SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997. Commission file number 0-22536
Monocacy Bancshares, Inc.
(Exact name of Registrant as specified in its charter)
Maryland 52-1824297
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 East Baltimore Street, Taneytown, Maryland 21787
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (410) 756-2655
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 $5 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 a definitive proxy of information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. {X}
The Registrant's revenues for the most recent fiscal year were $23,706,596.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 20, 1998, was $46,215,978.
As of March 20, 1998, Monocacy Bancshares, Inc. had 1,798,325 shares of common
stock outstanding, par value $5.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Monocacy Bancshares, Inc. Annual Report to Shareholders for the year
ended December 31, 1997, are incorporated by reference into Parts I, II and III.
Portions of the Definitive Proxy Statement for the annual shareholders' meeting
to be held April 27, 1998, are incorporated by reference in Part III.
<PAGE>
PART I
ITEM 1 DESCRIPTION OF BUSINESS
Monocacy Bancshares, Inc. ("Monocacy" or "Registrant") commenced business
on October 1, 1993, and is a Maryland corporation and a bank holding
company. Taneytown Bank & Trust Company ("Bank") is a wholly owned
subsidiary of Monocacy and its primary operating entity. The primary
regulator of Monocacy is the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"), while the Bank, as a state chartered
commercial bank, is regulated by the Federal Deposit Insurance Corporation
("FDIC") and the Maryland State Banking Commission. On December 31, 1995,
the Registrant acquired Royal Oak Savings Bank, F.S.B. ("Royal Oak") as a
subsidiary of Monocacy. The transaction was accounted for as a purchase and
the results of operations for the year 1995 properly do not include any
income from Royal Oak. The purchase price of the assets and costs
associated therewith were approximately equal to the liabilities and
capital assumed and no goodwill was recorded in the transaction. A $3.6
million deposit premium was paid in the transaction. Royal Oak was merged
with and into the Bank in April, 1996. On April 1, 1996, the Registrant
acquired Classic Mortgage Company ("Classic"), which was merged into the
Bank. It is now operated as a division of the Bank. The purchase price was
approximately $250,000. On May 15, 1997, the Bank signed a management
agreement with Franey, Parr & Associates, Inc. for the purpose of managing
the Bank's newly formed insurance center ("TBT Insurance Center"), which
began marketing and selling insurance on September 1, 1997. On September
22, 1997, the Bank entered into a service agreement with TrustCorp America
(the "Trust Company") for the Trust Company to provide trust services to
the Bank's existing trust customers as successor fiduciary and to provide
ongoing service through operation of a referral program for future trust
business.
The Bank, which operates as a commercial bank and trust company, operates
in Carroll County, Baltimore County and Howard County, Maryland, as well as
Adams County, Pennsylvania. The Bank is engaged in commercial and savings
business, as authorized by the banking statutes of the State of Maryland,
including the receiving of demand and time deposits and the making of loans
to individuals, associations, partnerships and corporations. The Bank is
also engaged in trust business through the Trust Company as described
above. Real estate financing comprises residential first and second
mortgages, home equity lines of credit and commercial mortgages. Consumer
lending is primarily made directly to individuals. Commercial lending is
made primarily to small businesses in the Bank's trade area in the form of
equipment and other fixed asset loans and short term lines of credit
supported by current assets. The Bank offers fiduciary and trust services
(through the Trust Company, as described above), as well as other
specialized services in connection with its general banking and trust
business in keeping with the current trends of the banking industry. The
Bank also owns and operates TBT Insurance, Inc., a Maryland corporation and
wholly-owned subsidiary of the Bank offering Single Premium and IRA
annuities. Investors Marketplace, Inc., is a separate division that offers
mutual funds. TBT Insurance Center offers a full range of insurance
products and Classic, described above, provides the Bank's mortgage-banking
operations.
Competition
The Bank operates in a very competitive market that is served primarily by
several locally headquartered community banks, several large regional
banks, as well as other financial intermediaries including brokerage firms,
savings and loan associations and savings banks, credit unions, consumer
loan companies, finance companies, insurance companies and certain
government agencies. The Bank operates 11 branches, as well as 6 automatic
teller machines and employed the equivalent of 147 employees (full-time
equivalents) at December 31, 1997. Carroll County, Baltimore County and
Howard County, as well as Adams County, Pennsylvania are largely
agriculture, light industry and retail business economies and are
residential areas for metropolitan Baltimore and Washington, D.C. The Bank
does not experience any significant fluctuations in loan or deposit
activity that are seasonal in nature. However, the competition for loans
does vary from time to time depending on such factors as the general
availability of credit, general and local economic conditions, current
interest rate levels, conditions in the mortgage market and other factors
that are not readily predictable. The Bank does not engage in any
operations involving foreign countries.
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In order to compete with other institutions in the market area, Monocacy
relies heavily on the personal contacts of officers, directors and
employees, in addition to a high level of personalized service that is an
advantage of a community oriented banking institution.
Government Policy
The earnings of the Registrant are affected not only by general economic
conditions, but also by the policies of various governmental regulatory
authorities. The Federal Reserve Board, through its monetary and credit
policies, has significant influence on overall growth and distribution of
bank loans, investments and deposits and affects interest rates. The
Registrant cannot accurately predict the effect such policies may have on
the future of its business and earnings.
Interstate Banking
Under current law, Monocacy can, under certain circumstances, participate
in interstate affiliations with banks and bank holding companies located in
the District of Columbia, Pennsylvania, Delaware, Virginia, West Virginia
and several other southeastern states. During 1996, the Company opened its
first interstate branch in Gettysburg, Pennsylvania. There are no recent or
known future legislative changes, events or trends, except as discussed in
a subsequent section, that would have a material adverse impact on the
financial condition or results of operations of Monocacy.
Additional Subsidiary Banks
The overall strategy of Monocacy is to expand its operations throughout the
Baltimore-Washington corridor as well as in south central Pennsylvania by
organizing new community banks and/or selectively acquiring existing
institutions. Additional subsidiary banks will tailor their marketing
strategies to the needs of the communities in which they serve. Capital for
the additional subsidiary banks may come from borrowings, dividends from
existing banks, the sale of additional securities of Monocacy, or some
combination of such methods. Specific locations, number and timing for
additional subsidiary banks is not known and will depend, in part, on
factors beyond Monocacy's control, including the financial condition of
Monocacy, the economy, the regulatory environment, and the success of
Monocacy's existing operations.
Supervision and Regulation - Registrant
Monocacy is subject to the jurisdiction of the Securities and Exchange
Commission (the "Commission") and of state securities commissions for
matters relating to the offering and sale of its securities. Issuances of
stock to raise capital and for dividend reinvestment, stock option and
other plans are subject to registration, absent any exemption from
registration with the Commission. Monocacy is subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, and,
accordingly, files reports, proxy statements and other information with the
Commission.
Monocacy is prohibited from engaging in or acquiring direct or indirect
control of more than five percent (5%) of the voting shares of any company
engaged in non-banking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be so closely related to
banking or managing or controlling banks as to be a proper incident
thereto. In making this determination, the Federal Reserve Board considers
whether these activities offer benefits to the public that outweigh any
possible adverse effects. Currently, Monocacy does not engage in any
activities not permitted.
As a bank holding company, Monocacy is required to file an annual report
with the Federal Reserve Board, as well as, any additional information that
the Federal Reserve Board may require by regulation promulgated pursuant to
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the Bank Holding Company Act of 1956, as amended ("the Act"). The Federal
Reserve Board may also make examinations of Monocacy and any or all of its
subsidiaries. Further, under Section 106 of the 1970 amendments to the Act
and the Federal Reserve Board's regulations, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit or provision of credit or provision
of any property or services. The so-called "anti-tie-in" provisions state,
generally, that a bank may not extend credit, lease, sell property, or
furnish any service to a customer on the condition that the customer
provide additional credit or service to the bank, to its bank holding
company or to any other subsidiary of its bank holding company or on the
condition that the customer not obtain other credit or service from a
competitor of the bank, its bank holding company or any subsidiary of its
bank holding company. Subsidiary banks of a bank holding company are
subject to certain restrictions imposed by the Act on any extensions of
credit to the bank holding company or any of its subsidiaries, on
investments in the stock or other securities of the bank holding company
and on taking of such stock or securities as collateral for loans to any
borrower.
Supervision and Regulation - The Bank
The Bank is subject to supervision, regulation and examination by the
Maryland Department of Licensing and Regulation and the FDIC. In addition,
the Bank is subject to a variety of local, state and federal laws that
affect its operations. From time to time, various types of federal and
state legislation are proposed that could result in additional regulation
of, and restrictions on, the business of the Bank. As a consequence of the
extensive regulation of commercial banking and thrift activities in the
United States, the Bank's business is particularly susceptible to federal
and state legislation and regulations that may increase the costs of doing
business.
The Federal Reserve System is managed through a tripartite hierarchy headed
by the Federal Reserve Board which oversees the entire system. The Federal
Reserve System is at the center of the nation's stable financial and
economic systems, and the Federal Reserve member banks are the means
through which the Federal Reserve System effectuates its goals of
maintaining financial and economic stability.
The earnings of the Bank are affected by domestic economic conditions and
the monetary and fiscal policies of the United States Government and its
agencies. An important function of the Federal Reserve System is to
regulate the money supply and interest rates. Among the instruments used to
implement those objectives are open market operations in United States
government securities and changes in reserve requirements against member
bank deposits. These instruments are used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, and their use may also affect rates charged on loans or paid on
deposits.
Although the Bank is not a member of the Federal Reserve System, the
policies and regulations of the Federal Reserve Board have a significant
effect on the Bank's deposit, loan and investment growth, as well as the
rate of interest earned and paid, and are expected to affect the Bank's
operations in the future. The effect of such policies and regulations upon
the future business and earnings of the Bank cannot be predicted.
Under the Community Reinvestment Act of 1977, as amended ("CRA"), federal
regulatory authorities are required to assess the record of financial
institutions to determine if these institutions are meeting the credit
needs of the community (including low and moderate income neighborhoods)
which they serve and to take this record into account in the evaluation of
any application made by any institution for, among other things, approval
of a branch or other deposit facility, office relocation, a merger or any
acquisition of bank shares. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989, discussed below, amended the CRA to require, among
other things, that the Bank's evaluation of meeting the credit needs of its
entire community, including low and moderate income neighborhoods be made
public. This evaluation includes a descriptive rating ("outstanding",
"satisfactory', "needs to improve" or "substantial noncompliance") and a
statement describing the basis for the rating. These ratings are publicly
disclosed.
In 1995, federal regulators revised the CRA rules to emphasize performance
over process and documentation. Under the revised rules, the five-point
rating scale is still used. A bank's compliance is determined by a
three-prong test whereby examiners assign a numerical score for a bank's
performance in each of three areas: lending, service and
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investment. The area of lending is weighted to increase its importance in
the application of the test. The rule became effective July 1, 1995. When
rating a bank in the area of lending, regulators examine the number and
amount of loan originations, the location of where the loans were made, and
the income levels of the borrowers. Although banks, under the revised
rules, are not required to make loans in every area, if there are apparent
tracts in which there is little lending, examiners will focus their
investigations in that area. The service prong evaluates how a bank
delivers its products to the community through branching. As with lending,
banks are not required to branch in every area, although conspicuous gaps
will be investigated. The third prong, investment in community, examines
how the bank meets the investment needs in the community within which it
operates. Assessment of investment is accomplished using a "performance
context" pursuant to which regulators meet with civic, community and bank
officials in order to determine the credit needs of the community. Expanded
Home Mortgage Disclosure Act reporting requirements were also approved for
large banks and thrifts which require reporting of census tract data on
mortgages made outside of the delineated communities. In addition,
effective March 1, 1997, institutions with assets above $250 million will
be required to report their aggregate small business loans made by
geographic region. Independent banks with total assets of less than $250
million and bank subsidiaries with total assets of less than $250 million
that have holding companies with total assets of less than $1 billion will
be subjected to less stringent CRA examinations.
Under the new regulation, banks enjoy a reduction in compliance burden.
Specifically, banks are not required to keep extensive documentation to
prove that directors have participated in drafting and review of CRA
policies. A formal CRA statement does not have to be prepared. The efforts
banks make to market in low-and moderate-income communities do not have to
be documented, nor will banks have to justify the basis for their community
delineation or the methods utilized to determine the credit needs of the
community.
Under the Bank Secrecy Act ("BSA"), banks and other financial institutions
are required to report to the Internal Revenue Service currency
transactions of more than $10,000 or multiple transactions of which the
Bank is aware in any one day that aggregate in excess of $10,000. Civil and
criminal penalties are provided under the BSA for failure to file a
required report, for failure to supply information required by the BSA or
for filing a false or fraudulent report.
An omnibus federal banking bill, known as the Competitive Equality Banking
Act ("CEBA"), was signed into law in August of 1987. Included in the
legislation were measures: (1) imposing certain restrictions on
transactions between banks and their affiliates; (2) expanding the powers
available to Federal bank regulators in assisting failed or failing banks;
(3) limiting the amount of time banks may hold certain deposits prior to
making such funds available for withdrawal and any interest thereon; and
(4) requiring that any adjustable rate mortgage loan secured by a lien on a
one-to-four family dwelling include a limitation on the maximum rate at
which interest may accrue on the principal balance during the term of such
loan. This legislation has not had a material adverse effect on the Bank's
operations or its competitive position.
The Garn - St. Germain Depository Institutions Act of 1982 ("1982 Act")
removed certain restrictions on a bank's lending powers and liberalized its
depository capabilities. The 1982 Act, however, tightened the provisions of
the Financial Institutions Regulatory and Interest Rate Control Act of 1978
("FIRA") respecting management interlocks and correspondent bank
relationships involving a bank's management personnel.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") was primarily enacted to improve the supervision of savings
associations by strengthening capital, accounting and other supervisory
standards. In addition, FIRREA reformed real estate appraisal procedures
and the existing supervisory/enforcement powers and penalty provisions in
connection with the regulation of the Bank. Under FIRREA, civil penalties
are classified into three levels, with amounts increasing with the severity
of the violation. The first tier provides for civil penalties of up to
$5,000 per day for any violation of law or regulation. A civil penalty of
up to $25,000 per day may be assessed if more than a minimal loss or a
pattern of misconduct is involved. Finally, a civil penalty of up to $1
million per day may be assessed for knowingly or recklessly causing a
substantial loss to an institution or taking action that results in a
substantial pecuniary gain or other benefit. Criminal penalties are
increased to $1 million per violation, up to $5 million for continuing
violations or for the actual amount of gain or loss. These monetary
penalties may be combined with
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prison sentences for up to five years. Management is of the opinion that
these additional reforms will have no material impact upon the anticipated
results of operations of the Bank.
Insurance
The Bank's deposits are insured by the FDIC pursuant to the system of
federal deposit insurance initially established by the Banking Act of 1933.
The Monetary Control Act of 1980 increased coverage of FDIC insurance from
$40,000 to $100,000 per deposit account. The Bank pays insurance premiums
according to rates established by the FDIC. The payment of deposit
insurance premiums is a significant cost to the Bank.
The operations of Monocacy and the Bank are affected by new federal and
state laws. The federal Economic Growth and Regulatory Paperwork Reduction
Act of 1996 ("New Act"), enacted in September 1996, includes provisions
that affect banks, bank holding companies, and savings institutions. The
New Act had, and is expected to have in the future, its most significant
effect upon bank and savings institutions that hold deposits assessed at
Savings Deposit Insurance Fund ("SAIF") rates. Among other things, the New
Act recapitalized the SAIF through a special assessment on savings
association deposits and bank deposits that had been acquired from savings
associations. The deposits acquired through the acquisition of Royal Oak
Savings Bank, a thrift acquired on December 31, 1995, were included in
this assessment. Accordingly, 1996 earnings reflect this assessment of
approximately $245,000.
The New Act may increase competition from savings associations by
equalizing, over time, the amount of federal insurance premiums paid on
savings association and bank deposits. The New Law also provides that,
beginning in 1997, institutions with deposits insured by the Bank
Insurance Fund, as well as those with SAIF insured deposits, will be
responsible for payment of certain bonds issued in connection with the
resolution of failed savings associations.
The New Act also simplifies the regulatory approval process for new
activities of banks and bank holding companies, and reduces a number of
other regulatory burdens. None of these changes is expected to have a
significant effect on Monocacy or the Bank.
The FDIC Improvement Act of 1991 ("FDICIA"), enacted in part to prevent the
deposit insurance funds from becoming insolvent, authorized the FDIC to
raise insurance premium assessments in order to achieve and maintain an
adequate level of funds. The depletion of the deposit insurance funds was
due, in part, to a large number of failed financial institutions in the
1980's, in combination with the increased coverage per deposit account. As
a result, the future cost of deposit insurance for the Bank is in large
part dependent upon the extent of future bank failures and the amount of
insurance coverage provided by the FDIC per deposit account, both of which
are not within the Bank's control. Moreover, FDICIA required the FDIC to
establish a risk-based insurance premium assessment system that
differentiates between higher and lower risk institutions, with lower
premiums assessed against institutions in a lower risk category. The Bank's
cost of deposit insurance; therefore, depends upon its risk-rating. During
1995, the Bank Insurance Fund of the FDIC became fully capitalized and
during 1996, the SAIF of the FDIC was fully capitalized through the
one-time special assessment mentioned above. Going forward, overall
premiums should be reduced.
Under FDICIA, banks must be classified in one of five defined categories
(well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized).
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<TABLE>
<CAPTION>
Total Tier 1 Under a
Risk- Risk- Tier 1 Capital
Based Based Leverage Order or
Ratio Ratio Ratio Directive
------ ------- --------- ----------
Capital Category
- ----------------
<S><C>
Well capitalized (greater than or equal to)10.0 (greater than or equal to)6.0 (greater than or equal to)5.0 No
Adequately capitalized (greater than or equal to) 8.0 (greater than or equal to)4.0 (greater than or equal to)4.0 *
Undercapitalized (less than) 8.0 (less than)4.0 (less than)4.0 *
Significantly undercapitalized (less than) 6.0 (less than)3.0 (less than)3.0
Critically undercapitalized (less than or equal to)2.0
</TABLE>
* 3.0 for those banks having the highest available regulatory rating.
In the event an institution's capital deteriorates to the undercapitalized
category or below, FDICIA prescribes an increasing amount of regulatory
intervention, including: (1) the institution by a bank of a capital
restoration plan and a guarantee of the plan by a parent institution; and
(2) the placement of a hold on increases in assets, number of branches or
lines of business. If capital has reached the significantly or critically
undercapitalized levels, further material restrictions can be imposed,
including restrictions on interest payable on accounts, dismissal of
management and (in critically undercapitalized situations) appointment of
a receiver. For well capitalized institutions, FDICIA provides authority
for regulatory intervention where the institution is deemed to be engaging
in unsafe or unsound practices or receives a less than satisfactory
examination report rating for asset quality, management, earnings or
liquidity. All but well capitalized institutions are prohibited from
accepting brokered deposits without prior regulatory approval. Management
believes that full implementation of FDICIA has had no material impact on
the Registrant's or the Bank's liquidity, capital resources or reported
results of operations. If all FDIC insurance premium assessments increase
in the future, Management believes that such increase might have a
material impact on future reported results of operations.
FDICIA also requires that banking agencies reintroduce loan-to-value
("LTV") ratio regulations which were previously repealed by the 1982 Act.
LTV's will limit the amount of money a financial institution may lend to a
borrower, when the loan is secured by real estate, to no more than a
percentage to be set by regulation of the value of the real estate.
Under the Federal Deposit Insurance Act (the "FDIA"), federal regulatory
agencies possess the power to prohibit institutions from engaging in any
activity that would be an unsafe or unsound banking practice or would
otherwise be in violation of the law. Moreover, the Financial Institutions
Regulatory and Interest Rate Control Act of 1978 ("FIRA") generally
expanded the circumstances under which officers or directors of a bank may
be removed by the institution's federal supervisory agency, restricts
lending by a bank to its executive officers, directors, principal
shareholders or related interests thereof and restricts management
personnel of a bank from serving as directors or in other management
positions with certain depository institutions whose assets exceed a
specified amount or which have an office within a specified geographic
area, and restricts the relationships of management personnel of a bank
with securities companies and securities dealers. Additionally, FIRA
prohibits acquisition of control of a bank unless the appropriate federal
supervisory agency has received sixty (60) days prior written notice and,
within that time, has not disapproved the acquisition of control, or
otherwise extended the period for disapproval. Control, for purposes of
FIRA, means the power to direct, either directly or indirectly, the
management or policies or to vote twenty-five percent (25 %) or more of
any class of outstanding stock of a financial institution or its
respective holding company. A person or group holding revocable proxies to
vote twenty-five percent (25 %) or more of the outstanding common stock of
a financial institution or holding company would be presumed to be in
control the institution for purposes of FIRA.
Annual full-scope, on site examinations are required for all the
FDIC-insured institutions except institutions with assets under $250
million which are well capitalized, well-managed and not subject to a
recent change in control, in which case, the examination period is every
eighteen (18) months. Moreover, effective after December 31, 1992, banks
with total assets of $500 million or more as of the beginning of the
fiscal year, are required to submit to their supervising federal and state
banking agencies a publicly available annual audit report. The independent
accountants of such banks shall attest to the accuracy of management's
report. The accountants shall also monitor management's
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compliance with governing laws and regulations. In addition, such banks
are also required to select an independent audit committee composed of
outside directors who are independent of management, to review with the
management and the independent accountants, the reports that must be
submitted to the bank regulatory agencies. If the independent accountants
resign or are dismissed, written notification must be given to the bank's
supervising government banking agencies. These accounting and reporting
reforms do not apply to an institution with total assets at the beginning
of its fiscal year of less than $500 million, such as the Bank.
Furthermore, the supervising banking agency may exempt institutions with
assets in excess of $500 million from these accounting and reporting
requirements.
The FDIC and other federal bank regulatory agencies have issued risk-based
capital guidelines which supplement leverage capital requirements. As of
December 31, 1992, the guidelines required all United States banks and
bank holding companies to maintain a minimum risk-based capital ratio of
8% (of which at least 4% must be in the form of common stockholders'
equity). Assets are assigned to four risk categories, with higher levels
of capital required for the categories perceived as representing greater
risk. The required capital ratios represent equity and (to the extent
permitted) non-equity capital as a percentage of total risk-weighted
assets. The risk-based capital rules are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among
banks and bank holding companies and to minimize disincentives for holding
liquid assets.
In July 1996, the federal bank regulatory agencies issued a joint policy
statement regarding the evaluation of commercial bank's capital adequacy
for interest rate risk. Under the policy, the assessment of a bank's
capital adequacy includes an assessment of the bank's exposure to adverse
changes in interest rates. Banks that are found to have a high level of
interest rate risk exposure or weak interest rate risk management systems
may be required by the regulators to take corrective actions. Management
believes its interest rate risk management systems and its capital
relative to its interest rate risk are adequate.
Riegle - Neal Act
On September 29, 1994, President Clinton signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Banking and Branch Act"). The legislation permits interstate banking
twelve months after its enactment into law. Bank holding companies,
pursuant to an amendment to the Bank Holding Company Act, can acquire a
bank located in any state, as long as the acquisition does not result in
the bank holding company controlling more than 10% of the deposits in the
United States, or 30% of the deposits in the target bank's state. The
legislation permits states to waive the concentration limits and require
that the target institution be in existence for up to five years before it
can be acquired by an out-of-state bank or bank holding company.
Interstate branching and merging of existing banks is permitted after
three years from the enactment of the Interstate Banking and Branching
Act, if the bank is adequately capitalized and demonstrates good
management. The Interstate Banking and Branching Act also amends the
International Banking Act to allow a foreign bank to establish and operate
a federal branch or agency upon approval of the appropriate federal and
state banking regulator.
From time to time, various types of federal and state legislation have
been proposed that could result in additional regulation of, and
restrictions on, the business of the Bank. It cannot be predicted whether
any such legislation will be adopted or, if adopted, how such legislation
would affect the business of the Bank. As a consequence of the extensive
regulation of commercial banking activities in the United States, the
Bank's business is particularly susceptible to being affected by federal
legislation and regulations that may increase the costs of doing business.
