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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934
For the fiscal year ended: December 31, 1997
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- ----- TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No.: 33-43317
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EASTON BANCORP, INC.
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(Name of small business issuer as specified in its charter)
Maryland 52-1745344
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 Idlewild Avenue, Easton, Maryland 21601
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (410) 819-0300
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Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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(Title of Class)
Check whether the small business issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the small business issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the small business issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
State the small business issuer's revenues for its most recent fiscal year:
$3,373,398.
The aggregate market value of the Common Stock held by non-affiliates of the
small business issuer on March 16, 1998, was $4,614,513. This calculation is
based upon an estimation by the Company's Board of Directors of fair market
value of the Common Stock of $12.50 per share. There is not an active trading
market for the Common Stock and it is not possible to identify precisely the
market value of the Common Stock.
On March 16, 1998, 559,478 shares of the small business issuer's Common Stock
were issued and outstanding.
Transitional Small Business Disclosure Format: YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE
The Company's Annual Report to Stockholders for the year ended December 31,
1997, is incorporated by reference in this Form 10-KSB in Part II Item 5, Item
6, and Item 7. The Company's Proxy Statement for Annual Meeting of Stockholders
to be held on May 20, 1998, is incorporated by reference in this Form 10-KSB in
Part III Item 9, Item 10, Item 11, and Item 12.
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This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements appear in
a number of places in this Report and include all statements regarding the
intent, belief or current expectations of the Company, its directors or its
officers with respect to, among other things: (i) the Company's financing
plans; (ii) trends affecting the Company's financial condition or results of
operations; (iii) the Company's growth strategy and operating strategy; and
(iv) the declaration and payment of dividends. Investors are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those projected in the forward-looking statements as a result of various
factors discussed herein and those factors discussed in detail in the Company's
filings with the Securities and Exchange Commission.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Easton Bancorp, Inc. (the "Company") was incorporated as a Maryland
corporation on July 19, 1991, primarily to own and control all of the capital
stock of Easton Bank & Trust Company (the "Bank") upon its formation. On
December 31, 1992, the Company completed the initial public offering (the
"Offering") of its Common Stock, par value $0.10 per share (the "Common
Stock"), in which it sold 559,328 shares of Common Stock at a price of $10.00
per share. Out of the proceeds of the Offering, the Company paid $5.0 million
to the Bank in exchange for all of its outstanding capital stock and retained
approximately $600,000 to cover expenses of the Company and to provide
additional capital to the Bank if required. The Bank commenced business on July
1, 1993, and the only activity of the Company since then has been the ownership
and operation of the Bank.
The Bank was organized as a nonmember state bank under the laws of the
State of Maryland. The Bank is engaged in a general commercial banking business
from its main office location in its primary service area, Talbot County,
Maryland.
The Company's holding company structure can assist the Bank in
maintaining its required capital ratios because the Company may, subject to
compliance with debt guidelines implemented by the Board of Governors of the
Federal Reserve System (the "Board of Governors" or the "Federal Reserve"),
borrow money and contribute the proceeds to the Bank as primary capital. The
holding company structure also permits greater flexibility in issuing stock for
cash, property or services and in reorganization transactions. Moreover,
subject to certain regulatory limitations, a holding company can purchase
shares of its own stock, which the Bank may not do. A holding company may also
engage in certain non-banking activities which the Board of Governors has
deemed to be closely related to banking and proper incidents to the business of
a bank holding company. These activities include making or servicing loans and
certain types of leases; performing certain data processing services; acting as
a fiduciary or investment or financial advisor; acting as a management
consultant for other depository institutions; providing courier, appraisal, and
consumer financial counseling services; providing tax planning and preparation
services; providing check guaranty and collection agency services; engaging in
limited real estate investment activities; underwriting, brokering, and selling
credit life and disability insurance; engaging in certain other limited
insurance activities; providing discount brokerage services; underwriting and
dealing in certain government obligations and money market instruments and
providing portfolio investment advice; acting as a futures commission merchant
with respect to certain financial instrument transactions; providing foreign
exchange advisory and transactional services; making investments in certain
corporations for projects designed primarily to promote community welfare; and
owning and operating certain healthy savings and loan associations. Although
the Company has no present intention of engaging in any of these activities, if
circumstances should lead the Company's management to believe that there is a
need for these services in the Bank's marketing area and that such activities
could be profitably conducted, the management of the Company would have the
flexibility of commencing these activities upon filing notice thereof with the
Board of Governors.
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LOCATION AND SERVICE AREA
The Bank conducts a general commercial banking business in its primary
service area, emphasizing the banking needs of individuals and small to
medium-sized businesses and professional concerns. The Bank operates from a
main office located at 501 Idlewild Avenue in Easton, Maryland, and from a
branch office in the William Hill Manor located on Dutchman Lane in Easton. See
"Facilities" below. The Bank draws most of its customer deposits and conducts
most of its lending transactions from within its primary service area which
encompasses Talbot County, Maryland.
