<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. ________________)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Easton Bancorp, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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<PAGE> 2
EASTON BANCORP, INC.
501 IDLEWILD AVENUE
EASTON, MARYLAND 21601
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 20, 1998
This Proxy Statement is furnished in connection with the solicitation
of proxies for use at the Annual Meeting of Stockholders (the "Meeting") of
Easton Bancorp, Inc. (the "Company") to be held on May 20, 1998, at 4:00 p.m.
and at any adjournment thereof, for the purposes set forth in this Proxy
Statement. THE ACCOMPANYING PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE
COMPANY. The principal executive offices of the Company are located at 501
Idlewild Avenue, Easton, Maryland 21601. This Proxy Statement and the
accompanying Form of Proxy were first mailed to the stockholders on or about
April 15, 1998.
VOTING AND REVOCABILITY OF PROXY APPOINTMENTS
The Company has fixed March 16, 1998, as the record date (the "Record
Date") for determining the stockholders entitled to notice of and to vote at the
Meeting. The Company's only class of stock is its Common Stock, par value $0.10
per share (the "Common Stock"). At the close of business on the Record Date,
there were outstanding and entitled to vote 559,478 shares of Common Stock of
the Company, with each share being entitled to one vote. There are no cumulative
voting rights. A majority of the outstanding shares of Common Stock represented
at the Meeting, in person or by proxy, will constitute a quorum.
All proxies will be voted in accordance with the instructions contained
in the proxies. If no choice is specified, proxies will be voted "FOR" the
election to the Board of Directors of all the nominees listed below under
"ELECTION OF DIRECTORS," "FOR" the ratification of the appointment of Rowles &
Company as independent auditors for the Company for the fiscal year ending
December 31, 1998, and, at the proxy holders' discretion, on any other matter
that may properly come before the Meeting. Any stockholder may revoke a proxy
given pursuant to this solicitation prior to the Meeting by delivering an
instrument revoking it or by delivering a duly executed proxy bearing a later
date to the Secretary of the Company. A stockholder may elect to attend the
Meeting and vote in person even if he or she has a proxy outstanding.
Management of the Company is not aware of any other matter to be
presented for action at the Meeting other than those mentioned in the Notice of
Annual Meeting of Stockholders and referred to in this Proxy Statement. If any
other matters come before the Meeting, it is the intention of the persons named
in the enclosed Proxy to vote on such matters in accordance with their judgment.
SOLICITATION
The costs of preparing, assembling and mailing the proxy materials and
of reimbursing brokers, nominees, and fiduciaries for the out-of-pocket and
clerical expenses of transmitting copies of the proxy materials to the
beneficial owners of shares held of record will be borne by the Company. Certain
officers and regular employees of the Company or its wholly-owned subsidiary,
without additional compensation, may use their personal efforts, by telephone or
otherwise, to obtain proxies in addition to this solicitation by mail. The
Company expects to reimburse brokers, banks, custodians and other nominees for
their reasonable out-of-pocket expenses in handling proxy materials for
beneficial owners of the Common Stock. The Company also has retained the
services of Corporate Investor Communication, Inc. to aid in the solicitation of
proxies, for which the Company will pay a fee not to exceed $1,000 plus
reimbursement of expenses.
<PAGE> 3
ELECTION OF DIRECTORS
Article Seven of the Company's Articles of Incorporation and Section
3.2 of the Company's Bylaws provide that the Board of Directors shall be divided
into three classes with each class to be as nearly equal in number as possible.
These provisions also provide that the three classes of directors are to have
staggered terms, so that the terms of only approximately one-third of the Board
members will expire at each annual meeting of stockholders. The Company
currently has eleven directors apportioned among Classes I, II and III as
follows: three in Class I, four in Class II, and four in Class III. In March
1998, the Board of Directors reduced the size of the Board to eleven members
from twelve members following the resignation of Thomas P. McDavid who was a
Class I director.
The current Class I directors are Sheila W. Bateman, W. David Hill,
D.D.S., and Mahmood S. Shariff, M.D. The terms of the Class I directors will
expire at the Meeting and each of these three current Class I directors has been
nominated for reelection and will stand for election at the Meeting for a
three-year term. The current Class II directors are J. Parker Callahan, Jr., J.
Fredrick Heaton, D.M.D., William C. Hill, and Roger A. Orsini, M.D. The terms of
the Class II directors will expire at the 1999 Annual Meeting of Stockholders.
The current Class III directors are Jack H. Bishop, D.D.S., David F. Lesperance,
Vinodrai Mehta, M.D., and Jerry L. Wilcoxon, C.P.A. The terms of the Class III
directors will expire at the 2000 Annual Meeting of Stockholders. The officers
of the Company are elected annually by the Board of Directors following the
annual meeting of stockholders and serve for terms of one year or until their
successors are duly elected and qualified.
It is the intention of the persons named as proxies in the accompanying
proxy to vote FOR the election of the nominees identified below to serve for a
three-year term, expiring at the 2001 Annual Meeting of Stockholders. If any
nominee is unable or fails to accept nomination or election (which is not
anticipated), the persons named in the proxy as proxies, unless specifically
instructed otherwise in the proxy, will vote for the election in his or her
stead of such other person as the Company's existing Board of Directors may
recommend.
The directors shall be elected by a plurality of the votes cast at the
Meeting. Abstentions and broker non-votes will not be considered to be either
affirmative or negative votes.
The table below sets forth certain information about the nominees,
including the nominee's age, position with the Company, and position with Easton
Bank & Trust Company (the "Bank"), the Company's wholly-owned banking
subsidiary. All of the nominees are currently serving as directors of the
Company and the Bank and are nominated as Class I directors of the Company. Each
of the nominees has been a director of the Company since its formation in 1991,
except for Mahmood S. Shariff, M.D. who was first elected as a director of the
Company in 1992.
<TABLE>
Name Age Position with the Company Position with the Bank
---- --- ------------------------- ----------------------
<S> <C> <C> <C>
Sheila W. Bateman 51 Director, Secretary Director, Secretary
W. David Hill 56 Chairman of the Board, Chairman of the Board
Chief Executive Officer
Mahmood S. Shariff 61 Director Director
</TABLE>
SHEILA W. BATEMAN, 51, serves as a Class I director and Secretary of
the Company and as a director and Secretary of the Bank. Mrs. Bateman is Chief
Administrative Officer of Caulk Management Company which manages various
companies. She was graduated from Goldey Beacom Junior College in 1967 with an
AA degree. She is a former owner of a word processing and document preparation
service. Mrs. Bateman is a partner in HTB Limited Partnership, a real estate
partnership, and is a director and officer of William Hill Manor, Inc. She is
also an officer in seven other private real estate-related businesses. Mrs.
Bateman is a member of Professional Secretaries International and Certified
Professional Secretary Associates. Her charitable activities include the
American Heart Association and serving on the Board of Talbot Philanthropies,
Inc. and Mid Atlantic Maritime Festival, Inc.
2
<PAGE> 4
W. DAVID HILL, D.D.S., 56, serves as a Class I director and Chief
Executive Officer of the Company and a director of the Bank. Dr. Hill has served
as Chairman of the Board of the Company and Chairman of the Board of the Bank
from the inception of the Company and the Bank, except for a brief period when
he took a temporary leave of absence from such positions. Dr. Hill is the
majority stockholder and president of William Hill Manor, Inc., a continuing
care retirement community in Easton, Maryland, which serves the needs of the
elderly population through the provision of skilled nursing, convalescent and
rehabilitative care. Dr. Hill is the owner and president of the Manor Discovery
Center, a day care center; and a general partner in Idlewild Associates Limited
Partnership, a limited partnership that owns land and income-producing
properties. He is the president of Caulk Management Company and a director of
Hill's Drug Store, Inc. Dr. Hill donated land to the local Red Cross unit,
provided accommodations for the Talbot County Paramedics, is a member of the
Board of Directors of the Talbot County Paramedic Foundation, Inc. and a member
of the Talbot County YMCA Advisory Board. He has served as a fund raiser for the
Talbot County Branch of the American Heart Association, Memorial Hospital at
Easton, Talbot County Historical Society, and was voted the Small Business
Person of the Year in 1989. He is a life-long resident of Talbot County.
MAHMOOD S. SHARIFF, M.D., 61, has served as a Class I director of the
Company and a director of the Bank since 1992. Dr. Shariff is an internist and a
cardiologist. He has been in solo practice in Cambridge, Maryland since 1973. He
received his training in New York City. He is Board Certified in Internal
Medicine and Cardiology. He served as Assistant Professor of Clinical Medicine
at the Mount Sinai School of Medicine in New York City. Dr. Shariff is a Fellow
of the American College of Physicians and the American College of Cardiology. He
is a member of the medical staff at Dorchester General Hospital where he has
been the Chief of Medicine for several years. He has also served in various
other capacities on the executive committee of the medical staff and is
presently serving as the Chief of Medicine. He was elected and served on the
board of directors of Dorchester General Hospital for a six-year period.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE
THREE NOMINEES NAMED ABOVE.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth the name of each director and executive
officer of the Company, in addition to the directors discussed above who are up
for reelection at the Meeting, his or her age, positions held, and a brief
description of his or her principal occupation and business experience for at
least the preceding five years. Except as otherwise indicated below, each of the
directors has been a director of the Company since its formation in 1991. None
of the directors are related, except that William C. Hill is the father of W.
David Hill.
JACK H. BISHOP, D.D.S., 53, serves as a Class III director of the
Company and a director of the Bank. Dr. Bishop has been practicing general
dentistry in Easton, Maryland, since 1972. He attended Albright College for his
dental prerequisites and was graduated from the University of Maryland Baltimore
College of Dental Surgery in 1969. He served as a Captain in the U.S. Army
Dental Corps before starting private practice. He is a member of the American
Dental Association, Maryland State Dental Association, and Eastern Shore Dental
Society. Dr. Bishop is an active participant in the Maryland Foundation of
Dentistry for the Handicapped, in which he donates his time and facilities to
elderly, poor or handicapped individuals for the betterment of their health. He
actively supports the American Heart Association and Talbot County YMCA. Dr.
Bishop is a member of the Oxford United Methodist Church where he is Chairman of
the Administrative Council. In the past, Dr. Bishop has been a partner in an
insurance and real estate company as well as a company selling building
supplies. He maintains several commercial and residential real estate holdings.
J. PARKER CALLAHAN, 65, has served as a Class II director of the
Company since June 1996, and a director of the Bank since its formation. Mr.
Callahan is a farmer and a life-long resident of Talbot County and Easton,
Maryland. Since completing high school in 1952, Mr. Callahan has operated a
diversified farming operation. In recent years he has expanded his operation and
now is an owner and trainer of race horses. Mr. Callahan also was recently
involved in the development of a residential community.
3
<PAGE> 5
J. FREDRICK HEATON, D.M.D., 50, serves as a Class II director of the
Company and a director of the Bank. Dr. Heaton is a dentist specializing in
endodontics practicing in Easton, Maryland. Dr. Heaton is a 1970 graduate of the
U.S. Naval Academy with a B.S. in Naval Science and a minor in Mechanical
Engineering. He served on active duty for five years in nuclear submarines. He
received his D.M.D. degree from the Medical University of South Carolina in
1979. In 1981 he completed advanced specialty training at the University of
Maryland Dental School in Baltimore and was awarded a Post-Graduate Certificate
in Endodontics. Dr. Heaton has practiced in Easton since 1981. He is active in
state and local dental societies and is past President of the Maryland State
Association of Endodontists and the Eastern Shore Dental Society. Dr. Heaton has
served on the Board of Trustees for the Maryland State Dental Association and is
past Chairman of the Maryland Dental Association's Council on Dental Education.