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Statistical Data
The statistical information required by Item I is in the Registrant's
Annual Report to Shareholders for the year ended December 31, 1997, which
is set forth in Exhibit 13, hereto, and is incorporated herein by
reference, as follows except as noted:
<TABLE>
<CAPTION>
Page in the Registrant's Annual
Report to Shareholders for
Guide 3 Disclosure the year ended December 31, 1997
------------------ --------------------------------
<S><C>
I. Distribution of Assets, Liabilities and
Stockholders' Equity; Interest Rates and
Interest Differential
A. Average Balance Sheet 8
B. Net Interest Income Analysis 8 & 9
C. Rate/Volume Analysis 9
II. Investment Portfolio
A. Book Value of Investment Securities 13
B. Maturities of Investment Securities 14
C. Investment Securities Concentrations 13 & 14
III. Loan Portfolio
A. Types of Loans 14 & 15
B. Maturities and Sensitivities of
Loans to Changes in Interest Rates 16
C. Risk Elements
1. Nonaccrual, Past Due and Restricted Loans 15, 16 & 17
2. Potential Problem Loans 17
3. Foreign Outstandings Not Applicable
D. Other Interest Bearing Assets Not Applicable
IV. Summary of Loan Loss Experience
A. Analysis of Allowance for Loan Losses 10
B. Allocation of the Allowance for Loan Losses 11
V. Deposits
A. Average Balances 8
B. Maturities of Large Denomination Certificates 17
C. Foreign Deposit Liability Disclosure Not Applicable
VI. Return on Equity and Assets
A. Return on Assets 5
B. Return on Equity 5
C. Dividend Payout Ratio See Item 6
D. Equity to Assets Ratio 5
VII. Short-Term Borrowings 34
</TABLE>
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ITEM 2 PROPERTIES
Monocacy Bancshares, Inc., Corporate Office
222 East Baltimore Street
Taneytown, Maryland 21787
Taneytown Bank & Trust Company:
<TABLE>
<S><C>
Main Office Columbia Branch * Randallstown Branch
222 East Baltimore Street 5565 Sterrett Place 9337 Liberty Road
Taneytown, MD 21787 Columbia, MD 21044 Randallstown, MD 21133
Westminster Branch * Uniontown Branch 140 Express Branch
402 Englar Road 3462 Uniontown Road 747 Baltimore Boulevard
Westminster, MD 21157 Westminster, MD 21158 Westminster, MD 21157
Taneytown Branch Keymar Branch Gettysburg Branch *
500 East Baltimore Street 6690 Middleburg Road 545 West Middle Street
Taneytown, MD 21787 Keymar, MD 21757 Gettysburg, PA 17325
Carroll Lutheran Village * Eldersburg Branch *
205 St. Mark Way 1350 Liberty Road
Westminster, MD 21157 Eldersburg, MD 21784
</TABLE>
* These properties are leased. Lease expiration dates are November 19,
2006, for the Westminster branch, October 1, 1998 for Carroll Lutheran
Village, March 31, 1998, for the Columbia branch, December 29, 2006 for
the Eldersburg branch and October 28, 2006 for the Gettysburg branch.
All other properties are owned in fee and without liens. All properties
owned and operated by the Registrant and its subsidiary are adequate
for the business to be conducted at each such location.
ITEM 3 LEGAL PROCEEDINGS
The Bank was named as a defendant in a legal proceeding in the circuit
Court for Baltimore City, wherein it was alleged that the Bank permitted
the improper withdrawal or transfer of funds from a deposit account
containing escrow monies at the Bank. The Bank was also alleged to have
misapplied certain sums of money by depositing them in an unrelated
account holder's deposit account. The complaint initially sought recovery
against the Bank in the amount of $482,000 and was later amended to seek
an amount in excess of $1 million. In January, 1998, the Bank, with the
approval of the Court, orally agreed to execute a Settlement Agreement and
Mutual Release. Under the terms, the Bank will pay $230,000 and release
any claims against other parties. In return, the Bank will receive a
General Release from all parties to the litigation. The Bank expects to
execute the Settlement Agreement and Mutual Release in the near future.
Monocacy and the Bank are involved in other matters of litigation
incidental to their business. In Management's opinion, the outcome of
these matters will not have a material impact on the financial statements
of Monocacy, or the Bank.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
10
<PAGE>
PART II
ITEM 5 MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Registrant's Common Stock is traded on the National Association of
Securities Dealers' Automated Quotation System under the symbol MNOC.
The Bank has paid cash dividends for at least 20 years. The Registrant has
paid dividends since the effective date of its formation as a bank holding
company, October 1, 1993. The Registrant's Board of Directors intends to
continue the dividend payment policy; however, future dividends must
necessarily depend upon net income, capital requirements, appropriate
legal restrictions and other factors relevant at the time the Board of
Directors of the Registrant considers dividend policy. Pages 18 and 42 of
the Registrant's Annual Report to Shareholders discusses the regulatory
restrictions that impact the Registrant's and the Bank's ability to pay
dividends. The following tables set forth the high and low bid prices for
each quarter of 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
Fourth Third Second First Fourth Third Second First
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
------ ------- ------- ------ ------- ------ ------- ------
<S><C>
Per Common Share:*
Cash dividends declared $ .10 $ .10 $ .10 $ .10 $.0825 $.0825 $.0825 $.0825
Bid Prices:
High $32.00 $24.50 $23.00 $24.75 $25.50 $25.50 $25.50 $25.00
Low $22.00 $21.00 $20.50 $20.50 $22.50 $22.50 $22.50 $22.00
</TABLE>
* Amounts have been restated to reflect the February, 1997 and February,
1998 10% stock dividends.
As of March 20, 1998, there were approximately 950 stockholders holding an
aggregate of 1,798,325 shares.
11
<PAGE>
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required to be set forth herein is included in the Registrant's
Annual Report to Shareholders, at pages 7 through 22, which is attached hereto
in Exhibit 13 and is incorporated herein by reference.
Five Year Comparative Summary
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S><C>
Summary of Operations:
Interest Income $20,856 19,593 17,079 14,997 12,441
Interest Expense 10,687 10,421 7,852 6,271 5,224
-------- ------- ------- ------- -------
Net interest income 10,169 9,172 9,227 8,726 7,217
Provision for loan losses 1,110 300 885 687 375
-------- ------- ------- ------- -------
Net interest income after provision
for loan losses 9,059 8,872 8,342 8,039 6,842
Other income 2,850 2,039 1,427 1,081 1,644
Other expenses 9,651 8,762 6,536 6,121 5,904
-------- ------- ------- ------- -------
Income before income taxes 2,258 2,149 3,233 2,999 2,582
Income taxes 140 538 882 777 621
-------- ------- ------- ------- -------
Net income $2,118 1,611 2,351 2,222 1,961
======== ======= ======= ======= =======
Per Share Data*:
Net income - basic $1.19 0.91 1.33 1.27 1.12
Net income - diluted 1.16 0.90 1.32 1.26 1.12
Dividend paid .40 0.33 0.30 0.21 0.17
Book Value 13.49 12.18 12.01 10.63 9.88
Shares outstanding* 1,791,369 1,777,998 1,765,310 1,756,584 1,753,955
Other Data:
Total assets $290,240 263,015 266,194 211,249 191,768
Total deposits 228,870 225,039 223,412 171,873 155,722
Total loans-net of allowance for
loan losses 155,716 156,690 137,222 145,564 121,370
Total equity 24,168 21,648 21,169 18,610 17,289
Key Ratios:
Return on average
stockholders' equity 9.25% 7.81 11.83 12.19 11.27
Return on average total assets 0.77% 0.61 1.07 1.08 1.09
Equity to assets 8.33% 8.23 7.95 8.81 9.02
Dividend payout ratio 33.61% 36.26 22.56 16.54 15.18
</TABLE>
* Per share data and shares outstanding for all years have been restated to
reflect the 10% common stock dividends issued in 1998, 1997 and 1996.
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be set forth herein is included in the Registrant's
Annual Report to Shareholders, at pages 23 through 42, which is attached hereto
in Exhibit 13 and is incorporated herein by reference. Supplemental data
required under 302 (a) (5) is not applicable.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
12
<PAGE>
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be set forth herein is included in the Registrant's
definitive Proxy Statement, dated March 25, 1998, at pages 6 and 7, which is
attached hereto in Exhibit 99 and is incorporated herein by reference.
ITEM 10 EXECUTIVE COMPENSATION
The information required to be set forth herein is included in the Registrant's
definitive Proxy Statement, dated March 25, 1998, at pages 8 through 12, which
is attached hereto in Exhibit 99 and is incorporated herein by reference.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be set forth herein is included in the Registrant's
definitive Proxy Statement, dated March 25, 1998, at pages 3 and 4, which is
attached hereto in Exhibit 99 and is incorporated herein by reference.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be set forth herein is included in the Registrant's
definitive Proxy Statement, dated March 25, 1998, at pages 12 through 14, which
is attached hereto in Exhibit 99 and is incorporated herein by reference.
ITEM 13 EXHIBITS AND REPORTS ON 8-K
(a) Documents filed as part of this report:
(1) The following financial statements of the Registrant are set forth on
page 23 through 42 of the Registrants' 1997 Annual Report to
Shareholders, which is included herein at Exhibit 13 and is incorporated
herein by reference:
Consolidated Balance Sheets at December 31, 1997 and 1996.
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995.
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements for the years ended December
31, 1997, 1996 and 1995.
Independent Auditors' Report for the year ended December 31, 1997.
(2) Financial statement schedules are omitted from this 10-KSB because the
required information is either not applicable or is not deemed material
to the Registrant.
(3) Listing of Exhibits:
The following documents are attached as Exhibits to this Form 10-KSB as
indicated by the Exhibit number or are incorporated by reference to the
prior filings of the Registrant with the Commission.
13
<PAGE>
<TABLE>
<CAPTION>
Form 10-KSB Exhibit # Exhibit
--------------------- -------
<S><C>
Exhibit (3i) Articles of Incorporation*
Exhibit (3ii) Bylaws of the Corporation (Incorporated by reference to Exhibit 3(ii) to
Registration Statement number 33-82332 filed with the Securities and Exchange
Commission)
Exhibit (10i) Employment Agreement, dated June 16, 1993, by and between Taneytown Bank and
Trust Company and Francis W. Neubauer, Jr. (Incorporated herein by reference to
the Registrant's Current Report on Form 8-K, filed with the Commission on March
24, 1997)
Exhibit (10ii) Supplemental Retirement Plan Agreement, dated April 25, 1994, by and between
Taneytown Bank and Trust Company and Francis W. Neubauer, Jr. (Incorporated
herein by reference to the Registrant's Current Report on Form 8-K, filed with the
Commission on March 24, 1997)
Exhibit (10iii) Stock Option Plan (Incorporated herein by reference to Exhibit 4.4 to Registration
Statement number 33-82332 filed with the Securities and Exchange Commission)
Exhibit (10iv) 1997 Independent Directors Stock Option Plan (Incorporated herein by reference to
Exhibit 4.3 to Registration Statement number 33-82332 filed with the Securities
and Exchange Commission)
Exhibit (11) Information used in the computation of net income per share**
Exhibit (13) Annual Report to Shareholders
Exhibit (21) List of Registrant's Subsidiaries
Exhibit (23) Consent of Independent Auditors
Exhibit (27) Financial Data Schedule
Exhibit (27(i)) Restated December 31, 1996 Financial Data Schedule
Exhibit (99) Proxy Statement, Notice and Form of Proxy for 1997 Annual Meeting of
Shareholders to be held on April 27, 1998.
</TABLE>
* Incorporated by reference to Exhibit (3i) to the Annual Report on Form 10-KSB
for the year ended December 31, 1996 filed with the Securities and Exchange
Commission.
** Exhibit is incorporated herein by reference to page 39 of Exhibit (13) -
Annual Report to Shareholders
ITEM 13 (b) REPORTS ON FORM 8-K
None.
14
<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.
MONOCACY BANCSHARES, INC.
(Registrant)
Date: March 20, 1998 By: /s/ Frank W. Neubauer
________________________________
Frank W. Neubauer, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S><C>
/s/ Eric E. Glass Chairman of the Board, Date March 20 ,1998
_______________________________ Director
Eric E. Glass
/s/ Frank W. Neubauer Director, President & CEO Date March 20 ,1998
_______________________________ (Principal Executive Officer)
Frank W. Neubauer
/s/ David M. Abramson Director Date March 20 ,1998
_______________________________
David M. Abramson
/s/ E. Wayne Baumgardner Director Date March 20 ,1998
_______________________________
E. Wayne Baumgardner
/s/ George B. Crouse Director Date March 20 ,1998
_______________________________
George B. Crouse
/s/ Glenn E. Eaves Director Date March 20 ,1998
_______________________________
Glenn E. Eaves
/s/ Donald R. Hull Director Date March 20 ,1998
_______________________________
Donald R. Hull
/s/ Michael K. Walsch CFO & COO Date March 20 ,1998
_______________________________
Michael K. Walsch (Principal Accounting and
Financial Officer and Principal
Operating Officer)
</TABLE>
15
1997
Monocacy Bancshares, Inc.
ANNUAL REPORT
Expanding Service to Our Customers
<PAGE>
OUR MISSION
THE MISSION OF MONOCACY BANCSHARES, INC. IS TO SERVE OUR COMMUNITY as an
independent, market driven organization by providing "service excellence"
through highly motivated and trained employees and officers who, complemented by
continued emphasis on advanced technology, will set the standard for excellence
in our marketplace. It is our stated desire to obtain superior profitability in
order to provide our shareholders a fair return on their investment.
1 COLUMBIA OFFICE &
CLASSIC MORTGAGE OFFICE
2 RANDALLSTOWN OFFICE &
CLASSIC MORTGAGE HEADQUARTERS
3 ELDERSBURG OFFICE
4 UNIONTOWN OFFICE [MAP OF PENNSYLVANIA/MARYLAND BORDER]
5 KEYMAR OFFICE
6 ROUTE 140 EXPRESS OFFICE
7 ENGLAR ROAD OFFICE
8 CARROLL LUTHERAN VILLAGE OFFICE
9 MAIN OFFICE & CORPORATE
HEADQUARTERS
10 FAIRGROUND OFFICE
11 GETTYSBURG OFFICE
<PAGE>
LETTER TO SHAREHOLDERS
OUR 1997 OPERATING RESULTS REFLECT THE BEGINNING OF THE RETURN ON THE
INVESTments we have made in recent years. Our earnings were up 31% to $2,118,000
from $1,611,000 in 1996. We saw corresponding asset growth to $290 million from
$263 million. This growth was heavily influenced by a strategy to take advantage
of our strong capital base.
During 1997, we continued to refine our operations with a focus on doing what
we do best. We formed an alliance with TrustCorp America under which they took
over the
[PHOTOGRAPH APPEARS HERE]
Donald R. Hull, Frank W. Neubauer and
Eric E. Glass
management of our trust assets and will continue to provide trust
services to both existing and new trust customers. TrustCorp America brings both
a level of expertise and depth that is consistent with what is available in the
marketplace and compatibility with our approach to business.
We continued to expand our offerings of non-insured products when we became
the first bank in the state of Maryland to be licensed to sell insurance
products. This is an extremely compatible line of business that fits well with
our other products. We are marketing a full line of personal and commercial
insurance products through the Taneytown Bank Insurance Center ("TBIC").
Investors MarketPlace rounds out our non-insured product offerings providing
access to mutual funds, fixed and variable rate annuities as well as stocks and
bonds.
We believe that income from these services, plus non-interest income
generated by Classic Mortgage, will continue to keep us in the forefront of the
ever emerging direction of our industry to offset continually contracting
margins. One of our prominent efforts in 1998 will be improving our asset mix
with a goal of increasing our loan portfolio as a percent of assets. We have a
high degree of liquidity and the ability to shift funds from our investment
portfolio to support this effort.
Quality loan growth will be a challenge in view of the current banking
environment. The following represents the initiatives that we have put in place
which we believe will allow us to accomplish this effort:
1. Business Banking. We consolidated our commercial lending and commercial
real estate lending areas under the umbrella of Business Banking. This division
consists of teams which will allow us to increase our business development
efforts with both existing customers and prospects without compromising our
portfolio management responsibilities.
2. Credit Department. We have expanded and strengthened the role of our
Credit Department in the underwriting and credit monitoring process.
3. Advisory Boards. During 1997, we established advisory boards in strategic
locations; namely Gettysburg, Pennsylvania and Howard County and Westminster,
Maryland. These advisory boards consist of local business and community leaders
who provide us with invaluable insight into the activities of these communities.
4. Community Relations. Additional business development efforts will be
occurring in Westminster with the deployment of one of our senior officers who
will concentrate on community relations.
1
<PAGE>
5. Marketing. We are supporting the business development efforts of our
Business Banking Division with enhancements to our marketing department. In late
1997, we made an investment in technology in the form of a Marketing Customer
Information File ("MCIF"). This resource provides us with information which
allows us to better understand and respond to our customers.
6. Relationship Banking. Our MCIF adds another dimension to our Relationship
Banking Program. During 1997, the first full year of implementation of our
Relationship Banking initiative, we were able to generate a substantial increase
in our cross sales ratios at all our branches. We have set cross sales goals for
1998 that are consistent with the characteristics of high performing banks.
Banking today has created more cynics than anything else. With frequent
mergers and buy-outs occurring in our industry, people can never be certain
where their money will end up or what new fees they will be subjected to.
Fortunately, our customers are not faced with such concerns. This says a lot
about the stability of Taneytown Bank and our commitment to the community. At a
time when other financial institutions are closing offices, we are strengthening
our ties to the community. To that end, we continue to foster our philosophy of
service quality both internally and externally to separate us from our
competition.
Our message is: "We are strong, stable and secure and we are here to stay."
As always, we appreciate your support and commitment to our organization and we
are optimistic that our operating results will continue to reflect a very
positive return on our efforts.
/s/ Frank W. Neubauer, Jr.
- --------------------------
Frank W. Neubauer, Jr.
President & Chief Executive Officer
2
<PAGE>
STRATEGIES, COMMITMENT & SERVICE
A PLEDGE was made in 1997 to our customers to offer an exceptional level of
service that would continue to make us a leader among financial institutions
throughout our region. Senior management has set forth a number of strategic
initiatives to focus our attention and insure everyone's concerted efforts.
To understand the importance of these steps is to remain aware of the fast
track evolution of the banking industry in our area as well as nationwide.
First, national and super regional banks have encroached upon local communities
via mergers and acquisitions. With the relaxation of regulatory restraints,
interstate banking and non traditional bank financial services are available to
us as well as our competition. Second, technological breakthroughs can now
permit us to serve our customers in ways we embrace but must be wary of at the
same time. For some it is all too easy to avoid meeting their banker in a face
to face transaction for months on end. The consumer has many choices facing them
and it is our challenge to attract them first and last to our institution.
Monocacy Bancshares Inc. has wisely set a course of strategic planning to
meet today's opportunities and secure a place for Taneytown Bank & Trust Company
and other subsidiaries long into the future. If 1996 saw a large investment for
our future, 1997 will be remembered as the year of the capitalization of those
investments and continued refinement of our position as an outstanding community
bank.
- --------------------------------------------------------------------------------
SERVICE
EXCELLENCE
- --------------------------------------------------------------------------------
It has always been assumed that a community bank gives good service. Our
attitude is to assume nothing. We will provide the best service, be a best bank,
and take the lead. Out-of-state institutions often leave a void of understanding
and continuity. We do not! But we cannot stop there. It is important to know
everything about our customers. Their lifestyles,
- --------------------------------------------------------------------------------
We will provide
the best service,
be a best bank,
and take the
lead.
- --------------------------------------------------------------------------------
habits, desires, and above all needs are what we now use to plan. In 1997, we
purchased a new Marketing Customer Information File system to best understand
our relationships with each household we serve. This state of the art technology
can tell us much about our customer base. Also Focus Groups regularly hosted by
bank personnel and customer surveys give a forum for folks to tell us directly
what they need from their bank. Knowledge of one's customer just opens the door.
We have made the commitment to build those relationships with our customers
which will last. The branch network continues to build upon a sales culture
wherein needs and desires are fulfilled by our extensive list of products and
services. Whether you are a grandparent saving for a child's education or an
entrepreneur starting a small business venture, we have the solutions to
important financial concerns. And as we meet the needs of our neighbors, we do
it with seamless excellent service. Each area of the bank has a list of seven
service excellence promises posted to underline this commitment.
Special effort has also been made to continue the fine spirit of cooperation
among all internal departments. We truly are each other's customers. How we work
together directly effects our service to our community. Senior Management
wholeheartedly
3
<PAGE>
supports an atmosphere of team spirit. A job well done does not go unnoticed.
Finally, management takes this spirit into the community where many of us
volunteer our services.
- --------------------------------------------------------------------------------
STRATEGIC
FOCUS
- --------------------------------------------------------------------------------
In 1997 we mined the dramatic 1996 investments we made in our delivery
systems which included new branches, new automatic teller stations, high-tech
commercial drive-up facilities and the popular Automated Customer Service Line.
We dedicated many resources to acquiring new personal checking relationships, a
core building block for any community bank. For example, some accounts feature
free ATM transactions to benefit commuters who are not always near a Taneytown
Bank ATM.
Two major alliances were established during 1997 that make a profound
positive impact on our customers. First, the Taneytown Bank Insurance Center was
established by forming an agreement with Franey & Parr, a renowned Maryland
agency whose expertise will allow us to offer a full assortment of insurance
products and services to both retail and commercial customers.
- --------------------------------------------------------------------------------
A fully
informed
workforce
can keep the
mission of
the company
in focus.
- --------------------------------------------------------------------------------
Now, a competitive Homeowners' Policy can be made available during the mortgage
process at Classic Mortgage. Proposals for life or automobile coverage are as
close as a toll-free call.
Second, our Trust Division has formed an alliance with TrustCorp America to
enhance our estate planning and trust servicing. Qualified professionals will
meet with our customers at their convenience anywhere off-site as well as at our
Branches.
The Commercial Lending Division received a number of commendations in 1997.
Again Senior Management has implemented a strategic process to better serve
those markets we have expanded into over the past few years. Restructuring our
lending teams and support staffs make us responsive to our customer. Additional
personnel, marketing, and strong credit risk management predicts a prosperous
1998.
- --------------------------------------------------------------------------------
EMPLOYEES, OUR MOST
IMPORTANT RESOURCE
- --------------------------------------------------------------------------------
We make it our business to hire, train, compensate and hence retain superior
staff. An atmosphere of respect and team spirit are necessary if we are to
maintain our strategy of service excellence. The Golden Rule paraphrased: "As
one is treated, one will treat the customer." Stability of the workforce lets us
know our customer and give them the continuity that they crave. This definitely
is the territory of the community bank and a blind side of the out-of-state
monoliths. At Monocacy Bancshares Inc., management and employees enjoy handsome
physical surroundings with access to the latest in time saving technologies.
Health and retirement benefits are well above average in the industry. A grass
roots organization of employees called the Enrichment Committee keeps Management
abreast of concerns within the organization and outside in the community. It
also provides opportunities for socialization among peers at outings and other
events. Several newsletters and regular staff meetings keep all informed of
goings on in all departments. A fully informed workforce can keep the mission of
the company in focus.
- --------------------------------------------------------------------------------
A TOP TIER FINANCIAL
PERFORMANCE
- --------------------------------------------------------------------------------
Our shareholders expect us to deliver them a maximum return on their
investment. Each strategy, each goal, and each action plan has built in
measurements. Reaching our targets for a return on assets or a return on equity
is never out of sight in making decisions. Achieving these targets will only
allow for momentary celebration however. The next step will always be obvious-
raise the bar. Our success will come because we have the right approach and the
courage to execute our strategies.
4
<PAGE>
MONOCACY BANCSHARES, INC.
SELECTED FINANCIAL HIGHLIGHTS
(Dollars in thousands--except per share data)
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C>
Earnings:
Net income ....................... $ 2,118 $ 1,611 $ 2,351 $ 2,222 $ 1,961
Tax equivalent net interest income 10,868 9,960 9,608 9,112 7,643
Provision for loan losses ........ 1,110 300 885 687 375
Per share: (1)
Net income-basic ................. $ 1.19 $ .91 $ 1.33 $ 1.27 $ 1.12
Net income-diluted ............... 1.16 .90 1.32 1.26 1.12
Cash dividend declared ........... .40 .33 .30 .21 .17
Book value ....................... 13.49 12.18 12.01 10.63 9.88
At year end:
Assets ........................... $ 290,240 $ 263,015 $ 266,194 $ 211,249 $ 191,768
Loans, net (2) ................... 155,716 156,690 137,222 145,564 121,370
Deposits ......................... 228,870 225,039 223,412 171,873 155,722
Borrowings ....................... 35,658 15,339 19,633 18,369 17,805
Stockholders' equity ............. 24,168 21,648 21,169 18,610 17,289
Non-performing assets (3) ........ 2,098 1,449 2,569 303 583
Number of employees
(full time equivalents) ......... 147 160 129 95 98
Ratios:
Return on average assets ......... 0.77% 0.61% 1.07% 1.08% 1.09%
Return on average equity ......... 9.25 7.81 11.83 12.19 11.27
Equity to assets ................. 8.33 8.23 7.95 8.81 9.02
Loan loss allowance to loans ..... 1.60 1.32 1.37 1.29 1.23
Efficiency ratio (4) ............. 74.13 78.16 61.35 62.42 66.63
Non-interest income to assets .... 0.98 0.78 0.54 0.51 0.86
Net interest margin .............. 4.28 4.09 4.68 4.75 4.60
</TABLE>
(1) Per share data for all years have been restated to reflect the 10% common
stock dividends issued in 1998, 1997 and 1996.
(2) Net of unearned income and allowance for loan losses.
(3) Nonperforming assets consist of nonaccrual loans plus other real estate
owned.
(4) Calculated as non-interest expenses divided by non-interest income plus net
interest income.
