SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 12 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission file number 0-22536
Monocacy Bancshares, Inc.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Maryland 52-1824297
--------------------------------- -------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
222 E. Baltimore Street
Taneytown, Maryland 21787
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(Address of Principal Executive Offices) (Zip Code)
(410) 756-2655
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 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 the number of shares outstanding of each of the classes of common
stock, as of the latest practical date.
1,799,005 shares of Common Stock, $5 par value per share, were outstanding as of
October 30, 1998.
<PAGE>
MONOCACY BANCSHARES, INC.
Index to Form 10-QSB Report
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets ........................................ 1
Consolidated Statements of Income and Comprehensive Income ......... 2
Consolidated Statements of Stockholders' Equity .................... 3
Consolidated Statements of Cash Flows .............................. 4
Notes to Consolidated Financial Statements ......................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................ 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ...................................................... 12
Item 2. Changes in Securities .................................................. 12
Item 3. Defaults Upon Senior Securities ........................................ 12
Item 4. Submission of Matters to a Vote of Security Holders .................... 12
Item 5. Other Information ...................................................... 12
Item 6. Exhibits and Reports on Form 8-K ....................................... 12
Signatures ..................................................................... 13
</TABLE>
<PAGE>
Part I
Item 1. Financial Statements
Monocacy Bancshares, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1998 1997
------ ------------- -------------
<S> <C> <C>
(unaudited)
Cash and due from banks $ 9,178,873 $ 7,081,321
Federal funds sold 20,732,123 12,613,708
Interest-bearing deposits with other banks 2,802,954 1,184,481
Loans held for sale 2,680,413 4,940,424
Securities available for sale 87,204,857 95,164,265
Loans, less allowance for loan losses of
$2,615,362 and $2,538,853 166,791,734 155,715,968
Bank premises and equipment 8,067,013 8,170,589
Other real estate owned 772,052 137,296
Deferred income taxes 926,320 771,011
Accrued interest receivable 1,809,129 2,151,978
Other assets 2,239,926 2,309,380
------------ ------------
Total Assets $303,205,394 $290,240,421
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Non-interest bearing deposits $ 29,347,095 $ 25,224,565
Interest bearing deposits 207,789,648 203,645,080
------------ ------------
237,136,743 228,869,645
Federal funds purchased - -
Other borrowings 34,004,638 35,658,153
Accrued interest and other expenses payable 1,095,148 1,270,535
Dividends payable 215,881 179,137
Other liabilities 4,634,757 94,663
------------ ------------
Total liabilities 277,087,167 266,072,133
Stockholders' Equity:
Common stock 8,995,025 8,142,610
Common stock dividend to be distributed - 4,033,720
Surplus 15,358,805 11,862,866
Retained earnings 1,570,643 66,301
Accumulated comprehensive income 193,754 62,791
------------ ------------
Total stockholders' equity 26,118,227 24,168,288
------------ ------------
Total liabilities and stockholders' equity $303,205,394 $290,240,421
============ ============
</TABLE>
See the accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
Monocacy Bancshares, Inc. and Subsidiary
Consolidated Statements of Income and Comprehensive Income
For the nine and three month periods ended September 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 11,475,621 $ 11,907,477 $ 3,807,538 $ 3,906,875
Interest-bearing deposits with other banks 43,436 15,626 3,427 5,056
Federal funds sold 287,588 69,785 51,106 33,637
Securities available for sale 4,393,839 2,411,151 1,479,682 906,880
Investment securities - 866,531 - 288,777
------------- ------------- ------------- -------------
Total interest income 16,200,484 15,270,570 5,341,753 5,141,225
------------- ------------- ------------- -------------
Interest expense:
Deposits 7,198,413 7,135,553 2,443,187 2,430,684
Federal funds purchased 27,389 26,567 16,099 11,257
Other borrowings 1,472,533 578,360 464,636 263,871
------------- ------------- ------------- -------------
Total interest expense 8,698,335 7,740,480 2,923,922 2,705,812
