-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MRxeMYUaHrGz2GTvgNOoFYRXT/GdRXFvMKnqUaU3ZRIsE+l/C2/STBfGE8VyPiHU 8q11mLov29f6+I1wMnbEhQ== 0001047469-98-012757.txt : 19980401 0001047469-98-012757.hdr.sgml : 19980401 ACCESSION NUMBER: 0001047469-98-012757 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MASON DIXON BANCSHARES INC/MD CENTRAL INDEX KEY: 0000879558 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 521764929 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20516 FILM NUMBER: 98580608 BUSINESS ADDRESS: STREET 1: 45 WEST MAIN ST CITY: WESTMINSTER STATE: MD ZIP: 21157 BUSINESS PHONE: 4108573401 MAIL ADDRESS: STREET 1: 45 WEST MAIN STREET CITY: WESTMINSTER STATE: MD ZIP: 21157 10-K 1 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997. Commission file number: 0-20516 MASON-DIXON BANCSHARES, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Maryland 52-1764929 - --------------------------------- ------------------------------------ (State of other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 45 West Main Street, Westminster, Maryland 21157 - ------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: 410-857-3401 Securities registered pursuant to section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Common Stock, Par Value $1.00 per share --------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. |X| The aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 28, 1998 was $169,312,320. As of February 28, 1998, Mason-Dixon Bancshares, Inc. had 5,082,070 shares of common stock outstanding with a par value of $1.00. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Mason-Dixon Bancshares, Inc. Annual Report to Stockholders for the year ended December 31, 1997 are incorporated by reference into Parts II and IV. Portions of the Proxy Statement of the annual stockholders meeting to be held April 18, 1998 are incorporated by reference in Part III. Table of Contents: Page - ------------------ ---- Part I-Business 3-9 Distribution of Assets, Liabilities and Stockholders' Equity 10 Interest Rates and Interest Differential 11 Investment Portfolio 12 Loan Portfolio 13 Non-Performing Loans 14 Summary of Loss Experience 14 Allocation of Allowance for Credit Losses 15 Rate Sensitivity Analysis 16 Deposits 17 Short-Term Borrowings 18 Return on Equity and Assets 19 Properties 20-22 Legal Proceedings 23 Submission of Matters to Vote of Securities Holders 23 Executive Officers 24-25 Parts II and III 26 Part IV and Index of Exhibits 27 Signatures 28 2 Part I Item 1. Business General Mason-Dixon Bancshares, Inc. ("Mason-Dixon") is a registered bank holding company which was incorporated in 1991 in the State of Maryland. Mason-Dixon is a legal entity, separate and distinct from its two principal operating subsidiaries, Carroll County Bank and Trust Company ("Carroll County Bank") and Bank of Maryland. Mason-Dixon's major activity since its inception has been to provide advisory services and coordinate the general policies of its subsidiaries. Prior to 1995, Mason-Dixon consisted of one bank subsidiary, Carroll County Bank. On July 17, 1995, Mason-Dixon acquired all of the outstanding stock of Bank Maryland Corp located in Towson, Maryland for a purchase price of $26,800,000. This purchase price included 915,868 shares of Mason-Dixon common stock and $13,100,000 cash. As a result of the acquisition, Bank of Maryland, Bank Maryland Corp's principal subsidiary, became a wholly-owned subsidiary of Mason-Dixon. The acquisition was accounted for as a purchase; therefore, the results of operations of Bank of Maryland were included in the consolidated statement of income from the date of acquisition. Assets and liabilities of Bank of Maryland were adjusted to market value as of the date of acquisition and were included in the consolidated statement of condition subsequent to the acquisition. The purchase price in excess of the net assets acquired was considered goodwill and is being amortized over 15 years. Historical financial data was not restated to include Bank of Maryland's historical data. Carroll County Bank and Trust Company The parent company's principal subsidiary is Carroll County Bank and Trust Company, which accounts for approximately 71% of Mason-Dixon's consolidated assets at December 31, 1997. Carroll County Bank, a Maryland state-chartered bank since 1962, is a commercial bank and trust company with eleven (11) offices in Carroll County, Maryland, and one banking office in Howard County, Maryland. Carroll County Bank operates two wholly-owned subsidiaries -- Carrollco Insurance, Inc. and Skylight Investment Corporation. Carrollco Insurance, Inc., headquartered in Manchester, Maryland, is an insurance agency primarily engaged in the sale of annuities. At December 31, 1997, Carrollco Insurance, Inc. had total assets of $168 thousand. Skylight Investment Corporation, headquartered in Wilmington, Delaware, is an investment company whose sole activity is to manage and maintain the passive investments of its parent. Skylight Investment Corporation had total assets of $89 million at December 31, 1997. At December 31, 1997, Carroll County Bank employed 329 individuals. Full-time equivalent employees were 298 as of year end. Bank of Maryland Bank of Maryland, acquired in 1995, accounts for approximately 29% of Mason-Dixon's consolidated assets at December 31, 1997. Bank of Maryland was chartered as a Maryland state bank in 1990. It is a commercial bank with ten (10) offices located throughout central Maryland and Maryland's Eastern Shore. At December 31, 1997, Bank of Maryland employed 116 individuals. Full-time equivalent employees were 111 as of year end. Services Offered Through its bank subsidiaries, Mason-Dixon engages in commercial, savings, and trust business, including the receiving of demand and time deposits and the making of loans to individuals, associations, partnerships, and corporations. Real estate financing comprises residential first and second mortgages, construction and land development, home equity lines of credit, and commercial mortgages. Consumer lending is direct to individuals 3 on both a secured and unsecured basis. Commercial loans include lines of credit and term and demand loans for the purchase of equipment, inventory, and accounts receivable financing. Mason-Dixon offers traditional demand deposit accounts for individuals, associations, partnerships, governments, and corporations. Also offered are NOW, savings, and money market accounts, as well as certificates of deposit and Individual Retirement Accounts. Deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). Carroll County Bank provides 24-hour access to customer information through its XpressLine automated voice response system, and both bank subsidiaries currently operate 24-hour automated teller machines. Safe deposit facilities are available at most locations, as are after hour depository services. Customers may also obtain travelers checks, money orders, and cashier's and treasurer's checks at all locations. Additionally, Carroll County Bank provides a full range of trust services to individuals, corporations, and non-profit organizations under the name of Mason-Dixon Trust Company. Services to individuals include investment management, living and testamentary trusts, estate management, and custody of securities. Corporate financial services and employee benefit plans are provided to businesses. Services provided to non-profit organizations include management of endowment trusts. Carroll County Bank also originates and services real estate mortgage and construction loans as a principal and as an agent under the name of Mason-Dixon Bancshares Mortgage Company, and sells annuities and mutual funds under the name of Mason-Dixon Investment Services. The bank subsidiaries are not dependent upon a single customer or small group of customers, the loss of which would have a material adverse effect on Mason-Dixon. Carroll County Bank and Bank of Maryland are not dependent on a single product or small number of products, and do not experience any significant fluctuations in loan or deposit activity which are seasonal in nature. Competition and Other Market Factors The banking and financial service businesses are intensely competitive. Mason-Dixon competes with other commercial banks, savings banks, thrift institutions, credit unions, finance companies, mortgage companies, and other investment advisory companies located in Maryland. Carroll County Bank's primary market is Carroll County, Maryland, which is served by all of the various financial service companies listed above. Its predominant commercial banking competitors are locally owned community banks, followed by regional banks. Through its eleven (11) offices in Carroll County, Carroll County Bank services the financial needs of communities throughout its market. It serves primarily small to medium size businesses and the financial needs of individuals. Carroll County Bank's market share (as measured by the percentage of insured deposits held in its primary market) has consistently approximated 25% for the last several years. It is by far the market leader, having nearly twice the market share of its nearest competitor. In order to maintain this market share, Carroll County Bank relies on a high level of responsible, personalized service, and affordable technology enhancements to keep up with customer needs for information and services around the clock. Advertising consists of television, radio, print media, and direct mail solicitations which emphasize specific product promotions, community orientation, and convenience. Bank of Maryland's primary market is central Maryland and Maryland's Eastern Shore, where it mainly serves the needs of small and medium sized businesses and professional organizations. Its predominant competitors are large regional banks, which are able to finance extensive advertising campaigns, make large commercial loans, and allocate their assets among investments of the highest yield in geographic areas with the greatest demand. Many of these major commercial banks offer services which are not directly offered by Bank of Maryland. In order to compete with the other financial institutions in its primary service areas, Bank of Maryland relies upon personal contacts by officers, directors, Boards of Advisors, and employees, as well as extended hours and highly personalized services. Bank of Maryland's promotional activities emphasize the advantages of dealing with a locally headquartered branch attuned to the particular needs of the community. 4 Supervision and Regulation Mason-Dixon is a bank holding company subject to supervision and regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the "BHCA"). In general, the BHCA and regulations promulgated by the Federal Reserve Board limit the business of bank holding companies to owning or controlling banks and engaging in such other activities as the Federal Reserve Board may determine to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. With certain exceptions, the BHCA prohibits bank holding companies from acquiring direct or indirect ownership or control of more than 5% of any class of voting shares in any company, including any bank, without the prior approval of the Federal Reserve Board. Mason-Dixon's two-bank subsidiaries are Maryland state-chartered banks regulated by the Division of Financial Regulations and the Federal Deposit Insurance Corporation (the "FDIC"). Various consumer laws and regulations also affect the operations of the subsidiaries. Holding Company Structure Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to its subsidiary banks and to make capital injections into a troubled subsidiary bank, and the Federal Reserve Board may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank when required. A required capital injection may be called for at a time when the holding company does not have the resources to provide it. Any capital loans by a holding company to its subsidiary bank would be subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In addition, under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), depository institutions insured by the FDIC can be held liable for any losses incurred by, or reasonably anticipated to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. Accordingly, if an insured subsidiary of Mason-Dixon causes a loss to the FDIC, other insured subsidiaries of Mason-Dixon could be required to compensate the FDIC by reimbursing it for the estimated amount of such loss. Capital Requirements Bank holding companies are required to comply with risk-based capital guidelines established by the Federal Reserve Board. The guidelines establish a framework that is intended to make regulatory capital requirements more sensitive to differences in risk profiles among banking organizations and to take off-balance sheet exposures into explicit account in assessing capital adequacy. The risk-based ratios are determined by allocating assets and specified off-balance sheet commitments into four risk-weight categories, with higher levels of capital being required for categories perceived as representing greater risk. Generally, under the applicable guidelines, a banking organization's capital is divided into two tiers. "Tier 1", or core capital, includes common equity, perpetual preferred stock (excluding auction rate issues), and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions. "Tier 2", or supplementary capital, includes, among other things, limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations and less required deductions. "Total capital" is the sum of Tier 1 and Tier 2 capital. The Tier 1 component must comprise at least 50% of qualifying total capital. Banking organizations that are subject to the guidelines are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at least 4% and a ratio of total capital to risk-weighted assets of at least 8%. The appropriate regulatory authority may set higher capital requirements when an organization's particular circumstances warrant. The Federal Reserve Board and the FDIC have also adopted leverage capital guidelines to which Mason-Dixon and its bank subsidiaries are subject. The guidelines provide for a minimum leverage ratio (Tier 1 capital 5 to adjusted total average assets) of 3% for financial institutions that have the highest regulatory examination ratings and are not experiencing or anticipating significant growth. Financial institutions not meeting these criteria are required to maintain leverage ratios of at least one to two percentage points higher. Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions, including limitations on its ability to pay dividends, the issuance by the applicable regulatory authority of a capital directive to increase capital, and, in the case of depository institutions, the termination of deposit insurance by the FDIC, as well as to the measures described under "Federal Deposit Insurance Corporation Improvement Act of 1991", as applicable to undercapitalized institutions. The following table sets forth the capital ratios of Mason-Dixon and its bank subsidiaries as of December 31, 1997:
Carroll County Bank of Regulatory Mason-Dixon Bank & Trust Maryland Minimum --------------- --------------- ------------ ------------- Tier 1 risk-based capital ratio 14.74% 14.68% 9.35% 4.00% Total risk-based capital ratio 15.64% 15.44% 10.51% 8.00% Leverage ratio 8.74% 7.48% 7.71% 3.00%
Based upon the foregoing capital ratios, Mason-Dixon and its bank subsidiaries are considered "well capitalized" within the meaning of the regulations adopted by the Federal Reserve Board and the FDIC. Federal Deposit Insurance Corporation Improvement Act of 1991 In December, 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made significant revisions to several other federal banking statutes. FDICIA provides for, among other things, (i) a recapitalization of the Bank Insurance Fund of the FDIC (the "BIF") by increasing the FDIC's borrowing authority and providing for adjustments in its assessment rates; (ii) annual on-site examinations of federally-insured depository institutions by banking regulators; (iii) publicly available annual financial condition and management reports for financial institutions, including audits by independent accountants; (iv) the establishment of uniform accounting standards by federal banking agencies; and (v) the establishment of a "prompt corrective action" system of regulatory supervision and intervention, based on capitalization levels, with more scrutiny and restrictions placed on depository institutions with lower levels of capital. A central feature of FDICIA is the requirement that the federal banking agencies take "prompt corrective action" with respect to depository institutions that do not meet minimum capital requirements. Pursuant to FDICIA, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized", and "critically undercapitalized." A depository institution is "well capitalized" if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater, and (iv) is not subject to any order, regulatory agreement, or written directive to meet and maintain a specific capital level for any capital measure. An "adequately capitalized" institution is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater, and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a bank with a composite CAMEL rating of 1). FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a cash dividend) or paying any management fees to its holding company if the depository institution would 6 thereafter be undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. For a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee (subject to certain limitations) that the institution will comply with such capital restoration plan. Significantly undercapitalized depository institutions may be subject to a number of other requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized and requirements to reduce total assets and stop accepting deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator, generally within 90 days of the date such institution is determined to be critically undercapitalized. FDICIA provides the federal banking agencies with significantly expanded powers to take enforcement action against institutions which fail to comply with capital or other standards. Such action may include the termination of deposit insurance by the FDIC or the appointment of a receiver or conservator for the institution. FDICIA also limits the circumstances under which the FDIC is permitted to provide financial assistance to an insured institution before appointment of a conservator or receiver. Interstate Banking Legislation The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 was enacted into law on September 29, 1994. The law provides that, among other things, substantially all state law barriers to the acquisition of banks by out-of-state bank holding companies are eliminated effective September 29, 1995. The law will also permit interstate branching by banks effective as of June 1, 1997, subject to the ability of states to opt-out completely or to set an earlier effective date. Mason-Dixon anticipates that the effect of the new law will be to increase competition within the markets in which Mason-Dixon now operates, although Mason-Dixon cannot predict the extent to which competition will increase in such markets or the timing of such increase. Effects of Monetary Policy Mason-Dixon and its bank subsidiaries are affected by the ongoing and changing monetary policy set forth by the Federal Reserve Board. Through its powers, the Federal Reserve Board can influence the supply of bank credit to affect the level of economic activity. Changes in the discount rate and reserve requirements are among the instruments used to influence the market. The monetary policies of the Federal Reserve have in the past and will in the future affect the operating results of financial institutions, including Mason-Dixon and its bank subsidiaries. Recent Developments Loan Company Consumer Finance. On February 11, 1998, the Company acquired substantially all of the assets and assumed certain liabilities of the Rose Shanis Companies, which were engaged in the consumer finance business. The consumer finance business is now conducted by the Company through two wholly-owned limited liability company subsidiaries, Rose Shanis Loans, LLC and Bay Insurance, LLC. (As used herein, the "Rose Shanis Companies" refers to the business and entities prior to the acquisition, and "Rose Shanis" or "Rose Shanis Loans, LLC" refers to the consumer finance business being conducted by the Company after the acquisition). Assets acquired in the acquisition approximated $46,000,000. The business conducted by the Rose Shanis Companies was established 66 years ago in Baltimore by Rose Shanis Glick; the business was family owned and managed until acquired by the Company. The Rose Shanis Companies established a reputation as a successful and dependable personal lender servicing second and even third generations of borrowers. Norman Glick, the founder's son and one of the owners of the Rose Shanis Companies, has continued on the management team of Rose Shanis Loans, LLC. The consumer finance business is now conducted by the Company through twelve branches located in the greater Baltimore area and in Annapolis, Bel Air, and Easton, Maryland. Bay Insurance, LLC is engaged in the business of selling insurance products that are directly related to extensions of credit by Rose Shanis Loans, LLC. 7 The acquisition of the Rose Shanis Companies' business furthered the Company's strategy to expand its business by acquiring banks and other financial service providers in its market area, to provide a range of financial services offering the opportunity for larger net interest margins and a broader customer base. Products and Services. Rose Shanis Loans, LLC offers consumer loans, sales finance, second mortgage loans, and various related products through two main lines of business: the purchase of credit sales contracts, and lending cash to consumers directly through its branches. The credit sale contracts represent financed sales of a range of products including health club memberships, household furniture and appliances, used automobiles and boats. These contracts are purchased through a wide variety of consumer dealers, both national and local, with which Rose Shanis has relationships. Sales from furniture and automobile dealers are the primary sources of the Rose Shanis installment sales portfolio. Credit sale contracts have a maximum term of 60 months, and in some cases, a dealer reserve is held to cover potentially doubtful accounts. The contracts either include precomputed finance charges or are interest-bearing. The direct cash loans have historically represented approximately half of the loan volume for the Rose Shanis Companies. A borrower can obtain cash immediately by visiting a branch and applying for a loan in person. Collateral is taken if available, usually in the form of an automobile or second lien on personal property. If the application is approved, a check will be drawn on-site and delivered to the borrower. Most of the direct cash loans have maximum terms of 60 months. A major portion of the loans are renewed in less than 12 months. Interest-bearing real estate secured loans have a maximum term of 60 months. Rose Shanis also generates loans through direct mail marketing, targeting present, former and potential customers who have used other sources of consumer credit. As of December 31, 1997, direct cash loans composed approximately 50% of the receivables portfolio. The purchase of the business of Rose Shanis Companies increased the Company's presence in the Central Maryland area and further diversifies the Company's lending activities. The acquisition and addition of consumer finance activities will introduce changes to the Company's loan mix, net interest margin, and asset quality measurements. Consumer finance companies differ from banks in several respects. Due to the nature of lending to individuals with limited or impaired credit histories, delinquencies and write-off levels are generally higher than those experienced in the banking industry. In addition, consumer finance companies typically place a lesser reliance on collateral as a repayment source. To mitigate these characteristics, rates charged on loans by consumer finance companies are typically higher than rates charged by banks, which results in higher interest income and to compensate for increased risk. With the addition of the consumer finance business, the Company as a whole is likely to experience higher net interest margins, greater balance in its loan mix, higher delinquencies, higher net charge-offs and increased levels of reserves. Compared to industry averages for consumer finance companies, Rose Shanis Companies has historically had higher delinquency, lower charge-offs, and higher reserve levels. These results were influenced by a charge-off policy based on delinquency of 270 days on a contractual basis, compared to a more common industry practice of 180 days. This policy resulted in more loans being characterized as delinquent and fewer loans charged-off. Rose Shanis Companies historically carried significantly higher levels of reserves which were available to absorb potential losses of delinquent loans. While the acquisition of the consumer finance business will likely have some negative effect on certain asset quality measurements, higher reserves, and significant net interest margins are available to mitigate the increased credit risk. Overall, the Company expects the acquisition to have a positive impact on its performance. Branches Sold The Company is pursuing a banking strategy of deeper penetration in its core market, Central Maryland. The Company believes that the Central Maryland market is a growth area with significant potential for banking products and services. As part of this business strategy, on March 12, 1998, the Bank of Maryland entered into an agreement to sell its five branches on Maryland's Eastern Shore. Under the terms of the agreement, Farmers Bank of Maryland and Atlantic Bank will acquire approximately $87 million in deposits, $59 million in loans, and 41 employees. The sale of the Eastern Shore branches will allow the Company to focus on its banking strategy and devote its resources to the Central Maryland market. 8 The Company still maintains a presence on Maryland's Eastern Shore through a consumer finance branch of Rose Shanis Loans LLC, and a branch of Mason-Dixon Bancshares Mortgage Company, a division of Carroll County Bank and Trust Company. The Company will continue to focus on the development of specialty lines of business such as mortgage lending and consumer finance in markets which may differ from markets pursued for traditional banking. 9 Distribution of Assets, Liabilities, and Stockholders' Equity The following table sets forth the amounts of the Corporation's daily average assets, liabilities, and stockholders' equity for the period indicated, the amounts of interest earned and the interest paid thereon, the average interest rate earned for each type of earning asset and the average rate paid for each type of interest bearing liability. Interest earned on non-accruing loans is included in the interest earned only when collected. The average balances on non-accruing loans are included in the average balances on loans.
(dollars in thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate - --------------------------------------------------------------------------------------------------------------------------------- Earning assets Loans $ 432,581 $ 39,175 9.06% $ 365,778 $ 34,122 9.33% $ 260,511 $ 25,133 9.65% Interest bearing deposits in banks 634 23 3.63% 210 16 7.62% 149 12 8.05% Federal funds sold 19,725 1,110 5.63% 21,826 1,176 5.39% 13,144 834 6.35% Investments: Mortgage-backed securities 249,611 17,579 7.04% 221,624 15,315 6.91% 208,302 15,004 7.20% Taxable 77,934 5,063 6.50% 66,504 4,353 6.55% 35,780 2,420 6.76% Tax-exempt 84,223 7,033 8.35% 72,394 6,029 8.33% 63,766 5,332 8.36% ------------------------------ ------------------------------ ---------------------------- Total earning assets 864,708 69,983 8.09% 748,336 61,011 8.15% 581,652 48,735 8.38% --------- --------- --------- Non-interest earning assets Cash and due from banks 20,294 19,701 13,580 Premises and equipment 15,427 15,552 12,042 Other assets 24,688 26,313 16,686 Allowance for credit losses (5,320) (4,827) (3,822) --------- --------- --------- Total assets $ 919,797 $ 805,075 $ 620,138 ========= ========= ========= Interest bearing liabilities Demand deposits $ 58,169 1,336 2.30% $ 58,676 1,514 2.58% $ 43,103 1,115 2.59% Savings deposits 184,972 5,964 3.22% 182,857 5,628 3.08% 158,228 4,972 3.14% Time deposits 302,205 16,898 5.59% 286,557 15,860 5.53% 200,883 11,568 5.76% Borrowings 204,608 11,977 5.85% 115,919 6,242 5.38% 93,351 5,416 5.80% ------------------------------ ------------------------------ ---------------------------- Total interest bearing liabilities 749,954 36,175 4.82% 644,009 29,244 4.54% 495,565 23,071 4.66% --------- --------- --------- Non-interest bearing liabilities Demand deposits 89,488 83,825 63,072 Other 7,858 8,471 8,183 Stockholders' equity 72,497 68,770 53,318 --------- --------- --------- Total liabilities and stockholders' equity $ 919,797 $ 805,075 $ 620,138 ========= ========= ========= Net interest spread $ 33,808 3.27% $ 31,767 3.61% $ 25,664 3.72% ========= ========= ========= Net interest margin 3.91% 4.25% 4.41%
Presented on a tax equivalent basis using the statutory Federal income tax rate of 35%. Non-accruing loans are included in average loan balances. 10 Interest Rates and Interest Differential The following table sets forth for the periods indicated a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates. Interest earned on non-accruing loans is included in the interest earned on loans only when collected (i.e. on a cash basis), but the average balances of such loans are included in the average balance of loans.
(dollars in thousands) 1997 compared to 1996 1996 compared to 1995 1995 compared to 1994 - ----------------------------------------------------------------------------------------------------------------------- Increase Increase Increase (decrease) (decrease) (decrease) due to due to due to ----------------------------- ---------------------------- ----------------------------- Volume Rate Total Volume Rate Total Volume Rate Total - ------------------------------------------------------------------------------------------------------------------------ Interest income Loans $ 6,232 $(1,179) $ 5,053 $10,156 $(1,167) $ 8,989 $ 5,673 $ 2,673 $ 8,346 Investments: Mortgage-backed securities 1,934 330 2,264 960 (649) 311 631 826 1,457 Taxable 748 (38) 710 2,078 (145) 1,933 1,187 (257) 930 Tax-exempt 985 19 1,004 721 (24) 697 749 (60) 689 Other earning assets (81) 22 (59) 556 (210) 346 480 285 765 ----------------------------- ---------------------------- ----------------------------- Total interest income 9,818 (846) 8,972 14,471 (2,195) 12,276 8,720 3,467 12,187 Interest expense Interest bearing demand deposits (13) (165) (178) 403 (4) 399 85 (6) 79 Savings deposits 65 271 336 774 (118) 656 (10) 155 145 Time deposits 866 172 1,038 4,934 (642) 4,292 3,280 1,984 5,264 Borrowings 4,776 959 5,735 1,309 (483) 826 993 1,198 2,191 ----------------------------- ---------------------------- ----------------------------- Total interest expense 5,694 1,237 6,931 7,420 (1,247) 6,173 4,348 3,331 7,679 ----------------------------- ---------------------------- ----------------------------- Net interest income $ 4,124 $(2,083) $ 2,041 $ 7,051 $ (948) $ 6,103 $ 4,372 $ 136 $ 4,508 ============================= ============================ =============================
Tax equivalent adjustments of $2,548,000 for 1997, $2,215,000 for 1996, and $1,998,000 for 1995 are included in the calculation of the tax-exempt rate variances. Tax equivalent adjustments of $164,000 for 1997, $165,000 for 1996, and $193,000 for 1995 are included in the calculation of the loan rate variances. 11 Investment Portfolio The following table sets forth the composition of investment securities at the dates indicated:
December 31 1997 1996 1995 --------------------- ---------------------- ------------------------ Available Held To Available Held To Available Held To (dollars in thousands) For Sale Maturity For Sale Maturity For Sale Maturity --------------------- ---------------------- ------------------------ U.S. Treasury and other U.S. Government agencies and corporations $50,318 $40,447 $9,563 $45,068 $21,205 $40,196 Mortgage-backed securities 186,947 77,793 150,829 70,106 149,940 58,916 States and political subdivisions -- 84,490 -- 78,070 -- 67,265 Common and preferred stocks 12,590 1,315 4,895 -- 2,990 -- -------- -------- -------- -------- -------- -------- Total Investment Securities $249,855 $204,045 $165,287 $193,244 $174,135 $166,377 ======== ======== ======== ======== ======== ========
There were no state, county, or municipal securities whose book value, as to any issuer, exceeded 10% of stockholders' equity at December 31, 1997, 1996, or 1995. The following schedule sets forth the maturities of investment securities at December 31, 1997 and the weighted average yields of such securities. Yields of tax-exempt securities have been computed on a tax equivalent basis using a tax rate of 35%. Available for sale securities yields are based on fair value; held to maturity yields are based on amortized cost.
