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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 [NO FEE REQUIRED, EFECTIVE OCTOBER 7, 1996].
For the fiscal year ended: December 31, 1996
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the transition period from to
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Commission File No.: 33-43317
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EASTON BANCORP, INC.
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(Name of small business issuer as specified in its charter)
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Maryland 52-1745344
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 Idlewild Avenue, Easton, Maryland 21601
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(Address of principal executive offices) (Zip Code)
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Issuer's telephone number, including area code: (410) 819-0300
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Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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(Title of Class)
Check whether the small business issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the small business issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the small business issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State the small business issuer's revenues for its most recent fiscal year:
$2,900,601.
The aggregate market value of the Common Stock held by non-affiliates of the
small business issuer on March 20, 1997, was $4,425,252. This calculation is
based upon an estimation by the Company's Board of Directors of fair market
value of the Common Stock of $12.00 per share. There is not an active trading
market for the Common Stock and it is not possible to identify precisely the
market value of the Common Stock.
On March 20, 1997, 559,328 shares of the small business issuer's Common Stock
were issued and outstanding.
Transitional Small Business Disclosure Format: YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE
The Company's Annual Report to Stockholders for the year ended December 31,
1996, is incorporated by reference in this Form 10-KSB in Part II Item 5, Item
6, and Item 7. The Company's Proxy Statement for Annual Meeting of Stockholders
to be held on May 14, 1997, is incorporated by reference in this Form 10-KSB in
Part III Item 9, Item 10, Item 11, and Item 12.
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This Report contains statements which constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and the
Securities Exchange Act of 1934. These statements appear in a number of places
in this Report and include all statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with respect
to, among other things: (i) the Company's financing plans; (ii) trends affecting
the Company's financial condition or results of operations; (iii) the Company's
growth strategy and operating strategy; and (iv) the declaration and payment of
dividends. Investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors discussed herein and
those factors discussed in detail in the Company's filings with the Securities
and Exchange Commission.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Easton Bancorp, Inc. (the "Company") was incorporated as a Maryland
corporation on July 19, 1991, primarily to own and control all of the capital
stock of Easton Bank & Trust Company (the "Bank") upon its formation. On
December 31, 1992, the Company completed the initial public offering (the
"Offering") of its Common Stock, par value $0.10 per share (the "Common Stock"),
in which it sold 559,328 shares of Common Stock at a price of $10.00 per share.
Out of the proceeds of the Offering, the Company paid $5.0 million to the Bank
in exchange for all of its outstanding capital stock and retained approximately
$600,000 to cover expenses of the Company and to provide additional capital to
the Bank if required. 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 was organized as a nonmember state bank under the laws of the
State of Maryland. The Bank is engaged in a general commercial banking business
from its main office location in its primary service area, Talbot County,
Maryland.
The Company's holding company structure can assist the Bank in maintaining
its required capital ratios because the Company may, subject to compliance with
debt guidelines implemented by the Board of Governors of the Federal Reserve
System (the "Board of Governors" or the "Federal Reserve"), borrow money and
contribute the proceeds to the Bank as primary capital. The holding company
structure also permits greater flexibility in issuing stock for cash, property
or services and in reorganization transactions. Moreover, subject to certain
regulatory limitations, a holding company can purchase shares of its own stock,
which the Bank may not do. A holding company may also engage in certain
non-banking activities which the Board of Governors has deemed to be closely
related to banking and proper incidents to the business of a bank holding
company. These activities include making or servicing loans and certain types of
leases; performing certain data processing services; acting as a fiduciary or
investment or financial advisor; acting as a management consultant for other
depository institutions; providing courier, appraisal, and consumer financial
counseling services; providing tax planning and preparation services; providing
check guaranty and collection agency services; engaging in limited real estate
investment activities; underwriting, brokering, and selling credit life and
disability insurance; engaging in certain other limited insurance activities;
providing discount brokerage services; underwriting and dealing in certain
government obligations and money market instruments and providing portfolio
investment advice; acting as a futures commission merchant with respect to
certain financial instrument transactions; providing foreign exchange advisory
and transactional services; making investments in certain corporations for
projects designed primarily to promote community welfare; and owning and
operating certain healthy savings and loan associations. Although the Company
has no present intention of engaging in any of these activities, if
circumstances should lead the Company's management to believe that there is a
need for these services in the Bank's marketing area and that such activities
could be profitably conducted, the management of the Company would have the
flexibility of commencing these activities upon filing notice thereof with the
Board of Governors.
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LOCATION AND SERVICE AREA
The Bank conducts a general commercial banking business in its primary
service area, emphasizing the banking needs of individuals and small- to
medium-sized businesses and professional concerns. The Bank operates from a main
office located at 501 Idlewild Avenue in Easton, Maryland, and from a branch
office in the William Hill Manor located on Dutchman Lane in Easton. See
"Facilities" below. The Bank draws most of its customer deposits and conducts
most of its lending transactions from within its primary service area which
encompasses Talbot County, Maryland.
Talbot County is centrally located on the eastern shore of the Chesapeake
Bay in eastern Maryland. Easton, the county seat, is approximately 59 miles
southeast of Baltimore and 73 miles east of Washington, D.C. The City of Easton
and Talbot County have experienced growth in population in recent years. The
population of Easton increased from approximately 7,500 in 1980 to approximately
9,000 in 1990, while the population of Talbot County increased from
approximately 25,000 to 30,000 during this period.
The principal components of the economy of Talbot County are manufacturing
(which accounts for approximately 30% of economic activity), agriculture, and
tourism. Easton also has a strong component of health-care related businesses.
The largest employers in the county include Memorial Hospital, Black & Decker,
Allen Family Foods, a poultry producer, Cadmus Journal Services, a printing
company, and William Hill Manor, Inc., a continuing care retirement community.
The county has had a significant boating industry since colonial days. At
present, this industry is made up of over a dozen builders, numerous supply
companies, dealers and charter companies, and approximately 20 marinas. Talbot
County's colonial homes and historical sites and boating, hunting, and fishing
opportunities have resulted in tourism constituting a significant segment of the
economy.
BANKING SERVICES
The Bank offers a full range of deposit services that are typically
available in most banks and savings and loan associations, including checking
accounts, NOW accounts, savings accounts and other time deposits of various
types, ranging from daily money market accounts to longer-term certificates of
deposit. The transaction accounts and time certificates are tailored to the
Bank's principal market area at rates competitive to those offered in the area.
In addition, the Bank offers certain retirement account services, such as
Individual Retirement Accounts ("IRAs"). All deposit accounts are insured by the
Federal Deposit Insurance Corporation (the "FDIC") up to the maximum amount
allowed by law (generally, $100,000 per depositor subject to aggregation rules).
The Bank solicits these accounts from individuals, businesses, associations and
organizations, and governmental authorities.
The Bank also offers a full range of short- to medium-term commercial and
personal loans. Commercial loans include both secured and unsecured loans for
working capital (including inventory and receivables), business expansion
(including acquisition of real estate and improvements), and purchase of
equipment and machinery. Consumer loans include secured and unsecured loans for
financing automobiles, home improvements, education, and personal investments.
The Bank also originates and holds or sells into the secondary market fixed and
variable rate mortgage loans and real estate construction and acquisition loans.
The Bank's lending activities are subject to a variety of lending limits imposed
by state and federal law. The Bank may not make any loans to any director,
officer, or employee of the Bank (except for commercial loans to directors who
are not officers or employees) unless the loan is approved by the Board of
Directors of the Bank. Any such loan must be reviewed every six months by the
Board of Directors.
Other bank services include cash management services, safe deposit boxes,
travelers checks, direct deposit of payroll and social security checks, and
automatic drafts for various accounts. The Bank is associated with the MOST
network of automated teller machines that may be used by Bank customers
throughout Maryland and other regions. The Bank also offers MasterCard and VISA
credit card services through a correspondent bank as an agent for the Bank.
The Bank does not presently exercise trust powers. The Bank may in the
future offer a full-service trust department, but cannot do so without the prior
approval of the Maryland State Bank Commissioner (the "Commissioner").
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COMPETITION
The banking business is highly competitive. The Bank competes as a
financial intermediary with other commercial banks, savings and loan
associations, credit unions, and money market mutual funds operating in Talbot
County and elsewhere. As of December 31, 1996, there were seven commercial banks
operating a total of twenty offices in Talbot County, Maryland. Of these
institutions, only The Talbot Bank of Easton is locally owned and operated. The
Talbot Bank has a main office in Easton and three branches: two located in
Easton and one in St. Michaels. St. Michaels Bank, while locally chartered, is
controlled by a holding company in Baltimore. It operates a main office and four
branches in Talbot County. NationsBank, Signet Bank -- Maryland, First National
Bank of Maryland, and Crestar Bank, all of which are based in Baltimore, operate
four, two, two, and one branches in Talbot County, respectively. Also, as of
December 31, 1996, one savings and loan association, Loyola Federal Savings and
Loan Association, was operating a branch in Easton. One credit union operates in
the county; however, it has only nominal deposits. Financial service companies,
such as Legg Mason Wood Walker, Inc., Ferris Baker Watts, Inc., Merrill Lynch,
A.G. Edwards & Sons, Inc. and H.C. Wainwright, Inc. also operate offices in
Talbot County.
FACILITIES
The Bank's main office is located at 501 Idlewild Avenue, Easton, Maryland
on approximately 53,000 square feet of land at the corner of Idlewild Avenue and
Caulk Lane. The Bank also operates a branch facility at William Hill Manor
located on Dutchman's Lane in Easton on approximately 72 square feet of leased
space. This branch is limited to accepting deposits and cashing checks and is
open only for limited hours each business day. See Item 12. "Certain
Relationships and Related Transactions." The Bank presently expects to open a
full-service branch facility during the Bank's fourth or fifth year of
operation, although no sites have been identified and there can be no assurance
that such a branch will actually be opened.
The Bank acquired the site for the main office for $281,000 and spent
approximately $1,081,000 for construction of the building, landscaping, paving,
and sidewalks. Construction of the main office was completed in June 1993. The
main office building is a two story building consisting of approximately 14,000
square feet. The Bank presently occupies only approximately 6,500 square feet
for housing the main branch of the Bank, the operations center of the Bank, and
the executive offices of the Company and the Bank. The Bank recently began
improvements to complete the second floor of the main office building at an
estimated cost of approximately $225,000. The improvements will provide
approximately 5,100 additional square feet of office space, of which the Bank
intends to use approximately 1,500 square feet. The remaining additional space
will be leased to third parties.
The William Hill Manor branch office space is leased pursuant to a five
year lease dated July 1, 1995. Rent is fixed at $3,600 annually. At the end of
the current term, the lease provides an option to extend with rent increases
contingent on the performance of the Bank and based on the consumer price index.
EMPLOYEES
As of March 20, 1997, the Bank had fifteen full-time employees and one
part-time employee. The Company's operations are conducted through the Bank.
Consequently, the Company does not have any separate employees. None of the
employees of the Bank are represented by any collective bargaining unit. The
Bank considers its relations with its employees to be good.
SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws and
regulations which impose specific requirements or restrictions on, and provide
for general regulatory oversight with respect to, virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not stockholders. The following is a brief summary of certain
statutes, rules and regulations affecting the Company and the Bank. To the
extent that the following summary describes statutory or regulatory provisions,
it is qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws or regulations may
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have a material adverse effect on the business and prospects of the Company.
Beginning with the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and following with the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), numerous additional
regulatory requirements have been placed on the banking industry in the past
five years, and additional changes have been proposed. The banking industry is
also likely to change significantly as a result of the passage of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"). The operations of the Company and the Bank may be
affected by legislative changes and the policies of various regulatory
authorities. The Company is unable to predict the nature or the extent of the
effect on its business and earnings that fiscal or monetary policies, economic
control, or new federal or state legislation may have in the future.
THE COMPANY
Because it owns the outstanding common stock of the Bank, the Company is a
bank holding company within the meaning of the federal Bank Holding Company Act
of 1956 (the "BHCA"). Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve and is required to file periodic reports of
its operations and such additional information as the Federal Reserve may
require. The Company's and the Bank's activities are limited to banking,
managing or controlling banks, furnishing services to or performing services for
its subsidiaries, or engaging in any other activity that the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.
Investments, Control, and Activities. With certain limited exceptions, the
BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring substantially all the assets of any bank,
(ii) acquiring direct or indirect ownership or control of any voting shares of
any bank if after such acquisition it would own or control more than 5% of the
voting shares of such bank (unless it already owns or controls the majority of
such shares), or (iii) merging or consolidating with another bank holding
company.
In addition, and subject to certain exceptions, the BHCA and the Change in
Bank Control Act, together with regulations thereunder, require Federal Reserve
approval (or, depending on the circumstances, no notice of disapproval) prior to
any person or company acquiring "control" of a bank holding company, such as the
Company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company. Because the Company's Common Stock is registered under the Securities
Exchange Act of 1934, under Federal Reserve regulations control will be
rebuttably presumed to exist if a person acquires at least 10% of the
outstanding shares of any class of voting securities of the Company. The
regulations provide a procedure for challenge of the rebuttable control
presumption.
