SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                 FORM 10 - KSB

                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

  For the fiscal year ended December 31, 1996. Commission file number 0-22536

                           Monocacy Bancshares, Inc.
             (Exact name of Registrant as specified in its charter)

                     Maryland                            52-1824297
        (State or other jurisdiction of                (I.R.S. Employer
        incorporation or organization)                Identification No.)

222 East Baltimore Street, Taneytown, Maryland                         21787
----------------------------------------------                         -----
(Address of principal executive offices)                             (Zip Code)

       Registrant's telephone number including area code:  (410) 756-2655
       Securities registered pursuant to section 12(b) of the Act:  None
          Securities registered pursuant to section 12(g) of the Act:

                      Common Stock, Par Value $5 per share
                                (Title of Class)
--------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                 Yes   X            No
                                      ---

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best  of  the  Registrant's  knowledge  in a  definitive  proxy  of  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-KSB. { }

The Registrant's revenues for the most recent fiscal year were $21,632,360.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant as of March 20, 1997, was $26,051,004.

As of March 20, 1997, Monocacy Bancshares, Inc.  had 1,618,803 shares  of common
stock outstanding, par value $5.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Monocacy Bancshares, Inc. Annual Report to Shareholders for the year
ended December 31, 1996, are incorporated by reference into Parts I, II and III.

Portions of the Definitive Proxy Statement for the annual shareholders'  meeting
to be held April 28, 1997, are incorporated by reference in Part III.


                                       1

<PAGE>


PART I

ITEM 1  DESCRIPTION OF BUSINESS

     Monocacy Bancshares,  Inc. ("Monocacy" or "Registrant")  commenced business
     on October  1,  1993,  and is a  Maryland  corporation  and a bank  holding
     company.  Taneytown  Bank  &  Trust  Company  ("Bank")  is a  wholly  owned
     subsidiary of Monocacy  Bancshares,  Inc. and its primary operating entity.
     The primary  regulator of Monocacy  Bancshares is the Board of Governors of
     the Federal Reserve System ("Federal Reserve Board"),  while the Bank, as a
     state  chartered  commercial  bank,  is  regulated  by the Federal  Deposit
     Insurance  Corporation  ("FDIC") and the Maryland State Banking Commission.
     On December 31,  1995,  the  Registrant  acquired  Royal Oak Savings  Bank,
     F.S.B.  ("Royal  Oak") as a subsidiary  of Monocacy.  The  transaction  was
     accounted for as a purchase and the results of operations for the year 1995
     properly do not include any income from Royal Oak.  The  purchase  price of
     the assets and costs associated  therewith were approximately  equal to the
     liabilities  and  capital  assumed  and no  goodwill  was  recorded  in the
     transaction.  A $3.6 million deposit  premium was paid in the  transaction.
     Royal Oak was  merged  with and into the Bank in April,  1996.  On April 1,
     1996, the Registrant  acquired Classic Mortgage  Company,  which was merged
     into the Bank.  It is now operated as a division of the Bank.  The purchase
     price was approximately $250,000.

     The Bank,  which operates as a commercial bank and trust company,  operates
     in Carroll County, Baltimore County and Howard County, Maryland, as well as
     Gettysburg,  Pennsylvania.  The Bank is engaged in  commercial  and savings
     business,  as authorized by the banking  statutes of the State of Maryland,
     including the receiving of demand and time deposits and the making of loans
     to individuals,  associations,  partnerships and corporations.  The Bank is
     also engaged in trust business. Real Estate financing comprises residential
     first and second  mortgages,  home  equity  lines of credit and  commercial
     mortgages.  Consumer  lending is primarily  made  directly to  individuals.
     Commercial  lending is made  primarily  to small  businesses  in the Bank's
     trade area in the form of  equipment  and other fixed asset loans and short
     term lines of credit supported by current assets. The Bank offers fiduciary
     and trust  services,  as well as other  specialized  services in connection
     with its  general  banking and trust  business in keeping  with the current
     trends  of the  banking  industry.  The Bank  also  owns and  operates  TBT
     Insurance,   Inc.,  a  Maryland  corporation  and  wholly-owned  subsidiary
     offering Single Premium and IRA annuities.  Investors Marketplace, Inc., is
     a separate  division that offers mutual funds.  Classic  Mortgage  Company,
     another  division  of  the  Bank,  described  above,  provides  the  Bank's
     mortgage-banking operations.

     Competition

     The Bank operates in a very competitive  market that is served primarily by
     several  locally  headquartered  community  banks,  several large  regional
     banks, as well as other financial intermediaries including brokerage firms,
     savings and loan  associations and savings banks,  credit unions,  consumer
     loan  companies,   finance  companies,   insurance  companies  and  certain
     government agencies.  The Bank operates 11 branches, as well as 5 automatic
     teller machines and employed 141 full-time  employees at December 31, 1996.
     Carroll County,  Baltimore County and Howard County, as well as Gettysburg,
     Pennsylvania  are largely  agriculture,  light industry and retail business
     economies  and  are  residential  areas  for  metropolitan   Baltimore  and
     Washington,  D.C. The Bank does not experience any significant fluctuations
     in loan or deposit  activity  that are  seasonal  in nature.  However,  the
     competition for loans does vary from time to time depending on such factors
     as  the  general  availability  of  credit,   general  and  local  economic
     conditions, current interest rate levels, conditions in the mortgage market
     and  other  factors  that are not  readily  predictable.  The Bank does not
     engage in any operations involving foreign countries.

     In order to compete with other  institutions  in the market area,  Monocacy
     relies  heavily  on  the  personal  contacts  of  officers,  directors  and
     employees,  in addition to a high level of personalized  service that is an
     advantage of a community oriented banking institution.