------------- ------------- ------------- -------------
Net interest income 7,502,149 7,530,090 2,417,831 2,435,413
Provision for loan losses 206,400 1,060,000 100,000 400,000
------------- ------------- ----------------- -------------
Net interest income after provision for loan
losses l7,295,749 6,470,090 2,317,831 2,035,413
------------- ------------- ------------- -------------
Noninterest income:
Service charges on deposit accounts 496,421 430,334 156,441 165,866
Loan service charges 541,611 495,492 175,495 171,461
Trust department fees 73,858 118,433 17,916 39,782
Gains and fees on sales of loans 991,027 877,310 284,019 246,061
Gains (losses) on sales of securities 821,486 9,189 118,213 11,739
Other 166,373 204,530 60,353 50,608
------------- ------------- ------------- -------------
Total noninterest income 3,090,776 2,135,288 812,437 685,517
------------- ------------- ------------- -------------
Noninterest expense:
Salaries & employee benefits 4,354,790 4,160,916 1,243,744 1,427,301
Occupancy 557,276 546,703 192,850 178,596
Equipment 618,919 578,149 211,855 191,080
Deposit insurance 38,000 45,000 8,000 15,000
Professional fees 452,699 384,639 187,886 177,815
Other 1,269,069 1,189,975 464,173 426,082
------------- ------------- ------------- -------------
Total noninterest expense 7,290,753 6,905,382 2,308,508 2,415,874
------------- ------------- ------------- -------------
Income before income taxes 3,095,772 1,699,996 821,760 305,056
Provision for income taxes 752,611 63,369 165,973 (85,907)
------------- ------------- ------------- -------------
Net income 2,343,161 1,636,627 655,787 390,963
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities 952,449 370,366 530,058 283,091
Reclassification of gains (losses) included in
income (821,486) - (118,213) -
------------- ------------- ------------- -------------
Other comprehensive income 130,963 370,366 411,845 283,091
------------- ------------- ------------- -------------
Comprehensive income $ 2,474,124 $ 2,006,993 $ 1,067,632 $ 674,054
============= ============= ============= =============
Net income per common share - basic $ 1.30 $ 0.92 $ 0.36 $ 0.22
============= ============= ============= =============
Net income per common share - diluted $ 1.27 $ 0.90 $ 0.36 $ 0.22
============= ============= ============= =============
</TABLE>
See the accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
Monocacy Bancshares, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
(Information for the nine months ended September 30, 1998 is unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
Common Dividend to be Retained Comprehensive Stockholders'
Stock Distributed Surplus Earnings Income Equity
---------- -------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $6,617,775 $ 2,845,643 $ 6,777,176 $ 4,908,739 $ 18,748 $ 21,168,081
Net income - - - 1,610,804 - 1,610,804
Issuance of shares of common stock
in connection with employee benefit
and dividend reinvestment plans 63,440 - 182,778 - - 246,218
Issuance of 10% common stock dividend 660,405 (2,845,643) 2,185,238 -
Cash dividend - - - (585,020) - (585,020)
10% stock dividend to be distributed - 3,699,159 - (3,699,159) - -
Other comprehensive income - - - - (791,698) (791,698)
----------- ------------ ------------ ------------ ---------- ------------
Balance at December 31, 1996 7,341,620 3,699,159 9,145,192 2,235,364 (772,950) 21,648,385
Net income - - - 2,117,723 - 2,117,723
Issuance of shares of common stock
in connection with employee benefit
and dividend reinvestment plans 66,855 - 221,615 - - 288,470
Issuance of 10% common stock dividend 734,135 (3,699,159) 2,496,059 461,483 - (7,482)
Cash dividend - - - (714,549) - (714,549)
10% stock dividend to be distributed - 4,033,720 - (4,033,720) - -
Other comprehensive income - - - - 835,741 835,741
----------- ------------ ------------ ------------ ---------- ------------
Balance at December 31, 1997 8,142,610 4,033,720 11,862,866 66,301 62,791 24,168,288
Net income for nine months - - - 2,343,161 - 2,343,161
Issuance of shares of common stock
in connection with employee benefit
and dividend reinvestment plans 57,440 - 174,719 - - 232,159
Retirement of outstanding shares (19,260) - (98,265) - - (117,525)
Issuance of 10% common stock dividend 814,235 (4,033,720) 3,419,485 (200,000) - -
Cash dividend - - - (638,819) - (638,819)
Other comprehensive income - - - - 130,963 130,963
=========== ============ ============ ============ ========== ============
Balance at September 30, 1998 $8,995,025 $ - $15,358,805 $ 1,570,643 $ 193,754 $26,118,227