Under the BHCA, the Company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting shares of any
company engaged in, nonbanking activities, unless the Federal Reserve, by order
or regulation, has found those activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Some of the
activities that the Federal Reserve has determined by regulation to be proper
incidents to the business of banking include making or servicing loans and
certain types of leases, engaging in certain insurance and discount brokerage
activities, performing certain data processing services, acting in certain
circumstances as a fiduciary or investment or financial advisor, owning savings
associations, and making investments in certain corporations or projects
designed primarily to promote community welfare.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
policy, the Company is expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances in which the
Company might not otherwise do so. Under the BHCA, the Federal Reserve may
require a bank holding company to terminate any activity or relinquish control
of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the
Federal Reserve's determination that such activity or control constitutes a
serious risk to the financial soundness or stability of any subsidiary
depository institution of the bank holding company. Further, federal bank
regulatory authorities have additional discretion to require a bank holding
company to divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's financial
condition. The Bank may be required to indemnify, or cross-guarantee, the FDIC
against losses it incurs
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with respect to any other Bank controlled by the Company, which in effect makes
the Company's equity investments in healthy bank subsidiaries available to the
FDIC to assist any failing or failed bank subsidiary of the Company.
THE BANK
General. The Bank operates as a state nonmember banking association
incorporated under the laws of the State of Maryland and is subject to
examination by the FDIC and the Commissioner. Deposits in the Bank are insured
by the FDIC up to a maximum amount (generally $100,000 per depositor, subject to
aggregation rules). The Commissioner and the FDIC regulate or monitor all areas
of the Bank's operations, including security devices and procedures, adequacy of
capitalization and loss reserves, loans, investments, borrowings, deposits,
mergers, issuances of securities, payment of dividends, interest rates payable
on deposits, interest rates or fees chargeable on loans, establishment of
branches, corporate reorganizations, maintenance of books and records, and
adequacy of staff training to carry on safe lending and deposit gathering
practices. The FDIC requires the Bank to maintain certain capital ratios and
imposes limitations on the Bank's aggregate investment in real estate, bank
premises, and furniture and fixtures. The Bank is required by the FDIC and the
Commissioner to prepare quarterly reports on the Bank's financial condition and
to conduct an annual audit of its financial affairs in compliance with minimum
standards and procedures prescribed by the Commissioner.
Under FDICIA, all insured institutions must undergo periodic on-site
examination by their appropriate banking agency. The cost of examinations of
insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports to
the FDIC and the appropriate agency (and state supervisor when applicable).
FDICIA also directs the FDIC to develop with other appropriate agencies a method
for insured depository institutions to provide supplemental disclosure of the
estimated fair market value of assets and liabilities, to the extent feasible
and practicable, in any balance sheet, financial statement, report of condition,
or other report of any insured depository institution. FDICIA also requires the
federal banking regulatory agencies to prescribe, by regulation, standards for
all insured depository institutions and depository institution holding companies
relating, among other things, to: (i) internal controls, information systems,
and audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; and (v) asset quality.
State nonmember banks which have been newly chartered within the past two
years, and state nonmember banks and their holding companies which have
undergone a change in control within the past two years or which have been
deemed by the FDIC to be troubled institutions, must give the FDIC or the Board
of Governors, respectively, 30 days prior notice of the appointment of any
senior executive officer or director. Within the 30 day period, the FDIC or the
Board of Governors, as the case may be, may disapprove any such appointment.
Transactions With Affiliates and Insiders. The Bank is subject to Section
23A of the Federal Reserve Act, which places limits on the amount of loans or
extensions of credit to, or investments in, or certain other transactions with,
affiliates and on the amount of advances to third parties collateralized by the
securities or obligations of affiliates. In addition, most of these loans and
certain other transactions must be secured in prescribed amounts. The Bank is
also subject to Section 23B of the Federal Reserve Act which, among other
things, prohibits an institution from engaging in certain transactions with
certain affiliates unless the transactions are on terms substantially the same,
or at least as favorable to such institution or its subsidiaries, as those
prevailing at the time for comparable transactions with nonaffiliated companies.
The Bank is subject to certain restrictions on extensions of credit to executive
officers, directors, certain principal stockholders, and their related
interests. Such extensions of credit (i) must be made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with third parties and (ii) must not involve more
than the normal risk of repayment or present other unfavorable features.
Community Reinvestment Act. The Community Reinvestment Act requires that
each insured depository institution shall be evaluated by its primary federal
regulator with respect to its record in meeting the credit needs of its local
community, including low and moderate income neighborhoods, consistent with
the safe and sound operation of those institutions. These factors are also
considered in evaluating mergers, acquisitions, and applications to open a
branch or facility. The Bank received a satisfactory rating in its most recent
evaluation.
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Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates. The Bank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help
meet the housing needs of the community it serves, the Equal Credit Opportunity
Act prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit, the Fair Credit Reporting Act of 1978 governing the
use and provision of information to credit reporting agencies, the Fair Debt
Collection Act governing the manner in which consumer debts may be collected by
collection agencies, and the rules and regulations of the various federal
agencies charged with the responsibility of implementing such federal laws. The
deposit operations of the Bank also are subject to the Right to Financial
Privacy Act, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative
subpoenas of financial records, and the Electronic Funds Transfer Act and
Regulation E issued by the Federal Reserve Board to implement that act, which
governs automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
DEPOSIT INSURANCE
The deposits of the Bank are currently insured to a maximum of $100,000 per
depositor, subject to certain aggregation rules. The FDIC establishes rates for
the payment of premiums by federally insured banks and thrifts for deposit
insurance. Separate insurance funds (BIF and SAIF) are maintained for commercial
banks and thrifts, with insurance premiums from the industry used to offset
losses from insurance payouts when banks and thrifts fail. Due to the high rate
of failures in recent years, the fees that commercial banks and thrifts pay to
BIF and SAIF have increased. Since 1993, insured depository institutions like
the Bank have paid for deposit insurance under a risk-based premium system.
Under this system, until mid-1995, depository institutions paid to BIF or SAIF
from $0.23 to $0.31 per $100 of insured deposits depending on its capital levels
and risk profile, as determined by its primary federal regulator on a
semi-annual basis. Once the BIF reached its legally mandated reserve ratio in
mid-1995, the FDIC lowered premiums for well-capitalized banks to $.04 per $100.
Subsequently, the FDIC revised the range of premiums from $.00 to $.31 per $100.
The assessment rate per $100 of insured deposits is currently $0.00 for the
Bank for 1997. The Deposit Insurance Funds Act of 1996 eliminated the minimum
assessment required by statute. It also separates, effective January 1, 1997,
the Financial Corporation (FICO) assessment to service the interest on its bond
obligations. The amount assessed on individual institutions, including the Bank,
by FICO will be in addition to the amount paid for deposit insurance according
to the risk-related assessment rate schedule. FICO assessment rates for the
first semi-annual period of 1997 were set at 1.30 basis points annually for BIF
deposits. For the first semi-annual period of 1997, the FDIC Board of Directors
maintained the adjusted rate schedule and the Bank's insurance assessment will
remain at $.00 per $100 in deposits through June 1997. Increases in deposit
insurance premiums or changes in risk classification will increase the Bank's
cost of funds, and there can be no assurance that such cost can be passed on the
Bank's customers.
DIVIDENDS
The principal source of the Company's cash revenues comes from dividends
received from the Bank. The amount of dividends that may be paid by the Bank to
the Company depends on the Bank's earnings and capital position and is limited
by federal and state law, regulations, and policies. The Federal Reserve has
stated that bank holding companies should refrain from or limit dividend
increases or reduce or eliminate dividends under circumstances in which the bank
holding company fails to meet minimum capital requirements or in which earnings
are impaired.
The Company's ability to pay any cash dividends to its stockholders in the
future will depend primarily on the Bank's ability to pay dividends to the
Company. In order to pay dividends to the Company, the Bank must comply with the
requirements of all applicable laws and regulations. Under Maryland law, the
Bank may pay a
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cash dividend only from the following, after providing for due or accrued
expenses, losses, interest, and taxes: (i) its undivided profits, or (ii) with
the prior approval of the Commissioner, its surplus in excess of 100% of its
required capital stock. Under FDICIA, the Bank may not pay a dividend if, after
paying the dividend, the Bank would be undercapitalized. See "Capital
Regulations" below. See Item 5 below for a discussion of dividends paid by the
Bank in the past two years.
In addition to the availability of funds from the Bank, the future dividend
policy of the Company is subject to the discretion of the Board of Directors and
will depend upon a number of factors, including future earnings, financial
condition, cash needs, and general business conditions. If dividends should be
declared in the future, the amount of such dividends presently cannot be
estimated and it cannot be known whether such dividends would continue for
future periods.
CAPITAL REGULATIONS
The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, account for off-balance sheet exposure,
and minimize disincentives for holding liquid assets. The resulting capital
ratios represent qualifying capital as a percentage of total risk-weighted
assets and offbalance sheet items. The guidelines are minimums, and the
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain ratios well in excess of the minimums. The
current guidelines require all bank holding companies and federallyregulated
banks to maintain a minimum risk-based total capital ratio equal to 8%, of which
at least 4% must be Tier 1 capital. Tier 1 capital includes common stockholders'
equity before the unrealized gains and losses on securities available for sale,
qualifying perpetual preferred stock, and minority interests in equity accounts
of consolidated subsidiaries, but excludes goodwill and most other intangibles
and excludes the allowance for loan and lease losses. Tier 2 capital includes
the excess of any preferred stock not included in Tier 1 capital, mandatory
convertible securities, hybrid capital instruments, subordinated debt and
intermediate term-preferred stock, and general reserves for loan and lease
losses up to 1.25% of risk-weighted assets.
Under the guidelines, banks' and bank holding companies' assets are given
risk-weights of 0%, 20%, 50%, and 100%. In addition, certain off-balance sheet
items are given credit conversion factors to convert them to asset equivalent
amounts to which an appropriate risk-weight will apply. These computations
result in the total risk-weighted assets. Most loans are assigned to the 100%
risk category, except for first mortgage loans fully secured by residential
property and, under certain circumstances, residential construction loans, both
of which carry a 50% rating. Most investment securities are signed to the 20%
category, except for municipal or state revenue bonds, which have a 50% rating,
and direct obligations of or obligations guaranteed by the United States
Treasury or United States Government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a leverage
ratio, which is Tier 1 capital as a percentage of average total assets less
intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%, but
most institutions are required to maintain an additional cushion of at least 100
to 200 basis points.
FDICIA established a new capital-based regulatory scheme designed to
promote early intervention for troubled banks and requires the FDIC to choose
the least expensive resolution of bank failures. The new capital-based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as a "well capitalized" institution, a bank must
have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less
than 6%, and a total risk-based capital ratio of no less than 10%, and the bank
must not be under any order or directive from the appropriate regulatory agency
to meet and maintain a specific capital level. As of December 31, 1996, the
Company and the Bank were qualified as "well capitalized." See "Item 6.
Management's Discussion and Analysis or Plan of Operation -- Capital."
7
<PAGE> 9
Under the FDICIA regulations, the applicable agency can treat an
institution as if it were in the next lower category if the agency determines
(after notice and an opportunity for hearing) that the institution is in an
unsafe or unsound condition or is engaging in an unsafe or unsound practice. The
degree of regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to (i) submit a capital restoration
plan; (ii) raise additional capital; (iii) restrict their growth, deposit
interest rates, and other activities; (iv) improve their management; (v)
eliminate management fees; or (vi) divest themselves of all or part of their
operations. Bank holding companies controlling financial institutions can be
called upon to boost the institutions' capital and to partially guarantee the
institutions' performance under their capital restoration plans.
These capital guidelines can affect the Company in several ways. If the
Bank begins to grow at a rapid pace, a premature "squeeze" on capital could
occur making a capital infusion necessary. The requirements could impact the
Company's ability to pay dividends. The Company's present capital levels are
more than adequate; however, rapid growth, poor loan portfolio performance, or
poor earnings performance or a combination of these factors could change the
Bank's capital position in a relatively short period of time.
Effective January 1, 1997, the FDIC amended the risk-based capital
standards to incorporate a measure for market risk to cover all positions
located in a institution's trading account, and foreign exchange and commodity
positions wherever located. The effect of the rule is that it requires any bank
or bank holding company with significant exposure to market risk to measure the
risk and hold capital commensurate with that risk. Since the Bank does not
currently engage, nor has any plans to engage, in trading, foreign exchange or
commodity position activities, the rule does not have an effect on the required
Bank capital levels.
Both the Company and the Bank exceeded their respective regulatory capital
requirements at December 31, 1996. See "Management's Discussion and Analysis or
Plan of Operation -- Capital."
INTERSTATE BANKING AND BRANCHING RESTRICTIONS
On September 29, 1994, the federal government enacted the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking
Act"). This Act became effective on September 29, 1995, and permits eligible
bank holding companies in any state, with regulatory approval, to acquire
banking organizations in any other state. Effective June 1, 1997, the Interstate
Banking Act will allow banks with different home states to merge, unless a
particular state opts out of the statute. Consistent with the Interstate Banking
Act, Maryland adopted legislation in 1995 which permits interstate bank mergers
beginning September 29, 1995.
