<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
<TABLE>
<CAPTION>
(Mark One)
<S> <C>
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
- --- For the quarterly period ended: June 30, 1997
----------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
- --- For the transition period from to
--------------- ----------------
</TABLE>
Commission file number: 33-43317
EASTON BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
Maryland 52-1745344
---------------- ------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
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 8, 1997, 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,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks $ 894,857 $ 1,211,182
Federal funds sold 4,952,156 2,824,727
Investment in Federal Home Loan Bank Stock 124,500 121,600
Investment securities held-to-maturity (market
value of $1,248,319 and $1,247,275, respectively) 1,250,000 1,250,000
Loans, less allowance for credit losses of
$348,000 and $332,253, respectively 30,928,305 30,062,431
Premises and equipment, net 1,608,895 1,515,354
Intangible assets, net 46,964 84,503
Accrued interest receivable 215,275 181,009
Other assets 49,896 44,134
----------- -----------
Total assets $40,070,848 $37,294,940
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $2,940,156 $ 1,719,187
Interest-bearing 32,703,046 31,039,372
----------- -----------
Total deposits 35,643,202 32,758,559
Accrued interest payable 94,259 93,684
Securities sold under agreements to repurchase 450,939 574,328
Other liabilities 32,534 145,578
----------- -----------
Total liabilities 36,220,934 33,572,149
----------- -----------
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) (1,423,705) (1,550,828)
----------- -----------
Total stockholders' equity 3,849,914 3,722,791
----------- -----------
Total liabilities and stockholders' equity $40,070,848 $37,294,940
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
<PAGE> 3
EASTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
------ ------ ----- ------
<S> <C> <C> <C> <C>
Interest revenue
Loans, including fees $722,032 $568,155 $1,408,710 $1,126,850
Investment securities 20,778 9,543 39,857 16,012
Federal funds sold 58,020 122,234 106,413 208,072
-------- -------- ---------- ----------
Total interest revenue 800,830 699,932 1,554,980 1,350,934
Interest expense 401,518 386,380 780,810 752,340
-------- -------- ---------- ----------
Net interest income 399,312 313,552 774,170 598,594
Provision for loan losses 19,608 21,297 41,466 25,096
-------- -------- ---------- ----------
Net interest income after
provision for loan losses 379,704 292,255 732,704 573,498
-------- -------- ---------- ----------
Other operating revenue 22,375 33,003 49,516 55,977
-------- -------- ---------- ----------
Other expenses
Salaries and benefits 175,217 157,774 349,403 312,012
Occupancy 19,183 22,030 37,727 41,289
Furniture and equipment 23,629 23,419 48,004 45,123
Other operating 120,683 92,488 219,963 176,827
-------- -------- ---------- ----------
Total operating expenses 338,712 295,711 655,097 575,251
-------- -------- ---------- ----------
Net income before income taxes 63,367 29,547 127,123 54,224
Income taxes - - - -
-------- -------- ---------- ----------
Net income $ 63,367 $ 29,547 $ 127,123 $ 54,224
======== ======== ========== ==========
Earnings per common share $ .10 $ .05 $ .21 $ .09
======== ======== ========== ==========
Earnings per common share fully diluted $ .10 $ .05 $ .21 $ .09
======== ======== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 4
EASTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 1,519,936 $ 1,331,246
Other revenue received 49,736 55,977
Cash paid for operating expenses (687,913) (479,450)
Interest paid (780,235) (753,065)
----------- -----------
101,524 154,708
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for premises, equipment and software (142,211) (4,828)
Net loans to customers (1,266,329) (300,175)
Loan participations purchased - (100,000)
Loan participations sold 359,766 -
Proceeds from sales/maturities of investments 500,000 -
Purchase of investment securities (502,900) (250,000)
Proceeds from sale of other real estate owned - 113,804
----------- -----------
(1,051,674) (541,199)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 2,884,643 3,865,183
Net decrease in securities sold under agreements
to repurchase (123,389) (34,825)
----------- -----------
2,761,254 3,830,358
----------- -----------
NET INCREASE (DECREASE) IN CASH 1,811,104 3,443,867
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,035,909 5,491,301
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,847,013 $ 8,935,168
=========== ===========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
FROM OPERATING ACTIVITIES
Net income $ 127,123 $54,224
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation and amortization 76,461 76,502
Provision for loan losses 41,466 25,096
Decrease (increase) in accrued interest receivable
and other assets (30,279) (2,742)
Increase (decrease) in operating accounts payable and
other liabilities (112,469) 7,076
Deferred loan origination fees (778) (1,387)
Gain on sale of other real estate - (4,061)
----------- -----------
$ 101,524 $ 154,708
=========== ===========
Noncash activity:
Other real estate acquired through foreclosure $ - $ 109,743
=========== ===========
</TABLE>
See accompanying Notes to Consolidated 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.