=========== ============ ============ ============ ========== ============
</TABLE>
See the accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
Monocacy Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the nine and three month periods ended September 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
1998 1997 1998 1997
------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,343,161 $ 1,636,627 $ 655,787 $ 390,963
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 594,745 585,231 198,620 192,824
Provision for loan losses 206,400 1,060,000 100,000 400,000
Deferred income taxes (222,775) (512,645) (94,942) (194,052)
(Gains)losses on sales of securities available for sale (821,486) (9,189) (118,213) (11,739)
Proceeds from sales of loans originated 33,382,147 22,273,155 15,272,575 3,626,800
Disbursements for loans originated for (30,131,109) (16,822,307) (13,589,756) (6,028,539)
Gains on sale of loans (991,027) (877,310) (284,019) (246,061)
Increase(decrease) in unearned income,
net of origination costs 624,731 167,067 (68,707) 256,286
Gain on sale of other real estate owned - (5,483) - (5,483)
Writdeown of other real estate owned - 5,500 - -
Decrease in accrued interest receivable 342,849 53,035 264,020 203,658
Increase(decrease) in accrued interest and other
expenses payable (292,912) 1,187,239 (3,343) 697,365
Other, net (653,052) 131,919 (1,349,334) (56,006)
----------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities 4,381,672 8,872,839 982,688 (773,984)
----------- ------------- ------------- -------------
Cash flows from investing activities:
Net decrease in interest-bearing
deposits with other banks (1,618,473) (210,166) (2,477,899) (314,744)
Proceeds from maturities of investment securities - 12,693 - 4,397
Proceeds from sales of securities available for sale 90,616,225 6,008,036 44,579,169 4,624,487
Proceeds from maturities of securities available for sale 43,588,909 4,449,152 7,691,662 2,857,736
Purchases of securities available for sale (125,225,811) (34,787,956) (32,244,326) (20,936,875)
Sales of loan participations 3,145,509 - 1,101,509 -
Purchases of loan participations (2,791,475) (8,727,546) (352,500) (900,013)
Loan originations, net of principal repayments (7,702,938) (429,810) (5,572,895) (35,671)
Purchases of bank premises and equipment (491,169) - (170,360) -
Proceeds from real estate owned 69,851 518,864 - 499,979
-------------- ------------- ------------- -------------
Net cash provided by (used in)
investing activities (409,372) (33,166,733) 12,554,360 (14,200,704)
-------------- ------------- ------------- -------------
Cash flows from financing activities:
Net increase(decrease) in deposits 8,267,098 4,509,714 (1,932,425) 1,683,423
Proceeds from issuance of other borrowings 8,193,135 26,966,119 8,193,135 17,350,000
Repayments of other borrowings (9,846,650) (6,833,615) - (201,726)
Issuance of common stock 268,903 248,565 39,114 90,532
Dividends paid on common stock (638,819) (535,413) (215,881) (178,823)
-------------- ------------- ------------- -------------
Net cash provided by
financing activities 6,243,667 24,355,370 6,083,943 18,743,406
-------------- ------------- ------------- -------------
Net increase in cash and cash equivalents 10,215,967 61,476 19,620,991 3,768,718
Cash and cash equivalents at beginning of period 19,695,029 12,373,937 10,290,005 8,666,695
============== ============= ============= =============
Cash and cash equivalents at end of period $ 29,910,996 $ 12,435,413 $ 29,910,996 $ 12,435,413
============== ============= ============= =============
Supplemental disclosures of cash flow information:
Interest paid on deposits and borrowings $ 5,145,783 $ 6,777,241 $ 2,595,758 $ 2,416,268
Income taxes paid 962,500 671,601 1,050 31,767
Transfers of loans to other real estate owned 704,607 73,000 - 73,000
Securitization of residential mortgage loans - - -
Retirement of common stock 117,525 -
</TABLE>
See the accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
MONOCACY BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Information as of and for the nine months
ended September 30, 1998 is unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with the instructions for Form 10-QSB and, therefore, do not include
all information and notes necessary for a fair presentation of financial
condition, results of operations and cash flows in conformity with generally
accepted accounting principles. The consolidated financial statements should be
read in conjunction with the audited financial statements included in the
Monocacy Bancshares, Inc., (the "Company") 1997 Annual Report on Form 10-KSB.