Talbot County is centrally located on the eastern shore of the
Chesapeake Bay in eastern Maryland. Easton, the county seat, is approximately
59 miles southeast of Baltimore and 73 miles east of Washington, D.C. The City
of Easton and Talbot County have experienced growth in population in recent
years. The population of Easton increased from approximately 7,500 in 1980 to
approximately 9,000 in 1990, while the population of Talbot County increased
from approximately 25,000 to 30,000 during this period.
The principal components of the economy of Talbot County are
manufacturing (which accounts for approximately 30% of the economic activity),
agriculture, and tourism. Easton also has a strong component of health-care
related businesses. The largest employers in the county include Memorial
Hospital, Black & Decker, Allen Family Foods, a poultry producer, Cadmus
Journal Services, a printing company, and William Hill Manor, Inc., a
continuing care retirement community. The county has had a significant boating
industry since colonial days. At present, this industry is made up of over a
dozen builders, numerous supply companies, dealers and charter companies, and
approximately 20 marinas. Talbot County's colonial homes and historical sites
and boating, hunting, and fishing opportunities have resulted in tourism
constituting a significant segment of the economy.
BANKING SERVICES
The Bank offers a full range of deposit services that are typically
available in most banks and savings and loan associations, including checking
accounts, NOW accounts, savings accounts and other time deposits of various
types, ranging from daily money market accounts to longer-term certificates of
deposit. The transaction accounts and time certificates are tailored to the
Bank's principal market area at rates competitive to those offered in the area.
In addition, the Bank offers certain retirement account services, such as
Individual Retirement Accounts ("IRAs"). All deposit accounts are insured by
the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum amount
allowed by law (generally, $100,000 per depositor subject to aggregation
rules). The Bank solicits these accounts from individuals, businesses,
associations and organizations, and governmental authorities.
The Bank also offers a full range of short- to medium-term commercial
and personal loans. Commercial loans include both secured and unsecured loans
for working capital (including inventory and receivables), business expansion
(including acquisition of real estate and improvements), and purchase of
equipment and machinery. Consumer loans include secured and unsecured loans for
financing automobiles, home improvements, education, and personal investments.
The Bank also originates and holds or sells into the secondary market fixed and
variable rate mortgage loans and real estate construction and acquisition
loans. The Bank's lending activities are subject to a variety of lending limits
imposed by state and federal law. The Bank may not make any loans to any
director, officer, or employee of the Bank (except for commercial loans to
directors who are not officers or employees) unless the loan is approved by the
Board of Directors of the Bank. Any such loan must be reviewed every six months
by the Board of Directors.
Other bank services include cash management services, safe deposit
boxes, travelers checks, direct deposit of payroll and social security checks,
and automatic drafts for various accounts. The Bank is associated with the MOST
network of automated teller machines that may be used by Bank customers
throughout Maryland and other regions. The Bank also offers MasterCard and VISA
credit card services through a correspondent bank as an agent for the Bank.
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The Bank does not presently exercise trust powers. The Bank may in the
future offer a full-service trust department, but cannot do so without the
prior approval of the Maryland State Bank Commissioner (the "Commissioner").
COMPETITION
The banking business is highly competitive. The Bank competes as a
financial intermediary with other commercial banks, savings and loan
associations, credit unions, and money market mutual funds operating in Talbot
County and elsewhere. As of December 31, 1997, there were seven commercial
banks operating a total of twenty offices in Talbot County, Maryland. Of these
institutions, only The Talbot Bank of Easton is locally owned and operated. The
Talbot Bank has a main office in Easton and three branches: two located in
Easton and one in St. Michaels. St. Michaels Bank, while locally chartered, is
controlled by a holding company in Baltimore. It operates a main office and
four branches in Talbot County. NationsBank, Signet Bank Maryland, First
National Bank of Maryland, and Crestar Bank, all of which are based in
Baltimore, operate four, two, two, and two branches in Talbot County,
respectively. One credit union operates in the county; however, it has only
nominal deposits. Financial service companies, such as Legg Mason Wood Walker,
Inc., Ferris Baker Watts, Inc., Merrill Lynch, A.G. Edwards & Sons, Inc. and
H.C. Wainwright, Inc. also operate offices in Talbot County.
FACILITIES
The Bank's main office is located at 501 Idlewild Avenue, Easton,
Maryland on approximately 53,000 square feet of land at the corner of Idlewild
Avenue and Caulk Lane. The Bank also operates a branch facility at William Hill
Manor located on Dutchman's Lane in Easton with approximately 72 square feet of
leased space. This branch is limited to accepting deposits and cashing checks
and is open only for limited hours each business day. See Item 12. "Certain
Relationships and Related Transactions." The Company will investigate branching
possibilities during 1998, but currently has no definite plans to branch.