(dollars in thousands) Maturity Distribution - Available For Sale Portfolio ------------------------------------------------------------------------------ Within After One But After Five But After One Year Within Five Years Within Ten Years Ten Years -------------- ----------------- ---------------- --------------- Amount Yield Amount Yield Amount Yield Amount Yield -------------- ----------------- ---------------- --------------- U.S. Treasury and other U.S. Government agencies $ 5,434 4.42 $35,058 6.42 $ 9,826 6.59 $ -- -- States and political subdivisions -- -- -- -- -- -- -- -- Mortgage-backed securities -- -- -- -- 3,124 8.00 183,823 6.79 Equity securities 12,590 4.47 -- -- -- -- -- -- ------- ------- ------- -------- At Fair Value $18,024 4.45 $35,058 6.42 $12,950 6.93 $183,823 6.79 ------- ------- ------- -------- At Amortized Cost $17,391 $34,997 $12,842 $181,123 ------- ------- ------- --------
(dollars in thousands) Maturity Distribution - Held To Maturity Portfolio ------------------------------------------------------------------------------ Within After One But After Five But After One Year Within Five Years Within Ten Years Ten Years -------------- ----------------- ---------------- --------------- Amount Yield Amount Yield Amount Yield Amount Yield -------------- ----------------- ---------------- --------------- U.S. Treasury and other U.S. Government agencies $ 9,027 5.44 $18,033 6.33 $13,388 6.93 $ -- -- States and political subdivisions 3,507 9.35 6,854 9.25 34,802 8.15 39,327 8.20 Mortgage-backed securities -- -- 589 8.03 1,869 8.72 75,334 6.65 Other debt securities -- -- -- -- -- -- 1,315 7.95 ------- ------- ------- -------- At Amortized Cost $12,534 6.53 $25,476 7.16 $50,059 7.85 $115,976 7.19 ------- ------- ------- -------- At Fair Value $12,611 $25,919 $50,802 $117,183 ------- ------- ------- --------
The maturities listed for mortgage-backed securities are based on final maturity dates, no estimates have been included for any normal principal repayment or any prepayment of principal of these securities. 12 Loan Portfolio The following table shows the Company's loan distribution at the end of each of the last five years:
December 31 (dollars in thousands) 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Construction and land development $ 31,427 $ 24,202 $ 17,286 $ 12,543 $ 13,095 Residential real estate - mortgage 186,978 164,656 137,372 100,941 113,469 Commercial real estate - mortgage 136,194 111,724 93,504 56,280 42,011 Commercial 88,669 77,579 88,531 15,447 13,859 Consumer 17,464 20,575 17,399 11,249 1,746 -------- -------- -------- -------- -------- Total Loans 460,732 398,736 354,092 196,460 184,180 Unearned income on loans (341) (572) (1,142) (948) (1,414) -------- -------- -------- -------- -------- Loans (net of unearned income) 460,391 $398,164 $352,950 $195,512 $182,766 ======== ======== ======== ======== ========
The following table shows the amounts of loans outstanding as of December 31, 1997 which, based on the remaining scheduled repayments of principal, are due in the periods indicated. Also included is the sensitivity of loans to interest rate fluctuations at December 31, 1997 for loans due after one year.
Maturity Distribution ----------------------------------------- Within After 1 But After (dollars in thousands) 1 Year Within 5 Yrs 5 Yrs Total ------- -------- ------- -------- Construction and land development $ 12,504 $ 15,248 $ 3,675 $ 31,427 Residential real estate - mortgage 39,600 71,997 75,381 186,978 Commercial real estate - mortgage 34,465 97,739 28,714 160,918 Commercial 17,002 36,470 10,473 63,945 Consumer 10,893 6,405 166 17,464 ------- -------- ------- -------- Total loans 114,464 227,859 118,409 460,732 Unearned income on loans (points) (341) 0 0 (341) ------- -------- ------- -------- Loans (net of unearned income) $114,123 $227,859 $118,409 $460,391 ======= ======== ======= ========
Sensitivity of loans due after one year to changes in interest rates: Loans at predetermined interest rates $ 182,229 Loans at floating or adjustable rates 164,039 --------- Total $ 346,268 ========= 13 Risk Elements Non-Performing Loans The following table presents information concerning the aggregate amount of risk elements for the past five years. Risk elements comprise 1) loans accounted for on a non-accrual basis, 2) loans contractually past due ninety days or more as to interest or principal payments, and 3) other loans whose terms have been negotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower.
(dollars in thousands) December 31 1997 1996 1995 1994 1993 ------ ------ ------ ---- ------ Loans accounted for on a non-accrual basis $3,189 $2,821 $1,560 $211 $1,015 Accruing loans past due 90 days or more 597 214 277 62 270 Loans whose terms have been negotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower -- -- -- -- -- ------ ------ ------ ---- ------ Totals $3,786 $3,035 $1,837 $273 $1,285 ------ ------ ------ ---- ------ Interest income which would have been recorded at original term $ 87 $ 414 $ 127 $ 14 $ 57 ------ ------ ------ ---- ------
Summary of Loss Experience The following table summarizes the Company's loan loss experience for the five years ended December 31:
(dollars in thousands) 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Daily Average (net of unearned income) $432,581 $365,778 $260,511 $194,711 $200,121 Balance of allowance for credit losses at beginning of the year $ 5,167 $ 4,729 $ 2,627 $ 2,686 $ 2,411 Allowance applicable to loans of purchased company -- -- 2,355 -- -- Loans charged-off: Construction and Land Development -- -- -- -- -- Residential Real Estate - Mortgage 73 117 40 78 42 Commercial Real Estate - Mortgage 33 106 -- -- -- Commercial 197 336 314 25 -- Consumer 274 177 56 132 247 -------- -------- -------- -------- -------- Total charged-offs 577 736 410 235 289 Recoveries of loans previously charged-off: Construction and Land Development -- -- -- -- -- Residential Real Estate - Mortgage 2 4 7 2 18 Commercial Real Estate - Mortgage 27 116 -- -- -- Commercial 343 144 43 1 2 Consumer 131 74 107 173 215 -------- -------- -------- -------- -------- Total recoveries 503 338 157 176 235 Net loans charged-off 74 398 253 59 54 Additions to allowance charged to expense 138 836 -- -- 329 Balance of allowance for credit losses at end of the year $ 5,231 $ 5,167 $ 4,729 $ 2,627 $ 2,686 Ratio of net charge-offs during period to average loans outstanding 0.02% 0.11% 0.10% 0.03% 0.03%
14 Allocation of Allowance for Credit Losses The allowance for credit losses is based on management's evaluation of historical and anticipated net charge-offs, analysis of non-performing loans, prevailing and anticipated economic conditions, and bank industry standards. In the opinion of management, the allowance is considered adequate based upon its evaluation of the various factors affecting the collectibility of loans. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs.
December 31 (dollars in thousands) 1997 1996 1995 1994 1993 ------------- ------------- ------------- ------------- ------------- As a As a As a As a As a % of % of % of % of % of Reserve Loans Reserve Loans Reserve Loans Reserve Loans Reserve Loans Construction and Land Development, Commercial Real Estate - Mortgage, and Commercial (1) $3,189 56% $4,062 54% $3,353 56% $1,866 43% $1,312 34% Residential Real Estate - Mortgage 527 40% 553 41% 857 39% 242 51% 233 57% Consumer 251 4% 133 5% 193 5% 293 6% 280 9% Not Allocated 1,264 N/A 419 N/A 326 N/A 226 N/A 861 N/A ------------- ------------- ------------- ------------- ------------- Total Allowance for Credit Losses $5,231 100% $5,167 100% $4,729 100% $2,627 100% $2,686 100% ------------- ------------- ------------- ------------- -------------
(1) These categories have been consolidated and the reserve amount is based on a detailed analysis of the estimated credit risk for these loan types. The reserve amount is established by evaluating various factors including current economic conditions, the financial condition of the borrower, and the risk elements which may pertain to certain types of loans. The allocations do not necessarily reflect the expected future charge-offs applicable to each category. 15 Rate Sensitivity Analysis
December 31, 1997 After 3 After 1 Non- Months- Year- Interest Within Within Within After Sensitive (dollars in thousands) 3 Months 1 Year 5 Years 5 Years Funds Total ------------------------------------------------------------------- Assets Federal funds sold $ 17,236 $ -- $ -- $ -- $ -- $ 17,236 Interest bearing deposits in banks 482 -- -- -- -- 482 Investment securities 89,152 129,746 187,310 47,692 -- 453,900 Loans (including loans held for sale) 183,184 48,600 201,056 31,990 -- 464,830 Interest sensitivity hedges on assets (7,000) 17,000 (10,000) -- -- -- Non--interest earning assets -- -- -- -- 55,732 55,732 ------------------------------------------------------------------- Total Assets $283,054 $195,346 $378,366 $ 79,682 $ 55,732 $992,180 -----------------------------------------------------------======== Liabilities and Stockholders' Equity Interest bearing deposits $ 87,842 $140,818 $304,978 $ 27,919 $ -- $561,557 Short--term borrowings 68,392 28,811 -- -- -- 97,203 Long--term borrowings 80,263 30,022 30,571 20,033 -- 160,889 Non--interest bearing liabilities and stockholders' equity -- -- -- -- 172,531 172,531 ------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $236,497 $199,651 $335,549 $ 47,952 $ 172,531 $992,180 -----------------------------------------------------------======== Interest rate sensitivity gap $ 46,557 $ (4,305) $ 42,817 $ 31,730 $(116,799) Cumulative interest rate sensitivity gap 46,557 42,252 85,069 116,799 -- Cumulative ratio of interest sensitive assets to interest sensitive liabilities 1.20 1.10 1.11 1.14 1.00
The rate sensitivity analysis provided in the preceding table indicates the sensitivity to fluctuations in interest rates by analyzing maturity and repricing information for selected categories of assets and liabilities. Other rate sensitive assets, consisting of Federal funds sold and interest bearing deposits in banks, are assigned to an immediately repricable category, as these are overnight investments. Mortgage-backed investments are categorized based on the estimated amortization of these securities using recent prepayment histories. Fixed rate, noncallable investments are grouped by final maturity date. Fixed rate callable investments are grouped based on management's estimates of call probability. Variable rate investments are categorized according to the next available repricing opportunity. Fixed rate loans are grouped in the appropriate category based on normal scheduled amortization. Variable rate loans are categorized based on the next available repricing opportunity. Interest bearing deposits without a contractual maturity are estimated based on management's estimates of deposit withdrawals. Interest bearing deposits with contractual maturities are categorized based on the effective maturity of the deposit. Long-term borrowings with call provisions are grouped based on management's estimates of call probability. 16 Deposits The following schedule presents daily average amounts of deposits by type:
(dollars in thousands) December 31 1997 1996 1995 --------- ----------- --------- Non-interest bearing demand deposits $ 89,488 $ 83,825 $ 63,072 Interest bearing demand deposits 58,169 58,676 43,103 Savings deposits 184,972 182,857 158,228 Time deposits 302,205 286,557 200,883 --------- ---------- --------- Total Deposits $ 634,834 $ 611,915 $ 465,286 ========= ========== =========
The following schedule presents daily average rates paid on deposits by type:
(dollars in thousands) December 31 1997 1996 1995 --------- ----------- --------- Non-interest bearing demand deposits -- -- -- Interest bearing demand deposits 2.30% 2.58% 2.59% Savings deposits 3.22% 3.08% 3.14% Time deposits 5.59% 5.53% 5.76% --------- ---------- --------- Total Deposits 4.44% 4.36% 4.36% ========= ========== =========
At December 31, 1997, the maturity distribution for time deposits issued in amounts of $100,000 or more was: (dollars in thousands) 3 months or less $ 17,498 Over 3 months through 6 months 6,098 Over 6 months through 12 months 6,375 Over 12 months 15,097 ---------- Total $ 45,068 ========== 17 Short-Term Borrowings Short-term borrowings were as follows: (dollars in thousands) December 31 1997 1996 1995 -------- ------- ------- Average amount outstanding during year $ 87,173 $45,823 $68,571 Weighted average interest rate during year 5.60% 5.48% 5.89% Amount outstanding at year end $ 97,203 $53,734 $49,451 Weighted average interest rate at year end 5.73% 5.42% 5.56% Maximum amount at any month end $119,774 $67,607 $86,535 18 Return on Equity and Assets The following table shows net income as a percent of average stockholders' equity and average total assets, as well as certain other ratios for the periods indicated: December 31 1997 1996 1995 ----- ----- ----- Percentage of net income to: Average stockholders' equity 12.63% 12.27% 13.69% Daily average total assets 1.00% 1.05% 1.18% Percentage to tangible net income to: Average stockholders' equity 14.51% 14.02% 14.74% Daily average total assets 1.08% 1.12% 1.22% Percentage of dividends declared per share to net income Per common share 35.10% 32.60% 31.83% Percentage of average stockholders' equity to daily average total assets 7.88% 8.54% 8.60% 19 Item 2: Properties Mason-Dixon Bancshares, Inc. Corporate Office 45 West Main Street Westminster, MD 21157 Carroll County Bank and Trust Company Main Office Finksburg Office * 45 West Main Street 3000 Gamber Road Westminster, MD 21157 Finksburg, MD 21048 Englar Road Office Heartlands Office ** 401 Englar Road 3004 North Ridge Road Westminster, MD 21157 Ellicott City, MD 21043 East Main Street Office Mount Airy Office * 193 East Main Street 1001 Twin Arch Road Westminster, MD 21157 Mt. Airy, MD 21771 Manchester Office Operations Center 3200 Main Street 200 Baltimore Boulevard Manchester, MD 21102 Westminster, MD 21157 Manchester Drive-in 3068 Westminster Street Mason-Dixon Bancshares Manchester, MD 21102 Mortgage Company Eldersburg Office 1643 Liberty Road ** 1300 Liberty Road Suite 202 Sykesville, MD 21784 Eldersburg, MD 21784 Hampstead Office 502 Washington Avenue ** 999 South Main Street 3rd Floor Hampstead, MD 21074 Towson, MD 21204 Melrose Office 309 East Main Street ** 4501 Hanover Pike Suite 100 Manchester, MD 21102 Salisbury, MD 21801 Taneytown Office 4345 Old Taneytown Road Taneytown, MD 21787 * Properties are subject to land leases ** Properties are leased 20 Item 2: Properties (continued) Bank of Maryland Executive Offices ** Salisbury Office 502 Washington Avenue 1300 Salisbury Boulevard Towson, MD 21204 Salisbury, MD 21801 Towson Office ** Bishopville Office 600 Washington Avenue 10657 Bishopville Road Towson, MD 21204 Bishopville, MD 21813 Annapolis Office ** Crisfield Office 2661 Riva Road 257 North Somerset Avenue Annapolis, MD 21401 Crisfield, MD 21817 Harford County Office ** Federalsburg Office 333 Baltimore Pike 102 South Main Street Bel Air, MD 21014 Federalsburg, MD 21632 Perry Hall Office ** Princess Anne Office 9650 Belair Road 12136 Elm Street Perry Hall, MD 21236 Princess Anne, MD 21853 Pikesville Office ** 44 E. Sudbrook Lane Baltimore, MD 21208 Bethesda Production Office ** 4720 Montgomery Lane, Suite 420 Bethesda, MD 20814 ** Properties are leased 21 Item 2: Properties (continued) Rose Shanis Loans, LLC Catonsville Office ** Glen Burnie Office ** 924 Frederick Road 7566 Ritchie Highway P.O. Box 21197 Glen Burnie, MD 21061 Baltimore, MD 21228 Essex Office ** Highlandtown Office ** 136 Eastern Boulevard 3605 Eastern Avenue Baltimore, MD 21221 P.O. Box 12059 Baltimore, MD 21281 Randallstown Office ** 8519 Liberty Road Dundalk Office ** Randallstown, MD 21133 1713 Poplar Place P.O. Box 21795 Bel Air Office ** 136 Office Baltimore, MD 21222 Street Bel Air, MD 21014 Howard Street Office ** 313 North Howard Street Easton Office ** P.O. Box 296 218 North Washington Street Baltimore, MD 21203 Suite 17 Easton, MD 21601 Light Street Office ** 1103 Light Street Annapolis Office ** Baltimore, MD 21230 2621 Riva Road P.O. Box 6357 Parkville Office ** Annapolis, MD 21401 8301 Harford Road Baltimore, MD 21234 ** Properties are leased Mason-Dixon's subsidiaries lease properties from other parties and, during 1997, incurred rental expense of $1,077,000 on these properties. See Note 6 (Premises and Equipment) of the Consolidated Financial Statements. The premises occupied or leased by Mason-Dixon and its subsidiaries are considered to be well located and suitably equipped to serve as banking facilities. Neither the location of any particular office nor the unexpired term of any lease is deemed material to Mason-Dixon's business. 22 Item 3: Legal Proceedings Mason-Dixon is a party to litigation related to its business. In the opinion of management, the ultimate liability, if any, resulting from these matters would not have a significant effect on Mason-Dixon's consolidated financial position, results of operations, or liquidity. Item 4: Submission of Matters to a Vote of Securities Holders None Item 5: Limits on Dividends and Other Payments Both federal and state laws impose restrictions on the ability of the bank subsidiaries to pay dividends to Mason-Dixon. In general, bank regulatory agencies have the ability to prohibit proposed dividends by a bank if the regulatory body determines that such distribution would constitute an unsafe or unsound practice. For a Maryland state-chartered bank, dividends may be paid out of undivided profits or, with the prior approval of the Division of Financial Regulations, from surplus in excess of 100% of required capital stock after providing for all expenses, losses, interest, and taxes that are due or accrued. There are also statutory limits on the transfer of funds to a holding company and its nonbanking subsidiaries by its banking subsidiaries, whether in the form of loans or other extensions of credit, investments, or asset purchases. Such transfers by any banking subsidiary to a holding company or to any such nonbanking subsidiary generally are limited in amount, and such loans and extensions of credit are required to be collateralized in specified amounts. 23 Item 4A: Executive Officers Mason-Dixon Bancshares, Inc.: NAME AGE HIRE DATE CURRENT POSITION - ---- --- --------- ---------------- Thomas K. Ferguson 55 August 27, 1991 President and Chief Executive Officer for the last five years. William B. Dulany 70 August 27, 1991 Chairman of the Board for the last five years. Carroll County Bank and Trust Company: NAME AGE HIRE DATE CURRENT POSITION - ---- --- --------- ---------------- Michael L. Oster 45 September 2, 1986 President and Chief Executive Officer for one year. Held various executive positions for prior four years. Gerald G. Alsentzer 50 June 26, 1989 Senior Vice President and Director of the Human Resources Division for the last five years. William J. Gering 52 April 22, 1986 Senior Vice President and Director of the Trust Division for the last five years. Mark A. Keidel 36 August 17, 1987 Held various accounting positions for the bank and has been Senior Vice President/Chief Financial Officer for the last three years. Also, Vice President/Chief Financial Officer for Mason-Dixon for the last three years. M. Lee Primm 56 May 13, 1974 Senior Vice President and Director of Retail Operations for the last five years. Louna S. Primm 50 December 31, 1974 Senior Vice President/Chief Lending Officer for the last two years. Manager of Commercial Loan Division for the previous three years. William K. Stocksdale 35 July 22, 1985 Worked in various operational capacities for the bank and has been Senior Vice President and Operations Division Manager since 1997. Christine M. Whiteleather 47 May 2, 1984 Worked in various capacities for the bank and has been Senior Vice President/Chief Investment Officer for the last three years. Bank of Maryland: NAME AGE HIRE DATE CURRENT POSITION - ---- --- --------- ---------------- H. David Shumpert 53 August 15, 1991 President and Chief Executive Officer for the last five years. A. Gary Rever 45 January 28, 1991 Executive Vice President, Secretary, Chief Financial Officer and Treasurer for the last five years. 24 W. Bruce McPherson 56 December 29, 1995 Executive Vice President of Commercial/Real Estate Lending and Credit Division for the past two years. Hunter F. Calloway 50 April 8, 1996 Senior Vice President of Commercial Lending/Southern Region for the past two years. Robert D. Lockard 58 May 1, 1989 Worked in various operations positions at the bank and has been Senior Vice President of Retail Banking and Compliance for the past three years. 25 Part II Item 5: Market for Registrant's Common Stock and Related Stockholders Matters Common Stock Data -- Annual Stockholders Report, page 19, incorporated herein by reference. Item 6: Selected Financial Data Five Year Comparative Summary -- Annual Stockholders Report, page 1, incorporated herein by reference. Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations Annual Stockholders Report, pages 6-19, incorporated herein by reference. See also recent developments in Item 1. Item 7a: Quantitative and Qualitative Disclosures About Market Risk Annual Stockholders Report, pages 11-14, incorporated herein by reference. Item 8: Financial Statements and Supplementary Data Financial Statements and related notes are included in the Annual Stockholders Report, pages 20-45, incorporated herein by reference. Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. Part III Item 10: Directors and Executive Officers of the Registrant Directors are listed in the Annual Proxy Statement dated March 16, 1998, pages 4 and 5, incorporated herein by reference. Executive officers are included in Part I, Item 4A. Item 11: Executive Compensation Proxy Statement dated March 16, 1998, pages 7 through 12, incorporated herein by reference. Item 12: Security Ownership of Certain Beneficial Owners and Management Proxy Statement dated March 16, 1998, pages 2 and 3, incorporated herein by reference. Item 13: Certain Relationships and Related Transactions Proxy Statement dated March 16, 1998, pages 11, incorporated herein by reference. Executive officers are included in Part I, Item 4A. 26 Part IV Item 14: Exhibits, Financial Statement Schedules, and Reports on 8-K (a) Documents filed as part of this report: (1) The following financial statements of the Registrant, included on pages 20 through 46 of the registrants 1997 Annual Report to Stockholders, are incorporated herein by reference in item 8: Consolidated Balance Sheets -- December 31, 1997 and 1996 Consolidated Statements of Income -- Years ended December 31, 1997, 1996, and 1995 Consolidated Statements of Changes in Stockholders' Equity -- Years ended December 31, 1997, 1996, and 1995 Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996, and 1995 Notes to Consolidated Financial Statements -- Years ended December 31, 1997, 1996, and 1995 Report of Independent Auditors for the year ending December 31, 1997 (2) Financial statement schedules are omitted from this 10-K since the required information is not applicable to the Registrant. (3) Listing of Exhibits: The following documents are attached as Exhibits to this Form 10-K as indicated by the Exhibit number or are incorporated by reference to the prior filings of the Registrant with the Commission. Form 10-K Exhibit # Exhibit ------------------- ------- Exhibit 3(i)* Certificate of Incorporation Exhibit 3(ii) Bylaws of the Corporation Exhibit 13 Annual Report to Stockholders Exhibit 21 List of Registrant's Subsidiaries Exhibit 23 Consent of Independent Auditors * Exhibit 3(i) is incorporated herein by reference to the identically numbered exhibit to the Form S-4 Registration Statement filed by the Company with the Securities and Exchange Commission on October 15, 1991. Item 14(b) On December 3, 1997, the Company filed on Form 8-K its announcement to purchase Rose Shanis Companies. This event was reported under Item 5 on 8-K. Item 14(c) See Item 14(a)(3) above. Item 14(d) See item 14(a)(2) above. 27 Signatures Pursuant to the registration requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MASON-DIXON BANCSHARES, INC. ---------------------------- (Registrant) Date: March 26, 1998 By /s/ Thomas K. Ferguson -------------- ------------------------------ Date: March 26, 1998 By /s/ Mark A. Keidel -------------- ------------------------------ Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ David S. Babylon, Jr. Director Date: March 26, 1998 - --------------------------------------- -------------- Henry S. Baker, Jr. Director Date: March 26, 1998 - --------------------------------------- -------------- /s/ Miriam F. Beck Director Date: March 26, 1998 - --------------------------------------- -------------- Donald H. Campbell Director Date: March 26, 1998 - --------------------------------------- -------------- /s/ William B. Dulany Director Date: March 26, 1998 - --------------------------------------- -------------- /s/ R. Neal Hoffman Director Date: March 26, 1998 - --------------------------------------- -------------- /s/ S. Ray Hollinger Director Date: March 26, 1998 - --------------------------------------- -------------- J. William Middelton Director Date: March 26, 1998 - --------------------------------------- -------------- /s/ Edwin W. Shauck Director Date: March 26, 1998 - --------------------------------------- -------------- /s/ James C. Snyder Director Date: March 26, 1998 - --------------------------------------- -------------- /s/ Stevenson B. Yingling Director Date: March 26, 1998 - --------------------------------------- -------------- 28 EX-3 2 EX-3(II) Exhibit 3(ii) MASON-DIXON BANCSHARES, INC. BYLAWS ARTICLE I Stockholders SECTION 1. Annual Meeting. The annual meeting of stockholders shall be held on such date and time in the month of April in each year as may be fixed by resolution of the Board of Directors at which the stockholders shall elect Directors whose term of office has expired, shall consider reports of the affairs of the Corporation, and shall transact such other business as may properly be brought before the meeting. SECTION 2. Special Meetings. Special meetings of the stockholders may be called at any time for any purpose or purposes by the Chairman of the Board, by the President, or by a majority of the Board of Directors, and shall be called by the Chairman, President or Secretary of the Corporation upon the request in writing of the holders of at least 50% of all the shares outstanding and entitled to vote on the business to be transacted at such meeting. Such request shall state the purpose or purposes of the meeting. Unless requested by stockholders entitled to cast a majority of all votes entitled to be cast at the meeting, however, a special meeting need not be called to consider any matter which is substantially the same as a matter voted on at any special meeting of the stockholders held during the preceding 12 months. SECTION 3. Place of Holding Meetings. All meetings of stockholders shall be held at the principal office of the Corporation or elsewhere in the United States as designated by the Board of Directors. SECTION 4. Notice of Meetings. Written notice of each meeting of the stockholders shall be mailed, postage pre-paid by the Secretary, to each stockholder entitled to vote thereat at his post office address as it appears upon the books of the Corporation at least ten (10) days, but not more than ninety (90) days, before the meeting. Each such notice shall state the place, day, and hour at which the meeting is to be held and, in the case of any special meeting, shall state briefly the purpose or purposes thereof. SECTION 5. Quorum. The presence in person or by proxy of the holders of record of a majority of the shares of the capital stock of the Corporation issued and outstanding and entitled to vote thereat shall constitute a quorum at all meetings of the stockholders, except as otherwise provided by law, by the Articles of Incorporation or by these Bylaws. If less than a quorum shall be in attendance at the time for which the meeting shall have been called, the meeting may be adjourned from time to time by a majority vote of the stockholders present or represented, without any notice other than by announcement at the meeting, until a quorum shall attend. At any adjourned meeting at 1 which a quorum shall attend, any business may be transacted which might have been transacted if the meeting had been held as originally called. SECTION 6. Conduct of Meetings. Meetings of stockholders shall be presided over by the Chairman of the Board, or if he or she is not present, by the Vice Chairman, or if he or she is not present, the President of the Corporation or, if he or she is not present, by a Vice President, or, if none of said officers is present, by a chairman to be elected at the meeting. The Secretary of the Corporation, or if he or she is not present, any Assistant Secretary shall act as Secretary of such meetings; in the absence of the Secretary and any Assistant Secretary, the presiding officer may appoint a person to act as Secretary of the meeting. SECTION 7. Voting. At all meetings of stockholders, every stockholder entitled to vote thereat shall have one (l) vote for each share of stock standing in his or her name on the books of the Corporation on the date for the determination of stockholders entitled to vote at such meeting. Such vote may be either in person or by proxy appointed by an instrument in writing subscribed by such stockholder or his or her duly authorized attorney, bearing a date not more than eleven (11) months prior to said meeting, unless said instrument provides for a longer period. Such proxy shall be dated, but need not be sealed, witnessed or acknowledged. All elections shall be held and all questions shall be decided by a majority of the votes cast at a duly constituted meeting, except as otherwise provided by law, in the Articles of Incorporation or by these Bylaws. If the chairman of the meeting shall so determine, a vote by ballot may be taken upon any election or matter, and the vote shall be so taken upon request of the holders of a majority of the stock entitled to vote on such election or matter. In either of such events, the proxies and ballots shall be received and be taken in charge and all questions touching the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided by the tellers. Such tellers shall be appointed by the chairman of the meeting. ARTICLE II Board of Directors SECTION 1. General Powers. The property and business of the Corporation shall be managed by the Board of Directors of the Corporation. SECTION 2. Number and Qualification of Directors. The authorized number of Directors shall be no less than twelve (12) nor more than fourteen (14) until changed by amendment to the Articles of Incorporation. In accordance with Article VII of these bylaws, the exact number of Directors shall be fixed within the limits specified above by a resolution adopted by the Board of Directors. 