Operating results for the six months ended June 30, 1997, are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997. For further information, refer to the consolidated financial statements
and footnotes thereto for the Company's fiscal year ended December 31, 1996,
included in the Company's Form 10-KSB for the year ended December 31, 1996.
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.
3. Adoption of New Accounting Principles
During the first quarter of 1997, the Company adopted Financial
Accounting Standards Board Statement No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Under this
principle, financial assets are recognized based on the assets the Company
controls and are removed from the balance sheet when control is surrendered.
Liabilities are recorded when incurred.
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, 1997,
was $63,367, compared to $29,547 during the corresponding period of 1996. Net
income for the six months ended June 30, 1997, was $127,123, compared to
$54,224 for the corresponding period of 1996. The increase in net income can
be attributed primarily to the increase in net interest income primarily as a
result of the increase in the Bank's loan portfolio from $24,504,498 at June
30, 1996, to $30,928,305 at June 30, 1997.
The Bank's provision for loan losses was $19,608 for the quarter ended
June 30, 1997, and $41,466 for the six months ended June 30, 1997, compared to
$21,297 for the quarter ended June 30, 1996, and $25,096 for the six months
ended June 30, 1996. The allowance for loan losses was $348,000 at June 30,
1997, or 1.11% of total loans, compared to $329,000 at March 31, 1997, or 1.10%
of total loans, and $332,253 at December 31, 1996, or 1.09% of total loans.
Management believes that the allowance for loan losses reflects an amount that
is more than adequate to cover 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 increased $43,001 to $338,712 for the quarter
ended June 30, 1997, from $295,711 for the quarter ended June 30, 1996. The
increase was primarily related to the increase in other operating expenses of
$28,195, and increases in salaries and benefits of $17,443. The increase in
other operating expenses for the three months ended June 30, 1997, compared to
the same period for 1996 was primarily due to increased expenses in legal fees
of $5,975, consultants of $3,583, donations of $2,610, data processing of
$2,034 and entertainment of $4,398. Also, effective April 1997 all directors
are paid $25 for each committee meeting they attend. This accounted for an
increase in director fees of $2,600 for the quarter end June 30, 1997, from
quarter end June 30, 1996. The increase in salaries and benefits was due to
annual salary increases, the accrual of bonuses for employees and officers, and
two new employees hired in June 1997.
Return on average assets and average equity, on an annualized basis,
for the quarter ended June 30, 1997, were .64% and 6.66%, respectively,
compared to .33% and 3.33%, respectively, for the same quarter of 1996. Return
on average assets and average equity, on an annualized basis, for the six
months ended June 30, 1997, were .66% and 6.71%, respectively. Earnings per
share on a fully diluted basis for the quarter and the six months ended June
30, 1997, were $.10 and $.21, respectively, compared to $.05 and $.09,
respectively, for the same periods of 1996.
The Company's assets ended the second quarter of 1997 at $40.1
million, an increase of $2.8 million, or 7.4%, from $37.3 million at December
31, 1996. This increase can be attributed primarily
5
<PAGE> 7
to the increase in the Bank's deposits which contributed significantly to the
$2.1 million increase in federal funds sold. Total deposits ended the quarter
at $35.6 million, up 8.8% from $32.8 million at December 31, 1996. At June 30,
1997, the Company's loan to deposit ratio was 86.8%, compared to 91.8% at
December 31, 1996.
Management expects that its 1997 income will exceed expenses. The net
income of $127,123 for the six months ended June 30, 1997, is the largest
profit shown for any six month period 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 $2.9 million increase in deposits from December 31, 1996, to June
30, 1997, is primarily reflected in the $2.1 million increase in federal funds
sold. The Company's primary source of liquidity is cash on hand plus
short-term investments. At June 30, 1997, the Company's liquid assets totaled
$7.2 million, or 18.0% of total assets, compared to $5.4 million, or 14.5% of
total assets, at December 31, 1996. The Company has a $3,500,000 secured line
of credit with the Federal Home Loan Bank of Atlanta, a $1,000,000 line of
credit, secured by investment securities of the Bank, from a correspondent
bank, and a $1,000,000 unsecured line of credit from another correspondent
bank, all 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, 1997. At June 30, 1997, the Tier 1
leverage ratio for the Bank was 9.63%. At June 30, 1997, the Bank had a
risk-weighted total capital ratio of 13.95%, and a Tier 1 risk-weighted capital
ratio of 12.76%. 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.
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.
