to
provide adequate assurance of Year 2000 readiness.
Management of Mason-Dixon believes that the potential effects on
Mason-Dixon's internal operations of the Year 2000 problem can and will be
addressed prior to the year 2000. However, if required modifications or
conversions are not made or are not completed on a timely basis prior to the
year 2000, the Year 2000 problem could disrupt normal business operations. The
most reasonably likely worst case Year 2000 scenarios foreseeable at this time
would include Mason-Dixon temporarily not being able to process, in some
combination, various types of customer transactions. This could affect the
ability of Mason-Dixon to, among other things, originate new loans, post loan
payments, accept deposits or allow immediate withdrawals and, depending on the
amount of time such a scenario lasted, could have material adverse effects on
Mason-Dixon.
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<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Ultimately, the success of Mason-Dixon's efforts to address the Year 2000
issue depends to a large extent not only on the corrective measures that
Mason-Dixon undertakes, but also on the efforts undertaken by businesses,
government entities and other independent entities who provide data to, or
receive data from, Mason-Dixon, such as borrowers, vendors or deposit customers.
In particular, Mason-Dixon's credit risk associated with its borrowers may
increase as a result of problems such borrowers may have resolving their own
Year 2000 issues. Although it is not possible to evaluate the magnitude of any
potential increased credit risk at this time, the impact of the Year 2000 issue
on borrowers could result in increases in problem loans and credit losses in
future years.
The entire cost 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. Factors that
might affect the timely and efficient completion of Mason-Dixon's Year 2000
projects include, but are not limited to, vendors' abilities to adequately
correct or convert software and the effect on Mason-Dixon's ability to test its
systems, the availability and the cost of personnel trained in the Year 2000
area and the ability to identify and correct all relevant computer programs and
similar uncertainties.
Bank regulatory agencies assess Year 2000 readiness. The failure of a
financial institution to take appropriate action to address deficiencies in the
Year 2000 project management process may result in enforcement actions which
could have a material adverse effect on Mason-Dixon, result in civil money
penalties or result in the delay of applications seeking to acquire other
entities or otherwise expand activities.
Recent Stock Prices and Dividends
Mason-Dixon's common stock is traded on the Nasdaq National Market(R)
system under the symbol "MSDX." The number of stockholders of record as of
December 31, 1998 and 1997 was 1,769 and 1,822, respectively. The table below
indicates the range of stock prices and cash dividends paid in 1998 and 1997:
1998
- --------------------------------------------------------------------------------
Cash
High Low Dividend
- --------------------------------------------------------------------------------
1st Quarter $36.63 $29.00 $0.17
2nd Quarter $35.25 $31.50 $0.17
3rd Quarter $33.00 $29.50 $0.17
4th Quarter $30.75 $25.00 $0.19
================================================================================
1997
- --------------------------------------------------------------------------------
Cash
High Low Dividend
- --------------------------------------------------------------------------------
1st Quarter $22.00 $19.25 $0.15
2nd Quarter $22.25 $20.75 $0.15
3rd Quarter $28.75 $21.63 $0.15
4th Quarter $30.25 $26.00 $0.17
================================================================================
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<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 22,642 $ 20,245
Interest bearing deposits in other banks 638 482
Federal funds sold 2,363 17,236
Investment securities available for sale (AFS)--at fair value 381,512 249,855
Investment securities held to maturity (HTM)--at amortized cost--
fair value of $188,522 (1998) and $206,515 (1997) 185,366 204,045
Loans held for sale 7,645 4,439
Loans (net of unearned income) 462,557 460,391
Less: Allowance for credit losses (8,893) (5,231)
----------------------------------
Loans, net 453,664 455,160
Premises and equipment 15,213 15,530
Other real estate owned 388 685
Deferred income taxes 5,697 6,089
Mortgage servicing and sub-servicing rights 2,213 3,412
Intangible assets 6,654 2,956
Accrued interest receivable and other assets 18,247 12,046
----------------------------------
Total Assets $ 1,102,242 $ 992,180
==================================
Liabilities
Non-interest bearing deposits $ 94,946 $ 89,692
Interest bearing deposits 545,403 561,557
----------------------------------
Total deposits 640,349 651,249
Short-term borrowings 41,816 97,203
Long-term borrowings 328,347 160,889
Accrued expenses and other liabilities 9,591 7,390
----------------------------------
Total Liabilities 1,020,103 916,731
----------------------------------
Stockholders' Equity
Common stock--$1.00 par value, authorized:
10,000,000 share, issued and outstanding:
5,071,682 shares (1998) and 5,077,468 (1997) 5,072 5,077
Surplus 35,738 35,948
Retained earnings 39,535 32,275
Accumulated other comprehensive income 1,794 2,149
----------------------------------
Total Stockholders' Equity 82,139 75,449
----------------------------------
Total Liabilities and Stockholders' Equity $ 1,102,242 $ 992,180
==================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans $48,618 $39,011 $33,957
Interest on deposits in other banks 368 23 16
Interest on Federal funds sold 1,185 1,110 1,176
Interest and dividends on investment securities:
Taxable interest on mortgage-backed securities 16,936 17,579 15,315
Other taxable interest and dividends 10,157 5,063 4,353
Tax exempt interest and dividends 4,802 4,649 3,979
-----------------------------------------
Total interest income 82,066 67,435 58,796
-----------------------------------------
Interest Expense
Interest on deposits:
Time certificates of deposit of $100,000 or more 2,445 2,168 1,466
Other deposits 21,720 22,030 21,536
-----------------------------------------
Total interest on deposits 24,165 24,198 23,002
Interest on short-term borrowings 3,780 4,880 2,511
Interest on long-term borrowings 16,246 7,097 3,731
-----------------------------------------
Total interest expense 44,191 36,175 29,244
-----------------------------------------
Net interest income 37,875 31,260 29,552
Provision for Credit Losses 3,677 138 836
-----------------------------------------
Net interest income after provision for credit losses 34,198 31,122 28,716
-----------------------------------------
Other Operating Income
Service charges on deposit accounts 2,045 2,228 2,128
Trust Division income 1,666 1,471 1,407
Gain on sale of securities 792 554 271
Gain on sale of mortgage loans 2,140 1,843 584
Gain on sale of deposits -- -- 1,469
Gain on sale of branches 6,717 -- --
Other income 3,654 1,894 1,622
-----------------------------------------
Total other operating income 17,014 7,990 7,481
-----------------------------------------
Other Operating Expenses
Salaries and employee benefits 21,236 16,109 14,433
Net occupancy expenses 2,708 2,533 2,319
Equipment expenses 1,994 1,654 1,604
Legal and professional fees 1,007 1,078 690
FDIC insurance expense 76 78 4
Outside data processing expense 1,090 1,068 1,008
Amortization of mortgage sub-servicing rights 1,198 415 415
Amortization of other intangible assets 643 444 493
Other expenses 6,161 3,412 3,792
-----------------------------------------
Total other operating expenses 36,113 26,791 24,758
-----------------------------------------
Income Before Taxes 15,099 12,321 11,439
Applicable Income Taxes 4,288 3,162 3,003
-----------------------------------------
Net Income $10,811 $ 9,159 $ 8,436
=========================================
Per Share Data
Net Income Per Common Share (Basic) $ 2.13 $ 1.77 $ 1.60
=========================================
Net Income Per Common Share (Diluted) $ 2.13 $ 1.77 $ 1.60
=========================================
</TABLE>
See accompanying notes to consolidated financial statements.