The Bank acquired the site for the main office for $281,000 and spent
approximately $1,081,000 for construction of the building, landscaping, paving,
and sidewalks. Construction of the main office was completed in June 1993. The
main office building is a two story building consisting of approximately 14,000
square feet. The Bank presently occupies only approximately 6,500 square feet
for housing the main branch of the Bank, the operations center of the Bank, and
the executive offices of the Company and the Bank. In July 1997, the Bank
completed improvements to the second floor of the main office building at a
cost of $243,792. The improvements provided approximately 5,100 additional
square feet of office space, of which the Bank occupies approximately 1,500
square feet. The remaining additional space has been leased to two third
parties.
One of the third party leases consists of 1,820 square feet with an
initial lease term of eight years and it commenced August 1, 1997. The first
year's annual rent for this lease is $20,020. The other third party lease
consists of 1,800 square feet with an initial lease term of five years and it
commenced on July 1, 1997. The first year's annual rent for this lease is
$18,000. The annual rent on both leases is subject to adjustment at the
beginning of the second year and at the beginning of each year thereafter
during the initial term and during the renewal term, if any; provided, however,
the annual rent shall only be increased.
The William Hill Manor branch office space is leased pursuant to a
five year lease dated July 1, 1995. Rent is fixed at $3,600 annually. At the
end of the current term, the lease provides an option to extend with rent
increases contingent on the performance of the Bank and based on the consumer
price index.
EMPLOYEES
As of March 16, 1998, the Bank had fifteen full-time employees and
three part-time employees. The Company's operations are conducted through the
Bank. Consequently, the Company does not have any separate employees. None of
the employees of the Bank are represented by any collective bargaining unit.
The Bank considers its relations with its employees to be good.
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SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws
and regulations which impose specific requirements or restrictions on, and
provide for general regulatory oversight with respect to, virtually all aspects
of operations. These laws and regulations are generally intended to protect
depositors, not stockholders. The following is a brief summary of certain
statutes, rules and regulations affecting the Company and the Bank. To the
extent that the following summary describes statutory or regulatory provisions,
it is qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws or regulations may have a
material adverse effect on the business and prospects of the Company. Beginning
with the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and following with the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), numerous additional
regulatory requirements have been placed on the banking industry in the past
five years, and additional changes have been proposed. The banking industry is
also likely to change significantly as a result of the passage of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"). The operations of the Company and the Bank may be
affected by legislative changes and the policies of various regulatory
authorities. The Company is unable to predict the nature or the extent of the
effect on its business and earnings that fiscal or monetary policies, economic
control, or new federal or state legislation may have in the future.
THE COMPANY
Because it owns the outstanding common stock of the Bank, the Company
is a bank holding company within the meaning of the federal Bank Holding
Company Act of 1956 (the "BHCA"). Under the BHCA, the Company is subject to
periodic examination by the Federal Reserve and is required to file periodic
reports of its operations and such additional information as the Federal
Reserve may require. The Company's and the Bank's activities are limited to
banking, managing or controlling banks, furnishing services to or performing
services for its subsidiaries, or engaging in any other activity that the
Federal Reserve determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
Investments, Control, and Activities. With certain limited exceptions,
the BHCA requires every bank holding company to obtain the prior approval of
the Federal Reserve before (i) acquiring substantially all the assets of any
bank, (ii) acquiring direct or indirect ownership or control of any voting
shares of any bank if after such acquisition it would own or control more than
5% of the voting shares of such bank (unless it already owns or controls the
majority of such shares), or (iii) merging or consolidating with another bank
holding company.
In addition, and subject to certain exceptions, the BHCA and the
Change in Bank Control Act, together with regulations thereunder, require
Federal Reserve approval (or, depending on the circumstances, no notice of
disapproval) prior to any person or company acquiring "control" of a bank
holding company, such as the Company. Control is conclusively presumed to exist
if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. Because the Company's Common Stock is
registered under the Securities Exchange Act of 1934, under Federal Reserve
regulations control will be rebuttably presumed to exist if a person acquires
at least 10% of the outstanding shares of any class of voting securities of the
Company. The regulations provide a procedure for challenge of the rebuttable
control presumption.
Under the BHCA, the Company is generally prohibited from engaging in,
or acquiring direct or indirect control of more than 5% of the voting shares of
any company engaged in nonbanking activities, unless the Federal Reserve, by
order or regulation, has found those activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Some of the activities that the Federal Reserve has determined by regulation to
be proper incidents to the business of banking include making or servicing
loans and certain types of leases, engaging in certain insurance and discount
brokerage activities, performing certain data processing services, acting in
certain circumstances as a fiduciary or investment or financial advisor, owning
savings associations, and making investments in certain corporations or
projects designed primarily to promote community welfare.