He is currently Chairman of the Maryland State Dental Association's Political
Action Committee. On a local level, Dr. Heaton is a member of the Easton
Business Management Authority, Elks Lodge 1622, Habitat for Humanity, Tred Avon
Yacht Club, Chesapeake Bay Yacht Club and Talbot Country Club.
WILLIAM C. HILL, 73, serves as a Class II director of the Company and a
director of the Bank. Since 1957, Mr. Hill has been President of Hill's Drug
Store, Inc., which owns and operates three drug stores in Easton, Maryland. He
is also vice president of William Hill Manor, Inc., a local retirement
community, along with being a partner in Idlewild Associates Limited Partnership
and Eastern Shore Retirement Associates. He served in the United States Marine
Corps and was graduated from the Philadelphia College of Pharmacy and Science.
Mr. Hill has served on the Advisory Board of Maryland National Bank and First
Annapolis Savings Bank. He has served as past president of the Eastern Shore
Pharmaceutical Association, the Maryland State Pharmaceutical Association, and
he received the 1992 Talbot County Businessman of the Year Award. He is an
active member of many other national and local organizations. Mr. Hill is a
native of Talbot County.
DAVID F. LESPERANCE, 44, serves as a Class III director of the Company
and a director of the Bank. Mr. Lesperance is the owner and president of David
Lesperance, Inc., doing business as Lesperance Construction Company. The company
builds residential and commercial projects in Talbot, Queen Anne and Dorchester
counties. Prior to starting his own construction business, Mr. Lesperance was
employed by Willow Construction and Charles E. Brohawn Construction Company. Mr.
Lesperance has been in the construction field for 26 years.
VINODRAI MEHTA, M.D., 56, has served as a Class III director of the
Company and a director of the Bank since 1992. Dr. Mehta has been practicing
internal medicine at Dorchester General Hospital in Cambridge, Maryland since
1975. He attended University Tutorial College, London, England, and later
attended Medical College of Rhinische-Friedrich-Wilhelm University in Bonn,
Germany. He received his M.D. in 1968. After working for a year at St. Paul
Hospital in Addis Ababa, Ethiopia, he came to the United States. He completed
his training program for internal medicine at Greater Baltimore Medical Center
and Union Memorial Hospital, both in Baltimore, Maryland. Since 1975, he has
been a member of the Medical and Surgical Society of Maryland.
ROGER A. ORSINI, M.D., 50, serves as a Class II director of the Company
and a director of the Bank. Dr. Orsini is a plastic and reconstructive surgeon
and has been in solo practice in Easton, Maryland, since 1985. He is the owner
of Shore Aesthetic and Reconstructive Associates, a general plastic surgical
practice which includes aesthetic surgery, hand, head and neck surgery,
maxillofacial, microvascular and pediatric surgery. He received his bachelor of
science degree from Georgetown University and pursued graduate studies in
physiology, including marine biology at the University of Connecticut. Dr.
Orsini received his medical degree from the Medical College of Pennsylvania,
then served his internship at Presbyterian-University of Pennsylvania and went
on to complete his surgical residency at Thomas Jefferson Hospital, both in
Philadelphia. He then completed a fellowship in plastic and reconstructive
surgery at the Hospital of the University of Pennsylvania. Dr. Orsini has been a
member of the medical staff at The Memorial Hospital at Easton since 1985, where
he has served as Chairman of the Tissue Review Committee and served on
Rehabilitation, Cancer and Utilization Committees. He also completed a year-long
physicians' management course sponsored by Memorial Hospital at Easton. Dr.
Orsini is a member of the American Society of Plastic and Reconstructive
Surgeons, Talbot County Medical Society, the American Medical Society and the
American Cleft Palate-Craniofacial Associations. He is licensed to practice
medicine in the state of Maryland. He is the chairman and coordinator of the
Eastern Shore Cleft Lip and Palate Team dedicated to provide care for children
with cleft and craniofacial deformities no matter what their financial status.
He is a Board Certified member of the American Society of Plastic and
Reconstructive Surgeons,
4
<PAGE> 6
a fellow of the American College of Surgeons and a member of the American
Society of Laser Medicine. He was a member of the Coalition of Ambulatory Care
for the State of Maryland and was the former head of the Governor's Task Force
to Care for Eastern European Refugees. He is also a member of the Talbot Country
Club.
JERRY L. WILCOXON, C.P.A., 37, serves as a Class III director and
Treasurer of the Company and as a director of the Bank. Mr. Wilcoxon is a
certified public accountant and is currently a principal of Caulk Management
Company, Inc., where he has served as Chief Financial Officer since August 1989.
Prior to that time, he spent five years as controller for Pioneer Transportation
Systems in Hurlock, Maryland, after a two-year career in public accounting. Mr.
Wilcoxon was born in Baltimore, Maryland, and is a graduate of Shepherd College
with a degree in Accounting. He is a current member of the Maryland Association
of CPA's and a former member and officer of the Delmarva Chapter of the National
Association of Accountants. Locally he has served on the Board of the Talbot
County YMCA, is currently the Treasurer of the Board of Governors of the Talbot
Country Club and actively participates in the Easton Little League. Residing in
Easton since 1983, he is a member of the St. Peter and Paul Roman Catholic
Church and is a member of the Talbot Country Club.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth for the fiscal years ended December 31,
1995, 1996 and 1997, the cash compensation paid or accrued by the Company and
the Bank, as well as certain other compensation paid or accrued for those years,
for services in all capacities to the chief executive officers of the Company
and the Bank. No executive officer of the Company or the Bank other than Thomas
P. McDavid earned total annual compensation, including salary and bonus, for the
fiscal year ended December 31, 1997, in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
---------------------------------------------------
Name and Securities
Principal Underlying
Position Year Salary ($)(1) Bonus ($) Options (#)
-------------------------- ---- ------------- --------- -----------
<S> <C> <C> <C> <C>
W. David Hill - 1997 $ 1,025 $ -- 0
Chief Executive Officer
of the Company; 1996 $ -- $ -- 0
Chairman of the Board
of the Company and the 1995 $ -- $ -- 0
Bank
Thomas P. McDavid - 1997 $90,073 $15,370 2,797
President of the
Company; President 1996 $88,046 $10,720 5,593
and Chief Executive
Officer of the Bank 1995 $87,000 $10,500 0
</TABLE>
- --------------------
(1) No directors' fees were paid to Dr. Hill or Mr. McDavid during
the fiscal years ended December 31, 1995, 1996 or 1997, except for $1,025 paid
to Dr. Hill during 1997 for his attendance at meetings of committees of the
Board of Directors of the Bank.
5
<PAGE> 7
STOCK OPTIONS
The following table sets forth the options granted during the fiscal
year ended December 31, 1997, to Mr. McDavid. There were no other option grants
by the Company during the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
- ----------------------------------------------------------------------------------------------------------------------
Number of % of Total Market
Securities Options Price at
Underlying Granted to Exercise or Date of
Options Employees in Base Price Grant Expiration
Name Granted(#)(1) Fiscal Year ($/share) ($)(2) Date
---------------------- ------------- ------------ ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
Thomas P. McDavid 2,797 100% $10.00 $11.75 4/9/04
</TABLE>
- --------------------
(1) These options were exercisable as of the grant date.
(2) There is no active trading market for the Company's Common
Stock; therefore, the market price of the Common Stock as of April 9, 1997, the
date of grant of the options, is not readily discernible. Based on the sale of
the Common Stock nearest April 9, 1997, of which the Company is aware, which
sale was at $11.75 per share on April 22, 1997, the Company believes that the
market price of the Common Stock was approximately $11.75 per share on April 9,
1997.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to Mr. McDavid
concerning the exercise of options during the last fiscal year and unexercised
options held as of the end of the fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year End Fiscal Year End(1)
(#) ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
- ------------------------- --------------- ------------------ --------------- --------------------
<S> <C> <C> <C> <C>
Thomas P. McDavid -- -- 8,390 / -0- $20,975 / -0-
</TABLE>
- --------------------
(1) There is no active trading market for the Company's Common
Stock; therefore, the fair market value of the Common Stock as of December 31,
1997, is not readily discernible. Based on the sale of the Common Stock nearest
December 31, 1997, of which the Company is aware, which sale was at $12.50 per
share on December 19, 1997, the Company believes that the fair market value of
the Common Stock was approximately $12.50 per share on December 31, 1997. The
exercise price for the options is $10.00 per share and thus based on a fair
market value of $12.50 per share, all of the options are in-the-money as of
December 31, 1997.
6
<PAGE> 8
COMPENSATION OF DIRECTORS
Directors of the Company received no compensation for their services as
directors during 1997. Directors of the Bank received no compensation for their
services as directors during 1997 except that the outside directors of the Bank
who were not organizers of the Company (Charles T. Capute, Walter E. Chase, Sr.,
and Thomas E. Hill) received a fee of $100 per meeting for each meeting of the
Board of Directors of the Bank they attended during 1997, and each director of
the Bank who was a member of a committee of the Board of Directors of the Bank
received $25 for each committee meeting attended during 1997.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Mr. Thomas P. McDavid, who served as a Class I director and President
of the Company and as a director, President and Chief Executive Officer of the
Bank, resigned from his positions with the Company and the Bank on March 6,
1998. Prior to his employment with the Bank, Mr. McDavid entered into an
Employment Agreement (the "Agreement") with the Company. The Agreement provided
for a base salary as well as bonuses and stock options to be paid to Mr. McDavid
based upon the achievement of certain goals by the Bank. In this regard, in 1997
Mr. McDavid was granted stock options to acquire 2,797 shares of the Company's
Common Stock at $10.00 per share related to the Bank's achievement of certain
goals for the fiscal year ended December 31, 1996.
In connection with Mr. McDavid's resignation, Mr. McDavid will receive
his base salary as well as health and disability insurance from the Bank for a
period of up to twelve months from the date of his resignation. In addition, in
accordance with the terms of the Agreement and the terms of his resignation, Mr.
McDavid is restricted from engaging in certain banking activities within Talbot
County for a period of two years from the date of his resignation.
STOCK OPTION PLAN
The Company has adopted a Stock Option Plan, covering 35,000 shares of
the Common Stock, which is intended to qualify for favorable tax treatment under
Section 422 of the Internal Revenue Code. The Stock Option Plan will be
administered by the Board of Directors of the Company and will provide for the
granting of options to purchase shares of the Common Stock to officers and other
key employees of the Company and the Bank. The purchase price under all such
options intended to qualify as incentive options will not be less than the fair
market value of the shares of Common Stock on the date of grant. Options will be
exercisable upon such terms as may be determined by the body administering the
Stock Option Plan, but in any event, options intended to qualify as incentive
options will be exercisable no later than ten years after the date of grant. As
of the Record Date, no options have been granted under this Stock Option Plan.
