1996

--------------------------------------------------------------------------------
                            MONOCACY BANCSHARES, INC.
                                  ANNUAL REPORT


                        A Year of Investing in Our Future


<PAGE>

                                   OUR MISSION

================================================================================
       The mission of Monocacy Bancshares,  Inc. is to serve our community as an
independent,  market  driven  organization  by  providing  "Service  Excellence"
through highly motivated and trained employees and officers who, complemented by
continued emphasis on advanced technology,  will set the standard for excellence
in our marketplace.  It is our stated desire to obtain superior profitability in
order to provide our shareholders a fair return on their investment.
--------------------------------------------------------------------------------

1    Columbia Office &
     Classic Mortgage Office
2    Randallstown Office &
     Classic Mortgage Headquarters
3    Eldersburg Office
4    Uniontown Office
5    Keymar Office                        [MAP OF ADAMS CO., PA; CARROLL, HOWARD
6    Route 140 Express Office                   AND BALTIMORE CO., MD; AND
7    Englar Road Office                       BALTIMORE CITY  APPEARS HERE]
8    Carroll Lutheran Village Office
9    Main Office & Corporate
     Headquarters
10   Fairground Office
11   Gettysburg Office



<PAGE>

                               FROM THE PRESIDENT

================================================================================

         [PHOTOGRAPH OF THE FOLLOWING PEOPLE APPEARS IN CENTER OF PAGE]
                                 ERIC E. GLASS,
                               DONALD R. HULL AND
                                FRANK W. NEUBAUER

Carroll County has changed dramatically since we first opened our doors over 110
years ago.  The pace of these  changes has picked up  momentum in recent  years.
Correspondingly,  the banking industry has been going through dramatic  changes.
Every  day  there is news of  another  merger or a new  approach  to  delivering
services. We all know that these environments will continue to change as we move
into the future.  Monocacy  Bancshares  has grown and  evolved  right along with
these changes;  in fact, we take great pride in the way we have  anticipated and
prepared for these changes.
   The  theme of our  Annual  Report  this year is "A Year of  Investing  in our
Future".  While our financial  results in terms of earnings are down compared to
1995, our financial  performance  reconciles with this theme and we believe that
1996 represents a banner year in our Company's history.
   At our 1996 stockholders'  meeting, we outlined energetic plans for 1996. Not
only  did we  accomplish  everything  we  set  out to  do,  but we  added  a few
additional  initiatives.  Any one of these  initiatives would have represented a
challenge  for a bank our size  but,  together,  they  should  be  viewed  as an
extraordinary   accomplishment  and  a  true  testimonial  to  the  quality  and
dedication  of our staff.  Our  Annual  Report  provides  an  overview  of these
initiatives. We believe we have positioned our Bank to be able to exploit growth
and profitability opportunities in the future.
   An anticipated but unquantifiable  event, both in terms of the timing and the
dollar  amount,  was the special FDIC  Assessment  to  recapitalize  the Savings
Association  Insurance Fund (SAIF) on which Congress vacillated for over a year.
This had an impact of $245,000 on  earnings.  All savings  banks and  commercial
banks  with  savings  deposits  received  such  an  assessment.   This  and  the
substantial  first year costs  associated with our initiatives had a significant
impact on our 1996 earnings.

   I would like to highlight some of the more substantial  initiatives completed
in 1996.
   o The deposit acquisition and integration of the two Royal Oak branches
   o The acquisition of Classic Mortgage
   o The  opening of a state of the art  express  drive-in  banking  facility in
Westminster
   o The  opening  of  our  second  Commercial  Banking  Office  in  Gettysburg,
Pennsylvania
   Perhaps  more  important  than the  initiatives  described  above in terms of
impact and positioning for the future were less physically tangible efforts in a
variety of areas which included:
   o The completion and full implementation of our Relationship  Banking program
   o The completion of a functional  reorganization
   o The beginning of the next stage of our technology efforts
   These  initiatives  were costly,  but they fit the Strategic Plan outlined in
the  beginning of the year,  "A Year of Investing in our Future".  Intelligently
investing in people,  marketing,  facilities and technology  will  significantly
increase the future value of our Bank.
   Our Board of Directors,  at our January Board  meeting,  adopted a management
rotation plan whereby Eric E. Glass was elected Chairman of the Board and Donald
R. Hull was elected  Vice  Chairman of the Board and  Chairman of the  Executive
Committee.  Mr.  Glass and Mr.  Hull have worked  closely  with each other for a
number of years and have long viewed their respective roles on a unified basis.
   In late February,  the City of Taneytown  experienced  the loss of one of our
community leaders with the passing of Henry Reindollar.  Henry was dedicated and
committed to improving our community and will be greatly missed.
   More than ever, we are  optimistic  and highly  focused as we move into 1997;
our compasses of growth,  profitability and adding shareholder value are pointed
in the same  direction.  Our agenda is well defined,  is based on input from all
areas within our organization and is driven by an  organizational  commitment to
service excellence. Your support of our initiatives is sincerely appreciated and
will be  rewarded as these  investments  begin to mature and  contribute  to our
future successes.


/s/ Frank W. Neubauer, Jr.

Frank W. Neubauer, Jr.
President and Chief Executive Officer

                                       1


<PAGE>


                                 YEAR IN REVIEW

================================================================================

   [THE FOLLOWING 9 LINES IS A PULL QUOTE APPEARING AT THE CENTER OF THE PAGE]

                                  1996 WILL BE
                                   REMEMBERED
                                 AS THE YEAR WE
                                 COMMITTED OUR
                               RESOURCES IN WAYS
                                UNPRECEDENTED IN
                                OUR ONE HUNDRED
                                  TWELVE YEAR
                                    HISTORY.



                        A YEAR OF INVESTING IN OUR FUTURE
--------------------------------------------------------------------------------

1996  will  be  remembered  as the  year  we  committed  our  resources  in ways
unprecedented  in our one hundred  twelve year history.  With a goal to remain a
strong independent community financial institution, we undertook pivotal efforts
to  significantly  improve our retail delivery system with four new full service
branch offices, a realignment of staff functions, a new telephone banking system
and new  marketing  initiatives.  We acquired a successful  mortgage  company to
further  support our  opportunities  to serve our diverse market region with all
mortgage related services.  All these activities were underlined by an extensive
strategic  planning  effort  that  resulted  in our  renewed  mission to Service
Excellence.

                                   NEW MARKETS
--------------------------------------------------------------------------------

In an age of mergers  and  acquisitions,  each  community  bank must  accept the
challenge to grow wisely in order to remain a viable independent entity.  During
1996,  we ably met that  challenge by  significantly  expanding  our presence in
Carroll County and by entering new markets in Randallstown and Gettysburg.
   A review of the population growth in Carroll County and the subsequent steady
increase of commuters to our region clearly  directed us to explore sites in the
southern  Carroll  County area.  By the merger of a savings  bank,  we found the
right advantage we needed. With an office in Eldersburg and another further east
in Randallstown we are able to serve this dynamic  suburban  community and those
that  commute  on Route 26, a major  artery  into  Baltimore.  The  Randallstown
location has also become the hub/Corporate Headquarters of Classic Mortgage.
   Merging two savings bank  branches into our full service  commercial  banking
operation was a daunting  experience.  Every  department of the bank rose to the
occasion  to meet  the  systems',  regulatory  and  customer  demands.  Multiple
communications  were personalized to each new customer  introducing our bank and
the many new services we provide. By all measurements, we were very successful.
   Our Englar Road  office has been a trend  setter for our  competition  in the
Westminster  market.  Our  customers  have  commended  us time and  again on our
extended  lobby  hours and  personalized  service.  All that was  missing  was a
drive-up  facility.  In September,  we introduced  the Rt. 140 Express office to
Westminster.  The finest drive-up  banking  equipment was installed to make sure
commercial  customers and commuters are serviced  quickly and  efficiently.  Our
dawn to dusk  hours are a true  sign of our  commitment  to meet our  customers'
needs.
   Finally,  with our three year old Business  Development office in Columbia, a
model for  commercial  banking  success,  the  Gettysburg  office  was opened in
December.  This was a market desperate for the style of personalized service our
community bank has always been proud to offer. Our results to date have exceeded
our expectations.
   Each step of the way,  with each new office,  we have  rallied the talents of
our staff to insure we met our goals.

                             THE FINEST RESIDENTIAL
                                 MORTGAGE LENDER
--------------------------------------------------------------------------------

Columbia's  much  respected  Classic  Mortgage  Company became the best regional
community bank mortgage department when we joined forces in April. No competitor
offers more types of programs or better  service.  On top of that,  all our bank
products  and  services  have a  whole  new  audience.  Already,  customers  are
referring  friends  because  Classic  works  hard to make it  happen.  There are
"Financing by Taneytown Bank" signs in every new subdivision we serve as our lot
and construction loan programs take off. Our Homeowners  Checking Account brings
these new customers into our family.  With over $60 million of new business from
our mortgage  division in

                                       2


<PAGE>

  [THE FOLLOWING 10 LINES IS A PULL QUOTE APPEARING AT THE CENTER OF THE PAGE]

                                 THE FINANCIAL
                                BUSINESS IS IN A
                               CONSTANT STATE OF
                                CHANGE, AND THE
                                RACE BELONGS TO
                                 THOSE WITH THE
                                   VISION AND
                                DETERMINATION TO
                               MOVE AHEAD IN THIS
                                  ENVIRONMENT.


1996, we have laid the groundwork to become the finest residential lender in the
area.

                                   TECHNOLOGY
--------------------------------------------------------------------------------

Monocacy has prudently invested in that technology which was once only available
at much larger  institutions  over the past 3 years.  Whether it's express drive
through lanes or an innovative  information  delivery system,  our customers and
their needs drive our technological actions.
   Mid  year,  we  introduced  the  Automated  Customer  Service  Line.  Now all
customers can access  account  information,  transfer  funds,  and initiate stop
payments from a personal telephone.  Due to its dependability and ease, the line
is now receiving over five thousand calls per month.  There is also  information
designed to attract non-customers, such as, branch locations, rates, and product
highlights.
   Yes, we are now on the Internet.  Customers and  non-customers  can leisurely
survey our services,  review recent corporate news, calculate a mortgage or loan
payment and make inquiries on their personal computers at www.taneytownbank.com.
   These are  investments  that only a positive  and growth  oriented  corporate
culture like ours can support.

                               THE DRIVING FORCE--
                                EMPLOYEES MATTER
--------------------------------------------------------------------------------

Quality products and efficient  delivery  systems are vital to our success,  but
it's our  employees--in  all areas of the  company--who  are making it work.  In
order to effect our many 1996 projects,  we have expected  heroic efforts of all
our employees. Using a team approach at all times, many resources were allocated
to refine  and  enhance  our  capabilities.  Again  and  again,  bank  employees
responded  to a changing  environment  with a flexible,  innovative  approach to
"getting the job done."
   Branch  expansion  and the addition of Classic  Mortgage  led  naturally to a
reorganization.  A  consolidation  of operational and  administrative  functions
permitted a flattened organizational chart in our sales and production areas.

                               SERVICE EXCELLENCE
--------------------------------------------------------------------------------

Our commitment to our customers has never been taken for granted.  To insure our
position among our peers, we reaffirmed a mission of service  excellence in 1996
and to  recognize  the nature of our  business,  one of rapid change and greatly
increased  competition,  we saw the need to  develop  a renewed  energy  towards
Service  Excellence.  The organization at every level has drafted an action plan
focusing on customers and programs to enhance our sales culture.  These efforts,
coupled with the enhanced  delivery  systems have presented our employees with a
sense of mission and shared vision.

                         INVESTMENTS MAKE OPPORTUNITIES
--------------------------------------------------------------------------------

In today's changing market,  we cannot rest on past success.  Our small business
package of services, "BOSS" has been a magnet to business people from Gettysburg
to Columbia.  We are recognized as having the premiere retirement account:  Club
50.  Investors  MarketPlace,  Inc.,  with TBT  Insurance,  offers our  customers
creditable non-FDIC insured investments. Our products and services combined with
our  strategic  1996  investments  offer us many new  opportunities  to continue
excellent service as we attract many new friends. The financial business is in a
constant  state of  change,  and the race  belongs  to those with the vision and
determination  to move  ahead in this  environment.  Your  company is poised and
ready to take full advantage of future opportunities.

                                       3

<PAGE>

                           MONOCACY BANCSHARES, INC.
                         SELECTED FINANCIAL HIGHLIGHTS

================================================================================

                 (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                 December 31,
                               ------------------------------------------------
                                 1996      1995       1994      1993      1992
                               -------   -------    -------   -------   -------
<S> <C>
EARNINGS:
   Net income                 $  1,611   $ 2,351    $ 2,222   $ 1,961   $ 1,952
   Net interest income           9,172     9,227      8,726     7,217     6,662
   Provision for loan losses       300       885        687       375       263

PER SHARE: (1)
   Net income                 $   1.00    $ 1.47     $ 1.40    $ 1.23    $ 1.23
   Cash dividend declared          .36       .33        .23       .19       .17
   Book value                    13.40     13.21      11.69     10.87      9.69

AT YEAR END:
   Assets                     $263,015  $266,194   $211,249  $191,768  $157,725
   Loans, net                  156,690   137,222    145,564   121,370   101,079
   Deposits                    225,039   223,412    171,873   155,722   141,069
   Stockholders' equity         21,648    21,169     18,610    17,289    15,415
   Non-performing assets         1,449     2,569        303       583     1,491
   Number of employees
    (full time equivalents)        160       129         95        98        86

RATIOS:
   Return on average assets        0.61%    1.07%      1.08%     1.09%     1.27%
   Return on average equity        7.81    11.83      12.19     11.27     13.31
   Equity to assets                8.23     7.95       8.81      9.02      9.77
   Loan loss allowance to loans    1.32     1.37       1.29      1.23      1.09
</TABLE>

(1) Per share data for all years have been  restated  to reflect  the 10% common
stock dividends  issued in 1997 and 1996. Per share data for years prior to 1994
have been restated to reflect a 20% common stock dividend issued in 1992 and a 2
for 1 stock split in 1993.

                                       4

<PAGE>

                               FINANCIAL CONTENTS

================================================================================
<TABLE>

<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of Operations..... 6
Independent Auditors' Report..............................................................21
Consolidated Balance Sheets...............................................................22
Consolidated Statements of Income.........................................................23
Consolidated Statements of Changes in Stockholders' Equity................................24
Consolidated Statements of Cash Flows.....................................................25
Notes to Consolidated Financial Statements................................................26
</TABLE>
--------------------------------------------------------------------------------

                                       5

<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

================================================================================

                 December 31, 1996 compared to December 31, 1995
                  (Dollars in thousands, except per share data)


Monocacy Bancshares,  Inc.  ("Monocacy" or the "Company"),  with headquarters in
Taneytown,  Maryland is a registered  Bank Holding  Company formed on October 1,
1993. At December 31, 1996,  Monocacy had total consolidated assets of $263,015.
Monocacy is engaged in the general,  commercial and consumer banking  businesses
through its subsidiary, Taneytown Bank and Trust Company. Taneytown Bank & Trust
Company  (the  "Bank"),   provides  a  full  range  of  financial   services  to
individuals,  businesses and  organizations  through eleven banking  offices and
five Automated Teller  Machines.  Classic  Mortgage  Company,  a division of the
Bank, provides the Bank's mortgage-banking operations.  Monocacy Bancshares also
offers annuity sales through TBT Insurance,  Inc., a subsidiary of the Bank. The
primary market area of the Company extends through Carroll, Howard and Baltimore
Counties,   Maryland  and   surrounding   areas   including   Southern   Central
Pennsylvania.

A detailed  discussion of the 1996 Operating Results and Financial  Condition at
December 31, 1996 follows and is intended to assist readers in their analysis of
the  Company's   consolidated  financial  statements  and  related  notes.  Such
financial condition and results of operations are not necessarily  indicative of
future performance.

FORWARD-LOOKING STATEMENTS

In  addition  to   historical   information,   this   annual   report   contains
forward-looking  statements. The forward-looking statements contained herein are
subject to certain risks and  uncertainties  that could cause actual  results to
differ  materially  from  those  projected  in the  forward-looking  statements.
Important  factors  that might  cause  such a  difference  include,  but are not
limited to, those discussed in the section entitled "Management's Discussion and
Analysis  of  Financial  Condition  and  Results  of  Operations."  Readers  are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to publicly revise or update these  forward-looking  statements to
reflect events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the  Securities  and Exchange  Commission,  including the
Quarterly  Reports on Form  10-QSB to be filed by the  Company in 1997,  and any
Current Reports on Form 8-K filed by the Company.