                                       2

<PAGE>


     Government Policy

     The earnings of the  Registrant  are affected not only by general  economic
     conditions,  but also by the  policies of various  governmental  regulatory
     authorities.  The Federal  Reserve  Board,  through its monetary and credit
     policies,  has significant  influence on overall growth and distribution of
     bank loans,  investments  and  deposits  and affects  interest  rates.  The
     Registrant cannot  accurately  predict the effect such policies may have on
     the future of its business and earnings.

     Interstate Banking

     Under current law, Monocacy can, under certain  circumstances,  participate
     in interstate affiliations with banks and bank holding companies located in
     the District of Columbia,  Pennsylvania,  Delaware, Virginia, West Virginia
     and several other southeastern states.  During 1996, the Company opened its
     first interstate branch in Gettysburg, Pennsylvania. There are no recent or
     known future legislative changes,  events or trends, except as discussed in
     a  subsequent  section,  that would have a material  adverse  impact on the
     financial condition or results of operations of Monocacy.

     Additional Subsidiary Banks

     The overall strategy of Monocacy is to expand its operations throughout the
     Baltimore-Washington  corridor as well as in Southern Central  Pennsylvania
     by organizing new community  banks and/or  selectively  acquiring  existing
     institutions.  Additional  subsidiary  banks will  tailor  their  marketing
     strategies to the needs of the communities in which they serve. Capital for
     the additional  subsidiary banks may come from  borrowings,  dividends from
     existing  banks,  the sale of additional  securities  of Monocacy,  or some
     combination  of such  methods.  Specific  locations,  number and timing for
     additional  subsidiary  banks is not known  and will  depend,  in part,  on
     factors beyond  Monocacy's  control,  including the financial  condition of
     Monocacy,  the  economy,  the  regulatory  environment,  and the success of
     Monocacy's existing operations.

     Supervision and Regulation - Registrant

     Monocacy is subject to the  jurisdiction  of the  Securities  and  Exchange
     Commission  (the  "Commission")  and of state  securities  commissions  for
     matters  relating to the offering and sale of its securities.  Issuances of
     stock to raise  capital and for  dividend  reinvestment,  stock  option and
     other  plans  are  subject  to  registration,  absent  any  exemption  from
     registration  with the  Commission.  Monocacy  is subject to the  reporting
     requirements  of the  Securities  Exchange  Act of 1934,  as amended,  and,
     accordingly, files reports, proxy statements and other information with the
     Commission.

     Monocacy is  prohibited  from  engaging in or acquiring  direct or indirect
     control of more than five percent (5%) of the voting  shares of any company
     engaged in non-banking  activities  unless the Federal  Reserve  Board,  by
     order or regulation,  has found such activities to be so closely related to
     banking  or  managing  or  controlling  banks  as to be a  proper  incident
     thereto. In making this determination,  the Federal Reserve Board considers
     whether  these  activities  offer  benefits to the public that outweigh any
     possible  adverse  effects.  Currently,  Monocacy  does not  engage  in any
     activities not permitted.

     As a bank holding  company,  Monocacy is required to file an annual  report
     with the Federal Reserve Board, as well as, any additional information that
     the Federal Reserve Board may require by regulation promulgated pursuant to
     the Bank Holding  Company Act of 1956, as amended ("the Act").  The Federal
     Reserve Board may also make  examinations of Monocacy and any or all of its
     subsidiaries.  Further, under Section 106 of the 1970 amendments to the Act
     and the Federal Reserve Board's regulations, a bank holding company and its
     subsidiaries are prohibited from engaging in certain tie-in arrangements in
     connection with any extension of

                                       3

<PAGE>


     credit or provision of credit or provision of any property or services. The
     so-called "anti-tie-in"  provisions state,  generally,  that a bank may not
     extend credit,  lease, sell property,  or furnish any service to a customer
     on the condition that the customer provide  additional credit or service to
     the bank,  to its bank holding  company or to any other  subsidiary  of its
     bank holding company or on the condition that the customer not obtain other
     credit or service from a competitor of the bank,  its bank holding  company
     or any subsidiary of its bank holding  company.  Subsidiary banks of a bank
     holding company are subject to certain  restrictions  imposed by the Act on
     any  extensions  of  credit  to  the  bank  holding  company  or any of its
     subsidiaries,  on investments in the stock or other  securities of the bank
     holding company and on taking of such stock or securities as collateral for
     loans to any borrower.

     Supervision and Regulation - The Bank
     The Bank is subject  to  supervision,  regulation  and  examination  by the
     Maryland  Department of Licensing and Regulation and the FDIC. In addition,
     the Bank is  subject  to a variety of local,  state and  federal  laws that
     affect its  operations.  From time to time,  various  types of federal  and
     state  legislation are proposed that could result in additional  regulation
     of, and  restrictions on, the business of the Bank. As a consequence of the
     extensive  regulation  of commercial  banking and thrift  activities in the
     United States,  the Bank's business is particularly  susceptible to federal
     and state  legislation and regulations that may increase the costs of doing
     business.

     Federal Law

       The Federal Reserve System

     The Federal Reserve System is managed through a tripartite hierarchy headed
     by the Federal Reserve Board which oversees the entire system.  The Federal
     Reserve  System  is at the  center of the  nation's  stable  financial  and
     economic  systems,  and the  Federal  Reserve  member  banks  are the means
     through  which  the  Federal  Reserve  System   effectuates  its  goals  of
     maintaining financial and economic stability.

       Monetary Policy

     The earnings of the Bank are affected by domestic  economic  conditions and
     the monetary and fiscal  policies of the United States  Government  and its
     agencies.  An  important  function  of the  Federal  Reserve  System  is to
     regulate the money supply and interest rates. Among the instruments used to
     implement  those  objectives  are open market  operations  in United States
     government  securities and changes in reserve  requirements  against member
     bank  deposits.  These  instruments  are used in  varying  combinations  to
     influence  overall growth and  distribution of bank loans,  investments and
     deposits,  and their use may also affect rates  charged on loans or paid on
     deposits.