EQUITY TO ASSETS
[BAR GRAPH APPEARS HERE--SEE PERCENTAGES BELOW]
1997 8.33%
1996 8.23%
1995 7.95%
ASSETS, LOANS AND DEPOSITS
(Dollars in thousands)
[BAR GRAPH APPEARS HERE--SEE DOLLAR AMOUNTS BELOW]
1997 1996 1995
Total Deposits 228,870 225,039 223,412
Net Loans 155,716 156,690 137,222
Total Assets 290,240 263,015 266,194
5
<PAGE>
FINANCIAL CONTENTS
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Independent Auditors' Report 23
Consolidated Balance Sheets 24
Consolidated Statements of Income 25
Consolidated Statements of Changes in Stockholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28
[MONOCACY BANCSHARES, INC. LOGO]
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
December 31, 1997 compared to December 31, 1996
(Dollars in thousands--except per share data)
Monocacy Bancshares, Inc. ("Monocacy" or the "Company"), with headquarters in
Taneytown, Maryland is a registered Bank Holding Company formed on October 1,
1993. At December 31, 1997, Monocacy had total consolidated assets of $290,240.
Monocacy is engaged in the general, commercial and consumer banking businesses
through its subsidiary, Taneytown Bank & Trust Company (the "Bank"). The Bank
provides a full range of financial services to individuals, businesses and
organizations through eleven banking offices and six Automated Teller Machines.
Classic Mortgage Company, a division of the Bank, provides the Bank's
mortgage-banking operations. Monocacy also offers annuity sales through TBT
Insurance, Inc., a subsidiary of the Bank. Taneytown Bank Insurance Center (the
"Insurance Center") provides a full range of personal and commercial insurance
products and the Trust Division, affiliated with TrustCorp America (the "Trust
Company"), provides full trust and estate services. The primary market area of
the Company extends through Carroll, Howard and Baltimore Counties, Maryland and
surrounding areas including south central Pennsylvania.
A detailed discussion of the 1997 Operating Results and Financial Condition at
December 31, 1997 follows and is intended to assist readers in their analysis of
the Company's consolidated financial statements and related notes. Such
financial condition and results of operations are not necessarily indicative of
future performance.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this annual report contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected in the forward-looking statements.
Important factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-QSB to be filed by the Company in 1998, and any
Current Reports on Form 8-K filed by the Company.
OVERVIEW
Monocacy reported consolidated net income for 1997 of $2,118 or $1.19 per share
(basic) as compared with consolidated net income of $1,611 or $.91 per share
(basic) in 1996. For Monocacy, 1997 was a year of capitalizing on prior year
investments. In 1996, the Company acquired Classic Mortgage Company ("Classic").
Classic's operations contributed approximately $450 in pre-tax earnings in 1997
through the sale of brokered and warehouse loans. The two new branches that were
opened in late 1996 (Gettysburg and Rt. 140 Express) saw their deposit base grow
to a combined level of approximately $5.7 million as of December 31, 1997.
Additionally, the new branches expanded the Company's access to new lending
populations.
The 1997 performance reflected greater net interest margins than in 1996. In
addition, 1997 reflected increases in non-interest revenues and non-interest
expenses and an increase in the provision for loan losses. The 1997 Return on
Average Assets was .77% and Return on Average Equity was 9.25%. Total assets
were $290,240 at December 31, 1997, with growth in both interest-earning assets
and interest-bearing liabilities. Return on Average Assets was .61% and Return
on Average Equity was 7.81% for 1996.
INCOME STATEMENT ANALYSIS
TAX EQUIVALENT NET INTEREST INCOME
(Dollars in thousands)
[BAR GRAPH APPEARS HERE--SEE DOLLAR AMOUNTS BELOW]
1997 $10,868
1996 $ 9,960
1995 $ 9,608
NET INTEREST INCOME
The net interest margin of 4.28% was 19 basis points above the 1996 level of
4.09%. Taxable equivalent interest income, Monocacy's primary contributor to
earnings, was $21,555 for 1997 which was a 5.8% increase over the 1996 level of
$20,381. This increase can be attributed to increase in the average volume of
interest earning assets, primarily in federal funds sold and in the loan
portfolios. Interest expense for 1997 was $10,687, an increase of $266 or 2.6%
over 1996, caused for the most part by the change in the Company's deposit mix
towards higher costing certificates of deposit and an increase in the
7
<PAGE>
- --------------------------------------------------------------------------------
TABLE 1
AVERAGE BALANCES, INTEREST AND YIELDS
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996
--------------------------------- ---------------------------------
Average Average
Balances Interest Yield Balances Interest Yield
-------- -------- ----- -------- -------- -----
<S> <C>
ASSETS
Interest-earning assets:
Loans, net of unearned
income (2)(3) ............................ $165,687 $15,648 9.44% $148,521 $14,024 9.44%
Securities available for sale--
taxable .................................. 50,282 3,244 6.45 58,100 3,797 6.54
Securities available for sale--
tax-exempt (1) ........................... 5,702 450 7.89 9,419 639 6.78
Investment securities--taxable ............. -- -- -- 401 26 6.48
Investment securities--
tax-exempt (1) ........................... 23,376 1,606 6.87 22,915 1,677 7.32
Loans held for sale ........................ 3,993 334 8.36 235 20 8.51
Federal funds sold ......................... 4,145 227 5.48 2,654 146 5.50
Interest-bearing deposits .................. 919 46 5.01 1,116 52 4.66
--------- ------- -------- -------
Total interest-earning assets ........ 254,104 21,555 8.48% 243,361 20,381 8.37%
------- -------
Non-interest-earning assets:
Cash and due from banks .................... 7,371 7,463
Bank premises and equipment,
net ...................................... 8,355 7,442
Other assets ............................... 6,635 6,353
Less--allowance for loan losses ............ (2,635) (2,055)
--------- --------
Total assets ......................... $273,830 $262,564
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing checking accounts.......... $ 24,622 569 2.31% $21,488 540 2.51%
Savings and money market accounts........... 59,042 2,120 3.59 62,507 2,324 3.72
Certificates of deposit .................... 120,467 6,869 5.70 112,673 6,387 5.67
Federal funds purchased .................... 640 28 4.38 1,727 95 5.50
Other borrowings ........................... 18,195 1,101 6.05 17,991 1,075 5.98
--------- ------- -------- -------
Total interest-bearing liabilities.... 222,966 10,687 4.79% 216,386 10,421 4.82%
------- -------
Non-interest-bearing liabilities:
Non-interest-bearing deposits .............. 26,397 23,792
Other liabilities .......................... 1,574 1,767
Stockholders' equity .......................... 22,893 20,619
--------- --------
Total liabilities and
stockholders' equity ............. $273,830 $262,564
========= ========
Net interest income ........................... $10,868 $ 9,960
========= =========
Net interest spread (4) ....................... 3.69% 3.55%
Net yield on earning assets (5) ............... 4.28% 4.09%
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------------
Average
Balances Interest Yield
-------- -------- -----
<S> <C>
ASSETS
Interest-earning assets:
Loans, net of unearned
income (2)(3) ............................ $140,969 $13,535 9.60%
Securities available for sale--
taxable .................................. 12,480 711 5.70
Securities available for sale--
tax-exempt (1) ........................... 5,475 406 7.42
Investment securities--taxable ............. 31,490 1,892 6.01
Investment securities--
tax-exempt (1) ........................... 10,720 715 6.67
Loans held for sale ........................ -- -- --
Federal funds sold ......................... 1,250 68 5.44
Interest-bearing deposits .................. 2,819 133 4.72
-------- -------
Total interest-earning assets ........ 205,203 17,460 8.51
-------
Non-interest-earning assets:
Cash and due from banks .................... 4,683
Bank premises and equipment,
net ...................................... 5,851
Other assets ............................... 4,931
Less--allowance for loan losses ............ (1,904)
--------
Total assets ......................... $218,764
--------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing checking accounts.......... $ 18,426 446 2.42%
Savings and money market accounts........... 52,442 1,628 3.10
Certificates of deposit .................... 86,406 4,831 5.59
Federal funds purchased .................... 1,300 55 4.23
Other borrowings ........................... 17,059 892 5.23
-------- -------
Total interest-bearing liabilities.... 175,633 7,852 4.47%
-------
Non-interest-bearing liabilities:
Non-interest-bearing deposits .............. 21,500
Other liabilities .......................... 1,761
Stockholders' equity .......................... 19,870
--------
Total liabilities and
stockholders' equity ............. $218,764
========
Net interest income ........................... $9,608
========
Net interest spread (4) ....................... 4.04%
Net yield on earning assets (5) ............... 4.68%
</TABLE>
(1) Interest on state and municipal investments is presented on a fully-taxable
equivalent basis
(2) Includes non-accrual loans
(3) Interest income on loans includes the amortized portion of net loan fees of
$466, $351 and $611 for the years ended December 31, 1997, 1996 and 1995,
respectively
(4) Represents the difference between the yield on interest-earning assets and
the cost of interest-bearing liabilities
(5) Represents net interest income divided by average interest-earning assets
8
<PAGE>
- --------------------------------------------------------------------------------
TABLE 2
NET INTEREST INCOME ANALYSIS
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 over 1996 1996 over 1995
------------------------------- -------------------------------
Due to change in (2) Due to change in (2)
-------------------- Increase -------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
<S> <C>
Interest Income:
Loans, net of unearned income ....... $ 1,621 $ 3 $ 1,624 $ 718 $ (229) $ 489
Securities available for sale--
taxable ........................... (505) (48) (553) 2,967 119 3,086
Securities available for sale--
tax-exempt (1) .................... (281) 92 (189) 270 (37) 233
Investment securities--taxable ...... (26) -- (26) (2,005) 139 (1,866)
Investment securities--tax-exempt (1) 35 (106) (71) 886 76 962
Loans held for sale ................. 314 -- 314 20 -- 20
Federal funds sold .................. 82 (1) 81 77 1 78
Interest-bearing deposits ........... (10) 4 (6) (80) (1) (81)
------- ------- ------- ------- ------- -------
Total ............................. 1,230 (56) 1,174 2,853 68 2,921
------- ------- ------- ------- ------- -------
Interest expense:
Interest-bearing checking accounts .. 65 (36) 29 76 18 94
Savings and money market accounts ... (126) (78) (204) 343 353 696
Certificates of deposit ............. 444 38 482 1,488 68 1,556
Federal funds purchased ............. (51) (16) (67) 21 19 40
Other borrowings .................... 12 14 26 51 132 183
------- ------- ------- ------- ------- -------
Total ............................. 344 (78) 266 1,979 590 2,569
------- ------- ------- ------- ------- -------
Net interest income ............... $ 886 $ 22 $ 908 $ 874 $ (522) $ 352
======= ======= ======= ======= ======= =======
</TABLE>
(1) Interest on state and municipal investments is presented on a fully-taxable
equivalent basis.
(2) The change in interest due to both rate and volume has been allocated to
rate and volume changes in proportion to the absolute dollar amounts of the
change in each.
- --------------------------------------------------------------------------------
Bank's average borrowing rate, which were partially offset by rate decreases on
certain transaction accounts. The overall cost of interest-bearing liabilities
(deposits and borrowings) was 4.79%, which was a 3 basis point decrease from
1996.
Table 1: Average Balances, Interest and Yields and Table 2: Net Interest Income
Analysis, provide further details of the Company's net interest income.
Average interest-earning assets were $254,104 for 1997, an increase of 4.4% from
the previous year. Increases in average balances occurred in almost all
categories of the loan portfolio (although actual year-to-year balances may not
have increased in some cases) generally reflecting the results of commercial,
construction and consumer lending initiatives and other marketing efforts.
Average securities (including the Available for Sale portfolio) experienced
overall increases of $11,475 from the 1996 level as a result of investing
borrowed funds. See the Balance Sheet Review below for further discussion on
interest-earning assets.
Average interest-bearing liabilities, increased by $6,580 from the prior year.
The mix in core deposits also changed during 1997. See a more comprehensive
discussion of funding elsewhere in this report.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is the periodic expense of maintaining an adequate
allowance for loan losses to absorb possible future losses, net of recoveries
inherent in the existing loan portfolio. The provision for loan losses was
$1,110 for 1997 and $300 in 1996. Net charge-offs were $671 in 1997 and $104 in
1996. The higher allowance for loan losses, provision for loan losses and
charge-offs reflect the deterioration of some credits in
9
<PAGE>
- --------------------------------------------------------------------------------
TABLE 3
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year .............. $ 2,100 $ 1,904 $ 1,902 $ 1,509 $ 1,113
Provision for loan losses ................. 1,110 300 885 687 375
Loans charged-off:
Real Estate:
Residential mortgages ................ -- -- -- -- --
Commercial mortgages ................. 478 302 377 -- --
Construction and land development .... -- -- -- -- --
Commercial ........................... 144 -- 500 297 --
Consumer ............................. 81 20 63 16 8
------- ------- ------- ------- -------
Total loans charged-off ........... 703 322 940 313 8
------- ------- ------- ------- -------
Recoveries of loans previously charged off:
Real Estate:
Residential mortgages ................ 15 4 6 -- --
Commercial mortgages ................. -- 211 -- 11 12
Construction and land development .... -- -- -- -- --
Commercial ........................... -- -- 41 -- --
Consumer ............................. 17 3 10 8 17
------- ------- ------- ------- -------
Total recoveries ................. 32 218 57 19 29
------- ------- ------- ------- -------
Net loans charged-off ..................... 671 104 883 294 (21)
------- ------- ------- ------- -------
Balance at end of year .................... $ 2,539 $ 2,100 $ 1,904 $ 1,902 $ 1,509
======= ======= ======= ======= =======
Ratio of allowance to loans, net
of unearned income ..................... 1.60% 1.32% 1.37% 1.29% 1.23%
======= ======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
the Bank's portfolio. The Bank's focus on credit quality prompts quick
corrective action including the aggressive exiting of certain relationships that
represent higher than desired risks due to a borrower's financial condition, the
industry of the borrower and the Bank's overall credit standards. Table 3,
Analysis of Allowance for Loan Losses, shows further details on the Allowance
for Loan Losses for the past five years.
The allowance for loan losses at December 31, 1997, was $2,539 or 1.60% of year
end net loans, compared to the 1996 year end allowance of $2,100 or 1.32% of net
loans. The 1997 allowance for loan losses was 93.3% of year-end non-performing
and past due loans and 121.0% of year-end non-performing assets.
One property represents 45% of the total 1997 charge-offs. Of the $478
commercial mortgage charge-offs, $319 was for one low income housing apartment
complex.
Monocacy's allowance for loan losses for all loan categories is further
detailed in Table 4: Allowance for Loan Losses Allocation. On a monthly basis,
loans warranting management's attention are identified and examined. Factors
such as the financial condition of the borrower, the adequacy of underlying
collateral and the impact of business and economic conditions upon the borrower
are evaluated. Based on this information and action plans provided by the
lending officers, each of these loans is subject to classification by the Credit
Department which then determines the allowance based on aggregate
classifications. Remaining loan portfolio categories receive general allocation
deemed reasonably necessary to provide for losses within the categories of loans
set forth on the table and based on the factors previously listed. The overall
allocation should not be interpreted as an indication of future charge-off
trends. While management makes every effort to reasonably assess the level of
the allowance necessary for
10
<PAGE>
- -------------------------------------------------------------------------------
TABLE 4
ALLOWANCE FOR LOAN LOSSES ALLOCATION
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ -------------------------
Percentage of Percentage of Percentage of
Loans in Each Loans in Each Loans in Each
Allowance Category to Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans Amount Total Loans
--------- ------------- --------- ------------- --------- -------------
<S> <C>
Real Estate:
Commercial
mortgages $1,141 42.3% $1,222 43.9% $ 642 40.2%
Residential
mortgages 137 15.7 60 12.9 46 22.5
Construction and
land development 714 18.5 300 18.0 289 9.4
Commercial 374 11.5 275 14.2 381 15.9
Consumer 83 12.0 80 11.0 64 12.0
Unallocated 90 -- 163 -- 482 --
------ ----- ------ ----- ------ -----
Total $2,539 100.0% $2,100 100.0% $1,904 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1994 1993
------------------------- -------------------------
Percentage of Percentage of
Loans in Each Loans in Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
--------- ------------- --------- -------------
<S> <C>
Real Estate:
Commercial
mortgages $1,019 43.7% $ 899 54.2%
Residential
mortgages 52 24.9 26 20.0
Construction and
land development 403 7.4 252 5.7
Commercial 268 14.1 107 10.0
Consumer 31 9.9 69 10.1
Unallocated 129 -- 156 --
------ ----- ------ -----
Total $1,902 100.0% $1,509 100.0%
====== ===== ====== =====
</TABLE>
- --------------------------------------------------------------------------------
the portfolio, further adjustments may be necessary based on economic conditions
and any related changes in asset quality.
NON-INTEREST INCOME
(Dollars in thousands)
[BAR GRAPH APPEARS HERE--SEE DOLLAR AMOUNTS BELOW]
1997 $2,850
1996 $2,039
1995 $1,427
NON-INTEREST INCOME
A portion of Monocacy's net income is derived from non-interest related sources
including service charges, trust, mortgage-banking, securities transactions and
other income. Non-interest revenue for 1997 was $2,850 or 1.04% of average
assets, up from $2,039 or .78% of average assets for 1996.
The 1997 results included $87 of net investment security gains as compared to
$220 of net losses in 1996. The 1997 security gains occurred with the sale of
securities related to the Bank's overall asset/liability management practices
and were taken to reposition the Bank's securities portfolio for funding loan
growth and interest rate considerations.
Service charges related to deposits were $600 in 1997, a $162 increase over the
1996 level, due primarily to the increased transaction charges and to
implementing foreign ATM surcharging. The average volume of ATM transactions
increased approximately 20% from 1996 to 1997. In 1997, the Bank added an
off-site ATM location in a gas/convenience mart.
Other service charges totaled $651 for 1997 which was a 1.4% decrease from 1996
because there were less fees collected on letters of credit and there were
write-offs of chronically overdrawn accounts. The residential mortgage loan
servicing portfolio of $123,927, which is created when mortgage loans are sold
with the servicing retained by the Company, contributed approximately $406 in
servicing fees in 1997, an increase of 7.4% over 1996. A large percentage of
residential loans are sold in the secondary markets. In addition to regular
sales of individual residential loans in the secondary market, the Company made
a bulk sale of approximately $9 million of its residential loan portfolio during
1997, recognizing $179 in gains on the sale. Total gains on residential mortgage
loan sales totaled $1,143 for 1997 compared to $864 for 1996. The increased
activity in the mortgage-banking operations can be attributed to the April, 1996
acquisition of Classic. Loan production from Classic for the year was $84
million as compared to $64 million in 1996. In addition, the Company originates
Small Business Administration ("SBA") loans, which are partially guar-
11
<PAGE>
- --------------------------------------------------------------------------------
TABLE 5
NON-INTEREST EXPENSES
(Dollars in thousands)
December 31,
------------------------------------
1997 1996 Change % Change
---- ---- ------ --------
Salaries and benefits ..................$5,222 $4,779 $ 443 9.3%
Commissions ............................ 404 308 96 31.2
Occupancy .............................. 720 628 92 14.7
Equipment .............................. 778 712 66 9.3
Deposit insurance ...................... 60 335 (275) (82.1)
Professional fees ...................... 676 379 297 78.4
Litigation ............................. 230 -- 230 100.0
Advertising ............................ 311 224 87 38.8
Data processing ........................ 31 167 (136) (81.4)
Postage and freight .................... 151 122 29 23.8
Meals and entertainment ................ 99 106 (7) (6.6)
Telephone .............................. 211 161 50 31.1
Supplies ............................... 214 263 (49) (18.6)
Amortization of intangibles ............ 183 135 48 35.6
Compliance restitution ................. 50 -- 50 100.0
Other .................................. 311 443 (132) (29.8)
------ ------ ------
$9,651 $8,762 $ 889 10.2
====== ====== ======
- --------------------------------------------------------------------------------
anteed by the SBA, and sells the guaranteed portion in the secondary market.
Gains from the sales of SBA loans decreased to $11 in 1997 from $67 in 1996 due
to the Bank's decreased emphasis on these loans.
The 1997 non-interest income included trust fees of $121, which were 19.3% less
than in 1996, primarily due to a change in the strategic plan of the Bank. As
mentioned previously, the Bank's trust activities are now limited to providing
referrals to the Trust Company and a continuation of revenue sharing on the
existing business.
NON-INTEREST EXPENSE
Non-interest expense for 1997 was $9,651, an increase of 10.2% from 1996. The
Company had 129 full-time and 35 part-time employees at December 31, 1997 as
compared to 141 full-time and 38 part-time employees at December 31, 1996. Table
5: Non-Interest Expenses shows the breakdown of non-interest expenses by
category.
Salary and Benefit expenses (including commissions) increased $539 or 10.6% over
1996 due for the most part to the Company reorganization in 1997. Several new
positions were created at the management level in the lending, marketing and
Classic division areas, while other lower-level positions became vacant due to
normal turnover and were not re-filled. In addition, 1996 only included nine
months' of salaries and benefits expense for Classic because it was not acquired
until April 1, 1996. The additional three months' expense would have been
approximately $270 for 1996. Salary expenses also include $404 in commissions
related to Classic for 1997 and $308 for 1996. Classic lenders are paid
commissions on loan production, and accordingly, the expense for commissions
grows in direct proportion to loan production. Classic loan production was $84
million in 1997 and $64 million for the nine months in 1996.
Occupancy and equipment expenses increased 11.8% from 1996 to 1997 due to
certain capital investments made in late 1996, such as the Gettysburg and Rt.
140 Express branch offices and the renovations on the Main Office and Eldersburg
branch locations. Deposit insurance decreased from $335 in 1996 to $60 in 1997
due to the decrease in FDIC insurance rates. In addition, the 1996 amount
includes a one-time special assessment for the recapitalization of the Savings
Association Insurance Fund ("SAIF") of $245. Other non-interest expenses totaled
$1,561, which was below the 1996 level of $1,621 due to lower meals and
entertainment, data processing and supplies expenses, which were partially
offset by higher advertising, postage and telephone expenses.
12
<PAGE>
The 1996 data processing fees of $167 included certain large expenditures
related to the merger of Royal Oak into the Bank, while 1997's lower expenses of
$31 did not include any such expenditures.
A total of $676 of professional fees were paid in 1997 as compared to $379 in
1996. The increase was primarily due to additional legal fees related to credit
workouts ($213) and to the ongoing litigation noted in Note 13 to the Company's
Consolidated Financial Statements ($142). The Company also recognized $230 as
expense in relation to the settlement of the litigation.
INCOME TAXES
Income tax expense for 1997 was $140 as compared with $538 for 1996. The 1997
effective tax rate was 6.2% down from 25.0% in 1996 because the Company's 1997
taxable income was more sheltered for tax purposes than it was in 1996, due to
the effect of tax-exempt securities. In addition, in 1997 the Company was able
to recapture taxes associated with prior years' tax exempt assets in the amount
of $143. The effective tax rate before the effect of this recapture was 12.5%
for 1997. Note 10 to the Consolidated Financial Statements reconciles reported
income tax expenses with the amount computed by applying the federal statutory
rate to income before taxes.
BALANCE SHEET REVIEW
EARNING ASSETS
Average earning assets were $254,104 for 1997 as shown in Table 1. This was an
increase of 4.4% from the 1996 level of $243,361.
LOANS HELD FOR SALE
The Company originates residential mortgage loans for sale in the secondary
market. At December 31, 1997, loans held for sale were $4,940, down from $10,118
at December 31, 1996 due to a bulk sale of $9 million in loans in the first
quarter of 1997. In 1997, loans originated for sale were $42 million compared to
$34 million in 1996. The increase in volume was due primarily to the efforts of
Classic which the Company acquired in the second quarter of 1996.
SECURITIES
The Available For Sale ("AFS") portfolio is comprised of securities the Company
feels it may sell in response to changes in interest rates or liquidity needs.
The AFS portfolio averaged $55,984 for 1997. The Held to Maturity ("HTM")
portfolio averaged $23,376. In December, 1997, due to a change in the Company's
business focus and because of a concern for credit diversification, the Company
transferred its remaining HTM portfolio to the AFS portfolio.
Average investment securities HTM remained relatively stable at $23,376 in 1997.