OVERVIEW

Monocacy reported  consolidated net income for 1996 of $1,611 or $1.00 per share
as compared with  consolidated net income of $ 2,351 or $1.47 per share in 1995.
For Monocacy,  1996 was a year of  investment  in the future.  In March of 1996,
Royal Oak Savings Bank, which was acquired on December 31, 1995, was merged into
Taneytown Bank. In April,  1996, the Company  acquired  Classic Mortgage Company
("Classic")  and  is  currently  operating  it as a  division  of the  Bank.  In
addition,  two new branches of Taneytown  Bank were opened in 1996. All of these
projects involved extensive costs in the data processing, operational and branch
areas of the Company  throughout  the year. The 1996  performance  reflected net
interest  margins  that were lower  than in 1995,  although  tax-equivalent  net
interest  income was higher due to higher  earning  assets in 1996. In addition,
1996 reflected increases in non-interest  revenues and non-interest expenses and
a decrease in the provision for loan losses.  The 1996 Return on Average  Assets
was .61% and Return on Average  Equity was 7.81%.  Total assets were $263,015 at
December 31, 1996, with strong interest-earning asset and deposit growth. Return
on Average Assets for 1995 was 1.07% and Return on Average Equity was 11.83%.

INCOME STATEMENT ANALYSIS

NET INTEREST INCOME

The net  interest  margin of 4.09% was 59 basis  points  below the 1995 level of
4.68%.  Taxable equivalent  interest income,  Monocacy's primary  contributor to
earnings, was $20,381 for 1996 which was a 16.7% increase over the 1995 level of
$17,460.  This increase can be  attributed to increase in the average  volume of
interest earning assets,  primarily in the investment securities  portfolios.  A
major  contributor to the higher asset volume was the acquisition of Royal Oak's
asset  portfolio  on December 31,  1995.  Interest  expense for 1996 was $10,421
which was an increase of $2,569 or 32.7% over 1995  because of the change in the
Company's  deposit mix towards higher costing  certificates of deposit,  largely
due to the higher costing deposits acquired in the Royal Oak transaction and the
effect of amortization  of the related deposit premium paid in the  transaction.
The Royal Oak  acquisition  increased  average  interest-bearing  liabilities by
approximately 22% and the deposit premium  amortization  increased the Company's
overall  cost of funds by  approximately  17 basis  points.  The overall cost of
interest-bearing  liabilities (deposits and borrowings) was 4.82% which was a 35
basis point  increase  over 1995,  primarily  as a result of the noted change in
deposit  mix.

                                       6

<PAGE>

--------------------------------------------------------------------------------

Table 1: Average Balances,  Interest and Yields and Table 2: Net Interest Income
Analysis, provide further details of the Company's net interest income.

--------------------------------------------------------------------------------

TABLE 1
AVERAGE BALANCES, INTEREST AND YIELDS
(Dollars in thousands)


<TABLE>
<CAPTION>
                                                 1996                           1995                           1994
                                     ---------------------------    ---------------------------    ---------------------------
                                     Average                        Average                        Average
                                     Balances   Interest   Yield    Balances   Interest   Yield    Balances   Interest   Yield
                                     --------   --------   -----    --------   --------   -----    --------   --------   -----
<S> <C>
ASSETS
Interest-earning assets:
   Loans, net of unearned
      income (2)(3)                  $148,756    $14,044   9.44%    $140,969    $13,535   9.60%    $137,808    $12,148   8.82%
   Securities available for sale--
      taxable                          58,100      3,797   6.54       12,480        711   5.70       18,392        921   5.01
   Securities available for sale--
      tax-exempt (1)                    9,419        639   6.78        5,475        406   7.42        6,192        453   7.32
   Investment securities--taxable         401         26   6.48       31,490      1,892   6.01       17,960      1,104   6.15
   Investment securities--
      tax-exempt (1)                   22,915      1,677   7.32       10,720        715   6.67       10,108        685   6.78
   Federal funds sold                   2,654        146   5.50        1,250         68   5.44          504         30   5.95
   Interest-bearing deposits            1,116         52   4.66        2,819        133   4.72          837         42   5.02
                                     --------    -------            --------    -------            --------    -------
      Total interest-earning assets   243,361     20,381   8.37%     205,203     17,460   8.51%     191,801     15,383   8.02%
                                                 -------                        -------                        -------
Non-interest-earning assets:
   Cash and due from banks              7,463                          4,683                          6,529
   Bank premises and equipment,
      net                               7,442                          5,851                          5,817
   Other assets                         6,353                          4,931                          3,182
   Less--allowance for loan
      losses                           (2,055)                        (1,904)                        (1,715)
                                     --------                       --------                       --------
      Total assets                   $262,564                       $218,764                       $205,614
                                     --------                       --------                       --------

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
   Interest-bearing checking
      accounts                       $ 21,488        540   2.51%    $ 18,426        446   2.42%    $ 19,595        489   2.50%
   Savings and money market
      accounts                         62,507      2,324   3.72       52,442      1,628   3.10       56,657      1,728   3.05
   Certificates of deposit            112,673      6,387   5.67       86,406      4,831   5.59       68,831      2,995   4.35
   Federal funds purchased              1,727         95   5.50        1,300         55   4.23          804         34   4.23
   Other borrowings                    17,991      1,075   5.98       17,059        892   5.23       20,588      1,026   4.98
                                     --------    -------            --------    -------            --------    -------
      Total interest-bearing
         liabilities                  216,386     10,421   4.82%     175,633      7,852   4.47%     166,475      6,271   3.77%
                                                 -------                        -------                        -------
Non-interest-bearing liabilities:
   Non-interest-bearing deposits       23,792                         21,500                         19,612
   Other liabilities                    1,767                          1,761                          1,306
Stockholders' equity                   20,619                         19,870                         18,221
                                     --------                       --------                        -------
   Total liabilities and
      stockholders' equity           $262,564                       $218,764                       $205,614
                                     ========                       ========                       ========
Net interest income                              $ 9,960                        $ 9,608                        $ 9,112
                                                 =======                        =======                        =======
Net interest spread (4)                                    3.55%                          4.04%                          4.25%
Net yield on earning assets (5)                            4.09%                          4.68%                          4.75%
</TABLE>

(1) Interest on state and municipal  investments is presented on a fully-taxable
equivalent basis
(2)  Includes  loans held for sale and  non-accrual  loans
(3) Interest income on loans includes the amortized  portion of net loan fees of
$351,  $611 and $415 for the  years  ended  December  31,  1996,  1995 and 1994,
respectively
(4) Represents the difference between the yield on  interest-earning  assets and
the cost of interest-bearing liabilities
(5) Represents net interest income divided by average interest-earning assets

--------------------------------------------------------------------------------

                                       7


<PAGE>

Average  interest-earning assets totaled $243,361 for 1996, an increase of 18.6%
from the previous  year.  Increases  occurred in most all categories of the loan
portfolio,  generally  reflecting  the results of commercial,  construction  and
consumer lending  initiatives and other marketing  efforts.  Average  securities
(including the Available for Sale portfolio)  experienced  overall  increases of
$30,670 from the 1995 level as a result of the funds  reinvested after the Royal
Oak  transaction.  During  1996,  the Company sold a pool of  approximately  $10
million of the Bank's  residential  mortgage  loan  portfolio  in the  secondary
market,  while  retaining  the  servicing of those loans.  Net of the loan sale,
average loan growth was $7,787 in 1996.  See the Balance  Sheet Review below for
further discussion on interest-earning assets.

Average interest-bearing liabilities,  increased by $40,753 from the prior year.
The increase was due primarily to the acquisition of Royal Oak, which brought in
approximately $39 million in additional deposits.  The mix in core deposits also
changed  during  1996,  as a result  of the Royal  Oak  acquisition.  See a more
comprehensive discussion of funding elsewhere in this report.

--------------------------------------------------------------------------------

TABLE 2
NET INTEREST INCOME ANALYSIS
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                       1996 over 1995                        1995 over 1994
                                              ---------------------------------    -----------------------------------
                                              Due to change in (2)                  Due to change in (2)
                                              --------------------    Increase     ---------------------     Increase
                                               Volume        Rate     (Decrease)    Volume         Rate     (Decrease)
<S> <C>                                        ------       ------    ----------    ------        ------    ----------
Interest Income:
   Loans, net of unearned income               $  738       $(229)     $  509       $  284        $1,103       $1,387
   Securities available for sale--taxable       2,967         119       3,086         (325)          115         (210)
   Securities available for sale--
      tax-exempt (1)                              270         (37)        233          (53)            6          (47)
   Investment securities--taxable              (2,005)        139      (1,866)         812           (24)         788
   Investment securities--tax-exempt (1)          886          76         962           41           (11)          30
   Federal funds sold                              77           1          78           41            (3)          38
   Interest-bearing deposits                      (80)         (1)        (81)          45            46           91
                                               ------       -----      ------       ------        ------       ------
      Total                                     2,853          68       2,921          845         1,232        2,077
                                               ------       -----      ------       ------        ------       ------
Interest expense:
   Interest-bearing checking accounts              76          18          94          (29)          (14)         (43)
   Savings and money market accounts              343         353         696         (130)           30         (100)
   Certificates of deposit                      1,488          68       1,556          868           969        1,837
   Federal funds purchased                         21          19          40           21            --           21
   Other borrowings                                51         132         183         (183)           49         (134)
                                               ------       -----      ------       ------        ------       ------
      Total                                     1,979         590       2,569          547         1,034        1,581
                                               ------       -----      ------       ------        ------       ------
      Net interest income                      $  874       $(522)     $  352       $  298        $  198       $  496
                                               ======       =====      ======       ======        ======       ======
</TABLE>

(1) Interest on state and municipal  investments is presented on a fully-taxable
equivalent basis
(2) The change in  interest  due to both rate and volume has been  allocated  to
rate and volume  changes in  proportion  to the absolute  dollar  amounts of the
change in each.

--------------------------------------------------------------------------------

PROVISION AND ALLOWANCE FOR LOAN LOSSES

The provision for loan losses is the periodic expense of maintaining an adequate
allowance for loan losses to absorb  possible  future losses,  net of recoveries
inherent in the existing loan  portfolio.  The provision for loan losses totaled
$300 for 1996 and $885 in 1995.  Net  charge-offs  amounted  to $104 in 1996 and
$883 in 1995.  Table 3,  Analysis of Allowance  for Loan Losses,  shows  further
details on the Allowance for Loan Losses for the past five years.

The allowance for loan losses at December 31, 1996,  was $2,100 or 1.32% of year
end net loans, compared to the 1995 year end allowance of $1,904 or 1.37% of net
loans. The 1996 allowance for loan losses was 135.5% of year-end  non-performing
and past due  loans  and  144.9%  of  year-end  non-performing  assets.

                                       8

<PAGE>

--------------------------------------------------------------------------------

TABLE 3
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)

<TABLE>
<CAPTION>

                                                              December 31,
                                            ------------------------------------------------
                                             1996      1995       1994       1993      1992
                                            ------    ------     ------     ------    ------
<S> <C>
Balance at beginning of year                $1,904    $1,902     $1,509     $1,113    $  919
Provision for loan losses                      300       885        687        375       263
Loans charged-off:
   Real Estate:
      Residential mortgage                      --        --         --         --        49
      Commercial mortgage                      302       377         --         --        49
      Construction and land development         --        --         --         --        --
   Commercial                                   --       500        297         --        --
   Consumer                                     20        63         16          8       145
                                            ------    ------     ------     ------    ------
         Total loans charged-off               322       940        313          8       243
                                            ------    ------     ------     ------    ------

Recoveries of loans previously charged off:
   Real Estate:
      Residential mortgage                       4         6         --         --        47
      Commercial mortgage                      211        --         11         12       --
      Construction and land development         --        --         --         --        --
      Commercial                                --        41         --         --        17
      Consumer                                   3        10          8         17       110
                                            ------    ------     ------     ------    ------
         Total recoveries                      218        57         19         29       174
                                            ------    ------     ------     ------    ------
Net loans charged-off                          104       883        294        (21)       69
                                            ------    ------     ------     ------    ------
Balance at end of year                      $2,100    $1,904     $1,902     $1,509    $1,113
                                            ------    ------     ------     ------    ------
Ratio of allowance to loans, net
   of unearned income                         1.32%     1.37%      1.29%      1.23%     1.09%
                                            ======    ======     ======     ======    ======
</TABLE>

--------------------------------------------------------------------------------

Monocacy's allowance for loan losses for all loan categories is further detailed
in Table 4: Allowance for Loan Losses Allocation.  The allowance for loan losses
is based on a risk-rating  system under which all commercial and commercial real
estate loans are assigned a risk rating. Factors such as the financial condition
of the  borrower,  the  adequacy  of  underlying  collateral  and the  impact of
business and economic conditions upon the borrower are evaluated.  Based on this
information  and action plans  provided by the lending  officers,  each of these
loans  is  subject  to  classification  by  the  Credit  Department  which  then
determines the allowance based on aggregate classifications. On a monthly basis,
remaining loan portfolio categories receive general allocation deemed reasonably
necessary to provide for losses within the  categories of loans set forth on the
table and based on the factors  previously listed. The overall allocation should
not  be  interpreted  as  an  indication  of  future  charge-off  trends.  While
management has made every effort to make a reasonable assessment of the level of
the allowance necessary for the portfolio,  further adjustments may be necessary
based on economic conditions and any related changes in asset quality.

                                       9

<PAGE>

--------------------------------------------------------------------------------

TABLE 4
ALLOWANCE FOR LOAN LOSSES ALLOCATION
(Dollars in thousands)

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                             December 31,
                         ------------------------------------------------------------------------------------
                                   1996                         1995                          1994
                         -------------------------   --------------------------    --------------------------
                                     Percentage of                Percentage of                 Percentage of
                                     Loans in Each                Loans in Each                 Loans in Each
                         Allowance    Category to    Allowance     Category to     Allowance     Category to
                          Amount      Total Loans     Amount       Total Loans      Amount       Total Loans
                         ---------   -------------   ---------    -------------    ---------    -------------
<S> <C>
Real Estate:
   Commercial
     mortgages             $1,222         43.9%        $  642          40.2%         $1,019         43.7%
   Residential
     mortgages                 60         12.9             46          22.5              52         24.9
   Construction and
     land development         300         18.0            289           9.4             403          7.4
Commercial                    275         14.2            381          15.9             268         14.1
Consumer                       80         11.0             64          12.0              31          9.9
Unallocated                   163           --            482            --             129           --
                           ------        -----         ------         -----          ------        -----
     Total                 $2,100        100.0%        $1,904         100.0%         $1,902        100.0%
                           ======        =====         ======         =====          ======        =====
</TABLE>

--------------------------------------------------------------------------------



-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                             December 31,
                       --------------------------------------------------------
                                  1993                          1992
                       --------------------------    --------------------------
                                    Percentage of                 Percentage of
                                    Loans in Each                 Loans in Each
                       Allowance     Category to     Allowance     Category to
                        Amount       Total Loans      Amount       Total Loans
                       ---------    -------------    ---------    -------------
<S> <C>
Real Estate:
   Commercial
     mortgages           $  899          54.2%         $  667          51.1%
   Residential
     mortgages               26          20.0              27          18.8
   Construction and
     land development       252           5.7             177           4.3
Commercial                  107          10.1              86          13.6
Consumer                     69          10.0              62          12.2
Unallocated                 156            --              94            --
                         ------         -----          ------         -----
     Total               $1,509         100.0%         $1,113         100.0%
                         ======         =====          ======         =====
</TABLE>

-------------------------------------------------------------------------------

NON-INTEREST REVENUE

A portion of Monocacy's net income is derived from non-interest  related sources
including service charges, trust fees, gains on the sale of loans and securities
and other income.  Non-interest  revenue for 1996 was $2,039, up from $1,427 for
1995.

The 1996 results included $220 of net investment  security losses as compared to
$55 of net gains in 1995.  The 1996  security  losses  occurred with the sale of
securities related to the Bank's overall  asset/liability  management  practices
and were taken to reposition  the Bank's  securities  portfolio for funding loan
growth and interest rate considerations.

Service charges related to deposits increased in 1996 to $438 over $329 in 1995,
due to the higher customer and deposit volume in large part due to the Royal Oak
acquisition and other new branch sites and marketing initiatives.

Other service charges totaled $660 for 1996 which was a 39.0% increase from 1995
due to a 14.8%  increase  in loans  serviced  for others and a 5.5%  increase in
average loans.  The  residential  mortgage loan servicing  portfolio of $119,374
(including  $40,363  acquired  from Royal Oak),  which is created when  mortgage
loans  are  sold  with  the  servicing  retained  by  the  Company,  contributed
approximately $378 in servicing fees in 1996. Most residential loans are sold in
the secondary  markets.  In addition to regular sales of individual  residential
loans on the secondary market, the Company made a bulk sale of approximately $10
million of its  residential  loan  portfolio  during 1996 and $110 in gains were
recognized on the sale.  Total gains on residential  mortgage loan sales totaled
$797 for 1996  compared to $167 for 1995.  The  increased  profitability  of the
mortgage-banking  operations  can be  attributed  to the  April  acquisition  of
Classic. Loan production from Classic for the year was $64 million. In addition,
the Company  originates  Small Business  Administration  (SBA) loans,  which are
partially  guaranteed  by the SBA,  and  sells  the  guaranteed  portion  on the
secondary market. Gains from the sales of SBA loans were $67 in 1996.