COMPLIANCE WITH BENEFICIAL OWNERSHIP REPORTING RULES
Section 16(a) of the Securities Exchange Act of 1934 requires (i) the
Company's directors and executive officers and (ii) persons who own more than
10% of a registered class of the Company's equity securities to file with the
Securities and Exchange Commission (the "SEC"), within certain specified time
periods, reports of ownership and changes in ownership. Such officers, directors
and stockholders are required by SEC regulations to furnish the Company with
copies of all such reports that they file.
To the Company's knowledge, based solely upon a review of copies of
such reports furnished to the Company and representations that no other reports
were required with respect to the year ended December 31, 1997, all persons
subject to the reporting requirements of Section 16(a) filed the required
reports on a timely basis with respect to 1997.
7
<PAGE> 9
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of outstanding
shares of the Company's Common Stock beneficially owned at the Record Date by
(a) each executive officer of the Company, (b) each director of the Company, (c)
all executive officers and directors of the Company as a group, and (d) each
person or entity known to the Company to own more than five percent of the
outstanding Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) CLASS(2)
------------------------ --------------------- ----------
<S> <C> <C>
Sheila W. Bateman(3) 5,469(5) *
Jack H. Bishop, D.D.S.(3) 39,586(6) 6.87%
J. Parker Callahan, Jr.(3) 19,189(7) 3.39%
J. Fredrick Heaton, D.M.D.(3) 13,186(8) 2.33%
William C. Hill(3) 35,254(9) 6.11%
W. David Hill, D.D.S.(3) 60,463(10) 10.34%
David F. Lesperance(3) 25,784(11) 4.52%
Vinodrai Mehta, M.D.(3) 42,973(12) 7.44%
Roger A. Orsini, M.D.(3) 25,882(13) 4.54%
Mahmood S. Shariff, M.D.(3) 58,973(14) 10.12%
Jerry L. Wilcoxon, C.P.A.(3) 1,969(15) *
Idlewild Associates(4) 68,758(16) 11.69%
Executive officers and directors
of the Company as a group (11 persons) 328,728(17) 47.10%
</TABLE>
- --------------------
(1) Information relating to beneficial ownership of the Common Stock is
based upon "beneficial ownership" concepts set forth in rules of the
SEC under Section 13(d) of the Securities Exchange Act of 1934. Under
these rules a person is deemed to be a "beneficial owner" of a security
if that person has or shares "voting power," which includes the power
to vote or direct the voting of such security, or "investment power,"
which includes the power to dispose or to direct the disposition of
such security. A person is also deemed to be a beneficial owner of any
security of which that person has the right to acquire beneficial
ownership within 60 days. Under the rules, more than one person may be
deemed to be a beneficial owner of the same securities, and a person
may be deemed to be a beneficial owner of securities as to which he has
no beneficial interest. For instance, beneficial ownership includes
spouses, minor children and other relatives residing in the same
household, and trusts, partnerships, corporations or deferred
compensation plans which are affiliated with the principal.
(2) Percentage is determined on the basis of 559,478 shares of Common Stock
issued and outstanding plus shares subject to options or warrants held
by the named individual for whom the percentage is calculated which are
exercisable within the next 60 days as if outstanding, but treating
shares subject to warrants or options held by others as not
outstanding. An asterisk (*) indicates less than 1% ownership.
(3) Address is 501 Idlewild Avenue, P. O. Box 629, Easton, Maryland 21601.
(4) Address is 501 Dutchman's Lane, Easton, Maryland 21601.
(5) Includes 1,869 shares Mrs. Bateman has the right to acquire within 60
days pursuant to the exercise of warrants. Also includes 1,000 shares
owned by Mrs. Bateman's husband in which she shares voting and
investing power.
(6) Includes 16,557 shares Dr. Bishop has the right to acquire directly or
indirectly within 60 days pursuant to the exercise of warrants. Also
includes 8,000 shares for which the beneficial ownership is
attributable to him as a result of his 20% interest in Idlewild
Associates Limited Partnership.
8
<PAGE> 10
(7) Includes 7,189 shares Mr. Callahan has the right to acquire within 60
days pursuant to the exercise of warrants.
(8) Includes 5,515 shares Dr. Heaton has the right to acquire within 60
days pursuant to the exercise of warrants. Also includes 230 shares
owned by Dr. Heaton's wife in which he shares voting and investing
power.
(9) Includes 17,254 shares Mr. Hill has the right to acquire directly or
indirectly within 60 days pursuant to the exercise of warrants. Also
includes 8,000 shares for which the beneficial ownership is
attributable to him as a result of his 20% interest in Idlewild
Associates Limited Partnership.
(10) Includes 25,163 shares Dr. Hill has the right to acquire directly or
indirectly within 60 days pursuant to the exercise of warrants. Also
includes 10,000 shares for which the beneficial ownership is
attributable to him as a result of his 25% interest in Idlewild
Associates Limited Partnership and 100 shares owned by Dr. Hill's wife
in which he shares voting and investing power.
(11) Includes 10,784 shares Mr. Lesperance has the right to acquire within
60 days pursuant to the exercise of warrants. Also includes 1,449
shares owned by Mr. Lesperance's wife in which he shares voting and
investing power.
(12) Includes 17,973 shares Dr. Mehta has the right to acquire within 60
days pursuant to the exercise of warrants.
(13) Includes 10,825 shares Dr. Orsini has the right to acquire within 60
days pursuant to the exercise of warrants.
(14) Includes 23,413 shares Dr. Shariff has the right to acquire within 60
days pursuant to the exercise of warrants. Also includes 3,283 shares
owned by Dr. Shariff's wife in which he shares voting and investing
power and 10,000 shares held for the benefit of their children in which
he shares voting and investing power with his wife.
(15) Includes 1,869 shares Mr. Wilcoxon has the right to acquire within 60
days pursuant to the exercise of warrants.
(16) Includes 28,758 shares Idlewild Associates Limited Partnership has the
right to acquire within 60 days pursuant to the exercise of warrants.
Partners in Idlewild Associates Limited Partnership include Dr. Bishop,
Mr. Hill, and Dr. Hill, and a proportionate interest of these 28,758
shares are also included as beneficially owned by such persons.
(17) Includes 138,411 total shares the officers and directors have the right
to acquire directly or indirectly within 60 days pursuant to the
exercise of warrants.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank leases approximately 600 square feet of office space in the
main office to William Hill Manor, Inc. ("WHM") at a rate of $14.00 per square
foot for five years. Rent received totalled $7,938 for each of the years ended
December 31, 1995, 1996 and 1997. Dr. W. David Hill, a director of the Bank and
the Company, is the Chief Executive Officer, founder, and principal stockholder
of WHM. Three other directors of the Company and/or the Bank, Sheila W. Bateman,
William C. Hill and Donna S. Taylor, are officers and directors of WHM. Sheila
W. Bateman is a director and the Secretary of the Company and the Bank. William
C. Hill is a director of the Company and the Bank and Donna S. Taylor is a
director of the Bank. The Bank currently leases approximately 72 square feet of
space from WHM in which it operates a branch office at WHM's retirement
facility. Activities at this branch are limited to receiving checks and
accepting deposits. The lease has a term of two years with rent of $3,600 per
year. The terms of the lease were based upon terms upon which this space was
previously leased to another bank. Management believes that the terms of the
above-described transactions are at least as favorable to the Company and the
Bank as could have been obtained in negotiated transactions with independent
third parties.
The Company and the Bank have banking and other transactions in the
ordinary course of business with the directors and officers of the Company and
the Bank and their affiliates, including members of their families or
corporations, partnerships or other organizations in which such officers or
directors have a controlling interest, on substantially the same terms
(including price or interest rates, and collateral) as those prevailing at the
time for comparable transactions with unrelated parties. Such transactions do
not involve more than the normal risk of collectibility or present other
unfavorable features to the Company and the Bank. Loans to individual directors
9
<PAGE> 11
and officers must comply with the Bank's lending policies and statutory lending
limits, and directors with a personal interest in any loan application are
excluded from the consideration of such loan application.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Because all of the Company's operations are conducted through the Bank,
the Bank, but not the Company, has an Audit and Compliance Committee and a
Compensation Committee. In 1997, the Audit and Compliance Committee was composed
of Charles T. Capute, Stephen W. Chitty, Pamela H. Lappen (Chairman), Vinodrai
Mehta, M.D., and Jerry L. Wilcoxon, C.P.A. The Audit and Compliance Committee
met three times in 1997. This committee has the responsibility for reviewing the
financial statements, evaluating internal accounting controls, reviewing reports
of regulatory authorities, and determining that all audits and examinations
required by law are performed. The committee recommends to the Board the
appointment of the independent auditors for the next fiscal year, reviews and
approves the auditors' audit plans, and reviews with the independent auditors
the results of the audit and management's response thereto. The committee is
responsible for overseeing the entire audit function and appraising the
effectiveness of internal and external audit efforts. The committee reports its
findings to the Board of Directors.
The Compensation Committee is responsible for establishing the
compensation plans for the Bank. Its duties include the development with
management of all benefit plans for employees of the Bank, the formulation of
bonus plans, incentive compensation packages, and medical and other benefit
plans. This committee met five times in 1997. In 1997 the Compensation Committee
was composed of Jack H. Bishop, D.D.S., J. Parker Callahan, Jr., Walter E.
Chase, Sr., J. Fredrick Heaton, D.M.D. (Chairman), W. David Hill, D.D.S., Thomas
E. Hill, William R. Houck, L. Linda Kildea, Marian H. Shannahan, Donna S.
Taylor, and Jerry L. Wilcoxon, C.P.A.
The Company does not have a nominating committee. The entire Board of
Directors is responsible for nominating individuals for election to the
Company's Board of Directors and welcomes recommendations made by stockholders
of the Company. Any recommendations for the 1999 Annual Meeting of Stockholders
should be made in writing addressed to the Company's Board of Directors, P. O.
Box 629, Easton, Maryland 21601, and should be made prior to December 15, 1998.
The Board of Directors of the Company held twelve meetings, and the
Board of Directors of the Bank held twelve meetings, during the year ended
December 31, 1997. All of the directors of the Company attended at least 75% of
the aggregate of such board meetings and the meetings of each committee on which
they served, except for Jack H. Bishop, D.D.S., William C. Hill, W. David Hill,
D.D.S., Vinodrai Mehta, M.D., and Mahmood S. Shariff, M.D.
RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS
Subject to ratification by the stockholders, the Board of Directors has
reappointed Rowles & Company as independent auditors to audit the financial
statements of the Company for the 1998 fiscal year. Rowles & Company served as
the independent auditors for the Company for the fiscal years ended December 31,
1992, 1993, 1994, 1995, 1996 and 1997.
A representative of Rowles & Company is expected to be present at the
Meeting and will have an opportunity to make a statement, if the representative
so desires, and will be available to respond to any appropriate questions
stockholders may have.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF
ROWLES & COMPANY AS INDEPENDENT AUDITORS.
10
<PAGE> 12
STOCKHOLDER PROPOSALS FOR NEXT ANNUAL MEETING OF STOCKHOLDERS
Stockholders' proposals intended to be presented at the 1999 Annual
Meeting of Stockholders must be received by the Company no later than December
15, 1998, to be presented at the 1999 Annual Meeting of Stockholders or
considered for inclusion in the Company's Proxy Statement and form of proxy for
that meeting.