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Page 22
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Retained Comprehensive Stockholders'
(dollars in thousands, except per share data) Stock Surplus Earnings Income Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996 $5,258 $39,807 $20,645 $ 886 $66,596
Net income -- -- 8,436 -- 8,436
Other comprehensive income, net of tax:
unrealized loss on securities of $482, net of
reclassification adjustment for losses of $101 (381) (381)
-------
Total comprehensive income 8,055
Cash dividends ($0.52 per share) -- -- (2,750) -- (2,750)
Issuance of additional shares of common stock 45 753 -- -- 798
---------------------------------------------------------------
Balances at December 31, 1996 5,303 40,560 26,331 505 72,699
Net income -- -- 9,159 -- 9,159
Other comprehensive income, net of tax:
unrealized gain on securities of $1,646, net of
reclassification adjustment for losses of $2 1,644 1,644
-------
Total comprehensive income 10,803
Cash dividends ($0.62 per share) -- -- (3,215) -- (3,215)
Issuance of additional shares of common stock 24 551 -- -- 575
Repurchase of common stock (250) (5,163) -- -- (5,413)
---------------------------------------------------------------
Balances at December 31, 1997 5,077 35,948 32,275 2,149 75,449
Net income -- -- 10,811 -- 10,811
Other comprehensive income, net of tax:
unrealized loss on securities of $565, net of
reclassification adjustment for losses of $210 (355) (355)
-------
Total comprehensive income 10,456
Cash dividends ($0.70 per share) -- -- (3,551) -- (3,551)
Issuance of additional shares of common stock 27 777 -- -- 804
Repurchase of common stock (32) (987) -- -- (1,019)
---------------------------------------------------------------
Balances at December 31, 1998 $5,072 $35,738 $39,535 $1,794 $82,139
===============================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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Page 23
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income $ 10,811 $ 9,159 $ 8,436
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 1,611 1,519 1,392
Amortization of mortgage sub-servicing rights 1,198 415 415
Amortization of intangibles 643 444 493
Net accretion of purchase accounting adjustments (206) (408) (702)
Provision for credit losses 3,677 138 836
Provision for deferred taxes 616 551 598
Proceeds from sales of investment securities--Trading 12,826 3,177 4,002
Purchases of investment securities--Trading (12,740) (3,152) (4,000)
Originations of loans held for sale (52,126) (46,879) (22,485)
Proceeds for sales of loans held for sale 50,386 47,425 21,590
Net gain on sale of assets (8,969) (2,397) (846)
Gain on sale of deposits -- -- (1,469)
Net (increase) decrease in accrued interest receivable and other assets (5,759) (2,853) 913
Net (decrease) increase in accrued expenses and other liabilities (46) (1,241) 1,861
Other--net (22) 300 299
--------------------------------------
Net cash provided by operating activities 1,900 6,198 11,333
--------------------------------------
Cash Flows From Investing Activities
Proceeds from maturities of investment securities--HTM 82,059 23,529 29,915
Purchases of investment securities--HTM (63,283) (35,612) (56,759)
Proceeds from maturities of investment securities--AFS 88,314 27,313 46,137
Proceeds from sales of investment securities--AFS 99,399 74,842 71,249
Purchases of investment securities--AFS (319,626) (182,634) (109,518)
Net increase in loans (18,563) (62,033) (45,065)
Capital expenditures (3,251) (1,578) (1,873)
Purchases of mortgage servicing rights -- -- (15)
Purchase of loans (18) -- --
Proceeds from sales of fixed assets 2,500 -- 709
Sale of branches (21,037) -- --
Sale of deposits -- -- (18,694)
Acquisitions of subsidiaries, net of cash acquired (14,993) -- --
--------------------------------------
Net cash used by investing activities (168,499) (156,173) (83,914)
--------------------------------------
Cash Flows From Financing Activities
Net increase in deposits 76,352 30,562 47,347
Net (decrease) increase in short-term borrowings (85,730) 43,469 4,283
Proceeds from long-term borrowings 179,350 139,402 42,819
Repayments of long-term borrowings (11,927) (63,788) (6,673)
Issuance of additional shares of common stock 804 575 798
Repurchase of common stock (1,019) (5,413) --
Dividends paid (3,551) (3,215) (2,750)
--------------------------------------
Net cash provided by financing activities 154,279 141,592 85,824
--------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (12,320) (8,383) 13,243
Cash and Cash Equivalents at Beginning of Year 37,963 46,346 33,103
--------------------------------------
Cash and Cash Equivalents at End of Year $ 25,643 $ 37,963 $ 46,346
======================================
Supplemental Cash Flow Information
Interest payments $ 44,806 $ 35,439 $ 28,306
Income tax payments $ 4,778 $ 2,378 $ 1,406
Noncash Investing Activities
Transfers from loans to other real estate owned $ 133 $ 184 $ 170
Elimination of valuation for deferred income taxes $ -- $ 1,400 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
Page 24
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
1. Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of Mason-Dixon
Bancshares, Inc. ("Mason-Dixon") and its subsidiaries, including principal
operating subsidiaries Carroll County Bank and Trust Company ("Carroll County
Bank"), Bank of Maryland, Rose Shanis Financial Services, LLC ("Rose Shanis")
and Bay Insurance, LLC 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 1998.
Nature of Operations--Mason-Dixon, through its subsidiaries, conducts
domestic financial services business in Central Maryland. Mason-Dixon's largest
subsidiary, Carroll County Bank, is the largest commercial bank operating in
Carroll County. Bank of Maryland, Rose Shanis, and Bay Insurance operate in the
Baltimore Metropolitan area defined as Baltimore City and its surrounding
counties. 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. Goodwill related to the acquisition of
Bank of Maryland is being amortized over 15 years. Goodwill related to the
acquisition of Rose Shanis is being amortized over 10 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.
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 fair value. Gains and losses on trading account
securities are included in other operating income. Mason-Dixon had no securities
classified as "trading" at December 31, 1998 or 1997.
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.
Loans--Loans are stated at their principal balance outstanding, net of any
deferred fees and costs. Interest income on most loans is accrued at the
contractual rate based on the principal outstanding. Interest income on certain
installment loans is recognized on the actuarial method. Mason-Dixon
discontinues the accrual of interest on loans when any portion of the principal
or interest is ninety days past due and collateral is insufficient to discharge
the debt in full. Interest accruals may also be discontinued earlier if
management believes collection is unlikely.
Loans are considered impaired when, based on current information, it is
probable that the full amount of principal and interest will not be fully
collected according to contractual terms. Loans are generally considered
impaired once principal payments become ninety days or more past due, and the
accrual of interest is discontinued. Management also considers the cash flow of
the borrower, cash flows of the loan and the value of the related collateral.
Impaired loans do not include large groups of smaller, homogeneous loans such as
consumer and residential real estate loans which are evaluated collectively for
impairment. Loans specifically reviewed for impairment are not considered
impaired during the periods where payments are less than ninety days past due,
provided eventual collection of all amounts due is expected. The impairment of a
loan is measured based on present value of expected future cash flows discounted
at the loan's effective interest rate or the fair value of the collateral if the
repayment of the loan is expected to be provided through the liquidation of the
collateral. Interest income on impaired loans is recognized on the cash basis.
Allowance for Credit Losses--The allowance for credit losses represents an
amount which, in management's opinion, is sufficient to absorb probable future
losses on existing loans and other extensions of credit that may become
uncollectible.
- --------------------------------------------------------------------------------
Page 25
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
The adequacy of the allowance is determined through continual review and
evaluation of the loan portfolio and involves the balancing of a number of
factors to establish an appropriate level. Management considers historical loss
experience, loss allocations for specific nonperforming credits, portfolio
trends, the Year 2000 issue and general economic conditions. Allowances for
impaired loans are generally determined based on collateral values. Loans deemed
uncollectible are charged against the allowance, while recoveries are credited
to the allowance. Management adjusts the level of the allowance through the
provision for credit losses, which is recognized as a current period expense.
Management believes the allowance for credit losses is adequate to provide
for potential loan losses. While management uses available information to
recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions or deterioration in the overall quality
of the loan portfolio.
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 are amortized using the straight-line method. Goodwill is
being amortized over periods ranging from 10 to 15 years.
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.
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.
Mortgage Servicing Rights--The rights to service certain mortgages,
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 straight-line
method.
Pension Plan--Mason-Dixon sponsors a defined benefit pension plan covering
certain employees if they satisfy specific plan criteria. 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--Mason-Dixon 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. The plan is not funded, and obligations under
the plan are recognized on the accrual basis.
Net Income Per Share--Basic net income per common share is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding during the year. Diluted net income per
common share is computed by dividing net income available to common stockholders
by the weighted average number of common shares outstanding during the year,
including any potential dilutive common shares outstanding, such as options and
warrants.
Stock-Based Compensation--Stock-based compensation is recognized using the
intrinsic value method. For disclosure purposes, pro forma net income and
earnings per share impacts are provided as if the fair value method had been
applied.
Income Taxes--Deferred income taxes reflect the future years' tax
consequences of differences between the tax and financial accounting bases of
assets and liabilities.
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
- --------------------------------------------------------------------------------
Page 26
<PAGE>
- --------------------------------------------------------------------------------
from the differential between exchanging floating and fixed-rate interest
payments is recorded on a current basis.
Fair Value Disclosure--Disclosure of fair value information about financial
instruments is presented for instruments where 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 fair values for
those assets.
Investment Securities (including mortgaged-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 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 (except Trust Preferred securities) are estimated
using discounted cash flow analyses, based on the Banks' current
incremental borrowing rates for similar types of borrowing arrangements.
The fair value of Trust Preferred securities included in long-term
borrowings is based on quoted market prices.
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.
Recent Accounting Pronouncements--Statement of Financial Accounting
Standard ("SFAS") No. 130, "Reporting Comprehensive Income," was issued in June
1997. This statement established standards for reporting and displaying of
comprehensive income and its components in the financial statements. The
provisions of this disclosure requirement were adopted on January 1, 1998 and
did not affect Mason-Dixon's financial condition or results of operations.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," was also issued in June 1997. This statement requires that public
business enterprises report financial and descriptive information about their
reportable operating segments. Reportable operating segments are defined as
components of an enterprise about which separate financial information is
available and is evaluated regularly by the chief operating decision maker as a
basis for allocating resources and assessing performance. The statement was
adopted by Mason-Dixon for 1998 annual reporting and did not impact
Mason-Dixon's financial condition or results of operations.