The 1996  non-interest  revenue  included  Trust  fees of $150,  which  was flat
compared to 1995.  Assets under  management by the Trust Department were $27,625
in market  value at  December  31, 1996  compared to $23,749 in market  value at
December 31, 1995.

NON-INTEREST EXPENSES

Non-interest  expense for 1996 totaled  $8,762,  an increase of 34.1% from 1995.
1996 was a year of significant investment in staff, equipment and infrastructure
to support  future  growth.  The  Company  had 141  full-time  and 38  part-time
employees  at December  31, 1996 as compared to 114  full-time  and 30 part-time
employees  at  December  31,  1995.  Table 5:  Non-Interest  Expenses  shows the
breakdown of non-interest expenses by category.

Salary  and  Benefit  expenses  increased  $1,282 or 33.7%  over 1995 due to the
Company  growth in 1996.  27 full-time and 8 part-time  positions  were added in
1996. Salary expenses also include $308 of commissions that were not experienced
in 1995 and were a result of acquiring Classic Mortgage Company. Classic lenders

                                       10

<PAGE>

--------------------------------------------------------------------------------

TABLE 5
NON-INTEREST EXPENSES
(Dollars in thousands)

<TABLE>
<CAPTION>
                                               December 31,
                            ---------------------------------------------------
                             1996           1995         Change        % Change
                             ----           ----         ------        --------
<S> <C>
Salaries and Benefits       $5,087        $3,805         $1,282           33.7%
Occupancy                      628           436            192           44.0%
Equipment                      712           670             42            6.3%
Deposit Insurance              335           198            137           69.2%
Professional Fees              379           282             97           34.4%
Advertising                    224           136             88           64.7%
Data Processing                167            21            146          695.2%
Postage and Freight            122            94             28           29.8%
Meals and Entertainment        106            63             43           68.3%
Telephone                      161           110             51           46.4%
Supplies                       263           178             85           47.8%
Amortization of Intangibles    135            21            114          542.9%
Other                          443           522            (79)         (15.1)%
                            ------        ------         ------          -----
                            $8,762        $6,536         $2,226           34.1%
                            ======        ======         ======      
</TABLE>

--------------------------------------------------------------------------------

are paid commissions on loan production and,  accordingly,  commissions  expense
grows in direct proportion to loan production.

Occupancy  expenses  increased  $192 or 44.0% over 1995 and  equipment  expenses
increased by $42 or 6.3% over 1995 due to the investment in new branch locations
and  significant  investments  in  additional  technology.   Other  non-interest
expenses  totaled  $1,621,  which was above the 1995 level of $1,145  because of
higher data processing, advertising, postage, meals and entertainment, telephone
and supplies  expenses prompted in large part by the acquisitions and new branch
openings.  Also related to the acquisitions,  and included in other non-interest
expenses,  were $114 in  amortization of  intangibles.  The related  intangibles
include organization costs, premium paid on mortgage servicing and goodwill.

In 1996,  Congress passed  legislation to recapitalize  the Savings  Association
Insurance  Fund  (SAIF)  of the FDIC.  This  legislation  called  for a one time
special assessment of 65.7 basis points on thrift deposits as of March 31, 1995.
Royal Oak Savings  Bank,  which the Company  acquired on December 31,  1995,  is
included in this  assessment.  Accordingly,  non-interest  expenses reflect this
assessment of approximately $245,000. Furthermore, FDIC rates going forward will
increase  from  their  1996  levels  due  to  the   finalization   of  the  FDIC
restructuring and the merger of the SAIF with the Bank Insurance Fund (BIF).

A total of $379 of legal and professional  fees were paid in 1996 as compared to
$282 in 1995.  The increase was primarily  due to additional  legal fees paid on
loan workouts and expenses  incurred in conjunction with the merger of Royal Oak
and Classic into Taneytown Bank.

In addition to the merger of Royal Oak and the  acquisition of Classic  Mortgage
Company,  the Company  opened two new  branches  in 1996.  The Route 140 Express
branch  was  opened  in  Westminster,  Maryland  in  September  of 1996  and the
Gettysburg  branch was opened in Gettysburg,  Pennsylvania  in December of 1996.
The  opening  of the  Gettysburg  branch  marked  the  Company's  entrance  into
inter-state  banking.  Total  non-interest  expenses  related  to  these  branch
openings and to the two acquisitions that are non-recurring were $252.

INCOME TAXES

Income tax expense  for 1996 was $538 as compared  with $882 for 1995 with lower
pre-tax income in 1996. The 1996 effective tax rate was 25.0% down from 27.3% in
1995 as increased  taxable  income of the Company was more sheltered in 1996 for
tax  purposes  than it was in 1995,  mostly  due to the  increase  in  volume of
tax-exempt  securities.   Note  10  to  the  Consolidated  Financial  Statements
reconciles reported income tax expenses with the amount computed by applying the
federal statutory rate to income before taxes.

BALANCE SHEET REVIEW

EARNING ASSETS

Average  earning assets totaled  $243,361 for 1996 as shown in Table 1. This was
an increase of 18.6% from the 1995 level of $205,203.

                                       11

<PAGE>

LOANS HELD FOR SALE

The Company  originates  residential  mortgage  loans for sale in the  secondary
market.  In 1996,  loans originated for sale amounted to $34 million compared to
$17 million in 1995.  The increase in volume was due primarily to the efforts of
Classic  Mortgage  Company,  which the Company acquired in the second quarter of
1996.  Approximately  $10 million of the  balance at December  31, 1996 is under
contract for sale that should close in the first quarter of 1997 at a gain.

SECURITIES

The  Available  For Sale ("AFS")  portfolio  is generally  comprised of somewhat
shorter term investment securities and other securities the company feels it may
sell in  response  to changes in  interest  rates or  liquidity  needs.  The AFS
portfolio  averaged  $67,519 for 1996.  The Held to Maturity  ("HTM")  portfolio
averaged   $23,316  and  is   comprised  of  state  and   municipal   bonds  and
mortgage-backed securities with original maturities greater than eight years.

Investment securities, including those in the AFS portfolio, are primarily fixed
rate instruments with maturities that range from less than one year to ten years
or in some  small  cases  have no  maturities  such as with the small  amount of
mutual funds that the Bank owns. These mutual funds,  which have a fair value of
$853 at December 31, 1996,  invest in securities  comparable  to the  securities
that are  directly  owned by the  Company  including  U.S.  Government  and U.S.
Government  agency  obligations  and  obligations  of  municipal  and  political
subdivisions. Investment securities can be used to secure public deposits and as
collateral  for  Federal  Home  Loan  Bank  borrowings.   The  Company  owns  no
derivatives in its portfolios.  The accounting policy for securities is included
in Note 1 to the Consolidated  Financial  Statements.  At year end 1996, the HTM
and AFS  securities  portfolios  had  total  unrealized  gains of $74 and  total
unrealized losses of $1,427.

Investment  securities  portfolios yields increased to 6.76% from the prior year
levels of 6.19% as a result of the change in the mix of the portfolio  caused by
the turnover  (sales and  maturities) of lower  yielding  securities and limited
reinvestment  into the  portfolio,  as well as  investment  of the excess  funds
provided by the Royal Oak  acquisition,  in higher yielding  securities.  During
1996, the overall  portfolio was managed with a goal to increase loan volumes as
discussed  below. The interest rate environment in 1996 was somewhat higher than
in 1995 for the most part as indicated by the securities  markets. At the end of
the past two years, the Company did not have any investment with a single issuer
(except for U.S.  Government and agency  obligations) which was greater than 10%
of stockholders'  equity. Table 6: Securities and Table 7: Maturities and Yields
of Debt  Securities  provide  further  information  on the Company's  securities
portfolios.

--------------------------------------------------------------------------------

TABLE 6
SECURITIES
(Dollars in thousands)

<TABLE>
<CAPTION>
                                           1996                       1995                      1994
                                 ------------------------   ------------------------   ----------------------
                                               Securities                 Securities               Securities
                                 Investment     available   Investment     available   Investment   available
                                 securities     for sale    securities     for sale    securities   for sale
                                 ----------    ----------   ----------    ----------   ----------  ----------
<S> <C>
U.S. Treasury securities           $    --       $    --      $    --      $ 1,520       $ 3,056     $   --
U.S. Government agency
   securities                           --        21,721           --       18,917        10,978      3,658
State & municipal
   securities                       24,042         5,349        8,311       15,856        11,397      2,666
Mortgage-backed
   securities                           --        16,372        7,213       14,638        14,607         --
Equity securities                       --           853           --          887            --        784
Federal Home Loan
   Bank Stock                           --         1,623           --        2,023            --      1,863
                                   -------       -------      -------      -------       -------     ------
                                   $24,042       $45,918      $15,524      $53,841       $40,038     $8,971
                                   =======       =======      =======      =======       =======     ======
</TABLE>

--------------------------------------------------------------------------------

                                       12

<PAGE>

--------------------------------------------------------------------------------

TABLE 7
MATURITIES AND YIELDS OF DEBT SECURITIES
(Dollars in thousands)

<TABLE>
<CAPTION>
                                            Investment securities
                               ----------------------------------------------------
                                                                          Current
                               Amor-     Un-         Un-     Estimated    weighted-
                               tized   realized   realized     fair        average
                               cost     gains      losses      value       yield
                               -----   --------   --------   ---------    ---------
<S> <C>
U.S. Government
   agency securities:
   Due within one year       $    --      $--       $ --     $    --           --
   Due after one-
      five years                  --       --         --          --           --
   Due after five years           --       --         --          --           --
State & municipal securities:
   Due after one-
      five years                  --       --         --          --           --
   Due after five years       24,042       56        238      23,860         7.30%
Mortgage-backed securities:
   Due after five years           --       --         --          --           --
                             -------      ---       ----     -------
                             $24,042      $56       $238     $23,860
                             =======      ===       ====     =======
</TABLE>
--------------------------------------------------------------------------------




<TABLE>
<CAPTION>
                                           Securities available for sale
                                ----------------------------------------------------
                                                                           Current
                                Amor-     Un-         Un-     Estimated    weighted-
                                tized   realized   realized     fair        average
                                cost     gains      losses      value       yield
                                -----   --------   --------   ---------    ---------
<S> <C>
U.S. Government
   agency securities:
   Due within one year        $ 1,000      $--      $    2     $   998       6.24%
   Due after one-
      five years               12,488       --         107      12,381       5.91%
   Due after five years         8,496       --         154       8,342       6.46%
State & municipal securities:
   Due after one-
      five years                2,614        4           3       2,615       6.61%
   Due after five years         2,725       14           5       2,734       6.97%
Mortgage-backed securities:
   Due after five years        17,122       --         750      16,372       6.78%
                              -------      ---      ------     -------
                              $44,445      $18      $1,021     $43,442
                              =======      ===      ======     =======
</TABLE>


--------------------------------------------------------------------------------

LOANS

Loans net of unearned income for 1996 averaged  $148,756,  which was an increase
of $7,787 or 5.5% from the 1995  level.  Total  loans at  December  31,  1996 of
$159,247 are shown in Table 8: Summary of Total Loans. Increases occurred in all
loan  categories  except  residential  mortgages due to the generally  favorable
economic  environment  coupled with  extensive  marketing  efforts by the Bank's
lending staff. In addition,  the  acquisition of Classic created  increased loan
volume  and  loan  growth  in  the  residential  construction  portfolio  as  we
emphasized this product in our marketing efforts.  Borrowers are concentrated in
a market area which  extends from Carroll  County,  Baltimore  County and Howard
County,  Maryland  and to a lesser  extent  other parts of central  Maryland and
southern central Pennsylvania.

Commercial  mortgage loans,  which  represent 43.9% of the loan portfolio,  were
$69,947 at December 31, 1996. This was an increase of 24.9% over the 1995 level.
This  increase was due to a renewed  focus on these types of loans and increased
marketing efforts by the lending staff.

Commercial loans,  which represent 14.2% of the loan portfolio,  were $22,582 at
December 31, 1996. The commercial  loan portfolio,  which consists  primarily of
secured loans, is strongly oriented towards  diversified middle market borrowers
in the  manufacturing,  wholesaling,  services and real estate  industries.  The
credit risk associated with middle market borrowers is principally influenced by
general  economic   conditions  and  the  resulting  impact  on  the  borrowers'
operations.  The emphasis on  commercial  loans is  desirable  to diversify  the
overall loan portfolio and to increase the Bank's net interest margin.

Consumer  loans,  which  includes  home equity  lines of credit as well as other
personal  loans,  increased  by 4.7% in 1996 as the Company  continues  to focus
marketing  efforts  in this  area,  particularly  home  equity  lines of  credit
("helocs")  and  fixed  rate  second  mortgages  because  of  the  profitability
associated with consumer  relationships  that can be created and the competitive
environment  that exists for other  consumer type loans from  specialty  lenders
such  as  finance  companies,  credit  card  banks  and  captive  auto  lenders.
Management  also  believes  that the  Company's  overall  focus  on  residential
lending,  including lot,  construction,  permanent and helocs is a strategy that
will differentiate us from the competition.

Residential  mortgage  loans of $20,477 were 12.9% of the loan  portfolio.  This
category decreased by 34.7% in 1996,  primarily due to the sale of a $10 million
pool of such loans on the secondary  market in the third quarter yielding a gain
of $110. The majority of residential  mortgage loan  originations  occur through
Classic  Mortgage  Company  and are  sold  on the  secondary  market.  Classic's
residential  mortgage  loan  production  for 1996 was $44.5 million of which $24
million  was sold  servicing  released,  $8.5  million  was sold with  servicing
retained and $12 million was retained in the Bank's portfolio.

                                       13

<PAGE>

--------------------------------------------------------------------------------

Construction and land development loans were $28,695, an increase of 118.7% from
1995,  due in large  part to  renewed  focus  on  these  types of loans in 1996.
Residential  construction  loans  comprised  the  majority of the  increase  and
represented  42% of the total  portfolio  balance due to  Classic's  substantial
efforts in the marketing of these loans in 1996. Residential  construction loans
are owned and serviced by the Bank until the end of the construction  period. At
the time of conversion  to permanent  loans,  the loan is generally  sold on the
secondary market.

Loans, as a result of maturities,  monthly payments,  salability and as a source
of collateral  provided an important source of liquidity to the Company.  Unused
loan  commitments  related  primarily to commercial loans are shown in Note 6 to
the Consolidated Financial Statements.

Table 9:  Maturities of Loans,  shows the maturities of selected loan categories
at year end 1996.

--------------------------------------------------------------------------------

TABLE 8
SUMMARY OF TOTAL LOANS
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                   December 31,
                            --------------------------------------------------------
                              1996        1995        1994        1993        1992
                            --------    --------    --------    --------     -------
<S> <C>
Real Estate:
   Commercial mortgages     $ 69,947    $ 56,001    $ 64,684    $ 66,692     $49,551
   Residential mortgages      20,477      31,357      36,880      24,588      18,206
   Construction and land
      development             28,695      13,121      10,913       7,026       4,185
Commercial                    22,582      22,181      20,909      12,361      13,173
Consumer                      17,546      16,759      14,602      12,493      11,792
                            --------    --------    --------    --------     -------
      Total                 $159,247    $139,419    $147,988    $123,160     $96,907
                            ========    ========    ========    ========     =======
</TABLE>

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

TABLE 9
MATURITIES OF LOANS
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                            After 1
                                  Within 1 Year       But Within 5 Years        After 5 Years
                              --------------------    -------------------   --------------------
                               Fixed      Variable     Fixed     Variable    Fixed      Variable
                              -------     --------    -------    --------   -------    ---------
<S> <C>
Real Estate:
   Commercial mortgages (3)   $15,947     $ 7,454     $32,185     $  846    $    --     $13,515
   Residential mortgages        1,085          --       2,496         --         --      16,896
   Construction and
      land development (2)      6,275       4,830       4,331     10,239      1,102       1,918
Commercial (1)                    155       8,478         995      3,876      9,078          --
Consumer (4)                      216         189       7,020      6,082      1,188       2,851
                              -------     -------     -------    -------    -------     -------
      Total                   $23,678     $20,951     $47,027    $21,043    $11,368     $35,180
                              =======     =======     =======    =======    =======     =======
</TABLE>

(1) Includes nonaccrual loans of $52
(2) Includes nonaccrual loans of $143
(3) Includes nonaccrual loans of $592
(4) Includes nonaccrual loans of $6

--------------------------------------------------------------------------------

                                       14

NON-PERFORMING ASSETS

Non-performing   assets  include  non-accrual  loans  and  foreclosed  property.
Non-accrual   loans  represent  loans  on  which  interest  accruals  have  been
suspended.  It is the  Company's  policy to  discontinue  interest  accruals  on
commercial and real estate loans when  management  believes,  after  considering
economic  and  business  conditions,  collection  efforts  and in the absence of
adequate  collateral that collection is questionable.  Legal  foreclosures occur
when Monocacy legally takes title to the collateral of the loan.