In addition, beginning June 1, 1997, the Interstate Banking Act will permit
national and state banks to establish de novo branches in another state if there
is a law in that state which applies equally to all banks and expressly permits
all out-of-state banks to establish de novo branches. In 1995, Maryland adopted
"opt-in" legislation by which Maryland adopted the federal legislation effective
September 29, 1995, before it automatically takes effect on June 1, 1997. The
Maryland legislation permits out-of-state banks to establish branches in
Maryland by opening a de novo branch, by acquiring an existing branch from a
Maryland depository institution, or as a result of an interstate merger with a
Maryland banking organization, as long as such states grant similar privileges
for acquiring banking organizations in their states to banking organizations in
Maryland. Under Maryland law, the Bank may open branches state-wide, subject to
the prior approval of the Commissioner and the FDIC. There are currently no
definite plans for the Company to acquire any bank, but the Company remains open
to acquisitions as part of its strategic growth plan.
RECENT LEGISLATIVE DEVELOPMENTS
From time to time, various bills are introduced in the United States
Congress and at the state legislative level with respect to the regulation of
financial institutions. Certain of these proposals, if adopted, could
significantly change the regulation of banks and the financial services
industry. The Company cannot predict whether any such proposals will be adopted
or, if adopted, how such proposals would affect the Company.
8
<PAGE> 10
ITEM 2. DESCRIPTION OF PROPERTY
The Bank's main office is located at 501 Idlewild Avenue, Easton, Maryland
on approximately 53,000 square feet of land at the corner of Idlewild Avenue and
Caulk Lane. The Bank also operates a branch facility at William Hill Manor
located on Dutchman's Lane in Easton on approximately 72 square feet of leased
space. This branch is limited to accepting deposits and cashing checks and is
open only for limited hours each business day. See Item 12. "Certain
Relationships and Related Transactions."
The Bank acquired the site for the main office for $281,000 and spent
approximately $1,081,000 for construction of the building, landscaping, paving,
and sidewalks. Construction of the main office was completed in June 1993. The
main office building is a two story building consisting of approximately 14,000
square feet. The Bank presently occupies only approximately 6,500 square feet
for housing the main branch of the Bank, the operations center of the Bank, and
the executive offices of the Company and the Bank. The Bank recently began
improvements to complete the second floor of the main office building at an
estimated cost of approximately $225,000. The improvements will provide
approximately 5,100 additional square feet of office space, of which the Bank
intends to use approximately 1,500 square feet. The remaining additional space
will be leased to third parties.
The William Hill Manor branch office space is leased pursuant to a five
year lease dated July 1, 1995. Rent is fixed at $3,600 annually. At the end of
the current term, the lease provides an option to extend with rent increases
contingent on the performance of the Bank and based on the consumer price index.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or the
Bank or any of their properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the stockholders of the
Company during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In response to this Item, the information included on pages 15 though 16 of
the Company's Annual Report to Stockholders for the year ended December 31,
1996, is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
In response to this Item, the information included on pages 3 through 15 of
the Company's Annual Report to Stockholders for the year ended December 31,
1996, is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
In response to this Item, the information included on pages 17 through 38
of the Company's Annual Report to Stockholders for the year ended December 31,
1996, is incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
9
<PAGE> 11
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
In response to this item, the information included on pages 2 through 5 and
page 8 of the Company's Proxy Statement for the Annual Meeting of Stockholders
to be held on May 14, 1997, is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
In response to this item, the information included on pages 5 through 8 of
the Company's Proxy Statement for the Annual Meeting of Stockholders to be held
on May 14, 1997, is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In response to this item, the information included on pages 8 through 10 of
the Company's Proxy Statement for the Annual Meeting of Stockholders to be held
on May 14, 1997, is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In response to this item, the information included on page 10 of the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
May 14, 1997, is incorporated herein by reference.
ITEM 13. 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).
13 Annual Report to Stockholders for the year ended December 31, 1996.
21 Subsidiaries of the Company.
27 Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1996.
10
<PAGE> 12
SIGNATURES
In accordance with 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.
EASTON BANCORP, INC.
-------------------------------------
(Registrant)
By: /s/ W. David Hill
-----------------------------------
W. David Hill
Chairman of the Board
Date: March 28, 1997
In accordance with 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- --------------
<S> <C> <C>
/s/ Sheila W. Bateman Director; Secretary March 28, 1997
- ---------------------------------------------------
Sheila W. Bateman
/s/ Jack H. Bishop Director March 28, 1997
- ---------------------------------------------------
Jack H. Bishop
/s/ J. Parker Callahan, Jr. Director March 28, 1997
- ---------------------------------------------------
J. Parker Callahan, Jr.
/s/ J. Fredrick Heaton Director March 28, 1997
- ---------------------------------------------------
J. Fredrick Heaton
/s/ William C. Hill Director March 28, 1997
- ---------------------------------------------------
William C. Hill
/s/ W. David Hill Director; Chairman of the March 28, 1997
- --------------------------------------------------- Board; Principal Executive
W. David Hill Officer
/s/ David F. Lesperance Director March 28, 1997
- ---------------------------------------------------
David F. Lesperance
/s/ Thomas P. McDavid Director; President March 28, 1997
- ---------------------------------------------------
Thomas P. McDavid
/s/ Vinodrai Mehta Director March 28, 1997
- ---------------------------------------------------
Vinodrai Mehta
/s/ Roger A. Orsini Director March 28, 1997
- ---------------------------------------------------
Roger A. Orsini
</TABLE>
11
<PAGE> 13
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- --------------
<S> <C> <C>
/s/ Mahmood S. Shariff Director March 28, 1997
- ---------------------------------------------------
Mahmood S. Shariff
/s/ Jerry L. Wilcoxon Director; Treasurer March 28, 1997
- --------------------------------------------------- (principal financial officer and
Jerry L. Wilcoxon principal accounting officer)
</TABLE>
12
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
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).
13 Annual Report to Stockholders for the year ended December
31, 1996.
21 Subsidiaries of the Company.
27 Financial Data Schedule (for SEC use only).
</TABLE>
<PAGE> 1
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1996
<PAGE> 2
ANNUAL REPORT TO STOCKHOLDERS
DECEMBER 31, 1996
EASTON BANCORP, INC.
<PAGE> 3
EASTON BANCORP, INC.
March 1997
Dear Stockholders:
I am pleased and proud to present Easton Bancorp, Inc.'s 1996 Annual Report to
Stockholders. Total assets at the end of 1996 stood at $37,294,940 and our
deposits have grown from $28,237,995 to $32,758,559.
As Easton's first community bank in over 100 years, we are committed to
providing quality service, growth, and profitability.
Thanks to the efforts of our officers and staff, Easton Bank & Trust is on
course to a very exciting future. Our customer base is continuing to grow and
we showed a profit for each month of 1996.
In closing, let me thank all of the stockholders who have supported Easton
Bancorp, Inc. You are an essential component in the growth of the Bank; and by
sharing with friends your satisfaction with our services, you have contributed
greatly to our success.
Sincerely,
/s/ W. David Hill
W. David Hill, DDS
Chairman of the Board
501 Idlewild Ave. P.O. Box 629 Easton MD 21601
410-819-0300 FAX 410-819-8091
2
<PAGE> 4
BUSINESS OF THE COMPANY
Easton Bancorp, Inc. (the "Company") was incorporated as a Maryland
corporation on July 19, 1991, to become a one-bank holding company by acquiring
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 was organized as a nonmember state bank under the laws of the State of
Maryland. The Bank is engaged in a general commercial banking business,
emphasizing in its marketing the Bank's local management and ownership, from
its main office location in its primary service area, Talbot County, Maryland.
The Bank offers a full range of deposit services that are typically available
in most banks and savings and loan associations, including checking accounts,
NOW accounts, savings accounts and other time deposits of various types,
ranging from daily money market accounts to longer-term certificates of
deposit. In addition, the Bank offers certain retirement account services,
such as Individual Retirement Accounts. The Bank also offers a full range of
short- to medium-term commercial and personal loans. The Bank also originates
and holds or sells into the secondary market fixed and variable rate mortgage
loans and real estate construction and acquisition loans. Other bank services
include cash management services, safe deposit boxes, travelers checks, direct
deposit of payroll and social security checks, and automatic drafts for various
accounts.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Company's
financial statements and related notes and other statistical information
included elsewhere herein.
OVERVIEW
Easton Bancorp, Inc. is a one-bank holding company which was
incorporated on July 19, 1991. Its wholly-owned subsidiary, Easton Bank and
Trust Company, is a Maryland-chartered bank which began operations July 1,
1993.
Consolidated income of the Company is derived primarily from
operations of the Bank. Fiscal year 1996 represented the Bank's third full
year of operations. Losses were projected for the first three years of
operation for the Bank as it developed its deposit and loan base. The Bank has
shown net income since the fourth quarter of 1995. As a result, the Company is
reporting net income of $191,114 for 1996, compared to a net loss of $164,608
for 1995.
RESULTS OF OPERATIONS
The Company reported its first full year of profitability with net
income of $191,114, or $.32 per share, for the year ended December 31, 1996,
which was an increase of $355,722 over the net loss of $164,608, or ($.29) per
share, for the year ended December 31, 1995. The primary reason for the change
in profitability is the increase in net interest income while controlling
overhead so that operating expenses have remained relatively stable.
Net interest income increased $246,888, or 23.59%, to $1,293,645 in
1996 from $1,046,757 in 1995. This increase in net interest income was the
result of a $585,653 increase in interest income and a $338,765 increase in
interest expense associated with the Bank's continued development of its
deposit and loan base. Net interest spread decreased to 3.77% in 1996 from
3.92% in 1995, and the net interest margin decreased to 3.94% in 1996 from
4.12% in 1995.
The provision for loan losses was $18,699 in 1996, a decrease of
$105,601 from the $124,300 provision in 1995. The reduced provision is the
result of net recoveries for 1996 of $53,554, compared to net charge-offs for
1995 of $452,300.
3
<PAGE> 5
The Company had loans over ninety days delinquent on which the accrual
of interest had been discontinued totaling $13,058 and $184,704 as of December
31, 1996 and 1995, respectively. The Company's allowance for loan losses as a
percentage of its year-end loans was 1.09% at December 31, 1996, compared to
1.06% at December 31, 1995. During 1996, the Company had net recoveries of
$53,554 which was .21% of average loans. Net charge-offs of $452,300 during
1995 resulted in a ratio of net charge-offs to average loans of 2.04%. The
1995 net charge-offs as a percentage of loans were unusually high because of a
charge-off of approximately $400,000 made during the year for the loans of one
borrower which victimized the Bank in a fraudulent loan scheme. During 1996,
the banks which were victimized by this loan scheme recovered part of the loans
charged off. The share of these recoveries received by the Bank during 1996
was in excess of $60,000.
Noninterest income increased $28,258, or 33.31%, to $113,088 in 1996
from $84,830 in 1995. The increase was due primarily to an increase in credit
card merchant fees and a 29.46% growth in average deposits.
Noninterest expense increased $25,025, or 2.14%, to $1,196,920 in 1996
from $1,171,895 in 1995. The Company has closely monitored its overhead
expenses during 1996. The Company's efficiency ratio, which is noninterest
expense as a percentage of the sum of net interest income and noninterest
income, improved to 85.09% in 1996, compared to 103.56% in 1995. The Company's
improving ratio is the result of growth in loans and deposits without an
increase in corresponding overhead expenses. This is typical in the first
years of operation of a new bank.
The Company showed a profit for the first time during the final
quarter of 1995 when net income for the quarter was $12,992. In each
succeeding quarter, the net income of the Company has increased. For the
fourth quarter of 1996, net income was $75,586.
NET INTEREST INCOME
The primary source of income for the Company is net interest income,
which is the difference between revenue on interest-earning assets, such as
investment securities and loans, and interest incurred on interest-bearing
sources of funds, such as deposits and borrowings. The level of net interest
income is determined primarily by the average balances of interest-earning
assets and funding sources and the various rate spreads between the
interest-earning assets and the Company's funding sources. The table "Average
Balances, Income and Expenses, and Rates" which follows shows the Company's
average volume of interest-earning assets and interest-bearing liabilities for
1996 and 1995 and related income/expense and yields. Changes in net interest
income from period to period result from increases or decreases in the volume
of interest-earning assets and interest-bearing liabilities, and increases or
decreases in the average rates earned and paid on such assets and liabilities.
The volume of interest-earning assets and interest-bearing liabilities is
affected by the ability to manage the earning-asset portfolio (which includes
loans), and the availability of particular sources of funds, such as
noninterest bearing deposits. The table "Analysis of Changes in Net Interest
Income" shows the amount of net interest income change from rate changes and
from activity changes.
The key performance measure for net interest income is the "net margin
on interest-bearing assets," or net interest income divided by average
interest-earning assets. The Company's net interest margin for 1996 was 3.94%,
compared to 4.12% for 1995. The decrease is due to a larger investment in
federal funds sold during 1996 compared to 1995 which have lower interest rates
than other earning assets. The Bank has no old, higher yielding loans or
securities to increase the average yield, and a significant number of the
Bank's loans are fixed rate loans. As a result of the significant amount of
fixed rate loans, the Bank's income may increase in a falling interest rate
environment and decrease in a rising interest rate environment. Management of
the Company expects to maintain or increase the net margin on interest-earning
assets. The net margin may decline, however, if competition increases, loan
demand decreases, or the cost of funds rises faster than the return on loans.