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Source of Strength; Cross-Guarantee. In accordance with Federal
Reserve policy, the Company is expected to act as a source of financial
strength to the Bank and to commit resources to support the Bank in
circumstances in which the Company might not otherwise do so. Under the BHCA,
the Federal Reserve may require a bank holding company to terminate any
activity or relinquish control of a nonbank subsidiary (other than a nonbank
subsidiary of a bank) upon the Federal Reserve's determination that such
activity or control constitutes a serious risk to the financial soundness or
stability of any subsidiary depository institution of the bank holding company.
Further, federal bank regulatory authorities have additional discretion to
require a bank holding company to divest itself of any bank or nonbank
subsidiary if the agency determines that divestiture may aid the depository
institution's financial condition. The Bank may be required to indemnify, or
cross-guarantee, the FDIC against losses it incurs with respect to any other
Bank controlled by the Company, which in effect makes the Company's equity
investments in healthy bank subsidiaries available to the FDIC to assist any
failing or failed bank subsidiary of the Company.
THE BANK
General. The Bank operates as a state nonmember banking association
incorporated under the laws of the State of Maryland and is subject to
examination by the FDIC and the Commissioner. Deposits in the Bank are insured
by the FDIC up to a maximum amount (generally $100,000 per depositor, subject
to aggregation rules). The Commissioner and the FDIC regulate or monitor all
areas of the Bank's operations, including security devices and procedures,
adequacy of capitalization and loss reserves, loans, investments, borrowings,
deposits, mergers, issuances of securities, payment of dividends, interest
rates payable on deposits, interest rates or fees chargeable on loans,
establishment of branches, corporate reorganizations, maintenance of books and
records, and adequacy of staff training to carry on safe lending and deposit
gathering practices. The FDIC requires the Bank to maintain certain capital
ratios and imposes limitations on the Bank's aggregate investment in real
estate, bank premises, and furniture and fixtures. The Bank is required by the
FDIC and the Commissioner to prepare quarterly reports on the Bank's financial
condition and to conduct an annual audit of its financial affairs in compliance
with minimum standards and procedures prescribed by the Commissioner.
Under FDICIA, all insured institutions must undergo periodic on-site
examination by their appropriate banking agency. The cost of examinations of
insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports to
the FDIC and the appropriate agency (and state supervisor when applicable).
FDICIA also directs the FDIC to develop with other appropriate agencies a
method for insured depository institutions to provide supplemental disclosure
of the estimated fair market value of assets and liabilities, to the extent
feasible and practicable, in any balance sheet, financial statement, report of
condition, or other report of any insured depository institution. FDICIA also
requires the federal banking regulatory agencies to prescribe, by regulation,
standards for all insured depository institutions and depository institution
holding companies relating, among other things, to: (i) internal controls,
information systems, and audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; and (v) asset quality.
State nonmember banks which have been newly chartered within the past
two years, and state nonmember banks and their holding companies which have
undergone a change in control within the past two years or which have been
deemed by the FDIC to be troubled institutions, must give the FDIC or the Board
of Governors, respectively, 30 days prior notice of the appointment of any
senior executive officer or director. Within the 30 day period, the FDIC or the
Board of Governors, as the case may be, may disapprove any such appointment.
Transactions With Affiliates and Insiders. The Bank is subject to
Section 23A of the Federal Reserve Act, which places limits on the amount of
loans or extensions of credit to, or investments in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. In addition,
most of these loans and certain other transactions must be secured in
prescribed amounts. The Bank is also subject to Section 23B of the Federal
Reserve Act which, among other things, prohibits an institution from engaging
in certain transactions with certain affiliates unless the transactions are on
terms substantially the same, or at least as favorable to such institution or
its subsidiaries, as those
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prevailing at the time for comparable transactions with non-affiliated
companies. The Bank is subject to certain restrictions on extensions of credit
to executive officers, directors, certain principal stockholders, and their
related interests. Such extensions of credit (i) must be made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with third parties and (ii) must not
involve more than the normal risk of repayment or present other unfavorable
features.
Community Reinvestment Act. The Community Reinvestment Act requires
that each insured depository institution shall be evaluated by its primary
federal regulator with respect to its record in meeting the credit needs of its
local community, including low and moderate income neighborhoods, consistent
with the safe and sound operation of those institutions. These factors are also
considered in evaluating mergers, acquisitions, and applications to open a
branch or facility. The Bank received a satisfactory rating in its most recent
evaluation.
Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates. The Bank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials
to determine whether a financial institution is fulfilling its obligation to
help meet the housing needs of the community it serves, the Equal Credit
Opportunity Act prohibiting discrimination on the basis of race, creed or other
prohibited factors in extending credit, the Fair Credit Reporting Act of 1978
governing the use and provision of information to credit reporting agencies,
the Fair Debt Collection Act governing the manner in which consumer debts may
be collected by collection agencies, and the rules and regulations of the
various federal agencies charged with the responsibility of implementing such
federal laws. The deposit operations of the Bank also are subject to the Right
to Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds
Transfer Act and Regulation E issued by the Federal Reserve Board to implement
that act, which governs automatic deposits to and withdrawals from deposit
accounts and customers' rights and liabilities arising from the use of
automated teller machines and other electronic banking services.