     Although  the Bank is not a  member  of the  Federal  Reserve  System,  the
     policies and  regulations  of the Federal  Reserve Board have a significant
     effect on the Bank's deposit,  loan and investment  growth,  as well as the
     rate of  interest  earned and paid,  and are  expected to affect the Bank's
     operations in the future.  The effect of such policies and regulations upon
     the future business and earnings of the Bank cannot be predicted.

       Insurance

     The  Bank's  deposits  are  insured by the FDIC  pursuant  to the system of
     federal deposit insurance initially established by the Banking Act of 1933.
     The Monetary Control Act of 1980 increased  coverage of FDIC insurance from
     $40,000 to $100,000 per deposit account.  The Bank pays insurance  premiums
     according  to  rates  established  by the  FDIC.  The  payment  of  deposit
     insurance premiums is a significant cost to the Bank.


                                       4

<PAGE>


     The  operations  of Monocacy  and the Bank are affected by new federal and
     state laws. The federal Economic Growth and Regulatory Paperwork Reduction
     Act of 1996 ("New Act"),  enacted in September 1996,  includes  provisions
     that affect banks, bank holding companies,  and savings institutions.  The
     New Act had, and is expected to have in the future,  its most  significant
     effect upon bank and savings  institutions  that hold deposits assessed at
     Savings Deposit Insurance Fund ("SAIF") rates. Among other things, the New
     Act  recapitalized  the SAIF  through  a  special  assessment  on  savings
     association deposits and bank deposits that had been acquired from savings
     associations.  The deposits  acquired through the acquisition of Royal Oak
     Savings  Bank, a thrift  acquired on December 31, 1995,  were  included in
     this  assessment.  Accordingly,  1996 earnings  reflect this assessment of
     approximately $245,000.

     The  New  Act  may  increase  competition  from  savings  associations  by
     equalizing,  over time, the amount of federal  insurance  premiums paid on
     savings  association  and bank  deposits.  The New Law also provides that,
     beginning  in  1997,  institutions  with  deposits  insured  by  the  Bank
     Insurance  Fund,  as well as those  with SAIF  insured  deposits,  will be
     responsible  for payment of certain  bonds issued in  connection  with the
     resolution of failed savings associations.  The result of these provisions
     will be somewhat higher federal deposit  insurance  premiums for the Bank.
     These  higher  insurance  premiums  are not  expected  to have a  material
     adverse effect on the Bank or Monocacy.

     The New Act  also  simplifies  the  regulatory  approval  process  for new
     activities  of banks and bank holding  companies,  and reduces a number of
     other  regulatory  burdens.  None of these  changes is  expected to have a
     significant effect on Monocacy or the Bank.

     The FDIC Improvement Act of 1991 ("FDICIA"), enacted in part to prevent the
     deposit  insurance  funds from becoming  insolvent,  authorized the FDIC to
     raise  insurance  premium  assessments  in order to achieve and maintain an
     adequate level of funds.  The depletion of the deposit  insurance funds was
     due, in part,  to a large number of failed  financial  institutions  in the
     1980's, in combination with the increased coverage per deposit account.  As
     a result,  the future  cost of deposit  insurance  for the Bank is in large
     part  dependent  upon the extent of future bank  failures and the amount of
     insurance coverage provided by the FDIC per deposit account,  both of which
     are not within the Bank's  control.  Moreover,  FDICIA required the FDIC to
     establish  a   risk-based   insurance   premium   assessment   system  that
     differentiates  between  higher  and lower  risk  institutions,  with lower
     premiums assessed against institutions in a lower risk category. The Bank's
     cost of deposit insurance;  therefore, depends upon its risk-rating. During
     1995,  the Bank  Insurance  Fund of the FDIC became fully  capitalized  and
     during  1996,  the SAIF of the  FDIC  was  fully  capitalized  through  the
     one-time  special  assessment  mentioned  above.  Going  forward,   overall
     premiums should be reduced.

       FDICIA

         Capital Categories

     Under FDICIA,  banks must be classified in one of five defined categories
     (well capitalized, adequately capitalized, undercapitalized, significantly
     undercapitalized and critically undercapitalized).

<TABLE>
<CAPTION>
                                             Total                    Tier 1
                                             Risk-                    Risk-                                   Tier 1
                                             Based                    Based                                   Leverage
                                             Ratio                    Ratio                                   Ratio
                                             -----                    -----                                   -----
<S> <C>
Capital Category
----------------
Well capitalized               (greater than or equal to) 10.0   (greater than or equal to) 6.0    (greater than or equal to) 5.0
Adequately capitalized         (greater than or equal to)  8.0   (greater than or equal to) 4.0    (greater than or equal to) 4.0 *
Undercapitalized               (less than)                 8.0   (less than)                4.0    (less than)                4.0 *
Significantly undercapitalized (less than)                 6.0   (less than)                3.0    (less than)                3.0
Critically undercapitalized

<CAPTION>

                                  Under a
                                  Capital
                                  Order or
                                  Directive
                                  ---------
<S> <C>
Capital Category
----------------
Well capitalized                      No
Adequately capitalized
Undercapitalized
Significantly undercapitalized
Critically undercapitalized


(less than or equal to) 2.0
</TABLE>

* 3.0 for those banks having the highest available regulatory rating.