The consolidated financial statements include the accounts of the Company's
subsidiary, Taneytown Bank & Trust Company (the "Bank). All significant
intercompany balances and transactions have been eliminated.
The consolidated financial statements as of September 30, 1998, and for the nine
month periods ended September 30, 1998 and 1997 are unaudited but include all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of financial position and results of
operations for those periods. The Consolidated Statements of Income for the nine
months ended September 30, 1998 are not necessarily indicative of the results
that will be achieved for the entire year.
NOTE 2 - EARNINGS PER COMMON SHARE
Basic earnings per common share are based upon the weighted average number of
common shares outstanding during the periods, giving retroactive effect to stock
dividends. Diluted earnings per share are based upon the weighted average number
of common shares outstanding during the periods, adjusted by any common stock
equivalents and giving retroactive effect to stock dividends.
NOTE 3 - 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 evaluations of the
collectibility of loans and prior loan loss experience. While management uses
available information to recognize losses on loans, future additions to the
allowance 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
judgments about information available to them at the time of their examinations.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (dollars in thousands)
FINANCIAL CONDITION
Total assets at September 30, 1998, were $303,205, a 4.47% or $12,965 increase
from December 31, 1997. The increase in assets from December 31, 1997 occurred
primarily in the loan portfolio and in liquid assets. Net loans at September 30,
1998 were $166,792, compared to $155,716 at December 31, 1997. The majority of
the loan increase was a result of growth in the commercial real estate,
residential construction and residential mortgage portfolios. Federal funds sold
increased $8,118, while securities available for sale decreased $7,959. During
the third quarter of 1998, the Company sold securities in order to restructure
the portfolio and some of the funds generated by these sales are still awaiting
re-investment at September 30, 1998.
Deposits increased $8,267 or 3.61% from December 31, 1997. The Company had
$34,005 outstanding in borrowings at September 30, 1998 compared to $35,658 at
December 31, 1997.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses was $2,615 at September 30, 1998, which was 1.54%
of loans. During the first nine months of 1998, Monocacy had a $206 provision
for loan losses and had net charge-offs of $130. At December 31, 1997, the
allowance for loan losses was $2,539 or 1.60% of loans.
Table 1, "Non-Performing Assets and Past Due Loans" for Monocacy shows total
non-performing assets of $1,440 at September 30, 1998, a decrease of 31.36% from
the December 31, 1997 level of $2,098. Based upon the latest quarterly analysis
of the loan portfolio, Management considers the allowance for loan losses to be
adequate to absorb any reasonable, foreseeable loan losses. The allowance for
loan losses is 391.47% of non-accrual loans and 181.60% of non-performing assets
at September 30, 1998.
Table 2, "Allowance for Loan Losses" shows the activity in the allowance for
loan losses for the nine month periods ended September 30, 1998 and 1997.
LIQUIDITY
Liquidity describes the ability of the Company to meet financial obligations,
including lending commitments and contingencies, that arise during the normal
course of business. Liquidity is primarily needed to meet the borrowing and
deposit withdrawal requirements of the customers of the Company, as well as for
loan funding and to meet current and planned expenditures.