DEPOSIT INSURANCE
The FDIC establishes rates for the payment of premiums by federally
insured banks and thrifts for deposit insurance. A separate Bank Insurance Fund
("BIF") and Savings Association Insurance Fund ("SAIF") are maintained for
commercial banks and thrifts, respectively, with insurance premiums from the
industry used to offset losses from insurance payouts when banks and thrifts
fail. Since 1993, insured depository institutions like the Bank have paid for
deposit insurance under a risk-based premium system. Under this system, until
mid-1995 depository institutions paid to BIF or SAIF from $0.23 to $0.31 per
$100 of insured deposits depending on its capital levels and risk profile, as
determined by its primary federal regulator on a semi-annual basis. Once the
BIF reached its legally mandated reserve ratio in mid-1995, the FDIC lowered
premiums for well-capitalized banks, eventually to $.00 per $100, with a
minimum semiannual assessment of $1,000. However, in 1996 Congress enacted the
Deposit Insurance Funds Act of 1996, which eliminated this minimum assessment.
It also separated the Financial Corporation (FICO) assessment to service the
interest on its bond obligations. The amount assessed on individual
institutions, including the Bank, by FICO is in addition to the amount paid for
deposit insurance according to the risk-related assessment rate schedule.
Increases in deposit insurance premiums or changes in risk classification will
increase the Bank's cost of funds, and there can be no assurance that such cost
can be passed on to the Bank's customers.
DIVIDENDS
The principal source of the Company's cash revenues comes from
dividends received from the Bank. The amount of dividends that may be paid by
the Bank to the Company depends on the Bank's earnings and capital position and
is limited by federal and state law, regulations, and policies. The Federal
Reserve has stated that bank holding companies should refrain from or limit
dividend increases or reduce or eliminate dividends
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under circumstances in which the bank holding company fails to meet minimum
capital requirements or in which earnings are impaired.
The Company's ability to pay any cash dividends to its stockholders in
the future will depend primarily on the Bank's ability to pay dividends to the
Company. In order to pay dividends to the Company, the Bank must comply with
the requirements of all applicable laws and regulations. Under Maryland law,
the Bank may pay a cash dividend only from the following, after providing for
due or accrued expenses, losses, interest, and taxes: (i) its undivided
profits, or (ii) with the prior approval of the Commissioner, its surplus in
excess of 100% of its required capital stock. Under FDICIA, the Bank may not
pay a dividend if, after paying the dividend, the Bank would be
undercapitalized. See "Capital Regulations" below. See Item 5 below for a
discussion of dividends paid by the Bank in the past two years.
In addition to the availability of funds from the Bank, the future
dividend policy of the Company is subject to the discretion of the Board of
Directors and will depend upon a number of factors, including future earnings,
financial condition, cash needs, and general business conditions. If dividends
should be declared in the future, the amount of such dividends presently cannot
be estimated and it cannot be known whether such dividends would continue for
future periods.
CAPITAL REGULATIONS
The federal bank regulatory authorities have adopted risk-based
capital guidelines for banks and bank holding companies that are designed to
make regulatory capital requirements more sensitive to differences in risk
profile among banks and bank holding companies, account for off-balance sheet
exposure, and minimize disincentives for holding liquid assets. The resulting
capital ratios represent qualifying capital as a percentage of total
risk-weighted assets and off-balance sheet items. The guidelines are minimums,
and the regulators have noted that banks and bank holding companies
contemplating significant expansion programs should not allow expansion to
diminish their capital ratios and should maintain ratios well in excess of the
minimums. The current guidelines require all bank holding companies and
federally-regulated banks to maintain a minimum risk-based total capital ratio
equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital
includes common stockholders' equity before the unrealized gains and losses on
securities available for sale, qualifying perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries, but
excludes goodwill and most other intangibles and excludes the allowance for
loan and lease losses. Tier 2 capital includes the excess of any preferred
stock not included in Tier 1 capital, mandatory convertible securities, hybrid
capital instruments, subordinated debt and intermediate term-preferred stock,
and general reserves for loan and lease losses up to 1.25% of risk-weighted
assets.
Under the guidelines, banks' and bank holding companies' assets are
given risk-weights of 0%, 20%, 50%, and 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential construction
loans, both of which carry a 50% rating. Most investment securities are signed
to the 20% category, except for municipal or state revenue bonds, which have a
50% rating, and direct obligations of or obligations guaranteed by the United
States Treasury or United States Government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a
leverage ratio, which is Tier 1 capital as a percentage of average total assets
less intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%, but
most institutions are required to maintain an additional cushion of at least
100 to 200 basis points.