Average AFS securities decreased by 17.1% from 1996 to 1997 due to a
redeployment of funds into higher yielding loans. Investment securities,
including those in the AFS portfolio, are primarily fixed rate instruments with
maturities that range from less than one year to over ten years or, in some
cases, have no maturities, as, for example, the small amount of mutual funds
that the Bank owns. These mutual funds, which had a fair value of $851 at
December 31, 1997, invest in securities comparable to
- --------------------------------------------------------------------------------
TABLE 6
SECURITIES
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ----------------------- -----------------------
Securities Securities Securities
Investment available Investment available Investment available
securities for sale securities for sale securities for sale
---------- ---------- ---------- ---------- ---------- ----------
<S> <C>
U.S. Treasury securities $ -- $ -- $ -- $ -- $ -- $ 1,520
U.S. Government agency
securities -- 31,455 -- 21,721 -- 18,917
State and municipal bonds -- 34,059 24,042 5,349 8,311 15,856
Mortgage-backed securities -- 25,465 -- 16,372 7,213 14,638
Equity securities -- 871 -- 853 -- 887
Federal Home Loan Bank stock -- 3,314 -- 1,623 -- 2,023
------- ------- ------- ------- ------- -------
$ -- $95,164 $24,042 $45,918 $15,524 $53,841
======= ======= ======= ======= ======= =======
- --------------------------------------------------------------------------------
13
<PAGE>
- -------------------------------------------------------------------------------
TABLE 7
MATURITIES AND YIELDS OF DEBT SECURITIES
(Dollars in thousands)
</TABLE>
<TABLE>
<CAPTION>
Investment securities Securities available for sale
------------------------------------------------ ------------------------------------------------
Current Current
Amor- Un- Un- Estimated weighted- Amor- Un- Un- Estimated weighted-
tized realized realized fair average tized realized realized fair average
cost gains losses value yield cost gains losses value yield
----- -------- -------- --------- --------- ----- -------- -------- --------- ---------
<S> <C>
U.S. Government
agency securities:
Due within one year $-- $-- $-- $-- --% $ -- $ -- $ -- $ -- --%
Due after one--
five years -- -- -- -- -- 22,987 5 84 22,908 6.25
Due after five years -- -- -- -- -- 8,493 61 7 8,547 6.79
State and municipal securities:
Due within one year -- -- -- -- -- 1,080 2 -- 1,082 5.75
Due after one--
five years -- -- -- -- -- 4,027 24 4 4,047 6.34
Due after five years -- -- -- -- -- 28,338 596 4 28,930 7.33
Mortgage-backed securities:
Due after five years -- -- -- -- -- 25,809 21 365 25,465 7.16
---- ---- ---- ---- ------ ---- ---- -------
$-- $-- $-- $-- $90,734 $709 $464 $90,979
==== ==== ==== ==== ====== ==== ==== =======
</TABLE>
- --------------------------------------------------------------------------------
the securities that are directly owned by the Company, including U.S. Government
and U.S. Government agency obligations and obligations of municipal and
political subdivisions. Investment securities can be used to secure public
deposits and as collateral for Federal Home Loan Bank ("FHLB") borrowings. The
Company holds no derivatives in its portfolios. The accounting policy for
securities is included in Note 1 to the Consolidated Financial Statements. At
year end 1997, the AFS securities portfolio had total unrealized gains of $709
and total unrealized losses of $614.
Investment securities portfolio yields decreased to 6.68% from the prior year
levels of 6.76% as a result of the change in the mix of the portfolio caused by
the turnover (sales and maturities) of higher yielding securities. In 1997,
$22,495 of securities were sold, $6,423 of securities were called or matured and
$52,769 of securities were purchased. During 1997, the overall portfolio was
managed with a goal to increase loan volumes, as discussed below. At December
31, 1997, the Company had $5,305 in municipal securities issued by Pennsylvania
School Districts and guaranteed by the State of Pennsylvania. At the end of the
past two years, the Company did not have any other investment with a single
issuer (except for U.S. Government and agency obligations) that was greater than
10% of stockholders' equity. Table 6: Securities and Table 7: Maturities and
Yields of Debt Securities provide further information on the Company's
securities portfolios.
LOANS
Loans net of unearned income for 1997 averaged $165,687, which was an increase
of $17,166 or 11.6% from the 1996 level. Total loans at December 31, 1997 of
$158,292 are shown in Table 8: Summary of Total Loans. Increases occurred in the
residential mortgage, construction and land development and consumer loan
categories due to the generally favorable economic environment coupled with
extensive marketing efforts by the Bank's lending staff. In addition, Classic
created increased loan volume and loan growth in the residential construction
and residential lot portfolios as we emphasized these products in our marketing
efforts. The small decreases in the commercial mortgage and commercial loan
categories were due to a refocus in the Bank's lending initiatives. Borrowers
are concentrated in a market area that extends from Carroll County, Baltimore
County and Howard County, Maryland and to a lesser extent other parts of central
Maryland and south central Pennsylvania.
Commercial mortgage loans, which represent 42.3% of the loan portfolio, were
$66,995 at December 31, 1997. This was a decrease of 4.2% from the 1996 level.
14
<PAGE>
Commercial loans, which represent 11.5% of the loan portfolio, were $18,208 at
December 31, 1997, a decrease of 19.4% from the 1996 level. The decreases in
these portfolios were due primarily to the exiting from certain relationships
which no longer fit the overall credit and strategic philosophies of the Bank.
The commercial mortgage and commercial loan portfolios are strongly oriented
towards diversified middle market borrowers in the manufacturing, wholesaling,
services and real estate industries. The credit risk associated with middle
market borrowers is principally influenced by general economic conditions and
the resulting impact on the borrowers' operations. Generally, emphasis on
commercial loans is desirable to diversify the overall loan portfolio and to
increase the Bank's net interest margin. The Bank places a very heavy reliance
on real estate collateral in most of its commercial underwriting.
Consumer loans, which include home equity lines of credit, as well as other
personal loans, increased by 8.7% in 1997 as the Company continues to focus
marketing efforts in this area. Particular emphasis is placed on home equity
lines of credit ("helocs") because of the profitability associated with consumer
relationships that develop and the competitive environment that exists for other
consumer types of loans from specialty lenders, such as finance companies,
credit card banks and captive auto lenders. Management also believes that the
Company's overall focus on residential lending, including lot, construction,
permanent and helocs is a strategy that will differentiate us from the
competition.
Residential mortgage loans of $24,837 were 15.7% of the loan portfolio. This
category increased by 21.3% in 1997, primarily due to activities of the Bank's
mortgage-banking division, Classic. While the majority of residential mortgage
loan originations that occur at Classic are sold in the secondary market, some
of their production is placed in the Bank's portfolio to suit the Bank's
strategic purposes. Classic's loan production for 1997 was $84 million, of which
$24 million was sold servicing released and $11 million was sold, servicing
retained. Loans of $33 million, which included $26 million in residential
construction and lot loans, were retained in the Bank's portfolio and $16
million was originated for the loans held for sale portfolio.
Construction and land development loans were $29,187, an increase of 1.7% from
1996, due to continued focus on these types of loans in 1997. Residential
construction loans comprised the majority of the increase and represented 34.5%
of the total portfolio balance due to Classic's substantial marketing efforts in
1997. Residential construction loans are owned and serviced by the Bank until
the end of the construction period. At the time of conversion to permanent
loans, the loan is generally sold in the secondary market.
Loans, as a result of maturities, monthly payments, salability and as a source
of collateral provided an important source of liquidity to the Company. Unused
loan commitments related primarily to commercial loans are shown in Note 6 to
the Consolidated Financial Statements.
Table 9: Maturities of Loans, shows the maturities of selected loan categories
at year end 1997.
NON-PERFORMING ASSETS
Non-performing assets include non-accrual loans and
- -------------------------------------------------------------------------------
TABLE 8
SUMMARY OF TOTAL LOANS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------
1997 % 1996 % 1995 % 1994 % 1993 %
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S><C>
Real Estate:
Commercial mortgages $ 66,995 42.3% $ 69,947 43.9% $ 56,001 40.2% $ 64,684 43.7% $ 66,692 54.2%
Residential mortgages 24,837 15.7 20,477 12.9 31,357 22.5 36,880 24.9 24,588 20.0
Construction and land
development 29,187 18.5 28,695 18.0 13,121 9.4 10,913 7.4 7,026 5.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate 121,019 76.5 119,119 74.8 100,479 72.1 112,477 76.0 98,306 79.9
Commercial 18,208 11.5 22,582 14.2 22,181 15.9 20,909 14.1 12,361 10.0
Consumer 19,065 12.0 17,546 11.0 16,759 12.0 14,602 9.9 12,493 10.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total $158,292 100.0% $159,247 100.0% $139,419 100.0% $147,988 100.0% $123,160 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
- -------------------------------------------------------------------------------
15
<PAGE>
- -------------------------------------------------------------------------------
TABLE 9
MATURITIES OF LOANS
(Dollars in thousands)
<TABLE>
<CAPTION>
After 1
Within 1 Year But Within 5 Years After 5 Years
------------------- ------------------- -------------------
Fixed Variable Fixed Variable Fixed Variable
------- -------- ------- -------- ------- --------
<S><C>
Real Estate:
Commercial mortgages (3) $ 7,059 $11,639 $24,240 $ 5,860 $16,892 $ 1,305
Residential mortgages 661 42 1,454 57 17,126 5,497
Construction and
land development (2) 9,863 5,257 3,212 2,353 7,343 1,159
Commercial (1) 1,029 7,139 2,843 3,784 2,595 818
Consumer (4) 345 7 3,770 105 7,253 7,585
------- ------- ------- ------- ------- -------
Total $18,957 $24,084 $35,519 $12,159 $51,209 $16,364
======= ======= ======= ======= ======= =======
</TABLE>
(1) includes nonaccrual loans of $289
(2) includes nonaccrual loans of $264
(3) includes nonaccrual loans of $1,385
(4) includes nonaccrual loans of $23
- -------------------------------------------------------------------------------
foreclosed property. Non-accrual loans represent loans on which interest
accruals have been suspended. It is the Company's policy to discontinue interest
accruals on commercial and real estate loans when management believes, after
considering economic and business conditions and collection efforts and in the
absence of adequate collateral, that collection is questionable. Legal
foreclosures occur when Monocacy legally takes title to the collateral of the
loan.
Non-performing assets at year end 1997 were $2,098 or 1.3% of loans, net of
unearned income and foreclosed property, compared with $1,449 or .9% at the end
of 1996. This increase of $649 occurred as the Company adopted a new credit
philosophy, which, among other things, calls for aggressive exit strategies on
certain loans that no longer fit the Company's desired portfolio. In addition,
two significant commercial mortgage loans were placed on non-accrual status
during 1997 due to questionable collectibility. Table 10 provides details of the
various components of non-performing assets and past due loans for the past five
years. The Bank's coverage for these non-performing assets is at 121%, which
management considers adequate.
The majority of the nonaccrual loan balance consists of five commercial
properties, three commercial business loans, one residential construction
property and two sin-
- -------------------------------------------------------------------------------
TABLE 10
NON-PERFORMING ASSETS AND PAST DUE LOANS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S><C>
Non-performing loans--
Non-accrual loans $1,961 $ 793 $1,258 $ 25 $519
Other real estate owned 137 656 1,311 278 64
------ ------ ------ ---- ----
Total non-performing assets $2,098 $1,449 $2,569 $303 $583
====== ====== ====== ==== ====
Accruing loans past due
90 days or more $ 760 $ 757 $ 174 $936 $240
====== ====== ====== ==== ====
Allowance for loan losses to:
Non-performing loans 129.5% 264.8% 151.4% 7,608.0% 290.8%
Non-performing assets 121.0 144.9 74.1 627.7 258.8
</TABLE>
- -------------------------------------------------------------------------------
16
<PAGE>
gle family residences. The foreclosed property consists of one undeveloped
residential lot. Management is aggressively working out all non-performing
assets as fast as legal constraints permit in order to minimize their impact on
earnings and growth strategies.
Accruing loans past due 90 days or more as to principal or interest were $760 at
the end of 1997, as compared to $757 for 1996. These loans are in the process of
collection and are considered by management to be adequately collateralized.
At December 31, 1997, management had identified nonaccrual loans (as shown in
Table 10) of $1,961 as impaired loans, in accordance with FASB Statement No.
114. There were no valuation allowances for impaired loans at December 31, 1997
as the amounts by which the measure of the impaired loans were less than the
investment in the loans were charged off in 1997 for all impaired loans held in
1997.
BANK PREMISES AND EQUIPMENT
The Company's bank premises and equipment decreased to $8,171 at December 31,
1997 from $8,435 at December 31, 1996. Construction in progress at December 31,
1997 consists mostly of costs incurred to date on a possible new branch
location.
FUNDING
DEPOSITS
The Company offers to its diverse customer base a full range of savings
instruments including interest-bearing and non interest-bearing demand, savings
and certificates of deposit. Monocacy competes for deposits with other
commercial banks, savings banks and savings and loan associations, bond and
stock markets and non-bank financial service providers including money market
funds,
- -------------------------------------------------------------------------------
TABLE 11
MATURITY OF LARGE DENOMINATION CERTIFICATES OF $100,000 OR MORE
(Dollars in thousands)
December 31,
1997
------------
3 months or less $1,821
Over 3 through 6 months 1,463
Over 6 through 12 months 595
Over 12 months 2,825
------
$6,704
======
- -------------------------------------------------------------------------------
credit unions and other deposit gathering institutions. The competition among
the various financial institutions, higher consumer awareness and a desire for
high returns and service has increased the relative cost of and continues to
reduce the overall benefits received from many categories of deposits.
Interest-bearing liabilities (including other borrowings, discussed below)
averaged $222,966 for 1997, an increase of 3.0% from 1996. The increase was due
primarily to increases in the Company's savings products, primarily certificates
of deposit as a result of a 1997 certificate of deposit promotional campaign.
The opening of the two new branches during the second half of 1996 continues to
bring in additional deposits. In addition, Monocacy was able to increase its
deposit and customer base during the year through new products, marketing and a
high quality of customer service.
The Company has a portfolio of large denomination certificates of $100,000 or
more as shown in Table 11. The majority of the certificates have been sold to
existing in-market customers; however, at times, deposits have been placed at
the Bank from national brokers. At December 31, 1997, 94.2% of the $6,704 total
are from the Bank's existing deposit base.
OTHER FUNDING SOURCES
The Company periodically borrows from the FHLB of Atlanta under a secured
borrowing arrangement. At December 31, 1997, the aggregate advances from the
FHLB were $34,571. These borrowings are done primarily on a matched basis,
meaning that the Company manages the interest rate risk that may otherwise exist
on certain types of transactions such as long term fixed rate loans or fixed
rate securities in concert with the Company's overall asset/liability policy. As
a result, the transactions are likely to be more profitable to the Company and
can allow the Company to better serve its markets. In general, these borrowings
are stable although relatively more expensive than deposits. Of these
borrowings, $14,823 will mature in 1998. The Company from time to time will
borrow funds on an overnight basis from its correspondents banks and the FHLB.
These types of borrowings averaged $640 for 1997.
STOCKHOLDERS' EQUITY
Stockholders' equity provides a source of permanent funding, allows for future
growth and assists the Company to withstand unforeseen and adverse developments.
At December 31, 1997, stockholders' equity was $24,168, which was above the
previous year end level of $21,648, as a result of earnings, the increase in the
17
<PAGE>
- -------------------------------------------------------------------------------
TABLE 12
RISK BASED AND OTHER CAPITAL DATA
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1997 1996
---------------------- ---------------------- Regulatory
Balance Percent Balance Percent Requirement
--------- ------- --------- ------- -----------
<S><C>
Common stockholders' equity (1) $ 24,106 $ 22,421
Intangibles (2) (3,798) (4,012)
-------- ----- -------- -----
Total tier 1 20,308 11.10% 18,409 10.31% 4.00%
Qualifying allowance
for loan losses 2,289 2,100
-------- ----- -------- -----
Total tier II $ 22,597 12.35% $ 20,509 11.49%
======== ===== ======== =====
Total risk-based capital $ 22,597 12.35% $ 20,509 11.49% 8.00%
======== ===== ======== =====
Total risk-adjusted assets $182,928 $178,569
======== ========
Leverage ratio 7.00% 7.03% 3.00-5.00%
===== =====
</TABLE>
(1) Calculation does not include adjustment to capital for net unrealized
gains/losses on AFS securities as defined by regulators.
(2) Includes deposit premium, goodwill, purchased mortgage servicing rights,
mortgage-servicing rights and organization costs.
- -------------------------------------------------------------------------------
adjustment in the fair values of the AFS securities portfolio offset by an
increase in cash dividends and new issues of common stock under the Bank's
dividend reinvestment plan.
For 1997, the Company's annual cash dividend rate, as adjusted for the February
1998 10% stock dividend, was $.40 per share, as compared to a rate of $.33 in
1996. In addition, the Company declared a 10% common stock dividend in 1997 and
in 1996. The increase in the cash dividend rate and the declaration of the
common stock dividend was in recognition of the continued strong financial
health, liquidity and capital position of the Company. The net unrealized
holding gain on securities available for sale of $62 reflects the after-tax
unrealized net gain on these securities. This was an unrealized net loss of $773
at December 31, 1996. It is important to note that the monthly adjustments of
fair value on these securities will generally move in concert with interest
rates and there is potential for volatility in this category of stockholders'
equity. Management intends to actively manage this portfolio to ensure that
optimal returns are achieved by the Company with low impact on stockholders'
equity.
A Dividend Reinvestment plan was established in October 1994 which offers
stockholders a variety of options to increase their stock holdings. At January
30, 1998, 431 stockholders were enrolled in the plan. In 1997, approximately
13,000 new shares of stock were issued through the plan which resulted in
additional capital of $289.
A primary objective of management is and has been to sustain a strong capital
position to merit the confidence of its customers, the investing public, banking
regulators and stockholders. Capital adequacy may be defined as the amount of
capital needed to support future asset growth and to absorb losses if necessary.
Regulators consider a range of factors when determining capital adequacy such as
the organization's size, quality and stability of earnings, risk
diversification, management expertise, asset quality, liquidity and internal
controls. Management reviews the various capital ratios monthly and takes
appropriate action to ensure they are within established internal and external
guidelines. Management believes that Monocacy's current capital ratios
(consolidated), as shown in Table 12, are adequate to support its various
business ventures. Table 12 shows the Company's capital positions, as of
December 31, 1997, and shows that the Company's ratios are significantly above
the regulatory requirements. The Company is subject to restrictions on the
payment of dividends to its stockholders as discussed in Note 19 to the
Consolidated Financial Statements. In addition, Federal and State banking
regulations place certain restrictions on the ability of the Bank to pay
dividends to Monocacy.
INTEREST RATE SENSITIVITY
The Company's interest rate sensitivity position is managed by the Asset and
Liability Committee ("ALCO"). ALCO's purpose is to optimize net interest income
and earnings by managing balance sheet mix and interest
18
<PAGE>
rate sensitivity in order to create an acceptable balance between safety,
profitability and liquidity. The committee addresses policy and business
decisions of pricing, asset and funding mix, asset sales, investments, capital
and tax strategies. Legislative changes, monetary control efforts of the Federal
Reserve, the effects of deregulation and the overall economic environment
significantly affect the task. Table 13: Interest Rate Sensitivity, shows the
Company to be in a cumulative net asset sensitive position of 10.67% within the
one year horizon as of December 31, 1997. When interest rates are rising, a
net asset sensitive position is desirable, as more assets will be priced at
higher rates than liabilities, resulting in a favorable impact on net interest
income. Likewise, when interest rates are declining, a net liability sensitive
position is preferred. It is important to note that management possesses the
ability to adjust this position through the sale of various assets or obtaining
of other sources of funds including certificates of deposit, FHLB borrowings or
other deposit adjustments as deemed necessary.
LIQUIDITY
Liquidity is the ability to meet present and future financial obligations either
through the sale or maturity of existing assets or by the acquisition of
additional funds through liability management. During 1997 and on an ongoing
basis, all aspects noted have been utilized, including loan sales, investment
security transactions and the use of borrowings from the FHLB and other
correspondent banks and deposit promotions to complement
- -------------------------------------------------------------------------------
TABLE 13
INTEREST RATE SENSITIVITY
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------
1-30 31-90 91-360 >1 Year- >3 Years- Over
Days Days Days 3 Years 5 Years 5 Years
------- ------- ------- -------- -------- --------
<S><C>
Interest-earning assets:
Loans held for sale $ 3 $ 11 $ 37 $ 1,296 $ 973 $ 2,620
Securities available for sale,
investment securities and
federal funds sold 19,068 4,166 7,338 18,030 8,845 51,515
Loans (1) 54,487 3,778 17,323 29,852 21,894 30,958
------- ------- ------- -------- -------- --------
Total interest-earning assets 73,558 7,955 24,698 49,178 31,712 85,093
Interest-bearing liabilities:
Savings and interest checking (2) 1,471 1,471 5,148 72,785 -- --
Certificates of deposit 6,238 14,177 30,824 66,799 4,657 75
Borrowings 1,087 1,000 13,823 1,650 15,000 3,098
------- ------- ------- -------- -------- --------
Total interest-bearing liabilities 8,796 16,648 49,795 141,234 19,657 3,173
Non-rate related assets
and liabilities, net (32,891)
------- ------- ------- -------- -------- --------
Interest sensitivity gap (3) 64,762 (8,693) (25,097) (92,056) 12,055 49,029
------- ------- ------- -------- -------- --------
Interest sensitivity gap as a
percentage of total assets 22.31% (2.99)% (8.65)% (31.72)% 4.15% 16.89%
Cumulative interest sensitivity
gap (3) $64,762 $56,069 $30,972 $(61,084) $(49,029) $ --
------- ------- ------- -------- -------- --------
Cumulative interest sensitivity
gap as a percentage of
total assets 22.31% 19.32% 10.67% (21.05)% (16.89)% --%
======= ======= ======= ======== ======== ========
</TABLE>
(1) Loans are stated before deducting allowance for loan losses, but net of
unearned income.
(2) The Company's historical rate sensitivity analysis shows that interest
checking and statement savings, while technically subject to immediate
withdrawals, actually have repricings and run-off characteristics of longer
term deposits.
(3) Interest sensitivity gaps represent the difference between total
interest-earning assets and total interest-bearing liabilities.
- --------------------------------------------------------------------------------
19
<PAGE>
the Company's normal deposit gathering efforts. A coordination of asset
maturities and effective liability management are important to the maintenance
of liquidity. Stable core deposits and other non-interest-bearing funds,
accessibility to local, regional and national funding sources and readily
marketable assets are all important to manage liability. Asset liquidity is
generally provided by cash, federal funds sold, securities available for sale
and maturing investment securities. Liability liquidity is measured by adequate
amounts and by length of maturities. Since core deposits are the most stable
source of liquidity a bank can have because they are generally government
insured, the high level of average core deposits during 1997 maintained the
Company's strong liquidity position. The Company's equity base also provides a
stable source of funding. It is important to note that the Company does not rely
on the capital markets for funding.
OTHER MATTERS
On May 15, 1997, the Bank signed a management agreement with Franey, Parr &
Associates, Inc. for the purpose of managing the Bank's newly formed insurance
center, which began marketing and selling insurance on September 1, 1997.
On September 22, 1997, the Bank entered into a service agreement with TrustCorp
America for the Trust Company to provide trust services to the Bank's existing
trust customers, as successor fiduciary, and to provide ongoing service through
operation of a referral program for future trust business.
From time to time, various types of federal and state legislation have been
proposed that could result in additional regulation of, and restrictions on, the
business of the Company and the Bank. Management cannot predict whether such
legislation will be adopted or, if adopted, how such legislation would affect
the business of the company and the Bank. As a consequence of the extensive
regulation of commercial banking activities in the United States, the Company's
and the Bank's business is particularly susceptible to being affected by federal
legislation and regulations that may increase the cost of doing business. Except
as specifically described above, Management believes that the effect of the
provisions of the legislation on the liquidity, capital resources, and results
of operations of the Company will be immaterial. Management is not aware of any
other current specific recommendations by regulatory authorities or proposed
legislation, which, if they were implemented, would have a material adverse
effect upon the liquidity, capital resources, or results of operations, although
the general cost of compliance with numerous and multiple federal and state laws
and regulations does have, and in the future may have, a negative impact on the
Company's results of operations.
Further, the business of the Company is also affected by the state of the
financial services industry in general. As a result of legal and industry
changes, Management anticipates that the industry will continue to experience an
increase in consolidations and mergers as the financial services industry
strives for greater cost efficiencies and market share. Management believes that
such consolidations and mergers may enhance its competitive position as a
community bank.
YEAR 2000 COMPLIANCE
The Company is in the process of assessing the cost and extent of vulnerability
of the Company's computer systems to the "Year 2000 problem." Modification or
replacements of computer systems to attain Year 2000 compliance have begun, and
the Company expects to attain Year 2000 compliance and institute appropriate
testing of its modifications and replacements before the Year 2000 date change.
The Company believes that, with modifications to existing software and
conversions to new software, the Year 2000 problem will not pose a significant
operational problem for the Company. However, because most computer systems are,
by their very nature, interdependent, it is possible that non-compliant third
party computers could "reinfect" the Company's computer systems. The Company
could be adversely affected by the Year 2000 problem if it or unrelated parties
fail to successfully address this problem. The Company has taken steps to
communicate with the unrelated parties with whom it deals to coordinate Year
2000 compliance. Most of the costs incurred in addressing the Year 2000 problem
are expected to be expensed as incurred, in accordance with Generally Accepted
Accounting Principles.
The financial impact to the Company of Year 2000 compliance has not yet been
determined. However, it is not anticipated to be material to the Company's
financial position or results of operations in any given year.