The Company's liquidity is derived primarily from its deposit base and equity
capital. Core deposits, defined as all deposits except certificates of deposit
of $100 or more, totaled $229,975 or 96.98% of total deposits at September 30,
1998.
Liquidity is also provided through the Company's portfolios of cash and interest
bearing deposits in other banks, federal funds sold (purchased), loans held for
sale and securities available for sale. Such assets totaled $122,599 or 40.43%
of total assets at September 30, 1998.
In addition, the Bank has established lines of credit totaling $45,000 with the
Federal Home Loan Bank of Atlanta (the "FHLB") as an additional source of
liquidity. At September 30, 1998, the Bank had $33,717 outstanding with the FHLB
and had sufficient collateral necessary to borrow the full amount available
under the lines of credit.
CAPITAL RESOURCES
The Federal Reserve Board has adopted risk-based capital guidelines for bank
holding companies. As of September 30, 1998, the required minimum ratio of
capital to risk-adjusted assets (including certain off-balance sheet items, such
as standby letters of credit) was 8%. At least nine months of the total capital
must be comprised of common equity, retained earnings and a limited amount of
perpetual preferred stock, after subtracting goodwill and making certain other
adjustments ("Tier I capital").
The remainder may consist of perpetual debt, mandatory convertible debt
securities, a limited amount of subordinated debt, remaining preferred stock and
a limited amount of loan loss reserves ("Tier 2 capital"). The maximum amount of
supplementary capital elements that qualify as Tier 2 capital is limited to 100%
of Tier 1
6
<PAGE>
capital net of goodwill and certain other intangible assets. The Federal Reserve
Board also has adopted a minimum leverage ratio (Tier 1 capital to assets) of 3%
for bank holding companies that meet certain specified criteria, including
having the highest regulatory rating. The rule indicates that the minimum
leverage ratio should be at least 1.0% to 2.0% higher for holding companies that
do not have the highest rating or that are undertaking major expansion programs.
Failure to meet the capital guidelines could subject a banking institution to a
variety of enforcement remedies available to federal regulatory authorities.
The table below presents the Company's capital position relative to its various
minimum statutory and regulatory capital requirements at September 30, 1998.
<TABLE>
<CAPTION>
Minimum
Monocacy Bancshares, Inc Regulatory
September 30, Requirements
------------------------ ------------
<S> <C> <C>
Risk-based capital ratios:
Tier I capital 13.06% 4.00%
Total capital 14.31% 8.00%
Leverage capital ratio 7.73% 3.00%-5.00%
</TABLE>
RESULTS OF OPERATIONS
Net income was $2,343 for the first nine months of 1998, up from $1,637 or
43.13% for the same period last year. Net interest income was relatively stable
for the first nine months of 1998, as compared to the first nine months of 1997.
The provision for loan losses was $206 for the first nine months of 1998 and
$1,060 for the same period last year. The provision for loan losses was higher
in 1997 due to an intense credit effort in 1997 dealing with the recognition and
disposition of loan relationships that management had concluded no longer fit
our long term objectives. These relationships generally involved credit and
servicing issues. These initiatives have been concluded and, accordingly,
reserves have been decreased to a level that management believes is sufficient,
taking into consideration our improved credit culture.
Non-interest income increased by $956 or 44.78% for the first nine months of
1998 with higher deposit service charges, loan servicing fees and more gains
realized on the sales of securities. Mortgage-banking activities were more
profitable during the nine month period ended September 30, 1998, as evidenced
by a 11.6% increase in servicing fees and gains on sales of loans. This increase
is attributable to the improved performance of the Bank's mortgage banking
division, Classic Mortgage Company.
The Company realized net gains on sales of securities available for sale of $821
for the nine months ended September 30, 1998 as compared to gains of $9 for the
same period in 1997. These 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.