SFAS No. 132, "Employer's Disclosures about Pensions and Other
Postretirement Benefits," was issued in 1998. This statement modifies previous
disclosure requirements and was adopted in 1998 for annual reporting. The
provisions of this statement did not impact Mason-Dixon's financial condition or
results of operations.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998. This statement requires that derivative
financial instruments be carried at fair value on the balance sheet. The
statement continues to allow the continued use of derivatives to hedge certain
risks and establishes specific criteria for the use of hedge accounting. The
statement also allows for offsetting changes in fair values or cash flows of
both the derivative instrument and hedged asset or liability to be recognized in
earnings in the same period. Derivative instruments not accounted for as hedges
must have changes in fair value recognized in earnings. This statement will
become effective for reporting beginning January 1, 2000, with early adoption
permitted. Mason-Dixon is reviewing the provisions of this statement. The impact
of
- --------------------------------------------------------------------------------
Page 27
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
adoption will depend on a number of factors, including the financial position of
Mason-Dixon and the nature and purpose of the derivative instruments in place at
the time the statement is adopted.
2. Mergers and Acquisitions
On February 11, 1998, Mason-Dixon purchased substantially all of the assets
and assumed certain liabilities of Rose Shanis Companies ("Rose Shanis") of
Baltimore, Maryland. Rose Shanis is a consumer finance company which operates
twelve branch offices; eleven in Central Maryland and one on Maryland's Eastern
Shore. At the acquisition date, Mason-Dixon purchased assets totaling
$42,500,000 and assumed certain liabilities totaling $32,600,000, for a
consideration of $15,400,000 which was paid in cash. Goodwill recognized in the
transaction totaled $5,450,000 and is being amortized over 10 years using the
straight-line method. The acquisition is being accounted for as a purchase in
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16"). Under the rules of this opinion, historical results of
Mason-Dixon have not been restated to include Rose Shanis, however, disclosure
rules governed by APB 16 require certain supplemental data be presented on a pro
forma basis for the current and prior year. The following pro forma combined
information reflects the results of operations for the current and prior year as
though Mason-Dixon and Rose Shanis had combined at the beginning of each
respective period:
(dollars in thousands, except per share data) 1998 1997
- --------------------------------------------------------------------------------
Revenue $100,488 $ 89,255
Net income $ 10,615 $ 9,136
Earnings per share $ 2.09 $ 1.76
On January 5, 1999, Mason-Dixon completed the acquisition of Sterling
Bancorp, a privately held commercial bank headquartered in Baltimore, Maryland.
Sterling Bancorp was the parent company of Sterling Bank & Trust Co., which
operated four branches; one in Baltimore City, two in Baltimore County
(Pikesville and Timonium) and one in Anne Arundel County (Annapolis). On
February 12, 1999, Mason-Dixon merged Sterling Bank & Trust Co. into Bank of
Maryland and simultaneously closed the branch offices in Pikesville and
Baltimore City, servicing existing customers of these branches through nearby
Bank of Maryland locations. The acquisition was paid for in cash totaling
$10,300,000 and will be accounted for as a purchase in accordance with APB 16.
At December 31, 1998, Sterling Bancorp had consolidated assets approximating
$73,800,000, liabilities of $67,200,000 and stockholders' equity of $6,600,000.
Sterling recorded a net loss for 1998 of $250,000 before merger related
expenses. Goodwill associated with the purchase will be amortized over 15 years
using the straight-line method.
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 $7,394,000 at December 31, 1998.
4. Investment Securities
The amortized cost and estimated fair values of investment securities
available for sale are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1998
- ---------------------------------------------------------------------------------------------------
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 $138,864 $ 898 $ 69 $139,693
Mortgage-backed securities 219,202 2,460 47 221,615
--------------------------------------------------
Total debt securities available for sale 358,066 3,358 116 361,308
Equity securities available for sale 20,523 94 413 20,204
--------------------------------------------------
Total investment securities available for sale $378,589 $ 3,452 $ 529 $381,512
==================================================
</TABLE>
- --------------------------------------------------------------------------------
Page 28
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollars in thousands) 1997
- ------------------------------------------------------------------------------------------------
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 $ 50,233 $ 85 $ -- $ 50,318
Mortgage-backed securities 184,160 2,799 12 186,947
-----------------------------------------------
Total debt securities available for sale 234,393 2,884 12 237,265
Equity securities available for sale 11,960 630 -- 12,590
-----------------------------------------------
Total investment securities available for sale $246,353 $ 3,514 $ 12 $ 249,855
===============================================
</TABLE>
The amortized cost and estimated fair values of investment securities held
to maturity are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1998
- ------------------------------------------------------------------------------------------------
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 $ 26,292 $ 190 $ -- $ 26,482
Obligations of states and political subdivisions 99,885 2,862 313 102,434
Mortgage-backed securities 52,269 544 342 52,471
Other debt securities 6,920 215 -- 7,135
-----------------------------------------------
Total debt securities held to maturity 185,366 3,811 655 188,522
Other securities -- -- -- --
-----------------------------------------------
Total investment securities held to maturity $185,366 $ 3,811 $ 655 $ 188,522
===============================================
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) 1997
- ------------------------------------------------------------------------------------------------
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 $ 40,447 $ 116 $ 34 $ 40,529
Obligations of states and political subdivisions 84,490 2,032 3 86,519
Mortgage-backed securities 77,793 674 312 78,155
-----------------------------------------------
Total debt securities held to maturity 202,730 2,822 349 205,203
Other securities 1,315 -- 3 1,312
-----------------------------------------------
Total investment securities held to maturity $204,045 $ 2,822 $ 352 $ 206,515
===============================================
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1998,
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.
Available for Held to
(dollars in thousands) Sale Portfolio Maturity Portfolio
- --------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------
Due in one year $ 5,304 $ 5,315 $ 7,313 $ 7,388
Due after one year through five years 23,653 24,039 13,546 13,928
Due after five years through ten years 109,907 110,339 41,091 41,973
Due after ten years -- -- 71,147 72,762
Mortgage-backed securities 219,202 221,615 52,269 52,471
-----------------------------------------
Total debt securities $358,066 $361,308 $185,366 $188,522
=========================================
Proceeds from sales of investments in securities were $99,399 in 1998,
$74,842 in 1997, and $71,249 in 1996.
- --------------------------------------------------------------------------------
Page 29
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Gross gains and gross losses on investment securities were as follows:
(dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Gross gains $812 $778 $431
Gross losses $ 20 $224 $160
Investment securities held to maturity with a book value of $43,166,000 and
investment securities available for sale with a book value of $263,848,000 at
December 31, 1998, were pledged as collateral for certain liabilities as
required or permitted by law.
There were no state, county, and municipal securities whose book value, as
to any issuer, exceeded 10% of stockholders' equity at December 31, 1998 or
1997.
5. Loans and Allowance for Credit Losses At December 31, loans were as
follows:
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Construction and land development $ 41,262 $ 31,427
Residential real estate--mortgage 151,003 186,978
Commercial real estate--mortgage 127,825 136,194
Commercial 87,166 88,669
Consumer 55,303 17,464
---------------------------
Total loans 462,559 460,732
Unearned income on loans (2) (341)
---------------------------
Loans (net of unearned income) $ 462,557 $ 460,391
===========================
Proceeds from sales of loans in 1998 and 1997 were $50,386,000 and
$47,425,000, respectively.
Changes in the allowance for credit losses were as follows:
(dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Balance at January 1 $ 5,231 $ 5,167 $ 4,729
Allowance applicable to loans
of acquired company 2,881 -- --
Provision charged to
operating expense 3,677 138 836
Recoveries 579 503 338
Loans charged off (3,475) (577) (736)
------------------------------------
Balance at December 31 $ 8,893 $ 5,231 $ 5,167
====================================
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:
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Actual recorded investment at year end $2,237 $1,716
====================
Average recorded investment $2,044 $1,586
====================
Allowance for credit losses relating
to all impaired loans $ 339 $ 364
====================
Cash payments:
Applied to principal $ 14 $ 40
Applied to interest 49 95
--------------------
Totals $ 63 $ 135
====================
6. Premises and Equipment
At December 31, premises and equipment consisted of the following:
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Land $ 2,981 $ 3,325
Buildings and leasehold improvements 12,808 14,911
Vehicles and equipment 10,865 10,187
Construction and projects-in-process 1,263 463
--------------------
27,917 28,886
Accumulated depreciation and amortization 12,704 13,356
--------------------
Premises and equipment, net $15,213 $15,530
====================
Depreciation expense on premises, equipment and leasehold improvements
totaled $1,611,000, $1,519,000 and $1,392,000, for 1998, 1997 and 1996,
respectively.
Total rental expenses for premises and equipment were $1,151,000 for 1998,
$1,077,000 for 1997 and $1,060,000 for 1996. At December 31, 1998, 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)
- --------------------------------------------------------------------------------
1999 $ 1,233
2000 1,167
2001 1,132
2002 1,074
2003 1,010
Thereafter 4,408
-------
Total $10,024
=======
In addition to minimum rentals, certain leases have escalation clauses and
include provisions for additional payments to cover taxes, insurance and
maintenance.
