<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1996
-------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
-------------- -----------------
Commission file number: 33-43317
------------
EASTON BANCORP, INC.
----------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Maryland 52-1745344
------------------------ ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
501 Idlewild Avenue, Easton, Maryland 21601
--------------------------------------------
(Address of principal executive offices)
(410) 819-0300
--------------
(Issuer's telephone number)
Not Applicable
-------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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
----- -----
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
On August 5, 1996, 559,328 shares of the issuer's common stock, par
value $.10 per share, were issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EASTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks $ 685,168 $ 991,301
Federal funds sold 8,250,000 4,500,000
Investment securities held-to-maturity (market
value of $739,073 and $496,113, respectively) 750,000 500,000
Loans, less allowance for credit losses of
$279,000 and $260,000, respectively 24,504,498 24,237,775
Premises and equipment, net 1,553,376 1,597,478
Intangible assets, net 93,928 137,844
Accrued interest receivable 174,785 156,483
Other assets 38,054 37,270
----------- -----------
Total assets $36,049,809 $32,158,151
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 1,396,188 $ 1,493,690
Interest-bearing 30,706,990 26,744,305
----------- -----------
Total deposits 32,103,178 28,237,995
Accrued interest payable 100,384 101,109
Securities sold under agreements to repurchase 242,538 277,363
Other liabilities 17,808 10,007
----------- -----------
Total liabilities 32,463,908 28,626,474
----------- -----------
Stockholders' equity
Common stock, par value $.10 per share;
authorized 5,000,000 shares, 559,328
issued and outstanding 55,933 55,933
Additional paid-in-capital 5,217,686 5,217,686
Retained earnings (deficit) (1,687,718) (1,741,942)
----------- -----------
Total stockholders' equity 3,585,901 3,531,677
----------- -----------
Total liabilities and stockholders' equity $36,049,809 $32,158,151
=========== ===========
</TABLE>
See accompanying notes to financial statements.
1
<PAGE> 3
EASTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------------
1996 1995 1996 1995
------ ------ ----- ------
<S> <C> <C> <C> <C>
Interest revenue
Loans, including fees $568,155 $475,534 $1,126,850 $ 907,070
Investment securities 9,543 6,469 16,012 12,836
Federal funds sold 122,234 45,973 208,072 63,699
-------- -------- ---------- ---------
Total interest revenue 699,932 527,976 1,350,934 983,605
Interest expense 386,380 286,494 752,340 502,717
-------- -------- ---------- ---------
Net interest income 313,552 241,482 598,594 480,888
Provision for loan losses 21,297 47,943 25,096 75,597
-------- -------- ---------- ---------
Net interest income after
provision for loan losses 292,255 193,539 573,498 405,291
-------- -------- ---------- ---------
Other operating revenue 33,003 24,210 55,977 48,078
-------- -------- ---------- ---------
Other expenses
Salaries and benefits 157,774 154,298 312,012 309,007
Occupancy 22,030 16,103 41,289 32,658
Furniture and equipment 23,419 22,386 45,123 43,574
Other operating 92,488 105,709 176,827 228,034
-------- -------- ---------- ---------
Total operating expenses 295,711 298,496 575,251 613,273
-------- -------- ---------- ---------
Net income (loss) before income taxes 29,547 (80,747) 54,224 (159,904)
Income taxes - - - -
-------- -------- ---------- ---------
Net income (loss) $ 29,547 $(80,747) $ 54,224 $(159,904)
======== ======== ========== =========
Earnings (loss) per common share $ .05 $ (.14) $ .09 $ (.29)
======== ======== ========== =========
Earnings (loss) per common share fully diluted $ .05 $ (.14) $ .09 $ (.29)
======== ======== ========== =========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 4
EASTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $1,331,246 $ 973,406
Other revenue received 55,977 48,078
Cash paid for operating expenses (479,450) (540,669)
Interest paid (753,065) (472,399)
---------- -----------
154,708 8,416
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for premises, equipment and software (4,828) (2,010)
Net loans to customers (300,175) (4,953,439)
Loan participations purchased (100,000) -
Loan participations sold - 897,750
Purchase of investment securities (250,000) -
Proceeds from sale of other real estate owned 113,804 -
---------- -----------
(541,199) (4,057,699)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits and securities sold under
agreements to repurchase 3,830,358 5,121,967
---------- -----------
NET INCREASE (DECREASE) IN CASH 3,443,867 1,072,684
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,491,301 3,177,753
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $8,935,168 $ 4,250,437
========== ===========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH USED
IN OPERATING ACTIVITIES
Net income (loss) $ 54,224 $ (159,904)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 76,502 74,587
Provision for loan losses 25,096 75,597
Decrease (increase) in accrued interest receivable
and other assets (2,742) (19,817)
Increase (decrease) in operating accounts payable and
other liabilities 7,076 32,276
Deferred loan origination fees (1,387) 5,677
Gain on sale of other real estate (4,061) -
---------- -----------
$ 154,708 $ 8,416
========== ===========
Noncash activity:
Other real estate acquired through foreclosure $ 109,743 $ -
========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B of the Securities and Exchange Commission. Accordingly, they
do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. For further information,
refer to the financial statements and footnotes thereto for the fiscal period
ended December 31, 1995, included in the Company's Form 10-KSB.
2. Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, unrestricted amounts due from banks, overnight investments in
repurchase agreements, and federal funds sold.
4
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Easton Bancorp, Inc. (the "Company") was incorporated in Maryland on
July 19, 1991, primarily to own and control all of the capital stock of Easton
Bank & Trust Company (the "Bank") upon its formation. The Bank commenced
business on July 1, 1993, and the only activity of the Company since then has
been the ownership and operation of the Bank. The Bank conducts a general
commercial banking business in its service area, emphasizing the banking needs
of individuals and small- to medium-sized businesses and professional concerns.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
financial statements and related notes and other statistical information
included elsewhere herein.
Results of Operations
Net income for the Company for the three months ended June 30, 1996,
was $29,547, compared to a loss of $80,747 during the corresponding period of
1995. Net income for the six months ended June 30, 1996, was $54,224, compared
to a loss of $159,904 for the corresponding period of 1995. The increase in
net income can be attributed primarily to the increase in net interest income,
the reduction in the provision for loan losses, and the reduction in other
operating expenses. The increase in net interest income is primarily the result
of the increase in the Bank's loan portfolio from $21,753,602 at June 30, 1995,
to $24,504,498 at June 30, 1996.
The Bank's provision for loan losses was $21,297 for the quarter ended
June 30, 1996, and $25,096 for the six months ended June 30, 1996, compared to
$47,943 for the quarter ended June 30, 1995, and $75,597 for the six months
ended June 30, 1995. The allowance for loan losses was $279,000 at June 30,
1996, or 1.13% of total loans, compared to $263,000 at March 31, 1996, or 1.10%
of total loans, and $260,000 at December 31, 1995, or 1.06% of total loans.
The level of the allowance for loan losses represents management's current
estimate of future losses in the loan portfolio; however, there can be no
assurance that loan losses in future periods will not exceed the allowance for
loan losses or that additional increases in the allowance will not be required.
Noninterest expense decreased $2,785 to $295,711 for the quarter ended
June 30, 1996, from $298,496 for the quarter ended June 30, 1995. The decrease
was primarily related to the decrease in other operating expenses of $13,221,
offset by minimal increases in salaries and benefits, occupancy and furniture
and equipment expenses. The decrease in other operating expenses for the three
months ended June 30, 1996, compared to the same period for 1995 was primarily
due to a $10,124 decline in the premium rate paid by the Bank to the Federal
Deposit Insurance Corporation (the "FDIC") for deposit insurance. In mid-1995,
the FDIC reduced the deposit insurance rates for most banks to the statutory
minimum assessment of $1,000 semiannually as a result of the Bank Insurance
Fund reaching its legally mandated reserve ratio. The FDIC can raise the
deposit insurance rates at any time. Any increase in the deposit insurance
rates for the Bank will increase the Bank's cost of funds, and there can be no
assurance that such cost could be passed on to the Bank's customers.
Return on average assets and average equity, on an annualized basis,
for the quarter ended June 30, 1996, were .33% and 3.33%, respectively,
compared to (1.13)% and (7.79)%, respectively, for the same quarter of 1995.
Return on average assets and average equity, on an annualized basis, for the
six months ended June 30, 1996, were .31% and 3.14%, respectively. Earnings
per share on a fully diluted
5
<PAGE> 7
basis for the quarter and six months ended June 30, 1996, were $.05 and $.09,
respectively, compared to ($.14) and ($.29), respectively, for the same periods
of 1995.