ANNUAL REPORTS
COPIES OF THE COMPANY'S 1997 ANNUAL REPORT ARE BEING MAILED TO ALL
STOCKHOLDERS TOGETHER WITH THIS PROXY STATEMENT. THE COMPANY WILL PROVIDE,
WITHOUT CHARGE, TO ANY STOCKHOLDER OF RECORD AS OF MARCH 16, 1998, WHO SO
REQUESTS IN WRITING A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE
YEAR ENDED DECEMBER 31, 1997, AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. ANY SUCH REQUESTS SHOULD BE DIRECTED TO SHEILA W. BATEMAN, EASTON
BANK & TRUST COMPANY, 501 IDLEWILD AVENUE, P.O. BOX 629, EASTON, MARYLAND 21601.
OTHER MATTERS
The Board of Directors knows of no business other than that set forth
above to be transacted at the Meeting, but if other matters requiring a vote of
the stockholders arise, the persons designated as proxies will vote the shares
of Common Stock represented by the proxy cards in accordance with their judgment
on such matters.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ W. David Hill
----------------------------------------
W. David Hill, D.D.S.
Chief Executive Officer
Easton, Maryland
April 15, 1998
11
<PAGE> 13
APPENDIX A
EASTON BANCORP, INC.
POST OFFICE BOX 629
EASTON, MARYLAND 21601
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD
MAY 20, 1998
Dear Stockholder:
The Annual Meeting of Stockholders of Easton Bancorp, Inc. will be held at 4:00
p.m. on Wednesday, May 20, 1998 at Easton Bank & Trust Company, 501 Idlewild
Avenue, Easton, Maryland, for the following purposes:
1. To elect three members to the Board of Directors to serve three-year
terms;
2. To ratify the appointment of Rowles & Company as independent auditors
for the Company for the fiscal year ending December 31, 1998; and
3. To consider such other matters as properly may come before the Meeting
or any adjournment of the Meeting.
Only holders of record of Common Stock of Easton Bancorp, Inc. at the close of
business on March 16, 1998 will be entitled to notice of and to vote at the
Meeting or any adjournment thereof.
TO BE SURE THAT YOUR VOTE IS COUNTED, WE URGE YOU TO COMPLETE AND SIGN THE PROXY
CARD BELOW, DETACH IT FROM THIS LETTER AND RETURN IT IN THE POSTAGE PAID
ENVELOPE ENCLOSED IN THIS PACKAGE. The giving of such proxy does not affect your
right to vote in person if you attend the Meeting. The prompt return of your
signed proxy will aid the Company in reducing the expense of additional proxy
solicitation.
If you plan to attend the Annual Meeting in person, detach and bring this letter
to the Meeting as an admission ticket for you and your guests.
BY ORDER OF THE BOARD OF DIRECTORS
April 15, 1998
/s/ W. David Hill
W. David Hill, DDS
Chief Executive Officer
- DETACH PROXY CARD HERE -
- --------------------------------------------------------------------------------
1. To elect three members FOR all nominees
to the Board of Directors. listed below [ ]
WITHHOLD AUTHORITY to vote
for all nominees listed below [ ] *EXCEPTIONS [ ]
Nominees: Sheila W. Bateman, W. David Hill and Mahmood S. Shariff to serve
three-year terms.
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK
THE "EXCEPTIONS" BOX AND STRIKE A LINE THROUGH THAT NOMINEE'S NAME.)
2. To ratify the appointment of Rowles & Company as independent auditors
for the Company for the fiscal year ending December 31, 1998.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. In their discretion, to vote upon such other matters as properly may come
before the Meeting or any adjournment of the Meeting.
Address Change and/or
Comments Mark Here [ ]
Please date and sign exactly as your name appears to the left. All joint
owners should sign. When signing as a fiduciary, representative or corporate
officer, give full title as such. If you receive more than one proxy card,
please sign and return all cards received.
Dated:______________________________________________________________________
____________________________________________________________________________
(Signature)
____________________________________________________________________________
(Signature if held jointly)
VOTES MUST BE INDICATED
(X) IN BLACK OR BLUE INK. [X]
PLEASE SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
<PAGE> 14
EASTON BANCORP, INC.
PROXY CARD VOTING INSTRUCTIONS
- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF EASTON BANCORP, INC. FOR THE ANNUAL MEETING ON MAY 20, 1998.
The undersigned appoints David F. Lesperance and Roger A. Orsini, and each of
them, with full power of substitution in each, as the proxies of the undersigned
to represent the undersigned and vote all shares of Easton Bancorp, Inc. Common
Stock which the undersigned may be entitled to vote at the Annual Meeting of
Stockholders to be held on May 20, 1998, and at any adjournment or postponement
thereof, as indicated on the reverse side.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED FOR THE ELECTION OF ALL LISTED NOMINEES UNDER PROPOSAL 1, FOR THE
RATIFICATION OF THE APPOINTMENT OF ROWLES & COMPANY UNDER PROPOSAL 2 AND, AT THE
DISCRETION OF THE PROXIES, ON ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE
THE MEETING.
Easton Bancorp, Inc.
501 Idlewild Avenue EASTON BANCORP, INC.
PO Box 629 P.O. BOX 11361
Easton, MD 21601 NEW YORK, N.Y. 10203-0361
<PAGE> 15
APPENDIX B
ANNUAL REPORT TO STOCKHOLDERS
DECEMBER 31, 1997
EASTON BANCORP, INC.
<PAGE> 16
Easton Bancorp, Inc.
March 1998
Dear Stockholders:
It is my pleasure to report to you on another successful year. Total
assets reached $42,739,697 as of the end of 1997, an increase of 14.6 percent
from the previous year; and deposits stood at $38,088,152 at December 31, 1997,
an increase of 16.3 percent from the prior year. Net income was up to $289,921
for 1997, a substantial gain of 51.7 percent over 1996. This increase in
earnings, along with a very strong capital ratio, positions us well for the many
challenges and opportunities that will surely arise over the coming years.
Easton Bank & Trust, Talbot County's first community bank in over 100
years, is continuing to gain market share and is committed to providing the
ultimate in banking service, growth, and profitability. For this, I sincerely
thank our officers and staff.
As always, your support is greatly appreciated and we look forward to
an exciting and successful 1998.
Sincerely,
/s/ W. David Hill
W. David Hill, DDS
Chairman of the Board
501 Idlewild Avenue, P.O. Box 619, Easton, MD 21601
410-819-0300 FAX 410-819-8091
<PAGE> 17
This Annual Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements appear in a
number of places in this Annual 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.
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 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
Consolidated income of the Company is derived primarily from operations
of the Bank. Fiscal year 1997 represented the Bank's fourth 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 the Bank continues to expand its deposit
and loan base, its net interest income continues to increase. As a result, the
Company is reporting net income of $289,921 for 1997, compared to $191,114 for
1996.
RESULTS OF OPERATIONS
The Company reported net income of $289,921, or $.52 per share, for the
year ended December 31, 1997, which represents an increase of $98,807, or $.18
per share from $191,114, or $.34 per share, for the year ended December 31,
1996. The primary reason for the change in profitability is the increase in net
interest income.
Net interest income increased $335,802, or 25.96%, to $1,629,447 in
1997 from $1,293,645 in 1996. This increase in net interest income was the
result of a $490,470 increase in interest income and a $154,668
2
<PAGE> 18
increase in interest expense associated with the Bank's continued development of
its deposit and loan base while increasing net interest spread to 4.23% in 1997
from 3.77% in 1996. The net interest margin increased to 4.40% in 1997 from
3.94% in 1996.
The provision for loan losses was $81,807 in 1997, an increase of
$63,108 from the $18,699 provision in 1996. The provision increased because of
loan growth and because in 1997 the Company experienced net charge-offs of
$36,060 compared to net recoveries for 1996 of $53,554.
The Company had loans over ninety days delinquent on which the accrual
of interest had been discontinued totaling $42,446 and $13,058 as of December
31, 1997 and 1996, respectively. The Company's allowance for loan losses as a
percentage of its year-end loans was 1.08% at December 31, 1997, compared to
1.09% at December 31, 1996. Net charge-offs of $36,060 during 1997 resulted in a
ratio of net charge-offs to average loans of .11%. During 1996, the Company had
net recoveries of $53,554 which was .21% of average loans. The 1996 net
recoveries were related to a significant charge-off in 1995 resulting from a
fraudulent loan scheme by one borrower who victimized several banks, including
the Bank. During 1996, the banks which were victimized by the fraudulent 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 decreased $17,673, or 15.63%, to $95,415 in 1997
from $113,088 in 1996. Despite an increase in average deposits, return check
charges and overdraft charges decreased $10,617 during 1997. The Company's fee
schedule for these items remained constant in 1996 and 1997, but has been
adjusted for 1998.
Noninterest expense increased $156,214, or 13.05%, to $1,353,134 in
1997 from to $1,196,920 in 1996. To handle the volume of transactions associated
with growth in both deposits and loans, the Company has hired two additional
full-time and one part-time employee. These additional employees and annual
salary increases accounted for an increase of noninterest expense of $70,594.
Effective April, 1997, all directors were compensated $25 for each committee
meeting of the Bank they attended. As a result, directors' fees increased $8,625
during 1997. The increased cost of data processing and supplies, totaling
$21,056, were the result of increased deposit and loan accounts. The Company's
efficiency ratio, which is noninterest expense as a percentage of the sum of net
interest income and noninterest income, improved to 78.45% in 1997, compared to
85.09% in 1996. The Company's improving ratio is the result of faster growth in
loans and deposits than in corresponding overhead expenses. This is typical in
the first years of operation of a new bank.
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
1997 and 1996 and related interest 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 1997 was 4.40%,
compared to 3.94% for 1996. The increase is due to larger investment yields and
lower rates paid on savings and NOW accounts. 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
3
<PAGE> 19
the Company expects to maintain 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.
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 1997 and 1996.