Although such expectations are based on management's judgment, actual results
will depend on a number of factors that cannot be predicted with certainty, and
fulfillment of management's expectations cannot be assured.
4
<PAGE> 6
The following table depicts interest income on earning assets and
related average yields as well as interest expense on interest-bearing
liabilities and related average rates paid for 1996 and 1995.
AVERAGE BALANCES, INCOME AND EXPENSES, AND RATES
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1996 December 31, 1995
--------------------------------- -------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expenses Rate Balance Expenses Rate
----------- ---------- ------ ----------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 6,845,883 $ 364,327 5.32% $ 3,021,489 $ 177,606 5.88%
Interest-bearing deposits 10,360 530 5.12% - - 0.00%
Investment securities:
U.S. Government agency 717,213 38,863 5.42% 500,000 25,773 5.15%
Other 4,319 - 0.00% - - 0.00%
----------- ---------- ----- ----------- ---------- ----
Total investment securities 721,532 38,863 5.39% 500,000 25,773 5.15%
----------- ---------- ----- ----------- ---------- ----
Loans:
Demand and time 3,179,554 300,504 9.45% 2,700,786 253,131 9.37%
Mortgage 20,577,929 1,892,300 9.20% 17,796,041 1,589,671 8.93%
Installment 1,812,925 190,989 10.53% 1,637,469 155,679 9.51%
----------- ---------- ----- ----------- ---------- ----
Total loans 25,570,408 2,383,793 9.32% 22,134,296 1,998,481 9.03%
Allowance for loan losses 284,970 - - 250,380 - -
----------- ---------- ----- ----------- ---------- ----
Total loans, net of allowance 25,285,438 2,383,793 9.43% 21,883,916 1,998,481 9.13%
----------- ---------- ----- ----------- ---------- ----
Total interest-earning assets 32,863,213 2,787,513 8.48% 25,405,405 2,201,860 8.67%
---------- ----- ---------- ----
Cash and due from banks 711,474 690,638
Premises and equipment 1,576,200 1,645,044
Other assets 307,884 328,981
----------- -----------
Total assets $35,458,771 $28,070,068
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Deposits
Savings and NOW deposits $ 7,273,028 $ 236,164 3.25% $ 6,248,071 $ 213,330 3.41%
Money market and supernow 2,497,559 88,182 3.53% 1,909,174 69,530 3.64%
Other time deposits 20,122,148 1,157,291 5.75% 14,882,301 865,095 5.81%
----------- ---------- ----- ----------- ---------- ----
Total interest-bearing deposits 29,892,735 1,481,637 4.96% 23,039,546 1,147,955 4.98%
Noninterest-bearing deposits 1,429,358 - - 1,155,459 - -
----------- ---------- ----- ----------- ---------- ----
Total deposits 31,322,093 1,481,637 4.73% 24,195,005 1,147,955 4.74%
Borrowed funds 388,883 12,231 3.15% 128,356 7,148 5.57%
----------- ---------- ----- ----------- ---------- ----
31,710,976 1,493,868 4.71% 24,323,361 1,155,103 4.75%
---------- ----- ---------- ----
Other liabilities 135,260 89,736
Stockholders' equity 3,612,535 3,656,971
----------- -----------
Total liabilities and
stockholders equity $35,458,771 $28,070,068
=========== ===========
Net interest spread 3.77% 3.92%
===== ====
Net interest income $1,293,645 $1,046,757
========== ==========
Net interest income/margin 3.94% 4.12%
===== ====
</TABLE>
5
<PAGE> 7
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1996 Compared with 1995 1995 Compared with 1994
Variance Due To Variance Due To
------------------------------------ --------------------------------------
Total Rate Volume Total Rate Volume
-------- -------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Interest-bearing deposits $ 530 $ - $ 530 $ (9,268) $ - $ (9,268)
with banks
Federal funds sold 186,721 (38,153) 224,874 109,560 47,061 62,499
Investment Securities:
U.S. Treasury - - - (6,999) - (6,999)
U.S. Government Agency 13,090 1,904 11,186 (5,094) 5,688 (10,782)
Loans:
Demand and time 47,373 2,512 44,861 92,791 30,231 62,560
Mortgage 302,629 54,206 248,423 787,773 92,700 695,073
Installment 35,310 18,624 16,686 63,793 5,966 57,827
-------- ------- -------- ---------- -------- ---------
Total interest income 585,653 39,093 546,560 1,032,556 181,646 850,910
-------- ------- -------- ---------- -------- ---------
INTEREST-BEARING LIABILITIES
Savings and NOW deposits 22,834 (12,117) 34,951 60,441 10,850 49,591
Money market and
supernow deposits 18,652 (2,765) 21,417 12,006 7,254 4,752
Time deposits 292,196 (12,239) 304,435 566,184 147,755 418,429
Federal funds purchased and 5,083 (9,428) 14,511 7,148 - 7,148
short-term borrowings -------- --------- -------- ---------- -------- ---------
Total interest expense 338,765 (36,549) 375,314 645,779 165,859 479,920
-------- -------- -------- ---------- -------- ---------
Net interest income $246,888 $ 75,642 $171,246 $ 386,777 $ 15,787 $ 370,990
======== ======== ======== ========== ======== =========
</TABLE>
COMPOSITION OF LOAN PORTFOLIO
Because loans are expected to produce higher yields than investment
securities and other interest-earning assets (assuming that loan losses are not
excessive), the absolute volume of loans and the volume as a percentage of
total earning assets is an important determinant of net interest margin.
Average loans, net of the allowance for loan losses, were $25,285,438 and
$21,883,916 during 1996 and 1995, respectively, which constituted 76.94% and
86.14% of average interest-earning assets for the periods. At December 31,
1996, the Company's loan to deposit ratio was 91.77%, compared to 85.83% at
December 31, 1995. The Bank extends loans primarily to customers located in
and near Talbot County. There are no industry concentrations in the Bank's
loan portfolio. The Bank does, however, have a substantial portion of its
loans in real estate and its performance may be influenced by the real estate
market in the region.
6
<PAGE> 8
The following table sets forth the composition of the Company's loan
portfolio as of December 31, 1996 and 1995, respectively.
COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------------ ----------------------------
Percent Percent
Amount of Total Amount of Total
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Commercial $ 2,473,468 8.12% $ 1,949,673 7.94%
Real estate 21,371,852 70.19% 16,913,382 68.87%
Construction 2,624,709 8.62% 2,323,490 9.46%
Home equity 1,607,606 5.28% 1,268,170 5.16%
Consumer 2,372,719 7.79% 2,103,166 8.57%
----------- ------ ----------- ------
Total Loans 30,450,354 100.00% 24,557,881 100.00%
====== ======
Less deferred loan origination fees 55,670 60,106
Less allowance for credit losses 332,253 260,000
----------- -----------
Net Loans $30,062,431 $24,237,775
=========== ===========
</TABLE>
The following table sets forth the maturity distribution, classified
according to sensitivity to changes in interest rates, for selected components
of the Company's loan portfolio as of December 31, 1996.
LOAN MATURITY SCHEDULE AND SENSITIVITY TO CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------
Over one
One Year through Over five
or less five years years Total
----------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Commercial $ 1,347,194 $ 1,126,274 $ - $ 2,473,468
Real estate 6,898,079 13,879,820 593,953 21,371,852
Construction 2,624,709 - - 2,624,709
Home equity 1,607,606 - - 1,607,606
Consumer 654,418 1,708,942 9,359 2,372,719
----------- ----------- -------- -----------
Total $13,132,006 $16,715,036 $603,312 $30,450,354
=========== =========== ======== ===========
Fixed interest rate $ 7,936,324 $16,450,718 $253,312 $24,640,354
Variable interest rate 5,195,682 264,318 350,000 5,810,000
----------- ----------- -------- -----------
Total $13,132,006 $16,715,036 $603,312 $30,450,354
=========== =========== ======== ===========
</TABLE>
As of December 31, 1996, $24,640,354, or 80.92%, of the total loans were
fixed rate loans. The significant amount of fixed rate loans was the result of
the market demand during the first three years of operations of the Bank. With
such a significant amount of fixed rate loans, the Bank's income will decrease
in a rising interest rate environment, but will increase in a falling interest
rate environment.
7
<PAGE> 9
The Company has the following commitments, lines of credit, and letters
of credit outstanding as of December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Construction loans $1,650,040 $ 620,059
Lines of credit 1,257,319 1,140,976
Overdraft protection lines 93,997 88,454
Standby letters of credit 44,563 12,700
---------- ----------
Total $3,045,919 $1,862,189
========== ==========
</TABLE>
Loan commitments and lines of credit are agreements to lend to a
customer as long as there is no violation of any condition to the contract.
Loan commitments may have interest fixed at current rates, fixed expiration
dates, and may require the payment of a fee. Lines of credit generally have
variable interest rates. Such lines do not represent future cash requirements
because it is unlikely that all customers will draw upon their lines in full at
any time. Letters of credit are commitments issued to guarantee the
performance of a customer to a third party. Loan commitments and lines and
letters of credit are made on the same terms, including collateral, as
outstanding loans. The Company's exposure to credit loss in the event of
nonperformance by the borrower is represented by the contract amount of the
commitment. Management is not aware of any accounting loss the Company will
incur by the funding of these commitments.
LOAN QUALITY
The allowance for loan losses represents a reserve for potential losses
in the loan portfolio. The adequacy of the allowance for loan losses is
evaluated periodically based on a review of all significant loans, with a
particular emphasis on non-accruing, past due and other loans that management
believes require attention. The determination of the reserve level rests upon
management's judgment about factors affecting loan quality and assumptions
about the economy. Management considers the year-end allowance appropriate and
adequate to cover possible losses in the loan portfolio; however, management's
judgment is based upon a number of assumptions about future events, which are
believed to be reasonable, but which may or may not prove valid. Thus, there
can be no assurance that charge-offs in future periods will not exceed the
allowance for loan loss or that additional increases in the loan loss allowance
will not be required.
For significant problem loans, management's review consists of an
evaluation of the financial strengths of the borrowers and guarantors, the
related collateral, and the effects of economic conditions. The Bank uses a
loan grading system where all loans are graded based on management's evaluation
of the risk associated with each loan. Based on the loan grading, a factor is
applied to the loan balance to reserve for potential losses. The overall
evaluation of the adequacy of the total allowance for loan losses is based on
an analysis of historical loan loss ratios, loan charge-offs, delinquency
trends, and previous collection experience, along with an assessment of the
effects of external economic conditions. The Bank is a relatively new
institution without a long history. Its current policy is to maintain an
allowance equal to the greater of one percent of gross loans or the results of
management's evaluation of the risk associated with each loan. This allowance
is increased for reserves for specific loans identified as substandard during
management's loan review.
The table "Allocation of Allowance for Loan Losses" which follows shows
the specific reserves applied by loan type and also the general allowance
included in the December 31, 1996 and 1995 allowance for loan losses.
The provision for loan losses is a charge to earnings in the current
period to replenish the allowance and maintain it at a level management has
determined to be adequate. At year-end 1996, the allowance for loan losses was
1.09% of outstanding loans, compared to 1.06% at year-end 1995.
8
<PAGE> 10
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Commercial $ 32,537 9.79% $ 37,612 14.47%
Real estate 185,532 55.84% 133,377 51.29%
Construction 13,124 3.95% 11,618 4.47%
Home equity 11,034 3.32% 8,877 3.41%
Consumer 24,817 7.47% 18,759 7.22%
Commitments 24,706 7.44% 16,038 6.17%
General 40,503 12.19% 33,719 12.97%
-------- ------ -------- ------
Total $332,253 100.00% $260,000 100.00%
======== ====== ======== ======
</TABLE>
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Balance at beginning of year $ 260,000 $ 588,000
Loan losses:
Commercial 2,464 414,307
Consumer 25,592 47,454
----------- -----------
Total loan losses 28,056 461,761
----------- -----------
Recoveries on loans previously charged off
Commercial 73,469 2,555
Consumer 8,141 6,906
----------- -----------
Total loan recoveries 81,610 9,461
----------- -----------
Net loan losses (53,554) 452,300
Provision for loan losses charged to expense 18,699 124,300
----------- -----------
Balance at end of year $ 332,253 $ 260,000
=========== ===========
Total loans outstanding at end of year $30,450,354 $24,557,881
Allowance for loan losses to loans outstanding
at end of year 1.09% 1.06%
Net charge-offs to average loans (0.21%) 2.04%
</TABLE>
As a result of management's ongoing review of the loan portfolio, loans
are classified as nonaccrual when it is not reasonable to expect collection of
interest under the original terms. These loans are classified as nonaccrual
even though the presence of collateral or the borrower's financial strength may
be sufficient to provide for ultimate repayment. Interest on nonaccrual loans
is recognized only when received. A delinquent loan is generally placed in
nonaccrual status when it becomes 90 days or more past due. When a loan is
placed in nonaccrual status, all interest which has been accrued on the loan
but remains unpaid is reversed and deducted from earnings as a reduction of
reported interest income. No additional interest is accrued on the loan
balance until the collection of both principal and interest becomes reasonably
certain. When a problem loan is finally resolved, there may ultimately be an
actual writedown or charge-off of the principal balance of the loan which would
necessitate additional charges to earnings.