                                       5

<PAGE>

         Prompt Corrective Action

       In   the   event   an   institution's   capital   deteriorates   to   the
       undercapitalized  category  or below,  FDICIA  prescribes  an  increasing
       amount of regulatory  intervention,  including:  (1) the institution by a
       bank of a  capital  restoration  plan  and a  guarantee  of the plan by a
       parent  institution;  and (2) the  placement  of a hold on  increases  in
       assets,  number of branches or lines of business.  If capital has reached
       the significantly or critically undercapitalized levels, further material
       restrictions can be imposed, including restriction on interest payable on
       accounts,  dismissal of management  and (in  critically  undercapitalized
       situations) appointment of a receiver. For well capitalized banks, FDICIA
       provides  authority for regulatory  intervention where the institution is
       deemed to be engaging in unsafe or unsound  practices  or receives a less
       than   satisfactory   examination   report  rating  for  asset   quality,
       management,  earnings or liquidity. All but well capitalized institutions
       are prohibited from accepting  brokered deposits without prior regulatory
       approval.

         Examinations and Audits

       Annual  full-scope,  on  site  examinations  are  required  for  all  the
       FDIC-insured  institutions  except  institutions  with assets  under $250
       million  which are well  capitalized,  well-managed  and not subject to a
       recent change in control,  in which case, the examination period is every
       eighteen (18) months. Moreover,  effective after December 31, 1992, banks
       with  total  assets of $500  million or more as of the  beginning  of the
       fiscal  year,  are  required to submit to their  supervising  federal and
       state banking  agencies a publicly  available  annual audit  report.  The
       independent  accountants  of such banks shall  attest to the  accuracy of
       management's  report.  The  accountants  shall also monitor  management's
       compliance with governing laws and regulations.  In addition,  such banks
       are also required to select an independent  audit  committee  composed of
       outside  directors who are independent of management,  to review with the
       management  and the  independent  accountants,  the reports  that must be
       submitted to the bank regulatory agencies. If the independent accountants
       resign or are dismissed, written notification must be given to the bank's
       supervising  government banking agencies.  These accounting and reporting
       reforms do not apply to an institution with total assets at the beginning
       of its  fiscal  year  of  less  than  $500  million,  such  as the  Bank.
       Furthermore,  the supervising banking agency may exempt institutions with
       assets in excess of $500  million  from these  accounting  and  reporting
       requirements.

         Real Estate Loans

       FDICIA also  requires  that banking  agencies  reintroduce  loan-to-value
       ("LTV") ratio regulations which were previously repealed by the 1982 Act.
       LTV's will limit the amount of money a financial  institution may lend to
       a borrower,  when the loan is secured by real  estate,  to no more than a
       percentage to be set by regulation of the value of the real estate.

         Truth-In-Savings

       A separate  subtitle  within FDICIA,  called the "Bank  Enterprise Act of
       1991",  requires  "truth-in-savings" on consumer deposit accounts so that
       customers can make meaningful comparisons between the competing claims of
       banks with regard to deposit accounts and products.  The Bank is required
       to  provide  information  to  depositors  concerning  the  terms of their
       deposit  accounts,  and in particular,  to disclose the annual percentage
       yield.

         CBCA

       Federal law,  including the Change in Bank Control Act of 1978  ("CBCA"),
       also prohibits  acquisitions of control of a bank without prior notice to
       certain federal bank regulators. "Control" is defined for this purpose as
       the

                                       6

<PAGE>



       power, directly or indirectly,  to direct the management or policies of a
       bank or to vote twenty-five  percent (25%) or more of any class of voting
       securities of a bank.

         FDIA/FIRA

       Under  the  Federal  Deposit  Insurance  Act (the  "FDIA"),  the  federal
       regulatory  agencies  possess  the power to  prohibit  institutions  from
       engaging  in any  activity  that would be an unsafe and  unsound  banking
       practice or would  otherwise be in violation  of the law.  Moreover,  the
       Financial  Institutions  Regulatory and Interest Rate Control Act of 1978
       ("FIRA")  generally  expanded the  circumstances  under which officers or
       directors  of  a  bank  may  be  removed  by  the  institution's  federal
       supervisory  agency,  restricts  lending  by  a  bank  to  its  executive
       officers, directors,  principal shareholders or related interest thereof,
       restricts  management personnel of a bank from serving as directors or in
       other management  positions with certain  depository  institutions  whose
       assets  exceed a  specified  amount  or  which  have an  office  within a
       specified  geographic area, and restricts the relationships of management
       personnel of a bank with  securities  companies and  securities  dealers.
       Additionally,  FIRA prohibits acquisition of control of a bank unless the
       appropriate federal supervisory agency has received sixty (60) days prior
       written notice and, within that time, has not disapproved the acquisition
       of control or otherwise extended the period for disapproval. Control, for
       purposes  of  FIRA,  means  the  power  to  direct,  either  directly  or
       indirectly,  the  management or policies or to vote  twenty-five  percent
       (25%)  or  more  of  any  class  of  outstanding  stock  of  a  financial
       institution or its respective  holding company. A person or group holding
       revocable  proxies  to  vote  twenty-five  percent  (25%)  or more of the
       outstanding  common stock of a financial  institution or holding  company
       would be presumed  to be in control of the  institution  for  purposes of
       FIRA.

         Garn - St. Germain

       The Garn - St. Germain Depository Institutions Act of 1982  ("1982  Act")
       removed certain restrictions on a bank's lending  powers and  liberalized
       its depository capabilities.   The  1982  Act,  however,  tightened  FIRA
       provisions  respecting   management  interlocks  and  correspondent  bank
       relationships  involving  a  bank's management personnel.

         CRA

       Under the Community Reinvestment Act of 1977, as amended ("CRA"), federal
       regulatory authorities are required to assess the record of all financial
       institutions  to determine if these  institutions  are meeting the credit
       needs of the community (including low and moderate income  neighborhoods)
       which they serve and to take this record into  account in the  evaluation
       of any application made by any such institutions for, among other things,
       approval of a branch or other deposit facility, office relocation, merger
       or any  acquisition of bank shares.  The Financial  Institutions  Reform,
       Recovery and Enforcement Act of 1989 ("FIRREA"), described below, amended
       the CRA to require,  among other  things,  that the Bank's  evaluation of
       meeting  the credit  needs of its  entire  community,  including  low and
       moderate income  neighborhoods be made public. This evaluation includes a
       descriptive rating ("outstanding",  "satisfactory", "needs to improve" or
       "substantial noncompliance") and a statement describing the basis for the
       rating.