<TABLE>
<CAPTION>
AVERAGE BALANCES, INCOME AND EXPENSES, AND RATES
For the Year Ended For the Year Ended
December 31, 1997 December 31, 1996
--------------------------------------- --------------------------------------
Average Income/ Yield/ Average Income/ Yield/
ASSETS Balance Expenses Rate Balance Expenses Rate
----------- --------- ----- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 4,061,651 $ 223,281 5.50% $ 6,845,883 $ 364,327 5.32%
Interest-bearing deposits 3,819 211 5.53% 10,360 530 5.12%
Investment securities:
U.S. Government agency 1,302,055 77,907 5.98% 717,213 38,863 5.42%
Other 123,898 8,982 7.25% 4,319 - 0.00%
----------- ---------- ----- ----------- ---------- -----
Total investment securities 1,425,953 86,889 6.09% 721,532 38,863 5.39%
----------- ---------- ----- ----------- ---------- -----
Loans:
Demand and time 3,198,500 314,191 9.82% 3,179,554 300,504 9.45%
Mortgage 26,558,797 2,437,593 9.18% 20,577,929 1,892,300 9.20%
Installment 2,131,907 215,818 10.12% 1,812,925 190,989 10.53%
----------- ---------- ----- ----------- ---------- -----
Total loans 31,889,204 2,967,602 9.31% 25,570,408 2,383,793 9.32%
Allowance for loan losses 347,325 - - 284,970 - -
----------- ---------- ----- ----------- ---------- -----
Total loans, net of allowance 31,541,879 2,967,602 9.41% 25,285,438 2,383,793 9.43%
----------- ---------- ----- ----------- ---------- -----
Total interest-earning assets 37,033,302 3,277,983 8.85% 32,863,213 2,787,513 8.48%
---------- ----- ---------- -----
Cash and due from banks 732,418 711,474
Premises and equipment 1,624,800 1,576,200
Other assets 330,160 307,884
----------- -----------
Total assets $39,720,680 $35,458,771
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings and NOW deposits $ 7,806,635 $ 243,536 3.12% $ 7,273,028 $ 236,164 3.25%
Money market 4,065,734 158,799 3.91% 2,497,559 88,182 3.53%
Other time deposits 21,408,000 1,224,459 5.72% 20,122,148 1,157,291 5.75%
----------- ---------- ----- ----------- ---------- -----
Total interest-bearing deposits 33,280,369 1,626,794 4.89% 29,892,735 1,481,637 4.96%
Noninterest-bearing deposits 1,947,430 - - 1,429,358 - -
----------- ---------- ----- ----------- ---------- -----
Total deposits 35,227,799 1,626,794 4.62% 31,322,093 1,481,637 4.73%
Borrowed funds 478,005 21,742 4.55% 388,883 12,231 3.15%
----------- ---------- ----- ----------- ---------- -----
35,705,804 1,648,536 4.62% 31,710,976 1,493,868 4.71%
---------- ----- ---------- -----
Other liabilities 143,505 135,260
Stockholders' equity 3,871,371 3,612,535
----------- -----------
Total liabilities and
stockholders equity $39,720,680 $35,458,771
=========== ===========
Net interest spread 4.23% 3.77%
===== =====
Net interest income $1,629,447 $1,293,645
========== ==========
Net interest income/margin 4.40% 3.94%
===== =====
</TABLE>
4
<PAGE> 20
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
Year Ended December 31, 1997 Year Ended December 31, 1996 Compared
Compared with 1996 with 1995
Variance Due To Variance Due To
------------------------------------------- ------------------------------------------
Total Rate Volume Total Rate Volume
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Interest-bearing deposits $ (319) $ 16 $ (335) $ 530 $ - $ 530
Federal funds sold (141,046) 7,075 (148,121) 186,721 (38,153) 224,874
Investment Securities:
U.S. Government Agency 39,044 7,346 31,698 13,090 1,904 11,186
Other 8,982 - 8,982 - - -
Loans:
Demand and time 13,687 11,897 1,790 47,373 2,512 44,861
Mortgage 545,293 (4,947) 550,240 302,629 54,206 248,423
Installment 24,829 (8,760) 33,589 35,310 18,624 16,686
--------- ------- --------- -------- ------- --------
Total interest income 490,470 12,627 477,843 585,653 39,093 546,560
--------- ------- --------- -------- ------- --------
INTEREST-BEARING LIABILITIES
Savings and NOW deposits 7,372 (9,970) 17,342 22,834 (12,117) 34,951
Money-market deposits 70,617 15,260 55,357 18,652 (2,765) 21,417
Time deposits 67,168 (6,768) 73,936 292,196 (12,239) 304,435
Federal funds purchased and
short-term borrowings 9,511 6,704 2,807 5,083 (9,428) 14,511
--------- ------- --------- -------- ------- --------
Total interest expense 154,668 5,226 149,442 338,765 (36,549) 375,314
--------- ------- --------- -------- ------- --------
Net interest income $ 335,802 $ 7,401 $ 328,401 $246,888 $75,642 $171,246
========= ======= ========= ======== ======= ========
</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 $31,541,879 and
$25,285,438 during 1997 and 1996, respectively, which constituted 85.17% and
76.94%, respectively, of average interest-earning assets for the periods. At
December 31, 1997, the Company's loan to deposit ratio was 91.06%, compared to
91.77% at December 31, 1996. 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.
5
<PAGE> 21
The following table sets forth the composition of the Company's loan
portfolio as of December 31, 1997 and 1996, respectively.
COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------
1997 1996
---------------------------------- -----------------------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
<S> <C> <C> <C> <C>
Commercial $2,270,375 6.46% $ 2,473,468 8.12%
Real estate 24,273,513 69.10% 21,371,852 70.19%
Construction 3,658,528 10.41% 2,624,709 8.62%
Home equity 2,067,995 5.89% 1,607,606 5.28%
Consumer 2,859,345 8.14% 2,372,719 7.79%
----------- ------ ----------- ------
Total loans 35,129,756 100.00% 30,450,354 100.00%
====== ======
Less deferred loan origination fees 69,477 55,670
Less allowance for credit losses 378,000 332,253
----------- -----------
Net loans $34,682,279 $30,062,431
=========== ===========
</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, 1997.
<TABLE>
<CAPTION>
LOAN MATURITY SCHEDULE AND SENSITIVITY TO CHANGES IN INTEREST RATES
December 31, 1997
---------------------------------------------------------------
Over One Over
One Year through Five
Or Less Five Years Years Total
------- ---------- ----- -----
<S> <C> <C> <C> <C>
Commercial $ 1,202,081 $ 1,068,294 $ - $ 2,270,375
Real estate 9,283,500 14,990,013 - 24,273,513
Construction 3,658,528 - - 3,658,528
Home equity 2,067,995 - - 2,067,995
Consumer 629,307 2,222,021 8,017 2,859,345
----------- ----------- -------- -----------
Total $16,841,411 $18,280,328 $ 8,017 $35,129,756
=========== =========== ======== ===========
Fixed interest rate $12,980,695 $18,280,328 $ 8,017 31,269,040
Variable interest rate 3,860,716 - - 3,860,716
----------- ----------- -------- -----------
Total $16,841,411 $18,280,328 $ 8,017 $35,129,756
=========== =========== ======== ===========
</TABLE>
As of December 31, 1997, $31,269,040, or 89.01%, of the total loans were
fixed rate loans. The significant amount of fixed rate loans was the result of
the market demand 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.
6
<PAGE> 22
The Company has the following commitments, lines of credit, and letters
of credit outstanding as of December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Construction loans $1,319,956 $1,650,040
Lines of credit 1,472,709 1,257,319
Overdraft protection lines 144,026 93,997
Standby letters of credit 382,767 44,563
---------- ----------
Total $3,319,458 $3,045,919
========== ==========
</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, 1997 and 1996, 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 1997, the allowance for loan losses was
1.08% of outstanding loans, compared to 1.09% at year-end 1996.
7
<PAGE> 23
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1997 1996
--------------------- -----------------------
Amount Percent Amount Percent
-------- ------ -------- -------
<S> <C> <C> <C> <C>
Commercial $ 17,926 4.74% $ 32,537 9.79%
Real estate 214,117 56.64% 185,532 55.84%
Construction 18,293 4.84% 13,124 3.95%
Home equity 12,958 3.43% 11,034 3.32%
Consumer 31,445 8.32% 24,817 7.47%
Commitments 33,912 8.97% 24,706 7.44%
General 49,349 13.06% 40,503 12.19%
-------- ------ -------- ------
Total $378,000 100.00% $332,253 100.00%
======== ====== ======== ======
</TABLE>
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year $ 332,253 $ 260,000
Loan losses:
Commercial 8,244 2,464
Real Estate 18,278 --
Consumer 23,290 25,592
----------- -----------
Total loan losses 49,812 28,056
----------- -----------
Recoveries on loans previously charged off
Commercial 1,885 73,469
Real Estate 7,500 --
Consumer 4,367 8,141
----------- -----------
Total loan recoveries 13,752 81,610
----------- -----------
Net loan losses/(recoveries) 36,060 (53,554)
Provision for loan losses charged to expense 81,807 18,699
----------- -----------
Balance at end of year $ 378,000 $ 332,253
=========== ===========
Total loans outstanding at end of year $35,129,756 $30,450,354
Allowance for loan losses to loans outstanding
at end of year 1.08% 1.09%
Net charge-offs/(recoveries) to average loans 0.11% (0.21%)
</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 ultimately may be an actual
writedown or charge-off of the principal balance of the loan which would
necessitate additional charges to earnings.
8
<PAGE> 24
The Company had nonperforming loans totaling $42,466 and $13,058 as of
December 31, 1997 and 1996, 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, 1997.
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, 1997, the Company had seventeen borrowers with loans considered by
management to be potential problem loans totaling approximately $355,117. 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
17.67% of average deposits for 1997, compared to 26.46% for 1996. 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 generally can 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, 1997, is
presented in the table "Interest Sensitivity Analysis." The difference between
rate-sensitive assets and rate-sensitive liabilities, or the interest rate
sensitivity
9
<PAGE> 25
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
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, 1997
---------------------------------------------------------------------------------------
After Three
Within but Within After One but
Three Twelve Within Five After Five
Months Months Years Years Total
------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Federal funds sold $ 3,739,622 $ -- $ -- $ -- $ 3,739,622
Investment securities
available for sale 124,500 -- -- -- 124,500
Investment securities
held to maturity -- 500,000 1,000,000 -- 1,500,000
Loans 7,728,584 9,112,827 18,280,328 8,017 35,129,756
------------ ------------ ------------ ------------ ------------
Total earning assets $ 11,592,706 $ 9,612,827 $ 19,280,328 $ 8,017 $ 40,493,878
============ ============ ============ ============ ============
LIABILITIES
Interest-bearing liabilities:
Money market and NOW $ 9,328,273 $ -- $ -- $ -- $ 9,328,273
Savings deposits 3,558,605 -- -- -- 3,558,605
Club accounts -- 22,443 -- -- 22,443
Certificates $100,000 and over 1,116,056 1,452,974 1,579,570 -- 4,148,600
Certificates under $100,000 2,923,645 5,434,683 10,600,221 10,834 18,969,383
Securities sold under
agreements to repurchase 481,490 -- -- -- 481,490
------------ ------------ ------------ ------------ ------------
Total interest-bearing liabilities $ 17,408,069 $ 6,910,100 $ 12,179,791 $ 10,834 $ 36,508,794
============ ============ ============ ============ ============
Period gap $ (5,815,363) $ 2,702,727 $ 7,100,537 $ (2,817) $ 3,985,084
Cumulative gap $ (5,815,363) $ (3,112,636) $ 3,987,901 $ 3,985,084 $ 3,985,084
Ratio of cumulative gap to total
earning assets (14.36)% (7.69)% 9.85% 9.84% 9.84%
</TABLE>
As noted in the table "Loan Maturity Schedule and Sensitivity to
Changes in Interest Rates," as of December 31, 1997, approximately $5,928,903,
or 16.88%, of the loan portfolio consisted of commercial loans and real estate
construction loans. Of this amount, $4,860,609, or 81.98%, matures within one
year.
The table "Investment Securities Maturity Distribution and Yields"
shows that as of December 31, 1997, $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 is 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 $3,500,000 secured line
of credit the Company has from the Federal Home Loan Bank, the $1,000,000
unsecured line of credit the Company has from a correspondent bank, and the
$1,500,000 secured line of credit the Company has from another correspondent
bank, of which $675,000 of the $1,500,000 line of credit is pledged to secure
repurchase agreements.