PROSPECTIVE ACCOUNTING CHANGES
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"). SFAS 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after
20
<PAGE>
December 31, 1997 and is to be applied prospectively. This Statement will
require, among other things, that the Company record at fair value, assets and
liabilities resulting from a transfer of financial assets. The Company will
adopt the provisions of SFAS 125 as of January 1, 1998. As of December 31, 1997,
the Company had $538 in assets comprised of mortgage servicing rights that would
be subject to this statement.
In June, 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 is effective for
fiscal years beginning after December 15, 1997. This Statement will require the
disclosure of comprehensive income, which is defined as "the change in equity
[net assets] of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners."
In June, 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 is effective for fiscal years beginning after December
15, 1997. This Statement will require the reporting of information by operating
segments if those segments meet certain quantitative thresholds.
[MONOCACY BANCSHARES, INC. LOGO]
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
December 31, 1996 compared to December 31, 1995
(Dollars in thousands--except per share data)
OVERVIEW
Earnings for 1996 were $1,611 or $.91 per share (as restated for the February,
1998 stock dividend) which was a $740 or 31.5% decrease from the earnings level
of 1995. 1996 was a year of investment in the future. In March of 1996, Royal
Oak Savings Bank, which was acquired on December 31, 1995, was merged into the
Bank. In April, 1996, the Company acquired Classic and is currently operating it
as a division of the Bank. In addition, two new branches of the Bank were opened
in 1996. All of these projects involved extensive costs in the data processing,
operational and branch areas of the Company throughout the year.
The 1996 performance reflected net interest margins that were lower than in
1995, although tax-equivalent net interest income was higher due to higher
earning assets in 1996. In addition, 1996 reflected increases in non-interest
revenues and non-interest expenses and a decrease in the provision for loan
losses. The 1996 Return on Average Assets was .61% and Return on Average Equity
was 7.81%. Total assets were $263,015 at December 31, 1996, with strong
interest-earning asset and deposit growth. Return on Average Assets for 1995 was
1.07% and Return on Average Equity was 11.83%.
NET-INTEREST INCOME
Net interest income after provision for loan losses was $8,872 in 1996, up from
$8,342 in 1995. The growth in both earning assets and interest-bearing
liabilities contributed to this increase and was offset by a decrease in the net
yield on earning assets to 4.09% from 4.68%.
Tax equivalent net interest income increased to $9,960 in 1996, from $9,608
in 1995, due to the increase in tax-exempt state and municipal securities.
INTEREST INCOME
Interest income on a fully taxable equivalent basis increased to $20,381 from
the $17,460 level in 1995 due to higher available yields on increased average
earning assets. The average earning assets increased to $243,361 with growth
noted in most all loan categories and in the investment securities portfolios.
INTEREST EXPENSE
Interest expense increased to $10,421 from $7,852 in 1995 with significant
increases in interest rates and levels of interest-bearing liabilities including
FHLB borrowings. In addition, average certificates of deposit, one of the higher
cost components of interest expense, increased by 30.4% over 1995.
INTEREST RATE PERFORMANCE
The net interest margin in 1996 was 4.09%, which was down by 59 basis points
from the 1995 level. During 1996, the net interest margin decreased generally
because of increased interest costs on interest-bearing liabilities and the
decreased yield on earning assets. The yield on earning assets decreased by 14
basis points and the rates paid on liabilities and borrowings increased by 35
basis points.
NON-INTEREST INCOME
During 1996, non-interest income was $2,039, a substantial increase from the
1995 level of $1,427. This increase was due primarily to the increased
profitability of the Company's mortgage-banking operations, due to the
acquisition of Classic in April, 1996. During 1996, $220 of investment security
losses were recorded versus $55 of security gains recorded in 1995.
NON-INTEREST EXPENSE
Non-interest expense for 1996 was $8,762, a $2,226 or 34.1% increase from the
1995 level. The largest increase was noted in salary/benefit categories as staff
grew during 1996. Other categories of non-interest expenses, including data
processing and equipment expenses, increased with the increasing staff and loan
and deposit volumes and locations noted.
LIQUIDITY
As in the past, the Company maintained a very favorable liquid position in
accordance with management's Asset/Liability and Liquidity policies. In
addition, the Bank retains a correspondent relationship for the purchase of
Federal Funds as well as a line of credit with the FHLB.
CAPITAL
The Company had a Tier I Capital Ratio of 10.31%, a Total Risk-Based Capital
Ratio of 11.49% and a Leverage Ratio of 7.03% at December 31, 1996, which were
well above regulatory requirement levels.
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Monocacy Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Monocacy
Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, 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, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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
Monocacy Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Stegman & Company
Towson, Maryland
January 23, 1998
23
<PAGE>
Consolidated Balance Sheets
December 31, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ------
<S><C>
Cash and due from banks (note 2) $ 7,081 $ 10,374
Federal funds sold 12,614 2,000
Interest-bearing deposits with other banks 1,184 108
Loans held for sale 4,940 10,118
Securities available for sale (note 3) 95,164 45,918
Investment securities (approximate fair value of
$23,860 at December 31, 1996) (note 4) -- 24,042
Loans, net of allowance for loan losses of
$2,539 and $2,100 (note 5) 155,716 156,690
Bank premises and equipment, net (note 7) 8,171 8,435
Other real estate owned 137 656
Deferred income taxes (note 10) 771 899
Accrued interest receivable 2,152 1,939
Other assets 2,310 1,836
-------- --------
Total assets $290,240 $263,015
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 25,225 $ 24,002
Interest-bearing:
Savings and checking 80,875 84,160
Certificates of deposit:
Under $100,000 116,066 109,664
$100,000 and over 6,704 7,213
-------- --------
Total deposits 228,870 225,039
Short-term borrowings (note 8) 15,910 7,600
Other long-term borrowings (note 8) 19,748 7,739
Accrued expenses payable 1,271 555
Other liabilities 94 287
Dividends payable 179 147
-------- --------
Total liabilities 266,072 241,367
-------- --------
Stockholders' equity:
Common stock, par value $5.00 per share;
authorized 4,000,000 shares; issued and
outstanding 1,628,522 in 1997
and 1,468,324 shares in 1996 8,143 7,342
Common stock dividend to be distributed 4,034 3,699
Surplus 11,863 9,145
Retained earnings 66 2,235
Unrealized holding gain (loss) on securities, net 62 (773)
Commitments and contingencies (notes 6 and 13)
-------- --------
Total stockholders' equity 24,168 21,648
-------- --------
Total liabilities and stockholders' equity $290,240 $263,015
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
24
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S><C>
INTEREST INCOME:
Loans, including fees $ 15,982 $ 14,043 $ 13,535
Securities available for sale - taxable 3,244 3,797 712
Securities available for sale - tax exempt 297 422 268
Investment securities-taxable 1 26 1,892
Investment securities-tax exempt 1,059 1,107 472
Interest-bearing deposits with other banks 46 52 132
Federal funds sold 227 146 68
---------- ---------- ----------
Total interest income 20,856 19,593 17,079
---------- ---------- ----------
INTEREST EXPENSE:
Deposits of $100,000 or more 401 469 486
Other deposits 9,157 8,782 6,419
Federal funds purchased 28 95 55
Other borrowings 1,101 1,075 892
---------- ---------- ----------
Total interest expense 10,687 10,421 7,852
---------- ---------- ----------
Net interest income 10,169 9,172 9,227
Provision for loan losses 1,110 300 885
---------- ---------- ----------
Net interest income after
provision for loan losses 9,059 8,872 8,342
---------- ---------- ----------
NON-INTEREST INCOME:
Service charges on deposit accounts 600 438 329
Other service charges 651 660 475
Trust department fees 121 150 151
Gains and fees on sale of loans 1,143 864 167
Gains (losses) on securities 87 (220) 55
Other 248 147 250
---------- ---------- ----------
Total non-interest income 2,850 2,039 1,427
---------- ---------- ----------
NON-INTEREST EXPENSE:
Salaries 4,265 3,956 3,062
Employee benefits (note 9) 1,361 1,131 743
Occupancy 720 628 436
Equipment 778 712 670
Deposit insurance 60 335 198
Professional fees 676 379 282
Litigation 230 - -
Other 1,561 1,621 1,145
---------- ---------- ----------
Total non-interest expense 9,651 8,762 6,536
---------- ---------- ----------
Income before income taxes 2,258 2,149 3,233
Income tax provision (note 10) 140 538 882
---------- ---------- ----------
Net income $ 2,118 $ 1,611 $ 2,351
========== ========== ==========
Net income per common share--basic (note 15) $ 1.19 $ .91 $ 1.33
Net income per common share--diluted (note 15) $ 1.16 $ .90 $ 1.32
Cash dividends per common share outstanding $ .40 $ .33 $ .30
Average common shares outstanding
(as adjusted to reflect the February, 1998 stock dividend) 1,785,754 1,771,177 1,761,694
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
25
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Common Stock Common Stock Holding
--------------------- Dividend to be Retained Gain (Loss)
Shares Par value Distributed Surplus Earnings on Securities
-------- ---------- -------------- ------- -------- -------------
<S><C>
BALANCE, DECEMBER 31, 1994 1,314,829 $6,574 $ -- $ 6,610 $ 5,932 $(506)
Net income -- -- -- -- 2,351 --
Issuance of shares of common stock
in connection with employee benefit
and dividend reinvestment plan 8,726 44 -- 167 -- --
Cash dividend, $0.30 per share -- -- -- -- (528) --
10% stock dividend to be
distributed -- -- 2,846 -- (2,846) --
Increase in fair value of
securities available for sale -- -- -- -- -- 525
--------- ------ ------- ------- ------- -----
BALANCE, DECEMBER 31, 1995 1,323,555 6,618 2,846 6,777 4,909 19
Net income -- -- -- -- 1,611 --
Issuance of shares of common stock
in connection with employee benefit
and dividend reinvestment plan 12,688 63 -- 183 -- --
Issuance of 10% stock dividend 132,081 661 (2,846) 2,185 -- --
Cash dividend, $0.33 per share -- -- -- -- (586) --
10% stock dividend to be
distributed -- -- 3,699 -- (3,699) --
Decrease in fair value of securities
available for sale -- -- -- -- -- (792)
--------- ------ ------- ------- ------- -----
BALANCE, DECEMBER 31, 1996 1,468,324 7,342 3,699 9,145 2,235 (773)
Net income -- -- -- -- 2,118 --
Issuance of shares of common stock
in connection with employee benefit
and dividend reinvestment plan 13,371 67 -- 222 -- --
Issuance of 10% stock dividend 146,827 734 (3,699) 2,496 462 --
Cash dividend, $0.40 per share -- -- -- -- (715) --
10% stock dividend to be
distributed -- -- 4,034 -- (4,034) --
Increase in fair value of securities
available for sale -- -- -- -- -- 835
--------- ------ ------- ------- ------- -----
BALANCE, DECEMBER 31, 1997 1,628,522 $8,143 $ 4,034 $11,863 $ 66 $ 62
========= ====== ======= ======= ======= =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
26
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995 (1)
------ ------ --------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,118 $ 1,611 $ 2,351
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 957 1,131 628
Provision for loan losses 1,110 300 885
Deferred income taxes 143 29 114
(Gains)/losses on sales of securities available for sale (87) 220 (55)
Proceeds from sales of loans originated for sale 42,477 33,585 17,256
Disbursements for loans originated for sale (36,156) (43,058) (17,089)
Gains on sale of loans (1,143) (864) (167)
Increase(decrease) in unearned income,
net of origination costs (366) 519 (229)
Gain on sale of other real estate owned (5) (14) (20)
Write-down of real estate owned 6 14 --
Net change in:
Accrued interest receivable (213) (276) (138)
Accrued expenses payable (314) (605) (332)
Other--net (244) (1,786) 58
-------- -------- --------
Net cash provided by (used in) operating activities 8,283 (9,194) 3,262
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase)decrease in interest-bearing
deposits with other banks (1,076) 696 328
Proceeds from maturities of investment securities 15 7,003 6,717
Proceeds from sales of securities available for sale 22,495 34,984 4,974
Proceeds from maturities of securities available for sale 6,408 2,506 3,065
Purchases of securities available for sale (52,769) (29,614) (19,479)
Purchases of investment securities -- (15,521) (7,268)
Sales of loan participations 704 7,532 945
Purchases of loan participations -- (1,300) --
Loan originations, net of principal repayments (547) (26,488) (2,044)
Proceeds from sales of other real estate owned 591 561 25
Additions to other real estate owned -- (68) (38)
Purchases of bank premises and equipment (508) (2,860) (991)
-------- -------- --------
Net cash used in investing activities (24,687) (22,569) (13,766)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 3,831 1,627 51,539
Proceeds from issuance of other borrowings 27,243 23,167 3,000
Repayment of other borrowings (6,923) (27,461) (2,886)
Issuance of common stock 289 246 211
Dividends paid on common stock (715) (586) (528)
-------- -------- --------
Net cash provided by (used in) financing activities 23,725 (3,007) 51,336
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 7,321 (34,770) 40,832
Cash and cash equivalents at beginning of year 12,374 47,144 6,312
-------- -------- --------
Cash and cash equivalents at end of year $ 19,695 $ 12,374 $ 47,144
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid on deposits and borrowings $ 10,667 $ 10,368 $ 7,785
Income taxes paid $ 897 $ 475 $ 755
Transfers of loans to other real estate owned $ 73 $ 163 $ 999
Transfers of securities from the investment security
portfolio to the available for sale portfolio $ 24,027 $ -- $ 32,850
Securitization of residential mortgage loans $ -- $ -- $ 7,784
Transfers of loans to held for sale $ -- $ 10,118 $ --
</TABLE>
(1) The components of the purchase of Royal Oak Savings Bank (purchase price of
$7.8 million) are included in the respective categories in the cash flows
statement.
The accompanying notes are an integral part of these consolidated financial
statements
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies reflected in the consolidated financial
statements of Monocacy Bancshares, Inc. and subsidiary (the "Company") conform
to generally accepted accounting principles and prevailing practices within the
banking industry. Certain reclassifications have been made to 1996 and 1995
amounts to conform with the presentation for 1997.
ORGANIZATION
The Company was formed on October 1, 1993, and is a Maryland Corporation
chartered as a Bank Holding Company. The Company holds all the issued and
outstanding shares of common stock of Taneytown Bank & Trust Company (the
"Bank"). The Bank is a Maryland trust company, originally established in 1884,
which engages in general commercial banking operations. Deposits in the Bank are
insured by the Federal Deposit Insurance Corporation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company,
including Taneytown Bank & Trust Company, its principal subsidiary. All
significant intercompany balances and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents include cash and due from banks and federal funds sold.
FEDERAL FUNDS SOLD/PURCHASED
Federal funds sold and purchased are carried at cost which approximates fair
value and are generally sold and purchased for one day periods.
LOANS HELD FOR SALE
Loans held for sale are those loans which management does not intend to hold
until maturity. Loans held for sale are carried at the lower of cost or market
with adjustments recorded as a component of income. Gains or losses on the
disposition of loans held for sale are computed using the specific
identification method.
SECURITIES AVAILABLE FOR SALE
Securities available for sale are those securities which management does not
have the ability and intent to hold until maturity. Securities available for
sale may be sold in response to changes in interest rates, for liquidity needs
or for tax planning purposes and are carried at fair value with unrealized
holding gains or losses, net of the related tax effect, excluded from earnings
and reported as a separate component of stockholders' equity until realized.
Gains or losses on the disposition of securities available for sale are computed
using the specific identification method.
INVESTMENT SECURITIES
Investment securities are those securities which management has the ability and
intent to hold to maturity. Investment securities are stated at cost adjusted
for amortization of premiums and accretion of discounts. Gains or losses on the
disposition of investment securities are computed using the specific
identification method.
LOANS
Loans are stated at the current amount of unpaid principal, reduced by unearned
income, net deferred origination fees and the allowance for loan losses.
Unearned income consists of commitment and origination fees, net of origination
costs and is generally recognized as income over the commitment and loan periods
using the interest method. Interest on loans is accrued based upon the principal
amount outstanding. Loans are placed on non-accrual status when management
believes, after considering economic and business conditions and collection
efforts and in the absence of adequate collateral, that collection is
questionable. At that time, interest is recognized on a cash basis only after
all principal has been recovered. A loan is only returned to accrual status when
it becomes current as to payment of both principal and interest and the borrower
demonstrates the ability to pay and remain current.
28
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan losses
charged to expenses. Loans are charged against the allowance when management
believes that the collectibility of the principal is unlikely. The allowance is
an amount that management believes will be adequate to absorb possible losses on
existing loans that may become uncollectible, based on evaluation of the
collectibility of loans and prior loan loss experience. While management uses
available information to recognize losses on loans, future additions to the
allowances may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance based on their
judgements about information available to them at the time of their
examinations.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the estimated useful lives using the straight-line
method.
OTHER REAL ESTATE OWNED
Real estate acquired through foreclosure is recorded at the lower of cost or
estimated fair value on the date acquired and at the lower of cost or estimated
fair value less selling costs thereafter. Losses incurred at the time of
acquisition of the property are charged to the allowance for loan losses.
Subsequent write-downs are included in other non-interest expense. Rental income
and expenses are included in other operating non-interest expense.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights are valued using the aggregate method of determining
the lower of cost or market value and are amortized over the remaining life of
the loans serviced. Servicing rights are periodically reviewed for impairment
with any required adjustment to market value made at the time of review.
PER SHARE DATA
The Company adopted Financial Accounting Standards Board ("FASB") Statement No.
128, "Earnings Per Share," ("SFAS No. 128") in 1997. Accordingly, Basic Earnings
Per Share are based on the average shares outstanding, giving retroactive effect
to stock dividends and Diluted Earnings Per Share and dividends per share are
based on the average shares outstanding adjusted by any common stock
equivalents, giving retroactive effect to stock dividends.
ORGANIZATION COSTS
Organization costs are capitalized and amortized on a straight-line basis over
five years.
CORE DEPOSIT INTANGIBLE
The core deposit intangible acquired in connection with the Royal Oak
acquisition is being amortized over the estimated remaining life of the
intangible, which has been determined to be 10 years at December 31, 1997.
TRUST ASSETS AND INCOME
Assets (other than cash deposits) held by the Company for others under fiduciary
and agency relationships are not included in the accompanying balance sheets
since they are not assets of the Company. Trust department fees are accounted
for on the cash basis. Amounts recognized under this method are not
significantly different from amounts that would have been recognized on the
accrual basis.
On September 22, 1997, the Bank entered into a service agreement with TrustCorp
America (the "Trust Company") for the Trust Company to provide trust services to
the Bank's existing trust customers as successor fiduciary and to provide
ongoing service through operation of a referral program for future trust
business.
INCOME TAXES
The provision for income taxes is based upon the results of operations, adjusted
for tax-exempt income and other differences between items of income or expenses
reported in the financial statements and those reported for income tax purposes.
Deferred income taxes are provided to give effect to temporary differences
between financial statement carrying amounts and the tax bases of assets and
liabilities.
2. CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances through cash or
reserves with the Federal Reserve Bank or in other commercial banks. The amount
of these reserves, calculated based on percentages of certain deposit balances,
was $1,004 at December 31, 1997.
29
<PAGE>
3. SECURITIES AVAILABLE FOR SALE
The Available for Sale ("AFS") portfolio is generally comprised of somewhat
shorter term investment securities and other securities the Company feels it may
sell in response to changes in interest rates or liquidity needs. Securities
available for sale are carried at fair value. Net unrealized holding gains and
losses on securities available for sale are reported as a separate component of
stockholders' equity, net of related income taxes. In 1995, the FASB granted a
one time exemption from the restrictions on transferring securities between
various portfolios. The Company took advantage of this opportunity to transfer
approximately $33 million in securities previously held in the Held to Maturity
("HTM") portfolio to the AFS portfolio. In 1997, due to a change in the
Company's business focus, the Company transferred it's remaining HTM portfolio
to the AFS portfolio.
Securities available for sale are summarized as follows at December 31:
- --------------------------------------------------------------------------------
1997
-----------------------------------------------
Gross Unrealized Holding Estimated
Amortized ------------------------ Fair
Cost Gains Losses Value
--------- ----- ------ ---------
U.S. Government agency $31,480 $ 66 $ 91 $31,455
State and municipal bonds 33,445 622 8 34,059
Mortgage-backed securities 25,809 21 365 25,465
Equity securities 4,335 -- 150 4,185
------- ---- ----- -------
$95,069 $709 $614 $95,164
======= ==== ==== =======
1996
-----------------------------------------------
Gross Unrealized Holding Estimated
Amortized ------------------------ Fair
Cost Gains Losses Value
--------- ----- ------ ---------
U.S. Government agency $21,984 $ -- $ 263 $21,721
State and municipal bonds 5,339 18 8 5,349
Mortgage-backed securities 17,122 -- 750 16,372
Equity securities 2,644 -- 168 2,476
------- ---- ------ -------
$47,089 $ 18 $1,189 $45,918
======= ==== ====== =======
- --------------------------------------------------------------------------------
Securities available for sale with a carrying value of $4,973 and $4,630 at
December 31, 1997 and 1996, respectively, were pledged as collateral for certain
liabilities as required by law. In addition, securities available for sale with
a carrying value of $26,482 and $12,847 at December 31, 1997 and 1996,
respectively, were pledged as collateral for certain borrowing arrangements of
the Company.
The amortized cost and fair value of securities available for sale by
contractual maturity, at December 31, 1997 and 1996, are shown below. Actual
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTIOM>
1997 1996
---- ----
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------- --------- ---------
<S><C>
Due within one year $ 1,080 $ 1,082 $ 1,000 $ 998
Due after one through five years 27,014 26,955 15,102 14,996
Due after five through ten years 30,733 31,233 11,221 11,076
Due after ten years 6,098 6,244 -- --
Mortgage-backed securities 25,809 25,465 17,122 16,372
Equity securities 4,335 4,185 2,644 2,476
------- ------- ------- -------
$95,069 $95,164 $47,089 $45,918
======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
30
<PAGE>
Proceeds from sales of securities available for sale were $22,495 in 1997 with
gains of $90 and losses of $3. Proceeds from sales of securities available for
sale were $34,984 in 1996 with gains of $31 and losses of $251.
4. INVESTMENT SECURITIES
Investment securities are summarized as follows at December 31, 1996:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS UNREALIZED HOLDING ESTIMATED
AMORTIZED ------------------------ FAIR
COST GAINS LOSSES VALUE
--------- ----- ------ -----
<S><C>
State and municipal bonds $24,042 $56 $238 $23,860
======= === ==== =======
</TABLE>
- --------------------------------------------------------------------------------
Investment securities with an amortized cost of $197 at December 31, 1996 were
pledged as collateral for certain liabilities as required by law.
The amortized cost and estimated fair value of debt securities by contractual
maturity at December 31, 1996 are shown below. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
- --------------------------------------------------------------------------------
Estimated
Amortized Fair
Cost Value
--------- ---------
Due after five through ten years $11,510 $11,452
Due after ten years 12,532 12,408
------- -------
$24,042 $23,860
======= =======
- --------------------------------------------------------------------------------
5. LOANS
Major classifications of loans are as follows at December 31:
- --------------------------------------------------------------------------------
1997 1996
Real Estate: ---- ----
Commercial mortgages $ 66,995 $ 69,947
Residential mortgages 24,837 20,477
Construction and land development 29,187 28,695
Commercial 18,208 22,582
Consumer 19,065 17,546
-------- --------
Total loans 158,292 159,247
Less:
Unearned income (37) (457)
Allowance for loan losses (2,539) (2,100)
-------- --------
$155,716 $156,690
======== ========
- --------------------------------------------------------------------------------
31
<PAGE>
The Company has placed on non-accrual status loans totaling $1,961 at December
31, 1997, $793 at December 31, 1996 and $1,258 at December 31, 1995. Gross
interest income that would have been recognized had the loans performed in
accordance with original terms was $247 in 1997, $257 in 1996 and $190 in 1995.
Interest income on these loans included in the results of operations was $100 in
1997, $127 in 1995 and none in 1996.
Changes in the allowance for loan losses were as follows for the years ended
December 31:
- --------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Balance at January 1 $2,100 $1,904 $1,902
Provision for loan losses 1,110 300 885
Recoveries 32 218 57
Loans charged off (703) (322) (940)
------ ------ ------
Balance at December 31 $2,539 $2,100 $1,904
====== ====== ======
- --------------------------------------------------------------------------------
Effective January 1, 1996, the Company adopted FASB Statements No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), and No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures ("SFAS 118"). In accordance with SFAS 114, impaired loans are
measured and reported based on the present value of expected cash flows
discounted at the loan's effective interest rate, or at the fair value of the
loan's collateral if the loan is deemed "collateral dependent." A valuation
allowance is required to the extent that the measure of the impaired loans is
less than the recorded investment.
Impaired loans are specifically reviewed loans for which it is probable that the
creditor will be unable to collect all amounts due according to the terms of the
loan agreement. The specific factors that influence management's judgment in
determining when a loan is impaired include evaluation of the financial strength
of the borrower and the fair value of the collateral. A specifically reviewed
loan is not impaired during a period of "minimum delay" in payment, regardless
of the amount of the shortfall, if the ultimate collectibility of all amounts
due is expected. The Company defines "minimum delay" as past due less than 90
days.