FDICIA established a new capital-based regulatory scheme designed to
promote early intervention for troubled banks and requires the FDIC to choose
the least expensive resolution of bank failures. The new capital-based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including
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"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." To qualify
as a "well capitalized" institution, a bank must have a leverage ratio of no
less than 5%, a Tier 1 risk-based ratio of no less than 6%, and a total
risk-based capital ratio of no less than 10%, and the bank must not be under
any order or directive from the appropriate regulatory agency to meet and
maintain a specific capital level. As of December 31, 1997, the Company and the
Bank were qualified as "well capitalized." See "Item 6. Management's Discussion
and Analysis or Plan of Operation -- Capital."
Under the FDICIA regulations, the applicable agency can treat an
institution as if it were in the next lower category if the agency determines
(after notice and an opportunity for hearing) that the institution is in an
unsafe or unsound condition or is engaging in an unsafe or unsound practice.
The degree of regulatory scrutiny of a financial institution will increase, and
the permissible activities of the institution will decrease, as it moves
downward through the capital categories. Institutions that fall into one of the
three undercapitalized categories may be required to (i) submit a capital
restoration plan; (ii) raise additional capital; (iii) restrict their growth,
deposit interest rates, and other activities; (iv) improve their management;
(v) eliminate management fees; or (vi) divest themselves of all or part of
their operations. Bank holding companies controlling financial institutions can
be called upon to boost the institutions' capital and to partially guarantee
the institutions' performance under their capital restoration plans.
These capital guidelines can affect the Company in several ways. If
the Bank begins to grow at a rapid pace, a premature "squeeze" on capital could
occur making a capital infusion necessary. The requirements could impact the
Company's ability to pay dividends. The Company's present capital levels are
more than adequate; however, rapid growth, poor loan portfolio performance, or
poor earnings performance or a combination of these factors could change the
Bank's capital position in a relatively short period of time.
Effective January 1, 1997, the FDIC amended the risk-based capital
guidelines to incorporate a measure for market risk to cover all positions
located in an institution's trading account, and foreign exchange and commodity
positions wherever located. The effect of the rule is that it requires any bank
or bank holding company with significant exposure to market risk to measure the
risk and hold capital commensurate with that risk. Since the Bank does not
currently engage, nor has any plans to engage, in trading, foreign exchange or
commodity position activities, the rule does not have an effect on the Bank's
required capital levels.
Both the Company and the Bank exceeded their respective regulatory
capital requirements at December 31, 1997. See "Management's Discussion and
Analysis or Plan of Operation -- Capital."
INTERSTATE BANKING AND BRANCHING RESTRICTIONS
On September 29, 1994, the federal government enacted the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Banking Act"). This Act became effective on September 29, 1995, and permits
eligible bank holding companies in any state, with regulatory approval, to
acquire banking organizations in any other state. Effective June 1, 1997, the
Interstate Banking Act allowed banks with different home states to merge,
unless a particular state opts out of the statute. Consistent with the
Interstate Banking Act, Maryland adopted legislation in 1995 which permits
interstate bank mergers beginning September 29, 1995.
In addition, beginning June 1, 1997, the Interstate Banking Act
permitted national and state banks to establish de novo branches in another
state if there is a law in that state which applies equally to all banks and
expressly permits all out-of-state banks to establish de novo branches. In
1995, Maryland adopted "opt-in" legislation by which Maryland adopted the
federal legislation effective September 29, 1995, before it automatically took
effect on June 1, 1997. The Maryland legislation permits out-of-state banks to
establish branches in Maryland by opening a de novo branch, by acquiring an
existing branch from a Maryland depository institution, or as a result of an
interstate merger with a Maryland banking organization, as long as such states
grant similar privileges for acquiring banking organizations in their states to
banking organizations in Maryland. Under Maryland law, the Bank may open
branches state-wide, subject to the prior approval of the Commissioner and the
FDIC. There are currently no definite plans for the Company to acquire any
bank, but the Company remains open to acquisitions as part of its strategic
growth plan.
8
<PAGE> 10
RECENT LEGISLATIVE DEVELOPMENTS
From time to time, various bills are introduced in the United States
Congress and at the state legislative level with respect to the regulation of
financial institutions. Certain of these proposals, if adopted, could
significantly change the regulation of banks and the financial services
industry. The Company cannot predict whether any such proposals will be adopted
or, if adopted, how such proposals would affect the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Bank's main office is located at 501 Idlewild Avenue, Easton,
Maryland on approximately 53,000 square feet of land at the corner of Idlewild
Avenue and Caulk Lane. The Bank also operates a branch facility at William Hill
Manor located on Dutchman's Lane in Easton with approximately 72 square feet of
leased space. This branch is limited to accepting deposits and cashing checks
and is open only for limited hours each business day. See Item 12. "Certain
Relationships and Related Transactions."