Non-interest expenses grew by $386 or 5.59% for the nine month period ended
September 30, 1998, with higher staff levels and related costs and the
additional investments in other resources made in late 1996 and early 1997.
Professional fees are up 17.66% primarily due to the expenses related to
workouts of credits and to the litigation noted in Note 13 to the Company's
Consolidated Financial Statements in the Company's 1997 Annual Report to
Stockholders.
Income taxes were $753 in the first nine months of 1998 as compared to $63 for
the first nine months of 1997. The increased effective tax rate is due primarily
to the decreased investment in tax-exempt municipal securities by the Company.
MERGER
The announced merger with F & M Bancorp is proceeding on schedule and the
transaction is expected to be completed by November 30, 1998. During the second
quarter, it was announced that the dividend reinvestment program has been
suspended until the merger is completed. Following the merger, Monocacy
shareholders will have an opportunity to enroll in the F & M Bancorp's Dividend
Reinvestment and Stock Purchase Plan.
7
<PAGE>
YEAR 2000
The following section contains forward-looking statements which involve risks
and uncertainties. The actual impact on the Company of the Year 2000 issue could
materially differ from that which is anticipated in the forward-looking
statements as a result of certain factors identified below.
The Year 2000 issue ("Y2K") is the result of computer programs being written
using two digits rather than four to define the applicable year. It is
anticipated that most systems may recognize a date using "00" as the year "1900"
rather than "2000." This could result in system failure, miscalculations, and
disruptions of normal business operations including, among other things, a
temporary inability to process transactions, send statements, or engage in
similar day to day business activities. The Company recognizes that the Year
2000 problem is more than just a systems issue. It is a business issue and is
being dealt with in that manner.
Monocacy is committed to ensuring that the Company's daily operations suffer
little or no impact from the century date change. The Company has applied due
diligence throughout the Y2K process, following the guidelines contained in the
series of Federal Financial Institutions Examinations Council's Interagency
Guidelines. The guidelines include, awareness, assessment, renovation or
remediation, testing and implementation.
Management has initiated a company-wide program to prepare the Company's
computer systems and applications for the Year 2000. The Company has developed a
comprehensive inventory of all mainframe and PC based applications, third-party
relationships and environmental programs.
The Company has acquired its mission-critical system from a highly regarded
third-party vendor. Thus, even though the Company does not have direct control
over the renovation process, it is monitoring the progress of its third-party
vendors to assess the status of their Y2K readiness efforts. However because
most computer systems are, by their very nature, interdependent, it is possible
that noncompliant third-party computers could impact the Company's computer
systems. The Company could be adversely affected by the Y2K problem if it or
unrelated parties fail to successfully address the problem. The Company has
taken steps to communicate with the unrelated parties with whom it deals to
coordinate Year 2000 compliance. Additionally, the Company is dependent on
external suppliers, such as wire transfer systems, telephone systems, electric
companies, and other utility companies for continuation of service. The Company
is also assessing the impact, if any, the century date change may have on its
credit risk. The Company is contacting its large commercial loan customers
concerning their level of readiness for Year 2000. The Company has initiated
formal communications with all of its vendors and large commercial customers to
determine the extent to which the Company is vulnerable to those third-parties'
failure to remedy their own Year 2000 issues. The Y2K Project Manager has
available each vendors' Y2K readiness efforts which includes their remediation
plan, renovation approach, testing methodologies and target dates.
In April 1998, the Company began converting its computer systems to be Year 2000
compliant. As of September 30, 1998, approximately 60% of the Company's systems
were compliant, with all systems expected to be compliant by April 1999.
The Company has developed a comprehensive Y2K testing plan. This plan includes:
* Prioritization of all mainframe and PC based applications,
third-party relationships, environmental and proprietary programs to
be tested.
* Description of testing environments established.
* Types of testing - limited unit testing, system testing and combined
system integration and acceptance testing.
* Test scripts.
* Testing resources.
* Testing validation and certification.
* Testing reporting.
8
<PAGE>
As of September 30, 1998, $20,000 has been expended as Year 2000 costs.