9
<PAGE> 11
The Company had nonperforming loans totaling $13,058 and $184,704 as of
December 31, 1996 and 1995, respectively. Where real estate acquired by
foreclosure and held for sale is included with nonperforming loans, the result
comprises nonperforming assets. Loans are classified as impaired when the
collection of contractual obligations, including principal and interest, is
doubtful. Management has identified no significant impaired loans as of
December 31, 1996.
A potential problem loan is one in which management has serious doubts
about the borrower's future performance under the terms of the loan contract.
These loans are current as to principal and interest and, accordingly, they are
not included in the nonperforming assets categories. Management monitors these
loans closely in order to ensure that the Company's interests are protected.
At December 31, 1996, the Company had twenty one borrowers with loans
considered by management to be potential problem loans totaling approximately
$412,502. The level of potential problem loans is factored into the
determination of the adequacy of the allowance for loan losses.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The primary objective of asset/liability management is to ensure the
steady growth of the Company's primary source of earnings, net interest income.
Net interest income can fluctuate with significant interest rate movements. To
lessen the impact of these margin swings, the balance sheet should be
structured so that repricing opportunities exist for both assets and
liabilities in roughly equivalent amounts at approximately the same time
intervals. Imbalances in these repricing opportunities at any point in time
constitute interest rate sensitivity.
Liquidity represents the ability to provide steady sources of funds for
loan commitments and investment activities, as well as to provide sufficient
funds to cover deposit withdrawals and payment of debt and operating
obligations. These funds can be obtained by converting assets to cash or by
attracting new deposits.
Average liquid assets (cash and amounts due from banks, interest bearing
deposits in other banks, federal funds sold and investment securities) were
26.46% of average deposits for 1996, compared to 17.41% for 1995. The Company
considers its loan portfolio as an alternate source of liquidity since it has
available third parties who will buy participations in loans.
Interest rate sensitivity may be controlled on either side of the
balance sheet. On the asset side, management can exercise some control on
maturities. Also, loans may be structured with rate floors and ceilings on
variable rate notes and by providing for repricing opportunities on fixed rate
notes. The Company's investment portfolio, including federal funds sold,
probably provides the most flexible and fastest control over rate sensitivity
since it can generally be restructured more quickly than the loan portfolio.
On the liability side, deposit products can be restructured so as to
offer incentives to attain the maturity distribution desired. Competitive
factors sometimes make control over deposits more difficult and less effective.
Interest rate sensitivity refers to the responsiveness of
interest-bearing assets and liabilities to changes in market interest rates.
The rate-sensitive position, or gap, is the difference in the volume of
rate-sensitive assets and liabilities at a given time interval. The general
objective of gap management is to actively manage rate-sensitive assets and
liabilities to reduce the impact of interest rate fluctuations on the net
interest margin. Management generally attempts to maintain a balance between
rate-sensitive assets and liabilities as the exposure period is lengthened to
minimize the overall interest rate risk to the Company.
The asset mix of the balance sheet is continually evaluated in terms of
several variables; yield, credit quality, appropriate funding sources, and
liquidity. Management of the liability mix of the balance sheet focuses on
expanding the various funding sources.
The interest rate sensitivity position at December 31, 1996, is
presented in the table "Interest Sensitivity Analysis." The difference between
rate-sensitive assets and rate-sensitive liabilities, or the interest rate
sensitivity gap, is shown at the bottom of the table. The Company was
liability-sensitive through the one-year period but asset-sensitive for longer
time horizons. For liability-sensitive institutions, if interest rates should
increase, the net
10
<PAGE> 12
interest margins should decline. Since all interest rates and yields do not
adjust at the same velocity, the gap is only a general indicator of rate
sensitivity.
INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------------------------------
After three
Within but within After one
three twelve but within After
months months five years five years Total
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Earning Assets:
Federal funds sold $ 2,824,727 $ - $ - $ - $ 2,824,727
Investment securities
available for sale 121,600 - - - 121,600
Investment securities
held to maturity 250,000 250,000 750,000 - 1,250,000
Loans 6,625,322 6,506,684 16,715,036 603,312 30,450,354
----------- ----------- ----------- ---------- -----------
Total earning assets $ 9,821,649 $ 6,756,684 $17,465,036 $ 603,312 $34,646,681
=========== =========== =========== ========== ===========
LIABILITIES
Interest-bearing liabilities:
Money market and NOW $ 7,660,738 $ - $ - $ - $ 7,660,738
Savings deposits 3,228,701 - - - 3,228,701
Club accounts - 26,084 - - 26,084
Certificates $100,000
and over 1,210,112 1,547,716 1,371,563 - 4,129,391
Certificates under $100,000 3,034,786 5,152,409 7,807,263 - 15,994,458
Securities sold under
agreements to repurchase 574,328 - - - 574,328
----------- ----------- ----------- ---------- -----------
Total interest-bearing liabilities $15,708,665 $ 6,726,209 $ 9,178,826 $ - $31,613,700
=========== =========== =========== ========== ===========
Period gap $(5,887,016) $ 30,475 $ 8,286,210 $ 603,312 $ 3,032,981
=========== =========== =========== ========== ===========
Cumulative gap $(5,887,016) $(5,856,541) $ 2,429,669 $3,032,981 $ 3,032,981
=========== =========== ========== ========== ===========
Ratio of cumulative gap to total
earning assets (16.99)% (16.90)% 7.01% 8.75% 8.75%
</TABLE>
As noted in the table "Loan Maturity Schedule and Sensitivity to Changes
in Interest Rates," approximately $5,098,177, or 16.74%, of the loan portfolio
consisted of commercial loans and real estate construction loans. Of this
amount, $3,971,903, or 77.91%, matures within one year.
The table "Investment Securities Maturity Distribution and Yields" shows
that as of December 31, 1996, $500,000 of the investment portfolio matures in
one year or less. The balance of the debt securities mature within five years.
All debt securities of the Company have been classified as "held-to-maturity."
The equity securities are comprised of Federal Home Loan Bank stock which are
classified as "available-for-sale" even though the Company has no immediate
plans to sell the securities. The funds invested in Federal funds sold provide
liquidity so that no debt securities have been classified as
"available-for-sale." Another source of liquidity is the $1,000,000 line of
credit the Company has available from a correspondent bank.
11
<PAGE> 13
INVESTMENT SECURITIES MATURITY DISTRIBUTION AND YIELDS
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------------- -----------------------
Year-end Year-end
Book Value Yields Book value Yields
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Government Agency securities
One year or less $ 500,000 5.2% $ - 0.0%
Over one through five years 750,000 6.0% 500,000 5.2%
---------- --- -------- ---
Total U.S. Government Agency securities $1,250,000 5.6% $500,000 5.2%
========== === ======== ===
</TABLE>
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Average interest-bearing liabilities increased $7,113,716, or 30.71%,
to $30,281,618 in 1996, from $23,167,902 in 1995. Average interest-bearing
deposits increased $6,853,189, or 29.75%, to $29,892,735 in 1996, from
$23,039,546 in 1995. These increases resulted from increases in all categories
of interest-bearing deposits resulting from the continued promotional efforts
of management to increase the deposits and loans of the Bank. At December 31,
1996, total deposits were $32,758,559, compared to $28,237,995 at December 31,
1995, an increase of 16.01%.
The following table sets forth the deposits of the Company by category
as of December 31, 1996 and 1995, respectively.
DEPOSITS
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1996 1995
-------------------------------- --------------------------------
Percent of Percent of
Amount Deposits Amount Deposits
----------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Demand deposit accounts $ 1,719,187 5.25% $ 1,493,690 5.29%
NOW accounts 4,457,641 13.61% 3,291,062 11.65%
Money market accounts 3,203,097 9.78% 1,965,025 6.96%
Savings accounts 3,254,785 9.94% 3,147,391 11.15%
Time deposits less than
$100,000 15,994,458 48.82% 13,555,818 48.00%
Time deposits of $100,000
or over 4,129,391 12.60% 4,785,009 16.95%
----------- ------ ----------- ------
Total deposits $32,758,559 100.00% $28,237,995 100.00%
=========== ====== =========== ======
</TABLE>
Core deposits, which exclude certificates of deposit of $100,000 or
more, provide a relatively stable funding source for the Company's loan
portfolio and other earning assets. The Company's core deposits increased
$5,176,182 during 1996. Deposits, and particularly core deposits, have been
the Company's primary source of funding and have enabled the Company to meet
both its short-term and long-term liquidity needs. Management anticipates that
such deposits will continue to be the Company's primary source of funding in
the future. The Company's loan-to-deposit ratio was 91.77% at December 31,
1996, and 85.83% at the end of 1995, with a 1996 ratio of average loans to
average deposits of 80.73%. The maturity distribution of the Company's time
deposits over $100,000 at December 31, 1996, is shown in the following table.
12
<PAGE> 14
MATURITIES OF CERTIFICATES OF DEPOSIT
AND OTHER TIME DEPOSITS OF $100,000 OF MORE
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------------
After
Three After Six
Within Through Through After
Three Six Twelve Twelve
Months Months Months Months Total
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Certificates of deposit
of $100,000 or more $1,210,112 $933,033 $614,683 $1,371,563 $4,129,391
Other time deposits of $100,000 or more - - - - -
---------- -------- -------- ---------- ----------
Total $1,210,112 $933,033 $614,683 $1,371,563 $4,129,391
========== ======== ======== ========== ==========
</TABLE>
Large certificate of deposit customers tend to be extremely sensitive
to interest rate levels, making these deposits less reliable sources of funding
for liquidity planning purposes than core deposits. Some financial
institutions partially fund their balance sheets using large certificates of
deposit obtained through brokers. These brokered deposits are generally
expensive and are unreliable as long-term funding sources. Accordingly, the
Company does not accept brokered deposits.
Borrowed funds consist primarily of short-term borrowings in the form
of securities sold under agreements to repurchase and federal funds purchased
from correspondent banks. Average short-term borrowings were $388,883 and
$128,356 during 1996 and 1995, respectively. As previously noted, the Company's
primary funding source is core deposits, and it does not depend heavily on
purchased funds to support its earning asset base.
NONINTEREST INCOME
Noninterest income for 1996 was $113,088, compared to noninterest
income in 1995 of $84,830, an increase of $28,258, or 33.31%. Of this
increase, $13,965 relates to revenues from credit card merchant fees. The Bank
offered its merchants, for a fee, the ability to deposit credit card receipts
beginning in 1993. However, the Bank did not receive the fees it was due from
the credit card clearing house until 1996, at which time the Bank received the
unpaid fees for 1993, 1994 and 1995 due from the credit card clearing house.
In addition, service charges on deposits have grown with the growth in
deposits. As the deposit base of the Bank grows, the Company expects the
noninterest income will continue to increase. This represents management's
best judgment but actual results depend on events that cannot be predicted with
certainty and these expectations cannot be assured.
The following table presents the principal components of noninterest
income for the years ended December 31, 1996 and 1995, respectively.
NONINTEREST INCOME
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Service charges on deposit accounts $ 68,660 $65,805
Other noninterest revenue 44,428 19,025
-------- -------
Total noninterest income $113,088 $84,830
======== =======
Noninterest income as a percentage of average total assets .32% .30%
=== ===
</TABLE>
13
<PAGE> 15
NONINTEREST EXPENSE
Noninterest expense increased by $25,025, or 2.14%, from $1,171,895 in
1995 to $1,196,920 in 1996. Increased personnel costs of $65,411 were offset
by controlling other operating expenses.
The Company has plans to finish the second floor of the Bank's main
office during 1997 and to begin renting part of it to third parties by the
second half of 1997. A portion of the second floor will be used as increased
space of the Bank. Although the floor space used by the Bank will increase,
management expects the rental income will offset the cost of this expansion.
The following table presents the principal components of noninterest
expense for the years ended December 31, 1996 and 1995, respectively.
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Compensation and related expenses $ 673,944 $ 608,533
Occupancy expense 75,310 64,108
Furniture and equipment expense 92,704 86,837
Advertising 35,332 39,544
Professional fees 44,890 59,976
Data processing 65,372 58,497
Deposit assessment 2,000 22,795
Insurance 21,435 34,147
Loan reports and collection costs 2,491 25,585
Organizational expense amortization 46,964 46,964
Stationery and supplies 35,119 30,112
Telephone and postage 34,115 30,769
Other 67,244 64,028
---------- ----------
Total noninterest expense $1,196,920 $1,171,895
========== ==========
Noninterest expense as a percentage of average total assets 3.38% 4.17%
===== =====
</TABLE>
CAPITAL
Under the capital guidelines of the Federal Reserve Board and the FDIC,
the Company and the Bank are currently required to maintain a minimum
risk-based total capital ratio of 8%, with at least 4% being Tier 1 capital.
Tier 1 capital consists of common stockholders' equity, qualifying perpetual
preferred stock, and minority interests in equity accounts of consolidated
subsidiaries, less certain intangibles. In addition, the Company and the Bank
must maintain a minimum Tier 1 leverage ratio (Tier 1 capital to total assets)
of at least 3%, but this minimum ratio is increased by 100 to 200 basis points
for other than the highest-rated institutions.
14
<PAGE> 16
At December 31, 1996, the Company and the Bank exceeded their regulatory
capital ratios, as set forth in the following table.