- --------------------------------------------------------------------------------
Page 30
<PAGE>
- --------------------------------------------------------------------------------
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. As of December 31, the total amounts of these
deposits included in the consolidated statements of financial condition were
$13,278,000 for 1998 and $16,373,000 for 1997. The $10,030,000 purchase price is
reduced by $7,911,000 in accumulated amortization and write-down costs as of
December 31, 1998. An impairment loss of $841,000 was recorded during 1998,
reflecting a deterioration in value precipitated by lower market interest rates
and higher prepayment levels related to the underlying mortgages.
Carroll County Bank retains servicing on certain loans it sells into the
secondary market. At December 31, 1998, Carroll County Bank's servicing
portfolio totaled $74,998,000. The servicing portfolio totaled $95,463,000 and
$106,880,000 at December 31, 1997 and 1996, respectively. Escrow deposit
balances relating to the servicing portfolio were $303,000, $911,000 and
$1,310,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The amounts capitalized in connection with acquiring the right to service
mortgage loans were $12,000 in 1998, $26,000 in 1997 and $50,000 in 1996.
Unamortized mortgage servicing rights at December 31, 1998 and 1997 were $94,000
and $95,000, respectively.
8. Intangible Assets
Intangible assets at December 31, 1998 consisted of the unamortized portion
of goodwill related to the purchases of Bank of Maryland and Rose Shanis. The
original goodwill for Bank of Maryland of $5,191,000 has been reduced by
accumulated amortization of $1,023,000, the elimination during 1997 of a
$1,400,000 valuation originally established for deferred income tax assets
acquired and a reduction of $1,128,000 in 1998 reflecting the goodwill
associated with the sale of five branches on the Eastern Shore of Maryland.
9. Deposits
At December 31, deposits were as follows:
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Non-interest bearing deposits $ 94,946 $ 89,692
Interest bearing deposits:
Passbook and statement savings 89,180 94,248
Money market savings 74,443 89,106
Time deposits:
$100,000 or more 50,901 45,068
Less than $100,000 266,207 269,353
------------------------
Total time deposits 317,108 314,421
NOW accounts 64,672 63,782
------------------------
Total interest bearing deposits 545,403 561,557
------------------------
Total deposits $640,349 $651,249
========================
10. Short-Term Borrowings
Short-term borrowings include securities sold under agreements to
repurchase, which are securities sold to customers, at the customers' request,
under a "roll-over" contract that matures in one business day. The underlying
securities sold are U.S. Treasury notes or notes of Federal agencies which are
segregated in Mason-Dixon's custodial accounts from other investments
securities. The following table summarizes certain information for short-term
borrowings:
(dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Average amount
outstanding during year $ 68,729 $ 87,173 $ 45,823
Weighted average
interest rate during year 5.50% 5.60% 5.48%
Amount outstanding at
year end $ 41,816 $ 97,203 $ 53,734
Weighted average
interest rate at year end 4.70% 5.73% 5.42%
Maximum amount at
any month end $107,529 $119,774 $ 67,607
- --------------------------------------------------------------------------------
Page 31
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
11. Long-Term Borrowings
Long-term borrowings consisted of the following as of December 31, 1998:
(dollars in thousands) 1998
- --------------------------------------------------------------------------------
Federal Home Loan Bank of Atlanta (FHLB):
5.30% Advance due January 18, 1999 $ 3,980
5.09% Advance due February 3, 2000 10,000
5.47% Advance due April 18, 2000 40,000
5.26% Advance due May 2, 2000 30,000
5.31% Advance due July 10, 2000 11,918
5.20% Advance due July 10, 2000 582
5.00% Advance due September 20, 2000 571
5.21% Advance due July 10, 2001 9,500
6.03% Advance due June 26, 2002 25,000
5.66% Advance due September 24, 2002 5,000
4.91% Advance due January 15, 2003 10,000
4.91% Advance due September 15, 2003 6,000
5.03% Advance due November 26, 2007 25,000
4.99% Advance due June 12, 2008 25,000
5.51% Advance due June 23, 2008 5,000
4.89% Advance due July 10, 2008 25,000
5.31% Advance due July 20, 2008 5,000
5.31% Advance due July 21, 2008 20,000
5.09% Advance due August 28, 2008 5,000
4.74% Advance due September 11, 2008 7,000
--------
Subtotal 269,551
Unsecured Senior Notes--7.48% due April 22, 2008 20,000
Mason-Dixon Capital Trust I--10.07% due
June 15, 2027, net of $569 underwriting discount 19,431
Mason-Dixon Capital Trust II--8.40% due
June 30, 2028, net of $635 underwriting discount 19,365
--------
Total $328,347
========
The contractual annual maturities on long-term borrowings over the next
five years are as follows: 1999--$3,980,000; 2000--$93,071,000;
2001--$9,500,000; 2002--$30,000,000; 2003--$16,000,000. 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 $89,548,000 of residential
mortgage loans and $222,042,000 of investment securities as collateral for the
advances.
In June of 1997, Mason-Dixon Capital Trust ("MDCT"), a wholly-owned
subsidiary of Mason-Dixon, issued $20,000,000 10.07% Preferred Securities due in
2027. MDCT invested the proceeds of the Preferred Securities, combined with
$619,000 paid by Mason-Dixon for MDCT's Common Securities, in $20,619,000 of
Mason-Dixon's 10.07% Junior Subordinated Debentures. MDCT's sole asset is the
Junior Subordinated Debentures which matures in 2027. Mason-Dixon has fully and
unconditionally guaranteed all of MDCT's obligations under the Preferred
Securities. The Preferred Securities of MDCT qualify for inclusion in Tier 1
Capital under current capital guidelines and are subject to varying call
provisions beginning in 2007.
In April of 1998, Mason-Dixon Capital Trust II ("MDCT II"), a wholly-owned
subsidiary of Mason-Dixon, issued $20,000,000 8.40% Preferred Securities due in
2028. MDCT II invested the proceeds of the Preferred Securities, combined with
$619,000 paid by Mason-Dixon for MDCT II's Common Securities, in $20,619,000 of
Mason-Dixon's 8.40% Junior Subordinated Debentures. MDCT II's sole asset is the
Junior Subordinated Debentures which matures in 2028. Mason-Dixon has fully and
unconditionally guaranteed all of MDCT II's obligations under the Preferred
Securities. A portion of the Preferred Securities of MDCT II qualify for
inclusion in Tier 1 Capital under current capital guidelines, while any amount
not qualifying as Tier 1 Capital is included in Total Capital. Preferred
Securities issued by MDCT II are subject to varying call provisions beginning in
2003.
In April of 1998, Mason-Dixon issued $20,000,000 of its 7.48% Senior Notes
through a private placement. The notes are not secured by any assets of
Mason-Dixon, are non-amortizing and mature in full in 2008. The note agreement
contains various covenants which are considered usual and customary.
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 $15,440,000 at December 31, 1998.
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 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.
- --------------------------------------------------------------------------------
Page 32
<PAGE>
- --------------------------------------------------------------------------------
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, 1998, 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, 1998. 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, 1998 and 1997.
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to Risk-Weighted Assets):
Mason-Dixon $117,508 18.30% $51,361 8.00% $64,201 10.00%
Carroll County Bank $ 51,464 12.75% $32,302 8.00% $40,378 10.00%
Bank of Maryland $ 23,555 12.69% $14,850 8.00% $18,562 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Mason-Dixon $ 96,265 14.99% $25,680 4.00% $38,520 6.00%
Carroll County Bank $ 48,609 12.04% $16,151 4.00% $24,227 6.00%
Bank of Maryland $ 21,234 11.44% $ 7,425 4.00% $11,137 6.00%
Capital Leverage (to Average Assets):
Mason-Dixon $ 96,265 8.87% $32,550 3.00% $54,249 5.00%
Carroll County Bank $ 48,609 6.39% $22,810 3.00% $38,017 5.00%
Bank of Maryland $ 21,234 7.84% $ 8,124 3.00% $13,541 5.00%
As of December 31, 1997
Total Capital (to Risk-Weighted Assets):
Mason-Dixon $ 90,804 15.64% $46,447 8.00% $58,059 10.00%
Carroll County Bank $ 55,239 15.44% $28,621 8.00% $35,777 10.00%
Bank of Maryland $ 22,862 10.51% $17,402 8.00% $21,753 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Mason-Dixon $ 85,573 14.74% $23,222 4.00% $34,833 6.00%
Carroll County Bank $ 52,533 14.68% $14,314 4.00% $21,471 6.00%
Bank of Maryland $ 20,337 9.35% $ 8,700 4.00% $13,050 6.00%
Capital Leverage (to Average Assets):
Mason-Dixon $ 85,573 8.74% $29,373 3.00% $48,955 5.00%
Carroll County Bank $ 52,533 7.48% $21,069 3.00% $35,116 5.00%
Bank of Maryland $ 20,337 7.71% $ 7,913 3.00% $13,189 5.00%
</TABLE>
- --------------------------------------------------------------------------------
Page 33
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Dividend Reinvestment Plan--Mason-Dixon sponsors 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 stockholders 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
$5,000 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
Mason-Dixon sponsors a defined benefit pension plan which covers certain
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:
(dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Service cost--benefits
earned during year $ 389 $ 318 $ 373
Interest cost on projected
benefit obligation 504 490 475
Expected return on plan assets (740) (616) (519)
Amortization of transition asset (52) (52) (21)
Amortization of prior
service cost (21) -- --
------------------------------
Net pension cost $ 80 $ 140 $ 308
==============================
Weighted average discount
rate used in determining
the actuarial present value
of the projected benefit
obligation 6.75% 7.25% 7.50%
Rate of increase in future
compensation 5.50% 5.50% 5.50%
Long-term rate of return
on assets 9.00% 9.00% 9.00%
The following table sets forth the plan's funded status and amounts
recognized in the balance sheet at December 31:
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 7,160 $ 6,987
Service cost 389 318
Interest cost 504 490
Plan participants' contributions -- --
Amendments -- (524)
Actuarial loss 667 166
Benefits paid (301) (277)
----------------------
Benefit obligation at end of year 8,419 7,160
----------------------
Change in plan assets
Fair value of assets at beginning of year 8,106 6,829
Actual return on plan assets 715 1,033
Employer contributions 504 521
Plan participants' contributions -- --
Benefits paid (301) (277)
----------------------
Fair value of assets at end of year 9,024 8,106
----------------------
Funded status 605 946
Unrecognized transition asset (108) (160)
Unamortized prior service cost (257) (278)
Unrecognized actuarial loss/(gain) 458 (234)
----------------------
Net amount recognized $ 698 $ 274
======================
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 provides
for both employee and employer matching contributions and additional unmatched
discretionary contributions. Participants in either matched or unmatched
contributions may be required to invest a portion in common stock of
Mason-Dixon. Contributions to the plan totaled $232,000 for 1998, $249,000 for
1997 and $352,000 for 1996.