10
<PAGE> 26
<TABLE>
<CAPTION>
INVESTMENT SECURITIES MATURITY DISTRIBUTION AND YIELDS
December 31, 1997 December 31, 1996
------------------------ -------------------------
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 5.9% $500,000 5.2%
Over one through five years 1,000,000 6.1% 750,000 6.0%
---------- --- ---------- ---
Total U.S. Government Agency securities $1,500,000 6.0% $1,250,000 5.6%
========== === ========== ===
</TABLE>
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Average interest-bearing liabilities increased $3,476,756, or 11.48%,
to $33,758,374 in 1997, from $30,281,618 in 1996. Average interest-bearing
deposits increased $3,837,634, or 11.33%, to $33,280,369 in 1997, from
$29,892,735 in 1996. These increases resulted from increases in all categories
of interest-bearing deposits, except NOW accounts, resulting from the continued
promotional efforts of management to increase the deposits and loans of the
Bank. At December 31, 1997, total deposits were $38,088,152, compared to
$32,758,559 at December 31, 1996, an increase of 16.27%.
The following table sets forth the deposits of the Company by category
as of December 31, 1997 and 1996, respectively.
DEPOSITS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
Percent of Percent of
Amount Deposits Amount Deposits
------ -------- ------ --------
<S> <C> <C> <C> <C>
Demand deposit accounts $ 2,060,848 5.41% $1,719,187 5.25%
NOW accounts 4,270,427 11.21% 4,457,641 13.61%
Money market accounts 5,057,846 13.28% 3,203,097 9.78%
Savings accounts 3,581,048 9.40% 3,254,785 9.94%
Time deposits less than
$100,000 18,969,383 49.81% 15,994,458 48.82%
Time deposits of $100,000
or over 4,148,600 10.89% 4,129,391 12.60%
----------- ------ ----------- ------
Total deposits $38,088,152 100.00% $32,758,559 100.00%
=========== ====== =========== ======
</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
$5,310,384 during 1997. 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 91.06% at December 31, 1997, and
91.77% at the end of 1996, with a 1997 ratio of average loans to average
deposits of 89.54%. The maturity distribution of the Company's time deposits
over $100,000 at December 31, 1997, is shown in the following table.
11
<PAGE> 27
MATURITIES OF CERTIFICATES OF DEPOSIT
AND OTHER TIME DEPOSITS OF $100,000 OF MORE
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------
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 $1,116,056 $838,291 $614,683 $1,579,570 $4,148,600
Other time deposits of $100,00 or more - - - - -
---------- -------- -------- ---------- ----------
Total $1,116,056 $838,291 $614,683 $1,579,570 $4,148,600
========== ======== ======== ========== ==========
</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 $478,055 and
$388,883 during 1997 and 1996, 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 1997 was $95,415, compared to noninterest income
in 1996 of $113,088, a decrease of $17,673, or 15.63%. Of this decrease, $10,617
is a result of the decrease in return check and overdraft charges. The Company's
fee schedule for these items remained constant in 1996 and 1997 but the number
of overdraft and return check occurrences decreased. 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. Credit card
merchant fees decreased $3,370 from 1996 to 1997. In 1996, the Bank was
originating fixed rate loans for another institution and receiving compensation
for processing the loans. The demand for these loans decreased during 1997,
decreasing fees by $3,396.
The following table presents the principal components of noninterest
income for the years ended December 31, 1997 and 1996, respectively.
NONINTEREST INCOME
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Service charges on deposit accounts $62,588 $ 68,660
Other noninterest revenue 32,827 44,428
------ --------
Total noninterest income $95,415 $113,088
======= ========
Noninterest income as a percentage
of average total assets 0.24% 0.32%
==== ====
</TABLE>
12
<PAGE> 28
NONINTEREST EXPENSE
Noninterest expense increased by $156,214, or 13.05%, from $1,196,920
in 1996 to $1,353,134 in 1997. To handle the volume of transactions associated
with growth in both deposits and loans, the Company has hired two additional
full-time and one part-time employee. These additional employees and annual
salary increases accounted for an increase of compensation and related expenses
of $70,594. Effective April, 1997, all directors were compensated $25 for each
committee meeting of the Bank they attended. As a result, directors' fees
increased $8,625 during 1997. The increased cost of data processing and
supplies, totaling $21,056, were the result of increased deposit and loan
accounts.
The following table presents the principal components of noninterest
expense for the years ended December 31, 1997 and 1996, respectively.
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Compensation and related expenses $ 744,538 $ 673,944
Occupancy expense 71,871 75,310
Furniture and equipment expense 99,050 92,704
Advertising 47,417 35,332
Professional fees 58,421 44,890
Data processing 77,487 65,372
Deposit assessment 3,712 2,000
Insurance 14,830 21,435
Loan reports and collection costs 8,086 2,491
Organizational expense amortization 46,964 46,964
Stationery and supplies 44,833 35,119
Telephone and postage 35,751 34,115
Other 100,174 67,244
---------- ----------
Total noninterest expense $1,353,134 $1,196,920
========== ==========
Noninterest expense as a percentage
of average total assets 3.41% 3.38%
========== ==========
</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.
At December 31, 1997, 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 12.5% 12.0% 4.0%
Total risk-based capital ratio 13.4% 13.1% 8.0%
Tier 1 leverage ratio 9.4% 9.2% 3.0%
</TABLE>
13
<PAGE> 29
ACCOUNTING RULE CHANGES
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. During 1996 the Financial Accounting Standards
Board (the "FASB") issued SFAS 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Many of its provisions
became 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. The adoption of SFAS 125 did not have a material adverse impact on the
Company's financial position or results of operations.
Earnings Per Share. SFAS 128, "Earnings Per Share," replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share and it requires a dual presentation of basic and diluted earnings per
share on the face of the income statement. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997. The adoption of
this pronouncement by the Company in 1997 resulted in the restatement of the
Company's prior period earnings per share disclosures.
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 affect 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.
YEAR 2000 ISSUES
The Company uses a third-party data processor for most of its
accounting functions. The processor has implemented many changes in preparation
for the year 2000 ("Year 2000"). Testing should be complete by the end of 1998.
The Company also has a number of portable computers, most of which, due to their
age, are Year 2000 compliant. Management expects no significant costs to get its
systems Year 2000 compliant. The largest Year 2000 exposure to most banks is the
preparedness of the customers of the banks. Management is addressing with its
customers the possible consequences of not being prepared for Year 2000. Should
large borrowers not sufficiently address this issue, the Company may experience
an increase in loan defaults. The amount of potential loss from this issue is
not quantifiable. Management is attempting to reduce this exposure by educating
its customers.
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 its common stock, par value $0.10 per share (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.
14
<PAGE> 30
As of March 16, 1998, there were approximately 569 holders of record of
the Common Stock and 559,478 shares of Common Stock issued and outstanding. In
addition, there were approximately 244,797 shares of Common Stock issuable
pursuant to warrants and options 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.
15
<PAGE> 31
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Easton Bancorp, Inc. and Subsidiary
Easton, Maryland
We have audited the consolidated balance sheets of Easton Bancorp, Inc.
and Subsidiary as of December 31, 1997, 1996, and 1995, 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, 1997, 1996, and 1995, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Bank changed
its method of reporting earnings per share in 1997.
/s/ Rowles & Company, LLP
Salisbury, Maryland
January 23, 1998
16
<PAGE> 32
EASTON BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Assets
Cash and due from banks $ 642,726 $ 1,211,182 $ 991,301
Federal funds sold 3,739,622 2,824,727 4,500,000
Investment in Federal Home Loan Bank stock 124,500 121,600 --
Investment securities held to maturity (market value of
$1,502,794, $1,247,275, and $496,113) 1,500,000 1,250,000 500,000
Loans, less allowance for credit losses of
$378,000, $332,253, and $260,000 34,682,279 30,062,431 24,237,775
Premises and equipment 1,713,683 1,515,354 1,597,478
Intangible assets 30,261 84,503 137,844
Accrued interest receivable 248,303 181,009 156,483
Other assets 58,323 44,134 37,270
------------ ------------ ------------
Total assets $ 42,739,697 $ 37,294,940 $ 32,158,151
============ ============ ============
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing $ 2,060,848 $ 1,719,187 $ 1,493,690
Interest-bearing 36,027,304 31,039,372 26,744,305
------------ ------------ ------------
Total deposits 38,088,152 32,758,559 28,237,995
Accrued interest payable 99,980 93,684 101,109
Securities sold under agreements to repurchase 481,490 574,328 277,363
Other liabilities 57,363 145,578 10,007
------------ ------------ ------------
Total liabilities 38,726,985 33,572,149 28,626,474
------------ ------------ ------------
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) (1,260,907) (1,550,828) (1,741,942)
------------ ------------ ------------
Total stockholders' equity 4,012,712 3,722,791 3,531,677
------------ ------------ ------------
Total liabilities and stockholders' equity $ 42,739,697 $ 37,294,940 $ 32,158,151
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 33
EASTON BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income (Loss)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST REVENUE
Loans, including fees $ 2,967,602 $ 2,383,793 $ 1,998,481
Deposits in banks 211 530 --
U.S. Treasury and Government agency securities 77,907 38,863 25,773
Federal funds sold 223,281 364,327 177,606
Other 8,982 -- --
----------- ----------- -----------
Total interest revenue 3,277,983 2,787,513 2,201,860
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 1,626,794 1,481,637 1,147,955
Interest on borrowed funds 21,742 12,231 7,148
----------- ----------- -----------
Total interest expense 1,648,536 1,493,868 1,155,103
----------- ----------- -----------
Net interest income 1,629,447 1,293,645 1,046,757
PROVISION FOR CREDIT LOSSES 81,807 18,699 124,300
----------- ----------- -----------
Net interest income after provision for credit losses 1,547,640 1,274,946 922,457
----------- ----------- -----------
OTHER OPERATING REVENUE
Service charges on deposit accounts 62,588 68,660 65,805
Other noninterest revenue 32,827 44,428 19,025
----------- ----------- -----------
Total other operating revenue 95,415 113,088 84,830
----------- ----------- -----------
OTHER EXPENSES
Compensation and related expenses 744,538 673,944 608,533
Occupancy 71,871 75,310 64,108
Furniture and equipment 99,050 92,704 86,837
Other operating 437,675 354,962 412,417
----------- ----------- -----------
Total other expenses 1,353,134 1,196,920 1,171,895
----------- ----------- -----------
Income (loss) before income taxes 289,921 191,114 (164,608)
Income taxes -- -- --
----------- ----------- -----------
NET INCOME (LOSS) $ 289,921 $ 191,114 $ (164,608)
=========== =========== ===========
Earnings (loss) per common share
Basic $ 0.52 $ 0.34 $ (0.29)
=========== =========== ===========
Diluted $ 0.48 $ 0.32 $ (0.29)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 34
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, 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)
NET INCOME -- -- -- 289,921
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 559,328 $ 55,933 $ 5,217,686 $(1,260,907)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 35
EASTON BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 3,224,496 $ 2,758,551 $ 2,179,706
Fees, commissions, and rent received 37,312 112,868 84,830
Interest paid (1,642,240) (1,501,293) (1,108,008)
Payments to suppliers and employees (1,240,368) (918,846) (1,016,472)
----------- ----------- -----------
379,200 451,280 140,056
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated, net of principal repayments (5,075,228) (5,604,316) (6,737,602)
Loan participations sold 359,766 -- 897,750
Loan participations purchased -- (344,346) (776,328)
Purchase of investment securities (1,502,900) (871,600) --
Proceeds from maturities of investment securities 1,250,000 -- --
Proceeds from sale of other real estate owned -- 113,804 --
Purchase of premises and equipment, including
construction in progress (298,893) (15,287) (2,817)
Cash paid for organization costs and software (2,261) (2,456) (435)
----------- ----------- -----------
(5,269,516) (6,724,201) (6,619,432)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in time deposits 2,994,134 1,783,022 7,798,690
Net increase in other deposits 2,335,459 2,737,542 716,871
Increase (decrease) in securities sold under agreements to repurchase (92,838) 296,965 277,363
----------- ----------- -----------
5,236,755 4,817,529 8,792,924
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 346,439 (1,455,392) 2,313,548
Cash and cash equivalents at beginning of year 4,035,909 5,491,301 3,177,753
----------- ----------- -----------
Cash and cash equivalents at end of year $ 4,382,348 $ 4,035,909 $ 5,491,301
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 36
EASTON BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net income (loss) $ 289,921 $ 191,114 $(164,608)
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Provision for credit losses 81,807 18,699 124,300
Depreciation 100,564 97,411 96,406
Amortization of intangibles 56,503 55,797 55,495
Gain on sale of other real estate owned -- (4,061) --
Decrease (increase) in
Accrued interest receivable (67,294) (24,526) (55,446)
Other assets (14,189) (6,864) (4,567)
Increase (decrease) in
Deferred loan origination fees 13,807 (4,436) 33,292
Accrued interest payable 6,296 (7,425) 47,095
Other liabilities (88,215) 135,571 8,089
--------- --------- ---------
$ 379,200 $ 451,280 $ 140,056
========= ========= =========
NONCASH ACTIVITY
Other real estate acquired in lieu of foreclosure $ -- $ 109,743 $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 37
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
In 1997, the Company adopted Statement of Financial Accounts
Standards (SFAS) No. 128, Earnings per Share which changes the earnings
per share disclosures from primary and fully diluted per share amounts
to basic and diluted earnings per share. Under SFAS No. 128, basic
earnings per common share are determined by dividing net income (loss)
by the weighted average number of shares of common stock outstanding.