The Company's assets ended the second quarter of 1996 at $36.0
million, an increase of $3.9 million, or 12.1%, from $32.2 million at December
31, 1995. This increase can be attributed primarily to the increase in the
Bank's deposits which contributed significantly to the $3.8 million increase in
federal funds sold. Total deposits ended the quarter at $32.1 million, up
13.7% from $28.2 million at December 31, 1995. At June 30, 1996, the Company's
loan to deposit ratio was 77.2%, compared to 86.8% at December 31, 1995.
The Company has adopted Statement of Financial Accounting Standards
115 ("SFAS 115") issued by the Financial Accounting Standards Board which
provides for the classification of investment securities into the following
three categories: trading, available-for-sale and held-to-maturity.
Securities that an enterprise has the intent and ability to hold until maturity
are classified as held-to-maturity and reported at amortized cost. Trading
securities and available-for-sale securities are reported at market value with
unrealized gains and losses on trading securities reported in income and
unrealized gains and losses on available-for-sale securities reported as a net
amount in a separate component of shareholders' equity until realized. At June
30, 1996, the Company held $750,000 in securities classified held-to-maturity
and no securities classified trading or available-for-sale.
Management expects that its 1996 income will exceed expenses. The net
income of $29,547 for the quarter ended June 30, 1996, is the largest profit
shown for any quarter since the Bank opened in July 1993. The growth of loans
and deposits and the associated increase in net interest income are the primary
reasons for the increased income. Although management expects that the
Company's current profitably will continue, future events, such as an
unanticipated deterioration in the loan portfolio, could reverse this trend.
Management's expectations are based on management's best judgement and actual
results will depend on a number of factors that cannot be predicted with
certainty and thus fulfillment of management's expectations cannot be assured.
Liquidity and Sources of Capital
The $3.9 million increase in deposits from December 31, 1995, to June
30, 1996, is primarily reflected in the $3.8 million increase in federal funds
sold. The Company's primary source of liquidity is cash on hand plus
short-term investments. At June 30, 1996, the Company's liquid assets totaled
$9,685,168, or 26.9% of total assets, compared to $5,991,301, or 18.6% of total
assets, at December 31, 1995. The Company has a $1,000,000 line of credit,
secured by investment securities of the Bank, from a correspondent bank for
future liquidity. If additional liquidity is needed, the Bank will sell
participations in its loans.
The capital of the Company and the Bank exceeded all prescribed
regulatory capital guidelines at June 30, 1996. At June 30, 1996, the Tier 1
leverage ratio for the Bank was 9.28%. At June 30, 1996, the Bank had a
risk-weighted total capital ratio of 15.7%, and a Tier 1 risk-weighted capital
ratio of 14.45%. The Company expects that its current capital and short-term
investments will satisfy the Company's cash requirements for the foreseeable
future. However, no assurance can be given in this regard as rapid growth,
deterioration in the loan quality or poor earnings, or a combination of these
factors, could change the Company's capital position in a relatively short
period of time.
6
<PAGE> 8
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company
or the Bank is a party or of which any of their property is the subject.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Shareholders on May 8, 1996, at
which meeting all three of management's nominees for the Board of Directors
were reelected to serve as Class II Directors for three year terms. The
individuals reelected are: J. Fredrick Heaton, receiving 337,544 votes for and
950 votes against or withheld, with no votes abstaining; William C. Hill,
receiving 338,094 votes for and 400 votes against or withheld, with no votes
abstaining; and Roger A Orsini, receiving 338,044 votes for and 450 votes
against or withheld, with no votes abstaining. Class I and Class III Directors
continuing in office are: Sheila W. Bateman, Jack H. Bishop, W. David Hill,
David F. Lesperance, Thomas P. McDavid, Vinodrai Mehta, Mahmood S. Shariff, and
Jerry L. Wilcoxon.
ITEM 5. OTHER INFORMATION.
None.
7
<PAGE> 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3.1 Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of
Registration Statement on Form S-18, File No.
33-43317).
3.2 Bylaws of the Company (incorporated by reference to
Exhibit 3.2 of Registration Statement on Form S-18,
File No. 33-43317).
10.1 Employment Agreement dated July 22, 1991, between the
Company and Thomas P. McDavid (incorporated by
reference to Exhibit 10.1 of Registration Statement
on Form S-18, File No. 33- 43317).
10.2 Easton Bancorp, Inc. 1991 Stock Option Plan
(incorporated by reference to Exhibit 10.2 of
Registration Statement on Form S-18, File No.