The Bank acquired the site for the main office for $281,000 and spent
approximately $1,081,000 for construction of the building, landscaping, paving,
and sidewalks. Construction of the main office was completed in June 1993. The
main office building is a two story building consisting of approximately 14,000
square feet. The Bank presently occupies only approximately 6,500 square feet
for housing the main branch of the Bank, the operations center of the Bank, and
the executive offices of the Company and the Bank. In July 1997, the Bank
completed improvements to the second floor of the main office building at a
cost of $243,792. The improvements provided approximately 5,100 additional
square feet of office space, of which the Bank occupies approximately 1,500
square feet. The remaining additional space has been leased to two third
parties.
One of the third party leases consists of 1,820 square feet with an
initial lease term of eight years and it commenced August 1, 1997. The first
year's annual rent for this lease is $20,020. The other third party lease
consists of 1,800 square feet with an initial lease term of five years and it
commenced on July 1, 1997. The first year's annual rent for this lease is
$18,000. The annual rent on both leases is subject to adjustment at the
beginning of the second year and at the beginning of each year thereafter
during the initial term and during the renewal term, if any; provided, however,
the annual rent shall only be increased.
The William Hill Manor branch office space is leased pursuant to a
five year lease dated July 1, 1995. Rent is fixed at $3,600 annually. At the
end of the current term, the lease provides an option to extend with rent
increases contingent on the performance of the Bank and based on the consumer
price index.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
or the Bank or any of their properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the stockholders of the
Company during the fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In response to this Item, the information included on pages 14 through
15 of the Company's Annual Report to Stockholders for the year ended December
31, 1997, is incorporated herein by reference.
9
<PAGE> 11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
In response to this Item, the information included on pages 2 through
14 of the Company's Annual Report to Stockholders for the year ended December
31, 1997, is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
In response to this Item, the information included on pages 16 through
38 of the Company's Annual Report to Stockholders for the year ended December
31, 1997, is incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
In response to this item, the information included on pages 2 through
5 and page 7 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 20, 1998, is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
In response to this item, the information included on pages 5 through
7 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held on May 20, 1998, is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In response to this item, the information included on pages 8 through
9 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held on May 20, 1998, is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In response to this item, the information included on pages 9 through
10 of the Company's Proxy Statement for the Annual Meeting of Stockholders to
be held on May 20, 1998, is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) EXHIBITS.
---------
<S> <C>
3.1 Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of Registration Statement on Form
S-18, File No. 33-43317).
3.2 Bylaws of the Company (incorporated by reference to Exhibit
3.2 of Registration Statement on Form S-18, File No.
33-43317).
10.1 Employment Agreement dated July 22, 1991, between the Company
and Thomas P. McDavid (incorporated by reference to Exhibit
10.1 of Registration Statement on Form S-18, File No.
33-43317).
</TABLE>
10
<PAGE> 12
<TABLE>
<S> <C>
10.2 Easton Bancorp, Inc. 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.2 of Registration Statement on Form
S-18, File No. 33-43317).
10.3 Form of Warrant Agreement (incorporated by reference to
Exhibit 10.3 of Registration Statement on Form S-18, File No.
33-43317).
13 Annual Report to Stockholders for the year ended December 31,
1997.
21 Subsidiaries of the Company.
27.1 Financial Data Schedule (for SEC use only).
27.2 Restated Financial Data Schedule for period ending
December 31, 1996 (for SEC use only).
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 1997.
11
<PAGE> 13
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
EASTON BANCORP, INC.
(Registrant)
By:/s/ W. David Hill
-------------------------------------
W. David Hill, Chairman of the Board
Date: March 25, 1998
In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Sheila W. Bateman Director; Secretary March 25, 1998
- ------------------------------
Sheila W. Bateman
Director
- ------------------------------
Jack H. Bishop
/s/ J. Parker Callahan, Jr. Director March 25, 1998
- ------------------------------
J. Parker Callahan, Jr.
/s/ J. Fredrick Heaton Director March 25, 1998
- ------------------------------
J. Fredrick Heaton
Director
- ------------------------------
William C. Hill
/s/ W. David Hill Director; Chairman of the
- ------------------------------ Board; Principal Executive March 25, 1998
W. David Hill Officer
/s/ David F. Lesperance Director March 25, 1998
- ------------------------------
David F. Lesperance
/s/ Vinodrai Mehta Director March 25, 1998
- ------------------------------
Vinodrai Mehta
/s/ Roger A. Orsini Director March 25, 1998
- ------------------------------
Roger A. Orsini
/s/ Mahmood S. Shariff Director March 25, 1998
- ------------------------------
Mahmood S. Shariff
/s/ Jerry L. Wilcoxon Director; Treasurer (principal March 25, 1998
- ------------------------------ financial officer and principal
Jerry L. Wilcoxon accounting officer)
</TABLE>
12
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
- ------ ----------- -----------
<S> <C> <C>
3.1 Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of Registration Statement on Form
S-18, File No.