       In 1995,  the  federal  regulators  revised  the CRA  rules to  emphasize
       performance over process and documentation.  Under the revised rules, the
       five-point ratings scale is still used. A bank's compliance is determined
       by a three- prong test whereby  examiners  assign a numerical score for a
       bank's  performance  in  each  of  three  areas:  lending,   service  and
       investment. The area of lending is weighted to increase its importance in
       the application of the test. The rule became effective July 1, 1995. When
       rating a bank in the area of lending,  regulators  examine the number and
       amount of loan  originations,  the location of where the loans were made,
       and the income levels of the borrowers. Although banks, under the revised
       rules,  are not  required  to make  loans in  every  area,  if there  are
       apparent  tracts in which there is little  lending,  examiners will focus
       their investigations in that area. The service prong evaluates how a bank
       delivers its products to the community through branching. As

                                       7

<PAGE>



       with  lending,  banks are not required to branch in every area,  although
       conspicuous  gaps will be  investigated.  The third prong,  investment in
       community,  examines  how the  bank  meets  the  investment  needs in the
       community   within  which  it  operates.   Assessment  of  investment  is
       accomplished  using a "performance  context" pursuant to which regulators
       meet with civic,  community and bank  officials in order to determine the
       credit needs of the  community.  Expanded  Home Mortgage  Disclosure  Act
       reporting  requirements  were also  approved  for large banks and thrifts
       which require reporting of census tract data on mortgages made outside of
       the  delineated  communities.  In  addition,  effective  March  1,  1997,
       institutions  with assets  above $250  million will be required to report
       their  aggregate   small  business  loans  made  by  geographic   region.
       Independent  banks with total  assets of less than $250  million and bank
       subsidiaries  with  total  assets  of less than  $250  million  that have
       holding  companies  with  total  assets of less than $1  billion  will be
       subject to less stringent CRA examinations.

       Under the new  regulation,  banks will enjoy a  reduction  in  compliance
       burden.   Specifically,   banks  are  not  required  to  keep   extensive
       documentation  to prove that directors have  participated in drafting and
       review  of CRA  policies.  A  formal  CRA  statement  does not have to be
       prepared.  The efforts  banks made to market in low and  moderate  income
       communities do not have to be documented,  nor will banks have to justify
       the basis for their  community  delineation  or the  methods  utilized to
       determine the credit needs of the community.

         BSA

       Under  the  Bank   Secrecy  Act  ("BSA"),   banks  and  other   financial
       institutions  are  required  to report to the  Internal  Revenue  Service
       currency  transactions  of more than $10,000 or multiple  transactions of
       which  the  Bank is  aware in any one day that  aggregate  in  excess  of
       $10,000.  Civil and criminal  penalties  are  provided  under the BSA for
       failure  to file a required  report,  for  failure to supply  information
       required by the BSA or for filing a false or fraudulent report.

         CEBA

       An  omnibus  federal  banking  bill,  known as the  Competitive  Equality
       Banking Act ("CEBA"),  was signed into law in August of 1987. Included in
       the  legislation  were measures:  (1) imposing  certain  restrictions  on
       transactions between banks and their affiliates; (2) expanding the powers
       available to Federal  bank  regulators  in  assisting  failed and failing
       banks;  (3) limiting  the amount of time banks may hold certain  deposits
       prior to making such funds  available  for  withdrawal  and any  interest
       thereon; and (4) requiring that any adjustable rate mortgage loan secured
       by a lien on a one-to-four  family  dwelling  include a limitation on the
       maximum rate at which interest may accrue on the principal balance during
       the term of such loan. This  legislation  has not had a material  adverse
       effect on the Bank's operations or its competitive position.

         FIRREA

       The Financial  Institutions Reform,  Recovery and Enforcement Act of 1989
       was primarily enacted to improve the supervision of savings  associations
       by strengthening capital,  accounting and other supervisory standards. In
       addition,  FIRREA  reorganized the FDIC by creating two deposit insurance
       funds to be administered by the FDIC: the Savings  Association  Insurance
       Fund and the Bank Insurance  Fund. The Bank's  deposits are insured under
       the Bank Insurance Fund. See discussion of insurance under "Federal Law -
       Insurance" above.

       FIRREA  reformed  real  estate  appraisal  procedures  and  the  existing
       supervisory/enforcement  powers and penalty provisions in connection with
       the regulation of the Bank. Under FIRREA,  civil penalties are classified
       into three  levels,  with  amounts  increasing  with the  severity of the
       violation.  The first tier  provides for civil  penalties of up to $5,000
       per day for any violation of law or regulation.  A civil penalty of up to
       $25,000 per day may be assessed if more than a minimal  loss or a pattern
       of misconduct is involved.  Finally,  a civil penalty of up to $1 million
       per day may be assessed for knowingly or recklessly causing a substantial
       loss to an  institution  or taking  action that results in a  substantial
       pecuniary gain or other benefit. Criminal penalties are increased to $1

                                       8

<PAGE>



       million per violation,  up to $5 million for continuing violations or for
       the  actual  amount  of gain or loss.  These  monetary  penalties  may be
       combined with prison sentences for up to five years. Management is of the
       opinion that these  additional  reforms will have no material impact upon
       the anticipated results of operations of the Bank.