ANALYSIS OF CAPITAL
<TABLE>
<CAPTION>
Required
Company Bank Minimums
------- ---- --------
<S> <C> <C> <C>
Tier 1 risk-based capital ratio 13.1% 12.8% 4.0%
Total risk-based capital ratio 14.3% 13.9% 8.0%
Tier 1 leverage ratio 10.1% 9.8% 3.0%
</TABLE>
ACCOUNTING RULE CHANGES
Accounting for Stock-Based Compensation. The Financial Accounting
Standards Board (the "FASB") issued SFAS 123, "Accounting for Stock-Based
Compensation," which encouraged, but did not require, the use of fair value
based accounting for stock compensation awards. Under SFAS 123, compensation
cost is measured and shown as an expense on the income statement based on the
fair value of the awards at the grant dates. The Company adopted SFAS 123 as
of January 1, 1996, electing to report the fair values in disclosure
information only.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. During 1996 the FASB issued SFAS 125. Many of
its provisions become effective in 1997. SFAS 125 defines when assets are
transferred or debt is extinguished. Generally, transfers are recognized when
the transferee no longer has control over the assets. The Company adopted SFAS
125 as of January 1, 1997. Management does not expect the adoption of SFAS 125
to have a material adverse impact on the Company's financial position or
results of operations.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of
financial institutions, such as the Company and the Bank, are primarily
monetary in nature. Therefore, interest rates have a more significant effect
on the Company's performance than do the effects of changes in the general rate
of inflation and changes in prices. In addition, interest rates do not
necessarily move in the same direction or in the same magnitude as the prices
of goods and services. As discussed previously, management seeks to manage the
relationships between interest sensitive assets and liabilities in order to
protect against wide interest rate fluctuations, including those resulting from
inflation. See "-- Liquidity and Interest Rate Sensitivity" above.
INDUSTRY DEVELOPMENTS
Certain recently enacted and proposed legislation could have an effect
on both the costs of doing business and the competitive factors facing the
financial institutions industry. The Company is unable at this time to assess
the impact of this legislation on its financial condition or results of
operations.
MARKET FOR COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Articles of Incorporation authorize it to issue up to
5,000,000 shares of the Common Stock. The Company closed its initial public
offering (the "Initial Offering") of Common Stock on December 31, 1992, in
which the Company offered for sale a minimum of 535,000 shares and a maximum of
700,000 shares at a purchase price of $10.00 per share. As a result of the
Initial Offering, 559,328 shares of the Common Stock were issued.
As of March 20, 1997, there were approximately 589 holders of record
of the Common Stock and 559,328 shares of Common Stock issued and outstanding.
In addition, there were 207,800 shares of Common Stock issuable
15
<PAGE> 17
pursuant to warrants which may be issued in the next 60 days. There is no
established public trading market in the stock, and there is no likelihood that
a trading market will develop in the near future. The development of a trading
market may be inhibited because a large portion of the Company's shares is held
by insiders. Transactions in the Common Stock are infrequent and are
negotiated privately between the persons involved in those transactions.
All outstanding shares of Common Stock of the Company are entitled to
share equally in dividends from funds legally available, when, as, and if
declared by the Board of Directors. No dividends have been paid to date on the
Common Stock, and it is anticipated that earnings will be retained for the
foreseeable future in order to expand the Bank's capital base to support
deposit growth. The Company currently has no source of income other than
dividends and other payments received from the Bank. It is unlikely that any
cash dividends will be paid in the near future.
16
<PAGE> 18
[ROWLES & COMPANY LLP LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Easton Bancorp, Inc. and Subsidiary
Easton, Maryland
We have audited the consolidated balance sheets of Easton Bancorp, Inc. and
Subsidiary as of December 31, 1996, 1995, and 1994, and the related consolidated
statements of income (loss), changes in stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Easton
Bancorp, Inc. and Subsidiary as of December 31, 1996, 1995, and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Rowles & Company LLP
Salisbury, Maryland
January 22, 1997
17
<PAGE> 19
EASTON BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
----------- ----------- -----------
Assets
<S> <C> <C> <C>
Cash and due from banks $ 1,211,182 $ 991,301 $ 1,277,753
Federal funds sold 2,824,727 4,500,000 1,900,000
Investment in Federal Home Loan Bank stock 121,600 -- --
Investment securities held to maturity (market value of
$1,247,275, $496,113, and $482,500) 1,250,000 500,000 500,000
Loans, less allowance for credit losses of
$332,253, $260,000, and $588,000 30,062,431 24,237,775 17,779,187
Premises and equipment 1,515,354 1,597,478 1,691,067
Intangible assets 84,503 137,844 192,904
Accrued interest receivable 181,009 156,483 101,037
Other assets 44,134 37,270 32,703
----------- ----------- -----------
Total assets $37,294,940 $32,158,151 $23,474,651
=========== =========== ===========
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing $ 1,719,187 $ 1,493,690 $ 1,261,038
Interest-bearing 31,039,372 26,744,305 18,461,396
----------- ----------- -----------
Total deposits 32,758,559 28,237,995 19,722,434
Accrued interest payable 93,684 101,109 54,014
Securities sold under agreements to repurchase 574,328 277,363 --
Other liabilities 145,578 10,007 1,918
----------- ----------- -----------
Total liabilities 33,572,149 28,626,474 19,778,366
----------- ----------- -----------
Stockholders' equity
Common stock, par value $.10 per share; authorized 5,000,000
issued and outstanding 559,328 shares 55,933 55,933 55,933
Additional paid-in capital 5,217,686 5,217,686 5,217,686
Retained earnings (deficit) (1,550,828) (1,741,942) (1,577,334)
----------- ----------- -----------
Total stockholders' equity 3,722,791 3,531,677 3,696,285
----------- ----------- -----------
Total liabilities and stockholders' equity $37,294,940 $32,158,151 $23,474,651
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 20
EASTON BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income (Loss)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST REVENUE
Loans, including fees $ 2,383,793 $ 1,998,481 $ 1,054,124
Deposits in banks 530 -- 9,268
U.S. Treasury and Government agency securities 38,863 25,773 37,866
Federal funds sold 364,327 177,606 68,046
----------- ----------- -----------
Total interest revenue 2,787,513 2,201,860 1,169,304
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 1,481,637 1,147,955 509,127
Interest on borrowed funds 12,231 7,148 197
----------- ----------- -----------
Total interest expense 1,493,868 1,155,103 509,324
----------- ----------- -----------
Net interest income 1,293,645 1,046,757 659,980
PROVISION FOR CREDIT LOSSES 18,699 124,300 546,510
----------- ----------- -----------
Net interest income after provision for credit losses 1,274,946 922,457 113,470
----------- ----------- -----------
OTHER OPERATING REVENUE
Service charges on deposit accounts 68,660 65,805 46,506
Other noninterest revenue 44,428 19,025 11,171
----------- ----------- -----------
Total other operating revenue 113,088 84,830 57,677
----------- ----------- -----------
OTHER EXPENSES
Compensation and related expenses 673,944 608,533 564,152
Occupancy 75,310 64,108 61,397
Furniture and equipment 92,704 86,837 80,796
Other operating 354,962 412,417 348,806
----------- ----------- -----------
Total other expenses 1,196,920 1,171,895 1,055,151
----------- ----------- -----------
Income (loss) before income taxes 191,114 (164,608) (884,004)
Income taxes -- -- --
----------- ----------- -----------
NET INCOME (LOSS) $ 191,114 $ (164,608) $ (884,004)
=========== =========== ===========
Earnings (loss) per common share and common stock equivalents
Primary $ 0.32 $ (0.29) $ (1.58)
=========== =========== ===========
Fully diluted $ 0.32 $ (0.29) $ (1.58)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 21
EASTON BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common stock Retained
--------------------- earnings
Shares Par value Surplus (deficit)
------ --------- ------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 559,328 $ 55,933 $ 5,217,686 $ (693,330)
Net loss - - - (884,004)
----------- ----------- ----------- -----------
Balance, December 31, 1994 559,328 55,933 5,217,686 (1,577,334)
Net loss - - - (164,608)
----------- ----------- ----------- -----------
Balance, December 31, 1995 559,328 55,933 5,217,686 (1,741,942)
Net income - - - 191,114
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 559,328 $ 55,933 $ 5,217,686 $(1,550,828)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 22
EASTON BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 2,758,551 $ 2,179,706 $ 1,101,322
Fees, commissions, and rent received 112,868 84,830 57,677
Interest paid (1,501,293) (1,108,008) (464,894)
Payments to suppliers and employees (918,846) (1,016,472) (905,619)
------------ ------------ ------------
451,280 140,056 (211,514)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated, net of principal repayments (5,604,316) (6,737,602) (13,686,815)
Loan participations sold - 897,750 -
Loan participations purchased (344,346) (776,328) -
Purchase of investment securities (871,600) - (250,000)
Purchase of interest-bearing deposits,
net of redemptions - - 300,000
Proceeds from maturities of investment securities - - 1,000,000
Proceeds from sale of other real estate owned 113,804 - -
Purchase of premises and equipment, including
construction in progress (15,287) (2,817) (35,414)
Cash paid for organization costs and software (2,456) (435) (966)
------------ ------------ ------------
(6,724,201) (6,619,432) (12,673,195)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 4,520,564 8,515,561 11,549,583
Increase in securities sold under agreements to repurchase 296,965 277,363 -
Advances from organizers repaid - - (500)
Payments on notes payable - - (16,380)
------------ ------------ ------------
4,817,529 8,792,924 11,532,703
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,455,392) 2,313,548 (1,352,006)
Cash and cash equivalents at beginning of year 5,491,301 3,177,753 4,529,759
------------ ------------ ------------
Cash and cash equivalents at end of year $ 4,035,909 $ 5,491,301 $ 3,177,753
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 23
EASTON BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net income (loss) $ 191,114 $ (164,608) $ (884,004)
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Accretion on investments - - (10,610)
Provision for credit losses 18,699 124,300 546,510
Depreciation 97,411 96,406 95,099
Amortization of intangibles 55,797 55,495 55,548
Gain on sale of other real estate owned (4,061) - -
Decrease (increase) in
Accrued interest receivable (24,526) (55,446) (77,391)
Other assets (6,864) (4,567) (2,639)
Increase (decrease) in
Deferred loan origination fees (4,436) 33,292 20,019
Accrued interest payable (7,425) 47,095 44,430
Other liabilities 135,571 8,089 1,524
---------- ---------- ----------
$ 451,280 $ 140,056 $ (211,514)
========== ========== ==========
NONCASH ACTIVITY
Other real estate acquired in lieu of foreclosure $ 109,743 $ - $ -
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 24
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies in the financial statements
conform to generally accepted accounting principles and to general
practices within the banking industry. Management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements. These estimates and assumptions may affect the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Business
Easton Bancorp, Inc. is a one-bank holding company. Easton Bank &
Trust Company is a financial institution operating primarily in Talbot
County. The Bank offers deposit services and loans to individuals, small
businesses, associations, and government entities. Other services include
direct deposit of payroll and social security checks, automatic drafts from
accounts, automated teller machine services, cash management services, safe
deposit boxes, money orders, and travelers cheques. The Bank also offers
credit card services and discount brokerage services through a
correspondent.
Principles of consolidation
The consolidated financial statements of Easton Bancorp, Inc. include
the accounts of its wholly owned subsidiary, Easton Bank & Trust Company.
Intercompany accounts and transactions have been eliminated.
Cash equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, and federal funds sold.
Investment securities
As securities are purchased, management determines if the securities
should be classified as held to maturity or available for sale. Securities
which management has the intent and ability to hold to maturity are
recorded at amortized cost which is cost adjusted for amortization of
premiums and accretion of discounts to maturity.
Earnings (loss) per share
Earnings (loss) per common share and common stock equivalents is
determined by dividing net income (loss) by the weighted average number of
common stock and dilutive common stock equivalents outstanding during the
period.
Dilutive common equivalent shares consist of stock warrants,
calculated using the treasury stock method. In loss periods, dilutive
common equivalent shares are excluded since the effect would be
anti-dilutive.
23
<PAGE> 25
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans and allowance for credit losses
Loans are stated at face value less deferred origination fees and the
allowance for credit losses.
Interest on loans is credited to income based on the principal amounts
outstanding. Origination fees are recorded as income over the contractual
life of the related loans as an adjustment of yield.
Accrual of interest on a loan is discontinued when management
believes, after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that collection of
interest is doubtful.
The allowance for credit losses represents an amount which, in
management's judgment, will be adequate to absorb possible losses on
existing loans that may become uncollectible. If the current economy or
real estate market were to suffer a severe downturn, the estimate for
uncollectible accounts would need to be increased. Management's judgment in
determining the adequacy of the allowance is based on evaluations of the
collectibility of loans. These evaluations take into consideration such
factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrowers' ability to pay.
Management classifies loans as impaired when the collection of
contractual obligations, including principal and interest, is doubtful.
Premises and equipment
Premises and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed
over the estimated useful lives using the straight-line method. Leasehold
improvements are amortized over the terms of the lease or the estimated
useful lives of the improvements, whichever is shorter.
Stock options
The Company accounts for stock options under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No.
25").
2. CASH AND EQUIVALENTS
The Bank normally carries balances with other banks that exceed the
federally insured limit. The average balances carried in excess of the
limit, including unsecured federal funds sold to the same banks, were
approximately $6,865,970, $3,031,492 and $1,422,037 for 1996, 1995, and
1994, respectively.