14. Stock Options
Mason-Dixon has awarded stock options to directors and executive officers
pursuant to various compensation plans. Each grant was made at a price equal to
the fair market value of the stock on the date of the grant. Options are granted
upon approval of the Board of Directors under various vesting schedules with a
maximum exercise term of 10 years.
- --------------------------------------------------------------------------------
Page 34
<PAGE>
- --------------------------------------------------------------------------------
Information with respect to options is as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Pricing Pricing Pricing
Shares Range Shares Range Shares Range
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year 10,905 $19.75-$21.00 4,500 $ 21.00 -- $ --
Granted 18,631 29.75- 33.00 6,405 19.75 4,500 21.00
Exercised -- -- -- -- -- --
Expired/canceled/forfeited (1,040) 33.00- 33.00 -- -- -- --
----------------------------------------------------------------
Outstanding at end of year 28,496 $19.75-$33.00 10,905 $19.75-$21.00 4,500 $21.00
================================================================
Weighted average exercise price $ 27.48 $ 20.27 $21.00
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
1998 1997 1996
- --------------------------------------------------------------------------------
Dividend yield 2.06% 2.73% 2.73%
Expected volatility 30.00% 30.00% 30.00%
Risk-free interest rate 5.69% 6.29% 6.29%
Expected lives 10 years 10 years 10 years
Mason-Dixon has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applies Accounting Principles
Board No. 25 and related interpretations in accounting for options. If
Mason-Dixon had elected to recognize compensation cost based on the fair value
at the grant dates for awards prescribed by SFAS 123, pro forma net income and
basic earnings per share would have been as follows:
(dollars in thousands,
except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Net income $ 10,742 $ 9,115 $ 8,403
Basic earnings per share $ 2.12 $ 1.76 $ 1.59
15. Post-Retirement Health Care and Life Insurance Benefits
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 is as
follows:
(dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Service cost $ 6 $ 5 $ 6
Interest cost on projected benefit obligation 49 43 66
Amortization of prior service cost (16) (16) --
Amortization of unrecognized net loss (gain) 3 -- (1)
-----------------------
Net post-retirement benefit cost $ 42 $ 32 $ 71
=======================
Mason-Dixon's post-retirement benefit plan is not funded. The status of the
plan as of December 31 was as follows:
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated post-retirement benefit
obligations--
Retirees $(521) $(585)
Fully eligible active plan participants (9) (39)
Other active plan participants (73) (41)
------------------
(603) (665)
Unrecognized prior service cost (221) (237)
Unrecognized net loss from the effect of change
of assumption 35 92
------------------
Accrued post-retirement liability $(789) $(810)
==================
The assumed health care cost trend rate used in measuring the accumulated
post-retirement obligation was 6.80% for 1998, gradually declining to 5.00% over
the next 7 years 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, 1998 by 10.00%.
The assumed discount rate in determining the accumulated post-retirement benefit
obligation was 7.25% for 1998 and 7.75% for 1997 and 8.00% for 1996.
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 1998, 1997, and 1996.
- --------------------------------------------------------------------------------
Page 35
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
17. Income Taxes
Applicable income taxes were as follows:
(dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Current:
Federal $ 3,558 $ 2,347 $ 2,089
State 114 264 316
--------------------------------
Total current 3,672 2,611 2,405
--------------------------------
Deferred:
Federal 505 451 490
State 111 100 108
--------------------------------
Total deferred 616 551 598
--------------------------------
Total income tax expense $ 4,288 $ 3,162 $ 3,003
================================
Components of deferred income tax expense for the three years ended
December 31 were as follows:
(dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Allowance for loan losses $ (502) $ (157) $ (257)
Pension expense 236 75 83
Depreciation 42 26 18
Loan fees 399 (17) (23)
Loan costs (34) 62 (43)
Deferred compensation 21 (188) (114)
Post-retirement benefits 5 13 (3)
Mortgage sub-servicing rights (218) 85 85
Net operating loss carryforwards 609 609 718
Lease expense 16 (64) --
Purchase accounting adjustments 17 157 271
Other 25 (50) (137)
--------------------------------
Total deferred income tax expense $ 616 $ 551 $ 598
================================
At December 31, 1998 and 1997, net deferred income taxes are as follows:
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for credit losses $2,345 $1,843
Purchase accounting adjustments 62 79
Deferred compensation 674 695
Post-retirement benefits 305 310
Deferred loan fees and costs 37 402
Pension expense -- --
Mortgage sub-servicing rights 775 557
Net operating loss carryforwards 2,923 3,532
Lease expense 48 64
Other 146 222
---------------
Total deferred tax assets 7,315 7,704
---------------
Deferred tax liabilities:
Depreciation 214 172
Pension expense 275 39
Other -- 52
Unrealized gain on securities available for sale 1,129 1,352
---------------
Total deferred tax liabilities 1,618 1,615
---------------
Net deferred income taxes $5,697 $6,089
===============
- --------------------------------------------------------------------------------
Page 36
<PAGE>
Total income tax expense of $4,288,000, $3,162,000 and $3,003,000 for 1998,
1997 and 1996 was 28.4%, 25.7% and 26.3%, respectively, of income before taxes
as compared to the maximum statutory rate for Federal income taxes, reconciled
as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 5,285 35.0% $ 4,312 35.0% $ 4,004 35.0%
Increases (decreases) in taxes resulting from:
Tax exempt interest income (1,745) (11.5) (1,647) (13.3) (1,521) (13.3)
Dividend exclusion (42) (0.3) (33) (0.3) (1) --
State income taxes, net of Federal income tax benefit 146 1.0 236 1.9 307 2.7
Nondeductible interest expense 249 1.6 234 1.9 197 1.7
Nondeductible goodwill and merger expenses 501 3.3 156 1.3 173 1.5
Other--net (106) (0.7) (96) (0.8) (156) (1.3)
---------------------------------------------------------------
Actual tax expense $ 4,288 28.4% $ 3,162 25.7% $ 3,003 26.3%
===============================================================
</TABLE>
Net operating loss carryforwards obtained through the acquisition of Bank
of Maryland totaled approximately $7,571,000 for income tax purposes at December
31, 1998, 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. At December 31, 1997, a $1,400,000
valuation allowance related to the net operating loss carryforwards was
eliminated. The valuation was determined to be unnecessary in light of Bank of
Maryland's continued pattern of profitability and likelihood of fully realizing
all of the net operating loss carryforward.
18. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which is effective for reporting periods ending after
December 15, 1997. Under the provisions of SFAS No. 128, primary and fully
diluted earnings per share were replaced with basic and diluted earnings per
share in an effort to simplify the computation and more closely align earnings
per share definitions with international rules. Basic earnings per share is
computed by dividing net income by the weighted average number of common shares
outstanding and does not include the impact of any potentially dilutive common
stock equivalents. Diluted earnings per share is arrived at by dividing net
income by the weighted average number of shares outstanding, adjusted for the
dilutive effect of outstanding stock options and the conversion impact of any
convertible equity securities.