2 Directors must be stockholders of the Corporation and must own, free and clear of all liens, pledges and other encumbrances, a minimum of 100 shares of Corporation stock (par value $1.00 per share) at the date of election as a Director. Within a five-year period from the date of initial election as Director, such Director must acquire and maintain, free and clear of all liens, pledges and other such encumbrances, a minimum of 500 shares of Corporation stock (par value $1.00 per share). Notwithstanding the foregoing, the minimum number of shares of the Corporation's stock required to be held by Directors shall be not less than the number required by Section 3- 403 of the Financial Institutions Article of the Annotated Code of Maryland (or any successor provision) or otherwise required by law. Nomination for election of members of the Board of Directors may be made by the Board of Directors or by any stockholder of any outstanding class of capital stock of the Corporation entitled to vote for the election of Directors. Notice by a stockholder of intention to make any nominations shall be made in writing and shall be delivered or mailed to the President of the Corporation not less than 120 days nor more than 150 days prior to any meeting of stockholders called for the election of Directors. Such notification shall contain the following information to the extent known by the notifying stockholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the number of shares of capital stock of the Corporation owned by each proposed nominee; (d) the name and residence address of the notifying stockholder; (e) the number of shares of capital stock of the Corporation owned by the notifying stockholder; and (f) the consent in writing of the proposed nominee as to the proposed nominee's name being placed in nomination for Director. Nominations not made in accordance herewith may, in the discretion of the chairman of the meeting, be disregarded and upon the chairman's instructions, the tellers can disregard all votes cast for each such nominee. Directors shall be residents for at least one year of a county (or a county contiguous to such county) in which the Corporation or any subsidiary of the Corporation maintains its principal office or principal banking office. An individual may not serve as a Director of the Corporation if such individual also serves as a director or employee of any financial institution (other than a subsidiary of the Corporation), or corporation which maintains as a principal subsidiary one or more financial institutions, or if such service otherwise would violate the federal Depository Institution Management Interlocks Act. The term "financial institution" means a credit union, savings and loan, or commercial bank. The term "principal subsidiary" is defined to mean one or more financial institutions whose total assets constitute twenty-five percent (25%) or more of such corporation's consolidated total assets. No more than three (3) Directors shall be "insiders" of the Corporation. The term, "insiders," means an employee of the Corporation or any financial institution 3 subsidiary of the Corporation, and also means any beneficial owner (as defined 0under Section 13(d) of the Securities Exchange Act of 1934) of ten percent (10%) or more of the Corporation's stock. For purposes of the ten percent (10%) beneficial ownership test, Corporation stock owned by such individual's spouse, lineal descendants (i.e., parents and children), any entity in which the individual owns a controlling interest (i.e., 20% or more interest), and any group of which the owner is a member will be attributed to such individual. SECTION 3. Election and Term of Office. The terms of the initial Board of Directors shall be set so as to implement staggered terms, with the terms of one third (or as near one-third as possible) of the Directors being one year, the terms of one-third being two years and the terms of one third being three years. Thereafter, one-third of the Directors shall be elected by a majority of the votes cast at each annual meeting of stockholders or by similar vote at any special meeting called for the purpose, to serve three-year terms. Each Director shall hold office until the expiration of the term for which he or she is elected, except as otherwise stated in these Bylaws, and thereafter until his or her successor has been elected and qualified. Election of Directors need not be by written ballot, unless required by Article I of these Bylaws. SECTION 4. Filling of Vacancies. Any and all vacancies on the Board of Directors, including those created by increase in the number of Directors or by removal of Directors, shall be filled by individuals who are not currently serving as Directors of the Corporation and who are elected by the Board of Directors to serve the remainder of the vacant Director's term of office. SECTION 5. Removal. A Director of the Corporation may only be removed during his or her term of office for cause, which means criminal conviction of a felony, unsound mind, adjudication of bankruptcy, non-acceptance of office or conduct prejudicial to the interest of the Corporation, by the affirmative vote of a majority of the entire Board of Directors of the Corporation (exclusive of the Director being considered for removal) or by the affirmative vote of not less than sixty-seven percent (67%) of the outstanding voting stock of the Corporation. Stockholders shall not have the right to remove Directors without such cause. Stockholders may only attempt to remove a Director for cause after service of specific charges, adequate notice and full opportunity to refute the charges. SECTION 6. Place of Meeting. The Board of Directors may hold their meetings and have one or more offices, and keep the books of the Corporation, at such place or places as they may from time to time determine by resolution or by written consent of all the directors, either within or outside the State of Maryland. The Board of Directors may hold their meetings by conference telephone or other similar electronic communications equipment in accordance with the provisions of Maryland Corporate Law. 4 SECTION 7. Regular Meetings. The Board of Directors shall hold regular quarterly meetings on such dates as shall be fixed by the Board. Following each annual stockholder's meeting, the Board of Directors shall hold its annual meeting of the Board to elect officers, and transact other business. Notice of regular meetings shall not be required. SECTION 8. Special Meetings. Special meetings of the Board of Directors for any purpose may be called at any time by the Chairman of the Board of Directors, the President, the Secretary, or by twenty-five (25%) percent or more of the number of Directors then holding office. Special meetings of the Board of Directors shall be held upon two days notice by mail or four (4) hours notice delivered personally or by telephone or telefax. If notice is by telephone or telefax, it shall be complete when the person calling the meeting believes in good faith that the notified person (or a person acting on behalf of or as agent for the notified person) has heard and acknowledged the notice or received transmission of the facsimile. If the notice is by mail, it shall be complete when deposited in the U.S. Mail, charges prepaid and addressed to the notified person at such person's address appearing on the corporate records or, if such address is not on these records or is not readily ascertainable, at the place where the regular Board of Directors meeting is held. SECTION 9. Quorum. A majority of the whole number of Directors shall constitute a quorum for the transaction of business at all meetings of the Board of Directors, but, if at any meeting less than a quorum shall be present, a majority of those present may adjourn the meeting from time to time, and the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by law or by the Corporation's Articles of Incorporation or by these Bylaws. SECTION 10. Compensation of Directors. Directors and members of committees shall receive neither compensation for their services nor reimbursement for their expenses unless these payments are fixed by resolution of the Board of Directors. SECTION 11. Committees. The Board of Directors, by resolution passed by a majority of the whole Board, may designate the following standing committees: (1) An Investment Committee, which shall have the power to discount, purchase and sell bills, notes and other evidences of debt; and (2) An Audit Committee which shall consist of at least three members of the Board of Directors none of whom shall be officers or employees of the Corporation or any subdivisions of the Corporation 5 and each of whom shall be independent of management of the Corporation. The duties of this committee shall be to make suitable examinations every 12 months of the affairs of the Corporation. The result of such examination shall be reported, in writing, to the Board of Directors stating whether the Corporation is in sound and solvent condition, whether adequate internal audit controls and procedure are being maintained, and recommending to the Board of Directors such changes in the manner of doing business, etc., as shall be deemed advisable. The Audit Committee, upon its own authority, may employ a qualified firm of Certified Public Accountants to make a suitable examination and audit of the Corporation. If such procedure is followed, the one annual examination and audit of such firm of accountants and the presentation of its report to the Board of Directors will be deemed sufficient to comply with this section of these Bylaws. The Board of Directors, by resolution adopted by a majority of the authorized number of Directors, also may designate one or more additional standing committees, including, but not limited to, an Executive Committee consisting of two or more Directors who shall be appointed by, and hold office at, the pleasure of the Board of Directors. The Board of Directors may, except as hereinafter limited, delegate the Executive Committee any of the powers and authorities of the Board of Directors. Other additional standing committees may include the Nominating Committee, consisting of two or more Directors and charged with the responsibility of recommending to the Board of Directors nominees to Board vacancies, and the Compensation Committee, consisting of two or more Directors, neither of whom is also an officer of the Corporation, whose responsibility it is to establish and set each year the compensation arrangements for senior management. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of Directors. The Board of Directors shall designate one or more Directors as alternate members of any committee who may replace any absent members at any meeting of the committee. Any such committee, to the extent provided in the resolution of the Board of Directors creating it, shall have the authority of the Board, except with respect to: (1) The approval of any action for which stockholder approval is also required, (2) The filling of vacancies on the Board or in any committee, 6 (3) The fixing of compensation of the Directors for serving on the Board or on any committee, (4) The amendment or repeal of bylaws or the adoption of new bylaws, (5) The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable, (6) A distribution to stockholders of the Corporation as defined under Maryland Corporate Law, except at a rate or in a periodic amount or within a price range determined by the Board, and permitted by law, (7) The appointment of members of other committees of the Board, (8) The authorization or approval of the reacquisition of Corporation stock (unless pursuant to a general formula or method specified by the Board of Directors and permitted by law), and (9) The authorization or approval of the issuance or sale or contract for sale of Corporation stock. The Board of Directors shall designate a chairman for each committee who shall have the sole power to call any committee meeting other than a meeting set by the Board. Except as otherwise established by the Board of Directors, the provisions of this entire Article II shall apply to committees of the Board and action by such committees, mutatis mutandis. ARTICLE III Officers SECTION 1. Officers. The officers of the Corporation shall be a President, a Secretary, and a Chief Financial Officer. The Corporation also may have, at the discretion of the Board of Directors, a Chairman of the Board and Vice-Chairman of the Board (both of whom shall be chosen from the Board of Directors), one or more Vice Presidents, one or more Trust Officers, one or more Assistant Secretaries, one or more Assistant Treasurers, and any other officers who may be appointed under Section 3 of this Article III. Any two or more offices, except those of President and Vice President, may be held by the same person. Any officer of the Corporation may be excluded by resolution of the Board of Directors or by a provision of these Bylaws from participation, other than in the capacity of a Director, in major policy-making functions of the Corporation. 7 The Corporation shall provide a fidelity bond in the amount required by law to cover each Director and officer of the Corporation who has control over or access to cash or securities of the Corporation. SECTION 2. Election. The officers of the Corporation, except those appointed under Section 3 of this Article III, shall be chosen annually by the Board of Directors, and each shall hold his or her office until he or she resigns or is removed or otherwise disqualified to serve, or his or her successor is elected and qualified. SECTION 3. Subordinate Officers. The Board of Directors may appoint, and may authorize the President to appoint, any other officers that the Business of the Corporation may require, each of whom shall hold office for the period, have the authority, and perform the duties specified in a resolution of the Board of Directors. SECTION 4. Removal and Resignation. Any officer may be removed with or without cause either by the Board at any regular or special Directors' meeting or, except for an officer chosen by the Board, by an officer on whom the power of removal may be conferred by the Board. An officer may resign at any time by giving written notice to the Board of Directors, the President or the Secretary of the Corporation. An officer's resignation shall take effect when it is received or at any later time specified in the resignation. Unless the resignation specifies otherwise, its acceptance by the Corporation shall not be necessary to make it effective. SECTION 5. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to the office. SECTION 6. Chairman and Vice Chairman of the Board. The Board of Directors may at its discretion elect a Chairman of the Board who shall preside at all meetings of the Board of Directors and at all stockholders' meetings at which the Chairman is present and who shall exercise and perform any other powers and duties assigned to the Chairman by the Board or prescribed by these Bylaws. Except where by law the signature of the President is required, the Chairman shall possess the same power as the President to sign all certificates, contracts and other instruments of the Corporation which may be authorized by the Board of Directors. The Chairman of the Board shall be ex officio a member of all committees. The Board of Directors in its discretion may elect a Vice Chairman of the Board, who in the absence of the Chairman, shall preside at all meetings of the Board of Directors and stockholders. 8 SECTION 7. President. Subject to any supervisory powers that may be given by the Board of Directors or these Bylaws to the Chairman of the Board, the President shall be the Corporation's chief executive officer and, subject to the control of the Board of Directors, shall have general supervision, direction, and control over the Corporation's business and officers. The President shall preside as chairman at all stockholders' meetings and at all Directors meetings not presided over by the Chairman or Vice Chairman of the Board. The President shall be ex officio a member of all the standing committees, except the Audit Committee and the Compensation Committee, shall have the general powers and duties of management usually vested in presidents of Corporations; shall have any other powers and duties that are prescribed by the Board of Directors or these Bylaws; and shall be primarily responsible for carrying out all orders and resolutions of the Board of Directors. SECTION 8. Vice President. If the President is absent or is unable or refuses to act, the Vice Presidents in order of their rank as fixed by the Board of Directors or, if not ranked, the Vice President designated by the Board of Directors, shall perform all duties of the President, and when so acting shall have all of the powers of, and be subject to all the restrictions on, the President. Each Vice President shall have any other powers and perform any other duties that are prescribed for said Vice President by the Board of Directors or these Bylaws. SECTION 9. Secretary. The Secretary shall keep or cause to be kept and be available at the principal office and any other place that the Board of Directors specifies, a book of minutes of all Directors' and stockholders' meetings. The minutes of each meeting shall state the time and place that it was held; whether it was regular or special; if a special meeting, how it was authorized; the notice given; the names of those present or represented at stockholders' meetings; and the proceedings of the meetings. A similar minute book shall be kept for each committee of the Board. The Secretary shall keep, or cause to be kept, at the principal office or at the office of the Corporation's transfer agent, a share register, or duplicate share register, showing the stockholders' names and addresses, the number and classes of shares held by each, the number and date of each certificate issued for these shares, and the number and date of cancellation of each certificate surrendered for cancellation. The Secretary shall give or cause to be given notice of all Directors' and stockholders' meetings required to be given under these Bylaws or by law, shall keep the corporate seal in safe custody, and shall have any other powers and perform any other duties that are prescribed by the Board of Directors or these Bylaws. The Secretary shall be deemed not to be an executive officer of the Corporation and the Secretary shall be excluded from participation, other than in the 9 capacity of Director if the Secretary is also a Director, in major policy- making functions of the Corporation. SECTION 10. Chief Financial Officer. The Chief Financial Officer shall be the Corporation's Treasurer and shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the Corporation's properties and business transactions, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account at all reasonable times shall be opened to inspection by any Director. The Chief Financial Officer shall deposit all money and other valuables in the name and to the credit of the Corporation with the depositories designated by the Board of Directors. The Chief Financial Officer shall disburse the Corporation's funds as ordered by the Board of Directors and shall render to the President and Directors, whenever they request it, an account of all the transactions as Chief Financial Officer and of the Corporation's financial condition; and shall have any other powers and perform any other duties that are prescribed by the Board of Directors or these Bylaws. ARTICLE IV Capital Stock SECTION 1. Issue of Certificates of Stock. The certificates for shares of the stock of the Corporation shall be of such form not inconsistent with the Certificate of Incorporation, or its amendments, as shall be approved by the Board of Directors. All certificates shall be signed by the President or by the Vice-President and counter-signed by the Secretary or by an Assistant Secretary, and sealed with the seal of the Corporation. All certificates for each class of stock shall be consecutively numbered. The name of the person owning the shares issued and the address of the holder shall be entered in the Corporation's books. All certificates surrendered to the Corporation for transfer shall be canceled and no new certificates representing the same number of shares shall be issued until the former certificate or certificates for the same number of shares shall have been so surrendered, and canceled, unless a certificate of stock is lost or destroyed, in which event the Board of Directors may authorize the issuance of a new certificate replacing the old one on any terms and conditions, including a reasonable arrangement for indemnification of the Corporation, that the Board may specify. SECTION 2. Transfer of Shares. Shares of the capital stock of the Corporation shall be transferred on the books of the Corporation only by the holder thereof in person or by his or her attorney upon surrender and cancellation of certificates for a like number of shares as hereinbefore provided. 10 SECTION 3. Registered Stockholders. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share in the name of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the Laws of Maryland. SECTION 4. Closing Transfer Books. The Board of Directors may fix the period, not exceeding twenty (20) days, during which time the books of the Corporation shall be closed against transfers of stock, or, in lieu thereof, the Board of Directors may fix a date not less than ten (10) days nor more than sixty (60) days preceding the date of any meeting of stockholders or any dividend payment date or any date for the allotment of rights, as a record date for the determination of the stockholders entitled to notice of and to vote at such meeting or to receive such dividends or rights. Only stockholders of record on such date shall be entitled to notice of and to vote at such meeting or to receive such dividends or rights. ARTICLE V Bank Accounts and Loans SECTION 1. Bank Accounts. Officers or agents of the Corporation designated by the Board of Directors shall have authority to deposit and withdraw funds of the Corporation in financial institutions designated by the Board of Directors. Each financial institution with which funds of the Corporation are so deposited is authorized to accept, honor, cash and pay, without limit as to amount, all checks, drafts or other instruments or orders for the payment of money, when drawn, made or signed by officers or agents designated by the Board of Directors until written notice of the revocation of the authority of such officers or agents by the Board of Directors shall have been received by such financial institutions. The signatures of these officers or agents shall be certified to the financial institutions in which the funds of the Corporation are deposited. If no such officers or agents are designated by the Board of Directors, all of such checks, drafts and other instruments or orders for the payment of money shall be signed by the President or a Vice President and countersigned by the Secretary or Treasurer or an Assistant Secretary or an Assistant Treasurer of the Corporation. SECTION 2. Loans. Officers or agents of the Corporation designated by the Board of Directors shall have authority to effect loans, advances or other forms of credit for the Corporation from such financial institutions, corporations, firms or persons as the Board of Directors shall designate. As security for the repayment of such loans, advances, or other forms of credit, these officers or agents may be authorized by the Board of Directors to assign, transfer, endorse, and deliver, either originally or in addition or substitution, any or all stock, bonds, rights, and interests of any kind in or to stocks or bonds, certificates of such rights or interests, deposits, accounts, documents covering merchandise, bills and accounts receivable and other commercial paper and evidences or 11 debt at any time held by the Corporation. These officers or agents may be authorized by the Board of Directors to execute and deliver one or more notes, acceptances or written obligations of the Corporation on such terms, and with such provisions as to the security or sale or disposition thereof as such officers or agents shall deem proper. These officers or agents also may be authorized by the Board of Directors to sell, discount or rediscount with such financial institutions, corporations, firms or persons any and all commercial paper, bills receivable, acceptances and other instruments and evidences of debt at any time held by the Corporation, and to endorse, transfer and deliver the same. The signatures of these officers and agents shall be certified to each such financial institution, corporation, firm or person. Each such financial institution, corporation, firm or person is authorized to rely upon such certification until written notice of the revocation by the Board of Directors of the authority of such officers or agents shall be delivered to such financial institution, corporation, firm or person. ARTICLE VI Miscellaneous Provisions SECTION 1. Fiscal Year. The fiscal year of the Corporation shall begin on the first day of January of each year. SECTION 2. Notices. Whenever, under the provisions of these Bylaws, notice is required to be given to any Director, officer or stockholder, unless otherwise provided in these Bylaws, such notice shall be deemed given if in writing, and personally delivered, or sent by telefax, or telegram, or by mail, by depositing the same in a post office or letter box, in a postpaid sealed wrapper, addressed to each stockholder, officer or Director, as the case may be, at such address as appears on the books of the Corporation, and such notice shall be deemed to have been given at the time the same is so personally delivered, telefaxed, telegraphed or so mailed. Any stockholder, director or officer may waive any notice required to be given under these Bylaws. SECTION 3. Voting Upon Stocks. Unless otherwise ordered by the Board of Directors, the President and the Vice President, or either of them, shall have full power and authority on behalf of the Corporation to attend and to vote and to grant proxies to be used at any meetings of stockholders of any corporation in which the Corporation may hold stock. ARTICLE VII Amendment of Bylaws Upon affirmative vote of the holders of not less than sixty-seven percent (67%) of the outstanding stock of the Corporation, the stockholders may amend, alter or repeal these Bylaws. Subject to the right of the stockholders under the preceding sentence, Bylaws other than a Bylaw fixing or changing the authorized number of Directors may 12 be adopted, amended, or repealed by the Board of Directors. However, if the Articles of Incorporation, or a Bylaw adopted by the stockholders, provide for an indefinite number of Directors within specified limits, the Directors may by resolution fix the exact number of Directors within those limits. ARTICLE VIII Indemnification SECTION 1. Definitions. As used in this Article VIII, any word or words that are defined in Section 2-418 of the Corporations and Associations Article of the Annotated Code of Maryland (the "Indemnification Section"), as amended from time to time, shall have the same meaning as provided in the Indemnification Section. SECTION 2. Indemnification of Directors and Officers. The Corporation shall indemnify and advance expenses to a Director or officer of the Corporation in connection with a proceeding to the fullest extent permitted by and in accordance with the Indemnification Section and federal law. SECTION 3. Indemnification of Other Agents and Employees. With respect to an employee or agent, other than a Director or officer of the Corporation, the Corporation may, as determined by and in the discretion of the Board of Directors of the Corporation, indemnify and advance expenses to such employees or agents in connection with a proceeding to the extent permitted by and in accordance with the Indemnification Section and federal law. END OF BYLAWS 13 EX-13 3 EX-13 - -------------------------------------------------------------------------------- CORPORATE INFORMATION COMPANY PROFILE Mason-Dixon Bancshares, Inc. is a multibank holding company organized in 1991 under the laws of the State of Maryland. Since July, 1995, the holding company operates two bank subsidiaries, Carroll County Bank and Trust Company and Bank of Maryland. CORPORATE BANKING Both bank subsidiaries pursue corporate banking activities that serve local businesses. Services provided include various types of commercial, real estate and asset-based lending, deposit acceptance, cash management, and short-term investing. Asset-based lending is offered through Mason-Dixon Commercial Finance, a division of Bank of Maryland. CONSUMER BANKING The bank subsidiaries have 22 retail banking offices providing consumer banking services. The services include deposit products such as Checking, NOW, Money Market Savings, Individual Retirement Accounts and Certificates of Deposit. Consumer loans are made to individuals