6
<PAGE> 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Shareholders on May 14, 1997,
at which meeting all five of management's nominees for the Board of Directors
were reelected, including four nominees who were reelected to serve as Class
III Directors for three year terms and one nominee who was elected for a two
year term to fill a vacancy resulting from a newly created Class II
directorship. The individuals reelected as Class III Directors were: Jack H.
Bishop, receiving 302,569 votes for and 1,550 votes against or withheld, with
no votes abstaining; David F. Lesperance, receiving 302,969 votes for and 1,150
votes against or withheld, with no votes abstaining; Vinodrai Mehta, receiving
302,919 votes for and 1,200 votes against or withheld, with no votes
abstaining; and Jerry L. Wilcoxon, receiving 303,119 votes for and 1,000 votes
against or withheld, with no votes abstaining. The individual elected to fill
the Class II directorship vacancy was J. Parker Callahan, Jr., receiving
303,119 votes for and 1,000 votes against or withheld, with no votes
abstaining. Class I and Class II Directors continuing in office are: Sheila W.
Bateman, J. Fredrick Heaton, William C. Hill, W. David Hill, Thomas P. McDavid,
Roger A Orsini and Mahmood S. Shariff.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<S> <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 Computation of Earnings Per Share.
27 Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company during
the quarter ended June 30, 1997.
7
<PAGE> 9
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.
<TABLE>
<S> <C> <C>
EASTON BANCORP, INC.
--------------------------------------------
(Registrant)
Date: August 11, 1997 By: /s/ Thomas P. McDavid
------------------- -----------------------------------------------
Thomas P. McDavid
President
Date: August 11, 1997 By: /s/ Pamela A. Mussenden
------------------- -----------------------------------------------
Pamela A. Mussenden
Assistant Treasurer
(Principal Financial Officer)
</TABLE>
8
<PAGE> 10
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
- ------ ----------- -----------
<S> <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 Computation of Earnings Per Share.
27 Financial Data Schedule (for SEC use only).
</TABLE>
<PAGE> 1
EXHIBIT 11
EASTON BANCORP, INC.
COMPUTATION OF EARNINGS PER SHARE
QUARTER ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1997 June 30, 1997
------------- -------------
<S> <C> <C>
Net income $ 63,367 $ 127,123
========== ==========
Average shares outstanding 559,328 559,328
Dilutive average shares outstanding under
warrants and options 216,191 216,191
Exercise price $ 10.00 $10.00
Assumed proceeds on exercise $2,161,910 $2,161,910
Average market value $ 12.50 $ 12.48
Less: Treasury stock purchased with assumed
proceeds from exercise of warrants and options 172,953 173,230
Adjusted average shares-Primary 602,566 602,289
Primary earnings per share $ .10 $ .21
========== ==========
Average shares outstanding 559,328 559,328
Dilutive average shares outstanding under
warrants and options 216,191 216,191
Exercise price $10.00 $ 10.00
Assumed proceeds on exercise $2,161,910 $2,161,910
Ending market value $ 12.50 $ 12.50
Less: Treasury stock purchased with assumed
proceeds from exercise of warrants and options 172,953 172,953
Adjusted average shares-Fully diluted 602,566 602,566
Fully diluted earnings per share $ .10 $ .21
========== ==========
</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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 892,165
<INT-BEARING-DEPOSITS> 2,692
<FED-FUNDS-SOLD> 4,952,156
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 124,500
<INVESTMENTS-CARRYING> 1,250,000
<INVESTMENTS-MARKET> 1,248,319
<LOANS> 31,276,305
<ALLOWANCE> 348,000
<TOTAL-ASSETS> 40,070,848
<DEPOSITS> 35,643,202
<SHORT-TERM> 450,939
<LIABILITIES-OTHER> 126,793
<LONG-TERM> 0
0
0
<COMMON> 55,933
<OTHER-SE> 3,793,981
<TOTAL-LIABILITIES-AND-EQUITY> 40,070,848
<INTEREST-LOAN> 1,408,710
<INTEREST-INVEST> 39,857
<INTEREST-OTHER> 106,413
<INTEREST-TOTAL> 1,554,980
<INTEREST-DEPOSIT> 769,101
<INTEREST-EXPENSE> 780,810
<INTEREST-INCOME-NET> 774,170
<LOAN-LOSSES> 41,466
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 659,066
<INCOME-PRETAX> 127,123
<INCOME-PRE-EXTRAORDINARY> 127,123
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 127,123
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
<YIELD-ACTUAL> 4.38
<LOANS-NON> 7,000
<LOANS-PAST> 95,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 289,639
<ALLOWANCE-OPEN> 332,253
<CHARGE-OFFS> 36,382
<RECOVERIES> 10,663
<ALLOWANCE-CLOSE> 348,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 348,000
</TABLE>