SFAS 114 does not apply to larger groups of homogeneous loans such as consumer
installment and real estate mortgage loans, which are collectively evaluated for
impairment. Impaired loans are therefore primarily business loans which include
commercial loans and income property and construction real estate loans. The
Company applies the measurement methods described above to these loans on a
loan-by-loan basis. Smaller balance populations of business loans, which are not
specifically reviewed in accordance with normal credit review procedures, are
also excluded from the application of SFAS 114. Most impaired loans are
non-accrual loans, as generally loans are placed on non-accrual status on the
earlier of the date that principal or interest amounts are 90 days or more past
due or the date that collection of such amounts is judged uncertain based on an
assessment of collectibility.
Impaired loans at December 31, 1997 and 1996 amounted to $1,961 and $793,
respectively. There was no valuation allowance for impaired loans at December
31, 1997 or 1996 as the amount by which the measure of the impaired loans were
less than the recorded investment in the loans was charged off in 1997 and 1996
for all impaired loans held in 1997 and 1996. Average impaired loans for 1997
and 1996 amounted to $1,914 and $1,230, respectively. No interest was recognized
during the time period that any loan was impaired as any cash received on such
loans was applied to the loan as a principal reduction.
SFAS 118 allows a creditor to use existing methods for recognizing interest
income on an impaired loan.
32
<PAGE>
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off balance sheet risk in
the normal course of business to meet the financing needs of customers. These
financial instruments include commitments to extend credit, available credit
lines and letters of credit. Outstanding loan commitments, unused lines and
letters of credit are summarized as follows at December 31:
- --------------------------------------------------------------------------------
1997 1996
---- ----
Loan Commitments:
Commercial mortgage loans $ 8,965 $ 3,075
Residential mortgage loans 3,453 898
Commercial loans 1,713 9,916
------- -------
$14,131 $13,889
======= =======
Unused lines of credit:
Construction and land development $14,192 $ 9,006
Commercial 9,916 12,991
Home-equity 13,776 15,138
Other consumer 1,621 1,366
------- -------
$39,505 $38,501
======= =======
Letters of credit $ 3,196 $ 3,026
======= =======
- --------------------------------------------------------------------------------
Loan commitments and lines of credit are agreements to lend to a customer as
long as there is no violation of any condition to the contract. Loan commitments
generally have interest rates fixed at current market amounts, fixed expiration
dates and may require payment of a fee. Lines of credit generally have variable
interest rates. Since many of the commitments and lines of credit are expected
to expire without being fully drawn, the available amounts do not necessarily
represent future cash requirements. Letters of credit are commitments issued to
guarantee the performance of a customer to a third party.
Loan commitments, lines and letters of credit are made on the same terms,
including collateral requirements, as outstanding loans. The contractual amount
of these instruments represents the Company's potential exposure to loss in the
event of non-performance by the other party after the commitment has been
fulfilled by the Company.
7. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment is as follows at December 31:
- --------------------------------------------------------------------------------
1997 1996
---- ----
Land $ 888 $ 863
Buildings 5,663 5,585
Equipment 4,914 4,562
Leasehold improvements 1,117 703
Construction in progress 102 477
------- -------
12,684 12,190
Accumulated depreciation and amortization (4,513) (3,755)
------- -------
$ 8,171 $ 8,435
======= =======
- --------------------------------------------------------------------------------
33
<PAGE>
Depreciation and amortization expense for bank premises and equipment was $774,
$658 and $607 for 1997, 1996 and 1995, respectively. Amortization expense for
intangible assets was $183, $135 and $21 for 1997, 1996 and 1995, respectively.
8. BORROWINGS
Information with respect to borrowings is as follows for the years ended
December 31:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S><C>
Amount outstanding at year-end:
Federal funds purchased $ -- $ -- $ --
FHLB advances 34,571 14,739 16,633
Term note -- -- 3,000
Treasury tax & loan note 1,087 600 --
Weighted average interest rate at year end:
Federal funds purchased --% --% --%
FHLB advances 5.89% 5.84% 5.50%
Term note --% --% 8.50%
Treasury tax & loan note 5.25% 5.40% --%
Maximum outstanding at any month-end:
Federal funds purchased $ 2,650 $ 5,750 $ 4,500
FHLB advances 34,660 24,429 18,356
Term note -- 2,917 3,000
Treasury tax & loan note 1,087 745 --
Average outstanding:
Federal funds purchased $ 640 $ 1,727 $ 1,300
FHLB advances 17,614 16,756 16,950
Term note -- 931 3,000
Treasury tax & loan note 581 168 --
Weighted average interest rate during the year:
Federal funds purchased 4.55% 5.50% 4.20%
FHLB advances 5.47% 5.80% 5.26%
Term note --% 8.50% 8.50%
Treasury tax & loan note 3.57% 5.13% --%
</TABLE>
- --------------------------------------------------------------------------------
The Company had borrowings from the Federal Home Loan Bank ("FHLB") of $34,571
at December 31, 1997 and $14,739 at December 31, 1996. The borrowings mature in
varying amounts through 2007 and have an average interest rate of 5.89% at
December 31, 1997. The advances are collateralized by certain real estate loans
with a carrying value of $14,566 and investment securities available for sale
with a book value of $26,482 at December 31, 1997. The Company may borrow up to
$45,000,000 under this line of credit at interest rates set periodically by the
lender.
The principal maturities of the FHLB advances at December 31, 1997, were:
- --------------------------------------------------------------------------------
1998 $14,823
1999 --
2000 1,650
2001 --
2002 15,000
Thereafter 3,098
-------
$34,571
=======
The Company was required to purchase shares of the capital stock of the FHLB as
additional collateral for the advances as a condition to obtaining the line of
credit. The amount invested in their capital stock was $3,314 at December 31,
1997 and $1,623 at December 31, 1996, and is carried in the securities available
for sale portfolio.
In anticipation of the cash outlay required for the acquisition of Royal Oak, in
December 1995, the Company borrowed $3,000,000 from another commercial bank. The
loan was repaid in April of 1996.
9. PENSION AND PROFIT SHARING PLANS
The Company has a contributory thrift plan qualifying under Section 401(k) of
the Internal Revenue Code. Employees with six months of service are eligible for
participation in the plan. The Company matches the employee's contribution up to
50% of the first 6% of employee contributions. The Company's contributions to
this plan, included in employee benefits expenses, were $75 for 1997, $61 for
1996 and $60 for 1995.
34
<PAGE>
The Company has agreements with certain of its executive officers to provide
certain supplemental retirement benefits upon retirement. The benefits to be
paid by the Company upon retirement are being accrued over the number of years
remaining to retirement date and in accordance with the plan vesting
arrangements. The amounts included in operating expenses were $52 for 1997, $74
for 1996 and $79 for 1995.
10. INCOME TAXES
The provision for income taxes is composed of the following for the years ended
December 31:
- --------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Current:
Federal $364 $597 $716
State (81) (88) 52
Deferred (143) 29 114
---- ---- ----
Provision for income taxes $140 $538 $882
==== ==== ====
- --------------------------------------------------------------------------------
The deferred tax effects of timing differences between financial and taxable
income are as follows for the years ended December 31:
- --------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Provision for loan losses $(169) $(75) $(10)
Depreciation 42 60 12
Deferred compensation plans 5 (7) (13)
Loan fees and costs 118 (64) 89
Mortgage servicing rights 91 87 30
Other 56 28 6
----- ---- ----
$ 143 $ 29 $114
===== ==== ====
- --------------------------------------------------------------------------------
35
<PAGE>
Net deferred tax assets consisted of the following at December 31:
- --------------------------------------------------------------------------------
1997 1996
---- ----
Deferred tax assets:
Provision for loan losses $ 838 $ 668
Deferred compensation plans 145 150
Loan fees and costs 35 153
Intangible assets 114 55
Deferred losses on securities available for sale -- 398
Other 244 99
------ ------
Total deferred tax assets 1,376 1,523
------ ------
Deferred tax liabilities:
Depreciation 346 304
Mortgage servicing rights 208 117
Deferred gains on securities available for sale 24 --
Other 27 203
------ ------
Total deferred tax liabilities 605 624
------ ------
Net deferred tax asset $ 771 $ 899
====== ======
- --------------------------------------------------------------------------------
The provisions for taxes on income are at effective rates of 6.2%, 25.0% and
27.3% as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S><C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax-exempt income (22.5) (7.5) (8.9)
State income taxes, net of federal income taxes (3.4) (2.7) 1.4
Other (1.9) 1.2 .8
----- ---- ----
6.2% 25.0% 27.3%
===== ==== ====
</TABLE>
- --------------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS
Certain members of the Board of Directors and senior officers had loan
transactions with the Bank. Such loans were made in the ordinary course of
business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated customers. Loans outstanding, both direct and indirect, to directors
and senior officers totaled $2,415 and $2,287 at December 31, 1997 and 1996,
respectively. During 1997, $838 of new loan advances were made and repayments
totaled $710.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. Fair values for securities available for sale and
investment securities are based on quoted market prices. For loans,
interest-bearing deposits and long-term borrowings, where quoted market prices
are not available, fair values are based on estimates using present value
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. The Company does not normally charge fees for
commitments to extend credit. Interest rates on commitments to extend credit are
normally committed for periods of less than one
36
<PAGE>
month. Fees charged on standby letters of credit and other financial guarantees
are deemed to be immaterial and these guarantees are expected to be settled at
face amount or expire unused. It is impracticable to assign any fair value to
these commitments.
The estimated fair values of the Company's financial instruments are as follows
at December 31, 1997:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Carrying Value Fair Value
-------------- ----------
<S><C>
Assets:
Cash and due from banks $ 7,081 $ 7,081
Federal funds sold 12,614 12,614
Interest-bearing deposits with other banks 1,184 1,184
Loans held for sale 4,940 4,940
Securities available for sale 95,164 95,164
Loans, net 155,716 172,718
Accrued interest receivable 2,152 2,152
Liabilities:
Non-interest bearing deposits 25,225 25,225
Interest-bearing deposits 203,645 205,167
Other borrowings 35,658 41,670
</TABLE>
- --------------------------------------------------------------------------------
13. Commitments and Contingent Liabilities
The Company is currently leasing five branch offices and one storage facility
under operating leases expiring from 1998 through 2007. The leases generally
provide for payment of property taxes, insurance, maintenance and common area
costs by the Company. Total rent and common area expenses for the three years
ended December 31, 1997, 1996 and 1995 were $203, $185 and $113, respectively.
Lease obligations will require rent and common area payments as follows:
- --------------------------------------------------------------------------------
Year Minimum Rentals
---- ---------------
1998 $ 191
1999 175
2000 175
2001 132
2002 132
Remaining years 541
------
$1,346
======
- --------------------------------------------------------------------------------
The Bank was named as a defendant in a legal proceeding in the Circuit Court for
Baltimore City, wherein it was alleged that the Bank permitted the improper
withdrawal or transfer of funds from a deposit account containing escrow monies
at the Bank. The Bank was also alleged to have misapplied certain sums of money
by depositing them in an unrelated account holder's deposit account. The
complaint initially sought recovery against the Bank in the amount of $482 and
was later amended to seek an amount in excess of $1 million. In January, 1998,
the Bank, with the approval of the Court, orally agreed to execute a Settlement
Agreement and Mutual Release. Under the terms, the Bank will pay $230 and
release any claims against other parties. In return, the Bank will receive a
General Release from all parties to the litigation. The Bank expects to execute
the Settlement Agreement and Mutual Release in the near future.
14. STOCK OPTIONS
The Company maintains a stock option incentive plan which provides for the
granting of common stock options to certain officers of the Company. These stock
option awards contain a serial feature whereby 20% of the options are awarded or
vested each year for the next five years at the Board's discretion. Option
prices are equal to or greater than the estimated fair market value of the
common stock at the date of the grant. Options are exercisable beginning six
months from the date of grant and expire 10 years after the date of grant.
In 1997, the Company adopted a stock option plan for the granting of common
stock options to Directors. Option prices are equal to or greater than the
estimated market value of the common stock at the date of the grant. Options
vest at 25% immediately at time of grant and then 25% per year for the next
three years. Options are exercisable beginning six months from the date of grant
and expire 10 years after the date of grant.
37
<PAGE>
Information with respect to options is as follows for the year ended December
31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1997 1996
--------------------------- ---------------------------
Shares Option Price Range Shares Option Price Range
------ ------------------ ------ ------------------
<S><C>
Outstanding at beginning of year 26,983 $17.28-18.60 19,734 $17.28
Granted 49,038 18.18-20.68 8,899 17.48-18.60
Exercised -- (220) 20.91
Expired/canceled (484) 19.23-20.00 (1,430) 19.01
------ ------
Outstanding at end of year 75,537 17.28-20.68 26,983 17.28-18.60
====== ======
Exercisable 37,037 17.28-20.68 26,983 17.28-18.60
====== ======
- ---------------------------------------------------------------------------------------------------------
</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 weighted-average
assumptions used for grants during the year ended December 31, 1997:
- -------------------------------------------------
1997 1996
---- ----
Dividend yield -- --
Expected volatility 15% 15%
Risk-free interest rate 5.909% 5.106%
Expected lives 10 years 10 years
- -------------------------------------------------
The company has adopted the disclosure-only provisions of FASB Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), but applies
Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its Plans. No compensation expense related to the Plans was
recorded during the two years ended December 31, 1997. If the Company had
elected to recognize compensation cost based on the fair value at the grant
dates for awards under the Plans consistent with the method prescribed by SFAS
123, net income and earnings per share would have been changed to the pro forma
amounts as follows for the years ended December 31:
- -------------------------------------------------
1997 1996
---- ----
Net income $1,478 $1,564
Earnings per share--basic $ .82 $ .87
Earnings per share--diluted $ .81 $ .86
- -------------------------------------------------
15. NET INCOME PER COMMON SHARE
In February 1997, the FASB issued SFAS No. 128, which became effective for the
Company 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 of these measures and align them more closely with the methodology
used internationally. Basic earnings per share is arrived at by dividing net
income available to common stockholders by the weighted-average number of common
shares outstanding and does not include the impact of any potentially dilutive
common stock equivalents. The diluted earnings per share calculation method 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
warrants. For purposes of comparability, all prior-period earnings per share
data have been restated. All per share data and share amounts below have been
adjusted to give retroactive effect to the 10% stock dividends issued in 1996,
1997 and 1998.
38
<PAGE>
The calculation of net income per common share follows for the years ended
December 31,
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S><C>
Basic:
Net income (applicable to common stock) $2,118 $1,611 $2,351
Average common shares outstanding 1,786 1,771 1,762
Basic net income per share $ 1.19 $ 0.91 $ 1.33
Diluted:
Net income (applicable to common stock) $2,118 $1,611 $2,351
Average common shares outstanding 1,786 1,771 1,762
Stock option adjustment 33 22 14
------ ------ ------
Average common shares outstanding - diluted 1,819 1,793 1,776
Diluted net income per share $ 1.16 $ 0.90 $ 1.32
- -----------------------------------------------------------------------------------------------------------
</TABLE>
16. REGULATORY MATTERS
The Company and the Bank 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 Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off- balance sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1997, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the Bank's category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
39
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------- ----- ------ -----
<S><C>
As of December 31, 1997:
Total capital (to risk weighted assets):
Consolidated $22,597 12.35% $14,634 8.00% $18,293 10.00%
Taneytown Bank & Trust Company 22,510 12.31% 14,631 8.00% 18,289 10.00%
Tier I Capital (to risk weighted assets):
Consolidated 20,308 11.10% 7,317 4.00% 10,976 6.00%
Taneytown Bank & Trust Company 20,221 11.06% 7,315 4.00% 10,973 6.00%
Tier I capital (to average assets):
Consolidated 20,308 7.00% 11,603 4.00% 14,504 5.00%
Taneytown Bank & Trust Company 20,221 6.97% 11,601 4.00% 14,501 5.00%
As of December 31, 1996:
Total capital (to risk weighted assets):
Consolidated 20,509 11.49% 14,285 8.00% 17,857 10.00%
Taneytown Bank & Trust Company 20,528 11.50% 14,284 8.00% 17,855 10.00%
Tier I capital (to risk weighted assets):
Consolidated 18,409 10.31% 7,143 4.00% 10,714 6.00%
Taneytown Bank & Trust Company 18,428 10.32% 7,142 4.00% 10,713 6.00%
Tier I capital (to average assets):
Consolidated 18,409 7.03% 10,467 4.00% 13,084 5.00%
Taneytown Bank & Trust Company 18,428 7.04% 10,465 4.00% 13,082 5.00%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
17. ACQUISITION
On December 31, 1995, the Company purchased Royal Oak Savings Bank as a
subsidiary of Monocacy Bancshares, Inc. The transaction was accounted for as a
purchase and the results of operations for the year 1995 properly do not include
any income from Royal Oak. Royal Oak's condensed balance sheet as of the date of
the acquisition as valued under purchase accounting was as follows:
- -------------------------------------------------
Cash and investments $45,398
Loans, net 451
Property, plant and equipment 510
Other assets 646
-------
$47,005
=======
Deposits $38,733
Other liabilities 517
Capital 7,755
-------
$47,005
=======
- -------------------------------------------------
The purchase price of $7.8 million included a deposit premium paid of $3.6
million and a mortgage servicing premium paid of $281. The purchase price of the
assets and costs associated were approximately equal to the liabilities assumed
and no goodwill was recorded in the transaction.
18. SUBSEQUENT EVENT
On February 17, 1998, the company distributed a 10% stock dividend which
increased shares outstanding by approximately 163,000.
40
<PAGE>
19. PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial information for Monocacy Bancshares, Inc. (parent company
only) is as follows as of and for the years ended December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS 1997 1996
---- ----
<S><C>
Assets
Cash and due from Bank subsidiary $ 224 $ 205
Securities available for sale 20 20
Investment in subsidiary 24,064 21,637
Other assets 39 30
------- -------
Total assets $24,347 $21,892
======= =======
Liabilities and Stockholders' Equity
Liabilities:
Other liabilities $ 179 $ 244
------- -------
Total liabilities 179 244
------- -------
Stockholders' equity:
Common stock 8,143 7,342
Common stock dividend to be distributed 4,034 3,699
Surplus 11,863 9,145
Retained earnings 128 1,462
------- -------
Total stockholders' equity 24,168 21,648
------- -------
Total liabilities and stockholders' equity $24,347 $21,892
======= =======
- -----------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Condensed Statements of Income 1997 1996 1995
---- ---- ----
<S><C>
Interest on investment securities $ 1 $ 1 $ 12
Interest expense on borrowings -- 101 --
------ ------ ------
Net interest income 1 (100) 12
Cash dividends from subsidiaries 600 1,759 2,393
Operating expenses 107 82 64
------ ------ ------
Income before income tax expense and equity in
undistributed net income of subsidiaries 494 1,577 2,341
Income tax benefit (34) (34) (10)
------ ------ ------
Income before equity in undistributed
net income of subsidiaries 528 1,611 2,351
Equity in undistributed net income of subsidiaries 1,590 -- --
------ ------ ------
Net income $2,118 $1,611 $2,351
====== ====== ======
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Condensed Statements of Cash Flows 1997 1996 1995
---- ---- ----
<S><C>
Cash flows from operating activities:
Net income $ 2,118 $ 1,611 $ 2,351
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries (1,590) -- --
(Increase) decrease in other assets (10) 142 (134)
Decrease in accrued interest receivable -- -- 4
Increase (decrease) in other liabilities (73) (39) 6
------- ------- -------
Net cash provided by operating activities 445 1,714 2,227
------- ------- -------
Cash flows from investing activities:
Purchases of securities available for sale -- (4) (16)
Maturities of investment securities -- 200
Distribution of undivided profits of Bank subsidiary -- 868 3,468
Investment in Savings Bank subsidiary -- -- (7,755)
------- ------- -------
Net cash provided by (used in) investing activities -- 864 (4,103)
------- ------- -------
Cash flows from financing activities:
Issuance of common stock 289 246 211
Dividends paid (715) (586) (528)
Proceeds from issuance of debt -- -- 3,000
Repayments of debt -- (3,000) --
------- ------- -------
Net cash provided by (used in) financing activities (426) (3,340) 2,683
------- ------- -------
Net increase (decrease) in cash and cash equivalents 19 (762) 807
Cash and cash equivalents at beginning of year 205 967 160
------- ------- -------
Cash and cash equivalents at end of year $ 224 $ 205 $ 967
======= ======= =======
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Under certain state and federal banking regulations, the Bank may declare cash
dividends to Monocacy Bancshares, Inc., from undivided profits, or with prior
approval of the Maryland Bank Commissioner, out of surplus in excess of 100% of
its capital stock, after providing for certain expenses.
42
<PAGE>
EXECUTIVE OFFICERS
CHAIRMAN OF THE BOARD: ASSISTANT VICE PRESIDENTS:
Eric E. Glass* Michael L. Barrett
Charlotte B. Bollinger
VICE CHAIRMAN OF THE BOARD, Joyce B. Clingan
CHAIRMAN OF THE EXECUTIVE COMMITTEE: Judith E. Frock
Donald R. Hull* Lawrence R. Hierstetter
Billie Jo Hoffman
PRESIDENT AND CHIEF EXECUTIVE S. Barry Klohr
OFFICER: C. Daniel Pastros
Francis W. Neubauer, Jr.* George W. Peck, Jr.
Sandra S. Pretty
EXECUTIVE VICE PRESIDENT, CHIEF Judith A. Shultz
FINANCIAL OFFICER AND CHIEF Linda S. Warehime
OPERATING OFFICER:
Michael K. Walsch* COMMUNITY BANKING OFFICERS:
Timothy L. Baumgardner
SENIOR VICE PRESIDENTS: Elizabeth J. Dutrow
Christopher D. Holt Barbara A. Ebaugh
Edward D. Leister Amy R. Eyler
Craig H. McConnell Herbert W. Findeisen, III
Beverly A. Franklin
VICE PRESIDENT AND CORPORATE Andrew P. Heck
SECRETARY: Janet L. Joy
Brian M. Etzler* Donna H. Moore
Theresa M. Perry
VICE PRESIDENTS: Richard L. Rose
Brenda K. Anders Jeris L. Talbott
Ronald H. Antrim JoAnn R. Vanscoy
Nancy B. Bahr
Linda L. Bennett Commercial Banking Officer:
Mary E. Bowns Joseph F. Wade, Jr.
Harold E. Eyler
William O. Eyler ASSISTANT SECRETARY:
Michael H. Galassi Kathleen A. Ford
Thomas J. Gerhart
Cynthia M. Joynes ADMINISTRATIVE OFFICER:
Edwin L. Koons Patricia A. Shryock-Smith
Donna L. Oliver
W. Stephen Pindell
William A. Springer, Jr.
Ronald E. Talbert
James C. Wise
*Officers of both Monocacy Bancshares, Inc. and Taneytown Bank & Trust Company,
its principal subsidiary
43
<PAGE>
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
<S><C>
David M. Abramson Eric E. Glass
Director, Executive Vice President and General Counsel Chairman of the Board
U.S. Foodservice Monocacy Bancshares, Inc.
Chairman of the Board,
E. Wayne Baumgardner The Taney Corporation
Independent Investor
Donald R. Hull
George B. Crouse Vice Chairman of the Board and Chairman
Vice President, Crouse Ford Sales, Inc. of the Executive Committee
Monocacy Bancshares, Inc.
Harry B. Dougherty(dagger) President, Hull Company Accountants, Inc.
Retired
Francis W. Neubauer, Jr.
Glenn E. Eaves President and Chief Executive Officer
Dairy Farmer Monocacy Bancshares, Inc.
George A. Fream(dagger)
Retired Postmaster, Taneytown Post Office
</TABLE>
(dagger) Directors Emeritus
Shareholders may obtain a free copy of the Monocacy Bancshares, Inc. form 10-KSB
upon written request to:
Michael K. Walsch, Executive Vice President
Monocacy Bancshares, Inc.
P.O. Box 491
Taneytown, Maryland 21787-0491
A charge of 10 cents per page may be billed for copies of exhibits
The Annual Report and other Company reports are also filed electronically
through the Electronic Data Gathering, Analysis, and Retrival System ("EDGAR")
which performs automated collection, validation, indexing, acceptance, and
forwarding of submissions to the Securities and Exchange Commission (SEC) and is
accessible by the public using the Internet at http://www.secgov/edgarhp.htm.
The Annual Meeting of Shareholders will be held on April 27, 1998 beginning at
3:00 P.M. in Taneytown, Maryland
Transfer Agent, Registrar and Dividend Disbursing Agent:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
1-800-368-5948
Taneytown Bank website: www.taneytownbank.com
44
<PAGE>
THE TANEYTOWN BANK TEAM
It's our employees who are making it work
<TABLE>
<S><C>
Kelly S Abell Brian M Etzler Stephan B Klohr Kristy S Sayavong
Monica B Adelman Lisa N Etzler Edwin L Koons Megan D Schroyer
Brenda L Allyn Amy R Eyler Donna L Koslowski Laura L Selby
Brenda K Anders Frances A Eyler Melanie L Lamer Laura B Shickman
Natalie A Andrews Harold E Eyler Robin L Lease Patricia A Shryock-Smith
Ronald H Antrim William O Eyler Edward D Leister Judith A Shultz
Elizabeth M Arthur Herbert W Findeisen, III Shelby D Lenker Helen Sims
Nancy B Bahr Karen D Fisher Tracy L Lewis Donna C Smith
Tracey L Barnes Bonnie S Fitzwater Richard D Lisko James R Smith
Michael L Barrett Kathleen A Ford Carol A Longenecker William A Springer, Jr.