Management expects to spend a total of $200,000 for the entire project. The
estimate Year 2000 project costs include the costs and time associated with the
impact of third-parties' Year 2000 issues, and are based on presently available
information. The total cost of the project is being funded through operating
cash flows. The Company continues to evaluate appropriate courses of corrective
action, including replacement of certain systems whose associated costs would be
recorded as assets and amortized. Accordingly, the Company does not expect the
amounts required to be expensed over the next 15 months to have a material
effect on the financial position or results of operations. However, if
compliance is not achieved in a timely manner by the Company or any of its
significant related third-parties, be it a supplier of services or a customer,
the Y2K issue could possibly have a material effect on the Company's operations
and financial position.
The cost of the projects and the date on which the Company plans to complete
both Year 2000 modifications and systems conversions are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
At present, management believes it's progress in installing the Y2K complaint
upgrades to the third-party vendor mainframe and PC based computer applications
is on target. The Y2K computer problem creates risk for the Company from
unforseen problems in its own computer systems and from third-party vendors who
provide the majority of mainframe and PC based computer applications. Failure of
third-party systems relative to the Y2K issue could have a material impact on
the Company's ability to conduct business.
The Company is in the process of obtaining back-up service providers, working up
contingency plans and assessing the potential adverse risks to the Company. The
Company's contingency plans involved the use of manual labor to compensate for
the loss of certain automated computer systems and inconveniences caused by
disruption in command systems.
A contingency plan has been developed for mission-critical and required
mainframe and PC based applications, third-party relationships and environmental
programs. This contingency plan identifies scheduled completion dates, test
dates and trigger dates. The trigger date is the date the Company would
implement the contingency plan.
A detailed business resumption contingency plan is currently under development
with a target completion ate of December 31, 1998. The resumption contingency
plan calculates a risk factors for each core business line and/or product. Based
upon the calculated risk factor, such business resumption contingency plan will
be designed and tested.
As a bank holding company, the Company and its subsidiary, the Bank, are subject
to the regulations and oversight of various banking regulators. Their oversight
includes the provision of specific timetables, programs and guidance regarding
Year 2000 issues. Regulatory examination of the holding company and its
subsidiary's Year 2000 programs are conducted on a periodic basis.
9
<PAGE>
Table 1
Monocacy Bancshares, Inc.
Non-Performing Assets and Past Due Loans
<TABLE>
<CAPTION>
September 30, September 30, December 31,
1998 1997 1997
------------- ------------- ------------
<S> <C> <C> <C>
Non-accrual loans:
Real Estate
Commercial mortgage $ 347 $ 2,652 $ 1,330
Residential mortgage 221 425 319
Commercial 84 305 289
Consumer 16 27 23
--------- --------- ---------
Total non-accrual loans 668 3,409 1,961
Foreclosed properties 772 210 137
========= ========= =========
Total non-performing assets $ 1,440 $ 3,619 $ 2,098
========= ========= =========
Allowance for loan losses to:
Non-accrual loans 391.47% 89.47% 129.47%
========= ========= =========
Non-performing assets 181.60% 84.28% 121.02%
========= ========= =========
Accruing loans past due
90 days or more $ 226 $ 2,099 $ 760
========= ========= =========
Allowance for loan losses $ 2,615 $ 3,050 $ 2,539
========= ========= =========
</TABLE>
10
<PAGE>
Table 2
Monocacy Bancshares, Inc.
Allowance For Loan Losses
<TABLE>
<CAPTION>
Nine months ended September 30 Three months ended September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Allowance for loan losses
at beginning of period $ 2,539 $ 2,100 $ 2,611 $ 2,679
Provision for loan losses 206 1,060 100 400
Charge-offs (252) (128) (102) (41)
Recoveries 122 18 6 12
--------- --------- --------- ---------
Allowance for loan losses
at end of period $ 2,615 $ 3,050 $ 2,615 $ 3,050
========= ========= ========= =========
Allowance for loan losses
as a percentage of loans
receivable, net of
unearned income 1.54% 1.82%
======== =========
</TABLE>
11
<PAGE>
PART II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On September 28, 1998, the Board of Directors of the Company declared a
$.12 per share cash dividend to common stockholders of record on October
13, 1998, payable October 26, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.