Non-performing  assets at year end 1996 totaled  $1,449 or .9% of loans,  net of
unearned income and foreclosed  property compared with $2,569 or 1.8% at the end
of 1995. This reduction of $1,120 occurred as the Company aggressively  resolved
many of these  properties  and loans.  Table 10 provides  details of the various
components of non-performing assets and past due loans for the past five years.

The  majority  of the  non-accrual  loan  balance  consists  of  one  commercial
property,  one commercial  business loan and two single family  residences.  The
foreclosed  properties  consist  of  three  undeveloped  residential  lots,  one
commercial property and one residential  property.  There are $405 of other real
estate owned under  contract for sale at December 31, 1996.  Management  expects
these  sales to close in the  first  half of 1997.  Management  is  aggressively
working out all  non-performing  assets as fast as legal  constraints  permit in
order to minimize their impact on earnings and growth strategies.

Accruing loans past due 90 days or more as to principal or interest totaled $757
at the end of 1996 as compared to $174 for 1995.  These loans are in the process
of collection and are considered adequately collateralized.

At December 31, 1996,  management had identified its non-accrual loans (as shown
in Table 10) of $793 as impaired  loans in  accordance  with FASB  Statement No.
114. There were no valuation  allowances for impaired loans at December 31, 1996
as the  amounts by which the  measure of the  impaired  loans were less than the
investment in the loans were charged off in 1996 for all impaired  loans held in
1996.

--------------------------------------------------------------------------------

TABLE 10
NON-PERFORMING ASSETS AND PAST DUE LOANS
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                               December 31,
                                   ---------------------------------------------------------------
                                    1996           1995            1994         1993         1992
                                   ------         ------          ------       ------       ------
<S> <C>
Non-performing loans--
   non-accrual loans               $  793         $1,258           $ 25         $519        $  736
Other real estate owned               656          1,311            278           64           755
                                   ------         ------           ----         ----        ------
      Total non-performing assets  $1,449         $2,569           $303         $583        $1,491
                                   ======         ======           ====         ====        ======
Accruing loans past due
   90 days or more                 $  757         $  174           $936         $240        $  492
                                   ======         ======           ====         ====        ======
Allowance for loan losses to:
   Non-performing loans             264.8%         151.4%       7,608.0%       290.8%        151.2%
   Non-performing assets            144.9           74.1          627.7        258.8          74.7
</TABLE>

--------------------------------------------------------------------------------

BANK PREMISES AND EQUIPMENT

The Company's  bank  premises and equipment  increased to $8,435 at December 31,
1996 from $6,233 at December 31, 1995 due to significant  investments for future
growth. Land, buildings and improvements were purchased for future branch sites,
including  the new branch  that opened in  Westminster  in 1996.  A  substantial
amount of equipment was purchased in 1996 and mostly includes  various  computer
related  equipment and furniture for the new branch locations and Classic.  Also
in 1996, the Company  undertook major  renovations of the main office operations
facilities in Taneytown, which cost approximately $250. Construction in progress
at December 31, 1996 consists  mostly of costs incurred to date in the expansion
of the Eldersburg branch facility.

FUNDING

DEPOSITS

The  Company  offers  to its  diverse  customer  base a full  range  of  savings
instruments including interest-bearing and non-interest-bearing  demand, savings
and  certificates  of  deposit.   Monocacy  competes  for  deposits  with

                                       15

<PAGE>

--------------------------------------------------------------------------------

other commercial banks,  savings banks and savings and loan  associations,  bond
and stock  markets and non-bank  financial  service  providers  including  money
market  funds,  credit  unions and other  deposit  gathering  institutions.  The
competition among the various financial institutions,  higher consumer awareness
and a desire for high returns and service has increased the relative cost of and
continues  to reduce the  overall  benefits  received  from many  categories  of
deposits.  Interest-bearing  liabilities (including other borrowings,  discussed
below) averaged  $216,386 for 1996, an increase of 23.2% from 1995. The increase
was due  primarily to increases in the  Company's  savings  products,  primarily
certificates  of deposit as a result of the  acquisition  of  approximately  $39
million  in   additional   deposits  in  the  Royal  Oak   purchase,   including
approximately  $21 million in certificates of deposit and $18 million in savings
and checking  deposits.  The opening of the two new  branches  during the second
half of 1996 brought in $2 million in additional  deposits in 1996. In addition,
Monocacy  was able to increase  its deposit  and  customer  base during the year
through new  products,  innovative  marketing  techniques  and a high quality of
customer service.

The Company has a portfolio of large  denomination  certificates  of $100,000 or
more as shown in Table 11. The  majority of the  certificates  have been sold to
existing in-market  customers;  however, at times,  deposits have been placed at
the Bank from national  brokers.  At December 31, 1996, 100% of the $7,213 total
are from the Bank's existing deposit base.

--------------------------------------------------------------------------------

TABLE 11
MATURITY OF LARGE DENOMINATION CERTIFICATES OF $100,000 OR MORE
(Dollars in thousands)
                                      December 31,
                                          1996
                                      ------------
3 months or less                         $  228
Over 3 through 6 months                     201
Over 6 through 12 months                  1,329
Over 12 months                            5,455
                                         ------
                                         $7,213
                                         ======

--------------------------------------------------------------------------------

OTHER FUNDING SOURCES

The Company  periodically  borrows  from the  Federal  Home Loan Bank of Atlanta
("FHLB")  under a secured  borrowing  arrangement.  At December  31,  1996,  the
aggregate  advances  from the  FHLB  were  $14,739.  These  borrowings  are done
primarily on a matched basis, meaning that the Company manages the interest rate
risk that may otherwise exist on certain types of transactions such as long term
fixed rate loans in concert with the Company's overall  asset/liability  policy.
As a result,  the  transactions  are likely to be more profitable to the Company
and can allow  the  Company  to better  serve its  markets.  In  general,  these
borrowings are stable although relatively more expensive than deposits. Of these
borrowings,  $280 will mature in 1997. The Company from time to time will borrow
funds on an overnight basis from its correspondent banks and the FHLB.

In preparation  for the cash  investment  required for the  acquisition of Royal
Oak, in 1995, the Company borrowed  $3,000,000 from another commercial bank at a
rate of 8.5%.  This loan was paid off following the merger of Royal Oak into the
Bank in April, 1996.

STOCKHOLDERS' EQUITY

Stockholders'  equity provides a source of permanent funding,  allows for future
growth and assists the Company to withstand unforeseen and adverse developments.
At  December  31,  1996,   stockholders'   equity  totaled   $21,648  which  was
approximately  the same as the previous year end level,  as a result of earnings
being  offset by the  increase in the  adjustment  in the fair values of the AFS
securities portfolio and an increase in cash dividends.

For 1996, the Company's  annual cash dividend rate, as adjusted for the February
1997 stock dividend,  was $.36 per share, as compared to a rate of $.33 in 1995.
In addition,  the Company declared a 10% common stock dividend in 1996 and 1995.
The increase in the cash dividend rate and the  declaration  of the common stock
dividend was in recognition of the continued strong financial health,  liquidity
and  capital  position  of the  Company.  The  net  unrealized  holding  loss on
securities available for sale of $773 reflects the after-tax unrealized net loss
of these  securities.  There was an  unrealized  net gain of $19 at December 31,
1995.  It is  important  to note that the monthly  adjustments  of fair value on
these securities will generally move in concert with interest rates and there is
potential  for  volatility  in this  category  of  stockholders'  equity.  It is
management's  intention to actively manage this portfolio to ensure that optimal
returns are achieved by the Company with low impact to stockholders' equity.

A  Dividend  Reinvestment  plan was  established  in October  1994 which  offers
shareholders  a variety of options  to  increase  their  stock  holdings.  As of
January  27,  1997,  415  shareholders  were  enrolled  in the  plan.  In  1996,
approximately  13,000  new shares of stock were  issued  through  the plan which
resulted in additional capital of approximately $246.

A primary  objective of management  is and has been to sustain a strong  capital
position to merit the confidence

                                       16

<PAGE>

--------------------------------------------------------------------------------

of its customers,  the investing  public,  banking  regulators and stockholders.
Capital  adequacy  may be defined  as the  amount of  capital  needed to support
future asset growth and to absorb  losses if  necessary.  Regulators  consider a
range of factors when determining  capital  adequacy such as the  organization's
size,  quality and  stability  of  earnings,  risk  diversification,  management
expertise,  asset quality,  liquidity and internal controls.  Management reviews
the various capital ratios monthly and takes  appropriate  action to ensure they
are within established  internal and external  guidelines.  Management  believes
that Monocacy's current capital ratios (consolidated), as shown in Table 12, are
strong and that its capital position is adequate to support its various business
ventures. Table 12 shows the Company's capital positions as of December 31, 1996
and shows that the  Company's  ratios  are  significantly  above the  regulatory
requirements. The Company is subject to restrictions on the payment of dividends
to its  shareholders  as  discussed  in  Note 18 to the  Consolidated  Financial
Statements.  In addition,  Federal and State banking  regulations  place certain
restrictions on the ability of the Bank to pay dividends to Monocacy.

--------------------------------------------------------------------------------

TABLE 12
RISK BASED AND OTHER CAPITAL DATA
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                December 31,
                                 --------------------------------------------
                                         1996                    1995
                                 --------------------    --------------------    Regulatory
                                  Balance     Percent     Balance     Percent    Requirement
                                 --------     -------    --------     -------    -----------
<S> <C>
Common stockholders' equity (1)  $ 22,421                $ 21,150
Intangibles (2)                    (4,012)                 (4,134)
                                 --------      -----     --------      -----
   Total Tier 1                    18,409      10.31%      17,016      10.61%         4.00%
Qualifying allowance
   for loan losses                  2,100                   1,904
                                 --------      -----     --------      -----
   Total Tier II                 $ 20,509      11.49%    $ 18,920      11.80%
                                 ========      =====     ========      =====
Total Risk-Based Capital         $ 20,509      11.49%    $ 18,920      11.80%         8.00%
                                 ========      =====     ========      =====
Total Risk-Adjusted Assets       $178,569                $160,393
                                 ========                ========
   Leverage Ratio                               7.03%                   7.56%    3.00-5.00%
                                               =====                   =====
</TABLE>

(1)  Calculation  does not  include  adjustment  to capital  for net  unrealized
gains/losses  on AFS securities as defined by regulators.
(2)  Includes  deposit  premium on Royal Oak  transaction,  goodwill  on Classic
purchase,   premium  paid  on  mortgage  servicing  in  Royal  Oak  transaction,
mortgage-servicing rights and various organization costs.

--------------------------------------------------------------------------------

INTEREST RATE SENSITIVITY

Monocacy's  interest  rate  sensitivity  position  is  managed  by the Asset and
Liability Committee ("ALCO") and Funds Management Committee of the Board. ALCO's
purpose is to optimize net  interest  income by managing  balance  sheet mix and
interest  rate  sensitivity  in order to create an  acceptable  balance  between
safety,  profitability  and  liquidity.  This  committee  addresses  policy  and
business decisions of pricing, asset and funding mix, asset sales,  investments,
capital and tax strategies. Legislative changes, monetary control efforts of the
Federal   Reserve,   the  effects  of  deregulation  and  the  overall  economic
environment  significantly affect the task. Table 13: Interest Rate Sensitivity,
shows the Company to be in a cumulative  net asset  sensitive  position of 1.88%
within the one year  horizon as of December 31, 1996.  When  interest  rates are
rising,  a net asset  sensitive  position  is  desirable  as more assets will be
priced at higher rates than liabilities,  resulting in a favorable impact on net
interest income.  Likewise,  when interest rates are declining,  a net liability
sensitive  position  is  preferred.  It is  important  to note  that  management
possesses the ability to adjust this position through the sale of various assets
or obtaining of other sources of funds including  certificates of deposit,  FHLB
borrowings or other deposit adjustments as deemed necessary.

                                       17

<PAGE>

TABLE 13
INTEREST RATE SENSITIVITY
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                               December 31, 1996
                                         --------------------------------------------------------------
                                          1-30       31-90     91-360     >1 Year-   >3 Years-   Over
                                           Days      Days       Days       3 Years    5 Years   5 Years
                                         -------    ------     ------     --------   ---------  -------
<S> <C>
Interest-earning assets:
   Loans held for sale                   $10,118  $     --    $     --   $     --   $     --    $    --
   Securities available for sale,
      investment securities and
      federal funds sold                   4,725       270       3,064     17,994      7,357     38,658
   Loans (1)                              51,299     6,015      21,070     33,889     21,528     24,989
                                         -------   -------      ------     ------     ------     ------
   Total interest-earning assets          66,142     6,285      24,134     51,883     28,885     63,647
Interest-bearing liabilities:
   Savings and interest checking (2)          --        --      42,080     42,080         --         --
   Certificates of deposit                 4,587    11,172      32,892     47,086     21,098         42
   Borrowings                                600        --         280      9,543      1,650      3,266
                                         -------   -------      ------     ------     ------     ------
   Total interest-bearing liabilities      5,187    11,172      75,252     98,709     22,748      3,308
Non-rate related assets
   and liabilities, net                       --        --          --         --         --     24,600
                                         -------   -------    --------   --------   --------    -------
Interest sensitivity gap (3)             $60,955   $(4,887)   $(51,118)  $(46,826)  $  6,137    $35,739
                                         -------   -------    --------   --------   --------    -------
Interest sensitivity gap as a
   percentage of total assets              23.18%    (1.86)%    (19.44)%   (17.80)%     2.33%     13.59%
Cumulative interest sensitivity gap (3)  $60,955   $56,068    $  4,950   $(41,876)  $(35,739)   $    --
                                         -------   -------    --------   --------   --------    -------
Cumulative interest sensitivity
   gap as a percentage of total assets     23.18%    21.32%       1.88%    (15.92)%   (13.59)%    --
                                         =======   =======    ========   ========   ========    =======
</TABLE>

(1) Loans are stated  before  deducting  allowance  for loan losses,  but net of
unearned income.
(2) The  Company's  historical  rate  sensitivity  analysis  shows that interest
checking  and  statement  savings,   while  technically   subject  to  immediate
withdrawals,  actually  have shown  repricings  and run-off  characteristics  of
longer term deposits.
(3)  Interest   sensitivity   gaps  represent  the   difference   between  total
interest-earning assets and total interest-bearing liabilities.

--------------------------------------------------------------------------------

LIQUIDITY

Liquidity is the ability to meet present and future financial obligations either
through  the sale or  maturity  of  existing  assets  or by the  acquisition  of
additional  funds through  liability  management.  During 1996 and on an ongoing
basis,  all aspects noted have been utilized,  including loan sales,  investment
security  transactions and the use of borrowings from the FHLB to complement the
Company's  deposit  gathering  efforts.  A coordination of asset  maturities and
effective  liability  management are important to the  maintenance of liquidity.
Stable core  deposits and other  non-interest-bearing  funds,  accessibility  to
local,  regional and national funding sources and readily  marketable assets are
all  important to manage  liability.  Asset  liquidity is generally  provided by
cash, federal funds sold,  securities available for sale and maturing investment
securities. Liability liquidity is measured by adequate amounts and by length of
maturities.  Since core  deposits are the most stable source of liquidity a bank
can have  because  they are  generally  government  insured,  the high  level of
average core deposits  during 1996  maintained  the Company's  strong  liquidity
position.  The 1996 year end loan balances are entirely funded by core deposits.
The equity base of the Company also provides a stable  source of funding.  It is
important to note that the parent  company does not rely on the capital  markets
for funding.

OTHER MATTERS

From time to time,  various  types of federal  and state  legislation  have been
proposed that could result in additional regulation of, and restrictions on, the
business  of the  Company  and the Bank.  It cannot be  predicted  whether  such
legislation will be adopted or, if adopted,  how such  legislation  would affect
the  business of the company and the Bank.  As a  consequence  of the  extensive
regulation of commercial  banking activities in the United States, the Company's
and the Bank's business is particularly susceptible to being affected by federal
legislation and regulations that may increase the cost of doing business. Except
as  specifi-

                                       18

<PAGE>

--------------------------------------------------------------------------------

cally described above,  Management believes that the effect of the provisions of
the legislation on the liquidity,  capital resources,  and results of operations
of the Company will be immaterial.  Management is not aware of any other current
specific  recommendations  by regulatory  authorities  or proposed  legislation,
which if they were  implemented,  would have a material  adverse effect upon the
liquidity,  capital  resources,  or results of operations,  although the general
cost of  compliance  with  numerous  and  multiple  federal  and state  laws and
regulations  does have,  and in the future  may have,  a negative  impact on the
Company's results of operations.