Bonnie L Baublitz Beverly A Franklin Scott P Maas Deborah M Stewart
Timothy L Baumgardner Tracy L Franklin Helen E Martin John W Stonesifer
Jill M Beasley Denise A Frock Sandra D Maxey Donna L Straub
Elizabeth R Benjamin Judith E. Frock Craig H McConnell Heidi R Straub
Linda L Bennett Michael H Galassi Jami M Merrell Ronald E Talbert
Jessica A Bittinger Samuel K Gardner Christy A Miles Jeris L Talbott
Charlotte B Bollinger Stephanie L Gauldin Valerie R Miller James A Updegraff
Lauren J Bond Thomas J Gerhart Donna H Moore William J Updegraff
Alicia L Bordley Brenda K Givvines George W Motter Don K Uphouse
Mary E Bowns Melissa D Goodwin Howard D Myerly JoAnn R Vanscoy
Shanna R Boyd Belinda A Grant Francis W Neubauer, Jr. Joseph F Wade, Jr.
M E Bratcher James E Grant Donna L Oliver Lynn M Wagner
Debra S Brauning Janice P Greenholtz C. Daniel Pastros Michael K Walsch
Karen M Brooks Loren M Grimm William C Paul Cynthia L Wantz
Dawn L Carroll Joan K Guliere Frances J Pawlowski Linda S Warehime
Joyce B Clingan Deborah L Gutowski George W Peck, Jr. Lana E Weidner
Belinda K Cole Teresa L Haines Theresa M Perry Sabrina L Weller
John F Collins Delcia E Hall W. S Pindell Belinda S Westermann
Pamela A Commarota Andrew P Heck Melissa K Potts Reta I Wetzel
Adriana M Cristofaro Lawrence R Hierstetter Sandra S Pretty Tina M Wetzel
Bonnie S Cullom Billie Jo Hoffman James A Pryor Patricia E Whelan
Carolyn M Delaney Ruth Hoffman Christina J Replogle Anne C Wildasin
Kelliann Dell Christopher D Holt Betty W Repp Joan S Wilhide
Kristen E Dickens Ange M Horner Jaime B Ridinger Lori L Wilson
Charlene S Dickson Eric M Horrell Shannon M Rill James C Wise
Kimberly J Diskin Marvin R Hurwitz Mary E Rohe Bonnie J Yingling
Judith N Dixon William A Jenkins, IV Kevin S Roland Sandra V Yingling
Elizabeth J Dutrow Janet L Joy Richard L Rose Lisa A Zepp
Barbara A Ebaugh Cynthia M Joynes Karin T Ross
Hollie A Edwards Cheryl L Keeney Lee W Russo
Erika D Elgersma Beverly B Kempler Carri L Ryer
</TABLE>
<PAGE>
[MONOCACY BANCSHARES, INC. LOGO]
222 East Baltimore Street
Taneytown, MD 21787
410-756-2655
Attached as Exhibit
Exhibit 21
List of Subsidiaries of Monocacy Bancshares, Inc.
<TABLE>
<CAPTION>
State of Owned Percentage
Name Incorporation By Ownership
---- -------------- ------- ----------
<S><C>
Taneytown Bank
& Trust Company Maryland Monocacy Bancshares, Inc. 100%
TBT Investments, Inc. Delaware Taneytown Bank & Trust Company 100%
TBT Insurance, Inc. Maryland Taneytown Bank & Trust Company 100%
TBT Title Holdings,
Inc. Maryland Taneytown Bank & Trust Company 100%
TBT Title I, Inc. Maryland TBT Title Holdings, Inc. 100%
TBT Title II, Inc. Maryland TBT Title Holdings, Inc. 100%
TBT Title III, Inc. Maryland TBT Title Holdings, Inc. 100%
TBT Title IV, Inc. Maryland TBT Title Holdings, Inc. 100%
TBT Title V, Inc. Maryland TBT Title Holdings, Inc. 100%
TBT Title VI, Inc. Maryland TBT Title Holdings, Inc. 100%
</TABLE>
Exhibit (23)
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in this Form 10-KSB
of Monocacy Bancshares, Inc. for the year ended December 31, 1997 of our report
dated January 23, 1998 which appears on page 23 of the 1997 Annual Report to
Shareholders.
Stegman & Company
Baltimore, Maryland
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,081
<INT-BEARING-DEPOSITS> 1,184
<FED-FUNDS-SOLD> 12,614
<TRADING-ASSETS> 4,940
<INVESTMENTS-HELD-FOR-SALE> 95,164
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 158,255
<ALLOWANCE> 2,539
<TOTAL-ASSETS> 290,240
<DEPOSITS> 228,870
<SHORT-TERM> 14,823
<LIABILITIES-OTHER> 1,053
<LONG-TERM> 20,835
0
0
<COMMON> 8,143
<OTHER-SE> 16,025
<TOTAL-LIABILITIES-AND-EQUITY> 290,240
<INTEREST-LOAN> 15,982
<INTEREST-INVEST> 4,874
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 20,856
<INTEREST-DEPOSIT> 9,559
<INTEREST-EXPENSE> 10,687
<INTEREST-INCOME-NET> 10,169
<LOAN-LOSSES> 1,110
<SECURITIES-GAINS> 87
<EXPENSE-OTHER> 9,652
<INCOME-PRETAX> 2,258
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,118
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.16
<YIELD-ACTUAL> 8.48
<LOANS-NON> 1,961
<LOANS-PAST> 760
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,100
<CHARGE-OFFS> 703
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 2,539
<ALLOWANCE-DOMESTIC> 2,465
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 74
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,374
<INT-BEARING-DEPOSITS> 108
<FED-FUNDS-SOLD> 2,000
<TRADING-ASSETS> 10,118
<INVESTMENTS-HELD-FOR-SALE> 45,918
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 158,790
<ALLOWANCE> 2,100
<TOTAL-ASSETS> 263,015
<DEPOSITS> 225,039
<SHORT-TERM> 7,600
<LIABILITIES-OTHER> 989
<LONG-TERM> 7,739
0
0
<COMMON> 7,342
<OTHER-SE> 14,306
<TOTAL-LIABILITIES-AND-EQUITY> 263,015
<INTEREST-LOAN> 14,043
<INTEREST-INVEST> 5,550
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 19,593
<INTEREST-DEPOSIT> 9,251
<INTEREST-EXPENSE> 10,421
<INTEREST-INCOME-NET> 9,172
<LOAN-LOSSES> 300
<SECURITIES-GAINS> (220)
<EXPENSE-OTHER> 8,762
<INCOME-PRETAX> 2,149
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,611
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.90
<YIELD-ACTUAL> 8.37
<LOANS-NON> 793
<LOANS-PAST> 757
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,904
<CHARGE-OFFS> 322
<RECOVERIES> 218
<ALLOWANCE-CLOSE> 2,100
<ALLOWANCE-DOMESTIC> 1,933
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 167
</TABLE>
March 25, 1998
DEAR SHAREHOLDER:
It is my pleasure to invite you to attend the 1998 Annual Meeting of
Shareholders of Monocacy Bancshares, Inc. to be held on Monday, April 27, 1998
at 3:00 p.m., prevailing time. The Annual Meeting will be held in the lobby at
the main office of Taneytown Bank & Trust Company, 222 East Baltimore Street,
Taneytown, Maryland 21787.
The Notice of the Annual Meeting and the Proxy Statement address the
formal business of the meeting. The formal business schedule includes the
election of two (2) directors, and the approval and ratification of the
selection of Stegman & Company, Certified Public Accountants, as the
Corporation's independent auditors for 1998. At the meeting, members of the
Corporation's management will review the Corporation's operations during the
past year and will be available to respond to questions.
We strongly encourage you to vote your shares whether or not you plan
to attend the meeting. It is very important that you sign, date and return the
Proxy as soon as possible, in the postage prepaid envelope accompanying this
mailing. Your Proxy may be revoked at any time before it is voted and does not
alter your right to attend the meeting and to vote in person.
Sincerely,
Frank W. Neubauer
President and
Chief Executive Officer
<PAGE>
[This Page Intentionally Left Blank.]
<PAGE>
--------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 27, 1998
--------------------------------
TO THE SHAREHOLDERS OF MONOCACY BANCSHARES, INC.:
Notice is hereby given that the Annual Meeting of Shareholders of
MONOCACY BANCSHARES, INC. (the "Corporation") will be held at 3:00 p.m.,
prevailing time, on Monday, April 27, 1998, in the lobby at the main office of
Taneytown Bank & Trust Company, 222 East Baltimore Street, Taneytown, Maryland
21787, for the following purposes:
1. To elect two (2) Directors to serve for a three-year term and
until their successors are elected and qualified;
2. To ratify the selection of Stegman & Company, Certified Public
Accountants, as the Corporation's independent auditors for the
year ending December 31, 1998; and
3. To transact such other business as may properly come before
the Annual Meeting and any adjournment or postponement
thereof.
In accordance with the By-laws of the Corporation and action of the
Board of Directors, only those shareholders of record at the close of business
on March 18, 1998, will be entitled to notice of and to vote at the Annual
Meeting and any adjournment or postponement thereof.
A copy of the Corporation's Annual Report for the fiscal year ended
December 31, 1997, is enclosed with this Notice. Copies of the Corporation's
Annual Report for the 1996 fiscal year may be obtained at no cost by contacting
Brian M. Etzler, Secretary, 222 East Baltimore Street, Post Office Box 491,
Taneytown, Maryland 21787, telephone number: (410) 756-2655.
<PAGE>
You are urged to mark, sign, date and promptly return your Proxy in the
enclosed envelope so that your shares may be voted in accordance with your
wishes and in order that the presence of a quorum may be assured. The prompt
return of your signed Proxy, regardless of the number of shares you hold, will
aid the Corporation in reducing the expense of additional proxy solicitation.
Your Proxy may be revoked at any time before it is voted and, therefore, does
not alter your right to attend the meeting and vote in person.
By Order of the Board of Directors,
Brian M. Etzler,
Secretary
March 25, 1998
<PAGE>
MONOCACY BANCSHARES, INC.
PROXY STATEMENT FOR THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON APRIL 27, 1998
GENERAL
INTRODUCTION, DATE, TIME AND PLACE OF ANNUAL MEETING
- ----------------------------------------------------
This Proxy Statement is furnished in connection with the solicitation
by the Board of Directors of MONOCACY BANCSHARES, INC. (the "Corporation"), a
Maryland business corporation and a registered bank holding company, of proxies
to be voted at the Meeting of Shareholders of the Corporation to be held on
Monday, April 27, 1998, at 3:00 p.m., prevailing time, in the lobby at the main
office of Taneytown Bank & Trust Company, 222 East Baltimore Street, Taneytown,
Maryland, 21787, and at any adjournment or postponement of the Annual Meeting.
The principal executive office of the Corporation is located at
Taneytown Bank & Trust Company (the "Bank"), 222 East Baltimore Street, Post
Office Box 491, Taneytown, Maryland 21787. The telephone number for the
Corporation is (410) 756-2655. All inquiries should be directed to Brian M.
Etzler, Secretary of the Corporation. The Bank is a wholly-owned subsidiary of
the Corporation.
SOLICITATION AND VOTING OF PROXIES
- ----------------------------------
This Proxy Statement and the enclosed form of proxy (the "Proxy") are
first being sent to shareholders of the Corporation on or about March 25, 1998.
Shares represented by proxies on the accompanying Proxy, if properly
signed and returned, will be voted in accordance with the specifications made
thereon by the shareholders. Any Proxy not specifying to the contrary will be
voted FOR the election of the nominees for director named below, and FOR
ratification of the selection of Stegman & Company, Certified Public
Accountants, as the Corporation's independent auditors for the year ending
December 31, 1998. Execution and return of the enclosed Proxy will not alter a
shareholder's right to attend the Annual Meeting and vote in person. The cost of
preparing, assembling, printing, mailing and soliciting proxies, and any
additional material that the Corporation may furnish shareholders in connection
with the Annual Meeting, will be borne by the Corporation. In addition to use of
the mails, certain directors, officers and employees of the Corporation and the
Bank may solicit proxies personally by telephone and by telecopier. The
Corporation will make arrangements with brokerage houses and other custodians,
nominees and fiduciaries to forward proxy solicitation material to the
beneficial owners of stock held of record by these persons, and, upon request,
the Corporation will reimburse them for their reasonable expenses.
- 1 -
<PAGE>
REVOCABILITY OF PROXY
- ---------------------
A shareholder who returns a Proxy may revoke the Proxy at any time
before it is voted. This right of revocation is not limited or subject to
compliance with any formal procedure. Revocations should be delivered to Brian
M. Etzler, Secretary of the Corporation, at 222 East Baltimore Street, Post
Office Box 491, Taneytown, Maryland 21787. Shareholders may also effect a
revocation of a previously executed Proxy by attending the Annual Meeting and
voting in person.
VOTING SECURITIES, RECORD DATE, AND QUORUM
- ------------------------------------------
At the close of business on March 18, 1998, the Corporation had
1,798,325 shares of common stock, par value $5.00 per share (the "Common
Stock"), issued and outstanding. The Common Stock is the Corporation's only
authorized, issued and outstanding class of stock.
Only holders of Common Stock of record at the close of business on
March 18, 1998, will be entitled to notice of and to vote at the Annual Meeting.
Cumulative voting rights do not exist with respect to the election of directors.
On all matters to come before the Annual Meeting, each share of Common Stock is
entitled to one vote.
Under Maryland law and the By-laws of the Corporation, the presence of
a quorum is required for each matter to be acted upon at the Annual Meeting.
Pursuant to Article I, Section 1.05 of the By-laws of the Corporation, the
presence, in person or by proxy, of shareholders entitled to cast a majority of
all the votes entitled to be cast at the meeting constitutes a quorum for the
transaction of business at the Annual Meeting. Votes withheld and abstentions
will be counted in determining the presence of a quorum for the particular
matter. Broker non-votes will not be counted in determining the presence of a
quorum for the particular matter as to which the broker withheld authority.
Assuming the presence of a quorum, the two (2) nominees for director
receiving the highest number of votes cast by shareholders entitled to vote for
the election of directors shall be elected. Votes withheld from a nominee and
broker non-votes will not be cast for the nominee.
Assuming the presence of a quorum, the affirmative vote of a majority
of all votes cast by shareholders is required for ratification of the selection
of independent auditors. Abstentions and broker non-votes are not deemed to
constitute "votes cast" and, therefore, do not count either for or against
ratification. Abstentions and broker non-votes, however, have the practical
effect of reducing the total number of shares voted from which the required
majority is calculated.
- 2 -
<PAGE>
PRINCIPAL BENEFICIAL OWNERS OF THE CORPORATION'S STOCK
PRINCIPAL OWNERS
- ----------------
The following table sets forth, as of March 18, 1998, and adjusted to
reflect the ten percent (10%) stock dividend payable to shareholders on February
17, 1998, the name and address of each person who owns of record or who is known
by the Board of Directors to be the beneficial owner of more than five percent
(5%) of the Corporation's outstanding Common Stock, the number of shares
beneficially owned by such person and the percentage of the Corporation's
outstanding Common Stock so owned.
<TABLE>
<CAPTION>
Percent of Outstanding
Number of Shares Common Stock
Name and Address Beneficially Owned (1) Beneficially Owned
---------------- ---------------------- ----------------------
<S><C>
Eric E. Glass 119,046 (2) 6.51%
16117 Toms Creek Church Road
Emmitsburg, MD 21727
</TABLE>
- ------------------
(1) For the definition of "beneficially owned", see Footnote 1, below,
under the caption "Beneficial Ownership by Officers, Directors and
Nominees."
(2) Includes 103,060 shares owned individually; 1,375 exercisable stock
options; 4,971 shares held jointly with, and 2,330 shares held
individually by, Mr. Glass' wife; 1,718 shares held by the Taney
Corporation, of which Mr. Glass is Chairman of the Board; and 5,592
shares held by the Taney Corporation's employees' profit sharing trust
over which Mr. Glass has investment discretion.
BENEFICIAL OWNERSHIP BY OFFICERS, DIRECTORS AND NOMINEES
- --------------------------------------------------------
The following table sets forth, as of March 18, 1998, and adjusted to
reflect the ten percent (10%) stock dividend payable to shareholders on February
17, 1998, and from information supplied by the respective individual, the amount
and percentage of the Common Stock beneficially owned by each director, each
nominee, each named executive officer, and all officers, directors and nominees
of the Corporation and the Bank as a group.
- 3 -
<PAGE>
Name of Individual Amount and Nature of Percent
or Identity of Group Beneficial Ownership (1) of Class (2)
-------------------- ------------------------ ------------
David M. Abramson 3,487 (3) --
E. Wayne Baumgardner 70,140 (4) 3.83%
George B. Crouse 26,677 (5) 1.46%
Glenn E. Eaves 15,992 (6) --
Eric E. Glass 119,046 (7) 6.51%
Donald R. Hull 66,514 (8) 3.64%
Frank W. Neubauer 17,387 (9) --
Michael K. Walsch 7,222 (10) --
All Officers, Directors and
Nominees as a Group (12 persons) 339,047 (11) 18.53% (12)
- ------------------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
General Rules and Regulations of the Securities and Exchange Commission
and may include securities owned by or for the individual's spouse and
minor children and any other relative who has the same home, as well as
securities to which the individual has or shares voting or investment
power or shares that the individual has the right to acquire beneficial
ownership of within 60 days after March 18, 1998. Beneficial ownership
may be disclaimed, at the discretion of the individual, as to certain of
the securities reported herein.
(2) Less than one percent (1%) unless otherwise indicated.
(3) Includes 282 shares owned individually; and 1,375 exercisable stock
options and 1,830 shares held as trustee of the Irma Abramson Pollack
Revocable Intervivos Trust.
(4) Includes 64,772 shares owned individually; 1,375 exercisable stock
options and 3,993 shares held jointly by Mr. Baumgardner's wife and
mother.
(5) Includes 7,978 shares owned individually; 1,375 exercisable stock
options; l6,780 shares held by Mr. Crouse jointly with his wife; and 544
shares held individually by Mr. Crouse's wife.
(6) Includes 2,303 shares owned individually; 1,375 exercisable stock options
and 12,314 shares held by Mr. Eaves jointly with his wife.
(7) See Footnote 2, above, under the caption "Principal Owners" for
information regarding the shares of Common Stock held beneficially by Mr.
Glass.
(8) Includes 9,885 shares owned individually; 1,375 exercisable stock
options; 42,520 shares held by Mr. Hull jointly with his wife; 110 shares
held individually by Mr. Hull's wife; and 12,624 shares held by the
Residuary Trust of the Estate of Robert W. Smith, for which Mr. Hull is
trustee.
(9) Includes 3,231 shares owned individually; 10,164 exercisable stock
options; and 3,992 shares granted as Restricted Stock Awards.
(10) Includes 974 shares owned individually; 5,082 exercisable stock options;
and 1,166 shares granted as Restricted Stock Awards.
(11) Includes 31,372 exercisable stock options; and 5,158 shares granted as
Restricted Stock Awards to Officers.
(12) The percent of class assumes all outstanding stock options, exercisable
within sixty (60) days of March 18, 1998, issued to the directors and
officers have been exercised and, therefore, on a proforma basis,
1,829,697 shares of Common Stock would be outstanding.
- 4 -
<PAGE>
ELECTION OF DIRECTORS
The By-laws of the Corporation provide that the Corporation's business
shall be managed by its Board of Directors. Sections 2.02 and 2.03 of the
By-laws provide that the number of directors that constitutes the whole Board of
Directors shall not be less than five nor more than twenty-four and that the
Board of Directors shall be classified into three classes as nearly equal as
possible. Each class is elected for a three year term and until their successors
are elected and qualified. Within the foregoing limits, the Board of Directors
may, from time to time, fix the number of directors and their respective
classifications. No person shall serve as a director after he or she has
attained the age of seventy (70) years, except those directors who were serving
at the formation of the Corporation. Pursuant to Section 2.05 of the By-laws,
vacancies on the Board of Directors, including vacancies resulting from an
increase in the number of directors, shall be filled by a majority vote of the
shareholders or of the remaining members of the Board of Directors. Each person
so appointed, if chosen by the directors, shall be a director until the next
Annual Meeting of Shareholders, at which time the shareholders shall elect a
director for the balance of the term then remaining. Alternatively, vacancies
may be filled by a majority vote of the shareholders, in which case, the
director so chosen holds office for the balance of the term then remaining.
Pursuant to Section 2.02 and 2.03 of the By-laws of the Corporation,
the number of Directors of the Corporation is currently set at seven (7)
members. Two (2) directors, whose term will expire in 2001, shall stand for
election at the 1998 Annual Meeting. There are two (2) directors in the class
whose term expires in 1999 and three (3) directors in the class whose term
expires in 2000.
Unless otherwise instructed, the Proxy holders will vote the Proxies
received by them for the election of the two (2) nominees named below. If any
nominee should become unavailable for any reason, Proxies will be voted in favor
of a substitute nominee as the Board of Directors of the Corporation shall
determine. The Board of Directors has no reason to believe that the nominees
named will be unable to serve, if elected. Any vacancy occurring on the Board of
Directors of the Corporation for any reason may be filled by a majority vote of
the directors then in office until the expiration of the term of the vacancy.
There is no cumulative voting for the election of directors. Each share
of Common Stock is entitled to cast only one vote for each nominee. For example,
if a shareholder owns ten shares of Common Stock, he or she may cast up to ten
votes for each of the two (2) directors in the class to be elected.
- 5 -
<PAGE>
INFORMATION AS TO NOMINEES, DIRECTORS AND EXECUTIVE OFFICERS
The following table contains certain information with respect to the
nominees for director and the current directors:
<TABLE>
<CAPTION>
Principal Occupation
Age as of for Past Five Years
March 18, and Position Held with the Director Since
Name 1998 Corporation and the Bank Corp/Bank
---- ---- ------------------------ ---------
<S><C>
NOMINEES FOR DIRECTOR
WHOSE TERM EXPIRES IN 2001 AND
CURRENT DIRECTORS
WHOSE TERM EXPIRES IN 1998
- --------------------------
E. Wayne Baumgardner (2) 61 Independent Investor 1993/1984
George B. Crouse (5)(6) 58 Vice President, Crouse Ford Sales, Inc. 1993/1985
CURRENT DIRECTORS
WHOSE TERM EXPIRES IN 1999
- --------------------------
Eric E. Glass (1)(3)(6) 58 Chairman of the Board of the Taney 1993/1977
Corporation; Chairman of the Board of
the Corporation and the Bank
Donald R. Hull (1)(4)(6) 59 Accountant, E.A., Vice Chairman of the 1993/1976
Board and Chairman of the Executive
Committee of the Corporation and the
Bank
CURRENT DIRECTORS
WHOSE TERM EXPIRES IN 2000
- --------------------------
David M. Abramson 45 Director, Executive Vice President and 1993/1992
General Counsel, U.S. Foodservice
Glenn E. Eaves (2)(4)(6) 62 Dairy Farmer 1993/1988
Frank W. Neubauer (1)(6) 55 Commercial Banker; President and 1994/1994
Chief Executive Officer of the
Corporation and the Bank
</TABLE>
- -----------------
(1) The President/Chief Executive Officer, the Chairman of the Board, and the
Vice Chairman of the Board are each ex-officio members of all standing
committees of the Bank's Board of Directors.
(2) Member of the Bank's Audit/Compliance Committee. The Audit/Compliance
Committee has as its primary functions the review and recommendation of
an outside auditor for each fiscal year and the oversight of the Bank's
audit and compliance functions. This committee is also the source for
reports concerning factual conflicts of interest and reviews
circumstances regarding conflicts of interest and reports same to the
full Board of Directors, if necessary. This committee met four (4) times
in 1997. Mr. Baumgardner was Chairman of the Audit/Compliance Committee
in 1997.
(3) Member of the Bank's Compensation Committee. This committee reviews
salary administration, including salary ranges, salary surveys and
benefits, and approves changes in salary ranges as needed. This committee
met four (4) times in 1997. Mr. Glass was Chairman of the Compensation
Committee in 1997. Other members of the Board of Directors sit on the
Compensation Committee on a rotating basis each quarter.
- 6 -
<PAGE>
(4) Member of the Bank's Funds Management Committee. This committee reviews
major policies of the Bank with respect to interest rate exposure,
liquidity, investments, earnings analysis and forecasts, tax planning,
capital, funding and pricing. This committee met three (3) times in 1997.