         Regulatory Capital

       The  FDIC  and  other  federal  bank  regulatory   agencies  have  issued
       risk-based   capital   guidelines  which   supplement   leverage  capital
       requirements. As of December 31, 1992, the guidelines required all United
       States banks and bank holding companies to maintain a minimum  risk-based
       capital  ratio of 8% (of  which at least 4% must be in the form of common
       stockholders' equity). Assets are assigned to four risk categories,  with
       higher  levels  of  capital  required  for the  categories  perceived  as
       representing  greater risk. The required  capital ratios represent equity
       and (to the extent permitted) non-equity capital as a percentage of total
       risk-weighted  assets.  The risk-based capital rules are designed to make
       regulatory  capital  requirements  more  sensitive to differences in risk
       profiles  among  banks  and  bank  holding   companies  and  to  minimize
       disincentives for holding liquid assets.

       In July 1996, the federal bank regulatory  agencies issued a joint policy
       statement  regarding the evaluation of commercial bank's capital adequacy
       for interest  rate risk.  Under the policy,  the  assessment  of a bank's
       capital adequacy includes an assessment of the bank's exposure to adverse
       changes in interest  rates.  Banks that are found to have a high level of
       interest rate risk exposure or weak interest rate risk management systems
       may be required by the regulators to take corrective actions.  Management
       believes  its  interest  rate risk  management  systems  and its  capital
       relative to its interest rate risk are adequate.

         Riegle - Neal Act

       On September 29, 1994,  President Clinton signed into law the Riegle-Neal
       Interstate Banking and Branching  Efficiency Act of 1994 (the "Interstate
       Banking and Branch Act").  The  legislation  permits  interstate  banking
       twelve  months after its  enactment  into law.  Bank  holding  companies,
       pursuant to an amendment  to the Bank Holding  Company Act, can acquire a
       bank located in any state, as long as the acquisition  does not result in
       the bank holding company controlling more than 10% of the deposits in the
       United  States,  or 30% of the deposits in the target bank's  state.  The
       legislation permits states to waive the concentration  limits and require
       that the target  institution  be in existence for up to five years before
       it can be  acquired  by an  out-of-state  bank or bank  holding  company.
       Interstate  branching  and merging of existing  banks is permitted  after
       three years from the  enactment of the  Interstate  Banking and Branching
       Act,  if  the  bank  is  adequately  capitalized  and  demonstrates  good
       management.   Branch  merging  will  be  permitted  earlier  if  a  state
       undertakes to enact a law which allows it and states may also enact a law
       to permit banks to branch de novo. The  Interstate  Banking and Branching
       Act also amends the International  Banking Act to allow a foreign bank to
       establish  and operate a federal  branch or agency  upon  approval of the
       appropriate federal and state banking regulator.


                                       9

<PAGE>


       Statistical Data

       The  statistical  information  required by Item I is in the  Registrant's
       Annual Report to Shareholders for the year ended December 31, 1996, which
       is set  forth in  Exhibit  13,  hereto,  and is  incorporated  herein  by
       reference, as follows except as noted:
<TABLE>
<CAPTION>
                                                                                         Page in the Registrant's Annual
                                                                                         Report to Shareholders for
         Guide 3 Disclosure                                                              the year ended December 31, 1996
         ------------------                                                              --------------------------------
<S> <C>
        I.    Distribution of Assets, Liabilities and
              Stockholders' Equity; Interest Rates and
              Interest Differential
              A.  Average Balance Sheet                                                                     7
              B.  Net Interest Income Analysis                                                            7 & 8
              C.  Rate/Volume Analysis                                                                      8

        II.   Investment Portfolio
              A.  Book Value of Investment Securities                                                      12
              B. Maturities of Investment Securities                                                       13
              C. Investment Securities Concentrations                                                      12

        III.  Loan Portfolio
              A. Types of Loans                                                                         13 & 14
              B. Maturities and Sensitivities of
                 Loans to Changes in Interest Rates                                                        14
              C. Risk Elements
                 1.  Nonaccrual, Past Due and Restricted Loans                                             15
                 2.  Potential Problem Loans                                                               15
                 3.  Foreign Outstandings                                                            Not Applicable
              D. Other Interest Bearing Assets                                                       Not Applicable

        IV.   Summary of Loan Loss Experience
              A.  Analysis of Allowance for Loan Losses                                                     9
              B. Allocation of the Allowance for Loan Losses                                               10

         V.   Deposits
              A. Average Balances                                                                           7
              B. Maturities of Large Denomination Certificates                                             16
              C. Foreign Deposit Liability Disclosure                                                Not Applicable

        VI.   Return on Equity and Assets
              A. Return on Assets                                                                           4
              B. Return on Equity                                                                           4
              C. Dividend Payout Ratio                                                                 See Item 6
              D. Equity to Assets Ratio                                                                     4

        VII.  Short-Term Borrowings                                                         31 & 32
</TABLE>



                                       10

<PAGE>


       ITEM 2  PROPERTIES

         Monocacy Bancshares, Inc., Corporate Office
         222 East Baltimore Street
         Taneytown, Maryland  21787


         Taneytown Bank & Trust Company:
<TABLE>
<S> <C>
         Main Office                       Columbia Branch *           Randallstown Branch
         222 East Baltimore Street         5565 Sterrett Place         9337 Liberty Road
         Taneytown, MD  21787              Columbia, MD  21044         Randallstown, MD  21133

         Westminster Branch *              Uniontown Branch            140 Express Branch
         402 Englar Road                   3462 Uniontown Road         747 Baltimore Boulevard
         Westminster, MD  21157            Westminster, MD  21158      Westminster, MD  21157

         Taneytown Branch                  Keymar Branch               Gettysburg Branch *
         500 East Baltimore Street         6690 Middleburg Road        545 West Middle Street
         Taneytown, MD  21787              Keymar, MD  21757           Gettysburg, PA  17325

         Carroll Lutheran Village *        Eldersburg Branch *
         205 St. Mark Way                  1350 Liberty Road
         Westminster, MD  21157            Eldersburg, MD  21784
</TABLE>

         * These properties are leased.  Lease expiration dates are November 19,
         2006, for the Westminster branch,  October 1, 1998 for Carroll Lutheran
         Village, March 31, 1998, for the Columbia branch, December 29, 2006 for
         the Eldersburg  branch and October 28, 2006 for the Gettysburg  branch.
         All other properties are owned in fee and without liens. All properties
         owned and operated by the  Registrant  and its  subsidiary are adequate
         for the business to be conducted at each such location.