Diluted earnings per share is calculated including the average dilutive
common stock equivalents outstanding during the period. Earnings (loss)
per share disclosures for prior periods have been restated to conform
to these new calculation methods.
Dilutive common equivalent shares consist of stock options and
warrants, calculated using the treasury stock method. In loss periods,
dilutive common equivalent shares are excluded since the effect would
be antidilutive.
22
<PAGE> 38
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.
The accrual of interest is discontinued when any portion of
the principal or interest is ninety days past due and collateral is
insufficient to discharge the debt in full.
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.
Loans are considered impaired when, based on current
information, management considers it unlikely that the collection of
principal and interest payments will be made according to contractual
terms. Generally, loans are not reviewed for impairment until the
accrual of interest has been discontinued.
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 $4,069,486, $6,865,970, and $3,031,492 for
1997, 1996, and 1995, 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.
23
<PAGE> 39
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, 1997
U.S. GOVERNMENT AGENCIES $1,500,000 $ 2,794 $ -- $1,502,794
========== ========== ========== ==========
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
========== ========== ========== ==========
</TABLE>
There were no sales of investment securities during 1997,
1996, or 1995.
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, 1997 December 31, 1996 December 31, 1995
-------------------------- -------------------------- --------------------------
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 $ 500,771 $ 500,000 $ 499,453 $ -- $ --
After one year
through five years 1,000,000 1,002,023 750,000 747,822 500,000 496,113
---------- ---------- ---------- ---------- ---------- ----------
$1,500,000 $1,502,794 $1,250,000 $1,247,275 $ 500,000 $ 496,113
========== ========== ========== ========== ========== ==========
Pledged securities $ 675,000 $ 676,095 $ 650,000 $ 648,546 $ 250,000 $ 249,863
========== ========== ========== ========== ========== ==========
</TABLE>
Securities were pledged as collateral for repurchase
agreements.
24
<PAGE> 40
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>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Commercial $ 2,270,375 $ 2,473,468 $ 1,949,673
Real estate 24,273,513 21,371,852 16,913,382
Construction 3,658,528 2,624,709 2,323,490
Home equity 2,067,995 1,607,606 1,268,170
Consumer 2,859,345 2,372,719 2,103,166
----------- ----------- -----------
35,129,756 30,450,354 24,557,881
Less deferred loan origination fees 69,477 55,670 60,106
Less allowance for credit losses 378,000 332,253 260,000
----------- ----------- -----------
Loans, net $34,682,279 $30,062,431 $24,237,775
=========== =========== ===========
</TABLE>
The residential mortgage portfolio is pledged as collateral
under lines of credit from correspondents and the Federal Home Loan
Bank.
The rate repricing distribution of the loan portfolio follows:
<TABLE>
<S> <C> <C> <C>
Immediately $ 4,110,743 $ 3,267,806 $ 3,501,979
Within one year 12,664,592 9,864,200 6,389,267
Over one to five years 18,346,404 16,715,036 14,662,115
Over five years 8,017 603,312 4,520
----------- ----------- -----------
$35,129,756 $30,450,354 $24,557,881
=========== =========== ===========
</TABLE>
Transactions in the allowance for credit losses are as
follows:
<TABLE>
<S> <C> <C> <C>
Beginning balance $332,253 $260,000 $588,000
Provision charged to operation 81,807 18,699 124,300
Recoveries 13,752 81,610 9,461
-------- -------- --------
427,812 360,309 721,761
Charge-offs 49,812 28,056 461,761
-------- -------- --------
Ending balance $378,000 $332,253 $260,000
======== ======== ========
</TABLE>
Management has identified no significant impaired loans.
25
<PAGE> 41
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>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Nonaccrual
Commercial $ 13,785 $ 7,333 $ --
Mortgage -- -- 180,079
Installment 28,661 5,725 4,625
-------- -------- --------
$ 42,446 $ 13,058 $184,704
======== ======== ========
Interest not accrued $ 1,388 $ 449 $ 13,526
======== ======== ========
Loans past due ninety days or more,
still accruing interest $218,055 $261,664 $ --
======== ======== ========
</TABLE>
The following commitments, lines of credit, and letters of
credit are outstanding as of December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Construction loans $1,319,956 $1,650,040 $ 620,059
Lines of credit, including home equities 1,472,709 1,257,319 1,140,976
Overdraft protection lines 144,026 93,997 88,454
Standby letters of credit 382,767 44,563 12,700
---------- ---------- ----------
$3,319,458 $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 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 includes an assessment of potential loss from funding these
commitments in its allowance for credit losses.
26
<PAGE> 42
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 1997 1996 1995
------------ ---------- ---------- ----------
<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 1,298,872 1,050,407 1,050,407
Furniture, fixtures, and equipment 5-10 years 518,624 468,195 452,908
---------- ---------- ----------
2,153,219 1,854,325 1,839,038
Accumulated depreciation 439,536 338,971 241,560
---------- ---------- ----------
Net premises and equipment $1,713,683 $1,515,354 $1,597,478
========== ========== ==========
Depreciation expense $ 100,564 $ 97,411 $ 96,406
========== ========== ==========
</TABLE>
6. INTANGIBLE ASSETS
A summary of intangible assets and the related amortization
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Organization costs $234,820 $234,820 $234,820
Computer software 44,032 42,940 40,917
-------- -------- --------
278,852 277,760 275,737
Accumulated amortization 248,591 193,257 137,893
-------- -------- --------
Net intangible assets $ 30,261 $ 84,503 $137,844
======== ======== ========
Amortization expense $ 56,503 $ 55,797 $ 55,495
======== ======== ========
</TABLE>
7. LINES OF CREDIT
The Bank has total lines of credit of $1,000,000 in unsecured
lines from other banks and secured lines of credit totaling $5,000,000.
27
<PAGE> 43
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
8. DEPOSITS
Major classifications of interest-bearing deposits are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Money market and NOW $ 9,328,273 $ 7,660,738 $ 5,256,087
Savings 3,581,048 3,254,785 3,147,391
Other time 23,117,983 20,123,849 18,340,827
----------- ----------- -----------
$36,027,304 $31,039,372 $26,744,305
=========== =========== ===========
</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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Three months or less $1,116,056 $1,210,112 $1,473,198
Three to twelve months 1,452,974 1,547,716 2,387,364
One to five years 1,579,570 1,371,563 924,447
---------- ---------- ----------
$4,148,600 $4,129,391 $4,785,009
========== ========== ==========
Interest expense $ 234,217 $ 296,856 $ 184,461
========== ========== ==========
</TABLE>
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank has repurchase agreements that are collateralized by
government agency securities owned by the Bank. During the year ended
December 31, 1997, the following applied to these repurchase
agreements:
<TABLE>
<S> <C>
Maximum amount outstanding $594,632
Average amount outstanding 478,005
Average rate paid during the year 4.55%
Investment securities underlying the agreements at year end
Carrying value $675,000
Estimated fair value 676,095
</TABLE>
$675,000 of the secured lines of credit the Bank has with
correspondent banks has been pledged as additional collateral for these
agreements.
28
<PAGE> 44
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
10. INCOME TAXES
For income tax purposes at December 31, 1997, 1996, and 1995,
the Corporation had net operating loss carryforwards of $1,147,924,
$1,432,564, and $1,598,364 available to offset future taxable income.
The statutory federal income tax rate was 34% for 1997, 1996,
and 1995. The Company's effective tax rate for 1997, 1996, and 1995 was
zero due to the net operating losses. The provision (benefit) for
income taxes is reconciled as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Income (loss) before income taxes $ 289,921 $ 191,114 $(164,608)
========= ========= =========
Tax provision at statutory rates $ 98,573 $ 64,979 $ (55,967)
Increase (decrease) resulting from
State income taxes, less federal benefit 13,377 8,822 (7,605)
Nondeductible expenses 3,346 1,649 2,068
Net operating loss carryover (115,296) (75,450) 61,504
--------- --------- ---------
Provision (benefit) for income taxes $ -- $ -- $ --
========= ========= =========
</TABLE>
The components of the deferred tax assets and liabilities as
of December 31, 1997, 1996, and 1995, are as follows:
<TABLE>
<S> <C> <C> <C>
Deferred tax assets
Allowance for credit losses $ 124,849 $ 93,255 $ 86,034
Deferred loan origination fees 992 1,033 1,668
Contributions carryforward -- 2,355 2,355
Net operating loss carryforward 435,721 550,902 617,288
Start-up costs 8,238 22,398 36,559
--------- --------- ---------
569,800 669,943 743,904
--------- --------- ---------
Deferred tax liabilities
Depreciation 45,537 46,980 47,803
Cash method accounting 59,417 34,741 32,198
--------- --------- ---------
104,954 81,721 80,001
--------- --------- ---------
Net deferred tax asset before
valuation allowance 464,846 588,222 663,903
Valuation allowance (464,846) (588,222) (663,903)
--------- --------- ---------
Net deferred tax asset $ -- $ -- $ --
========= ========= =========
</TABLE>
29
<PAGE> 45
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
11. OTHER OPERATING EXPENSES
Other operating expenses are comprised as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Advertising $ 47,417 $ 35,332 $ 39,544
Professional fees 58,421 44,890 59,976
Data processing 77,487 65,372 58,497
Deposit assessment 3,712 2,000 22,795
Insurance 14,830 21,435 34,147
Loan reports and collection costs 8,086 2,491 25,585
Organizational expense amortization 46,964 46,964 46,964
Postage 21,813 21,128 17,871
Proxy and transfer agent costs 15,141 2,701 9,076
Software amortization 9,539 8,833 8,531
Stationery and supplies 44,833 35,119 30,112
Telephone 13,938 12,987 12,898
Other 75,494 55,710 46,421
-------- -------- --------
$437,675 $354,962 $412,417
======== ======== ========
</TABLE>
12. 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>
1998 $3,600
1999 3,600
2000 1,800
------
$9,000
======
</TABLE>
Rent expense was $3,600 for each of the years ended December
31, 1997, 1996, and 1995.