Further,  the  business  of the  Company  is also  affected  by the state of the
financial  services  industry  in  general.  As a result of legal  and  industry
changes,  Management  predicts  that the industry will continue to experience an
increase  in  consolidations  and  mergers as the  financial  services  industry
strives for greater cost efficiencies and market share. Management believes that
such  consolidations  and  mergers may  enhance  its  competitive  position as a
community bank.

PROSPECTIVE ACCOUNTING CHANGES

In June 1996, the FASB issued  Statement of Financial  Accounting  Standards No.
125,   "Accounting   for  Transfers  and  Servicing  of  Financial   Assets  and
Extinguishments  of  Liabilities"  ("SFAS  125").  SFAS  125  is  effective  for
transfers and servicing of financial assets and  extinguishments  of liabilities
occurring  after  December  31,  1996 and is to be applied  prospectively.  This
Statement  will  require,  among other things,  that the Company  record at fair
value, assets and liabilities resulting from a transfer of financial assets. The
Company  will adopt the  provisions  of SFAS 125 as of  January  1, 1997.  As of
December  31,  1996,  the  Company  had $303 in  assets  comprised  of  mortgage
servicing rights that would be subject to this statement.

                                       19

<PAGE>

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

================================================================================

                 December 31, 1995 compared to December 31, 1994
                  (Dollars in thousands, except per share data)

OVERVIEW

The  earnings  for 1995 were  $2,351 or $1.47  per  share (as  restated  for the
February,  1997  stock  dividend)  which  was a $129 or 5.8%  increase  over the
earnings level of 1994.

The Company's  earnings  level in 1995  reflected  strong net interest  margins,
increased  non-interest revenues, a modest increase in non-interest expenses and
an  increase  in the  provision  for  loan  losses  to  compensate  for  the net
charge-offs of $883 experienced on loans in 1995.

The asset level of the Company increased to $266,194.  The increase in the asset
level resulted  primarily from the December 31, 1995 acquisition of Royal Oak as
well as extensive  loan growth in most segments due to the  increased  marketing
efforts  of the  Bank's  lending  staff.  This  growth  was  funded  by the FHLB
borrowings  and the  purchase  of  federal  funds as well as  deposit  growth of
approximately $51,000.

The Royal  Oak  acquisition  consisted  of assets  that  included  cash and cash
equivalents  of $45,398,  loans of $451,  property,  plant and  equipment of two
branch  facilities  of $510 and  miscellaneous  other assets of $646,  including
mortgage-servicing  rights.  $39 million in deposits  of the two  branches  were
assumed in the transaction.

NET INTEREST INCOME

Net  interest  income after  provision  for loan losses  totaled  $8,342 up from
$8,039  in  1994.  The  growth  in  both  earning  assets  and  interest-bearing
liabilities contributed to this increase and was offset by a decrease in the net
yield on earning assets to 4.68% from 4.75%.

Tax  equivalent net interest  income  increased to $9,608 in 1995 from $9,112 in
1994 due to the  increase  in the  volume  of  tax-exempt  state  and  municipal
securities.

INTEREST INCOME

Interest  income on a fully taxable  equivalent  basis increased to $17,460 from
the $15,383 level in 1994 due to higher  available  yields on increased  average
earning  assets.  The average  earning assets  increased to $205,203 with growth
noted in most all loan categories and in the investment securities portfolios.

INTEREST EXPENSE

Interest  expense  increased  to $7,852  from  $6,271  in 1994 with  significant
increases in interest rates and levels of interest-bearing liabilities.  Average
certificates  of  deposit,  one of the higher  costing  components  of  interest
expense, increased by 25.5% over 1994.

INTEREST RATE PERFORMANCE

The net yield margin in 1995 was 4.68% which was down by 7 basis points from the
1994 level.  During 1995, the net interest  margin  decreased  mostly because of
increased interest costs on interest-bearing liabilities as was mentioned above.
The yield on earning assets increased by 49 basis points while the rates paid on
liabilities and borrowings increased by 70 basis points.

NON-INTEREST INCOME

During 1995,  non-interest  income was $1,427,  a substantial  increase from the
1994  level  of  $1,081.  This  increase  was  due  primarily  to the  increased
profitability of the Company's mortgage-banking  operations,  mostly in the form
of mortgage servicing and gains on sales of loans, both residential mortgage and
SBA,  from $521 to $642.  During 1995,  $55 of  investment  security  gains were
recorded versus $78 of security losses recorded in 1994.

NON-INTEREST EXPENSE

Non-interest  expense for 1995 was $6,536, a $415 or 6.8% increase from the 1994
level. The largest increase was noted in salary/benefit categories as staff grew
during  1995.  Other  categories  of  non-interest   expenses,   including  data
processing and equipment expenses,  increased with the increasing staff and loan
and deposit volumes and locations noted.

LIQUIDITY

As in the past,  the Company  maintained  a very  favorable  liquid  position in
accordance  with  management's   Asset/Liability  and  Liquidity  policies.   In
addition,  the Bank  retains a  correspondent  relationship  for the purchase of
Federal Funds as well as a line of credit with the Federal Home Loan Bank.

CAPITAL

The Company had a Tier I Capital  Ratio of 10.61%,  a Total  Risk-Based  Capital
Ratio of 11.80% and a Leverage  Ratio of 7.56% at  December  31, 1995 which were
well above regulatory requirement levels.

                                       20

<PAGE>

                          INDEPENDENT AUDITORS' REPORT

================================================================================

The Board of Directors and Stockholders
Monocacy Bancshares, Inc.

We have  audited  the  accompanying  consolidated  balance  sheets  of  Monocacy
Bancshares,  Inc. and  Subsidiaries  as of December  31, 1996 and 1995,  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, 1996.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Monocacy Bancshares, Inc. and Subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended  December 31, 1996, in conformity  with  generally  accepted
accounting principles.

                                 
                                       /s/ Stegman & Company

Towson, Maryland
January 31, 1997

                                       21

<PAGE>

                           CONSOLIDATED BALANCE SHEETS

================================================================================

                          December 31, 1996 and 1995
                             (Dollars in thousands)


<TABLE>
<CAPTION>
                                                       1996         1995
                                                     --------     --------
<S> <C>
ASSETS
   Cash and due from banks (note 2)                  $ 10,374     $ 10,735
   Federal funds sold                                   2,000       36,409
   Interest-bearing deposits with other banks             108          805
   Loans held for sale                                 10,118           --
   Securities available for sale (note 3)              45,918       53,841
   Investment securities (approximate fair value of
      $23,860 and $15,261) (note 4)                    24,042       15,524
   Loans, net of allowance for loan losses of
      $2,100 and $1,904 (note 5)                      156,690      137,222
   Bank premises and equipment, net (note 7)            8,435        6,233
   Other real estate owned                                656        1,311
   Deferred income taxes (note 10)                        899          520
   Accrued interest receivable                          1,939        1,663
   Other assets                                         1,836        1,931
                                                     --------     --------
      Total Assets                                   $263,015     $266,194
                                                     ========     ========

LIABILITIES AND STOCKHOLDERS' EQUITY:
   Deposits:
      Non-interest-bearing                           $ 24,002      $21,317
      Interest-bearing:
         Savings and checking                          84,160       87,935
         Certificates of deposit:
            Under $100,000                            109,664      103,925
            $100,000 and over                           7,213       10,235
                                                     --------     --------
   Total deposits                                     225,039      223,412
   Short-term borrowings (note 8)                       7,600        9,310
   Other long-term borrowings (note 8)                  7,739       10,323
   Accrued expenses payable                               555          752
   Other liabilities                                      287        1,095
   Dividends payable                                      147          133
                                                     --------     --------
      Total Liabilities                               241,367      245,025
                                                     --------     --------
Stockholders' Equity:
   Common stock, par value $5.00 per share;
      authorized 4,000,000 shares; issued and
      outstanding 1,468,324 in 1996 and
      1,323,555 shares in 1995                          7,342        6,618
   Common stock dividend to be distributed              3,699        2,846
   Surplus                                              9,145        6,777
   Retained earnings                                    2,235        4,909
   Unrealized holding gain (loss) on securities, net     (773)          19
   Commitments and contingencies (notes 6 and 13)
                                                     --------     --------
      Total Stockholders' Equity                       21,648       21,169
                                                     --------     --------
      Total Liabilities and Stockholders' Equity     $263,015     $266,194
                                                     ========     ========
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements

                                       22

<PAGE>

                        CONSOLIDATED STATEMENTS OF INCOME

================================================================================

              For the years ended December 31, 1996, 1995 and 1994
                             (Dollars in thousands)


<TABLE>
<CAPTION>
                                                 1996             1995              1994
                                               ---------       ----------        ---------
<S> <C>
INTEREST INCOME:
   Loans, including fees                       $  14,043        $  13,535        $  12,148
   Securities available for sale - taxable         3,797              712              921
   Securities available for sale - tax-exempt        422              268              299
   Investment securities-taxable                      26            1,892            1,105
   Investment securities-tax-exempt                1,107              472              452
   Interest-bearing deposits with other banks         52              132               42
   Federal funds sold                                146               68               30
                                               ---------        ---------        ---------
      Total interest income                       19,593           17,079           14,997
                                               ---------        ---------        ---------
INTEREST EXPENSE:
   Deposits of $100,000 or more                      469              486              259
   Other deposits                                  8,782            6,419            4,953
   Federal funds purchased                            95               55               33
   Other borrowings                                1,075              892            1,026
                                               ---------        ---------        ---------
      Total interest expense                      10,421            7,852            6,271
                                               ---------        ---------        ---------
      Net interest income                          9,172            9,227            8,726
Provision for loan losses                            300              885              687
                                               ---------        ---------        ---------
      Net interest income after provision for
         loan losses                               8,872            8,342            8,039
                                               ---------        ---------        ---------
NON-INTEREST INCOME:
   Service charges on deposit accounts               438              329              329
   Other service charges                             660              475              417
   Trust department fees                             150              151              124
   Gains and fees on sales of loans                  864              167              104
   Gains (losses) on securities                     (220)              55              (78)
   Other                                             147              250              185
                                               ---------        ---------        ---------
      Total non-interest income                    2,039            1,427            1,081
                                               ---------        ---------        ---------
NON-INTEREST EXPENSE:
   Salaries                                        3,956            3,062            2,852
   Employee benefits (note 9)                      1,131              743              672
   Occupancy                                         628              436              490
   Equipment                                         712              670              475
   Deposit insurance                                 335              198              354
   Professional fees                                 379              282              252
   Other                                           1,621            1,145            1,026
                                               ---------        ---------        ---------
      Total non-interest expense                   8,762            6,536            6,121
                                               ---------        ---------        ---------
Income before income taxes                         2,149            3,233            2,999
Income tax provision (note 10)                       538              882              777
                                               ---------        ---------        ---------
      Net income                                 $ 1,611         $  2,351         $  2,222
                                               =========        =========        =========

Net income per common share                      $  1.00         $   1.47         $   1.40
Cash dividends per common share                  $   .36         $    .33         $    .23
Average common shares outstanding
   (as adjusted to reflect the
   February, 1997 stock dividend)              1,608,330        1,598,847        1,589,774
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements

                                       23

<PAGE>

                      CONSOLIDATED STATEMENTS OF CHANGES IN
                              STOCKHOLDERS' EQUITY

================================================================================

              For the years ended December 31, 1996, 1995 and 1994
                             (Dollars in thousands)

<TABLE>
<CAPTION>                                                                                                       Unrealized
                                                     Common Stock       Common Stock                              Holding
                                                 --------------------   Divided to be              Retained     Gain (Loss)
                                                  Shares    Par Value    Distributed    Surplus    Earnings    on Securities
<S> <C>                                          ---------  ---------   -------------   -------    --------    -------------
BALANCE, DECEMBER 31, 1993                       1,312,200    $6,561       $   --        $6,561     $ 4,078        $  90
   Net income                                           --        --           --            --       2,222           --
   Issuance of shares of common stock
      in connection with employee benefit
      and dividend reinvestment plan                 2,629        13           --            49          --           --
   Cash dividend, $0.23 per share                       --        --           --            --        (368)          --
   Decrease in fair value of
      securities available for sale                     --        --           --            --          --         (596)
                                                 ---------    ------        -----        ------      ------         ----
BALANCE, DECEMBER 31, 1994                       1,314,829     6,574           --         6,610       5,932         (506)
   Net income                                           --        --           --            --       2,351           --
   Issuance of shares of common stock
      in connection with employee benefit
      and dividend reinvestment plan                 8,726        44           --           167          --           --
   Cash dividend, $0.33 per share                       --        --           --            --        (528)          --
   10% stock dividend to be distributed                 --        --        2,846            --      (2,846)          --
   Increase in fair value of
      securities available for sale                     --        --           --            --          --          525
                                                 ---------    ------       ------        ------      ------         ----
BALANCE, DECEMBER 31, 1995                       1,323,555     6,618        2,846         6,777       4,909           19
   Net income                                           --        --           --            --       1,611           --
   Issuance of shares of common stock
      in connection with employee benefit
      and dividend reinvestment plan                12,688        63           --           183          --           --
   Issuance of 10% stock dividend                  132,081       661       (2,846)        2,185          --           --
   Cash dividend, $0.36 per share                       --        --           --            --        (586)          --
   10% stock dividend to be distributed                 --        --        3,699            --      (3,699)          --
   Decrease in fair value of securities
      available for sale                                --        --           --            --          --         (792)
                                                 ---------    ------      -------        ------     -------        -----
BALANCE, DECEMBER 31, 1996                       1,468,324    $7,342      $ 3,699        $9,145     $ 2,235        $(773)
                                                 =========    ======      =======        ======     =======        =====
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements

                                       24

<PAGE>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

================================================================================

              For the years ended December 31, 1996, 1995 and 1994
                             (Dollars in thousands)


<TABLE>
<CAPTION>
                                                                    1996           1995 (1)           1994
                                                                  --------         --------         --------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                     $  1,611         $  2,351         $  2,222
   Adjustments to reconcile net income to net cash
      provided by operating activities:
      Depreciation and amortization                                  1,131              628              444
      Provision for loan losses                                        300              885              687
      Deferred income taxes                                           (379)             114             (279)
      (Gains)/losses on sales of securities available for sale         220              (55)              78
      Proceeds from sales of loans originated for sale              33,585           17,256            9,179
      Disbursements for loans originated for sale                  (43,058)         (17,089)          (9,075)
      Gains on sales of loans                                         (864)            (167)            (104)
      Increase (decrease) in unearned income,
         net of origination costs                                      519             (229)             241
      Gain on sale of other real estate owned                          (14)             (20)              --
      Write down of real estate owned                                   14               --               --
   Net change in:
      Accrued interest receivable                                     (276)            (138)            (151)
      Accrued expenses payable                                        (197)            (332)             260
   Other--net                                                       (1,786)              58             (298)
                                                                   -------          -------           ------
      Net cash provided by (used in) operating activities           (9,194)           3,262            3,204
                                                                   -------          -------           ------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Net (increase) decrease in interest-bearing
      deposits with other banks                                        696              328             (838)
   Proceeds from maturities of investment securities                 7,003            6,717            1,273
   Proceeds from sales of securities available for sale             34,984            4,974            3,298
   Proceeds from maturities of securities available for sale         2,506            3,065           10,949
   Purchases of securities available for sale                      (29,614)         (19,479)          (4,110)
   Purchases of investment securities                              (15,521)          (7,268)          (6,180)
   Sales of loan participations                                      7,532              945            2,386
   Purchases of loan participations                                 (1,300)              --               --
   Loan originations, net of principal repayments                  (26,488)          (2,044)         (27,825)
   Proceeds from sales of other real estate owned                      561               25              103
   Additions to other real estate owned                                (68)             (38)              --
   Purchases of bank premises and equipment                         (2,860)            (991)            (527)
                                                                   -------          -------          -------
      Net cash used in investing activities                        (22,569)         (13,766)         (21,471)
                                                                   -------          -------          -------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net increase in deposits                                          1,627           51,539           16,151
   Proceeds from issuance of other borrowings                       23,167            3,000           18,700
   Repayment of other borrowings                                   (27,461)          (2,886)         (16,986)
   Issuance of common stock                                            246              211               62
   Dividends paid on common stock                                     (586)            (528)            (341)
                                                                   -------          -------          -------
      Net cash provided by (used in) financing activities           (3,007)          51,336           17,586
                                                                  --------         --------         --------
Net increase (decrease) in cash and cash equivalents               (34,770)          40,832             (681)
Cash and cash equivalents at beginning of year                      47,144            6,312            6,993
                                                                  --------         --------         --------
Cash and cash equivalents at end of year                          $ 12,374         $ 47,144         $  6,312
                                                                  ========         ========         ========
Supplemental disclosures of cash flow information:
   Interest paid on deposits and borrowings                       $ 10,368         $  7,785         $  6,265
   Income taxes paid                                              $    475         $    755         $    943
   Transfers of loans to other real estate owned                  $    163         $    999         $    318
   Transfers of securities from the available for
      sale portfolio to the investment security portfolio         $     --         $     --         $ 15,416
   Transfers of securities from the investment security
      portfolio to the available for sale portfolio               $     --         $ 32,850         $     --
   Securitization of residential mortgage loans                   $     --         $  7,784         $     --
   Transfers of loans to held for sale                            $ 10,118         $     --         $     --
</TABLE>

(1) The components of the purchase of Royal Oak Savings Bank (purchase  price of
$7.8  million)  are  included  in the  respective  categories  in the cash flows
statement.