The calculations of basic and diluted earnings per share were as follows:
(dollars in thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Basic earnings per share:
Net income $10,811 $9,159 $8,436
Average common shares outstanding--basic 5,073,518 5,183,659 5,285,268
Net income per common share--basic $2.13 $1.77 $1.60
Diluted earnings per share:
Net income $10,811 $9,159 $8,436
Average common shares outstanding 5,073,518 5,183,659 5,285,268
Stock option adjustment 4,260 1,492 --
Average common shares outstanding--diluted 5,077,778 5,185,151 5,285,268
Net income per common share--diluted $2.13 $1.77 $1.60
- --------------------------------------------------------------------------------
Page 37
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
19. 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 $8,644,000 and $3,552,000 at
December 31, 1998 and 1997, respectively. During 1998, $25,889,000 of new loans
were made and repayments totaled $20,797,000. In 1997, $1,990,000 of new loans
were made and repayments totaled $1,285,000.
20. 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.
21. 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:
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Commitments to extend credit $137,278 $151,403
Standby letters of credit $ 16,475 $ 6,072
Interest rate swaps $ 82,000 $ 55,000
Purchase commitments $ 311 $ 779
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.
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 $112,000 at December 31, 1998, representing the
current cost of replacing only those swaps in a gain position in the event of
counterparty failure.
Purchase commitments include contract agreements to purchase land and
certain computer equipment. Mason-Dixon entered into a five-year agreement for
outside computer processing services expiring June, 2001. There is a minimum
monthly processing fee of $78,000, plus additional amounts based on the number
and types of transactions.
- --------------------------------------------------------------------------------
Page 38
<PAGE>
- --------------------------------------------------------------------------------
22. 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) 1998 1997
- -------------------------------------------------------------------------------------------
Book Value Fair Value Book Value Fair Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks $ 22,642 $ 22,642 $ 20,245 $ 20,245
Interest bearing deposits in other banks $ 638 $ 638 $ 482 $ 482
Federal funds sold $ 2,363 $ 2,363 $ 17,236 $ 17,236
Investment securities--HTM $ 185,366 $ 188,522 $ 204,045 $ 206,515
Investment securities--AFS $ 381,512 $ 381,512 $ 249,855 $ 249,855
Loans held for sale $ 7,645 $ 7,791 $ 4,439 $ 4,486
Loans $ 462,557 $ 462,364 $ 460,391 $ 461,278
Financial Liabilities
Deposits $ 640,349 $ 640,636 $ 651,249 $ 654,301
Short-term borrowings $ 41,816 $ 41,816 $ 97,203 $ 97,203
Long-term borrowings $ 328,347 $ 331,622 $ 160,889 $ 165,242
Off-Balance Sheet Items
Commitments to extend credit $ -- $ -- $ -- $ --
Standby letters of credit $ -- $ 330 $ -- $ 121
Interest rate swaps $ -- $ (2,520) $ -- $ (269)
</TABLE>
23. Segment Information
In June of 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued. This accounting statement requires
disclosure of revenues and other information based on the way management
organizes segments of the business for making operating decisions and assessing
performance.
Mason-Dixon is organized into two distinct lines of business; community
banking and consumer finance. Community banking is comprised of lending and the
sale of traditional banking products, as well as retail investment products
through Mason-Dixon's community banking affiliates. Lending activities consist
of commercial, small business, residential and installment lending (primarily
home equity). Investment products include checking, savings, and money market
accounts; certificates of deposit, trust services, and non-deposit investment
products such as mutual funds and annuities. Consumer finance activities relate
to the activities of Rose Shanis and Bay Insurance. These companies are involved
in making small consumer loans and sales of credit related insurance products
through its independent branch offices, as well as the purchase of loans through
a network of dealers throughout Central Maryland. Mason-Dixon believes these are
two distinct lines of business, and measures and manages financial and operating
performance of business separately.
- --------------------------------------------------------------------------------
Page 39
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Information by business segment for 1998 is included in the table below.
Rose Shanis and Bay Insurance were acquired during 1998. Prior to the
acquisition of these companies, Mason-Dixon had no operating segments as defined
by SFAS No. 131.
<TABLE>
<CAPTION>
Community Consumer Intersegment
(dollars in thousands) Banking Finance Eliminations Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 73,910 $ 9,746 $ (1,590) $ 82,066
Interest expense 43,672 2,109 (1,590) 44,191
-------------------------------------------------------
Net interest income 30,238 7,637 -- 37,875
Provision for credit losses 1,114 2,563 -- 3,677
-------------------------------------------------------
Net interest income after provision for credit losses 29,124 5,074 -- 34,198
Other operating income 15,592 1,566 (144) 17,014
Other operating expense 30,511 5,746 (144) 36,113
Net intersegment income (1,734) 1,734 -- --
-------------------------------------------------------
Income before taxes $ 12,471 $ 2,628 $ -- $ 15,099
=======================================================
Average total assets $ 1,041,173 $ 40,884 $ (19,010) $ 1,063,047
=======================================================
</TABLE>
24. Subsequent Event (Unaudited)
On January 27, 1999, Mason-Dixon entered into an Agreement and Plan of
Reorganization with BB&T Corporation ("BB&T") of Winston-Salem, North Carolina.
The agreement allows for the acquisition of Mason-Dixon by BB&T. The terms of
the agreement call for stockholders of Mason-Dixon to receive 1.3 shares of BB&T
common stock for each common share of Mason-Dixon. The acquisition will be
structured as a tax-free exchange and accounted for as a pooling-of-interests.
The transaction is subject to various regulatory approvals and approval by
Mason-Dixon stockholders. In conjunction with the agreement, Mason Dixon entered
into a Stock Option Agreement which grants BB&T the option to purchase up to
1,006,868 common shares of Mason-Dixon at a price per share of $40.00. Under the
conditions of the Agreement and Plan of Reorganization, Mason-Dixon is not
permitted to issue any new shares of common stock other than those permitted
under Mason-Dixon's Omnibus Stock Plan without prior written consent of BB&T.
Additionally, Mason-Dixon may not issue any new debt, enter into any long-term
contracts or operate outside its normal course of business without written
consent from BB&T.
25. Quarterly Results Of Operations (Unaudited)
The following is a summary of Mason-Dixon's unaudited quarterly results of
operations:
(dollars in thousands, except per share data) 1998
- --------------------------------------------------------------------------------
Three months ended: 12/31 9/30 6/30 3/31
- --------------------------------------------------------------------------------
Interest income $20,780 $20,672 $20,936 $19,678
Interest expense 11,314 11,378 11,053 10,446
-------------------------------------
Net interest income 9,466 9,294 9,883 9,232
Provision for credit losses 63 125 3,172 317
Other operating income 2,777 2,252 9,076 2,117
Gain on sales of securities 287 148 46 311
Operating expenses 8,960 8,747 10,444 7,962
-------------------------------------
Income before taxes 3,507 2,822 5,389 3,381
Applicable income taxes 780 586 2,052 870
-------------------------------------
Net income $ 2,727 $ 2,236 $ 3,337 $ 2,511
=====================================
Net income per common share (Basic) $ 0.54 $ 0.44 $ 0.66 $ 0.49
=====================================
Net income per common share (Diluted) $ 0.54 $ 0.44 $ 0.66 $ 0.49
=====================================
- --------------------------------------------------------------------------------
Page 40
<PAGE>
- --------------------------------------------------------------------------------
(dollars in thousands, except per share data) 1997
- --------------------------------------------------------------------------------
Three months ended: 12/31 9/30 6/30 3/31
- --------------------------------------------------------------------------------
Interest income $ 18,095 $ 17,720 $ 16,125 $ 15,495
Interest expense 10,149 9,910 8,356 7,760
--------------------------------------
Net interest income 7,946 7,810 7,769 7,735
Provision for credit losses 42 (12) 51 57
Other operating income 2,101 1,928 1,802 1,605
Gain on sales of securities 220 26 87 221
Operating expenses 6,949 6,717 6,720 6,405
--------------------------------------
Income before taxes 3,276 3,059 2,887 3,099
Applicable income taxes 829 771 738 824
--------------------------------------
Net income $ 2,447 $ 2,288 $ 2,149 $ 2,275
======================================
Net income per common share (Basic) $ 0.48 $ 0.45 $ 0.41 $ 0.43
======================================
Net income per common share (Diluted) $ 0.48 $ 0.45 $ 0.41 $ 0.43
======================================
26. Parent Company Only Financial Information
Condensed financial information for Mason-Dixon Bancshares, Inc. (Parent
Company Only) is as follows:
(dollars in thousands) December 31,
- --------------------------------------------------------------------------------