-----------
11.0 Information used in the computation Page 14
of earnings per share
27.0 Financial Data Schedule Page 15
(b) Reports on Form 8-K
Press release on merger with F&M Bancorp*
*Exhibit incorporated by reference
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONOCACY BANCSHARES, INC.
Registrant
Principal Executive Officer:
By: Eric E. Glass
___________________________
Eric E. Glass, Chairman of the Board and Acting CEO
Date: November 4, 1998
Principal Financial and Accounting Officer:
By: Michael K. Walsch
___________________________
Michael K. Walsch, Executive Vice President
Date: November 4, 1998
13
EXHIBIT 11.0
MONOCACY BANCSHARES, INC. AND SUBSIDIARY
Information used in the computation
of net income per common share
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------- ------------------------
1998 1997 1998 1997
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Basic:
Net income $2,343,161 $1,636,627 $ 655,787 $ 390,963
========== ========== ========= ==========
Weighted average common shares outstanding 1,797,769 1,784,166 1,798,93 1,787,524
========== ========== ========= ==========
Net income per common share - basic $1.30 $.92 $.36 $.22
===== ==== ==== ====
Diluted:
Net income $2,343,161 $1,636,627 $ 655,787 $ 390,963
========== ========== ========== ==========
Weighted average common shares outstanding 1,797,769 1,784,166 1,798,935 1,787,524
Adjustment for common stock equivalents 49,154 28,959 45,216 29,627
---------- ---------- ---------- ----------
Weighted average common shares outstanding 1,846,923 1,813,125 1,844,151 1,817,151
========== ========== ========== ==========
Net income per common share - diluted $1.27 $.90 $.36 $.22
===== ==== ==== ====
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> Dec-31-1998 Dec-31-1998
<PERIOD-END> Sep-30-1998 Sep-30-1998
<CASH> 9,179 9,179
<INT-BEARING-DEPOSITS> 2,803 2,803
<FED-FUNDS-SOLD> 20,732 20,732
<TRADING-ASSETS> 2,680 2,680
<INVESTMENTS-HELD-FOR-SALE> 87,205 87,205
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 169,407 169,407
<ALLOWANCE> 2,615 2,615
<TOTAL-ASSETS> 303,205 303,205
<DEPOSITS> 237,137 237,137
<SHORT-TERM> 15,288 15,288
<LIABILITIES-OTHER> 5,946 5,946
<LONG-TERM> 18,717 18,717
0 0
0 0
<COMMON> 8,995 8,995
<OTHER-SE> 17,123 17,123
<TOTAL-LIABILITIES-AND-EQUITY> 303,205 303,205
<INTEREST-LOAN> 11,476 3,808
<INTEREST-INVEST> 4,725 1,534
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 16,201 5,342
<INTEREST-DEPOSIT> 7,198 2,443
<INTEREST-EXPENSE> 8,698 2,924
<INTEREST-INCOME-NET> 7,502 2,418
<LOAN-LOSSES> 206 100
<SECURITIES-GAINS> 821 118
<EXPENSE-OTHER> 7,291 2,309
<INCOME-PRETAX> 3,096 822
<INCOME-PRE-EXTRAORDINARY> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,343 656
<EPS-PRIMARY> 1.30 0.36
<EPS-DILUTED> 1.27 0.36
<YIELD-ACTUAL> 8.17 7.93
<LOANS-NON> 668 668
<LOANS-PAST> 226 226
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 2,539 2,611
<CHARGE-OFFS> 252 102
<RECOVERIES> 122 6
<ALLOWANCE-CLOSE> 2,615 2,615
<ALLOWANCE-DOMESTIC> 2,373 2,373
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 242 242
</TABLE>