The  accompanying  notes are an integral  part of these  consolidated  financial
statements

                                       25

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================

              For the years ended December 31, 1996, 1995 and 1994
                             (Dollars in thousands)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting  policies  reflected in the consolidated  financial
statements of Monocacy  Bancshares,  Inc. and subsidiary (the "Company") conform
to generally accepted accounting  principles and prevailing practices within the
banking  industry.  Certain  reclassifications  have  been made to 1995 and 1994
amounts to conform with the presentation for 1996.

ORGANIZATION

The  Company  was  formed on October  1,  1993,  and is a  Maryland  Corporation
chartered  as a Bank  Holding  Company.  The  Company  holds all the  issued and
outstanding  shares of  common  stock of  Taneytown  Bank & Trust  Company  (the
"Bank"). The Bank is a Maryland trust company,  originally  established in 1884,
which engages in general commercial banking operations. Deposits in the Bank are
insured by the Federal Deposit Insurance Corporation.

PRINCIPLES OF CONSOLIDATION

The  consolidated  financial  statements  include the  accounts of the  Company,
including  Taneytown  Bank  &  Trust  Company,  its  principal  subsidiary.  All
significant intercompany balances and transactions have been eliminated.

USE OF ESTIMATES

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

CASH EQUIVALENTS

For  purposes  of the  Consolidated  Statements  of Cash  Flows,  cash  and cash
equivalents include cash and due from banks and federal funds sold.

FEDERAL FUNDS SOLD/PURCHASED

Federal  funds sold and purchased  are carried at cost which  approximates  fair
value and are generally sold and purchased for one day periods.

LOANS HELD FOR SALE

Loans held for sale are those  loans  which  management  does not intend to hold
until  maturity.  Loans held for sale are carried at the lower of cost or market
with  adjustments  recorded  as a  component  of income.  Gains or losses on the
disposition   of  loans  held  for  sale  are   computed   using  the   specific
identification method.

SECURITIES AVAILABLE FOR SALE

Securities  available for sale are those  securities  which  management does not
have the ability and intent to hold until  maturity.  Securities  available  for
sale may be sold in response to changes in interest  rates,  for liquidity needs
or for tax  planning  purposes  and are  carried at fair  value with  unrealized
holding gains or losses,  net of the related tax effect,  excluded from earnings
and reported as a separate  component of  stockholders'  equity until  realized.
Gains or losses on the disposition of securities available for sale are computed
using the specific identification method.

INVESTMENT SECURITIES

Investment  securities are those securities which management has the ability and
intent to hold to maturity.  Investment  securities  are stated at cost adjusted
for amortization of premiums and accretion of discounts.  Gains or losses on the
disposition   of  investment   securities   are  computed   using  the  specific
identification method.

LOANS

Loans are stated at the current amount of unpaid principal,  reduced by unearned
income,  net  deferred  origination  fees and the  allowance  for  loan  losses.
Unearned income consists of commitment and origination  fees, net of origination
costs and is generally recognized as income over the commitment and loan periods
using the interest method. Interest on loans is accrued based upon the principal
amount  outstanding.  Loans are placed on  non-accrual  status  when  management
believes,  after  considering  economic and business  conditions  and collection
efforts  and  in  the  absence  of  adequate  collateral,   that  collection  is
questionable.  At that time,  interest is  recognized on a cash basis only after
all principal has been recovered. A loan is only returned to accrual status when
it becomes current as to payment of both principal and interest and the borrower
demonstrates the ability to pay and remain current.

                                       26

<PAGE>

--------------------------------------------------------------------------------

On January 1, 1995, the Company  adopted  Financial  Accounting  Standards Board
("FASB")  Statement No. 114,  "Accounting  by Creditors for the  Impairment of a
Loan," as amended  by  Statement  No.  118,  "Accounting  by  Creditors  for the
Impairment of a Loan - Income  Recognition  Disclosures" with no material impact
to the financial condition or results of operations of the Company.

On January 1, 1995, the Company adopted FASB Statement No. 122,  "Accounting for
Mortgage  Servicing  Rights,"  which amends  Statement No. 65,  "Accounting  for
Certain  Mortgage  Banking   Activities."   Statement  No.  122  eliminates  the
distinction  between  servicing rights purchased and servicing rights originated
and allows for the  capitalization  of  originated  servicing  rights.  Mortgage
servicing  rights are valued using the aggregate method of determining the lower
of cost or market value and are amortized  over the remaining  life of the loans
serviced.  Servicing  rights are  periodically  reviewed for impairment with any
required adjustment to market value made at the time of review.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is established through a provision for loan losses
charged to expenses.  Loans are charged  against the allowance  when  management
believes that the collectibility of the principal is unlikely.  The allowance is
an amount that management believes will be adequate to absorb possible losses on
existing  loans  that  may  become  uncollectible,  based on  evaluation  of the
collectibility  of loans and prior loan loss  experience.  While management uses
available  information  to recognize  losses on loans,  future  additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory  agencies,  as an integral part of their examination process,
periodically  review the Bank's  allowance  for loan losses.  Such  agencies may
require  the  Bank to  recognize  additions  to the  allowance  based  on  their
judgements   about   information   available  to  them  at  the  time  of  their
examinations.

BANK PREMISES AND EQUIPMENT

Bank premises and equipment  are stated at cost less  accumulated  depreciation.
Depreciation is computed over the estimated useful lives using the straight-line
method.

OTHER REAL ESTATE OWNED

Real estate  acquired  through  foreclosure  is recorded at the lower of cost or
estimated  fair value on the date acquired and at the lower of cost or estimated
fair  value  less  selling  costs  thereafter.  Losses  incurred  at the time of
acquisition  of the  property  are  charged to the  allowance  for loan  losses.
Subsequent writedowns are included in other non-interest expense. Rental revenue
and expenses are included in other operating non-interest expense.

PER SHARE DATA

Earnings  per share and  dividends  per  share are based on the  average  shares
outstanding  adjusted by any common  stock  equivalents  and giving  retroactive
effect to stock dividends.

ORGANIZATION COSTS

Organization  costs are capitalized and amortized on a straight-line  basis over
five years.

CORE DEPOSIT INTANGIBLE

The  core  deposit  intangible   acquired  in  connection  with  the  Royal  Oak
acquisition  is  being  amortized  over  the  estimated  remaining  life  of the
intangible, which has been determined to be 11 years at December 31, 1996.

TRUST ASSETS AND INCOME

Assets (other than cash deposits) held by the Company for others under fiduciary
and agency  relationships  are not included in the  accompanying  balance sheets
since they are not assets of the Company.  Trust  department  fees are accounted
for  on  the  cash  basis.   Amounts   recognized  under  this  method  are  not
significantly  different  from  amounts that would have been  recognized  on the
accrual basis.

INCOME TAXES

The provision for income taxes is based upon the results of operations, adjusted
for tax-exempt income and other differences  between items of income or expenses
reported in the financial statements and those reported for income tax purposes.
Deferred  income  taxes are  provided  to give effect to  temporary  differences
between  financial  statement  carrying  amounts and the tax bases of assets and
liabilities.

2. CASH AND DUE FROM BANKS

The Bank is  required to  maintain  average  reserve  balances  through  cash or
reserves with the Federal Reserve Bank or in other commercial  banks. The amount
of these reserves,  calculated based on percentages of certain deposit balances,
was $1,091 at December 31, 1996.

                                       27

<PAGE>

--------------------------------------------------------------------------------

3. SECURITIES AVAILABLE FOR SALE

The  Available  for Sale ("AFS")  portfolio  is generally  comprised of somewhat
shorter term investment securities and other securities the Company feels it may
sell in response to changes in interest  rates or  liquidity  needs.  Securities
available for sale are carried at fair value.  Net unrealized  holding gains and
losses on securities  available for sale are reported as a separate component of
stockholders'  equity,  net of related income taxes. In 1995, the FASB granted a
one time exemption from the  restrictions  on  transferring  securities  between
various  portfolios.  The Company took advantage of this opportunity to transfer
approximately $33 million in securities  previously held in the Held to Maturity
portfolio to the AFS portfolio.

Securities available for sale are summarized as follows at December 31:

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                   1996
                             -------------------------------------------------
                                         Gross Unrealized Holding    Estimated
                             Amortized   ------------------------      Fair
                               Cost         Gains        Losses        Value
<S> <C>                      ---------      -----        ------      ---------
U.S. Government agency        $21,984        $--         $  263        $21,721
State and municipal bonds       5,339         18              8          5,349
Mortgage-backed securities     17,122         --            750         16,372
Equity securities               2,644         --            168          2,476
                              -------        ---         ------        -------
                              $47,089        $18         $1,189        $45,918
                              =======        ===         ======        =======
</TABLE>


<TABLE>
<CAPTION>
                                                   1995
                             -------------------------------------------------
                                         Gross Unrealized Holding    Estimated
                             Amortized   ------------------------      Fair
                               Cost         Gains        Losses        Value
                             ---------      -----        ------      ---------
<S> <C>
U.S. Treasury                 $ 1,511       $  9          $ --        $ 1,520
U.S. Government agency         18,856        117            56         18,917
State and municipal bonds      15,738        142            24         15,856
Mortgage-backed securities     14,668         37            67         14,638
Equity securities               3,040         --           130          2,910
                              -------       ----          ----        -------
                              $53,813       $305          $277        $53,841
                              =======       ====          ====        =======
</TABLE>

--------------------------------------------------------------------------------

Securities  available  for sale with a  carrying  value of $4,630  and $4,003 at
December 31, 1996 and 1995, respectively, were pledged as collateral for certain
liabilities as required by law. In addition,  securities available for sale with
a  carrying  value of  $12,847  and  $7,345  at  December  31,  1996  and  1995,
respectively,  were pledged as collateral for certain borrowing  arrangements of
the Company.

The  amortized  cost  and  fair  value  of  securities  available  for  sale  by
contractual  maturity,  at December 31, 1996 and 1995,  are shown below.  Actual
maturities will differ from contractual  maturities  because  borrowers may have
the right to call or  prepay  obligations  with or  without  call or  prepayment
penalties.

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                          1996                         1995
                                   ----------------------     ----------------------
                                                Estimated                  Estimated
                                   Amortized      Fair        Amortized      Fair
                                     Cost         Value         Cost         Value
                                   ---------    ---------     ---------    ---------
<S> <C>
Due within one year                 $ 1,000      $   998       $ 6,169      $ 6,197
Due after one through five years     15,102       14,996        18,529       18,579
Due after five through ten years     11,221       11,076        11,407       11,517
Mortgage backed-securities           17,122       16,372        14,668       14,638
Equity securities                     2,644        2,476         3,040        2,910
                                    -------      -------       -------      -------
                                    $47,089      $45,918       $53,813      $53,841
                                    =======      =======       =======      =======
</TABLE>

--------------------------------------------------------------------------------

                                       28

<PAGE>

--------------------------------------------------------------------------------

Proceeds from sales of  securities  available for sale were $34,984 in 1996 with
gains of $31 and losses of $251. Proceeds from sales of securities available for
sale were $4,974 in 1995 with gains of $55 and no losses.

4. INVESTMENT SECURITIES
Investment securities are summarized as follows at December 31:

--------------------------------------------------------------------------------

                                                    1996
                              -------------------------------------------------
                                          Gross Unrealized Holding    Estimated
                              Amortized   ------------------------      Fair
                                Cost         Gains        Losses        Value
                              ---------      -----        ------      ---------
State and municipal bonds      $24,042        $56          $238        $23,860
                               =======        ===          ====        =======


                                                    1996
                              -------------------------------------------------
                                          Gross Unrealized Holding    Estimated
                              Amortized   ------------------------      Fair
                                Cost         Gains        Losses        Value
                              ---------      -----        ------      ---------
State and municipal bonds      $ 8,311        $46          $ 41        $ 8,316
Mortgage-backed securities       7,213         --           268          6,945
                               -------        ---          ----        -------
                               $15,524        $46          $309        $15,261
                               =======        ===          ====        =======

--------------------------------------------------------------------------------

Investment  securities  with an  amortized  cost of $197 at  December  31,  1996
were  pledged as  collateral  for  certain liabilities as required by law.

The amortized  cost and estimated  fair value of debt  securities by contractual
maturity at December 31, 1996 and 1995 are shown below.  Actual  maturities will
differ from contractual  maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.

--------------------------------------------------------------------------------


                                    1996                        1995
                            ----------------------     ----------------------
                                         Estimated                  Estimated
                            Amortized      Fair        Amortized      Fair
                              Cost         Value         Cost         Value
                            ---------    ---------     ---------    ---------
Due after five through
  ten years                  $11,510      $11,452       $ 8,311      $ 8,316
Due after ten years           12,532       12,408         7,213        6,945
                             -------      -------       -------      -------
                             $24,042      $23,860       $15,524      $15,261
                             =======      =======       =======      =======

--------------------------------------------------------------------------------

5. LOANS

Major classifications of loans are as follows at December 31:

--------------------------------------------------------------------------------
                                                       1996         1995
Real Estate:                                         --------    --------
   Commercial mortgages                              $ 69,947    $ 56,001
   Residential mortgages                               20,477      31,357
   Construction and land development                   28,695      13,121
Commercial                                             22,582      22,181
Consumer                                               17,546      16,759
                                                     --------    --------
      Total loans                                     159,247     139,419
Less:
   Unearned income                                       (457)       (293)
   Allowance for loan losses                           (2,100)     (1,904)
                                                     --------    --------
                                                     $156,690    $137,222
                                                     ========    ========
--------------------------------------------------------------------------------

                                       29

<PAGE>

--------------------------------------------------------------------------------

The Company has placed on non-accrual status loans totaling $793 at December 31,
1996,  $1,258 at December 31, 1995 and $25 at December 31, 1994.  Gross interest
income that would have been  recognized  had the loans  performed in  accordance
with  original  terms  was $257 in 1996,  $190 in 1995 and $2 in 1994.  Interest
income on these loans included in the results of operations was $127 in 1995 and
none in the years 1996 and 1994.

Changes in the  allowance  for loan  losses  were as follows for the years ended
December 31:

--------------------------------------------------------------------------------

                                          1996          1995        1994
                                         ------        ------      ------
Balance at January 1                     $1,904        $1,902      $1,509
Provision for loan losses                   300           885         687
Recoveries                                  218            57          19
Loans charged off                          (322)         (940)       (313)
                                         ------        ------      ------
Balance at December 31                   $2,100        $1,904      $1,902
                                         ======        ======      ======

--------------------------------------------------------------------------------

Effective  January 1,  1995,  the  Company  adopted  FASB  Statements  No.  114,
"Accounting  by Creditors for  Impairment of a Loan" ("SFAS 114"),  and No. 118,
"Accounting  by Creditors  for  Impairment  of a Loan - Income  Recognition  and
Disclosures  ("SFAS  118").  In  accordance  with SFAS 114,  impaired  loans are
measured  and  reported  based on the  present  value  of  expected  cash  flows
discounted at the loan's  effective  interest  rate, or at the fair value of the
loan's  collateral  if the loan is deemed  "collateral  dependent."  A valuation
allowance  is required to the extent that the measure of the  impaired  loans is
less than the recorded investment.

Impaired loans are specifically reviewed loans for which it is probable that the
creditor will be unable to collect all amounts due according to the terms of the
loan agreement.  The specific  factors that influence  management's  judgment in
determining when a loan is impaired include evaluation of the financial strength
of the borrower and the fair value of the  collateral.  A specifically  reviewed
loan is not impaired during a period of "minimum  delay" in payment,  regardless
of the amount of the shortfall,  if the ultimate  collectibility  of all amounts
due is expected.  The Company  defines  "minimum delay" as past due less than 90
days.

SFAS 114 does not apply to larger groups of  homogeneous  loans such as consumer
installment and real estate mortgage loans, which are collectively evaluated for
impairment.  Impaired loans are therefore primarily business loans which include
commercial  loans and income property and  construction  real estate loans.  The
Company  applies the  measurement  methods  described  above to these loans on a
loan-by-loan basis. Smaller balance populations of business loans, which are not
specifically  reviewed in accordance with normal credit review  procedures,  are
also  excluded  from the  application  of SFAS  114.  Most  impaired  loans  are
non-accrual  loans, as generally  loans are placed on non-accrual  status on the
earlier of the date that principal or interest  amounts are 90 days or more past
due or the date that collection of such amounts is judged  uncertain based on an
assessment of collectibility.