Condensed Balance Sheets 1998 1997
- --------------------------------------------------------------------------------
Assets
Cash and due from banks $ 629 $ 1,703
Interest bearing deposits in subsidiaries 3,893 849
Investment securities available for sale--
at fair value 6,544 7,462
Investment securities held to maturity--
at amortized cost--
fair value of $1,002 (1998) and $998 (1997) 1,000 1,000
Loans to subsidiaries 28,600 --
Investment in subsidiaries 102,690 86,493
Advances to subsidiaries and other assets 2,931 948
---------------------
Total Assets $146,287 $ 98,455
=====================
Liabilities
Long-term borrowings $ 63,034 $ 22,031
Deferred income taxes -- 243
Other liabilities 1,114 732
---------------------
Total Liabilities 64,148 23,006
---------------------
Stockholders' Equity
Common stock 5,072 5,077
Surplus 35,738 35,948
Retained earnings 39,535 32,275
Accumulated other comprehensive income 1,794 2,149
---------------------
Total Stockholders' Equity 82,139 75,449
---------------------
Total Liabilities and Stockholders' Equity $146,287 $ 98,455
=====================
- --------------------------------------------------------------------------------
Page 41
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
(dollars in thousands) December 31,
- ---------------------------------------------------------------------------------------------------------------------------
Condensed Statements of Income for the period ended 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Cash dividends from subsidiaries $ 12,379 $ 4,139 $ 6,372
Interest and dividend income 2,289 517 131
Other income 1,171 281 60
------------------------------
Total Income 15,839 4,937 6,563
Interest expense on long-term borrowings 4,548 1,394 490
Operating expenses 863 853 498
------------------------------
Income before income tax benefit and equity in undistributed income of subsidiaries 10,428 2,690 5,575
Income tax benefit (410) (554) (264)
------------------------------
Income before equity in undistributed income of subsidiaries 10,838 3,244 5,839
Equity in undistributed income of subsidiaries (27) 5,915 2,597
------------------------------
Net Income $ 10,811 $ 9,159 $ 8,436
==============================
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) December 31,
- ---------------------------------------------------------------------------------------------------------------------------
Condensed Statements of Cash Flows for the period ended 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income $ 10,811 $ 9,159 $ 8,436
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of subsidiaries 27 (5,915) (2,597)
Gain on sale of assets (341) (220) --
Net (increase) decrease in other assets (850) (400) 167
Net increase (decrease) in other liabilities 545 (201) 189
Other--net 35 23 --
------------------------------
Net Cash Provided by Operating Activities 10,227 2,446 6,195
------------------------------
Cash Flows From Investing Activities
Investments in and advances to subsidiaries (46,132) (6,179) (60)
Repayment of advances to subsidiaries 431 60 60
Purchases of investment securities (8,968) (10,021) --
Proceeds from sales of investment securities 9,278 3,397 --
------------------------------
Net Cash Used by Investing Activities (45,391) (12,743) --
------------------------------
Cash Flows From Financing Activities
Proceeds from long-term borrowings 39,969 20,019 2,000
Repayment of long-term borrowings -- (1,313) (5,188)
Proceeds from advances from subsidiaries 4,191 -- --
Repayment of advances from subsidiaries (3,260) -- --
Repurchase of common stock (1,021) (5,413) --
Issuance of additional shares of common stock 806 575 798
Dividends paid (3,551) (3,215) (2,750)
------------------------------
Net Cash Provided (Used) by Financing Activities 37,134 10,653 (5,140)
------------------------------
Net Increase in Cash and Cash Equivalents 1,970 356 1,055
Cash and Cash Equivalents at Beginning of Year 2,552 2,196 1,141
------------------------------
Cash and Cash Equivalents at End of Year $ 4,522 $ 2,552 $ 2,196
==============================
</TABLE>
- --------------------------------------------------------------------------------
Page 42
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
[LETTERHEAD]
STEGMAN
& COMPANY
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, 1998 and 1997, 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, 1998.
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, 1998 and 1997,
and the consolidated results of their operations and cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ STEGMAN & COMPANY
Baltimore, Maryland
January 15, 1999
- --------------------------------------------------------------------------------
Page 43
<PAGE>
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS AND DIRECTORS
Subsidiaries
Carroll County Bank and Trust Company
Executive Officers:
Michael L. Oster
President and Chief Executive Officer
Gerald G. Alsentzer
Senior Vice President
William J. Gering
Senior Vice President
J. Edward Gottleib
Senior Vice President
Mark A. Keidel, CPA
Senior Vice President
Louna S. Primm
Senior Vice President
Marcus L. Primm
Senior Vice President
Christine L. Whiteleather, CFA
Senior Vice President
Directors:
William B. Dulany
Chairman of the Board
Partner, Dulany and Leahy Attorneys
Westminster
David S. Babylon, Jr.
Retired Accountant
Westminster
Miriam F. Beck
Retired Administrator
Carroll County Board of Education
Sykesville
Brian L. Haight
Vice President and Treasurer
Haight Funeral Home and Chapel
Eldersburg
Linda A. Hikel
Vice President and Partner
Shelter Systems Limited
Westminster
R. Neal Hoffman
Managing Partner
Hoffman, Comfort, Galloway & Offutt
Attorneys
Westminster
S. Ray Hollinger
Chairman
W.H. Davis Company
T/A Davis Buick-GMC Truck
Westminster
Michael L. Oster
President and Chief Executive Officer
Westminster
Edwin W. Shauck
Retired Executive Vice President
Carroll County Bank and Trust Company
Westminster
James C. Snyder
Retired
Manufacturing and Distribution of
Truck Equipment
Manchester
G. Lee Sturgill, CPA
Partner
Sturgill & Associates
Westminster
Stevenson B. Yingling
President
Yingling General Tire, Inc.
Westminster
Bank of Maryland
Executive Officers:
Hunter F. Calloway
President and Chief Executive Officer
Edward P. Barker
Senior Vice President
Douglas S. Ewalt
Senior Vice President
Richard C. Springer
Senior Vice President
Directors:
Henry S. Baker, Jr.
Chairman of the Board
Retired
Maryland National Bank
Monkton
Hunter F. Calloway
President and Chief Executive Officer
Towson
Donald H. Campbell
President and Chief Executive Officer
First State Packaging, Inc.
Salisbury
Henry D. Felton
Chairman of the Board
Avatech Solutions, Inc.
Owings Mills
R. Michael Gill
President and Chief Executive Officer
Americom
Lutherville
Ethan D. Grossman
President
Ethan Grossman Engineering
Washington, DC
J. Patrick Henry
Chief Operating Officer
Colonial Professional Cars, Ltd.
Annapolis
Larry S. Kamanitz, CPA
Business Consultant
Grant Thornton, LLP
Baltimore
J. William Middelton
Chairman
Middelton, Limburg & Company, Inc.
Lutherville
Roger R. Rice
President
Rice & Associates Insurance
Bel Air
Jack A. Serber
Retired Accountant
Bethesda
Stephen C. Winter
Esquire
Miles & Stockbridge
Towson
Mason-Dixon Business Services, LLC
(Bank Operations Subsidiary)
Officers:
A. Gary Rever
President
William K. Stocksdale
Senior Vice President
Rose Shanis Financial Services, LLC
Officers:
Bonnie V. Klapaska
Regional Manager
Scott D. Frankle
Regional Manager
Joshua C. Johnson
Regional Manager
- --------------------------------------------------------------------------------
Page 44
<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS
Mason-Dixon Bancshares, Inc.
Officers:
William B. Dulany
Chairman of the Board
Thomas K. Ferguson
President and Chief Executive Officer
Mark A. Keidel, CPA
Vice President and Chief Financial Officer
Vivian A. Davis
Corporate Secretary
Caroline Babylon
Chief Internal Auditor
Directors:
William B. Dulany
Chairman of the Board
Partner, Dulany and Leahy Attorneys
Westminster
David S. Babylon, Jr.
Retired Accountant
Westminster
Henry S. Baker, Jr.
Retired
Maryland National Bank
Monkton
Miriam F. Beck
Retired Administrator
Carroll County Board of Education
Sykesville
Donald H. Campbell
President and Chief Executive Officer
First State Packaging, Inc.
Salisbury
Thomas K. Ferguson
President and Chief Executive Officer
Westminster
R. Neal Hoffman
Managing Partner
Hoffman, Comfort, Galloway & Offutt Attorneys
Westminster
S. Ray Hollinger
Chairman
W.H. Davis Company
T/A Davis Buick-GMC Truck
Westminster
J. William Middelton
Chairman
Middelton, Limburg & Company, Inc.
Lutherville
Edwin W. Shauck
Retired
Executive Vice President
Carroll County Bank and Trust Company
Westminster
James C. Snyder
Retired
Manufacturing and Distribution of Truck Equipment
Manchester
Stevenson B. Yingling
President
Yingling General Tire, Inc.
Westminster
Designed by Curran & Connors, Inc. / www.curran-connors.com
- --------------------------------------------------------------------------------
<PAGE>
MASON-DIXON BANCSHARES, INC.
45 WEST MAIN STREET
WESTMINSTER, MARYLAND 21157
(410) 857-3401
www.msdx.com
Exhibit 21 -- List of Registrant's 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.
Bank of Maryland is a wholly-owned subsidiary of Mason-Dixon Merger Sub,
Inc.
Mason-Dixon Capital Trust is a wholly-owned subsidiary of Mason-Dixon
Bancshares, Inc.
Mason-Dixon Capital Trust II is a wholly-owned subsidiary of Mason-Dixon
Bancshares, Inc.
Rose Shanis Financial Services, LLC is a wholly-owned subsidiary of
Mason-Dixon Bancshares, Inc.
Bay Insurance, LLC is a wholly-owned subsidiary of Mason-Dixon Bancshares,
Inc.