       ITEM 3  LEGAL PROCEEDINGS

       The Bank  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 $482,000.  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.

       Monocacy  and the  Bank  are  involved  in other  matters  of  litigation
       incidental to their  business.  In management's  opinion,  the outcome of
       these matters will not have a material impact on the financial statements
       of Monocacy, or the Bank.

       ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

       None

                                       11

<PAGE>

       PART II

       ITEM 5  MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

       Registrant's   Common  Stock  is  traded  on  a  limited   basis  in  the
       over-the-counter market. The Common Stock is not listed on any securities
       exchange  nor is it  quoted on the  National  Association  of  Securities
       Dealers' Automated Quotation System.

       Legg  Mason  Wood  Walker,  Inc.,   Ferris  Baker   Watts,  Inc.,  Koonce
       Securities, Inc. and Ryan Beck  and  Co.  offer  over-the-counter  market
       quotations which reflect  inter-dealer  prices, without  retail  mark-up,
       mark-down  or  commissions and which  do not necessarily represent actual
       transactions.

       The Bank has paid cash  dividends for at least 20 years.  The  Registrant
       has paid  dividends  since the effective  date of its formation as a bank
       holding  company,  October 1, 1993. The  Registrant's  Board of Directors
       intends  to  continue  the  dividend  payment  policy;   however,  future
       dividends must necessarily depend upon net income,  capital requirements,
       appropriate legal restrictions and other factors relevant at the time the
       Board of Directors of the Registrant  considers dividend policy. Pages 17
       and 38 of the  Registrant's  Annual Report to Shareholders  discusses the
       regulatory  restrictions  that  impact  the  Registrant's  and the Bank's
       ability to pay dividends. The following tables set forth the high and low
       bid prices for each quarter of 1996 and 1995.
<TABLE>
<CAPTION>
                                                          1996                                     1995

                                           Fourth    Third    Second     First      Fourth    Third    Second     First
                                           Qtr.      Qtr.     Qtr.       Qtr.       Qtr.      Qtr.     Qtr.       Qtr.
                                           -------   ------   ------     -----      ------    -----    ------     ------
<S> <C>
       Per Common Share:*
         Cash dividends declared           $  .09    $  .09   $   .09    $  .09     $  .08    $  .08   $  .08     $  .08

       Bid Prices:
         High                              $25.50    $25.50    $25.50    $25.00     $24.00    $24.50   $26.00     $26.00
         Low                               $22.50    $22.50    $22.50    $22.00     $23.00    $23.00   $25.00     $23.00
</TABLE>

       *  Amounts have been restated to reflect the January, 1996 and  February,
          1997 10% stock dividends.

       As of March 20, 1997, there were  approximately 952 stockholders  holding
an aggregate of 1,618,803 shares.


                                       12

<PAGE>



 ITEM 6  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

 The information required to be set forth herein is included in the Registrant's
 Annual Report to Shareholders,  at pages 6 through 20, which is attached hereto
 in Exhibit 13 and is incorporated herein by reference.

<TABLE>
<CAPTION>
 Five year Comparative Summary
                                               1996         1995          1994         1993        1992
                                               ----         ----          ----         ----        ----
<S> <C>
 Summary of Operations:
    Interest Income                          $19,593       17,079        14,997       12,441       12,469
    Interest Expense                          10,421        7,852         6,271        5,224        5,807
                                             -------      -------       -------      -------      -------
    Net interest income                        9,172        9,227         8,726        7,217        6,662
    Provision for loan losses                    300          885           687          375          263
                                             -------      -------       -------      -------      -------
    Net interest income after provision
      for loan losses                          8,872        8,342         8,039        6,842        6,399
    Other income                               2,039        1,427         1,081        1,644        1,205
    Other expenses                             8,762        6,536         6,121        5,904        4,937
                                             -------      -------       -------      -------      -------
      Income before income taxes               2,149        3,233         2,999        2,582        2,667
    Income taxes                                 538          882           777          621          715
                                             -------      -------       -------      -------      -------
      Net income                             $ 1,611        2,351         2,222        1,961        1,952
                                             =======      =======       =======      =======      =======

 Per Share Data*:
    Net income                                 $1.00         1.47          1.40         1.23         1.23
    Dividend paid                               $.36         0.33          0.23         0.19         0.17
    Book Value                                 13.40        13.21         11.69        10.87         9.69
 Shares outstanding*                       1,615,151    1,602,463     1,592,224    1,590,695    1,590,840

 Other Data:
    Total assets                            $263,015      266,194       211,249      191,768      157,725
    Total deposits                           225,039      223,412       171,873      155,722      141,069
    Total loans-net of allowance for
      loan losses                            156,690      137,222       145,564      121,370      101,079
    Total equity                              21,648       21,169        18,610       17,289       15,415

 Key Ratios:
    Return on average
      stockholders' equity                      7.81%       11.83         12.19        11.27        13.31
    Return on average total assets              0.61%        1.07          1.08         1.09         1.27
    Equity to assets                            8.23%        7.95          8.81         9.02         9.77
    Dividend payout ratio                      36.00%       22.45         16.43        15.45        13.82
</TABLE>

 *  Per share data and shares  outstanding  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 the 25% common
    stock dividend issued in 1991, a 20% common stock dividend issued in 1992
    and a 2 for 1 stock split in 1993.