Impaired  loans at  December  31,  1996 and 1995  amounted  to $793 and  $1,258,
respectively.  There was no valuation  allowance for impaired  loans at December
31,  1996 or 1995 as the amount by which the measure of the  impaired  loans was
less than the recorded  investment in the loans was charged off in 1996 and 1995
for all impaired  loans held in 1996 and 1995.  Average  impaired loans for 1996
and 1995 amounted to $1,230 and $1,285, respectively. No interest was recognized
during the time period that any loan was  impaired as any cash  received on such
loans was applied to the loan as a principal reduction.

SFAS 118 allows a creditor  to use  existing  methods for  recognizing  interest
income on an impaired loan.

6. FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK

The Company is a party to financial  instruments  with off balance sheet risk in
the normal  course of business to meet the financing  needs of customers.  These
financial  instruments  include  commitments to extend credit,  available credit
lines and letters of credit.  Outstanding  loan  commitments,  unused  lines and
letters of credit are summarized as follows at December 31:

                                       30

<PAGE>

--------------------------------------------------------------------------------
                                                 1996        1995
Loan Commitments:                              -------     -------
   Commercial mortgage loans                   $ 3,075     $ 4,337
   Residential mortgage loans                      898       1,372
   Commercial loans                              9,916       5,462
                                               -------     -------
                                               $13,889     $11,171
                                               =======     =======
Unused lines of credit:
   Construction and land development           $ 9,006     $10,726
   Commercial                                   12,991       8,374
   Home-equity                                  15,138      10,194
   Other consumer                                1,366         755
                                               -------     -------
                                               $38,501     $30,049
                                               =======     =======
Letters of credit                              $ 3,026     $ 1,905
                                               =======     =======

--------------------------------------------------------------------------------

Loan  commitments  and lines of credit are  agreements  to lend to a customer as
long as there is no violation of any condition to the contract. Loan commitments
generally have interest rates fixed at current market amounts,  fixed expiration
dates and may require payment of a fee. Lines of credit  generally have variable
interest  rates.  Since many of the commitments and lines of credit are expected
to expire without being fully drawn,  the available  amounts do not  necessarily
represent future cash requirements.  Letters of credit are commitments issued to
guarantee the performance of a customer to a third party.  All letters of credit
issued by the Bank are secured.

Loan  commitments,  lines  and  letters  of credit  are made on the same  terms,
including collateral requirements,  as outstanding loans. The contractual amount
of these instruments  represents the Company's potential exposure to loss in the
event of  non-performance  by the  other  party  after the  commitment  has been
fulfilled by the Company.

7. BANK PREMISES AND EQUIPMENT

A summary of bank premises and equipment is as follows at December 31:

--------------------------------------------------------------------------------
                                                 1996        1995
                                                ------     -------
Land                                           $   863     $   429
Buildings                                        5,585       4,459
Equipment                                        4,562       3,860
Leasehold improvements                             703         718
Construction in progress                           477          82
                                               -------     -------
                                                12,190       9,548
Accumulated depreciation and
   amortization                                 (3,755)     (3,315)
                                               -------     -------
                                               $ 8,435     $ 6,233
                                               =======     =======

--------------------------------------------------------------------------------

Depreciation and amortization  expense for bank premises and equipment was $658,
$607 and $430 for 1996, 1995 and 1994,  respectively.  Amortization  expense for
intangible assets was $135, $21 and $14 for 1996, 1995 and 1994, respectively.

8. BORROWINGS

Information  with  respect  to  borrowings  is as  follows  for the years  ended
December 31:

                                       31

<PAGE>

--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                   1996         1995         1994
                                                   ----         ----         ----
<S> <C>
Amount outstanding at year-end:
   Federal funds purchased                      $    --      $    --      $ 1,150
   Federal Home Loan Bank advances               14,739       16,633       18,369
   Term Note                                         --        3,000           --
   Treasury Tax & Loan Note                         600           --           --
Weighted average interest rate at year end:
   Federal funds purchased                           --%          --%        6.10%
   Federal Home Loan Bank advances                 5.84%        5.50%        5.02%
   Term Note                                         --%        8.50%          --%
   Treasury Tax & Loan Note                        5.40%          --%          --%
Maximum outstanding at any month-end:
   Federal funds purchased                      $ 5,750      $ 4,500      $ 4,100
   Federal Home Loan Bank advances               24,429       18,356       24,533
   Term Note                                      2,917        3,000           --
   Treasury Tax & Loan Note                         745           --           --
Average outstanding:
   Federal funds purchased                      $ 1,727      $ 1,300      $   871
   Federal Home Loan Bank advances               16,756       16,950       20,820
   Term Note                                        931        3,000           --
   Treasury Tax & Loan Note                         168           --           --
Weighted average interest rate during the year:
   Federal funds purchased                         5.50%        4.20%        3.90%
   Federal Home Loan Bank advances                 5.80%        5.26%        4.93%
   Term Note                                       8.50%        8.50%          --%
   Treasury Tax & Loan Note                        5.13%          --%          --%
</TABLE>

--------------------------------------------------------------------------------

The Company had  borrowings  from the Federal Home Loan Bank ("FHLB") of $14,739
at December 31, 1996 and $16,633 at December 31, 1995. The borrowings  mature in
varying  amounts  through  2007 and have an  average  interest  rate of 5.84% at
December 31, 1996. The advances are  collateralized by certain real estate loans
with a carrying  value of $19,728 and investment  securities  available for sale
with a book value of $12,847 at December 31, 1996.  The Company may borrow up to
$30,000,000  under this line of credit at interest rates set periodically by the
lender.

The principal maturities of the FHLB advances at December 31, 1996, were:

--------------------------------------------------------------------------------

           1997                                         $   280
           1998                                           9,543
           1999                                              --
           2000                                           1,650
           2001                                              --
           Thereafter                                     3,266
                                                        -------
                                                        $14,739
                                                        =======

--------------------------------------------------------------------------------

The Company was required to purchase  shares of the capital stock of the FHLB as
additional  collateral  for the advances as a condition to obtaining the line of
credit.  The amount  invested in their  capital stock was $1,623 at December 31,
1996,  and  $2,023 at  December  31,  1995,  and is  carried  in the  securities
available for sale portfolio.

In anticipation of the cash outlay required for the acquisition of Royal Oak, in
December 1995, the Company borrowed $3,000,000 from another commercial bank. The
loan was repaid in April of 1996.

9. PENSION AND PROFIT SHARING PLANS

The Company has a contributory  thrift plan qualifying  under Section 401 (k) of
the Internal Revenue Code. Employees with six months of service are eligible for
participation in the plan. The Company matches the employee's contribution up to
50% of the first 6% of employee  contributions.  The Company's  contributions to
this plan,  included in employee benefits  expenses,  were $61 for 1996, $60 for
1995 and $49 for 1994.

The Company has  agreements  with certain of its  executive  officers to provide
certain  supplemental  retirement  benefits upon retirement.  The benefits to be
paid by the Company upon  retirement  are being accrued over the number of years
remaining  to  retirement   date  and  in  accordance   with  the  plan  vesting
arrangements.  The amounts included in operating expenses were $74 for 1996, $79
for 1995 and $89 for 1994.

                                       32

<PAGE>

--------------------------------------------------------------------------------

10. INCOME TAXES

The  provision for income taxes is composed of the following for the years ended
December 31:

--------------------------------------------------------------------------------

                                          1996          1995        1994
                                          ----          ----       -----
Current:
   Federal                                $597          $716       $ 949
   State                                   (88)           52         106
Deferred                                    29           114        (278)
                                          ----          ----       -----
Provision for income taxes                $538          $882       $ 777
                                          ====          ====       =====

--------------------------------------------------------------------------------

The deferred tax effects of timing  differences  between  financial  and taxable
income are as follows for the years ended December 31:

--------------------------------------------------------------------------------

                                       1996          1995        1994
                                      -----          ----       -----
Provision for loan losses              $(75)         $(10)      $(151)
Depreciation                             60            12          85
Deferred compensation plans              (7)          (13)         39
Loan fees and costs                     (64)           89        (286)
Mortgage servicing rights                87            30          --
Other                                    28             6          34
                                       ----          ----       -----
                                       $ 29          $114       $(279)
                                       ====          ====       =====
--------------------------------------------------------------------------------

At December 31, 1996, net deferred tax assets consisted of the following:

--------------------------------------------------------------------------------

                                                         1996        1995
                                                       ------        ----
Deferred tax assets:
   Provision for loan losses                           $  668        $593
   Deferred compensation plans                            150         143
   Loan fees and costs                                    153          89
   Deferred losses on securities
     available for sale                                   398          --
   Other                                                  154          12
                                                       ------        ----
      Total deferred tax assets                         1,523         837
                                                       ------        ----
Deferred tax liabilities:
   Depreciation                                           304         244
   Mortgage servicing rights                              117          30
   Deferred gains on securities available for sale         --          10
   Other                                                  203          33
                                                       ------        ----
      Total deferred tax liabilities                      624         317
                                                       ------        ----
      Net deferred tax asset                           $  899        $520
                                                       ======        ====

--------------------------------------------------------------------------------

                                       33

<PAGE>

--------------------------------------------------------------------------------

The  provisions for taxes on income are at effective  rates of 25.0%,  27.3% and
25.9% as follows:

--------------------------------------------------------------------------------

                                                     1996      1995     1994
                                                     ----      ----     ----
Statutory federal income tax rate                    34.0%     34.0%    34.0%
Increase (decrease) resulting from:
   Tax-exempt income                                 (7.5)     (8.9)    (8.2)
   State income taxes, net of federal income taxes   (2.7)      1.4      1.8
Other                                                 1.2        .8     (1.7)
                                                     ----      ----     ----
                                                     25.0%     27.3%    25.9%
                                                     ====      ====     ====

--------------------------------------------------------------------------------

11. RELATED PARTY TRANSACTIONS

Certain  members  of the  Board  of  Directors  and  senior  officers  had  loan
transactions  with the Bank.  Such  loans  were made in the  ordinary  course of
business  on  substantially  the  same  terms,   including  interest  rates  and
collateral,  as those  prevailing at the time for comparable  transactions  with
unrelated customers.  Loans outstanding,  both direct and indirect, to directors
and senior  officers  totaled  $2,287 and $2,596 at December  31, 1996 and 1995,
respectively.  During 1996,  $694 of new loan advances were made and  repayments
totaled $1,003.

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments",
requires  disclosure  of fair  value  information  about  financial  instruments
whether or not recognized in the balance  sheet,  for which it is practicable to
estimate  that  value.  Fair  values  for  securities  available  for  sale  and
investment   securities   are  based  on  quoted  market   prices.   For  loans,
interest-bearing  deposits and long-term borrowings,  where quoted market prices
are not  available,  fair  values are based on  estimates  using  present  value
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows.  In that regard,
the derived  fair value  estimates  cannot be  substantiated  by  comparison  to
independent  markets  and,  in many cases,  could not be  realized in  immediate
settlement of the instrument. Interest rates on commitments to extend credit are
normally  committed  for  periods  of  less  than  60  days.  Fees  charged  for
commitments  to  extend  credit  and on  standby  letters  of  credit  and other
financial  guarantees  are deemed to be  immaterial  and these  commitments  and
guarantees  are  expected to be settled at face amount or expire  unused.  It is
impracticable to assign any fair value to these commitments.

The estimated fair values of the Company's financial  instruments are as follows
at December 31, 1996:

--------------------------------------------------------------------------------

                                                        Carrying      Fair
                                                          Value       Value
                                                        --------    --------
Assets:
   Cash and due from banks                              $ 10,374    $ 10,374
   Federal funds sold                                      2,000       2,000
   Interest-bearing deposits with other banks                108         108
   Loans held for sale                                    10,118      10,118
   Securities available for sale                          45,918      45,918
   Investment securities                                  24,042      23,860
   Loans, net                                            156,690     157,684
   Accrued interest receivable                             1,939       1,939

Liabilities:
   Non-interest bearing deposits                          24,002      24,002
   Interest-bearing deposits                             201,037     202,810
   Other borrowings                                       15,339      16,325

--------------------------------------------------------------------------------

                                       34

<PAGE>

--------------------------------------------------------------------------------

13. COMMITMENTS AND CONTINGENT LIABILITIES

The Company is currently  leasing five branch  offices and one storage  facility
under  operating  leases  expiring from 1997 through 2007. The leases  generally
provide for payment of property  taxes,  insurance,  maintenance and common area
costs by the  Company.  Total rent and common area  expenses for the three years
ended December 31, 1996, 1995 and 1994 were $185, $113 and $111, respectively.



Lease obligations will require rent and common area payments as follows:

--------------------------------------------------------------------------------

                                          Minimum
   Year                                   Rentals
   ----                                   -------
   1997                                   $  190
   1998                                      149
   1999                                      130
   2000                                      130
   2001                                      130
   Remaining years                           668
                                          ------
                                          $1,397
                                          ======

--------------------------------------------------------------------------------

The Bank has been named as a  defendant  in a legal  proceeding  in the  Circuit
Court for  Baltimore  City  wherein it is alleged  that the Bank  permitted  the
improper  withdrawal  or  transfer  of funds from a deposit  account  containing
escrow monies at the Bank. It is also alleged that the Bank  misapplied  certain
sums of  money by  depositing  them in an  unrelated  account  holder's  deposit
account.  The complaint  seeks recovery  against the Bank in the amount of $482.
Management,  after  consultation  with  legal  counsel,  believes  that  it  has
substantial  defenses  available  and intends to vigorously  defend  against the
claims.  Although  the amount of any  ultimate  liability  with respect to these
claims  cannot be  determined,  management  is of the  opinion  that any  losses
resulting from the disposition of these matters will not have a material adverse
effect on the financial condition of the Company.

14. STOCK OPTIONS

In 1994,  the Company  adopted a stock option  incentive plan which provides for
the granting of common stock options to officers. In January,  1996, the Company
issued an  additional  stock  option  award to certain  officers of the Company,
which contain a serial feature  whereby 20% of the options are awarded or vested
each year for the next five years at the  Board's  discretion.  Under this plan,
8,580  additional  options were issued in 1997 with an exercise price of $20.00.
Option  prices are equal to or greater than the  estimated  fair market value of
the common stock at the date of the grant. Options are exercisable beginning six
months from the date of grant and expire 10 years after the date of grant.

Information  with  respect  to options is as follows for the year ended December
31:

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                   1996                           1995
                                       -----------------------------     ---------------------
                                       Shares     Option Price Range     Shares   Option Price
                                       ------     ------------------     ------   ------------
<S> <C>
Outstanding at beginning of year       17,940           $19.01           17,940      $19.01
   Granted                              8,090         19.23-20.45            --          --
   Exercised                             (220)           20.91               --          --
   Expired/canceled                    (1,280)           20.91               --          --
                                       ------                            ------
Outstanding at end of year             24,530         19.23-20.45        17,940       19.01
                                       ------                            ------
Exercisable                            24,530         19.23-20.45        17,940       19.01
                                       ======                            ======
</TABLE>

--------------------------------------------------------------------------------

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions used for grants during the year ended December 31, 1996:

--------------------------------------------------------------------------------

                                                1996
                                            --------
Dividend yield                                    --
Expected volatility                              15%
Risk-free interest rate                       5.106%
Expected lives                              10 years

--------------------------------------------------------------------------------

The company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS
123"),  but  applies  Accounting  Principles  Board  Opinion  No. 25 and related
interpretations in accounting for its Plans. No compensation  expense related to
the Plans was recorded  during the two years ended  December  31,  1996.  If the
Company had elected to  recognize  compensation  cost based on the fair value at
the grant dates for awards under the Plans consistent with the method prescribed
by SFAS 123,  net income and  earnings  per share would have been changed to the
pro forma amounts as follows for the year ended December 31, 1996:

                                       35


<PAGE>

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

Net income                                    $1,564
Earnings per share                              $.96

--------------------------------------------------------------------------------

There were no options  issued in 1995 so there  would be no pro forma net income
or earnings per share related to stock options for 1995.

15. REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital  requirements
administered  by the federal banking  agencies.  Failure to meet minimum capital
requirements   can   initiate   certain   mandatory--and   possibly   additional
discretionary--actions  by regulators  that, if undertaken,  could have a direct
material  effect on the Company's  and the Bank's  financial  statements.  Under
capital adequacy  guidelines and the regulatory  framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities,  and certain off-balance sheet items
as calculated under regulatory accounting practices.  The Bank's capital amounts
and classification  are also subject to qualitative  judgments by the regulators
about components, risk weightings, and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the  Company  and the Bank to maintain  amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the  regulations) to
risk-weighted  assets (as  defined),  and of Tier I capital  (as  defined in the
regulations)  to  risk-weighted  assets (as defined),  and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1996, that the Corporation and the Bank meet all capital  adequacy  requirements
to which they are subject.

As of December 31, 1996, the most recent  notification from the FDIC categorized
the  Bank  as  well  capitalized  under  the  regulatory  framework  for  prompt
corrective  action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based,  Tier I risk-based,  and Tier I leverage ratios as set
forth in the table.  There are no conditions  or events since that  notification
that management believes have changed the Bank's category.