E-2
Exhibit 23 -- Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Mason-Dixon Bancshares, Inc. and Subsidiaries of our report dated
January 15, 1999, included in the 1998 Annual Report to Stockholders of
Mason-Dixon Bancshares, Inc. and Subsidiaries.
We also consent to the incorporation by reference in the Registration
Statements pertaining to the Mason-Dixon Bancshares, Inc. Deferred Compensation
and Fee Plan for Non-Employee Directors (Form S-8, No 333-51947), the
Mason-Dixon Bancshares, Inc. Management Deferred Compensation Plan (Form S-8,
No. 333-51303), the Mason-Dixon Bancshares Employee Savings and Investment Plan
(Form S-8, No.333-51305), and the Mason-Dixon Bancshares, Inc. 1997 Omnibus
Share Plan (Form S-8, No. 333-50731) of our report dated January 15, 1999, with
respect to the consolidated financial statements of Mason-Dixon Bancshares, Inc.
and Subsidiaries incorporated by reference in the Annual Report on Form 10-K for
the year ended December 31, 1998.
/s/ Stegman & Company
Baltimore, Maryland
March 25, 1999
E-3
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the Mason-Dixon
Bancshares, Inc. December 31, 1998 financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 22,642,000
<INT-BEARING-DEPOSITS> 638,000
<FED-FUNDS-SOLD> 2,363,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 185,366,000
<INVESTMENTS-CARRYING> 566,878,000
<INVESTMENTS-MARKET> 570,034,000
<LOANS> 462,557,000
<ALLOWANCE> 8,893,000
<TOTAL-ASSETS> 1,102,242,000
<DEPOSITS> 640,349,000
<SHORT-TERM> 41,816,000
<LIABILITIES-OTHER> 9,591,000
<LONG-TERM> 328,347,000
0
0
<COMMON> 5,072,000
<OTHER-SE> 77,067,000
<TOTAL-LIABILITIES-AND-EQUITY> 1,102,242,000
<INTEREST-LOAN> 48,618,000
<INTEREST-INVEST> 31,895,000
<INTEREST-OTHER> 1,553,000
<INTEREST-TOTAL> 82,066,000
<INTEREST-DEPOSIT> 24,165,000
<INTEREST-EXPENSE> 44,191,000
<INTEREST-INCOME-NET> 37,875,000
<LOAN-LOSSES> 3,677,000
<SECURITIES-GAINS> 792,000
<EXPENSE-OTHER> 36,113,000
<INCOME-PRETAX> 10,811,000
<INCOME-PRE-EXTRAORDINARY> 10,811,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,811,000
<EPS-PRIMARY> 2.13
<EPS-DILUTED> 2.13
<YIELD-ACTUAL> 4.07
<LOANS-NON> 6,018,000
<LOANS-PAST> 60,000
<LOANS-TROUBLED> 826,000
<LOANS-PROBLEM> 11,265,000
<ALLOWANCE-OPEN> 5,231,000
<CHARGE-OFFS> 3,475,000
<RECOVERIES> 579,000
<ALLOWANCE-CLOSE> 8,893,000
<ALLOWANCE-DOMESTIC> 8,893,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
Exhibit 99 - Risk Factors
Regulatory Risks. The banking industry is subject to many laws and
regulations. Regulations protect depositors, not stockholders. The Maryland
Division of Financial Regulation and the Board of Governors of the Federal
Reserve System regulate Mason-Dixon and its bank and nonbank subsidiaries.
Regulations and laws increase Mason-Dixon's operating expenses, affect
Mason-Dixon's earnings, and put Mason-Dixon at a disadvantage with less
regulated competitors, such as finance companies, mortgage banking companies,
and leasing companies.
Exposure to Local Economic Conditions. Most of the loans made by
Mason-Dixon subsidiaries are made to Maryland borrowers. A decline in local
economic conditions would affect Mason-Dixon's earnings.
Credit Risks and Inadequacy of Loan Loss Reserve. When borrowers default
and do not repay the loans made to them by a Mason-Dixon subsidiary, Mason-Dixon
loses money. Experience shows that some borrowers either will not pay on time or
will not pay at all. In these cases, the subsidiary will cancel, or "write off,"
the defaulted loan or loans. A "write off" reduces Mason-Dixon's assets and
hurts Mason-Dixon's earnings. Mason-Dixon anticipates losses by reserving what
it believes to be an adequate cushion so that it does not have to take a large
loss at any one time. However, actual loan losses cannot be predicted, and
Mason-Dixon's loan loss reserve may not be sufficient.
Interest Rate Risk. Mason-Dixon's earnings depend greatly on its net
interest income, the difference between the interest earned on loans and
investments and the interest paid on deposits. If the interest rate paid on
deposits is high and the interest rate earned on loans and investments is low,
net interest income is small and Mason-Dixon earns less. Because interest rates
are established by competition, Mason-Dixon cannot completely control its net
interest income.
Risks Associated with Real Estate Lending. Mason-Dixon subsidiaries make
many real estate secured loans. Real estate loans are in demand when interest
rates are low and economic conditions are good. Even when economic conditions
are good and interest rates are low, these conditions may not continue.
Mason-Dixon may lose money if the borrower does not pay a real estate loan. If
real estate values decrease, then Mason-Dixon may lose more money when borrowers
default.
No Assurance of Growth. Mason-Dixon's ability to increase assets and
earnings depends upon many factors, including competition for deposits and
loans, Mason-Dixon's branch and office locations, avoidance of credit losses,
and hiring and training of personnel. Many of these factors are beyond
Mason-Dixon's control.
Competition. Other banks and non-banks, including savings and loan
associations, credit unions, insurance companies, leasing companies, small loan
companies, finance companies, and mortgage companies, compete with Mason-Dixon.
Some of Mason-Dixon's competitors offer services and products that Mason-Dixon
does not offer. Larger banks and non-bank lenders can make larger loans and
service larger customers. Law changes now permit interstate banks which may
increase competition. Increased competition may decrease Mason-Dixon's earnings.
No Assurance of Cash or Stock Dividends. Whether dividends may be paid to
stockholders depends on Mason-Dixon's earnings, its capital needs, law and
regulations, and other factors. Mason-Dixon's payment of dividends in the past
does not mean that Mason-Dixon will be able to pay dividends in the future.
E-4
<PAGE>
Stock Not Insured. Investments in the shares of Mason-Dixon's common stock
are not deposits that are insured against loss by the government.
Risk Involved in Acquisitions. Part of Mason-Dixon's growth may come from
buying other banks and companies. A newly purchased bank or company may not be
profitable after Mason-Dixon buys it and may lose money, particularly at first.
The new bank or company may bring with it unexpected liabilities or bad loans,
bad employee relations, or the new bank or company may lose customers.
Risk of Claims. Customers may sue Mason-Dixon for losses due to
Mason-Dixon's alleged breach of fiduciary duties, errors and omissions of
employees, officers and agents, incomplete documentation, Mason-Dixon's failure
to comply with applicable laws and regulations, or many other reasons. Also,
employees of Mason-Dixon conduct all of Mason-Dixon's business. The employees
may knowingly or unknowingly violate laws and regulations. Mason-Dixon
management may not be aware of any violations until after their occurrence. This
lack of knowledge will not insulate Mason-Dixon from liability. Claims and legal
actions may result in legal expenses and liabilities that may reduce
Mason-Dixon's profitability and hurt its financial condition.
Developments in Technology. Financial services use technology, including
telecommunications, data processing, computers, automation, Internet-based
banking, debit cards, and "smart" cards. Technology changes rapidly.
Mason-Dixon's ability to compete successfully with other banks and non-banks may
depend on whether it can exploit technological changes. Mason-Dixon may not be
able to exploit technological changes and expensive new technology may not make
Mason-Dixon more profitable.
Year 2000. The "Year 2000 Issue" describes the problems that may result
from the improper processing of dates and date-sensitive calculations beginning
in the Year 2000. Many existing computer programs use only two digits to
identify the year in the date field of a program. These programs could
experience serious malfunctions when the last two digits of the year change to
"00" as a result of identifying a year designated "00" as the Year 1900 rather
than the Year 2000. A system failure or other disruptions of operations could
occur if Mason-Dixon's computer programs and other equipment identify a year
designated "00" as the Year 1900 rather than the Year 2000. Mason-Dixon cannot
be certain that its computer programs and other equipment, and the computer
programs and other equipment of its customers, vendors, suppliers and even the
government will be Year 2000 compliant. Any systems failure, disruption, or
other losses could affect Mason-Dixon's earnings.
Anti-Takeover Effects of Certain Charter and Bylaw Provisions.
Mason-Dixon's Articles of Incorporation and Bylaws divide Mason-Dixon's Board of
Directors into three classes and each class serves for a staggered three-year
term. No director may be removed except for cause, and then only by a vote of at
least two-thirds of the total eligible stockholder votes. In addition, Maryland
law contains anti-takeover provisions that apply to Mason-Dixon. These
provisions may discourage or make it more difficult for another company to buy
Mason-Dixon or may reduce the market price of Mason-Dixon's common stock.
E-5