Banks are required to carry noninterest-bearing cash reserves at
specified percentages of deposit balances. The Bank's normal amount of cash
on hand and on deposit with other banks is sufficient to satisfy the
reserve requirements.
24
<PAGE> 26
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
3. INVESTMENT SECURITIES
Investment securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
cost gains losses value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
U.S. Government agencies $1,250,000 $ - $ 2,725 $1,247,275
DECEMBER 31, 1995
U.S. Government agencies $ 500,000 $ - $ 3,887 $ 496,113
DECEMBER 31, 1994
U.S. Government agencies $ 500,000 $ - $ 17,500 $ 482,500
</TABLE>
There were no sales of investment securities during 1996, 1995, or
1994.
Pledged securities and the amortized cost and estimated market value
of investment securities, by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
------------------------ -------------------- --------------------
Amortized Market Amortized Market Amortized Market
cost value cost value cost value
---------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Due
One year or less $ 500,000 $ 499,453 $ - $ - $ - $ -
After one year
through five years 750,000 747,822 500,000 496,113 500,000 482,500
---------- ---------- -------- -------- -------- --------
$1,250,000 $1,247,275 $500,000 $496,113 $500,000 $482,500
========== ========== ======== ======== ======== ========
Pledged securities $ 650,000 $ 648,546 $250,000 $249,863 $250,000 $242,188
========== ========== ======== ======== ======== ========
</TABLE>
Securities were pledged as collateral for repurchase agreements.
25
<PAGE> 27
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Commercial $ 2,473,468 $ 1,949,673 $ 2,209,606
Real estate 21,371,852 16,913,382 11,914,573
Construction 2,624,709 2,323,490 1,629,267
Home equity 1,607,606 1,268,170 1,040,545
Consumer 2,372,719 2,103,166 1,600,010
----------- ----------- -----------
30,450,354 24,557,881 18,394,001
Less deferred loan origination fees 55,670 60,106 26,814
Less allowance for credit losses 332,253 260,000 588,000
----------- ----------- -----------
Loans, net $30,062,431 $24,237,775 $17,779,187
=========== =========== ===========
</TABLE>
The rate repricing distribution of the loan portfolio follows:
<TABLE>
<S> <C> <C> <C>
Immediately $ 3,267,806 $ 3,501,979 $ 2,812,446
Within one year 9,864,200 6,389,267 2,666,375
Over one to five years 16,715,036 14,662,115 12,826,499
Over five years 603,312 4,520 88,681
----------- ----------- -----------
$30,450,354 $24,557,881 $18,394,001
=========== =========== ===========
</TABLE>
Transactions in the allowance for credit losses are as follows:
<TABLE>
<S> <C> <C> <C>
Beginning balance $ 260,000 $ 588,000 $ 50,000
Provision charged to operation 18,699 124,300 546,510
Recoveries 81,610 9,461 -
----------- ----------- -----------
360,309 721,761 596,510
Charge-offs 28,056 461,761 8,510
----------- ----------- -----------
Ending balance $ 332,253 $ 260,000 $ 588,000
=========== =========== ===========
</TABLE>
Management has identified no significant impaired loans.
26
<PAGE> 28
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Nonaccrual loans and loans past due 90 days or more are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Nonaccrual
Commerical $ 7,333 $ - $ -
Mortgage - 180,079 -
Installment 5,725 4,625 -
----------- ----------- -----------
$ 13,058 $ 184,704 $ -
=========== =========== ===========
Interest not accrued $ 449 $ 13,526 $ -
=========== =========== ===========
Loans past due ninety days or more,
still accruing interest $ 261,664 $ - $ -
=========== =========== ===========
</TABLE>
The following commitments, lines of credit, and letters of credit are
outstanding as of December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Construction loans $1,650,040 $ 620,059 $1,347,733
Lines of credit, including home equities 1,257,319 1,140,976 990,247
Overdraft protection lines 93,997 88,454 72,066
Standby letters of credit 44,563 12,700 10,000
---------- ---------- ----------
$3,045,919 $1,862,189 $2,420,046
========== ========== ==========
</TABLE>
Loan commitments and lines of credit are agreements to lend to a
customer as long as there is no violation of any condition to the contract.
Loan commitments may have rates fixed at current market interest, fixed
expiration dates, and may require payment of a fee. Lines of credit
generally have variable interest rates. Such lines do not represent future
cash requirements because it is unlikely that all customers will draw upon
their lines in full at any time.
Letters of credit are commitments issued to guarantee the performance
of a customer to a third party.
Loan commitments, lines of credit and letters of credit are made on
the same terms, including collateral, as outstanding loans. The Bank's
exposure to credit loss in the event of nonperformance by the borrower is
represented by the contract amount of the commitment. Management is not
aware of any accounting loss the Bank will incur by the funding of these
commitments.
27
<PAGE> 29
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
5. PREMISES AND EQUIPMENT
A summary of premises and equipment and the related depreciation
expense is as follows:
<TABLE>
<CAPTION>
Estimated
useful lives 1996 1995 1994
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Land - $ 295,211 $ 295,211 $ 295,211
Land improvements 20 years 40,512 40,512 40,512
Building 10-40 years 1,050,407 1,050,407 1,049,519
Furniture, fixtures, and equipment 5-10 years 468,195 452,908 450,979
----------- ----------- -----------
1,854,325 1,839,038 1,836,221
Accumulated depreciation 338,971 241,560 145,154
----------- ----------- -----------
Net premises and equipment $ 1,515,354 $ 1,597,478 $ 1,691,067
=========== =========== ===========
Depreciation expense $ 97,411 $ 96,406 $ 95,099
=========== =========== ===========
</TABLE>
6. INTANGIBLE ASSETS
A summary of intangible assets and the related amortization follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Organization costs $ 234,820 $ 234,820 $ 234,820
Computer software 42,940 40,917 40,917
------------ ------------ ------------
277,760 275,737 275,737
Accumulated amortization 193,257 137,893 82,833
------------ ------------ ------------
Net intangible assets $ 84,503 $ 137,844 $ 192,904
============ ============ ============
Amortization expense $ 55,797 $ 55,495 $ 55,548
============ ============ ============
</TABLE>
7. LINES OF CREDIT
The Bank has available lines of credit of $1,000,000 in secured loans
from other banks.
28
<PAGE> 30
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
8. DEPOSITS
Major classifications of interest-bearing deposits are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Money market and NOW $ 7,660,738 $ 5,256,087 $ 5,228,180
Savings 3,254,785 3,147,391 2,691,079
Other time 20,123,849 18,340,827 10,542,137
------------ ------------ ------------
$ 31,039,372 $ 26,744,305 $ 18,461,396
============ ============ ============
</TABLE>
Included in other time deposits are certificates of deposit issued in
denominations of $100,000 or more. The maturities and related interest
expense of these deposits follow:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Three months or less $ 1,210,112 $ 1,473,198 $ 712,947
Three to twelve months 1,547,716 2,387,364 1,056,203
One to five years 1,371,563 924,447 1,012,357
------------ ------------ ------------
$ 4,129,391 $ 4,785,009 $ 2,781,507
============ ============ ============
Interest expense $ 296,856 $ 184,461 $ 77,833
============ ============ ============
</TABLE>
9. OTHER OPERATING EXPENSES
Other operating expenses are comprised as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Advertising $ 35,332 $ 39,544 $ 34,312
Professional fees 44,890 59,976 34,679
Data processing 65,372 58,497 44,447
Deposit assessment 2,000 22,795 22,667
Insurance 21,435 34,147 35,109
Loan reports and collection costs 2,491 25,585 8,855
Organizational expense amortization 46,964 46,964 46,964
Postage 21,128 17,871 10,672
Proxy and transfer agent costs 2,701 9,076 10,701
Software amortization 8,833 8,531 8,584
Stationery and supplies 35,119 30,112 36,084
Telephone 12,987 12,898 13,121
Other 55,710 46,421 42,611
------------ ------------ ------------
$ 354,962 $ 412,417 $ 348,806
============ ============ ============
</TABLE>
29
<PAGE> 31
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
10. INCOME TAXES
For income tax purposes at December 31, 1996, 1995, and 1994, the
Corporation had net operating loss carryforwards of $1,426,467, $1,598,364,
and $1,038,768 available to offset future taxable income.
The statutory federal income tax rate was 34% for 1996, 1995, and
1994. The Company's effective tax rate for 1996, 1995, and 1994 was zero
due to the net operating losses. The provision (benefit) for income taxes
is reconciled as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Income (loss) before income taxes $ 191,114 $ (164,608) $ (884,004)
========== ========== ==========
Tax provision at statutory rates $ 64,979 $ (55,967) $ (300,561)
Increase (decrease) resulting from
State income taxes, less federal benefit 8,822 (7,605) (40,841)
Nondeductible expenses 1,649 2,068 2,013
Net operating loss carryover (75,450) 61,504 339,389
---------- ---------- ----------
Provision (benefit) for income taxes $ - $ - $ -
========== ========== ==========
</TABLE>
The components of the deferred tax assets and liabilities as of
December 31, 1996, 1995, and 1994, are as follows:
<TABLE>
<S> <C> <C> <C>
Deferred tax assets
Allowance for credit losses $ 93,255 $ 86,034 $ 218,602
Deferred loan origination fees 1,033 1,668 -
Contributions carryforward 2,355 2,355 1,368
Net operating loss carryforward 550,902 617,288 401,172
Start-up costs 22,398 36,559 50,719
---------- ---------- ----------
669,943 743,904 671,861
---------- ---------- ----------
Deferred tax liabilities
Depreciation 46,980 47,803 38,671
Cash method accounting 34,741 32,198 30,790
---------- ---------- ----------
81,721 80,001 69,461
---------- ---------- ----------
Net deferred tax asset before
valuation allowance 588,222 663,903 602,400
Valuation allowance (588,222) (663,903) (602,400)
---------- ---------- ----------
Net deferred tax asset $ - $ - $ -
========== ========== ==========
</TABLE>
30
<PAGE> 32
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
11. LEASE COMMITMENTS
The Bank is currently leasing branch facilities from a related party.
The initial two year term of the lease began July 1, 1993. The second lease
term, for a period of five years, began July 1, 1995. Rent is fixed at $300
per month. There are options to extend beyond the initial lease terms with
rent increases that are contingent on the performance of the Bank and based
on the consumer price index of Easton.
<TABLE>
<CAPTION>
Minimum lease payments Amount
---------------------- ------
<S> <C>
1997 $ 3,600
1998 3,600
1999 3,600
2000 1,800
--------
$ 12,600
========
</TABLE>
Rent expense was $3,600 for each of the years ended December 31, 1996,
1995, and 1994.
12. STOCK WARRANTS
The organizers of the Corporation and certain partnerships controlled
by the organizers have purchased 272,574 shares of common stock sold in the
initial offering and hold warrants to purchase up to 207,800 additional
shares of common stock. The warrants are exercisable at a price of $10 per
share for a period of 10 years and expire June 30, 2003.
13. STOCK OPTION PLANS
The Corporation has entered into an employment agreement with an
executive officer that provides for options to purchase for $10 per share
2,797 shares each year for four years and, at the end of year five, to
receive an option for 5,593 shares. The officer must meet performance
criteria to be established by the Board of Directors. If issued, each such
option will be exercisable for a period of seven years following the date
of grant.
The Corporation has adopted a stock option plan, covering 35,000
shares of common stock, intended to qualify as incentive stock options
under Section 422 of the Internal Revenue Code. The plan will provide for
granting options to purchase shares of the common stock to the officers and
other key employees of the Corporation and the Bank.
31
<PAGE> 33
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
13. STOCK OPTION PLANS (Continued)
A summary of the status of the Company's performance-based stock
option plans follows:
<TABLE>
<CAPTION>
Shares 1996
- ----------------------------------- ---------
<S> <C>
Outstanding, beginning of year -
Granted 5,593
Exercised -
Forfeited -
---------
Outstanding, end of year 5,593
=========
</TABLE>
The Bank applies APB No. 25 in accounting for the stock option plan.
Accordingly, no compensation expense has been recognized for the stock
options granted. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123) was issued in
October, 1995 to establish accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 defines a fair value
based method of accounting for measuring compensation expense for
stock-based plans to be recognized in the statement of income or disclosed
in the notes to the financial statements. Based on estimated fair values of
the stock, no compensation expense has been recognized.
14. RELATED PARTY TRANSACTIONS
The executive officers and directors of the Corporation enter into
loan transactions with the Bank in the ordinary course of business. The
terms of these transactions are similar to the terms provided to other
borrowers entering into similar loan transactions. A summary of the
activity of loans of officers and directors follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Beginning balance $ 2,067,392 $ 2,025,790 $ 1,305,419
Advances 936,266 411,326 1,535,609
Repayments (561,815) (369,724) (815,238)
------------ ------------ ------------
Ending balance $ 2,441,843 $ 2,067,392 $ 2,025,790
============ ============ ============
</TABLE>
The Corporation engaged a firm owned by one of the organizers to
construct the Bank's main office. The general contractor was paid $7,578 in
1994.
The Bank paid rent to a company that is owned by a director. Annual
rental payments of $3,600 were paid for each of the three years ended
December 31, 1996.