 ITEM 7  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 The information required to be set forth herein is included in the Registrant's
 Annual Report to Shareholders, at pages 21 through 38, which is attached hereto
 in Exhibit 13 and is  incorporated  herein  by  reference.   Supplemental  data
 required under 302 (a) (5) is not applicable.

 ITEM 8  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

 None.

 PART III

 ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


                                       13

<PAGE>

 The information required to be set forth herein is included in the Registrant's
 definitive Proxy  Statement,  dated March 27, 1997, at pages 6 through 8, which
 is attached hereto in Exhibit 99 and is incorporated herein by reference.

 ITEM 10 EXECUTIVE COMPENSATION

 The information required to be set forth herein is included in the Registrant's
 definitive Proxy Statement,  dated March 27, 1997, at pages 9 through 12, which
 is attached hereto in Exhibit 99 and is incorporated herein by reference.

 ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 The information required to be set forth herein is included in the Registrant's
 definitive Proxy  Statement,  dated March 27, 1997, at pages 3 through 5, which
 is attached hereto in Exhibit 99 and is incorporated herein by reference.

 ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 The information required to be set forth herein is included in the Registrant's
 definitive Proxy Statement, dated March 27, 1997, at pages 13 through 22, which
 is attached hereto in Exhibit 99 and is incorporated herein by reference.

 ITEM 13 EXHIBITS AND REPORTS ON 8-K

 (a)  Documents filed as part of this report:

   (1)  The following financial statements of the Registrant are set forth on
        page 21 through 38 of the  Registrants'  1996 Annual Report to
        Shareholders, which is  included  herein at Exhibit 13 and is
        incorporated  herein by reference:

        Consolidated Balance Sheets at December 31, 1996 and 1995.

        Consolidated Statements of Income for the years ended December 31, 1996,
        1995 and 1994.

        Consolidated Statements of Changes in Stockholders' Equity for the years
        ended December 31, 1996, 1995 and 1994.

        Consolidated  Statements of Cash Flows for the years ended  December 31,
        1996, 1995 and 1994.

        Notes to Consolidated  Financial Statements for the years ended December
        31, 1996, 1995 and 1994.

        Independent Auditors' Report for the year ended December 31, 1996.

   (2)  Financial statement schedules are omitted from this 10-KSB  because  the
        required information is either not applicable  or is not deemed material
        to the Registrant.




                                       14

<PAGE>


   (3)                      Listing of Exhibits:

        The following  documents are attached as Exhibits to this Form 10-KSB as
        indicated by the Exhibit number or are  incorporated by reference to the
        prior filings of the Registrant with the Commission.
<TABLE>
<CAPTION>

        Form 10-KSB Exhibit #              Exhibit
        ---------------------              -------
        <S><C>
        Exhibit (3i)                       Articles of Incorporation
        Exhibit (3ii)                      Bylaws of the Corporation
        Exhibit (10i)                      Employment Agreement, dated June 16, 1993, by and between Taneytown Bank
                                           and Trust Company and Francis W. Neubauer, Jr. (Incorporated herein by
                                           reference to the Registrant's Current Report on Form 8-K, filed with the
                                           Commission on March 24, 1997)
        Exhibit (10ii)                     Supplemental  Retirement Plan Agreement, dated April 25, 1994, by and between
                                           Taneytown Bank and Trust Company and Francis W. Neubauer, Jr.
                                           (Incorporated herein by reference to the Registrant's Current Report on Form
                                           8-K, filed with the Commission on March 24, 1997)
        Exhibit (10iii)                    Stock Option Plan
        Exhibit (13)                       Annual Report to Shareholders
        Exhibit (21)                       List of Registrant's Subsidiaries
        Exhibit (23)                       Consent of Independent Auditors
        Exhibit (27)                       Financial Data Schedule
        Exhibit (99)                       Definitive Proxy Statement, Notice and Form of Proxy for 1996 Annual
                                           Meeting of Shareholders to be held on April 28, 1997.  (Incorporated into Part
                                           III of the Form 10-KSB)
</TABLE>

 ITEM 13 (b)  REPORTS ON FORM 8-K

 Form 8-K dated March 24, 1997 regarding certain contracts of the Registrant.



                                       15

<PAGE>


                                   SIGNATURES

 Pursuant  to  the  registration  requirements  of  Section  13 or 15 (d) of the
 Securities  Exchange Act of 1934, the Registrant has duly caused this report to
 be signed on its behalf by the undersigned, thereunto duly authorized.

                                         MONOCACY BANCSHARES, INC.
                                               (Registrant)

 Date:  March 20, 1997                   By:
                                            _____________________________
                                            Frank W. Neubauer, President and
                                            Chief Executive Officer

 Pursuant to the  requirements  of the  Securities  Exchange  Act of 1934,  this
 report  has been  signed  below  by the  following  persons  on  behalf  of the
 registrant and in the capacities and on the dates indicated.


                                 Chairman of the Board,     Date  March 20, 1997
   ----------------------        Director                        ---------------
   Eric E. Glass

                                 Director, President & CEO  Date  March 20, 1997
   ----------------------        (Principal Executive Officer)   ---------------
   Frank W. Neubauer

   ----------------------        Director                   Date  March 20, 1997
   David M. Abramson                                             ---------------

   ----------------------        Director                   Date  March 20, 1997
   E. Wayne Baumgardner                                          ---------------

   ----------------------        Director                   Date  March 20, 1997
   George B. Crouse                                              ---------------

   ----------------------        Director                   Date  March 20, 1997
   Glenn E. Eaves                                                ---------------

   ----------------------        Director                   Date  March 20, 1997
   Donald R. Hull                                                ---------------

   ----------------------        Director                   Date  March 20, 1997
   Jacob M. Yingling                                             ---------------

                                 CFO & COO                  Date  March 20, 1997
   ----------------------                                        ---------------
   Michael K. Walsch         (Principal Accounting and
                           Financial Officer and Principal
                                Operating Officer)


                                       16