for a variety of purposes. Mason-Dixon Investment Services, a division of Carroll County Bank and Trust Company, provides non-deposit investment products to consumers. MORTGAGE BANKING Mason-Dixon Bancshares Mortgage Company, a division of Carroll County Bank and Trust Company, originates and services real estate mortgage and construction loans as a principal and as an agent. TRUST Mason-Dixon Trust Company, a division of Carroll County Bank and Trust Company, provides trust services to individuals, corporations, and non-profit organizations. Services to individuals include investment management, living and testamentary trusts, estate management, and custody of securities. Corporate financial services and employee benefit plans are provided to businesses. Services to non-profit organizations include management of endowment trusts. CORPORATE HEADQUARTERS 45 West Main Street P.O. Box 1100 Westminster, MD 21158-0199 410-857-3401 STOCK INFORMATION Mason-Dixon Bancshares, Inc. common stock is traded on the NASDAQ National Market under the symbol "MSDX". Mason-Dixon Bancshares, Inc. preferred securities are traded on the NASDAQ National Market under the symbol "MSDXP". TRANSFER AGENT, REGISTRAR, AND DIVIDEND DISBURSING AGENT American Stock Transfer & Trust Company 40 Wall Street New York, NY 10005 1-800-937-5449 AUDITORS Stegman & Company 405 E. Joppa Road Baltimore, MD 21286 GENERAL COUNSEL Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC The Garrett Building 233 East Redwood Street Baltimore, MD 21202 ANNUAL MEETING OF STOCKHOLDERS 10:00 a.m. April 18, 1998 Wakefield Valley Golf and Conference Center 1000 Fenby Farm Road Westminster, MD 21158 SEC FORM 10-K A copy of the Company's annual report on Form 10-K for the year ended December 31, 1997, as filed with the Securities and Exchange Commission, may be obtained without charge upon written request to: Corporate Secretary Mason-Dixon Bancshares, Inc. 45 West Main Street P.O. Box 1100 Westminster, MD 21158-0199 DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN Mason-Dixon Bancshares, Inc. offers its stockholders a plan whereby they may automatically invest their cash dividends in Mason-Dixon Bancshares, Inc. common stock. Plan participants may also make additional cash payments to purchase stock through the Plan at the market price. Mason-Dixon Bancshares, Inc. absorbs all fees and transaction costs. Stockholders who wish to enroll in the Plan should contact the Corporation's Transfer Agent. - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Interest income $ 67,435 $ 58,796 $ 46,737 $ 34,790 $ 35,008 Interest expense 36,175 29,244 23,071 15,392 15,217 ----------- ----------- ----------- ----------- ----------- Net interest income 31,260 29,552 23,666 19,398 19,791 Provision for credit losses 138 836 -- -- 329 ----------- ----------- ----------- ----------- ----------- Net interest income after provision for credit losses 31,122 28,716 23,666 19,398 19,462 Other operating income 7,990 7,481 4,159 3,245 4,031 Other operating expenses 26,791 24,758 17,944 13,806 13,793 ----------- ----------- ----------- ----------- ----------- Income before income taxes and cumulative effect of accounting changes 12,321 11,439 9,881 8,837 9,700 Applicable income taxes 3,162 3,003 2,582 2,225 3,082 ----------- ----------- ----------- ----------- ----------- Income before cumulative effect of accounting changes 9,159 8,436 7,299 6,612 6,618 Cumulative effect of accounting change for: Post-retirement benefits -- -- -- -- (482) Income taxes -- -- -- -- 471 ----------- ----------- ----------- ----------- ----------- Net Income $ 9,159 $ 8,436 $ 7,299 $ 6,612 $ 6,607 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- PER SHARE DATA Income before cumulative effect of accounting changes* $ 1.77 $ 1.60 $ 1.54 $ 1.52 $ 1.52 Cumulative effect of accounting change for: Post-retirement benefits* -- -- -- -- (0.11) Income taxes* -- -- -- -- 0.11 ----------- ----------- ----------- ----------- ----------- Net income (basic)* $ 1.77 $ 1.60 $ 1.54 $ 1.52 $ 1.52 Net income (diluted)* $ 1.77 $ 1.60 $ 1.54 $ 1.52 $ 1.52 Dividends paid* $ 0.62 $ 0.52 $ 0.485 $ 0.45 $ 0.42 Book value $ 14.86 $ 13.71 $ 12.67 $ 9.89 $ 10.27 Tangible book value $ 14.28 $ 12.80 $ 11.66 $ 9.89 $ 10.27 Shares outstanding 5,077,468 5,303,166 5,258,040 4,326,125 4,363,902 OTHER DATA Total assets $ 992,180 $ 841,074 $ 765,781 $ 507,572 $ 489,058 Total investments $ 453,900 $ 358,531 $ 340,512 $ 282,202 $ 260,595 Total loans-net $ 455,160 $ 392,997 $ 348,221 $ 192,885 $ 195,779 Total deposits $ 651,249 $ 620,735 $ 593,835 $ 383,058 $ 373,022 Total equity $ 75,449 $ 72,699 $ 66,596 $ 42,773 $ 44,797 KEY RATIOS Return on average stockholders' equity 12.63% 12.27% 13.69% 15.28% 16.53% Return on average total assets 1.00% 1.05% 1.18% 1.34% 1.40% Dividends declared to net income 35.10% 32.60% 31.83% 29.71% 27.71% Average stockholders' equity to average total assets 7.88% 8.54% 8.60% 8.75% 8.50%
* BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES AFTER GIVING EFFECT TO THE 3-FOR-1 STOCK SPLIT IN 1994. - -------------------------------------------------------------------------------- 1 - -------------------------------------------------------------------------------- TO OUR STOCKHOLDERS We are pleased to report that 1997 was the 13th consecutive year of increased earnings for your company. Net income of $9,159,000 represents a 9% increase over 1996. On a per share basis, earnings of $1.77 represent an 11% increase over 1996. During the year, we paid $0.62 per share in cash dividends, an increase of 19% over the prior year. On December 31, 1997 our stock price closed at $29.50, a very respectable 44% increase in market value over the yearend 1996 close of $20.50. Share trading volume for non-block trading activity was up by 130,000 shares or 19% and the average trade size for the full year of 1997 was 803 shares, an increase of 8% over 1996. This depth of trading activity clearly enhances the liquidity of your investment in Mason-Dixon Bancshares, Inc. BUSINESS LINES SHOW SOLID GROWTH We also enjoyed strong growth in our balance sheet as evidenced by the following: - Total assets increased by 18% or $151.1 million; total loans increased by 16% or $62.2 million; total deposits increased by 5% or $30.5 million; total stockholders' equity increased by 4% or $2.8 million, despite a reduction in capital of $5.0 million as a result of the share repurchase from the dissident group. - Loan originations from our Mortgage Banking Division more than doubled in 1997 to $124 million from $58 million in 1996. Gains from the sale of mortgage loans were $1.8 million, a three-fold increase over 1996. - The market value of assets under management in our Trust Division increased by 26% to $204 million and revenue increased to nearly $1.5 million. - The Investment Services Division, which markets annuity and mutual fund products, saw its sales volume increase by 30% to $11.4 million, which produced a 25% increase in revenues. MAJOR HIGHLIGHTS AND NEW INITIATIVES DURING 1997 There were a number of key developments during the year, beyond the financial results, which deserve comment: - All of the litigation surrounding a group of dissident stockholders was settled and we repurchased all of their approximately 232,000 shares at $21.625 per share. - The stockholders voted by a 6 to 1 margin to reject the stockholder proposal submitted by a member of the dissident group. The proposal would have had the effect of dictating to the Board of Directors how they would deal with overtures from a possible acquirer. - A $20 million Trust Preferred issue was completed. This financing tool is being widely used as an alternative to issuing common equity and is attractive because it counts as Tier 1 capital for regulatory purposes but is classified as long-term borrowing for balance sheet purposes. The tax deduction for the dividends paid by Mason-Dixon significantly reduces the overall cost of capital. - The organization has been restructured along logical business lines. By taking advantage of the experience, skill, and best practices of both of our affiliate banks, we are positioned for well-managed growth. - The start-up of an asset-based lending unit permits us to compete on a broader geographic basis for this specialized type of lending and helps to round out our commercial product line. SIGNIFICANT ACQUISITION CREATES OPPORTUNITY Late in the year, we announced an agreement for Mason-Dixon Bancshares, Inc. to acquire substantially all of the assets and assume certain liabilities of the Rose Shanis Companies. This 2 - -------------------------------------------------------------------------------- family-owned consumer finance company has a 65 year history in the Baltimore area of providing consumer loans to a large base of customers. We have formed a new subsidiary to acquire the assets and liabilities, which will be known as Rose Shanis Loans, LLC. With nine offices in the Baltimore metropolitan area, and one each in Annapolis, Bel Air and Easton, we believe the acquisition of Rose Shanis is the best way to enter this specialized line of business. The all cash transaction will be accounted for as a purchase and is expected to be accretive to earnings in 1998. KEY DEVELOPMENTS SLATED FOR 1998 In looking ahead, we know there is much to do and little time to waste. The much talked about "Year 2000 problem" is a vexing one for virtually everyone. We have had a task force working on this issue and have developed a comprehensive plan to assure that all of our systems and software applications are Year 2000 compliant. During 1998, we will be doing the software conversions and equipment acquisitions necessary to assure compliance of critical systems prior to this year end. This schedule will enable us to experience a year end closing process with the new systems in place and have the remainder of 1999 to fix any problems that might occur. This issue is discussed in more detail in the Management's Discussion which follows in this report, including cost estimates to deal with the problem. As we move through the first quarter of 1998, we will continue refining our work and our cost estimates with an eye toward getting through this in the most cost effective way possible. In the Spring of 1998, we will be introducing an exciting innovation to the most basic of our products--the checking account. CHECK MANAGER PLUS offers a whole new way to help customers manage their financial affairs. At the heart of the product is a statement that provides an image of the customer's checks. By providing an image, rather than the original paper document, the customer will finally be able to get rid of the endless shoe boxes full of canceled checks that we all have a tendency to hang on to. Enhancements planned for this product over time will enable customers to better manage their checking accounts, thus the name CHECK MANAGER PLUS. OUR RESPONSE TO BROADER ISSUES FACING THE INDUSTRY Pricing for our core business, deposit-gathering and lending, continues to be under pressure. We find it difficult to reduce interest rates on basic savings accounts, certificates of deposit, money market accounts, and other interest bearing liabilities because of competitive pressure from traditional competitors as well as brokerage houses and insurance companies. At the same time, there is also pressure on lending rates as all competitors are aggressively driving for loan growth. Consequently, we have a margin squeeze which is only made worse with the flatness of today's yield curve. This is a perfect situation for savers and borrowers but it does not help our net interest margin. Consequently, we must continue to drive more non-interest income through the income statement, as we did in 1997, by developing additional services and product lines. We intend to explore additional lines of business and to offer new financial services. Leasing is an example of one new product. Statistics show that fully 30% of all equipment acquired by businesses, large and small, is through leasing. That opportunity for revenue growth is significant, and thus it is essential that we consider this line of business. The year 1997 was both challenging and rewarding and we anticipate 1998 to be the same. Mason-Dixon Bancshares, Inc. is well positioned, both geographically and strategically, to continue the profitable growth experienced in 1997. We have excellent teams of management and employees in place who are dedicated to our continued success. We are appreciative of your investment in Mason-Dixon Bancshares, Inc. and for your continued support of our strategic direction as we, too, make the investments necessary to ensure the future growth and vitality of our business. William B. Dulany Thomas K. Ferguson CHAIRMAN OF THE BOARD OF DIRECTORS PRESIDENT AND CHIEF EXECUTIVE OFFICER
3 - -------------------------------------------------------------------------------- BANK OF MARYLAND The Bank of Maryland had another record year and its success in 1997 can be measured many ways. The most important measurements, however, are profitability and growth, and I am pleased to report on the profitability side, net income of $2,203,000 was higher than our plan. This was $25,000 higher than 1996 reported earnings of $2,178,000, which were somewhat inflated by the deposit premium received on the sale of our Bethesda branch. Primary factors driving 1997 earnings were loan growth of 27% and operating expenses $402,000 below 1996. These positive factors were offset somewhat by a higher interest expense paid on deposits which negatively affected our net interest margin. This is a continuing concern as we move into 1998 with plans for continued substantial growth in loans which will be principally funded by purchased or higher priced deposits such as CD's. Asset quality remains strong and our loan loss reserve coverage of non-performing and non-accrual loans improved from 1.95x and 2.33x to 2.51x and 5.06x, respectively. This allowed us to decrease our coverage of the entire portfolio to 1.20% from 1.55% at December 31, 1996. Quality assets, loan momentum, continued bank business line consolidations, more business lines, and better market name recognition position us well to continue our momentum while building our infrastructure to ensure future quality earnings growth. Last year was the first year since 1992 that we didn't either enter or exit a market. Instead, emphasis was placed on loan growth and deposit campaigns that would help our existing branch network mature and stabilize our core deposit base. Additionally, we continued the business line consolidation with our sister bank, while maintaining the autonomy and integrity of each franchise. In addition to operations consolidated in early 1997, we created greater efficiencies through the consolidations of commercial, consumer and small business lending. In order to become more competitive, we expanded and added new business lines such as cash management, asset based lending, and real estate finance. We also secured the talent to start these business lines and grow them profitably. In fact, the level of experience and talent among those at Bank of Maryland who manage and staff our business lines would, and should be, the envy of any of our competitors including the regional and money center banks. Currently, we are exploring opportunities to enter the commercial leasing business, initiate PC banking for our corporate accounts, and set up a Private Banking Group that will provide specialized handling of our most profitable retail accounts. We are also close to signing commitments to expand our branch network in Annapolis and Baltimore City. The latter should become a reality by mid-year, and we are very optimistic that these locations will be second to none and aid dramatically in our goal to expand market share and profitability. We are proud to be affiliated with an active and aggressive holding company such as Mason-Dixon Bancshares, Inc. We believe we have effectively positioned our organization to fill the void created by bank consolidations occurring throughout our market. Change presents opportunity and at Mason-Dixon we are building our infrastructure to capitalize on that opportunity. Obstacles to unobstructed advancement such as preparation for Year 2000 and further technological advancement will require major expenditures. However, we recognize these needs and we plan to be at the forefront of change as evidenced by our CHECK MANAGER PLUS promotion. We are a Maryland bank for Marylanders. Our employees, our management team and the members of our Boards are dedicated to creating enhanced value for our stockholders, customers and the communities in which we operate. H. David Shumpert PRESIDENT AND CHIEF EXECUTIVE OFFICER 4 - -------------------------------------------------------------------------------- CARROLL COUNTY BANK AND TRUST COMPANY Carroll County Bank and Trust Company was able to post very good results in 1997. Net income totaled $7,829,000, a 16% increase over 1996. In 1995 our management team developed a five-year strategic plan with aggressive earnings goals. We continue to stay on track with those objectives. Competition, further leveraging of investments and borrowings with narrow spreads, and the interest rate environment continued to drive down our net interest margin another .30% to 3.66%. Decreases have occurred each year since 1993 when it was 4.65%. Several other areas achieved excellent results to offset the pressure on our net interest margin. We continued to achieve excellent credit quality ($38,000 in net recoveries), an 11% loan growth, 20% asset growth, and a 37% increase in non-interest income. If net interest margins in our industry continue to shrink in the future, we will become even more aggressive in asset growth, non-interest expense control, loan quality, and non-interest income growth. The two primary ways Carroll County Bank and Trust Company maximizes earnings for its stockholder, Mason-Dixon Bancshares, Inc., are to excel as a community bank and market leader in Carroll County, and profitably provide fee income services to other markets served by the holding company. The latest deposit market share data shows that we have maintained our market leader position with double the market share of our closest competitor. We believe that in order to maintain this position we must continue to develop multiple delivery channels for our customers' convenience. Our excellently located branch offices serve as a hub for our customers. They are supported by ATMs, extended-hours call center, and telephone banking services. Just as in 1995 when we relocated and significantly increased the capacity of our Eldersburg branch, the popularity of our Englar Road branch necessitates significantly increasing its ability to serve our growing Westminster market. During 1998 we plan to double the size of this strategically located branch. The second avenue to develop earnings is through our three fee-income producing divisions. Mason-Dixon Investment Services produced $532,000 in annuity and mutual fund revenue, a 25% increase over 1996. In 1998 we will also offer life and casualty insurance products to both banks' customers through a strategic partnership with SF&C Insurance Associates, Inc. of Towson. This should enable us to continue to grow this line of business. Mason-Dixon Trust Company produced revenue of $1,471,000 with assets under management of $203,900,000, growth rates of 5% and 26%, respectively. The introduction of employee benefits products should increase trust revenue opportunities and further support the corporate and small business growth strategies of both banks. Finally, Mason-Dixon Bancshares Mortgage Company closed 954 loans totaling $123,883,000 in 1997. For the second year in a row this doubled the prior year's production. This activity generated $1,843,000 in gains on loan sales compared to $584,000 last year. All of this success would not have been possible of course, without the continued support of our customers, associates, officers and directors, and community at large. Thank you. Michael L. Oster PRESIDENT AND CHIEF EXECUTIVE OFFICER 5 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following pages of this report present management's discussion and analysis of the consolidated financial condition, results of operations, and cash flows of Mason-Dixon Bancshares, Inc. ("Mason-Dixon") and subsidiaries, including its principal operating subsidiaries: Carroll County Bank and Trust Company ("Carroll County Bank") and Bank of Maryland. Certain reclassifications have been made to amounts previously reported to conform with classifications made in 1997. Mason-Dixon is a two bank holding company headquartered in Westminster, Maryland. Prior to 1995, Mason-Dixon consisted of one bank subsidiary, Carroll County Bank. On July 17, 1995, Mason-Dixon acquired all of the outstanding stock of Bank Maryland Corp located in Towson, Maryland for a combination of cash and stock in a transaction accounted for as a purchase. As a result of the acquisition, Bank of Maryland, Bank Maryland Corp's principal subsidiary, became a wholly-owned subsidiary of Mason-Dixon. The application of the purchase method of accounting requires that the earnings of any newly acquired company be included in consolidated earnings after the acquisition date. Assets and liabilities of the acquired company are adjusted to market value as of the date of the acquisition and are included in the consolidated statement of condition subsequent to the acquisition. Any excess of the purchase price over the net assets acquired is considered goodwill and is amortized over a period usually ranging from five to forty years. As a result of applying the purchase method of accounting, historical statements of earnings included in this Management Discussion and the accompanying financial statements are not restated to include the historical financial information of Bank Maryland Corp prior to the acquisition. Therefore, results of operations include Bank of Maryland for a full year for 1997 and 1996, approximately half of the year for 1995. In order to facilitate comparisons from 1996 to 1995, estimates of amounts attributable to the full year impact of the acquisition are included where relevant. The estimated impact was computed by annualizing the amounts in 1995's results of operations which were contributed by Bank of Maryland. PERFORMANCE OVERVIEW -- Mason-Dixon achieved a record level of earnings for 1997, marking the 13th consecutive year of higher profits. Net income for 1997 totaled $9,159,000, an increase of 9% over 1996's net income of $8,436,000. Basic earnings per share were $1.77 in 1997, up 11% from $1.60 in 1996. Diluted earnings per share, which include the effects of stock options, were also $1.77 for 1997 compared to $1.60 in 1996. Note 18 of the consolidated financial statements highlights changes in accounting standards for computing and disclosing earnings per share. Factors contributing to the increase in net income were higher levels of net interest income and other operating income. The favorable impact of these items was partially offset by higher levels of other operating expenses. Mason-Dixon's return on average assets was 1.00%, lower than the 1.05% posted in 1996. Return on average stockholders' equity was 12.63%, increasing from 12.27% in 1996. The acquisition of Bank Maryland Corp in 1995, as mentioned above, required the application of the purchase method of accounting which created goodwill (purchase price over net assets acquired) of $5,191,000. The recorded goodwill is a non-cash charge to earnings being amortized over a 15 year period using the straight-line method. The amortization of goodwill and other non-cash items created as a result of the application of purchase accounting has significant effects on Mason-Dixon's reported earnings and operating ratios. The introduction of these non-cash items affects the comparability of Mason-Dixon's earnings and operating ratios for periods subsequent to the acquisition. To assist in the comparison of earnings and operating ratios, the following table adjusts reported earnings and operating ratios to "cash" or "tangible" results, which negates the effects of purchase accounting on earnings and operating ratios. The reporting of tangible results for comparative purposes has 6 - -------------------------------------------------------------------------------- become more important to stockholders over recent years due to the increase in acquisitions being accounted for under the purchase method of accounting.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Reported net income $ 9,159 $ 8,436 Purchase Method Adjustments Goodwill amortization 346 346 Other purchase accounting adjustments (net of income taxes) (250) (431) Acquired net operating loss income tax benefits 609 609 ----------- ----------- Tangible net income $ 9,864 $ 8,960 ----------- ----------- ----------- ----------- Tangible operating ratios Tangible basic earnings per share (1) $ 1.90 $ 1.70 Tangible return on average assets (2) 1.08% 1.12% Tangible return on average equity (3) 14.51% 14.02%
(1) TANGIBLE NET INCOME DIVIDED BY AVERAGE SHARES OUTSTANDING (2) TANGIBLE NET INCOME DIVIDED BY AVERAGE TOTAL ASSETS LESS AVERAGE GOODWILL (3) TANGIBLE NET INCOME DIVIDED BY AVERAGE EQUITY LESS AVERAGE GOODWILL Tangible net income totaled $9,864,000 for 1997 compared to $8,960,000 in 1996, an increase of 10%. Tangible earnings per share increased 12%, increasing to $1.90 for 1997 compared to $1.70 for 1996. Tangible return on average assets and return on average equity were 1.08% and 14.51% respectively for 1997, compared to 1.12% and 14.02% in 1996. NET INTEREST INCOME -- Net interest income continues to be the principal component of net income and totaled $31,260,000. Net interest income for 1996 was $29,552,000. The increase in net interest income was primarily attributable to the growth in earning assets. A significant portion of earning assets are tax exempt instruments; therefore, it is more appropriate to analyze net interest income on a tax equivalent basis which adjusts interest income for the tax exempt status of certain loans and investment securities to an amount approximating what would have been earned if the income were 7 - -------------------------------------------------------------------------------- fully taxable. The following table highlights the major components of net interest income, adjusting for tax equivalency, for the past three years:
(DOLLARS IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST - ------------------------------------------------------------------------------------------------------------------------------------ Earning assets Loans $ 432,581 $ 39,175 9.06% $ 365,778 $ 34,122 9.33% $ 260,511 $ 25,133 Interest bearing deposits in banks 634 23 3.63% 210 16 7.62% 149 12 Federal funds sold 19,725 1,110 5.63% 21,826 1,176 5.39% 13,144 834 Investments: Mortgage-backed securities 249,611 17,579 7.04% 221,624 15,315 6.91% 208,302 15,004 Taxable 77,934 5,063 6.50% 66,504 4,353 6.55% 35,780 2,420 Tax-exempt 84,223 7,033 8.35% 72,394 6,029 8.33% 63,766 5,332 ----------------------------------- ----------------------------------- ------------------------ Total earning assets 864,708 69,983 8.09% 748,336 61,011 8.15% 581,652 48,735 ----------- ----------- ----------- Non-interest earning assets Cash and due from banks 20,294 19,701 13,580 Premises and equipment 15,427 15,552 12,042 Other assets 24,688 26,313 16,686 Allowance for credit losses (5,320) (4,827) (3,822) ----------- ----------- ----------- Total assets $ 919,797 $ 805,075 $ 620,138 ----------- ----------- ----------- ----------- ----------- ----------- Interest bearing liabilities Demand deposits $ 58,169 $ 1,336 2.30% $ 58,676 $ 1,514 2.58% $ 43,103 $ 1,115 Savings deposits 184,972 5,964 3.22% 182,857 5,628 3.08% 158,228 4,972 Time deposits 302,205 16,898 5.59% 286,557 15,860 5.53% 200,883 11,568 Borrowings 204,608 11,977 5.85% 115,919 6,242 5.38% 93,351 5,416 ----------------------------------- ----------------------------------- ------------------------ Total interest bearing liabilities 749,954 36,175 4.82% 644,009 29,244 4.54% 495,565 23,071 ----------- ----------- ----------- Non-interest bearing liabilities Demand deposits 89,488 83,825 63,072 Other 7,858 8,471 8,183 Stockholders' equity 72,497 68,770 53,318 ----------- ----------- ----------- Total liabilities and stockholders' equity $ 919,797 $ 805,075 $ 620,138 ----------- ----------- ----------- ----------- ----------- ----------- Net interest spread $ 33,808 3.27% $ 31,767 3.61% $ 25,664 ----------- ----------- ----------- ----------- ----------- ----------- Net interest margin 3.91% 4.25% (DOLLARS IN THOUSANDS) - -------------------------------- YIELD/ RATE - -------------------------------- Earning assets Loans 9.65% Interest bearing deposits in banks 8.05% Federal funds sold 6.35% Investments: Mortgage-backed securities 7.20% Taxable 6.76% Tax-exempt 8.36% Total earning assets 8.38% Non-interest earning assets Cash and due from banks Premises and equipment Other assets Allowance for credit losses Total assets Interest bearing liabilities Demand deposits 2.59% Savings deposits 3.14% Time deposits 5.76% Borrowings 5.80% Total interest bearing liabilities 4.66% Non-interest bearing liabilities Demand deposits Other Stockholders' equity Total liabilities and stockholders' equity Net interest spread 3.72% Net interest margin 4.41%
Net interest income on a tax equivalent basis was $33,808,000, an increase of 6% from 1996's net interest income of $31,767,000. Interest income includes taxable-equivalent adjustments of $2,548,000, $2,215,000, and $1,998,000 for 1997, 1996, and 1995 respectively. The tax equivalent net interest margin decreased to 3.91% from 4.25%. The decrease in the margin occurred as average rates on earning assets decreased 6 basis points, while the average rates paid on deposits and borrowings increased by 28 basis points. 8 - -------------------------------------------------------------------------------- Changes in net interest income occur from year to year due to changes in both the levels of earning assets and interest bearing liabilities, as well as the average rates received on earning assets and average rates paid on deposits and borrowings. Changes in the levels of earning assets and interest bearing liabilities are referred to as volume-related variances, while changes in average rates received on earning assets and average rates paid on deposits and borrowings are referred to as rate-related variances. The table below summarizes the changes in tax equivalent net interest income due to volume and rate variances:
(DOLLARS IN THOUSANDS) 1997 COMPARED TO 1996 1996 COMPARED TO 1995 1995 COMPARED TO 1994 - ------------------------------------------------------------------------------------------------------------------------------------ INCREASE INCREASE INCREASE (DECREASE) (DECREASE) (DECREASE) DUE TO DUE TO DUE TO ------------------------------- ------------------------------- ---------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE - ------------------------------------------------------------------------------------------------------------------------------------ Interest income Loans $ 6,232 $ (1,179) $ 5,053 $ 10,156 $ (1,167) $ 8,989 $ 5,673 $ 2,673 Investments: Mortgage-backed securities 1,934 330 2,264 960 (649) 311 631 826 Taxable 748 (38) 710 2,078 (145) 1,933 1,187 (257) Tax-exempt 985 19 1,004 721 (24) 697 749 (60) Other earning assets (81) 22 (59) 556 (210) 346 480 285 ------------------------------- ------------------------------- ---------------------- Total interest income 9,818 (846) 8,972 14,471 (2,195) 12,276 8,720 3,467 Interest expense Interest bearing demand deposits (13) (165) (178) 403 (4) 399 85 (6) Savings deposits 65 271 336 774 (118) 656 (10) 155 Time deposits 866 172 1,038 4,934 (642) 4,292 3,280 1,984 Borrowings 4,776 959 5,735 1,309 (483) 826 993 1,198 ------------------------------- ------------------------------- ---------------------- Total interest expense 5,694 1,237 6,931 7,420 (1,247) 6,173 4,348 3,331 ------------------------------- ------------------------------- ---------------------- Net interest income $ 4,124 $ (2,083) $ 2,041 $ 7,051 $ (948) $ 6,103 $ 4,372 $ 136 ------------------------------- ------------------------------- ---------------------- ------------------------------- ------------------------------- ---------------------- (DOLLARS IN THOUSANDS) - ------------------------------------------ TOTAL - ------------------------------------------ Interest income Loans $ 8,346 Investments: Mortgage-backed securities 1,457 Taxable 930 Tax-exempt 689 Other earning assets 765 Total interest income 12,187 Interest expense Interest bearing demand deposits 79 Savings deposits 145 Time deposits 5,264 Borrowings 2,191 Total interest expense 7,679 Net interest income $ 4,508
Interest income on a tax equivalent basis totaled $69,983,000, an increase of $8,972,000 or 15% from 1996. The increase was primarily attributable to higher levels of average earning assets which grew $116,372,000 or 16% compared to 1996. The mix of average earning assets changed little from 1996. Average yields declined 6 basis points due to lower yields on loans. Interest expense totaled $36,175,000, up $6,931,000 or 24% from $29,244,000 in 1996. Average interest bearing deposits increased $17,256,000 and average borrowings increased $88,689,000, resulting in higher interest expense. The mix of interest bearing liabilities shifted to more costly borrowings and time deposits, and resulted in an overall increase in average rates paid for interest bearing liabilities of 28 basis points. Included in the increase in borrowings is the issuance of $20,000,000 of Preferred Securities issued by Mason-Dixon Capital Trust which carry an annual dividend rate of 10.07%. A portion of the proceeds from the issuance of these securities was used to repurchase and retire approximately 250,000 shares of common stock for total consideration of $5,413,000. The issuance of these securities and the subsequent repurchase of common stock contributed to the increase in the weighted average cost of borrowings. These securities are discussed further in the Balance Sheet Review of this Management Discussion as well as in Note 11 of the consolidated financial statements. PROVISION AND ALLOWANCE FOR CREDIT LOSSES -- Mason-Dixon places a strong emphasis on asset quality and performs a thorough analysis of the risks in its loan portfolio and the allowance for credit losses. Each subsidiary maintains an adequate allowance for credit losses and performs a regular overview to assure that adequacy. Review of the loan portfolio and assessment of the adequacy of the allowance for credit losses is a continuing process in 9 - -------------------------------------------------------------------------------- light of changing economic conditions and changes in the strength of borrowers. In management's opinion, the allowance for credit losses is adequate as of December 31, 1997. The provision for credit losses in 1997 totaled $138,000 compared to $836,000 in 1996. The decrease in the provision is largely due to lower levels of loan losses. Net chargeoffs decreased by $324,000 to total $74,000. As a percentage of average loans, net chargeoffs were only .02%, compared to .11% in 1996. Intensive collection efforts continue after loans are charged off. Recoveries as a percentage of prior year chargeoffs were 68% in 1997 and 82% in 1996. The allowance for credit losses was 1.14% of loans outstanding at December 31, 1997 and 1.30% at December 31, 1996. Loans 90 days or more past due, secured by sufficient collateral and, therefore, still accruing, were $597,000 (.13% of loans outstanding), compared to $214,000 (.05% of loans outstanding) for 1996. Non-accrual loans totaled $3,189,000 (.69% of loans outstanding), compared to $2,821,000 (.71% of loans outstanding) at year end 1996. Non-performing loans, which consist of non-accrual loans and loans 90 days past due, totaled $3,786,000 at year end 1997, compared to $3,035,000 for 1996. Non-performing loans as a percentage of total loans were .82% at year end 1997, compared to .76% for 1996. Coverage of non-performing loans (allowance for credit losses divided by non-performing loans) equaled 1.40x at December 31, 1997 compared to 1.70x at December 31, 1996. Although levels of non-performing loans increased, Mason-Dixon still compares favorably to national industry peers. The average level of non-performing loans as a percentage of loans for bank holding companies with assets between $500 million and $1 billion was .85% at September 30, 1997. OTHER OPERATING INCOME -- Other operating income consists of service charges on deposit accounts, fees for trust services, gains on sales of loans and securities, commissions received on sales of annuities and mutual funds, loan servicing fees, and other miscellaneous income, such as safe deposit box rental fees. Total other operating income amounted to $7,990,000, up $509,000 or 7% from 1996. Other operating income in 1996 included a one-time gain on the sale of deposits of $1,469,000. Excluding the one-time gain, other operating income increased by $1,978,000 or 33%. Contributing to the increase was significant growth in mortgage banking revenue as well as increases in most other components of other operating income. Service charges increased $100,000 due to the increased volume of overdrafts and Automated Teller Machine transactions, as well as price increases on several services. Trust Division income continued to increase, up by $64,000 or 5%. Trust assets under management grew by $42,645,000 to reach $203,900,000. Gains on sales of securities totaled $554,000, compared to $271,000 in 1996. Gains on sales of mortgage loans increased to $1,843,000, compared to gains of $584,000 in 1996. The increase accompanied significant growth in mortgage loan origination volume, as Mason-Dixon expanded its mortgage operations in the third quarter of 1996. The expansion continued during 1997 and included the opening of two new Maryland production offices in Towson and Salisbury. All other sources of other operating income increased by $272,000 or 17%. Excluding a gain recognized in 1996 for the sale of a former branch location of $151,000, other sources of other operating income increased by $423,000. Most of the increase resulted from increased commissions from the sales of annuities and mutual funds of $420,000. OTHER OPERATING EXPENSES -- Total other operating expenses increased by $2,033,000 or 8%. Most components of other operating expenses increased. Salaries and employee benefits increased by $1,676,000 or 12%. Salary costs related to mortgage banking activities increased approximately $826,000. Otherwise, salaries and benefits increased by $850,000 or 6%. This increase resulted from normal increases in salaries as well as staff increases. Retirement plan expenses decreased by $168,000. 10 - -------------------------------------------------------------------------------- Net occupancy expenses grew by $214,000 or 9%. Increases in maintenance and repairs as well as additional rental expenses for the opening of additional mortgage offices contributed to the increase. Equipment expenses increased by $50,000. This increase is primarily attributable to higher depreciation expenses associated with several technology related initiatives. Legal and other professional fees increased by $388,000 as a result of litigation expenses associated with a group of dissident stockholders, as well as increased consulting fees. Federal Deposit Insurance Corporation (FDIC) insurance expenses increased to $78,000. Congress enacted legislation in 1996 resulting in the merger of the Bank Insurance Fund (BIF) with the Savings Association Insurance Fund (SAIF). Pursuant to the recapitalization and merger of the insurance funds, annual assessments for banks were increased by the FDIC beginning in 1997. Outside data processing expenses increased by $60,000 or 6%, due primarily to additional account volume. Amortization of mortgage sub-servicing rights totaled $415,000 in 1997, equal to 1996. This expense reflects the amortization of the purchase price of mortgage sub-servicing rights acquired in the purchase of Bank of Maryland. Mortgage sub-servicing rights permit the company to maintain escrow and other deposits for loans serviced by a third party. These rights are discussed in detail in the Balance Sheet Review of this Management Discussion as well as in the notes to the consolidated financial statements. Amortization of intangible assets totaled $444,000 in 1997, compared to $493,000 in 1996. Intangible assets being amortized included goodwill created as a result of the merger, as well as a core deposit intangible acquired in the merger. The lower amortization amount for 1997 reflects a reduction in amortization for the core deposit intangible, which was fully amortized at November 30, 1997. Other expenses decreased by $380,000 or 10%. 1996 expenses included $256,000 for costs associated with the disposition of the Bethesda branch of Bank of Maryland. NET OVERHEAD -- Management continues to monitor two ratios which it believes are effective measures of cost containment and efficiency. The first is the net overhead ratio, which measures the level of net operating expenses (other operating expenses less other operating income) as a percentage of average assets. The net overhead ratio for 1997 was 2.10%, improving from 2.18% for 1996. The second ratio monitored by management is known as the efficiency ratio. This ratio measures other operating expenses as a percentage of operating income (tax equivalent net interest income plus other operating income). For 1997, the efficiency ratio was 65.0% compared to 63.6% for 1996. Contributing to the increase in the efficiency ratio was the impact of initial investments in expanding mortgage operations as well as the repurchase of common stock which was paid for with interest bearing funds. Generally, net overhead ratios below 2.25% and efficiency ratios below 61.0% are considered favorable. INCOME TAXES -- Income tax expenses increased $159,000 from 1996, due to higher levels of pretax net income. The effective tax rate for 1997 was 25.7%, down slightly from 26.3% in 1996 due primarily to higher levels of tax exempt income. Note 17 to the consolidated financial statements includes a reconciliation of Federal income tax expense computed using the Federal statutory rate of 35%. See Notes 1 and 17 of the consolidated statements for additional information relating to income tax expense and deferred tax benefits. LIQUIDITY AND INTEREST RATE RISK -- Liquidity describes the ability of Mason-Dixon and its bank subsidiaries to meet financial obligations that arise out of the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of the banks' customers and to fund current and planned expenditures. Through its bank subsidiaries, Mason-Dixon derives liquidity from increased customer deposits, the maturity distribution of the investment portfolio, loan repayments, and income from earning assets. To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met utilizing short-term 11 - -------------------------------------------------------------------------------- funds markets. Longer-term funding requirements can be obtained through advances from the Federal Home Loan Bank (FHLB). Mason-Dixon's bank subsidiaries maintain lines of credit with the FHLB of $190,000,000. At December 31, 1997, Mason-Dixon's loan to deposit ratio was 71%. Additionally, Mason-Dixon's securities classified as available for sale, which totaled $249,855,000, were available for the management of liquidity and interest rate risk. Mortgage-backed securities classified as held to maturity, which totaled $77,793,000, provide significant cash flow each month. Cash and cash equivalents at December 31, 1997 were $37,963,000, down from $46,346,000 at year end 1996. Management is not aware of any trends, demands, commitments, or uncertainties that are reasonably likely to result in material changes in liquidity. Interest rate sensitivity is an important factor in the management of the composition and maturity configurations of earning assets and funding sources. Asset/Liability Committees of the subsidiary banks manage the interest rate sensitivity position in order to maintain an appropriate balance between the maturity and repricing characteristics of assets and liabilities that is consistent with liquidity, growth, and capital adequacy goals. Mason-Dixon's interest rate sensitivity at December 31, 1997, on a consolidated basis, is set forth in the table below:
AFTER 3 AFTER 1 NON- MONTHS- YEAR- INTEREST WITHIN WITHIN WITHIN AFTER SENSITIVE (DOLLARS IN THOUSANDS) 3 MONTHS 1 YEAR 5 YEARS 5 YEARS FUNDS - ------------------------------------------------------------------------------------------------------------------------- Assets Investment securities $ 89,152 $ 129,746 $ 187,310 $ 47,692 $ -- Loans (including loans held for sale) 183,184 48,600 201,056 31,990 -- Other rate sensitive assets 17,718 -- -- -- -- Interest sensitivity hedges on assets (7,000) 17,000 (10,000) -- -- Non-interest earning assets -- -- -- -- 55,732 ---------- ---------- ---------- ---------- ----------- Total Assets $ 283,054 $ 195,346 $ 378,366 $ 79,682 $ 55,732 ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- Liabilities and Stockholders' Equity Interest bearing deposits $ 87,842 $ 140,818 $ 304,978 $ 27,919 $ -- Short-term borrowings 68,392 28,811 -- -- -- Long-term borrowings 80,263 30,022 30,571 20,033 -- Non-interest bearing liabilities and stockholders' equity -- -- -- -- 172,531 ---------- ---------- ---------- ---------- ----------- Total Liabilities and Stockholders' Equity $ 236,497 $ 199,651 $ 335,549 $ 47,952 $ 172,531 ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- Interest rate sensitivity gap $ 46,557 $ (4,305) $ 42,817 $ 31,730 $ (116,799) Cumulative interest rate sensitivity gap $ 46,557 $ 42,252 $ 85,069 $ 116,799 $ -- Cumulative ratio of interest sensitive assets to interest sensitive liabilities 1.20 1.10 1.11 1.14 1.00 (DOLLARS IN THOUSANDS) TOTAL - ------------------------------------------------------------ Assets Investment securities $ 453,900 Loans (including loans held for sale) 464,830 Other rate sensitive assets 17,718 Interest sensitivity hedges on assets -- Non-interest earning assets 55,732 ---------- Total Assets $ 992,180 ---------- ---------- Liabilities and Stockholders' Equity Interest bearing deposits $ 561,557 Short-term borrowings 97,203 Long-term borrowings 160,889 Non-interest bearing liabilities and stockholders' equity 172,531 ---------- Total Liabilities and Stockholders' Equity $ 992,180 ---------- ---------- Interest rate sensitivity gap Cumulative interest rate sensitivity gap Cumulative ratio of interest sensitive assets to interest sensitive liabilities
Assumptions: The rate sensitivity analysis provided in the preceding table indicates the sensitivity to fluctuations in interest rates by analyzing maturity and repricing information for selected categories of assets and liabilities. Other rate sensitive assets, consisting of Federal funds sold and interest bearing deposits in banks, are assigned to an immediately repricable category, as these are overnight investments. Mortgage-backed investments are categorized based on the estimated amortization of these securities using recent prepayment histories. Fixed rate, noncallable investments are grouped by final maturity date. Fixed rate callable investments are grouped based on management's estimates of call probability. Variable rate investments are categorized according to the next available repricing opportunity. Fixed rate loans are grouped in the appropriate category based on normal scheduled amortization. 12 - -------------------------------------------------------------------------------- Variable rate loans are categorized based on the next available repricing opportunity. Interest bearing deposits without a contractual maturity are based on management's estimates of deposit withdrawals. Interest bearing deposits with contractual maturities are categorized based on the effective maturity of the deposit. Long-term borrowings with call provisions are grouped based on management's estimates of call probability. As a general rule, a positive GAP will have the effect of increasing net interest income during periods of rising interest rates, as higher volumes of rate sensitive earning assets will reprice at higher levels than rate sensitive liabilities. A negative GAP will usually have the opposite effect, as more rate sensitive liabilities will reprice at higher levels than rate sensitive assets, resulting in lower net interest income. In falling rate environments, the effects are reversed. A positive GAP will result in lower net interest income and a negative GAP will result in higher net interest income. At December 31, 1997, Mason-Dixon had a positive one year GAP (rate sensitive assets in excess of rate sensitive liabilities) of $42,252,000, which was 4% of total assets. The positive GAP widens to $85,069,000 or 9% of total assets at five years. At December 31, 1996, Mason-Dixon had a negative one year GAP of $79,069,000 and a negative five year GAP of $20,013,000. The change in cumulative GAP position was due to shorter projected average lives of mortgage-backed securities, changes in assumptions to reflect the probability of call features on certain securities being exercised, as well as growth in interest bearing liabilities with maturities or repricing opportunities beyond one year. The changes in assumptions on average lives of mortgage-backed securities and changes in assumptions on the probability of call provisions being exercised on certain securities were precipitated by the decline in interest rates. Lower interest rates will likely result in higher prepayments on mortgages and some securities to be called due to their original yields being significantly higher than current levels. A significant increase in interest rates would result in a lengthening of projected average lives of mortgage-backed securities and lower the probability of call features on callable securities being exercised. Management believes its overall rate sensitivity position is appropriate for current rate conditions. Mason-Dixon tests its interest rate sensitivity through the deployment of simulation analysis. An earnings simulation model is used to estimate what effect specific interest rate changes would have on one year of net interest income. Derivative financial instruments, such as interest rate swaps, are included in the analysis. Interest rate caps and floors on all products are included to the extent they become effective within a one year period. Changes in prepayments have been included where changes in payment behavior pattern is assumed to be significant to the simulation. Call features on certain securities are based on their projected call probability in view of the assumed rate environment. At December 31, 1997 Mason-Dixon's estimated earnings sensitivity profile reflected a modest sensitivity to interest rate changes. Based on an assumed 100 basis point immediate increase in interest rates Mason-Dixon's pretax net interest income would increase by $582,000 (2%) if rates were to increase by 100 basis points, and decline by $872,000 (3%) should rates fall 100 basis points. Mason-Dixon's bank subsidiaries employ the use of interest rate swaps to manage the interest rate risks of certain transactions and manage overall levels of interest rate risk. Interest rate swaps involve an agreement to exchange fixed and variable rate interest payments based on a notional amount. The use of interest rate swaps involves no exposure to loss of principal, as swaps do not involve the exchange of notional amounts, only net interest payments. Any credit risk is equal to the fair value of the instrument if a counterparty fails to perform, which is normally a small percentage of the notional amount and fluctuates with movements in interest rates. Counterparty risk is mitigated by executing all transactions in national markets with highly rated counterparties using International Derivatives Association Master Agreements. At December 31, 1997, the notional amount of all interest rate swaps totaled $55,000,000. The risk of loss due to failure of the counterparty to perform was 13 - -------------------------------------------------------------------------------- $322,000, which is the total of all interest rate swaps in a gain position. The terms of all interest rate swaps as of December 31, 1997 were as follows:
INTEREST RATE SWAPS THAT MATURE WITHIN: ONE TWO THREE (DOLLARS IN THOUSANDS) YEAR YEARS YEARS TOTAL - ------------------------------------------------------------------------------------------------------------------------ Pay fixed/receive floating: Notional amount $ 5,000 $ 5,000 $ 15,000 $ 25,000 Weighted average rates received 5.92% 5.81% 6.02% 5.96% Weighted average rates paid 6.06% 5.11% 6.44% 6.10% Receive fixed/pay floating: Notional amount $ 20,000 $ -- $ 10,000 $ 30,000 Weighted average rates received 6.39% -- 5.30% 6.03% Weighted average rates paid 5.83% -- 5.78% 5.81%
BALANCE SHEET REVIEW -- Total assets ended 1997 at $992,180,000, increasing $151,106,000 or 18%. The growth in total assets reflects increased levels of cash, loans, and investment securities. The increase in assets was funded through increases in deposits, borrowed funds, and stockholders' equity. Investment securities totaled $453,900,000, an increase of $95,369,000 or 27%. Much of the increase occurred as deposits and borrowings grew more than loans, resulting in an increase in investment securities. Securities classified as held to maturity increased $10,801,000 or 6%. The market value of the held to maturity investments was $206,515,000, a 1% unrealized appreciation over the amortized cost of $204,045,000. Securities classified as available for sale increased by $84,568,000. Management believes that the available for sale portfolio, which totaled $249,855,000 at December 31, 1997, is more than sufficient to allow for prudent management of liquidity and interest rate risk. Overall, the securities portfolio was comprised mainly of U.S Treasury securities and obligations of U.S. government agencies or sponsored agencies, which totaled $301,356,000 (66%). Obligations of states and political subdivisions totaled $84,490,000 (19%) at December 31, 1997. For several years, management has increased the holdings of tax exempt securities. The increase has been attributable to attractive tax equivalent yields compared to alternative high quality securities with similar term structures. Continued growth in the level of the tax exempt portfolio will be influenced by tax equivalent rates offered on tax exempt securities compared to other investment alternatives, potential changes in tax laws, and Alternative Minimum Tax considerations. 14 - -------------------------------------------------------------------------------- Loans increased by $62,227,000 or 16%. The table below highlights the changes in loan outstanding and mix:
PERCENT PERCENT DECEMBER 31, OF TOTAL DECEMBER 31, OF TOTAL (DOLLARS IN THOUSANDS) 1997 LOANS 1996 LOANS - ------------------------------------------------------------------------------------------------------------------------------------ Construction and land development $ 31,427 7% $ 24,202 6% Residential real estate--mortgage 186,978 41% 164,656 41% Commercial real estate--mortgage 136,194 29% 111,724 28% Commercial 88,669 19% 77,579 20% Consumer 17,464 4% 20,575 5% ------------- ----- ------------ ----- Total loans 460,732 100% 398,736 100% Unearned income on loans (341) 0% (572) 0% ------------- ----- ------------ ----- Loans (net of unearned income) $ 460,391 100% $ 398,164 100% ------------- ----- ------------ ----- ------------- ----- ------------ -----
Growth in residential real estate mortgages ($22,322,000 or 14%) was spurred by the expansion of mortgage banking activities during 1997, which resulted in increased originations of adjustable rate mortgages. These mortgages are generally retained and not sold due to a lower level of interest rate risk associated with these types of loans. Also contributing to growth in this category was an increase in home equity loans, which continue to be popular with consumers. Growth in commercial real estate mortgage loans ($24,470,000 or 22%) and construction and land development loans ($7,225,000 or 30%) resulted as Bank of Maryland introduced a Real Estate Finance Division which generated increased activity. Commercial loans also increased ($11,090,000 or 14%) due to expanded business development efforts and the introduction of an Asset-Based Lending Division. Consumer loans declined by $3,111,000. Deferred income taxes decreased by $185,000. The deferred tax liability related to available for sale securities increased, as the unrealized gain on these securities increased significantly in 1997. The unrealized gain on available for sale securities increased by $2,678,000, decreasing deferred income taxes by $1,034,000. Also contributing to the decrease was the realization of a portion of Bank of Maryland's net operating loss carryforwards totaling $609,000. Offsetting these decreases in deferred income taxes was the elimination of a $1,400,000 valuation established in 1995 to recognize the uncertainty of fully realizing the net operating loss carryforwards of Bank of Maryland. Management believes the elimination of this valuation is appropriate in light of the utilization of a significant portion of the acquired net operating loss carryforwards as well as a established pattern of profitability of Bank of Maryland which makes full realization of the net operating loss carryforwards more likely than not. Mortgage servicing and sub-servicing rights declined by $408,000, mostly due to normal scheduled amortization. Bank of Maryland holds mortgage sub-servicing rights to maintain escrow and other deposits for mortgages serviced by Greystone, a mortgage servicing company. These rights are valued much like a core deposit intangible. The right to maintain these deposits, both interest bearing and non-interest bearing, were purchased originally for $10,030,000. The purchase price is being amortized using the higher of the straight-line or level yield method. At year end, accumulated amortization reduced the book value to $3,317,000. Valuations are performed to determine if there has been any significant deterioration in value which would require a write-down in reported book value. Carroll County Bank had unamortized mortgage servicing rights totaling $95,000 at year end 1997 compared to $88,000 on December 31, 1996. Intangible assets at December 31, 1997 represent goodwill created as a result of the Bank Maryland Corp acquisition. Goodwill is typically created in acquisitions accounted for under the purchase method of accounting, and represents the excess of the purchase price of Bank Maryland Corp over the fair value of the net assets acquired. This amount is being amortized over 15 years using the straight-line method. At December 31, 1997 goodwill related to the acquisition of Bank Maryland Corp was reduced by $1,400,000, reflecting the elimination of a valuation for tax benefits acquired. This reduction of goodwill is governed by Statements of Financial Accounting 15 - -------------------------------------------------------------------------------- Standard No. 109, "Accounting for Income Taxes" which requires that any reduction to a valuation allowance established in a merger or acquisition be offset by reduction in any remaining unamortized goodwill. The remaining book value of goodwill was $2,956,000 at December 31, 1997. In addition to unamortized goodwill, intangible assets at December 31, 1996 included the unamortized portion of a core deposit intangible asset which totaled $97,000. The core deposit intangible was fully amortized by year end 1997. Deposits grew by $30,514,000 or 5%. The table below highlights the changes in deposit levels and the composition of total deposits:
PERCENT PERCENT DECEMBER 31, OF TOTAL DECEMBER 31, OF TOTAL (DOLLARS IN THOUSANDS) 1997 DEPOSITS 1996 DEPOSITS - ----------------------------------------------------------------------------------------------------------------------------- Non-interest bearing deposits $ 89,692 14% $ 94,660 15% NOW accounts 63,782 10% 58,363 10% Passbook and statement savings 94,248 14% 95,108 15% Money market savings 89,106 14% 85,043 14% Time deposits 314,421 48% 287,561 46% ------------- ----- ------------ ----- Total deposits $ 651,249 100% $ 620,735 100% ------------- ----- ------------ ----- ------------- ----- ------------ -----
Trends continued toward growth in higher cost deposits. Most of the growth in deposits occurred in time deposits which grew by $26,860,000 or 9%. NOW accounts also grew by 9% to total $63,782,000 at year end 1997. Money market accounts increased 5% while regular savings accounts declined by 1%. Non-interest bearing deposits decreased by $4,968,000. While period end non-interest bearing deposits were lower, average balances increased from $83,825,000 in 1996 to $89,488,000 in 1997. Short-term borrowings increased by $43,469,000. Higher short-term borrowings occurred as growth in earning assets exceeded growth in deposits and long-term borrowings. Long-term borrowings increased by $75,614,000 or 89%. Borrowings from the Federal Home Loan Bank of Atlanta (FHLB) increased $57,514,000, supporting significant growth in earning assets throughout 1997. The use of advances from the FHLB has increased over the last several years. These advances often carry longer term fixed rates and provide a funding source that minimizes interest rate risk on long-term fixed rate loans. Variable rate advances are also utilized to lower funding costs, as FHLB advances can be an alternative to repurchase agreements or other short-term funding sources. Longer term maturities available on variable rate FHLB advances provide a longer term source of liquidity, compared to short-term funding sources. Some of the fixed rate advances have call provisions, which may result in repayment of the advance before the stated maturity. Several variable rate advances have interest rate reset options, which may result in adjustments to stated rates of interest. In addition to increases in FHLB borrowings, Mason-Dixon completed the issuance of $20,000,000 of Preferred Securities of Mason-Dixon Capital Trust, a Trust established by Mason-Dixon for financing purposes. The issuance was completed on June 6, 1997. These securities are classified as long-term borrowings for balance sheet purposes, but the proceeds qualify as Tier 1 Capital of Mason-Dixon for regulatory purposes. The Preferred Securities have a fixed dividend yield of 10.07%, a mandatory redemption date of June 15, 2027, and are subject to varying call provisions beginning June 15, 2007. The stated value of the Preferred Securities is unconditionally guaranteed on a subordinated basis by Mason-Dixon. Issuance costs associated with the Preferred Securities are being amortized to maturity using the straight-line method. A portion of the proceeds was used to payoff a term loan facility which had a remaining unpaid amount of $1,313,000 at December 31, 1996 and a portion was used to repurchase 232,495 shares of common stock in June 1997 from a stockholder group for a total consideration of $5,028,000. The remainder of the net proceeds was used for general corporate purposes. STOCKHOLDERS' EQUITY AND CAPITAL RESOURCES -- Total stockholders' equity ended 1997 at $75,449,000, up $2,750,000 from year end 1996. Retained earnings grew $5,944,000 as a result of $9,159,000 in net income less 16 - -------------------------------------------------------------------------------- $3,215,000 in cash dividends paid. Unrealized appreciation in certain debt and equity securities increased by $1,644,000, as interest rates ended 1997 significantly lower than year end 1996 resulting in higher market values of investments classified as available for sale. The market value, net of tax effect, is included as a separate component of stockholders' equity. Offsetting these increases were reductions in common stock and surplus of $4,838,000. During 1997, Mason-Dixon repurchased and retired 250,000 shares of common stock at an average price of $21.65 per share. The largest single repurchase totaled 232,495 shares which were repurchased in June of 1997 from a stockholder group at a price of $21.625 per share. Various regulatory agencies have implemented capital adequacy guidelines which are based on an individual institution's risk profile. By regulatory definition, a "well capitalized" institution has a total capital ratio of 10% or more, a Tier 1 capital ratio of 6% or more, and a capital leverage ratio of 5% or more. Institutions which maintain ratios to qualify as well capitalized face fewer regulatory hindrances in operations and qualify for the lowest deposit insurance premiums. Minimum ratios of 8%, 4%, and 3% have been established for total capital, Tier 1 capital, and capital leverage ratios, respectively. Tier 1 capital consists of stockholders' equity and Trust Preferred Securities less unrealized gains on securities classified as available for sale and intangible assets. Deferred income tax assets which cannot be realized in the next 12 months are also disallowed from Tier 1 capital. Total capital consists of Tier 1 capital and the allowance for credit losses. The following table summarizes Mason-Dixon's capital adequacy for 1997 and 1996:
(DOLLARS IN THOUSANDS) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Tier 1 Capital: Total Stockholders' Equity $ 75,449 $ 72,699 Trust Preferred Securities 20,000 -- Less: Unrealized appreciation on certain debt and equity securities 2,149 505 Intangible assets 2,956 4,799 Disallowed deferred income taxes 4,771 4,125 ----------- ----------- Total Tier 1 Capital 85,573 63,270 Total Capital: Add: Allowance for credit losses 5,231 5,167 ----------- ----------- Total Capital $ 90,804 $ 68,437 ----------- ----------- ----------- ----------- Risk-weighted assets $ 580,693 $ 491,286 Quarterly average assets $ 979,160 $ 834,410 Total Capital Ratio (1) 15.64% 13.93% Tier 1 Capital Ratio (2) 14.74% 12.88% Capital Leverage Ratio (3) 8.74% 7.58%
(1) TOTAL CAPITAL DIVIDED BY RISK-WEIGHTED ASSETS (2) TIER 1 CAPITAL DIVIDED BY RISK-WEIGHTED ASSETS (3) TIER 1 CAPITAL DIVIDED BY QUARTERLY AVERAGE ASSETS All measures of capital adequacy improved significantly in 1997 primarily due to the issuance of the Trust Preferred Securities discussed above. The issuance added $20,000,000 to eligible Tier 1 and Total Capital of Mason-Dixon. The Capital Leverage Ratio improved from 1996, as the percentage increase in qualifying capital was greater than the increase in average quarterly assets. Both Total Capital and Tier 1 Capital Ratios increased, as the rate of growth of qualifying capital was greater than the rate of growth of risk-weighted assets. The significant increase in risk-weighted assets reflects the higher levels of loans as a percentage of assets. As a general rule, loans carry a higher risk-rating than investment securities, and a higher percentage of loans to total assets will increase risk-weighted assets. Management believes the increased levels of regulatory capital are sufficient to support the future 17 - -------------------------------------------------------------------------------- growth of Mason-Dixon, while maintaining a "well-capitalized" regulatory status. See Note 12 to the consolidated financial statements for more detailed information relating to capital adequacy ratios. 1996 COMPARED TO 1995 -- The following discussion and analysis provides a comparison of Mason-Dixon's results of operations for the years ended December 31, 1996 and 1995. This discussion should be read in conjunction with the consolidated financial statements and related notes included in this report. PERFORMANCE OVERVIEW -- Mason-Dixon's net income of $8,436,000, represented a 16% increase over 1995's net income of $7,299,000. Basic earnings per share were $1.60 and $1.54 for 1996 and 1995 respectively. Diluted earnings per share were equal to basic earnings per share for each period. Return on average stockholders' equity was 12.27%, decreasing from 13.69% in 1995. Return on average assets for 1996 was 1.05%, down from 1.18% in 1995. Significantly contributing to the increase in profits was the full year impact of Bank of Maryland's earnings. Bank of Maryland was acquired on July 17, 1995 in an acquisition accounted for as a purchase. Therefore, 1995's earnings include Bank of Maryland's results from the acquisition date to December 31, 1995. Also contributing to increased earnings were higher levels of net interest income and other operating income. Returns on average stockholders' equity and average assets were affected by the merger with Bank of Maryland, which resulted in the creation and subsequent amortization of goodwill and other non-cash charges to earnings. Tangible net income was $8,960,000 an increase of 19% over 1995 tangible net income of $7,509,000. Tangible return on average assets was 1.12% for 1996 compared to 1.22% for 1995. Tangible return on average equity equaled 14.02% down from 14.74% for 1995. Net interest income totaled $29,552,000 compared to $23,666,000 for 1995, with most of the increase attributable to the inclusion of a full year of net interest income from Bank of Maryland. The tax equivalent net interest margin decreased to 4.25% in 1996, down from 4.41% in 1995. The decrease occurred as average rates paid on earning assets decreased 23 basis points, while average rates on deposits and borrowings decreased by 12 basis points. The provision for credit losses in 1996 totaled $836,000. No provision was recognized in 1995. The provision was largely attributable to the increase in loans outstanding. Net losses on average total loans was .11% in 1996 compared to .10% in 1995. Other operating income increased $3,322,000 or 80% from 1995. Service charges increased $493,000 with the full effect of the acquisition of Bank of Maryland approximating $449,000 of the increase. Trust Division increased $294,000 and totaled $1,407,000 for 1996. The increase was driven by an increase in assets under management. Gains on sales of securities totaled $271,000 compared to $107,000 for 1995. Gains on sales of mortgage loans increased to $584,000 compared to $202,000 for 1995 due to a significant increase in the volume of loan originations and subsequent sales. 1996's other operating income included a gain on the sale of branch deposits of $1,469,000. Other operating income for 1996 included a gain of $151,000 recognized from the sale of a former branch site which was relocated. Other operating expenses increased by $6,814,000, or 38%. Much of this increase was attributable to the full year impact of Bank of Maryland, which accounted for $4,473,000 of the increase. Excluding the effect of the acquisition, expenses grew by $2,341,000 or 13%. Most categories of other operating expenses increased, reflecting expanded mortgage operations, higher salaries and benefits expenses, and increases attributable to the sale of branch deposits and data processing integration. Income taxes increased $421,000 from 1995, reflecting higher levels of taxable income. The effective tax rate for 1996 was 26.3%, up slightly from 26.1% in 1995. FUTURE TRENDS -- The Year 2000 Issue is the result of computer programs and equipment which are dependent on "embedded chip technology" using two digits rather than four to define the applicable year. Any of Mason-Dixon's computer programs or equipment that are date dependent may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of 18 - -------------------------------------------------------------------------------- operations, a temporary inability to process transactions, send invoices, or engage in similar normal business activity. Based on assessments made to date, Mason-Dixon has determined that it may be required to modify or replace portions of its software and other equipment so that its computer, security, and communications systems will properly utilize dates beyond December 31, 1999. Management believes that with modifications or conversions of software, and replacement of equipment which cannot be made Year 2000 compliant, the Year 2000 Issue can be mitigated. If such modifications, conversions or equipment replacements are not made, or are not completed in a timely manner, the Year 2000 Issue could have a material impact on the operations of Mason-Dixon. In 1996, Mason-Dixon created a corporate-wide task force to begin to assess the potential impact of the Year 2000 Issue. Since that time, significant suppliers and providers of third party processors have been contacted to assess their Year 2000 readiness. Mason-Dixon will employ both internal and external resources to reprogram, replace, and test software and equipment for Year 2000 readiness. It is expected that all critical remedies will be in place within one year or not later than December 31, 1998. The total estimated cost of the Year 2000 project is estimated at $660,000 and is being funded through operating cash flows. Of the total project cost approximately $200,000 is attributable to the purchase of equipment which will be capitalized. The remaining $460,000 will be expensed as incurred over the next two years, and is not anticipated to have a material effect on the results of operations. Costs incurred to date relating to the Year 2000 Issue have not had a material effect on Mason-Dixon's results of operations. The costs of the project and the projected completion date are based on management's best estimates, which were derived using numerous assumptions of future events. There can be no guarantee that these estimates will be achieved and actual results could differ materially from the estimates. In addition to issues relating to internal Year 2000 compliance, Mason-Dixon is vulnerable to third party suppliers and large customers to remedy their own Year 2000 Issue. There can be no guarantee that the systems of other companies on which Mason-Dixon's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with Mason-Dixon's systems, would not have a material adverse effect on Mason-Dixon. RECENT STOCK PRICES AND DIVIDENDS -- Mason-Dixon's common stock is traded on the NASDAQ National Market system under the symbol "MSDX". The number of stockholders of record as of December 31, 1997 and 1996 was 1,822 and 1,914, respectively. The table below indicates the range of stock prices and cash dividends paid in 1997 and 1996:
MARKET PRICE - ------------------------------------------------------------------------------------------------------------------- 1997 - ------------------------------------------------------------------------------------------------------------------- HIGH LOW HIGH LOW CASH ASK ASK BID BID DIVIDEND --------- --------- --------- --------- ----------- 1st Quarter $ 22.00 $ 20.25 $ 21.00 $ 19.25 $ 0.15 2nd Quarter $ 22.25 $ 21.63 $ 21.25 $ 20.63 $ 0.15 3rd Quarter $ 28.75 $ 22.25 $ 27.88 $ 21.50 $ 0.15 4th Quarter $ 30.75 $ 26.75 $ 29.50 $ 26.00 $ 0.17 - ------------------------------------------------------------------------------------------------------------------- 1996 - ------------------------------------------------------------------------------------------------------------------- HIGH LOW HIGH LOW CASH ASK ASK BID BID DIVIDEND --------- --------- --------- --------- ----------- 1st Quarter $ 19.75 $ 19.00 $ 19.00 $ 18.25 $ 0.125 2nd Quarter $ 19.25 $ 18.50 $ 18.50 $ 17.50 $ 0.125 3rd Quarter $ 18.50 $ 17.50 $ 17.50 $ 16.75 $ 0.13 4th Quarter $ 22.25 $ 17.75 $ 21.50 $ 16.75 $ 0.14
19 - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS) 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 20,245 $ 26,892 Interest bearing deposits in other banks 482 90 Federal funds sold 17,236 19,364 Investment securities held to maturity (HTM)--at amortized cost-- fair value of $206,515 (1997) and $194,257 (1996) 204,045 193,244 Investment securities available for sale (AFS)--at fair value 249,855 165,287 Loans held for sale 4,439 3,142 Loans (net of unearned income) 460,391 398,164 Less: Allowance for credit losses (5,231) (5,167) ------------ ------------ Loans, net 455,160 392,997 Premises and equipment 15,530 15,471 Other real estate owned 685 501 Deferred income taxes 6,089 6,274 Mortgage servicing and sub-servicing rights 3,412 3,820 Intangible assets 2,956 4,799 Accrued interest receivable and other assets 12,046 9,193 ------------ ------------ Total Assets $ 992,180 $ 841,074 ------------ ------------ ------------ ------------ Liabilities Non-interest bearing deposits $ 89,692 $ 94,660 Interest bearing deposits 561,557 526,075 ------------ ------------ Total deposits 651,249 620,735 Short-term borrowings 97,203 53,734 Long-term borrowings 160,889 85,275 Accrued expenses and other liabilities 7,390 8,631 ------------ ------------ Total Liabilities 916,731 768,375 ------------ ------------ Stockholders' Equity Common stock--$1.00 par value, authorized: 10,000,000 shares, issued and outstanding: 5,077,468 shares (1997) and 5,303,166 (1996) 5,077 5,303 Surplus 35,948 40,560 Retained earnings 32,275 26,331 Unrealized appreciation in certain debt and equity securities 2,149 505 ------------ ------------ Total Stockholders' Equity 75,449 72,699 ------------ ------------ Total Liabilities And Stockholders' Equity $ 992,180 $ 841,074 ------------ ------------ ------------ ------------
- -------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES. MASON-DIXON BANCSHARES, INC. 20 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- Interest Income Interest and fees on loans $ 39,011 $ 33,957 $ 24,940 Interest on deposits in other banks 23 16 12 Interest on Federal funds sold 1,110 1,176 834 Interest and dividends on investment securities: Taxable interest on mortgage-backed securities 17,579 15,315 15,004 Other taxable interest and dividends 5,063 4,353 2,420 Tax exempt interest and dividends 4,649 3,979 3,527 ------------ ------------ ------------ Total interest income 67,435 58,796 46,737 ------------ ------------ ------------ Interest Expense Interest on deposits: Time certificates of deposit of $100,000 or more 2,168 1,466 1,410 Other deposits 22,030 21,536 16,245 ------------ ------------ ------------ Total interest on deposits 24,198 23,002 17,655 Interest on short-term borrowings 4,880 2,511 4,165 Interest on long-term borrowings 7,097 3,731 1,251 ------------ ------------ ------------ Total interest expense 36,175 29,244 23,071 ------------ ------------ ------------ Net interest income 31,260 29,552 23,666 Provision For Credit Losses 138 836 -- ------------ ------------ ------------ Net interest income after provision for credit losses 31,122 28,716 23,666 ------------ ------------ ------------ Other Operating Income Service charges on deposit accounts 2,228 2,128 1,635 Trust Division income 1,471 1,407 1,113 Gain on sale of securities 554 271 107 Gain on sale of mortgage loans 1,843 584 202 Gain on sale of deposits -- 1,469 -- Other income 1,894 1,622 1,102 ------------ ------------ ------------ Total other operating income 7,990 7,481 4,159 ------------ ------------ ------------ Other Operating Expenses Salaries and employee benefits 16,109 14,433 10,475 Net occupancy expenses 2,533 2,319 1,474 Equipment expenses 1,654 1,604 1,294 Legal and professional fees 1,078 690 403 FDIC insurance expense 78 4 453 Outside data processing expense 1,068 1,008 923 Amortization of mortgage sub-servicing rights 415 415 173 Amortization of other intangible assets 444 493 210 Other expenses 3,412 3,792 2,539 ------------ ------------ ------------ Total other operating expenses 26,791 24,758 17,944 ------------ ------------ ------------ Income Before Taxes 12,321 11,439 9,881 Applicable Income Taxes 3,162 3,003 2,582 ------------ ------------ ------------ Net Income $ 9,159 $ 8,436 $ 7,299 ------------ ------------ ------------ ------------ ------------ ------------ Per Share Data Net Income Per Common Share (Basic) $ 1.77 $ 1.60 $ 1.54 ------------ ------------ ------------ ------------ ------------ ------------ Net Income Per Common Share (Diluted) $ 1.77 $ 1.60 $ 1.54 ------------ ------------ ------------ ------------ ------------ ------------
- -------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES. MASON-DIXON BANCSHARES, INC. 21 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
UNREALIZED APPRECIATION (DEPRECIATION) IN CERTAIN DEBT COMMON RETAINED AND EQUITY (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) STOCK SURPLUS EARNINGS SECURITIES - -------------------------------------------------------------------------------------------------------------------------- Balances at January 1, 1995 $ 4,326 $ 26,734 $ 15,669 $ (3,956) Net income -- -- 7,299 -- Cash dividends ($0.485 per share) -- -- (2,323) -- Issuance of additional shares of common stock 16 251 -- -- Acquisition of Bank Maryland Corp 916 12,822 -- -- Increase in unrealized appreciation in certain debt and equity securities--net of income taxes -- -- -- 4,842 ------------ ------------ ------------ ------------ Balances at December 31, 1995 5,258 39,807 20,645 886 Net income -- -- 8,436 -- Cash dividends ($0.52 per share) -- -- (2,750) -- Issuance of additional shares of common stock 45 753 -- -- Decrease in unrealized appreciation in certain debt and equity securities--net of income taxes -- -- -- (381) ------------ ------------ ------------ ------------ Balances at December 31, 1996 5,303 40,560 26,331 505 Net income -- -- 9,159 -- Cash dividends ($0.62 per share) -- -- (3,215) -- Issuance of additional shares of common stock 24 551 -- -- Repurchase of common stock (250) (5,163) -- -- Increase in unrealized appreciation in certain debt and equity securities--net of income taxes -- -- -- 1,644 ------------ ------------ ------------ ------------ Balances at December 31, 1997 $ 5,077 $ 35,948 $ 32,275 $ 2,149 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
- -------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES. MASON-DIXON BANCSHARES, INC. 22 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ Cash Flows From Operating Activities Net Income $ 9,159 $ 8,436 $ 7,299 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,519 1,392 967 Amortization of mortgage sub-servicing rights 415 415 173 Amortization of intangibles 444 493 210 Net accretion of purchase accounting adjustments (408) (702) (386) Provision for credit losses 138 836 -- Provision for deferred taxes 551 598 381 Proceeds from sales of investment securities--Trading 3,177 4,002 4,345 Purchases of investment securities--Trading (3,152) (4,000) (4,329) Originations of loans held for sale (46,879) (22,485) (7,482) Proceeds from sales of loans held for sale 47,425 21,590 6,452 Net gain on sale of assets (2,397) (846) (308) Gain on sale of deposits -- (1,469) -- Net (increase) decrease in accrued interest receivable and other assets (2,853) 913 (2,352) Net (decrease) increase in accrued expenses and other liabilities (1,241) 1,861 1,966 Other--net 300 299 (1) ------------ ------------ ------------ Net cash provided by operating activities 6,198 11,333 6,935 ------------ ------------ ------------ Cash Flows From Investing Activities Proceeds from maturities of investment securities--HTM 23,529 29,915 19,621 Purchases of investment securities--HTM (35,612) (56,759) (20,366) Proceeds from maturities of investment securities--AFS 27,313 46,137 13,446 Proceeds from sales of investment securities--AFS 74,842 71,249 42,007 Purchases of investment securities--AFS (182,634) (109,518) (76,436) Net increase in loans (62,033) (45,065) (24,376) Capital expenditures (1,578) (1,873) (3,826) Purchase of mortgage servicing rights -- (15) (29) Proceeds from sales of fixed assets -- 709 279 Sale of deposits -- (18,694) -- Acquisitions of subsidiaries, net of cash acquired -- -- 24,621 ------------ ------------ ------------ Net cash used by investing activities (156,173) (83,914) (25,059) ------------ ------------ ------------ Cash Flows From Financing Activities Net increase in deposits 30,562 47,347 23,067 Net increase (decrease) in short-term borrowings 43,469 4,283 (8,365) Proceeds from long-term borrowings 139,402 42,819 35,500 Repayments of long-term borrowings (63,788) (6,673) (9,485) Issuance of additional shares of common stock 575 798 267 Repurchase of common stock (5,413) -- -- Dividends paid (3,215) (2,750) (2,323) ------------ ------------ ------------ Net cash provided by financing activities 141,592 85,824 38,661 ------------ ------------ ------------ Net (Decrease) Increase In Cash And Cash Equivalents (8,383) 13,243 20,537 Cash and Cash Equivalents At Beginning Of Year 46,346 33,103 12,566 ------------ ------------ ------------ Cash and Cash Equivalents At End Of Year $ 37,963 $ 46,346 $ 33,103 ------------ ------------ ------------ ------------ ------------ ------------ Supplemental Cash Flow Information Interest payments $ 35,439 $ 28,306 $ 22,478 Income tax payments $ 2,378 $ 1,406 $ 2,922 Noncash Investing Activities Transfers from loans to other real estate owned $ 184 $ 170 $ -- Transfers from investments HTM to investments AFS $ -- $ -- $ 52,873 Elimination of valuation for deferred income taxes $ 1,400 $ -- $ --
- -------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES. MASON-DIXON BANCSHARES, INC. 23 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of Mason-Dixon Bancshares, Inc. ("Mason-Dixon") and its subsidiaries, including principal operating subsidiaries Carroll County Bank and Trust Company ("Carroll County Bank") and Bank of Maryland with all significant intercompany transactions eliminated. The accounting and reporting policies of Mason-Dixon conform to generally accepted accounting principles (GAAP) and to general practices in the banking industry. Certain reclassifications have been made to amounts previously reported to conform with the classifications made in 1997. NATURE OF OPERATIONS -- Mason-Dixon, through its bank subsidiaries, conducts domestic financial services business in Central Maryland and on Maryland's Eastern Shore. The primary financial services provided include real estate, commercial, and consumer lending, as well as offering demand deposits, savings products, trust services, and retail investment products. Products and services are offered to individuals, partnerships, corporations, governments, and associations. USE OF ESTIMATES -- The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PURCHASE METHOD OF ACCOUNTING -- Net assets of companies acquired in purchase transactions are recorded at the fair value at the date of acquisition. The excess of purchase price over the fair value of net assets acquired (goodwill) is amortized on a straight-line basis generally over 15 years. INVESTMENT SECURITIES HELD TO MATURITY -- Investment securities held to maturity are stated at cost adjusted for amortization of premiums and accretion of discounts. Mason-Dixon has the ability and intent to hold these securities until maturity. Sales from the held to maturity classification are rare occurrences. The amortized cost of the specific security sold is used to compute gains or losses on the sale of these securities. INVESTMENT SECURITIES AVAILABLE FOR SALE -- Investment securities designated as available for sale are stated at fair value based on quoted market prices. Securities available for sale represent those securities which management may sell as part of its asset/liability management or in response to changing interest rates, prepayment risk, or liquidity needs. The cost of securities sold is determined by the specific identification method. TRADING ACCOUNT SECURITIES -- Investment securities designated for the trading account are carried at market value. Gains and losses on trading account securities are included in other operating income. Mason-Dixon had no securities classified as "trading" at December 31, 1997 or 1996. LOANS HELD FOR SALE -- Loans held for sale are carried at the lower of aggregate cost or fair value. Gains and losses on sales of these loans are shown as a separate component of other operating income. Loans held for sale are originated and sold without recourse. Retention of the servicing rights to these loans for the collection of principal and interest payments and escrow account management is elected by the customer at the time of origination. The income derived from servicing these loans is included in other operating income. 24 - -------------------------------------------------------------------------------- LOANS -- Loans are stated at the amount of unpaid principal reduced by unearned income. Interest on commercial loans, real estate mortgages, and certain installment loans is accrued at the contractual rate on the principal amounts outstanding. Income on certain other installment loans is recognized on a declining balance method. When scheduled principal or interest payments are past due 90 days or more on any loan not fully secured by collateral and not in the process of collection, the accrual of interest income is discontinued and recognized only as collected. The loan is restored to an accruing status when all amounts past due have been paid and the borrower has demonstrated the ability to service the debt on a current basis. Loan fees and related direct costs of loan origination are deferred and recognized over the life of the loan as a component of interest income. ALLOWANCE FOR CREDIT LOSSES -- The determination of the balance of the allowance for credit losses is based on an analysis of the loan portfolio, current economic conditions, and off-balance sheet commitments. The allowance reflects an amount which, in management's judgment, is adequate to provide for potential loan losses; however, future additions may be necessary based on changes in economic conditions. Provisions for credit losses are charged to operating expenses. Certain loans are considered impaired when current information and events deem it probable that a creditor will be unable to collect all amounts due according to the loan's contractual terms. If the value of the impaired loan is less than its recorded investment, a valuation allowance is created for the difference. LONG-LIVED ASSETS -- Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of physical properties are computed on the straight-line method over the estimated useful lives of the properties. Expenditures for maintenance, repairs, and minor renewals are charged to operating expenses; expenditures for betterments are charged to the property accounts. Upon retirement or other disposition of properties, the carrying value and the related accumulated depreciation are removed from the accounts. Intangible assets are amortized using the straight-line method. Goodwill is being amortized over 15 years. A core deposit intangible, which was fully amortized as of December 31, 1997, was amortized over a period of 10 years. Long-lived assets are evaluated regularly for other-than-temporary impairment. If circumstances suggest that their value may be impaired and the write-down would be material, an assessment of recoverability is performed prior to any write-down of the asset. Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ", was adopted on January 1, 1996. Implementation of this Standard did not have a significant impact on the financial condition or results of operations of Mason-Dixon. OTHER REAL ESTATE OWNED -- Real estate acquired in foreclosure of loans is carried at cost or fair value, less estimated costs of disposal, whichever is lower. Fair value is based on independent appraisals and other relevant factors. At the time of acquisition, any excess of loan balance over fair value is charged to the allowance for credit losses. Any subsequent reduction in value, as well as any operating expenses, are included in other operating expenses. MORTGAGE SERVICING RIGHTS -- Mortgage servicing rights are accounted for under the provisions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which became effective January 1, 1997. The rights to service certain mortgages, including those purchased as well as originated, are amortized in proportion to and over the estimated period of the related net servicing revenues. Mortgage sub-servicing rights to maintain escrow and other deposits for mortgages serviced by a mortgage servicing company are amortized using the higher of straight-line or level yield method. 25 - -------------------------------------------------------------------------------- PENSION PLAN -- Mason-Dixon sponsors a defined benefit pension plan covering certain employees if they satisfy specific plan criteria. The benefits are based on years of service and the employee's average compensation during the final five years of employment. The funding policy is to contribute the maximum amount that can be deducted for Federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. POST-RETIREMENT BENEFITS -- Mason-Dixon provides health care benefits for its retired employees. Certain currently active employees who meet established age and service criteria will also be eligible for health care benefits upon retirement. Carroll County Bank also provides life insurance benefits for retirees. Current employees may become eligible for these benefits if they satisfy specific plan criteria. These benefits are accounted for in accordance with SFAS No. 106, "Employers' Accounting for Post-Retirement Benefits Other Than Pensions". This Standard establishes the accounting for post-retirement benefits on an accrual basis. NET INCOME PER SHARE -- Basic and diluted net income per common share are accounted for under the provisions of SFAS No. 128, "Earnings Per Share" which became effective for periods ending December 1997. The adoption of this standard had no impact on previously reported earnings per share. INCOME TAXES -- Deferred income taxes reflect the future years' tax consequences of differences between the tax and financial accounting bases of assets and liabilities. TRUST ASSETS AND INCOME -- Assets (other than cash deposits) held for others under fiduciary and agency relationships are not included in the accompanying balance sheets. Trust Division income is accounted for on a cash basis. Recognition of such income on an accrual basis would not materially affect reported income. CASH FLOWS -- Mason-Dixon has defined cash and cash equivalents as those amounts included in the balance sheet captions "Cash and due from banks", "Interest bearing deposits in other banks", and "Federal funds sold". FINANCIAL INSTRUMENTS -- Interest rate swaps used in asset/liability management activities are accounted for using the accrual method. Net interest income (expense) resulting from the differential between exchanging floating and fixed rate interest payments is recorded on a current basis. FAIR VALUE DISCLOSURE -- SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of Mason-Dixon. CASH AND CASH EQUIVALENTS -- The carrying amounts reported in the balance sheet for cash and cash equivalents approximate fair values for those assets. INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES) -- Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. 26 - -------------------------------------------------------------------------------- LOANS HELD FOR SALE -- The fair value of loans held for sale is based upon secondary market quotations for similar instruments. LOANS -- For all variable rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. The fair values for fixed rate commercial, consumer, and some mortgage loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. DEPOSIT LIABILITIES -- The fair values disclosed for demand deposits (e.g., interest and non-interest bearing checking), savings, and certain types of money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable rate money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. SHORT-TERM AND LONG-TERM BORROWINGS -- The fair values of short-term and long-term borrowings (except Trust Preferred securities) are estimated using discounted cash flow analyses, based on the Banks' current incremental borrowing rates for similar types of borrowing arrangements. The fair value of Trust Preferred securities included in long-term borrowings is based on quoted market prices. OFF-BALANCE SHEET INSTRUMENTS -- Fair values for loan commitments are based on fees currently charged to enter into similar agreements, taking into account remaining terms of the agreements and the counterparties' credit standards. The fair value of interest rate swaps is based upon secondary market quotations for similar contracts with like terms and conditions. PROSPECTIVE ACCOUNTING CHANGES -- SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125", was issued in December 1996. This statement defers, for one year, the effective date of Statement No. 125 for repurchase agreements, dollar-roll, securities lending and similar transactions. This statement was adopted prospectively as of January 1, 1997 and did not have a material effect on the operations of Mason-Dixon. SFAS No. 130, "Reporting Comprehensive Income", was issued in June 1997. This statement established standards for reporting and displaying of comprehensive income and its components of the financial statements. This disclosure requirement, which is effective for years beginning after December 31, 1997, will not affect Mason-Dixon's financial condition or results of operations. SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", was also issued in June 1997. This statement requires that public business enterprises report financial and descriptive information about their reportable operating segments. Reportable operating segments are defined as components of an enterprise about which separate financial information is available and is evaluated regularly by the chief operating decision maker as a basis for allocating resources and assessing performance. The statement, which is effective for periods beginning after December 15, 1997, is currently being evaluated by management as to its relevance to Mason-Dixon. In the future, Mason-Dixon may be required to report information relating to existing or acquired enterprises. The implementation and adoption of this disclosure requirement will not have a material effect on Mason-Dixon's financial condition or results of operations. 27 - -------------------------------------------------------------------------------- 2. ACQUISITION On February 11, 1998, Mason-Dixon purchased substantially all of the assets and assumed certain liabilities of Rose Shanis Companies ("Rose Shanis") of Baltimore, Maryland. Rose Shanis is a consumer finance company which operates twelve branch offices; eleven in Central Maryland and one on Maryland's eastern shore. At the acquisition date, Mason-Dixon purchased assets totaling approximately $46,000,000 and assumed certain liabilities approximating $32,000,000 for a consideration of $16,250,000 which was paid in cash. The purchase will be accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16 "Business Combinations". Under the rules of this opinion, historical results of Mason-Dixon will not be restated to include Rose Shanis. 3. RESTRICTIONS ON CASH AND DUE FROM BANKS The Federal Reserve requires banks to maintain certain minimum cash balances consisting of vault cash and deposits in the Federal Reserve Bank or in other commercial banks. The amounts of such reserves are based on percentages of certain deposit types and totaled $7,219,000 at December 31, 1997. 4. INVESTMENT SECURITIES The amortized cost and estimated fair values of investment securities held to maturity are as follows:
(DOLLARS IN THOUSANDS) 1997 - -------------------------------------------------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------ ------------ ------------ ------------ U.S. Treasury securities and obligations of U.S. government agencies $ 40,447 $ 116 $ 34 $ 40,529 Obligations of states and political subdivisions 84,490 2,032 3 86,519 Mortgage-backed securities 77,793 674 312 78,155 ------------ ------------ ------------ ------------ Total debt securities held to maturity 202,730 2,822 349 205,203 Other securities 1,315 -- 3 1,312 ------------ ------------ ------------ ------------ Total investment securities held to maturity $ 204,045 $ 2,822 $ 352 $ 206,515 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS) 1996 - -------------------------------------------------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------ ------------ ------------ ------------ U.S. Treasury securities and obligations of U.S. government agencies $ 45,068 $ 125 $ 328 $ 44,865 Obligations of states and political subdivisions 78,070 1,410 181 79,299 Mortgage-backed securities 70,106 593 606 70,093 ------------ ------------ ------------ ------------ Total investment securities held to maturity $ 193,244 $ 2,128 $ 1,115 $ 194,257 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
28 - -------------------------------------------------------------------------------- The amortized cost and estimated fair values of investment securities available for sale are as follows:
(DOLLARS IN THOUSANDS) 1997 - -------------------------------------------------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------ ------------ ------------ ------------ U.S. Treasury securities and obligations of U.S. government agencies $ 50,233 $ 85 $ -- $ 50,318 Mortgage-backed securities 184,160 2,799 12 186,947 ------------ ------------ ------------ ------------ Total debt securities available for sale 234,393 2,884 12 237,265 Equity securities available for sale 11,960 630 -- 12,590 ------------ ------------ ------------ ------------ Total investment securities available for sale $ 246,353 $ 3,514 $ 12 $ 249,855 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS) 1996 - -------------------------------------------------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------ ------------ ------------ ------------ U.S. Treasury securities and obligations of U.S. government agencies $ 9,462 $ 101 $ -- $ 9,563 Mortgage-backed securities 150,107 1,357 635 150,829 ------------ ------------ ------------ ------------ Total debt securities available for sale 159,569 1,458 635 160,392 Equity securities available for sale 4,894 1 -- 4,895 ------------ ------------ ------------ ------------ Total investment securities available for sale $ 164,463 $ 1,459 $ 635 $ 165,287 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
The amortized cost and fair value of debt securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
AVAILABLE FOR SALE (DOLLARS IN THOUSANDS) HELD TO MATURITY PORTFOLIO PORTFOLIO - -------------------------------------------------------------------------------------------------------------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ------------ ------------ ------------ ------------ Due in one year $ 12,534 $ 12,611 $ 5,431 $ 5,434 Due after one year through five years 24,888 25,314 34,997 35,058 Due after five years through ten years 48,189 48,868 9,805 9,826 Due after ten years 39,326 40,255 -- -- Mortgage-backed securities 77,793 78,155 184,160 186,947 ------------ ------------ ------------ ------------ Total debt securities $ 202,730 $ 205,203 $ 234,393 $ 237,265 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Proceeds from sales of investments in securities were $74,842 in 1997, $71,249 in 1996, and $42,007 in 1995. Gross gains and gross losses on investment securities were as follows:
(DOLLARS IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Gross gains $ 778 $ 431 $ 345 Gross losses $ 224 $ 160 $ 238
29 - -------------------------------------------------------------------------------- Investment securities held to maturity with a book value of $58,549,000 and investment securities available for sale with a book value of $151,875,000 at December 31, 1997, were pledged as collateral for certain liabilities as required or permitted by law. There were no state, county, and municipal securities whose book value, as to any issuer, exceeded 10% of stockholders' equity at December 31, 1997 or 1996. 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES At December 31, loans were as follows:
(DOLLARS IN THOUSANDS) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Construction and land development $ 31,427 $ 24,202 Residential real estate--mortgage 186,978 164,656 Commercial real estate--mortgage 136,194 111,724 Commercial 88,669 77,579 Consumer 17,464 20,575 ------------ ------------ Total loans 460,732 398,736 Unearned income on loans (341) (572) ------------ ------------ Loans (net of unearned income) $ 460,391 $ 398,164 ------------ ------------ ------------ ------------
Proceeds from sales of loans in 1997 and 1996 were $47,425,000 and $21,590,000, respectively. The following table presents information concerning non-accrual loans and loans 90 days or more past due and still accruing interest as of December 31:
(DOLLARS IN THOUSANDS) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Non-accrual loans $ 3,189 $ 2,821 ------------ ------------ ------------ ------------ Interest income which would have been recorded under original terms $ 229 $ 443 Less: Interest income recognized 142 29 ------------ ------------ Interest income not recognized $ 87 $ 414 ------------ ------------ ------------ ------------ Accruing loans 90 days or more past due $ 597 $ 214 ------------ ------------ ------------ ------------
Changes in the allowance for credit losses were as follows:
(DOLLARS IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Balance at January 1 $ 5,167 $ 4,729 $ 2,627 Allowance applicable to loans of acquired bank -- -- 2,355 Provision charged to operating expense 138 836 -- Recoveries 503 338 157 Loans charged off (577) (736) (410) ------------ ------------ ------------ Balance at December 31 $ 5,231 $ 5,167 $ 4,729 ------------ ------------ ------------ ------------ ------------ ------------
30 - -------------------------------------------------------------------------------- In accordance with SFAS Nos. 114 and 118, "Accounting By Creditors for Impairment of a Loan" and "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures", Mason-Dixon has identified certain loans as impaired. The following table presents information relating to impaired loans as of December 31:
(DOLLARS IN THOUSANDS) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Actual recorded investment at year end $ 1,716 $ 2,310 ------------ ------------ ------------ ------------ Average recorded investment $ 1,586 $ 2,455 ------------ ------------ ------------ ------------ Allowance for credit losses relating to all impaired loans $ 364 $ 662 ------------ ------------ ------------ ------------ Cash payments: Applied to principal $ 40 $ 633 Applied to interest 95 131 ------------ ------------ Totals $ 135 $ 764 ------------ ------------ ------------ ------------
6. PREMISES AND EQUIPMENT At December 31, premises and equipment consisted of the following:
(DOLLARS IN THOUSANDS) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Land $ 3,325 $ 3,309 Buildings and leasehold improvements 14,911 14,623 Vehicles and equipment 10,187 9,572 Construction and projects-in-process 463 16 ------------ ------------ 28,886 27,520 Accumulated depreciation and amortization 13,356 12,049 ------------ ------------ Premises and equipment, net $ 15,530 $ 15,471 ------------ ------------ ------------ ------------
Depreciation expense on premises, equipment, and leasehold improvements totaled $1,519,000, $1,392,000, and $967,000, for 1997, 1996, and 1995, respectively. Capitalized interest totaled $0 for 1997 and 1996, and $68,000 for 1995. Total rental expenses for premises and equipment were $1,077,000 for 1997, $1,060,000 for 1996, and $612,000 for 1995. At December 31, 1997, the aggregate minimum rental commitments under all noncancelable operating leases for premises are indicated below. There were no rental commitments for equipment.
(DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------------------------------------------------- 1998 $ 1,095 1999 1,122 2000 1,175 2001 886 2002 814 Thereafter 3,290 ------------ Total $ 8,382 ------------ ------------
In addition to minimum rentals, certain leases have escalation clauses and include provisions for additional payments to cover taxes, insurance, and maintenance. 31 - -------------------------------------------------------------------------------- 7. MORTGAGE SERVICING AND SUB-SERVICING RIGHTS Bank of Maryland retains the mortgage sub-servicing rights to maintain escrow and other deposits for mortgages currently serviced by Greystone, a mortgage servicing company. As of December 31, the total amounts of these deposits included in the consolidated statements of financial condition were $16,373,000 for 1997 and $18,468,000 for 1996. The $10,030,000 purchase price is reduced by $6,713,000 in accumulated amortization and write-down costs as of December 31, 1997. Carroll County Bank retains servicing on certain loans it sells into the secondary market. At December 31, 1997, Carroll County Bank's servicing portfolio totaled $95,463,000. The servicing portfolio totaled $106,880,000 and $113,516,000 at December 31, 1996 and 1995, respectively. Escrow balances relating to the servicing portfolio were $911,000, $1,310,000, and $1,263,000, for the years ended December 31, 1997, 1996, and 1995, respectively. The amounts capitalized in connection with acquiring the right to service mortgage loans were $26,000 in 1997, $50,000 in 1996, and $52,000 in 1995. 8. INTANGIBLE ASSETS Intangible assets at December 31, 1997 consisted solely of the unamortized portion of goodwill related to the purchase of Bank Maryland Corp. The original amount of $5,191,000 has been reduced by accumulated amortization of $835,000 and the elimination of a $1,400,000 valuation originally established for deferred income tax assets related to Bank Maryland Corp. The elimination of the valuation results in a corresponding reduction to goodwill in accordance with provisions of SFAS No. 109, "Accounting for Income Taxes". Intangible assets at December 31, 1996 included unamortized goodwill as well as the unamortized portion of a core deposit intangible. The core deposit intangible was fully amortized during 1997. 9. DEPOSITS At December 31, deposits were as follows:
(DOLLARS IN THOUSANDS) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Non-interest bearing deposits $ 89,692 $ 94,660 Interest bearing deposits: Passbook and statement savings 94,248 95,108 Money market savings 89,106 85,043 Time deposits: $100,000 or more 45,068 42,993 Less than $100,000 269,353 244,568 ------------ ------------ Total time deposits 314,421 287,561 NOW accounts 63,782 58,363 ------------ ------------ Total interest bearing deposits 561,557 526,075 ------------ ------------ Total deposits $ 651,249 $ 620,735 ------------ ------------ ------------ ------------
32 - -------------------------------------------------------------------------------- 10. SHORT-TERM BORROWINGS Short-term borrowings, which consist primarily of securities sold under agreements to repurchase and a U.S. Treasury demand note, were as follows:
(DOLLARS IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Average amount outstanding during year $ 87,173 $ 45,823 $ 68,571 Weighted average interest rate during year 5.60% 5.48% 5.89% Amount outstanding at year end $ 97,203 $ 53,734 $ 49,451 Weighted average interest rate at year end 5.73% 5.42% 5.56% Maximum amount at any month end $ 119,774 $ 67,607 $ 86,535
11. LONG-TERM BORROWINGS Long-term borrowings consisted of the following as of December 31:
(DOLLARS IN THOUSANDS) 1997 - ----------------------------------------------------------------------------------------------------------------------------- Federal Home Loan Bank of Atlanta (FHLB): 5.77% Advance due March 25, 1998 $ 1,439 6.48% Advance due September 6, 1998 2,000 5.79% Advance due September 12, 1998 7,000 4.48% Advance due September 20, 1998 400 4.63% Advance due September 20, 1998 200 4.49% Advance due October 21, 1998 450 4.64% Advance due October 21, 1998 150 5.30% Advance due January 18, 1999 3,980 5.59% Advance due April 18, 2000 40,000 5.82% Advance due May 2, 2000 30,000 5.00% Advance due September 20, 2000 857 6.03% Advance due June 26, 2002 25,000 5.66% Advance due September 24, 2002 5,000 5.03% Advance due November 26, 2007 25,000 ------------ Subtotal 141,476 Mason-Dixon Capital Trust I--10.07% due June 15, 2027, net of $587 underwriting discount 19,413 ------------ Total $ 160,889 ------------ ------------
The contractual annual maturities on the FHLB advances over the next five years are as follows: 1998-- $11,639,000; 1999--$3,980,000; 2000--$70,857,000; 2002--$30,000,000. Actual principal payments on the advances may vary, as Mason-Dixon has the option of prepaying principal on several advances. Some advances have interest rate reset provisions, which may result in changes to interest rates from the rates included in the table above. Mason-Dixon has pledged $92,569,000 of residential mortgage loans and $77,180,000 of investment securities as collateral for the advances. In June of 1997, Mason-Dixon Capital Trust ("MDCT"), a wholly-owned subsidiary of Mason-Dixon, issued $20,000,000 10.07% Preferred Securities due in 2027. MDCT invested the proceeds of the Preferred Securities, combined with $619,000 paid by Mason-Dixon for MDCT's Common Securities, in $20,619,000 of Mason-Dixon's 10.07% Junior Subordinated Debentures. MDCT's sole asset is the Junior Subordinated Debentures which matures in 2027. Mason-Dixon has fully and unconditionally guaranteed all of MDCT's obligations under the Preferred 33 - -------------------------------------------------------------------------------- Securities. The Preferred Securities of MDCT qualify for inclusion in Tier 1 Capital under current capital guidelines, and are subject to varying call provisions beginning in 2007. 12. STOCKHOLDERS' EQUITY DIVIDEND RESTRICTION -- Under Maryland banking law, the Boards of Directors of Mason-Dixon subsidiary banks may declare cash dividends to Mason-Dixon from undivided profits and, with the prior consent and approval of the Bank Commissioner, from each individual bank's excess surplus after providing for expenses, losses, interest, and taxes accrued or due. The amount of cash dividends that Mason-Dixon's subsidiaries could have paid without approval from the Bank Commissioner totaled $21,584,000 at December 31, 1997. CAPITAL ADEQUACY -- Mason-Dixon and its subsidiary banks ("the Banks") are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks' assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. Quantitative measures defined by regulation to ensure capital adequacy require the Banks to maintain the amounts and ratios of total and Tier I capital to risk-weighted assets and of capital leverage to average assets as set forth in the following table. As of December 31, 1997, management believes that the Banks meet all capital adequacy requirements to which they are subject. The most recent notification from the Federal Deposit Insurance Corporation categorized the Banks as well capitalized under the regulatory framework for prompt corrective action as of December 31, 1997. To be categorized as well capitalized, the Banks must maintain minimum total capital, Tier I capital, and capital leverage ratios as indicated in the table. There are no conditions or events since that notification that management believes have changed the Banks' category. The Banks' actual capital amounts and ratios are also presented as of December 31, 1997 and 1996. 34 - --------------------------------------------------------------------------------
TO BE WELL CAPITALIZED UNDER FOR CAPITAL ADEQUACY PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISIONS - ---------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ---------------------------------------------------------------------------------------------------------------------------- As of December 31, 1997 Total Capital (to Risk-Weighted Assets): Mason-Dixon $ 90,804 15.64% $ 46,447 8.00% $ 58,059 10.00% Carroll County Bank $ 55,239 15.44% $ 28,621 8.00% $ 35,777 10.00% Bank of Maryland $ 22,862 10.51% $ 17,402 8.00% $ 21,753 10.00% Tier 1 Capital (to Risk-Weighted Assets): Mason-Dixon $ 85,573 14.74% $ 23,222 4.00% $ 34,833 6.00% Carroll County Bank $ 52,533 14.68% $ 14,314 4.00% $ 21,471 6.00% Bank of Maryland $ 20,337 9.35% $ 8,700 4.00% $ 13,050 6.00% Capital Leverage (to Average Assets): Mason-Dixon $ 85,573 8.74% $ 29,373 3.00% $ 48,955 5.00% Carroll County Bank $ 52,533 7.48% $ 21,069 3.00% $ 35,116 5.00% Bank of Maryland $ 20,337 7.71% $ 7,913 3.00% $ 13,189 5.00% As of December 31, 1996 Total Capital (to Risk-Weighted Assets): Mason-Dixon $ 68,437 13.93% $ 39,303 8.00% $ 49,129 10.00% Carroll County Bank $ 45,515 14.76% $ 24,669 8.00% $ 30,836 10.00% Bank of Maryland $ 19,200 10.93% $ 14,057 8.00% $ 17,571 10.00% Tier 1 Capital (to Risk-Weighted Assets): Mason-Dixon $ 63,270 12.88% $ 19,651 4.00% $ 29,477 6.00% Carroll County Bank $ 42,920 13.92% $ 12,334 4.00% $ 18,501 6.00% Bank of Maryland $ 17,004 9.68% $ 7,028 4.00% $ 10,542 6.00% Capital Leverage (to Average Assets): Mason-Dixon $ 63,270 7.58% $ 25,032 3.00% $ 41,721 5.00% Carroll County Bank $ 42,920 7.47% $ 17,242 3.00% $ 28,737 5.00% Bank of Maryland $ 17,004 7.37% $ 6,925 3.00% $ 11,542 5.00%
DIVIDEND REINVESTMENT PLAN -- Mason-Dixon sponsors a Dividend Reinvestment and Stock Purchase Plan. This plan provides for 125,000 shares of Mason-Dixon's common stock to be reserved for issuance under the plan. The plan allows for participating stockholders to purchase additional shares by reinvesting the dividends paid on shares registered in their name, by making optional cash purchases, or both. Shares reinvested or purchased are acquired in the open market at fair market value (average high and low sale price on the investment date as quoted on NASDAQ). Optional cash purchases are limited to a maximum of $2,500 per calendar quarter. Mason-Dixon reserves the right to amend, modify, suspend, or terminate the plan at its discretion, at any time. 13. PENSION AND PROFIT SHARING PLANS Mason-Dixon sponsors a defined benefit pension plan which covers certain employees. Benefits are based on years of service and the employee's average compensation. The funding policy is to contribute the maximum amount deductible for Federal income tax purposes. Contributions provide not only for benefits attributed to 35 - -------------------------------------------------------------------------------- service to date, but also for those expected to be earned in the future. Net pension cost includes the following components:
(DOLLARS IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Service cost--benefits earned during year $ 318 $ 373 $ 287 Interest cost on projected benefit obligation 490 475 426 Actual return on plan assets (1,036) (807) (828) Net amortization and deferral 368 267 292 ------------ ------------ ------------ Net pension cost $ 140 $ 308 $ 177 ------------ ------------ ------------ ------------ ------------ ------------ Weighted average discount rate used in determining the actuarial present value of the projected benefit obligation 7.3% 7.5% 7.3% Rate of increase in future compensation 5.5% 5.5% 5.5% Long-term rate of return on assets 9.0% 9.0% 9.0%
The following table sets forth the plan's funded status and amounts recognized in the balance sheet at December 31:
(DOLLARS IN THOUSANDS) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $6,170 (1997) and $5,107 (1996) $ 6,270 $ 5,161 ------------ ------------ Plan assets at fair value, primarily listed stocks and fixed income securities 8,106 6,829 Projected benefit obligation for service rendered to date 7,160 6,987 ------------ ------------ Prepaid pension cost (benefit obligation) 946 (158) Unrecognized net (gain) from past experience different from that assumed and effects of changes in assumptions (159) (14) Prior service cost (recognized) not recognized (278) 276 Unrecognized net obligation at January 1, 1987 being recognized over 15 years (235) (211) ------------ ------------ Accrued pension asset (liability) $ 274 $ (107) ------------ ------------ ------------ ------------