33-43317).
10.3 Form of Warrant Agreement (incorporated by reference
to Exhibit 10.3 of Registration Statement on Form
S-18, File No. 33-43317).
11.1 Computation of Earnings Per Share.
27.1 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company during
the quarter ended June 30, 1996.
8
<PAGE> 10
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EASTON BANCORP, INC.
--------------------------------------
(Registrant)
Date: August 9, 1996 By: /s/ Thomas P. McDavid
--------------------------- ----------------------------------
Thomas P. McDavid
President
Date: August 9, 1996 By: /s/ Pamela A. Mussenden
-------------------------- ----------------------------------
Pamela A. Mussenden
Assistant Treasurer
(Principal Financial Officer)
9
<PAGE> 11
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
- ------ ----------- -----------
<S> <C> <C>
3.1 Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of
Registration Statement on Form S-18, File No. 33-43317).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 of Registration
Statement on Form S-18, File No. 33-43317).
10.1 Employment Agreement dated July 22, 1991, between the Company and Thomas P. McDavid
(incorporated by reference to Exhibit 10.1 of Registration Statement on Form S-18,
File No. 33-43317).
10.2 Easton Bancorp, Inc. 1991 Stock Option Plan (incorporated by reference to Exhibit 10.2
of Registration Statement on Form S-18, File No. 33-43317).
10.3 Form of Warrant Agreement (incorporated by reference to Exhibit 10.3 of Registration
Statement on Form S-18, File No. 33-43317).
11.1 Computation of Earnings Per Share.
27.1 Financial Data Schedule (for SEC Use Only).
</TABLE>
<PAGE> 1
EXHIBIT 11.1
EASTON BANCORP, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1996 June 30, 1996
------------- -------------
<S> <C> <C>
Net income $ 29,567 $ 54,244
========== ==========
Average shares outstanding 559,328 559,328
Dilutive average shares outstanding under warrants 195,955 195,955
Exercise price $ 10.00 $ 10.00
Assumed proceeds on exercise $1,959,550 $1,959,550
Average market value $ 12.50 $ 12.38
Less: Treasury stock purchased with assumed proceeds
from exercise of warrants 156,764 158,284
Adjusted average shares-Primary 598,519 596,999
Primary earnings per share $ .05 $ .09
========== ==========
Average shares outstanding 559,328 559,328
Dilutive average shares outstanding under warrants 195,955 195,955
Exercise price $ 10.00 $ 10.00
Assumed proceeds on exercise $1,959,550 $1,959,550
Ending market value $ 12.50 $ 12.50
Less: Treasury stock purchased with assumed proceeds
from exercise of warrants 156,764 156,764
Adjusted average shares-Fully diluted 598,519 598,519
Fully diluted earnings per share $ .05 $ .09
========== ==========
</TABLE>
The stock of the Company is not traded on any public exchange. The
average and ending market values are derived from trades known to management.
Private sales may occur where management of the Company is unaware of the sales
price.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 685,168
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,250,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 750,000
<INVESTMENTS-MARKET> 739,073
<LOANS> 24,504,498
<ALLOWANCE> 279,000
<TOTAL-ASSETS> 36,049,809
<DEPOSITS> 32,103,178
<SHORT-TERM> 242,538
<LIABILITIES-OTHER> 118,192
<LONG-TERM> 0
0
0
<COMMON> 55,933
<OTHER-SE> 3,529,968
<TOTAL-LIABILITIES-AND-EQUITY> 36,049,809
<INTEREST-LOAN> 1,126,850
<INTEREST-INVEST> 16,012
<INTEREST-OTHER> 208,072
<INTEREST-TOTAL> 1,350,934
<INTEREST-DEPOSIT> 752,340
<INTEREST-EXPENSE> 752,340
<INTEREST-INCOME-NET> 598,594
<LOAN-LOSSES> 25,096
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 575,251
<INCOME-PRETAX> 54,224
<INCOME-PRE-EXTRAORDINARY> 54,224
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,224
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
<YIELD-ACTUAL> 3.71
<LOANS-NON> 70,000
<LOANS-PAST> 55,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 29,000
<ALLOWANCE-OPEN> 260,000
<CHARGE-OFFS> 12,412
<RECOVERIES> 6,316
<ALLOWANCE-CLOSE> 279,000
<ALLOWANCE-DOMESTIC> 279,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