Mr. Jacob Yingling was Chairman of the Funds Management Committee until
September 1, 1997, at which time this committee combined with the ALCO
Committee to form the Asset & Liability Committee with Michael K. Walsch
as Chairman. The Asset & Liability Committee is no longer a committee of
the Board of Directors, but rather an internal committee of the Bank
since the Chairman is not a Director.
(5) Member of the Bank's Trust Committee. This committee oversees the
operations of the Trust Department of the Bank. This committee met three
(3) times in 1997. Mr. Crouse was Chairman of the Trust Committee in
1997. The complete functions of the Trust Department were outsourced to
TrustCorp America effective October 1, 1997, thereby eliminating this
committee.
(6) Permanent member of the Bank's Executive Committee. This committee
oversees the operations of the Bank. This committee met twelve (12) times
in 1997. Mr. Hull was Chairman of the Executive Committee in 1997. Other
members of the Board of Directors sat on the Executive Committee on a
rotating basis each quarter until September 1, 1997, when the committee
changed to fixed membership.
The aforementioned committees are committees of the Bank and not of the
Corporation.
During 1997, the Bank's Board of Directors held 12 meetings. During
1997, the Corporation's Board of Directors held 12 meetings. Each of the
Directors attended at least 75% of the total number of meetings of the Bank and
Corporation's Board of Directors.
The Board of Directors of the Corporation has, at present, one standing
committee, the Executive Committee, which met twelve (12) times in 1997. The
same persons who are members of the Bank's Executive Committee are members of
the Corporation's Executive Committee.
A shareholder who desires to propose an individual for consideration by
the Board of Directors as a nominee for director should submit a proposal in
writing to the Secretary of the Corporation in accordance with Article Eighth
(a)(8) of the Corporation's Articles of Incorporation. Any shareholder who
intends to nominate a candidate for election to the Board of Directors must
notify the Secretary of the Corporation in writing not less than 30 days or more
than 60 days prior to the meeting; provided, however, that if less than 31 days'
notice of the meeting is given to shareholders, such notice must be given to the
Secretary of the Corporation not later than the close of business on the tenth
(10th) day following the day on which notice of the meeting was mailed to
shareholders. Each notice must conform with the requirements set forth in
Article Eighth (a)(8) of the Corporation's Articles of Incorporation.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires that the Corporation's officers and directors, and persons who own more
than ten percent (10%) of a registered class of the Corporation's equity
securities, file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "SEC"). Officers, directors and greater
than ten percent (10%) shareholders are required by SEC regulation to furnish
the Corporation with copies of all Section 16(a) forms they file.
- 7 -
<PAGE>
Based solely on its review of the copies of such forms received by it
or written representations from certain reporting persons that no Forms 5 were
required for those persons, the Corporation believes that during the period
January 1, 1997, through December 31, 1997, its officers and directors were in
compliance with all filing requirements applicable to them.
EXECUTIVE COMPENSATION
The table below sets forth certain information concerning the annual
compensation for services in all capacities to the Corporation for the fiscal
year ended December 31, 1997, 1996 and 1995 of those persons who were, at
December 31, 1997, (i) the Chief Executive Officer, and (ii) the four other most
highly compensated executive officers of the Corporation to the extent such
persons' total annual salary and bonus exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------- -------------------------------------------------
Awards Payouts
--------------------- -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Annual Restricted All Other
Compen- Stock Options LTIP Compen-
Name and Salary Bonus sation Award(s) /SARs Payouts sation
Principal Position Year ($) ($) ($) ($)(1) (#) ($) ($)
------------------ ---- ------ ----- ------- ---------- ------- ------- ---------
<S><C>
Frank W. Neubauer 1997 148,400 25,000 0 17,066 2,000 0 14,608 (2)
President and Chief 1996 140,000 30,000 0 16,100 2,200 0 14,827 (2)
Executive Officer 1995 126,500 27,638 0 14,556 2,200 0 19,046 (2)
Michael K. Walsch 1997 116,000 24,000 0 6,670 1,000 0 16,843 (3)
Executive Vice 1996 102,500 25,000 0 5,980 1,100 0 16,939 (3)
President, Chief 1995 93,000 19,411 0 5,354 1,100 0 18,059 (3)
Financial Officer,
and Chief Operating
Officer
</TABLE>
- ----------------
(1) The aggregate restricted stock holdings by Mr. Neubauer are 3,019 shares
of Common Stock valued using the price of the Corporation's Common Stock
on December 31, 1997 at $28.50 per share, or $86,041 in the aggregate.
The aggregate restricted stock holdings of Mr. Walsch are 824 shares of
Common Stock valued using the price of the Corporation's Common Stock on
December 31, 1997 at $28.50 per share, or $23,484 in the aggregate.
Dividends are reinvested on the restricted stock holdings of Mr. Neubauer
and Mr. Walsch pursuant to the Corporation's Dividend Reinvestment Plan
("DRIP").
(2) Includes deferred cash contribution pursuant to a Supplemental Retirement
Plan, Bank contributions to 401(k) plan, and group term life insurance
premiums paid by Bank.
(3) Includes deferred cash contribution pursuant to a Supplemental Retirement
Plan, split dollar life insurance premiums paid by Bank, Bank
contributions to 401(k) plan, and group term life insurance premiums paid
by Bank.
- 8 -
<PAGE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
-----------------
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f) (g)
5%($) 10%($)
Number of % of Total Potential Realizable
Securities Options/SAR's Exercise Value at Assumed
Underlying Granted to or Base Annual Rates of Stock
Options/SAR's Employees in Price Expiration Price Appreciation for
Name Granted (#) Fiscal Year ($/Share) Date Option Term
---- ----------- ----------- --------- ---- -----------
<S><C>
Frank W. Neubauer December
President and Chief 2,000 29.85% 24.50 22, 2007 $43,880 $98,840
Executive Officer
Michael K. Walsch December
Executive Vice 1,000 14.93% 24.50 22, 2007 $21,940 $49,420
President, Chief
Financial Officer
and Chief Operating
Officer
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SAR's Options/SAR's
at FY-End(#) at FY-End(#)
Shares Acquired on Exercisable/ Exercisable/
Name Exercise(#) Value Realized($) Unexercisable Unexercisable
---- ----------- ----------------- ------------- -------------
<S><C>
Frank W. Neubauer 0 0 9,240/2,000 $85,025/$8,000
President and Chief
Executive Officer
Michael K. Walsch 0 0 4,620/1,000 $42,512/$4,000
Executive Vice
President, Chief
Financial Officer and
Chief Operating Officer
</TABLE>
- 9 -
<PAGE>
STOCK OPTION PLAN
- ------------------
The Corporation maintains the 1994 Stock Incentive Plan (the "Incentive
Plan"), which Plan was approved by shareholders at the 1994 Annual Meeting, to
advance the development, growth and financial condition of the Corporation and
its subsidiaries and was amended in 1997 to increase the shares issuable under
the Incentive Plan by 31,592 shares. The Incentive Plan provides for awards of
qualified stock options and non-qualified stock options and is administered by a
committee of the Corporation's Board of Directors. In 1997, 7,700 qualified
stock options were granted under the Plan.
INDEPENDENT DIRECTORS' STOCK OPTION PLAN
- ----------------------------------------
The Corporation maintains the 1997 Independent Directors' Stock Option
Plan (the "Directors Plan"), which Plan was approved by shareholders at the 1997
Annual Meeting, to advance the interests of the Corporation by providing
incentives to attract, motivate and retain non-employee members of the Board of
Directors of the Corporation through participation in the appreciation of the
capital stock of the Corporation. The Corporation reserved 60,000 shares for
issuance under the Directors Plan, which shares were adjusted to reflect the
Corporation's 10% stock dividend payable to shareholders on February 17, 1998,
and will be adjusted to reflect certain other increases in the outstanding
shares of the Corporation, as provided in the Directors Plan. The Directors Plan
provides for awards of non-qualified stock options to non-employee directors of
the Corporation. In 1997, 35,000 stock options were granted under the Directors
Plan.
401(K) PLAN
- -----------
Neither the Corporation nor the Bank has a retirement or pension plan.
The Bank has a contributory thrift plan qualifying under Section 401(k) of the
Internal Revenue Code (the "Plan"). Employees with six months of service are
eligible for participation in the Plan. Participants are allowed to defer up to
15% of their annual compensation by contributing amounts to the Plan. The Bank
contributes to the Plan for each participant $1.00 for each $2.00 of the
participants' contributions which do not exceed 6% of annual compensation. Each
year, the Board of Directors, at its discretion authorizes additional
contributions to the Plan. Plan participants are fully vested after five (5)
full years of service or upon death, disability or retirement. Contributions by
participants, matching contributions and annual discretionary contributions by
the Bank are invested in pre-selected investment funds at the direction of the
participants. Annual discretionary contributions by the Bank are invested at the
direction of the participants of the Plan or distributed in cash.
Mr. Neubauer has six (6) credited years of service and is one hundred
percent (100%) vested in the Plan. Mr. Walsch has five (5) credited years of
service and is one hundred percent (100%) vested in the Plan. The total amount
of Bank contributions to all employees, including $42,000 in discretionary
profit sharing distributions, under the plan in 1997 was $117,130.14.
- 10 -
<PAGE>
SUPPLEMENTAL RETIREMENT PLAN
- ----------------------------
The Bank entered into supplemental retirement agreements with Mr.
Neubauer (beginning in 1993) and Mr. Walsch (beginning in 1994) which are
performance-based. The Bank maintains deferred cash accounts for Mr. Neubauer
and Mr. Walsch to which the bank allocates, each year, an amount equal to .455%
and .2275%, respectively, of the pre-tax net income of the Bank for each year;
provided that, the financial and other performance goals of the Bank, as set and
determined by the Board of Directors, have been achieved during the year. These
goals were achieved in 1997. In addition to the Deferred Cash Account, the Bank
annually transfers to Mr. Neubauer and to Mr. Walsch shares of the Common Stock
of the Corporation valued at 11.5% of Mr. Neubauer's base salary and 5.75% of
Mr. Walsch's base salary, respectively; provided that the financial and other
performance goals of the Bank, as set and determined by the Board of Directors,
have been achieved during the year. These goals were achieved in 1997. All such
shares awarded under this Supplemental Retirement Plan are restricted and may
not be transferred prior to vesting and they are subject to forfeiture if
employment is terminated prior to vesting. Mr. Neubauer's deferred cash account
and shares awarded vest beginning in 2001 at a rate of 20% per year. Mr.
Walsch's deferred cash account and shares awarded vest beginning in 2002 at a
rate of 10% per year.
In the event of death, disability, termination of employment without
good cause, or a change in control of the Corporation, all awards will fully
vest. The Deferred Cash Accounts are invested in investment vehicles as proposed
in writing by Mr. Neubauer and Mr. Walsch, respectively, and approved by the
Bank's Board of Directors. The restricted shares earn dividends pursuant to the
Corporation's Dividend Reinvestment Plan. No payments will be made from the
respective Deferred Cash Accounts until retirement (assuming there is no
premature death or disability) at which time the full balance shall be paid,
unless the Bank and the named executive agree otherwise.
COMPENSATION OF DIRECTORS
- -------------------------
During 1997, the Chairman and Vice Chairman of the Bank's Board of
Directors received an annual retainer of $15,000. The non-employee Bank
directors received an annual retainer of $10,800. The Chairman of the Board of
Directors of the Bank's wholly-owned subsidiary, TBT Investments, Inc., received
an additional $1,200. In the aggregate, the Bank's Board of Directors received
$82,500 for service in 1997. This amount includes all directors fees paid to all
individuals who served as directors of the Bank in 1997. Directors received no
remuneration for attendance at meetings of the Board of Directors of the
Corporation.
EMPLOYMENT CONTRACT
- -------------------
On June 16, 1993, the Bank and Mr. Frank W. Neubauer, then Executive Vice
President of the Corporation and the Bank (currently President and Chief
Executive Officer of the Corporation and the Bank), entered into an employment
agreement. The employment agreement had a term of two (2) years, which term
renewed automatically for an additional one (1) year at the end of the first
calendar year and each year thereafter, unless either Mr. Neubauer or the Bank
provides 180 days prior written notification of termination of the employment
agreement. The agreement specifies Mr. Neubauer's position and duties,
compensation and benefits and termination. The employment agreement contains a
non-compete provision and a confidentiality provision. Also, the employment
- 11 -
<PAGE>
agreement provided for the relocation of Mr. Neubauer to Westminster, Carroll
County and a relocation bonus equal to the amount of loss, ($88,235), Mr.
Neubauer sustained in 1993 on the sale of his former principal residence. The
relocation bonus was paid to Mr. Neubauer in 1993 and vests over a five year
period beginning in 1994. In 1997, the Bank accrued an additional $17,647 (20%)
of the relocation bonus of $88,235 for compensation on the loss sustained on the
sale of a residence by Mr. Neubauer under his employment agreement. The
remainder will be accrued in 1998.
Under the terms of his employment agreement, Mr. Neubauer currently
serves as the President and Chief Executive Officer of the Bank. ln 1997, Mr.
Neubauer's annual direct salary was set by the Board of Directors at $148,400.
In the event of Mr. Neubauer's disability, the employment agreement provides
that Mr. Neubauer shall continue to receive his salary for a period of 90 days.
In addition, the Board of Directors of the Bank may provide for payment of a
periodic bonus if such bonus is deemed appropriate by the Board of Directors.
Mr. Neubauer is also entitled to receive the customary employee benefits made
available by the Bank to its employees, as well as twenty (20) days of paid
vacation.
CERTAIN TRANSACTIONS
Except as set forth below, there have been no material transactions
between the Corporation and the Bank, nor any material transactions proposed,
with any director or executive officer of the Corporation and the Bank, or any
associate of the foregoing persons. The Corporation and the Bank have had and
intend to continue to have banking and financial transactions in the ordinary
course of business with directors and officers of the Corporation and the Bank
and their associates on comparable terms and with similar interest rates as
those prevailing from time to time for other customers of the Corporation and
the Bank.
Total loans outstanding from the Corporation and the Bank at December
31, 1997, to the Corporation's and the Bank's officers and directors as a group
and to members of their immediate families and companies in which they had an
ownership interest of 10% or more was $2,413,642.01, or approximately 9.9% of
the total equity capital of the Bank. Loans to such persons were made in the
ordinary course of business, were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and did not involve more than the
normal risk of collectibility or present other unfavorable features. The
aggregate amount of indebtedness outstanding as of the latest practicable date,
February 27, 1998, to the above described group was $2,401,564.68.
Certain loans from the Bank to directors were outstanding in 1997 in an
amount considered by management of the Corporation and the Bank to be material.
Glenn E. Eaves, Director, had two (2) loans outstanding on December 31, 1997 in
the amount of $792,550.71 and $400,046.70, respectively. Each loan is secured by
real estate. All of the loans to Mr. Eaves are current as to payments of
principal and interest, and were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons as
discussed above.
- 12 -
<PAGE>
PRINCIPAL OFFICERS OF THE CORPORATION
- -------------------------------------
The following table sets forth selected information, as of March 18,
1998, and adjusted to reflect the ten percent (10%) stock dividend payable to
shareholders on February 17, 1998, about the principal officers of the
Corporation, each of whom is elected by the Board of Directors and each of whom
holds office at the discretion of the Board of Directors:
<TABLE>
<CAPTION>
Bank Number of Age as of
Held Employee Shares Beneficially March 18,
Name Since Since Owned 1998
---- ----- ----- ----- ----
<S><C>
Eric E. Glass 1997 (1) 119,046 (2) 58
Chairman of the Board
Donald R. Hull 1997 (1) 66,514 (3) 59
Vice Chairman of the Board
Frank W. Neubauer 1994 1992 17,387 (4) 55
President and Chief Executive Officer
Michael K. Walsch 1995 1993 7,222 (5) 42
Executive Vice President, Treasurer,
Chief Financial Officer, and Chief
Operating Officer
Edward D. Leister 1993 1977 6,595 (6) 57
Senior Vice President
Brian M. Etzler 1994 1974 2,163 (7) 43
Secretary
</TABLE>
- ---------------------
(1) Messrs. Glass and Hull are not employees of the Bank.
(2) See Footnote 2, above, under the caption "Principal Owners" for
information regarding the shares of Common Stock held beneficially by Mr.
Glass.
(3) See Footnote 8, above, under the caption "Beneficial Ownership by
Officers, Directors and Nominees" for information regarding the shares of
Common Stock held beneficially by Mr. Hull.
(4) See Footnote 9, above, under the caption "Beneficial Ownership by
Officers, Directors and Nominees" for information regarding the shares of
Common Stock held beneficially by Mr. Neubauer.
(5) See Footnote 10, above, under the caption "Beneficial Ownership by
Officers, Directors and Nominees" for information regarding the shares of
Common Stock held beneficially by Mr. Walsch.
(6) Includes 1 share owned individually; 3,872 exercisable stock options; and
2,722 shares held jointly with Mr. Leister's wife.
(7) Includes 665 shares owned individually; 484 exercisable stock options and
1,014 shares held jointly with Mr. Etzler's wife.
- 13 -
<PAGE>
PRINCIPAL OFFICERS OF THE BANK
- ------------------------------
The following table sets forth selected information, as of March 18,
1998, and adjusted to reflect the ten percent (10%) stock dividend payable to
shareholders on February 17, 1998, about the principal officers of the Bank,
each of whom is elected by the Board of Directors and each of whom holds office
at the discretion of the Board of Directors:
<TABLE>
<CAPTION>
Number of
Bank Shares Age as of
Office and Position Held Employee Beneficially March 18,
Name with the Bank Since Since Owned 1998
- ---- ------------- ----- ----- ----- ----
<S><C>
Eric E. Glass Chairman of the Board 1997 (1) 119,046 (2) 58
Donald R. Hull Vice Chairman of the Board 1997 (1) 66,514 (3) 59
Frank W. Neubauer President and Chief Executive 1994 1992 17,387 (4) 55
Officer
Michael K. Walsch Executive Vice President, 1995 1993 7,222 (5) 42
Treasurer, Chief Financial
Officer, and Chief Operating
Officer
Edward D. Leister Senior Vice President 1982 1977 6,595 (6) 57
Craig H. McConnell Senior Vice President 1996 1996 606 (7) 49
Christopher D. Holt Senior Vice President 1998 1992 3,218 (8) 34
Brian M. Etzler Vice President and Secretary 1994 1974 2,163 (9) 43
</TABLE>
- --------------------
(1) Messrs. Glass and Hull are not employees of the Bank.
(2) See Footnote 2, above, under the caption "Principal Owners" for
information regarding the shares of Common Stock held beneficially by Mr.
Glass.
(3) See Footnote 8, above, under the caption "Beneficial Ownership by
Officers, Directors and Nominees" for information regarding the shares of
Common Stock held beneficially by Mr. Hull.
(4) See Footnote 9, above, under the caption "Beneficial Ownership by
Officers, Directors and Nominees"for information regarding the shares of
Common Stock held beneficially by Mr. Neubauer.
(5) See Footnote 10, above, under the caption "Beneficial Ownership by
Officers, Directors and Nominees" for information regarding the shares of
Common Stock held beneficially by Mr. Walsch.
(6) See Footnote 6, above, under the caption "Principal Officers of the
Corporation" for information regarding the shares of Common Stock held
beneficially by Mr. Leister.
(7) Includes 1 share owned individually and 605 exercisable stock options.
(8) Includes 1 share owned individually; 2,915 exercisable stock options and
302 shares held by Mr. Holt jointly with his wife.
(9) See Footnote 7, above, under the caption "Principal Officers of the
Corporation" for information regarding the shares of Common Stock held
beneficially by Mr. Etzler.
- 14 -
<PAGE>
RATIFICATION OF INDEPENDENT AUDITORS
Unless instructed to the contrary, it is intended that votes will be
cast pursuant to the proxies for the ratification of the selection of Stegman &
Company, Certified Public Accountants, as the Corporation's independent auditors
for its 1998 fiscal year. The Corporation has been advised by Stegman & Company,
Certified Public Accountants, that none of its members has any financial
interest in the Corporation. Ratification of Stegman & Company, Certified Public
Accountants, will require the affirmative vote of a majority of the shares of
Common Stock represented in person or by proxy at the Annual Meeting. Stegman &
Company, Certified Public Accountants, served as the Corporation's independent
auditors for the 1997 fiscal year, assisted the Corporation and the Bank with
the preparation of their federal and state tax returns, provided assistance in
connection with regulatory matters, and provided data processing consulting
services, charging the Bank for such services at its customary hourly billing
rates. These non-audit services were approved by the Corporation's and the
Bank's Board of Directors after due consideration of the effect of the
performance thereof on the independence of the auditors and after the conclusion
by the Corporation's and the Bank's Board of Directors that there was no effect
on the independence of the auditors.
In the event that the shareholders do not ratify the selection of
Stegman & Company, Certified Public Accountants, as the Corporation's
independent auditors for the 1998 fiscal year, another accounting firm may be
chosen to provide independent audit services for the 1998 fiscal year. The Board
of Directors recommends that the shareholders vote FOR the ratification of the
selection of Stegman & Company, Certified Public Accountants, as the independent
auditors for the Corporation for the year ending December 31, 1998.
ANNUAL REPORT
A copy of the Corporation's Annual Report for its fiscal year ended
December 31, 1997 is enclosed with this Proxy Statement. A representative of
Stegman & Company, Certified Public Accountants, the accounting firm that
examined the financial statements in the Annual Report, will attend the meeting.
The representative will have the opportunity to make a statement, if he desires
to do so, and will be available to respond to any appropriate questions
concerning the Annual Report presented by shareholders at the Annual Meeting.
SHAREHOLDER PROPOSALS
Any shareholder who, in accordance with and subject to the provisions
of the proxy rules of the Securities and Exchange Commission, wishes to submit a
proposal for inclusion in the Corporation's Proxy Statement for its 1999 Annual
Meeting of Shareholders must deliver such proposal in writing to the President
of Monocacy Bancshares, Inc. at its principal executive offices, 222 East
Baltimore Street, Taneytown, Maryland 21787, not later than December 1, 1998.
- 15 -
<PAGE>
OTHER MATTERS
The Board of Directors does not know of any matters to be presented for
consideration other than the matters described in the accompanying Notice of
Annual Meeting of Shareholders, but if any matters are properly presented, it is
the intention of the persons named in the accompanying Proxy to vote on such
matters in accordance with their best judgment.
ADDITIONAL INFORMATION
UPON WRITTEN REQUEST OF ANY SHAREHOLDER, A COPY OF THE CORPORATION'S
REPORT ON FORM 10-K FOR ITS FISCAL YEAR ENDED DECEMBER 31, 1997 INCLUDING THE
FINANCIAL STATEMENTS AND THE SCHEDULES THERETO, REQUIRED TO BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 13a-1 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, MAY BE OBTAINED, WITHOUT CHARGE, FROM MICHAEL
K. WALSCH, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, MONOCACY
BANCSHARES, INC., 222 EAST BALTIMORE STREET, POST OFFICE BOX 491, TANEYTOWN,
MARYLAND 21787.
- 16 -
<PAGE>
MONOCACY BANCSHARES, INC.
PROXY
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 27, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby constitutes and appoints Michael K. Walsch and
Brian M. Etzler and each or any of them, proxies of the undersigned, with full
power of substitution, to vote all of the shares of Monocacy Bancshares, Inc.
(the "Corporation") that the undersigned may be entitled to vote at the Annual
Meeting of Shareholders of the Corporation to be held at the main office of
Taneytown Bank & Trust Company, 222 East Baltimore Street, Taneytown, Maryland
21787, on Monday, April 27, 1998, at 3:00 p.m., prevailing time, and at any
adjournment or postponement thereof as follows:
1. ELECTION OF TWO DIRECTORS WHOSE TERM EXPIRES IN 2001.
E. Wayne Baumgardner and George B. Crouse
[ ] FOR all nominees [ ] WITHHOLD AUTHORITY
listed above (except to vote for all
as marked to the nominees listed
contrary below) above
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
NOMINEE, WRITE THAT NOMINEE'S NAME ON THE SPACE PROVIDED BELOW.)
-----------------------------------------------------------------------
2. PROPOSAL TO RATIFY THE SELECTION OF STEGMAN & COMPANY, CERTIFIED PUBLIC
ACCOUNTANTS, AS THE INDEPENDENT AUDITORS FOR THE CORPORATION FOR THE
YEAR ENDING DECEMBER 31, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends a vote FOR this proposal.
-----------------------------------------------------------------------
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting and any adjournment or
postponement thereof.
<PAGE>
THIS PROXY, WHEN PROPERLY SIGNED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR ALL NOMINEES LISTED ABOVE AND FOR PROPOSAL 2.
Dated: _______________, 1998
____________________________________
Signature(s) of Shareholders
____________________________________
Signature(s) of Shareholders
Number of Shares Held
of Record on March 18,
1998 ______________
THE PROXY MUST BE DATED, SIGNED BY THE SHAREHOLDER(S) AND RETURNED PROMPTLY TO
THE TRANSFER AGENT IN THE ENCLOSED ENVELOPE. WHEN SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE. IF MORE
THAN ONE TRUSTEE, ALL SHOULD SIGN. IF STOCK IS HELD JOINTLY, EACH OWNER SHOULD
SIGN.