During 1996, 1995, and 1994, the Bank leased office space to a
director for $7,938 yearly.
32
<PAGE> 34
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
15. CAPITAL STANDARDS
The Federal Reserve Board and the Federal Deposit Insurance
Corporation have adopted risk-based capital standards for banking
organizations. These standards require ratios of capital to assets for
minimum capital adequacy and to be classified as well capitalized under
prompt corrective action provisions. As of December 31, 1996, the capital
ratios and minimum capital requirements of the Bank are as follows:
<TABLE>
<CAPTION>
To be well
Actual Capital adequacy capitalized
----------------- ------------------ -------------------
(in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $ 3,893 13.9% > $2,234 > 8.0% > $ 2,792 > 10.0%
- - - -
Tier 1 capital
(to risk-weighted assets) $ 3,561 12.8% > $1,117 > 4.0% > $ 1,675 > 6.0%
- - - -
Tier 1 capital
(to average assets) $ 3,561 9.8% > $1,454 > 4.0% > $ 1,818 > 5.0%
- - - -
</TABLE>
Tier 1 capital consists of capital stock, surplus, and undivided
profits. Total capital includes a limited amount of the allowance for
credit losses. In calculating risk-weighted assets, specified risk
percentages are applied to each category of asset and off-balance sheet
items.
Failure to meet the capital requirements could affect the Bank's
ability to pay dividends and accept deposits and may significantly affect
the operations of the Bank.
16. PROFIT SHARING PLAN
In 1996, the Bank adopted a defined contribution profit sharing plan
under Section 401(k) of the Internal Revenue Code. The plan covers
substantially all of the employees and allows discretionary Bank
contributions. In 1996, the Board of Directors approved contributions
matching 10% of employee contributions which totaled $1,605.
33
<PAGE> 35
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments are
summarized below. The fair values of a significant portion of these
financial instruments are estimates derived using present value techniques
prescribed by the FASB and may not be indicative of the net realizable or
liquidation values. Also, the calculation of estimated fair values is based
on market conditions at a specific point in time and may not reflect
current or future fair values.
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------------- -------------------------
Carrying Fair Carrying Fair
amount value amount value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 1,211,182 $ 1,211,182 $ 991,301 $ 991,301
Federal funds sold 2,824,727 2,824,727 4,500,000 4,500,000
Investment securities 1,371,600 1,368,875 500,000 496,113
Loans, net 30,062,431 29,907,317 24,237,775 23,958,784
Accrued interest receivable 181,009 181,009 156,483 156,483
Financial liabilities
Noninterest-bearing deposits $ 1,719,187 $ 1,719,187 $ 1,493,690 $ 1,493,690
Interest-bearing deposits and securities
sold under agreements to repurchase 31,613,700 31,887,840 27,021,668 27,282,075
Accrued interest payable 93,684 93,684 101,109 101,109
</TABLE>
The fair values of U.S. Government agency securities are determined
using market quotations.
The fair value of fixed-rate loans is estimated to be the present
value of scheduled payments discounted using interest rates currently in
effect for loans of the same class and term. The fair value of
variable-rate loans, including loans with a demand feature, is estimated to
equal the carrying amount. The valuation of loans is adjusted for possible
loan losses.
The fair value of interest-bearing checking, savings, and money market
deposit accounts is equal to the carrying amount. The fair value of
fixed-maturity time deposits is estimated based on interest rates currently
offered for deposits of similar remaining maturities.
It is not practicable to estimate the fair value of outstanding loan
commitments, unused lines, and letters of credit.
34
<PAGE> 36
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
18. PARENT COMPANY FINANCIAL INFORMATION
The balance sheet and statements of income and cash flows for Easton
Bancorp, Inc. (Parent Only) follow:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
------------ ------------ ------------
BALANCE SHEETS
Assets
<S> <C> <C> <C>
Cash $ 91,153 $ 100,414 $ 117,356
Investment in Easton Bank & Trust Company 3,623,899 3,418,365 3,560,872
Organization costs 7,739 12,898 18,057
------------ ------------ ------------
Total assets $ 3,722,791 $ 3,531,677 $ 3,696,285
============ ============ ============
Liabilities and Stockholders' Equity
Stockholders' equity
Common stock, par value $.10 per share;
authorized 5,000,000 shares; issued and
outstanding 559,328 shares $ 55,933 $ 55,933 $ 55,933
Additional paid-in capital 5,217,686 5,217,686 5,217,686
Retained earnings (deficit) (1,550,828) (1,741,942) (1,577,334)
------------ ------------ ------------
Total stockholders' equity 3,722,791 3,531,677 3,696,285
------------ ------------ ------------
Total liabilities and stockholders' equity $ 3,722,791 $ 3,531,677 $ 3,696,285
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF (INCOME) LOSS Years Ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Interest revenue $ 3,327 $ 3,929 $ 4,236
Equity in undistributed income (loss) of subsidiary 205,534 (142,507) (854,310)
------------ ------------ ------------
208,861 (138,578) (850,074)
------------ ------------ ------------
Expenses
Furniture and equipment 49 49 49
Other 17,698 25,981 33,881
------------ ------------ ------------
17,747 26,030 33,930
------------ ------------ ------------
Net income (loss) $ 191,114 $ (164,608) $ (884,004)
============ ============ ============
</TABLE>
35
<PAGE> 37
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
18. PARENT COMPANY FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
---------- ---------- ----------
STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Interest received $ 3,327 $ 3,929 $ 4,236
Cash paid for operating expenses (12,588) (20,871) (28,772)
---------- ---------- ----------
(9,261) (16,942) (24,536)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from organizers repaid - - (500)
---------- ---------- ----------
NET (DECREASE) IN CASH (9,261) (16,942) (25,036)
Cash and equivalents at beginning of year 100,414 117,356 142,392
---------- ---------- ----------
Cash and equivalents at end of year $ 91,153 $ 100,414 $ 117,356
========== ========== ==========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income (loss) $ 191,114 $ (164,608) $ (884,004)
Adjustments to reconcile net income (loss) to net
cash used in operating activities
Undistributed net (income) loss of subsidiary (205,534) 142,507 854,310
Amortization 5,159 5,159 5,158
---------- ---------- ----------
$ (9,261) $ (16,942) $ (24,536)
========== ========== ==========
</TABLE>
36
<PAGE> 38
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
Three months ended
------------------------------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
1996
- ----
<S> <C> <C> <C> <C>
Interest revenue $ 741,826 $ 694,753 $ 699,932 $ 651,002
Interest expense 373,791 367,737 386,380 365,960
Net interest income 368,035 327,016 313,552 285,042
Provision for loan losses (15,463) 9,066 21,297 3,799
Net income 75,586 61,304 29,547 24,677
Earnings per share 0.13 0.10 0.05 0.04
1995
- ----
Interest revenue $ 632,399 $ 585,856 $ 527,976 $ 455,629
Interest expense 334,910 317,476 286,494 216,223
Net interest income 297,489 268,380 241,482 239,406
Provision for loan losses 21,164 27,539 47,943 27,654
Net income (loss) 12,992 (17,696) (80,747) (79,157)
Earnings (loss) per share 0.02 (0.03) (0.14) (0.14)
1994
- ----
Interest revenue $ 419,208 $ 347,051 $ 248,273 $ 154,772
Interest expense 187,539 149,194 107,760 64,831
Net interest income 231,669 197,857 140,513 89,941
Provision for loan losses 420,784 38,726 49,000 38,000
Net income (loss) (443,790) (93,701) (173,492) (173,021)
Earnings (loss) per share (0.79) (0.17) (0.31) (0.31)
</TABLE>
37
<PAGE> 39
THE FOLLOWING COMMENT IS REQUIRED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
"This statement has not been reviewed or confirmed for accuracy or relevance by
the Federal Deposit Insurance Corporation"
38
<PAGE> 40
DIRECTORS AND EXECUTIVE OFFICERS OF
EASTON BANCORP, INC.
W. DAVID HILL, DDS PRESIDENT, WILLIAM HILL MANOR, INC.
CHAIRMAN/CHIEF EXECUTIVE OFFICER
THOMAS P. MCDAVID PRESIDENT/CHIEF EXECUTIVE OFFICER
PRESIDENT EASTON BANK & TRUST COMPANY
SHEILA W. BATEMAN CHIEF ADMINISTRATIVE OFFICER
SECRETARY WILLIAM HILL MANOR, INC.
JERRY L. WILCOXON CHIEF FINANCIAL OFFICER
TREASURER CAULK MANAGEMENT COMPANY
JACK H. BISHOP, DDS DENTIST, JACK H. BISHOP, DDS
J. PARKER CALLAHAN, JR. FARMER
J. FREDRICK HEATON, DMD ENDODONTIST, J. FREDRICK HEATON,
DMDPA
WILLIAM C. HILL PRESIDENT, HILL'S DRUG STORE, INC.
DAVID F. LESPERANCE PRESIDENT, LESPERANCE CONSTRUCTION,
INC.
VINODRAI MEHTA, MD PHYSICIAN, VINODRAI MEHTA, MD
ROGER A. ORSINI, MD PLASTIC & RECONSTRUCTIVE SURGEON
PRESIDENT OF SHORE AESTHETIC
& RECONSTRUCTIVE ASSOCIATES
MAHMOOD S. SHARIFF, MD CARDIOLOGIST, MAHMOOD S. SHARIFF, MD
ALL OF THE PERSONS NOTED ABOVE ARE DIRECTORS OF EASTON BANCORP, INC.
39
<PAGE> 41
DIRECTORS, OFFICERS AND STAFF OF
EASTON BANK & TRUST COMPANY
DIRECTORS
<TABLE>
<S> <C>
W. DAVID HILL, DDS THOMAS P. MCDAVID
CHAIRMAN OF THE BOARD PRESIDENT
SHEILA W. BATEMAN JERRY L. WILCOXON
SECRETARY TREASURER
JACK H. BISHOP, DDS PAMELA H. LAPPEN
J. PARKER CALLAHAN, JR. DAVID F. LESPERANCE
CHARLES T. CAPUTE VINODRAI MEHTA, MD
WALTER E. CHASE, JR. ROGER A. ORSINI, MD
STEPHEN W. CHITTY MARIAN H. SHANNAHAN
J. FREDRICK HEATON, DMD MAHMOOD S. SHARIFF, MD
THOMAS E. HILL JAMES B. SPEAR, SR.
WILLIAM C. HILL MYRON SZCZUKOWSKI, JR. MD
WILLIAM R. HOUCK, DDS DONNA S. TAYLOR
M. LINDA KILDEA
OFFICERS
--------
THOMAS P. MCDAVID DELIA B. DENNY
PRESIDENT/CHIEF EXECUTIVE OFFICER SENIOR VICE PRESIDENT
PAMELA A. MUSSENDEN GENE FISCHGRUND
SENIOR VICE PRESIDENT/TREASURER VICE PRESIDENT
BARBARA M. OSTRANDER ROSE M. KLECKNER
ASSISTANT VICE PRESIDENT ASSISTANT TREASURER
STAFF
-----
TERRI L. BRANNOCK, CSR SUPERVISOR BRENDA L. FORBES, CSR
BETTY C. GOULD, ADMINISTRATIVE ASSISTANT TRACY L. LEDNUM, CSR
SUSAN D. HASCHEN, OPERATIONS ADMINISTRATOR KIMBERLY D. STARTT, CSR
JACQUELINE D. WILSON, CREDIT ADMINISTRATOR PHILLIP B. MOANEY, JR., CSR
LESTA R. GUNTHER, OPERATIONS/LOAN ASSISTANT ANNE H. HUGHES, RECEPTIONIST
</TABLE>
40
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Easton Bank & Trust Company, a state bank organized under the laws of the
State of Maryland.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INCLUDED AS PART OF EXHIBIT 13 TO THIS FORM 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,211,182
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,824,727
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 121,600
<INVESTMENTS-CARRYING> 1,250,000
<INVESTMENTS-MARKET> 1,247,275
<LOANS> 30,394,684
<ALLOWANCE> 332,253
<TOTAL-ASSETS> 37,294,940
<DEPOSITS> 32,758,559
<SHORT-TERM> 574,328
<LIABILITIES-OTHER> 239,262
<LONG-TERM> 0
0
0
<COMMON> 55,933
<OTHER-SE> 3,666,858
<TOTAL-LIABILITIES-AND-EQUITY> 37,294,940
<INTEREST-LOAN> 2,383,793
<INTEREST-INVEST> 38,863
<INTEREST-OTHER> 364,857
<INTEREST-TOTAL> 2,787,513
<INTEREST-DEPOSIT> 1,481,637
<INTEREST-EXPENSE> 1,493,868
<INTEREST-INCOME-NET> 1,293,645
<LOAN-LOSSES> 18,699
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,196,920
<INCOME-PRETAX> 191,114
<INCOME-PRE-EXTRAORDINARY> 191,114
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 191,114
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
<YIELD-ACTUAL> 3.94
<LOANS-NON> 13,058
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 412,502
<ALLOWANCE-OPEN> 260,000
<CHARGE-OFFS> 28,056
<RECOVERIES> 81,610
<ALLOWANCE-CLOSE> 332,253
<ALLOWANCE-DOMESTIC> 291,750
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 40,503
</TABLE>