Mason-Dixon sponsors an employee savings and investment plan under the provisions of Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees meeting age and service requirements and provides for both employee and employer matching contributions and additional unmatched discretionary contributions. Participants in either matched or unmatched contributions may be required to invest a portion in common stock of Mason-Dixon. Contributions to the plan totaled $249,000 for 1997, $352,000 for 1996, and $256,000 for 1995. 14. STOCK OPTIONS During 1997 and 1996, Mason-Dixon awarded employee stock options pursuant to various compensation plans. Each grant was made at a price equal to the fair market value of the stock on the date of the grant. Options are granted upon approval of the Board of Directors under various vesting schedules with a maximum exercise term of 10 years. 36 - -------------------------------------------------------------------------------- Information with respect to options is as follows for the years ended December 31:
1997 1996 - --------------------------------------------------------------------------------------------------------------------------- PRICING PRICING SHARES RANGE SHARES RANGE --------------- ----------------- --------------- --------------- Outstanding at beginning of year 4,500 $ 21.00 -- $ -- Granted 6,405 19.75 4,500 21.00 Exercised -- -- -- -- Expired/Canceled -- -- -- -- --------------- ----------------- --------------- --------------- Outstanding at end of year 10,905 $ 19.75-$ 21.00 4,500 $ 21.00 --------------- ----------------- --------------- --------------- --------------- ----------------- --------------- --------------- Weighted average exercise price $ 20.27 $ 21.00
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Dividend yield 2.73% 2.73% Expected volatility 30.00% 30.00% Risk-free interest rate 6.29% 6.29% Expected lives 10 years 10 years
Mason-Dixon has adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", but applies Accounting Principles Board No. 25 and related interpretations in accounting for options. If Mason-Dixon had elected to recognize compensation cost based on the fair value at the grant dates for awards prescribed by SFAS 123, pro forma net income and basic earnings per share would have been as follows:
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 9,115 $ 8,403 Earnings per share $ 1.76 $ 1.59
15. POST-RETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS Post-retirement benefits are accounted for in accordance with SFAS No. 106, "Employers' Accounting for Post-Retirement Benefits Other Than Pensions". Under SFAS No. 106, the expected cost of providing post-retirement benefits is recognized in the financial statements during the employee's active service period. Post-retirement benefit expense for the years ended December 31 follows:
(DOLLARS IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Service cost $ 6 $ 6 $ 5 Interest cost on projected benefit obligation 49 66 71 Amortization of prior service cost (16) -- -- Amortization of unrecognized net loss (gain) 3 (1) 1 ------------ ------------ ------------ Net post-retirement benefit cost $ 42 $ 71 $ 77 ------------ ------------ ------------ ------------ ------------ ------------
37 - -------------------------------------------------------------------------------- Mason-Dixon's post-retirement benefit plan is not funded. The status of the plan as of December 31 was as follows:
(DOLLARS IN THOUSANDS) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated post-retirement benefit obligations - Retirees $ (585) $ (487) Fully eligible active plan participants (39) (51) Other active plan participants (41) (34) ------------ ------------ (665) (572) Unrecognized prior service cost (237) (253) Unrecognized net loss (gain) from the effect of change of assumption 92 (11) ------------ ------------ Accrued post-retirement liability $ (810) $ (836) ------------ ------------ ------------ ------------
The assumed health care cost trend rate used in measuring the accumulated post-retirement obligation was 7.8% for 1997, gradually declining to 5.5% over the next 7 years and remaining at that level thereafter. A one percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated post-retirement obligation as of December 31, 1997 by 9%. The assumed discount rate in determining the accumulated post-retirement benefit obligation was 7.8% for 1997 and 8.0% for 1996 and 1995. 16. DEFERRED COMPENSATION Mason-Dixon, Carroll County Bank, and Bank of Maryland have entered into deferred compensation agreements with former executive officers, certain members of senior management, and Boards of Directors. Under the terms of the agreements, certain portions of officers' base salaries and the directors' fees have been deferred. The plan is entirely contributory by the participant and, therefore, no benefit expense is included in the consolidated statements of income for 1997, 1996, and 1995. 17. INCOME TAXES Applicable income taxes were as follows:
(DOLLARS IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Current: Federal $ 2,347 $ 2,089 $ 1,837 State 264 316 364 ------------ ------------ ------------ Total current 2,611 2,405 2,201 ------------ ------------ ------------ Deferred: Federal 451 490 312 State 100 108 69 ------------ ------------ ------------ Total deferred 551 598 381 ------------ ------------ ------------ Total income tax expense $ 3,162 $ 3,003 $ 2,582 ------------ ------------ ------------ ------------ ------------ ------------
38 - -------------------------------------------------------------------------------- Components of deferred income tax expense for the three years ended December 31 were as follows:
(DOLLARS IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Provision for loan losses $ (157) $ (257) $ (758) Pension expense 75 83 (67) Depreciation 26 18 111 Loan fees (17) (23) 64 Loan costs 62 (43) (12) Deferred compensation (188) (114) (77) Post-retirement benefits 13 (3) (7) Mortgage sub-servicing rights 85 85 56 Net operating loss carryforwards 609 718 985 Lease expense (64) -- -- Purchase accounting adjustments 157 271 123 Other (50) (137) (37) ------------ ------------ ------------ Total deferred income tax expense $ 551 $ 598 $ 381 ------------ ------------ ------------ ------------ ------------ ------------
At December 31, 1997 and 1996, net deferred income taxes totaled $6,089,000 and $6,274,000, respectively, as follows:
(DOLLARS IN THOUSANDS) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Allowance for credit losses $ 1,843 $ 1,686 Acquisition valuations 79 236 Deferred compensation 695 507 Post-retirement benefits 310 323 Deferred loan fees and costs 402 447 Pension plan -- 36 Mortgage sub-servicing rights 557 642 Tax loss carryforwards 3,532 4,141 Lease expense 64 -- Other 222 135 ------------ ------------ Gross deferred tax assets 7,704 8,153 Valuation allowance -- (1,400) ------------ ------------ Total deferred tax assets 7,704 6,753 ------------ ------------ Deferred tax liabilities: Depreciation 172 146 Pension plan 39 -- Other 52 15 Unrealized gain on securities available for sale 1,352 318 ------------ ------------ Total deferred tax liabilities 1,615 479 ------------ ------------ Net deferred income taxes $ 6,089 $ 6,274 ------------ ------------ ------------ ------------
39 - -------------------------------------------------------------------------------- Total tax expense of $3,162,000, $3,003,000, and $2,582,000, for 1997, 1996, and 1995, was 25.7%, 26.3%, and 26.1%, respectively, of income before taxes as compared to the maximum statutory rate for Federal income taxes, reconciled as follows:
(DOLLARS IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ PERCENT PERCENT PERCENT OF PRETAX OF PRETAX OF PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME - ------------------------------------------------------------------------------------------------------------------------ Computed at statutory rate $ 4,312 35.0% $ 4,004 35.0% $ 3,360 34.0% Increases (decreases) in taxes resulting from: Tax exempt interest income (1,647) (13.3) (1,521) (13.3) (1,316) (13.3) Dividend exclusion (33) (0.3) (1) -- (4) -- State income taxes, net of Federal income tax benefit 236 1.9 307 2.7 277 2.8 Nondeductible interest expense 234 1.9 197 1.7 177 1.8 Nondeductible goodwill and merger expenses 156 1.3 173 1.5 68 0.6 Other--net (96) (0.8) (156) (1.3) 20 0.2 ------------ ------------ ------------ ------------ ------------ ------------ Actual tax expense $ 3,162 25.7% $ 3,003 26.3% $ 2,582 26.1% ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Net operating loss carryforwards obtained through the acquisition of Bank Maryland Corp totaled approximately $9,146,000 for income tax purposes at December 31, 1997, and expire at various times beginning in 2002. Under Section 382 of the Internal Revenue Code, Mason-Dixon's utilization of these loss carryforwards is limited to an annual maximum amount of $1,575,000, which can only be applied to the taxable income of Bank of Maryland. At December 31, 1997, a $1,400,000 valuation allowance related to the net operating loss carryforwards was eliminated. The valuation was determined to be unnecessary in light of Bank of Maryland's continued pattern of profitability and likelihood of fully realizing all of the net operating loss carryforward. 18. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share", which is effective for reporting periods ending after December 15, 1997. Under the provisions of SFAS No. 128, primary and fully diluted earnings per share were replaced with basic and diluted earnings per share in an effort to simplify the computation and more closely align earnings per share definitions with international rules. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding and does not include the impact of any potentially dilutive common stock equivalents. Diluted earnings per share is arrived at by dividing net income by the weighted average number of shares outstanding, adjusted for the dilutive effect of outstanding stock options and the conversion impact of any convertible equity securities. 40 - -------------------------------------------------------------------------------- The calculations of basic and diluted earnings per share were as follows:
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Basic earnings per share: Net income $ 9,159 $ 8,436 $ 7,299 Average common shares outstanding 5,183,659 5,285,268 4,753,185 Net income per common share--basic $ 1.77 $ 1.60 $ 1.54 Diluted earnings per share: Net income $ 9,159 $ 8,436 $ 7,299 Average common shares outstanding 5,183,659 5,285,268 4,753,185 Stock option adjustment 1,492 -- -- ------------ ------------ ------------ Average common shares outstanding--diluted 5,185,151 5,285,268 4,753,185 Net income per common share--diluted $ 1.77 $ 1.60 $ 1.54
19. RELATED PARTY TRANSACTIONS During the ordinary course of business, Mason-Dixon's subsidiaries make loans to many of their directors and their associates and several of their policy-making officers on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other customers. Loans outstanding, both direct and indirect, to directors, their associates, and policy-making officers totaled $3,552,000 and $2,847,000 at December 31, 1997 and 1996, respectively. During 1997, $1,990,000 of new loans were made and repayments totaled $1,285,000. In 1996, $3,931,000 of new loans were made and repayments totaled $4,062,000. 20. COMMITMENTS AND CONTINGENCIES Mason-Dixon is a party to litigation related to its business. In the opinion of management, the ultimate liability, if any, resulting from these matters would not have a significant effect on Mason-Dixon's consolidated financial position, results of operations, or liquidity. 21. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Mason-Dixon is a party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments may include commitments to extend credit, standby letters of credit, interest rate swaps, and purchase commitments. Mason-Dixon uses these financial instruments to meet the financing needs of its customers and reduce its own exposure to fluctuations in interest rates. Financial instruments involve, to varying degrees, elements of credit, interest rate, and liquidity risk. These do not represent unusual risks and management does not anticipate any losses which would have a material effect on the accompanying financial statements. The following is a summary of the contract or notional amount of significant commitments and contingent liabilities:
(DOLLARS IN THOUSANDS) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Commitments to extend credit $ 151,403 $ 111,279 Standby letters of credit $ 6,072 $ 8,586 Interest rate swaps $ 55,000 $ 48,000 Purchase commitments $ 779 $ --
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Mason-Dixon generally requires collateral to support financial instruments 41 - -------------------------------------------------------------------------------- with credit risk on the same basis as it does for on-balance sheet instruments. The collateral is based on management's credit evaluation of the counterparty. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Each customer's credit-worthiness is evaluated on a case-by-case basis. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Interest rate swaps involve an agreement to exchange fixed and variable rate interest payments based on a notional principal amount and maturity date. The differential between the fixed and variable rate is included as interest income or expense of the asset or liability being hedged. These derivative financial instruments are used for asset liability management. Entering into swaps involves the risk of dealing with counterparties and their ability to meet the terms of outstanding contracts and risks related to movements in interest rates. The credit risk of interest rate swap contracts is controlled through credit approvals, limits, and monitoring procedures. The principal or notional amounts are used to compute the volume of interest obligations, but the amounts potentially subject to risk are much smaller. With regard to these agreements, the risk of loss is estimated as $322,000 at December 31, 1997, representing the current cost of replacing only those swaps in a gain position in the event of counterparty failure. Purchase commitments include contract agreements to purchase land and certain computer equipment. Mason-Dixon entered into a five-year agreement for outside computer processing services expiring June, 2001. There is a minimum monthly processing fee of $72,000, plus additional amounts based on the number and types of transactions. 22. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of Mason-Dixon's financial instruments at December 31, were as follows:
(DOLLARS IN THOUSANDS) 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE - -------------------------------------------------------------------------------------------------------------------------- Financial Assets Cash and due from banks $ 20,245 $ 20,245 $ 26,892 $ 26,892 Interest bearing deposits in other banks $ 482 $ 482 $ 90 $ 90 Federal funds sold $ 17,236 $ 17,236 $ 19,364 $ 19,364 Investment securities--HTM $ 204,045 $ 206,515 $ 193,244 $ 194,257 Investment securities--AFS $ 249,855 $ 249,855 $ 165,287 $ 165,287 Loans held for sale $ 4,439 $ 4,486 $ 3,142 $ 3,217 Loans $ 460,391 $ 461,278 $ 398,164 $ 400,119 Financial Liabilities Deposits $ 651,249 $ 654,301 $ 620,735 $ 621,445 Short-term borrowings $ 97,203 $ 97,203 $ 53,734 $ 53,736 Long-term borrowings $ 160,889 $ 165,242 $ 85,275 $ 85,161 Off-Balance Sheet Items Commitments to extend credit $ -- $ -- $ -- $ -- Standby letters of credit $ -- $ 121 $ -- $ 172 Interest rate swaps $ -- $ (269) $ -- $ (80)
42 - -------------------------------------------------------------------------------- 23. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of Mason-Dixon's unaudited quarterly results of operations:
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1997 - -------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED: 12/31 9/30 6/30 3/31 - -------------------------------------------------------------------------------------------------------------------------- Interest income $ 18,095 $ 17,720 $ 16,125 $ 15,495 Interest expense 10,149 9,910 8,356 7,760 ------------ ------------ ------------ ------------ Net interest income 7,946 7,810 7,769 7,735 Provision for credit losses 42 (12) 51 57 Other operating income 2,101 1,928 1,802 1,605 Gain on sales of securities 220 26 87 221 Operating expenses 6,949 6,717 6,720 6,405 ------------ ------------ ------------ ------------ Income before taxes 3,276 3,059 2,887 3,099 Applicable income taxes 829 771 738 824 ------------ ------------ ------------ ------------ Net income $ 2,447 $ 2,288 $ 2,149 $ 2,275 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income per common share (Basic) $ 0.48 $ 0.45 $ 0.41 $ 0.43 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income per common share (Diluted) $ 0.48 $ 0.45 $ 0.41 $ 0.43 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1996 - -------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED: 12/31 9/30 6/30 3/31 - -------------------------------------------------------------------------------------------------------------------------- Interest income $ 15,179 $ 15,065 $ 14,505 $ 14,047 Interest expense 7,732 7,503 7,131 6,878 ------------ ------------ ------------ ------------ Net interest income 7,447 7,562 7,374 7,169 Provision for credit losses 612 35 189 -- Other operating income 2,950 1,394 1,357 1,509 Gain on sales of securities 4 92 55 120 Operating expenses 6,794 6,278 5,789 5,897 ------------ ------------ ------------ ------------ Income before taxes 2,995 2,735 2,808 2,901 Applicable income taxes 803 631 743 826 ------------ ------------ ------------ ------------ Net income $ 2,192 $ 2,104 $ 2,065 $ 2,075 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income per common share (Basic) $ 0.42 $ 0.40 $ 0.39 $ 0.39 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income per common share (Diluted) $ 0.42 $ 0.40 $ 0.39 $ 0.39 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
43 - -------------------------------------------------------------------------------- 24. PARENT COMPANY ONLY FINANCIAL INFORMATION Condensed financial information for Mason-Dixon Bancshares, Inc. (Parent Company Only) is as follows:
(DOLLARS IN THOUSANDS) DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------- CONDENSED BALANCE SHEETS 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 1,703 $ 808 Interest bearing deposits in subsidiaries 849 1,388 Investment securities held to maturity--at amortized cost-- fair value of $998 (1997) and $960 (1996) 1,000 1,000 Investment securities available for sale--at fair value 7,462 -- Investment in subsidiaries 86,493 73,201 Advances to subsidiaries and other assets 948 548 ------------ ------------ Total Assets $ 98,455 $ 76,945 ------------ ------------ ------------ ------------ Liabilities Long-term borrowings $ 22,031 $ 3,313 Deferred income taxes 243 -- Other liabilities 732 933 ------------ ------------ Total Liabilities 23,006 4,246 ------------ ------------ Stockholders' Equity Common stock 5,077 5,303 Surplus 35,948 40,560 Retained earnings 32,275 26,331 Unrealized appreciation in certain debt and equity securities 2,149 505 ------------ ------------ Total Stockholders' Equity 75,449 72,699 ------------ ------------ Total Liabilities and Stockholders' Equity $ 98,455 $ 76,945 ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS) DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------------- CONDENSED STATEMENTS OF INCOME FOR THE PERIOD ENDED 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Income Cash dividends from subsidiaries $ 4,139 $ 6,372 $ 9,617 Interest and dividend income 517 131 64 Other income 281 60 60 ------------ ------------ ------------ Total Income 4,937 6,563 9,741 Interest expense on long-term borrowings 1,394 490 183 Operating expenses 853 498 202 ------------ ------------ ------------ Income before income tax benefit and equity in undistributed income of subsidiaries 2,690 5,575 9,356 Income tax benefit (554) (264) (86) ------------ ------------ ------------ Income before equity in undistributed income of subsidiaries 3,244 5,839 9,442 Equity in undistributed income of subsidiaries 5,915 2,597 (2,143) ------------ ------------ ------------ Net Income $ 9,159 $ 8,436 $ 7,299 ------------ ------------ ------------ ------------ ------------ ------------
44 - --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------------- CONDENSED STATEMENTS OF CASH FLOWS FOR THE PERIOD ENDED 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net Income $ 9,159 $ 8,436 $ 7,299 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries (5,915) (2,597) 2,143 Gain on sale of assets (220) -- -- Net (increase) decrease in other assets (400) 167 (668) Net (decrease) increase in other liabilities (201) 189 725 Other--net 23 -- -- ------------ ------------ ------------ Net Cash Provided by Operating Activities 2,446 6,195 9,499 ------------ ------------ ------------ Cash Flows From Investing Activities Investments in and advances to subsidiaries (6,179) (60) (60) Repayment of advances to subsidiaries 60 60 60 Cash payment for acquisition -- -- (13,053) Purchases of investment securities (10,021) -- -- Proceeds from sales of investment securities 3,397 -- -- ------------ ------------ ------------ Net Cash Used by Investing Activities (12,743) 0 (13,053) ------------ ------------ ------------ Cash Flows From Financing Activities Proceeds from long-term borrowings 20,019 2,000 6,500 Repayment of long-term borrowings (1,313) (5,188) -- Repurchase of common stock (5,413) -- -- Issuance of additional shares of common stock 575 798 267 Dividends paid (3,215) (2,750) (2,323) ------------ ------------ ------------ Net Cash Provided (Used) by Financing Activities 10,653 (5,140) 4,444 ------------ ------------ ------------ Net Increase in Cash and Cash Equivalents 356 1,055 890 Cash and Cash Equivalents at Beginning of Year 2,196 1,141 251 ------------ ------------ ------------ Cash and Cash Equivalents at End of Year $ 2,552 $ 2,196 $ 1,141 ------------ ------------ ------------ ------------ ------------ ------------
45 REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Mason-Dixon Bancshares, Inc. Westminster, Maryland We have audited the accompanying consolidated balance sheets of Mason-Dixon Bancshares, Inc. and Subsidiaries as of December 31, 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 financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mason-Dixon Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Baltimore, Maryland January 17, 1998 46 - -------------------------------------------------------------------------------- MASON-DIXON BANCSHARES, INC. OFFICERS: William B. Dulany CHAIRMAN OF THE BOARD Thomas K. Ferguson PRESIDENT AND CHIEF EXECUTIVE OFFICER Mark A. Keidel, CPA VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Vivian A. Davis CORPORATE SECRETARY Caroline Babylon CHIEF INTERNAL AUDITOR DIRECTORS: William B. Dulany CHAIRMAN OF THE BOARD PARTNER, DULANY AND LEAHY ATTORNEYS WESTMINSTER David S. Babylon, Jr. RETIRED ACCOUNTANT WESTMINSTER Henry S. Baker, Jr. RETIRED-MARYLAND NATIONAL BANK MONKTON Miriam F. Beck RETIRED ADMINISTRATOR CARROLL COUNTY BOARD OF EDUCATION SYKESVILLE Donald H. Campbell PRESIDENT/CEO FIRST STATE PACKAGING, INC. SALISBURY Thomas K. Ferguson PRESIDENT AND CHIEF EXECUTIVE OFFICER WESTMINSTER R. Neal Hoffman MANAGING PARTNER, HOFFMAN, COMFORT, GALLOWAY & OFFUTT ATTORNEYS WESTMINSTER S. Ray Hollinger CHAIRMAN W.H. DAVIS COMPANY T/A DAVIS BUICK-GMC TRUCK WESTMINSTER J. William Middelton MIDDELTON, LIMBURG & COMPANY, INC. LUTHERVILLE Edwin W. Shauck RETIRED EXECUTIVE VICE PRESIDENT CARROLL COUNTY BANK AND TRUST COMPANY WESTMINSTER James C. Snyder RETIRED MANUFACTURING AND DISTRIBUTION OF TRUCK EQUIPMENT MANCHESTER Stevenson B. Yingling PRESIDENT YINGLING GENERAL TIRE, INC. WESTMINSTER - -------------------------------------------------------------------------------- BANK OF MARYLAND EXECUTIVE OFFICERS: H. David Shumpert PRESIDENT AND CHIEF EXECUTIVE OFFICER A. Gary Rever, CPA EXECUTIVE VICE PRESIDENT, SECRETARY AND TREASURER W. Bruce McPherson EXECUTIVE VICE PRESIDENT COMMERCIAL/REAL ESTATE LENDING AND CREDIT Hunter F. Calloway SENIOR VICE PRESIDENT COMMERCIAL LENDING/SOUTHERN REGION Robert D. Lockard SENIOR VICE PRESIDENT RETAIL BANKING DIRECTORS: Henry S. Baker, Jr. CHAIRMAN OF THE BOARD RETIRED-MARYLAND NATIONAL BANK MONKTON Donald H. Campbell PRESIDENT/CEO FIRST STATE PACKAGING, INC. SALISBURY Henry D. Felton AVATECH SOLUTIONS, INC. OWINGS MILLS Ethan Grossman ETHAN GROSSMAN ENGINEERING WASHINGTON, DC J. Patrick Henry COLONIAL PROFESSIONAL CARS, LTD. ANNAPOLIS Larry Kamanitz, CPA GRANT THORNTON, LLP BALTIMORE J. William Middelton MIDDELTON, LIMBURG & COMPANY, INC. LUTHERVILLE A. Gary Rever, CPA EXECUTIVE VICE PRESIDENT BANK OF MARYLAND TOWSON Roger R. Rice RICE & ASSOCIATES INSURANCE BEL AIR Jack A. Serber RETIRED BETHESDA H. David Shumpert PRESIDENT AND CHIEF EXECUTIVE OFFICER BANK OF MARYLAND TOWSON Stephen C. Winter MILES & STOCKBRIDGE TOWSON BRANCH LOCATIONS: Towson Office 600 Washington Avenue Towson, MD 21204 Annapolis Office 2661 Riva Road Annapolis, MD 21401 Harford County Office 333 Baltimore Pike Bel Air, MD 21014 Perry Hall Office 9650 Belair Road Perry Hall, MD 21236 Pikesville Office 44 E. Sudbrook Lane Baltimore, MD 21208 Salisbury Office 1300 Salisbury Boulevard Salisbury, MD 21801 Bishopville Office 10657 Bishopville Road Bishopville, MD 21813 Crisfield Office 257 North Somerset Avenue Crisfield, MD 21817 Federalsburg Office 102 South Main Street Federalsburg, MD 21632 Princess Anne Office 12136 Elm Street Princess Anne, MD 21853 LOAN PRODUCTION OFFICE 4720 Montgomery Lane, Suite 420 Bethesda, MD 20814 EXECUTIVE OFFICES 502 Washington Avenue Towson, MD 21204 47 - -------------------------------------------------------------------------------- CARROLL COUNTY BANK AND TRUST COMPANY EXECUTIVE OFFICERS: Michael L. Oster PRESIDENT AND CHIEF EXECUTIVE OFFICER Gerald G. Alsentzer SENIOR VICE PRESIDENT William J. Gering SENIOR VICE PRESIDENT/ SENIOR TRUST OFFICER Mark A. Keidel, CPA SENIOR VICE PRESIDENT/ CHIEF FINANCIAL OFFICER Marcus L. Primm SENIOR VICE PRESIDENT Louna S. Primm SENIOR VICE PRESIDENT/ CHIEF RETAIL LENDING OFFICER William K. Stocksdale SENIOR VICE PRESIDENT Christine L. Whiteleather, CFA SENIOR VICE PRESIDENT/ CHIEF INVESTMENT OFFICER DIRECTORS: William B. Dulany CHAIRMAN OF THE BOARD PARTNER, DULANY AND LEAHY ATTORNEYS WESTMINSTER David S. Babylon, Jr. RETIRED ACCOUNTANT WESTMINSTER Miriam F. Beck RETIRED ADMINISTRATOR CARROLL COUNTY BOARD OF EDUCATION SYKESVILLE R. Neal Hoffman MANAGING PARTNER, HOFFMAN, COMFORT, GALLOWAY & OFFUTT ATTORNEYS WESTMINSTER S. Ray Hollinger CHAIRMAN W.H. DAVIS COMPANY T/A DAVIS BUICK-GMC TRUCK WESTMINSTER Michael L. Oster PRESIDENT AND CHIEF EXECUTIVE OFFICER WESTMINSTER Edwin W. Shauck RETIRED EXECUTIVE VICE PRESIDENT CARROLL COUNTY BANK AND TRUST COMPANY WESTMINSTER James C. Snyder RETIRED MANUFACTURING AND DISTRIBUTION OF TRUCK EQUIPMENT MANCHESTER G. Lee Sturgill, CPA PARTNER, STURGILL & ASSOCIATES WESTMINSTER Stevenson B. Yingling PRESIDENT YINGLING GENERAL TIRE, INC. WESTMINSTER BRANCH LOCATIONS: Main Office 45 West Main Street Westminster, MD 21157 Englar Road Office 401 Englar Road Westminster, MD 21157 East Main Street Office 193 East Main Street Westminster, MD 21157 Eldersburg Office 1300 Liberty Road Eldersburg, MD 21784 Finksburg Office Finksburg Shopping Center 3000 Gamber Road Finksburg, MD 21048 Hampstead Office 999 South Main Street Hampstead, MD 21074 Manchester Office 3200 Main Street Manchester, MD 21102 Melrose Office 4501 Hanover Pike Manchester, MD 21102 Mt. Airy Office Twin Arch Shopping Center 1001 Twin Arch Road Mt. Airy, MD 21771 Taneytown Office 4345 Old Taneytown Road Taneytown, MD 21787 Fairhaven Office 7200 Third Avenue Sykesville, MD 21784 Heartlands Office 3004 North Ridge Road Ellicott City, MD 21043 MASON-DIXON BANCSHARES MORTGAGE COMPANY 1643 Liberty Road Suite 202 Eldersburg, MD 21784 502 Washington Avenue 3rd Floor Towson, MD 21204 309 East Main Street Suite 100 Salisbury, MD 21801 FIND US ON THE INTERNET AT WWW.CARROLLCOUNTYBANK.COM 48 EX-21 4 EX-21 Exhibit 21--List of Registrant's Subsidiaries Subsidiaries of the Registrant: Carroll County Bank and Trust Company is a wholly-owned subsidiary of Mason-Dixon Bancshares, Inc. Mason-Dixon Merger Sub, Inc. is a wholly-owned subsidiary of Mason-Dixon Bancshares, Inc. Bank of Maryland is a wholly-owned subsidiary of Mason-Dixon Bancshares, Inc. Mason-Dixon Capital Trust is a wholly-owned subsidiary of Mason-Dixon Bancshares, Inc. Rose Shanis Loans, LLC is a wholly-owned subsidiary of Mason-Dixon Bancshares, Inc. EX-23 5 EX-23 [LOGO] CONSENT OF INDEPENDENT AUDITORS The Board of Directors Mason-Dixon Bancshares, Inc. We hereby consent to the incorporation by reference in the prospectuses included in Registration Statements No. 33-80039, 333-07943, 33-07945, each on Form S-8, and Registration Statement No. 33-94686 on Form S-3, and in the Annual Report on Form 10-K of Mason-Dixon Bancshares, Inc. for the year ended December 31, 1997, of our report dated January 17, 1998, relating to the consolidated financial statements of Mason-Dixon Bancshares, Inc. /s/ Stegman & Company ------------------------------- Stegman & Company Towson, Maryland March 26, 1998 EX-27 6 EX-27 FDS
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MASON-DIXON BANCSHARES, INC. DECEMBER 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 20,245,000 482,000 17,236,000 0 249,855,000 204,045,000 206,515,000 460,391,000 5,231,000 992,180,000 651,249,000 97,203,000 7,390,000 160,889,000 0 0 5,077,000 70,372,000 992,180,000 39,011,000 27,291,000 1,133,000 67,435,000 24,198,000 36,175,000 31,260,000 138,000 554,000 26,791,000 12,321,000 9,159,000 0 0 9,159,000 1.77 1.77 3.91 3,189,000 597,000 178,000 15,138,000 5,167,000 577,000 503,000 5,231,000 5,231,000 0 0
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