33-43317).
3.2 Bylaws of the Company (incorporated by reference to Exhibit
3.2 of Registration Statement on Form S-18, File No.
33-43317).
10.1 Employment Agreement dated July 22, 1991, between the Company
and Thomas P. McDavid (incorporated by reference to Exhibit
10.1 of Registration Statement on Form S-18, File No.
33-43317).
10.2 Easton Bancorp, Inc. 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.2 of Registration Statement on Form
S-18, File No. 33-43317).
10.3 Form of Warrant Agreement (incorporated by reference to
Exhibit 10.3 of Registration Statement on Form S-18, File No.
33-43317).
13 Annual Report to Stockholders for the year ended December 31,
1997. 15
21 Subsidiaries of the Company. 56
27.1 Financial Data Schedule (for SEC use only). 57
27.2 Restated Financial Data Schedule for period ending December 31,
1996 (for SEC use only). 58
</TABLE>
<PAGE> 1
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
DECEMBER 31, 1997
EASTON BANCORP, INC.
<PAGE> 2
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> 3
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> 4
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> 5
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> 6
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> 7
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> 8
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> 9
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> 10
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> 11
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> 12
<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> 13
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> 14
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> 15
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> 16
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> 17
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> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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> 26
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> 27
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> 28
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> 29
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> 30
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> 31
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> 32
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> 33
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> 34
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> 35
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> 36
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> 37
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> 38
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> 39
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> 40
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> 41
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
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Easton Bank & Trust Company, a state bank organized under the laws of the
State of Maryland.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER
31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS INCLUDED AS PART OF EXHIBIT 13 TO THIS FORM 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 642,726
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,739,622
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 1,500,000
<INVESTMENTS-MARKET> 1,502,794
<LOANS> 35,060,279
<ALLOWANCE> 378,000
<TOTAL-ASSETS> 42,739,697
<DEPOSITS> 38,088,152
<SHORT-TERM> 481,490
<LIABILITIES-OTHER> 157,343
<LONG-TERM> 0
0
0
<COMMON> 55,933
<OTHER-SE> 3,956,779
<TOTAL-LIABILITIES-AND-EQUITY> 42,739,697
<INTEREST-LOAN> 2,967,602
<INTEREST-INVEST> 86,889
<INTEREST-OTHER> 223,492
<INTEREST-TOTAL> 3,277,983
<INTEREST-DEPOSIT> 1,626,794
<INTEREST-EXPENSE> 1,648,536
<INTEREST-INCOME-NET> 1,629,447
<LOAN-LOSSES> 81,807
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,353,134
<INCOME-PRETAX> 289,921
<INCOME-PRE-EXTRAORDINARY> 289,921
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 289,921
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.48
<YIELD-ACTUAL> 4.40
<LOANS-NON> 42,446
<LOANS-PAST> 218,055
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 355,117
<ALLOWANCE-OPEN> 332,253
<CHARGE-OFFS> 49,812
<RECOVERIES> 13,752
<ALLOWANCE-CLOSE> 378,000
<ALLOWANCE-DOMESTIC> 328,651
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 49,349
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED AS
PART OF EXHIBIT 13 TO THE FORM 10-KSB FOR THE PERIOD ENDED DECEMBER 31, 1996.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,211,182
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,824,727
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 121,600
<INVESTMENTS-CARRYING> 1,250,000
<INVESTMENTS-MARKET> 1,247,275
<LOANS> 30,394,684
<ALLOWANCE> 332,253
<TOTAL-ASSETS> 37,294,940
<DEPOSITS> 32,758,559
<SHORT-TERM> 574,328
<LIABILITIES-OTHER> 239,262
<LONG-TERM> 0
0
0
<COMMON> 55,933
<OTHER-SE> 3,666,858
<TOTAL-LIABILITIES-AND-EQUITY> 37,294,940
<INTEREST-LOAN> 2,383,793
<INTEREST-INVEST> 38,863
<INTEREST-OTHER> 364,857
<INTEREST-TOTAL> 2,787,513
<INTEREST-DEPOSIT> 1,481,637
<INTEREST-EXPENSE> 1,493,868
<INTEREST-INCOME-NET> 1,293,645
<LOAN-LOSSES> 18,699
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,196,920
<INCOME-PRETAX> 191,114
<INCOME-PRE-EXTRAORDINARY> 191,114
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 191,114
<EPS-PRIMARY> .34
<EPS-DILUTED> .32
<YIELD-ACTUAL> 3.94
<LOANS-NON> 13,058
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 412,502
<ALLOWANCE-OPEN> 260,000
<CHARGE-OFFS> 28,056
<RECOVERIES> 81,610
<ALLOWANCE-CLOSE> 332,253
<ALLOWANCE-DOMESTIC> 291,750
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 40,503
</TABLE>