13. 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.
30
<PAGE> 46
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
14. 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
provides for granting options to purchase shares of the common stock to
the officers and other key employees of the Corporation and the Bank.
No options have been granted.
A summary of the status of the Company's performance-based
stock option plans follows:
<TABLE>
<CAPTION>
Shares 1997 1996
---------------------------------- ----- -----
<S> <C> <C>
Outstanding, beginning of year 5,593 --
Granted 2,797 5,593
Exercised -- --
Forfeited -- --
----- -----
Outstanding, end of year 8,390 5,593
===== =====
These options expire as follows:
October, 2003 5,593
April, 2004 2,797
-----
8,390
=====
</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.
The weighted average fair value of options granted during 1997
and 1996 has been estimated using the Black-Scholes option-pricing
model with the following assumptions:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Dividend Yield 0.00% 0.00%
Risk-free interest rate 5.75% 6.00%
Expected volatility 4.50% 20.00%
Expected life in years 7 7
</TABLE>
31
<PAGE> 47
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
14. STOCK OPTION PLANS (Continued)
Had compensation been determined in accordance with the
provisions of SFAS No. 123, the Company's net income and earning per
share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net income
As reported $289,921 $191,114
Pro forma 282,955 184,819
Basic earnings per share
As reported 0.52 0.34
Pro forma 0.51 0.33
Diluted earnings per share
As reported 0.48 0.32
Pro forma 0.47 0.31
</TABLE>
During 1996, 2,796 options related to 1994 were granted. They
are not included in the reported pro forma amounts.
15. 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>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Beginning balance $ 2,441,843 $ 2,067,392 $ 2,025,790
Advances 465,854 936,266 411,326
Repayments (855,559) (561,815) (369,724)
----------- ----------- -----------
Ending balance $ 2,052,138 $ 2,441,843 $ 2,067,392
=========== =========== ===========
</TABLE>
The Corporation engaged a firm owned by one of the organizers
to construct the Bank's main office and remodel the second floor. The
general contractor was paid $240,028 in 1997.
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, 1997.
During 1997, 1996, and 1995, the Bank leased office space to a
director for $7,938 each year.
A director is a partner in a law firm which periodically
provides services to the Company or Bank. During 1997, $897 was paid to
this law practice by the Bank.
32
<PAGE> 48
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
16. 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. 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>
December 31, 1997
----------------------------
Total capital
(to risk-weighted assets) $4,303 13.15% >= $2,619 >= 8.0% >= $3,273 >= 10.0%
Tier 1 capital
(to risk-weighted assets) $3,925 11.99% >= $1,309 >= 4.0% >= $1,964 >= 6.0%
Tier 1 capital
(to average fourth
quarter assets) $3,925 9.18% >= $1,710 >= 4.0% >= $2,137 >= 5.0%
December 31, 1996
----------------------------
Total capital
(to risk-weighted assets) $3,893 13.90% >= $2,234 >= 8.0% >= $2,792 >= 10.0%
Tier 1 capital
(to risk-weighted assets) $3,561 12.80% >= $1,117 >= 4.0% >= $1,675 >= 6.0%
Tier 1 capital
(to average fourth
quarter assets) $3,561 9.80% >= $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.
17. 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. The Board of Directors approved contributions
matching 10% of employee contributions which totaled $1,913 and $1,605
in 1997 and 1996, respectively.
33
<PAGE> 49
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
18. 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 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,
1997 1996
---------------------------- ----------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE amount value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 642,726 $ 642,726 $ 1,211,182 $ 1,211,182
Federal funds sold 3,739,622 3,739,622 2,824,727 2,824,727
Investment securities 1,624,500 1,627,294 1,371,600 1,368,875
Loans, net 34,682,279 34,599,709 30,062,431 29,907,317
Accrued interest receivable 248,303 248,303 181,009 181,009
Financial liabilities
Noninterest-bearing deposits $ 2,060,848 $ 2,060,848 $ 1,719,187 $ 1,719,187
Interest-bearing deposits and securities
sold under agreements to repurchase 36,508,794 36,779,633 31,613,700 31,887,840
Accrued interest payable 99,980 99,980 93,684 93,684
</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> 50
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
19. PARENT COMPANY FINANCIAL INFORMATION
The balance sheets and statements of income and cash flows for
Easton Bancorp, Inc. (Parent Only) follow:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE SHEETS
Assets
Cash $ 64,491 $ 91,153 $ 100,414
Investment in Easton Bank & Trust Company 3,945,641 3,623,899 3,418,365
Organization costs 2,580 7,739 12,898
----------- ----------- -----------
Total assets $ 4,012,712 $ 3,722,791 $ 3,531,677
=========== =========== ===========
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) (1,260,907) (1,550,828) (1,741,942)
----------- ----------- -----------
Total stockholders' equity 4,012,712 3,722,791 3,531,677
----------- ----------- -----------
Total liabilities and stockholders' equity $ 4,012,712 $ 3,722,791 $ 3,531,677
=========== =========== ===========
<CAPTION>
STATEMENTS OF (INCOME) LOSS
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest revenue $ 3,002 $ 3,327 $ 3,929
Equity in undistributed income (loss) of subsidiary 321,742 205,534 (142,507)
----------- ----------- -----------
324,744 208,861 (138,578)
----------- ----------- -----------
Expenses
Furniture and equipment 49 49 49
Other 34,774 17,698 25,981
----------- ----------- -----------
34,823 17,747 26,030
----------- ----------- -----------
Net income (loss) $ 289,921 $ 191,114 $ (164,608)
=========== =========== ===========
</TABLE>
35
<PAGE> 51
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
19. PARENT COMPANY FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 3,002 $ 3,327 $ 3,929
Cash paid for operating expenses (29,664) (12,588) (20,871)
--------- --------- ---------
NET (DECREASE) IN CASH (26,662) (9,261) (16,942)
--------- --------- ---------
Cash and equivalents at beginning of year 91,153 100,414 117,356
--------- --------- ---------
Cash and equivalents at end of year $ 64,491 $ 91,153 $ 100,414
========= ========= =========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income (loss) $ 289,921 $ 191,114 $(164,608)
Adjustments to reconcile net income (loss) to net
cash used in operating activities
Undistributed net (income) loss of subsidiary (321,742) (205,534) 142,507
Amortization 5,159 5,159 5,159
--------- --------- ---------
$ (26,662) $ (9,261) $ (16,942)
========= ========= =========
</TABLE>
36
<PAGE> 52
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
20. EARNINGS PER SHARE
Diluted earnings per share are calculated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
NET INCOME (LOSS) $ 289,921 $ 191,114 $ (164,608)
========== ========== ==========
Average shares outstanding 559,328 559,328 559,328
Dilutive average shares
outstanding under options
and warrants 215,490 209,897 --
Exercise price $ 10.00 $ 10.00 n/a
Assumed proceeds on exercise $2,154,900 $2,098,970 n/a
Average market value $ 12.49 $ 12.41 n/a
Less: Treasury stock purchased
with assumed proceeds
from exercise 172,530 169,135 n/a
Average shares and common
stock equivalents 602,288 600,090 559,328
DILUTED EARNINGS PER SHARE $ 0.48 $ 0.32 $ (0.29)
========== ========== ==========
</TABLE>
The stock of the Company is not traded on any public exchange.
The market values are derived from trades known to management. Private
sales may occur where management of the Company is unaware of the sales
price.
37
<PAGE> 53
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
21. 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,
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
1997
----
Interest revenue $ 892,249 $ 830,754 $ 800,830 $ 754,150
Interest expense 449,961 417,765 401,518 379,292
Net interest income 442,288 412,989 399,312 374,858
Provision for loan losses 32,056 8,285 19,608 21,858
Net income 89,475 73,323 63,367 63,756
Earnings per share - basic 0.16 0.13 0.11 0.11
Earnings per share - diluted 0.15 0.12 0.10 0.11
1996
----
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 - basic 0.14 0.11 0.05 0.04
Earnings per share - diluted 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 - basic 0.02 (0.03) (0.14) (0.14)
Earnings (loss) per share - diluted 0.02 (0.03) (0.14) (0.14)
</TABLE>
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> 54
DIRECTORS AND EXECUTIVE OFFICERS OF
EASTON BANCORP, INC.
W. DAVID HILL, DDS PRESIDENT, WILLIAM HILL MANOR, INC.
CHAIRMAN/CHIEF EXECUTIVE OFFICER
SHEILA W. BATEMAN CHIEF ADMINISTRATIVE OFFICER
SECRETARY CAULK MANAGEMENT COMPANY
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> 55
DIRECTORS, OFFICERS AND STAFF OF
EASTON BANK & TRUST COMPANY
DIRECTORS
W. DAVID HILL, DDS
CHAIRMAN OF THE BOARD
SHEILA W. BATEMAN, CPS JERRY L. WILCOXON, CPA
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, SR. 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
DELIA B. DENNY GENE FISCHGRUND
INTERIM PRESIDENT/CHIEF EXECUTIVE OFFICER SENIOR VICE PRESIDENT
PAMELA A. MUSSENDEN ROSE K. KLECKNER
SENIOR VICE PRESIDENT/TREASURER ASSISTANT TREASURER
BARBARA M. OSTRANDER
VICE PRESIDENT
STAFF
ALLISON L. ANDREW, RECEPTIONIST
TERRI L. BRANNOCK, BRANCH MANAGER
SHIRLEE D. CHASE, CUSTOMER SERVICE REPRESENTATIVE
KATHLEEN K. COOK, CREDIT ADMINISTRATION
BRENDA L. FORBES, CUSTOMER SERVICE REPRESENTATIVE
BETTY C. GOULD, ADMINISTRATIVE ASSISTANT
LESTA R. GUNTHER, OPERATIONS ASSISTANT
SUSAN D. HASCHEN, OPERATIONS ADMINISTRATOR
ANNE H. HUGHES, CREDIT ADMINISTRATIVE ASSISTANT
KAREN L. LANDON, OPERATIONS ASSISTANT
TRACY L. LEDNUM, CUSTOMER SERVICE REPRESENTATIVE
KIMBERLY D. STARTT, CUSTOMER SERVICE REPRESENTATIVE
JACQUELINE D. WILSON, CREDIT ADMINISTRATIVE ASSISTANT
Easton Bank & Trust Company is a member of
F.D.I.C.
40