The  Company's  and the  Bank's  actual  capital  amounts  and  ratios  are also
presented in the table.

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                              To Be Well
                                                                                           Capitalized Under
                                                                           For Capital     Prompt Corrective
                                                          Actual        Adequacy Purposes  Action Provisions
                                                     ----------------   -----------------  -----------------
                                                     Amount     Ratio    Amount    Ratio    Amount    Ratio
                                                     ------     -----    ------    -----    ------    -----
<S> <C>
As of December 31, 1996:
   Total Capital (to Risk Weighted Assets):
      Consolidated                                   $20,509    11.49%   $14,285    8.00%   $17,857   10.00%
      Taneytown Bank & Trust Company                  20,528    11.50%    14,284    8.00%    17,855   10.00%

   Tier I Capital (to Risk Weighted Assets):
      Consolidated                                    18,409    10.31%     7,143    4.00%    10,714    6.00%
      Taneytown Bank & Trust Company                  18,428    10.32%     7,142    4.00%    10,713    6.00%

   Tier I Capital (to Average Assets):
      Consolidated                                    18,409     7.03%    10,467    4.00%    13,084    5.00%
      Taneytown Bank & Trust Company                  18,428     7.04%    10,465    4.00%    13,082    5.00%

As of December 31, 1995:
   Total Capital (to Risk Weighted Assets):
      Consolidated                                    18,920    11.80%    12,831    8.00%    16,039   10.00%
      Taneytown Bank & Trust Company                  17,294    10.86%    12,745    8.00%    15,931   10.00%

   Tier I Capital (to Risk Weighted Assets):
      Consolidated                                    17,016    10.61%     6,416    4.00%     9,624    6.00%
      Taneytown Bank & Trust Company                  15,390     9.66%     6,373    4.00%     9,559    6.00%

   Tier I Capital (to Average Assets):
      Consolidated                                    17,016     7.56%     9,003    4.00%    11,254    5.00%
      Taneytown Bank & Trust Company                  15,390     7.03%     8,751    4.00%    10,938    5.00%
</TABLE>

--------------------------------------------------------------------------------

                                       36

<PAGE>

16. ACQUISITION

On  December  31,  1995,  the  Company  purchased  Royal Oak  Savings  Bank as a
subsidiary of Monocacy  Bancshares,  Inc. The transaction was accounted for as a
purchase and the results of operations for the year 1995 properly do not include
any income from Royal Oak. Royal Oak's condensed balance sheet as of the date of
the acquisition as valued under purchase accounting was as follows:

--------------------------------------------------------------------------------

Cash and investments                         $45,398
Loans, net                                       451
Property, plant and equipment                    510
Other assets                                     646
                                             -------
                                             $47,005
                                             =======

Deposits                                     $38,733
Other liabilities                                517
Capital                                        7,755
                                             -------
                                             $47,005
                                             =======

--------------------------------------------------------------------------------

The  purchase  price of $7.8  million  included a deposit  premium  paid of $3.6
million and a mortgage servicing premium paid of $281. The purchase price of the
assets and costs associated were approximately  equal to the liabilities assumed
and no goodwill was recorded in the transaction.

17. SUBSEQUENT EVENT

On  February  17,  1997,  the company  distributed  a 10% stock  dividend  which
increased shares outstanding by approximately 146,000.

18. PARENT COMPANY ONLY FINANCIAL INFORMATION

Condensed financial  information for Monocacy  Bancshares,  Inc. (parent company
only) is as follows as of and for the years ended December 31:

--------------------------------------------------------------------------------

CONDENSED BALANCE SHEETS
                                                    1996          1995
Assets                                            -------       -------
   Cash and due from Bank subsidiary              $   205       $   967
   Securities available for sale                       20            16
   Investment securities                               --            --
   Investment in subsidiary                        21,637        23,150
   Other assets                                        30           172
                                                  -------       -------
      Total assets                                $21,892       $24,305
                                                  =======       =======
Liabilities and Stockholders' Equity
   Liabilities:
      Other borrowings                            $    --       $ 3,000
      Other liabilities                               244           136
                                                  -------       -------
         Total liabilities                            244         3,136
                                                  -------       -------
   Stockholders' equity:
      Common stock                                  7,342         6,618
      Common stock dividend to be distributed       3,699         2,846
      Surplus                                       9,145         6,777
      Retained earnings                             1,462         4,928
                                                  -------       -------
         Total stockholders' equity                21,648        21,169
                                                  -------       -------
Total liabilities and stockholders' equity        $21,892       $24,305
                                                  =======       =======

--------------------------------------------------------------------------------

                                       37

<PAGE>

--------------------------------------------------------------------------------

CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
                                                             1996       1995       1994
                                                           ------     ------     ------
<S> <C>
Interest on investment securities                          $    1     $   12     $    3
Interest expense on borrowings                                101         --         --
                                                           ------     ------     ------
   Net interest income                                       (100)        12          3
Cash dividends from subsidiaries                            1,759      2,393        400
Operating expenses                                             82         64         58
                                                           ------     ------     ------
   Income before income tax expense and equity in
      undistributed net income of subsidiaries              1,577      2,341        345
Income tax benefit                                            (34)       (10)        (9)
                                                           ------     ------     ------
   Income before equity in undistributed
      net income of subsidiaries                            1,611      2,351        354
Equity in undistributed net income of subsidiaries             --         --      1,868
                                                           ------     ------     ------
   Net income                                              $1,611     $2,351     $2,222
                                                           ======     ======     ======
</TABLE>

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                             1996       1995       1994
                                                           ------     ------     ------
<S> <C>
Cash flows from operating activities:
   Net income                                              $1,611     $2,351     $2,222
   Adjustments to reconcile net income to net cash
      provided by operating activities:
      Equity in undistributed income of subsidiaries           --         --     (1,868)
      (Increase) decrease in other assets                     142       (134)       129
      Decrease in accrued interest receivable                  --          4         --
      Increase (decrease) in other liabilities                (39)         6         41
                                                           ------     ------     ------
         Net cash provided by operating activities          1,714      2,227        524
                                                           ------     ------     ------
Cash flows from investing activities:
   Purchases of securities available for sale                  (4)       (16)      (200)
   Maturities of investment securities                         --        200         --
   Distribution of undivided profits of Bank subsidiary       868      3,468         --
   Investment in Savings Bank subsidiary                       --     (7,755)        --
                                                           ------     ------     ------
      Net cash provided by (used in) investing activities     864     (4,103)      (200)
                                                           ------     ------     ------
Cash flows from financing activities:
   Issuance of common stock                                   246        211         62
   Dividends paid                                            (586)      (528)      (341)
   Proceeds from issuance of debt                              --      3,000         --
   Repayments of debt                                      (3,000)        --         --
                                                           ------     ------     ------
      Net cash provided by (used in) financing activities  (3,340)     2,683       (279)
                                                           ------     ------     ------
Net increase (decrease) in cash and cash equivalents         (762)       807         45
Cash and cash equivalents at beginning of year                967        160        115
                                                           ------     ------     ------
Cash and cash equivalents at end of year                   $  205     $  967     $  160
                                                           ======     ======     ======
</TABLE>

--------------------------------------------------------------------------------

Under certain state and federal banking  regulations,  the Bank may declare cash
dividends to Monocacy  Bancshares,  Inc., from undivided profits,  or with prior
approval of the Maryland Bank Commissioner,  out of surplus in excess of 100% of
its capital stock, after providing for certain expenses.

                                       38

<PAGE>

                               EXECUTIVE OFFICERS

================================================================================


Chairman of the Board
Eric E. Glass*

Vice Chairman of the Board, Chairman
of the Executive Committee
Donald R. Hull*

President and Chief Executive Officer
Francis W. Neubauer, Jr.*

Executive Vice President and Chief Operating Officer and Chief Financial Officer
Michael K. Walsch*

Senior Vice Presidents
Francis X. Bossle, Jr.
Craig H. McConnell
Edward D. Leister

Vice President and Corporate Secretary
Brian M. Etzler*




*Officers of both Monocacy Bancshares, Inc.
and Taneytown Bank & Trust Company,
its principal subsidiary.



Vice Presidents:
Brenda K. Anders
Linda L. Bennett
Mary E. Bowns
Harold E. Eyler
William O. Eyler
Michael H. Galassi
Thomas J. Gerhart
Christopher D. Holt
C. Alan Jefferson
Cynthia M. Joynes
Edwin L. Koons
Donna L. Oliver
William A. Springer, Jr.

Assistant Vice Presidents:
Michael L. Barrett
Charlotte B. Bollinger
Joyce B. Clingan
Judith E. Frock
Laura M. Garriss-Smith
Jane E. Harford
Lawrence R. Hierstetter
C. Daniel Pastros
Judith A. Shultz
Linda S. Warehime

Commercial Banking Officers:
Timothy L. Baumgardner
Elizabeth J. Dutrow
Barbara A. Ebaugh
Amy R. Eyler
Herbert W. Findeisen, III
Beverly A. Franklin
Andrew P. Heck
Janet L. Joy
Donna H. Moore
Theresa M. Perry
Richard L. Rose
Jeris L. Talbott
JoAnn R. Vanscoy
Deborah A. Zepp

Assistant Secretary:
Kathleen A. Ford

Administrative Officer:
Patricia A. Shryock-Smith

                                       39

<PAGE>

                               BOARD OF DIRECTORS

================================================================================

David M. Abramson
Senior Vice President and General Counsel
JP Foodservice, Inc.

E. Wayne Baumgardner
Independent Investor

George B. Crouse
Vice President, Crouse Ford Sales, Inc.

Harry B. Dougherty+
Retired

Glenn E. Eaves
Dairy Farmer

George A. Fream+
Retired Postmaster, Taneytown Post Office

Donald R. Hull
Vice Chairman of the Board and Chairman
of the Executive Committee
Monocacy Bancshares, Inc.
President, Hull Company Accountants, Inc.

Eric E. Glass
Chairman of the Board
Monocacy Bancshares, Inc.
Chairman of the Board,
The Taney Corporation

Francis W. Neubauer, Jr.
President and Chief Executive Officer
Monocacy Bancshares, Inc.

Jacob M. Yingling
Independent Consultant/Investor


+Directors Emeritus






Shareholders may obtain a free copy of the Monocacy Bancshares, Inc. Form 10-KSB
upon written request to:

Michael K. Walsch, Executive Vice President
Monocacy Bancshares, Inc.
P.O. Box 491
Taneytown, Maryland 21787-0491

A charge of 10 cents per page may be billed for copies of exhibits

The  Annual  Report and other  Company  reports  are also  filed  electronically
through the Electronic Data Gathering,  Analysis,  and Retrival System ("EDGAR")
which performs  automated  collection,  validation,  indexing,  acceptance,  and
forwarding of submissions to the Securities and Exchange Commission (SEC) and is
accessible by the public using the Internet at http://www.secgov/edgarhp.htm.

The Annual Meeting of  Shareholders  will be held on April 28, 1997 beginning at
3:00 P.M. in Taneytown, Maryland

Transfer Agent, Registrar and Dividend Disbursing Agent:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
1-800-368-5948

Taneytown Bank website: www.taneytownbank.com

                                       40

<PAGE>

                             THE TANEYTOWN BANK TEAM

                    It's our employees who are making it work

================================================================================

KELLY S. ABELL  MONICA B. ADELMAN  PHYLLIS E. ALBAN BRENDA K. ANDERS  NATALIE A.
ANDREWS  ELIZABETH  M.  ARTHUR  MELISA K.  BANKS  MICHAEL L.  BARRETT  BONNIE L.
BAUBLITZ  TIMOTHY L.  BAUMGARDNER  FRANCES J. BEARD JILL M.  BEASLEY  DOLORES A.
BEDNAR  ELIZABETH R. BENJAMIN LINDA L. BENNETT  CHARLOTTE B. BOLLINGER LAUREN J.
BOND LOUIS J. BONNEVILLE  FRANCIS X. BOSSLE, JR. MARY E. BOWNS SHANNA R. BOYD M.
E. BRATCHER  DEBRA S. BRAUNING  KAREN M. BROOKS DAWN L. CARROLL MARY ANN CARROLL
JOYCE B.  CLINGAN  JOHN W. COE  BELINDA K. COLE  SANDRA K. COLE JOHN F.  COLLINS
NANCY L. COMEGNA PAMELA A. COMMAROTA  ADRIANA M.  CRISTOFARO  CAROLYN M. DELANEY
KRISTEN E. DICKENS TERRI L. DISKIN  KIMBERLY J. DISKIN JUDITH N. DIXON ELIZABETH
J. DUTROW DONNA A. DUTTERER  BARBARA A. EBAUGH HOLLIE A. EDWARDS BRIAN M. ETZLER
LISA N. ETZLER WILLIAM O. EYLER HAROLD E. EYLER FRANCES A. EYLER MARISA L. EYLER
AMY R. EYLER HERBERT W. FINDEISEN,  III HARRY E. FISHER KATHLEEN A. FORD BEVERLY
A. FRANKLIN TRACY L. FRANKLIN JUDITH E. FROCK DENISE A. FROCK MICHAEL H. GALASSI
SAMUEL K. GARDNER LAURA M. GARRISS-SMITH  STEPHANIE L. GAULDIN THOMAS J. GERHART
BRENDA K. GIVVINES  PATRICIA A.  GODWIN-YINGLING  MELISSA D. GOODWIN  BELINDA A.
GRANT JAMES E. GRANT  KELLIANN  GREENE JANICE P.  GREENHOLTZ  MAUREEN GREGG JOHN
MICHAEL GUILLOTT JOAN K. GULIERE DEBORAH L. GUTOWSKI TERESA L. HAINES SHIRLIE A.
HANSBROUGH JANE E. HARFORD MELISSA S. HARRIS ANDREW P. HECK PATRICIA A. HENNESSY
LAWRENCE R. HIERSTETTER MARY P. HIGGS BILLIE JO HOFFMAN RUTH HOFFMAN CHRISTOPHER
D. HOLT KAREN M. HOOPER ANGE M. HORNER ERIC M. HORRELL MARVIN R. HURWITZ C. ALAN
JEFFERSON  WILLIAM A.  JENKINS,  IV EDDIE A. JONES,  SR. JANET L. JOY CYNTHIA M.
JOYNES  CHERYL L. KEENEY  MELISSA K. KEISER  BEVERLY B.  KEMPLER  EDWIN L. KOONS
MELANIE L. LAMER ROBIN L. LEASE  MICHELLE A. LEIKAM EDWARD D. LEISTER  SHELBY D.
LENKER RICHARD D. LISKO CAROL A. LONGENECKER BEULAH E. MACKINZIE HELEN E. MARTIN
SANDRA D.  MAXEY  MONICA A. MAY  ROBERT L.  MCAFEE  CRAIG H.  MCCONNELL  JAMI M.
MERRELL CHRISTY A. MILES DONNA H. MOORE GEORGE W. MOTTER HOWARD D. MYERLY GEORGE
A. MYERS JOHN E. MYERS FRANCIS W. NEUBAUER JR DONNA L. OLIVER C. DANIEL  PASTROS
FRANCES J. PAWLOWSKI MARILYN PELKOSKI THERESA M. PERRY SANDRA S. PRETTY JAMES A.
PRYOR CATHY L. REAVER CHRISTINA J. REPLOGLE BETTY W. REPP JAIME B. RIDINGER MARY
E. ROHE RICHARD L. ROSE KARIN T. ROSS PAMELA M. RUBIN LEE W. RUSSO CARRI L. RYER
LAURA L. SELBY  LAURA B.  SHICKMAN  PATRICIA A.  SHRYOCK-SMITH  JUDITH A. SHULTZ
DONNA C. SMITH WILLIAM A.  SPRINGER,  JR. EVE M.  STANCOVICH  DEBORAH M. STEWART
JOHN W. STONESIFER MARY H. STONESIFER  DONNA L. STRAUB JERIS L. TALBOTT WENDY N.
TUCKER WILLIAM J.  UPDEGRAFF  JAMES A. UPDEGRAFF DON K. UPHOUSE JOANN R. VANSCOY
GWENDOLYN  A.  WACHTER  JOSEPH F. WADE,  JR.  LYNN M.  WAGNER  MICHAEL K. WALSCH
CYNTHIA L. WANTZ LINDA S.  WAREHIME  LANA E.  WEIDNER  SABRINA L. WELLER RETA I.
WETZEL TINA M. WETZEL ANNE C.  WILDASIN JOAN S. WILHIDE LORI L. WILSON SANDRA V.
YINGLING BONNIE J. YINGLING DEBORAH A. ZEPP

             Taneytown Bank & Trust Company is a member of F.D.I.C.
                          and an equal housing lender.

<PAGE>


                        [Monocacy Bancshares Inc. Logo]


                           222 East Baltimore Street
                           Taneytown, MD 21787-0491
                           410-756-2655