<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
Easton Bancorp, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
EASTON BANCORP, INC.
501 IDLEWILD AVENUE
EASTON, MARYLAND 21601
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 26, 1999
This Proxy Statement is furnished in connection with the solicitation
of proxies for use at the Annual Meeting of Stockholders (the "Meeting") of
Easton Bancorp, Inc. (the "Company") to be held on May 26, 1999, at 4:00 p.m.
and at any adjournment thereof, for the purposes set forth in this Proxy
Statement. THE ACCOMPANYING PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE
COMPANY. The principal executive offices of the Company are located at 501
Idlewild Avenue, Easton, Maryland 21601. This Proxy Statement and the
accompanying Form of Proxy were first mailed to the stockholders on or about
April 15, 1999.
VOTING AND REVOCABILITY OF PROXY APPOINTMENTS
The Company has fixed March 19, 1999, as the record date (the "Record
Date") for determining the stockholders entitled to notice of and to vote at the
Meeting. The Company's only class of stock is its Common Stock, par value $0.10
per share (the "Common Stock"). At the close of business on the Record Date,
there were outstanding and entitled to vote 560,318 shares of Common Stock of
the Company, with each share being entitled to one vote. There are no cumulative
voting rights. A majority of the outstanding shares of Common Stock represented
at the Meeting, in person or by proxy, will constitute a quorum.
All proxies will be voted in accordance with the instructions contained
in the proxies. If no choice is specified, proxies will be voted "FOR" the
election to the Board of Directors of all the nominees listed below under
"ELECTION OF DIRECTORS," "FOR" the ratification of the appointment of Rowles &
Company as independent auditors for the Company for the fiscal year ending
December 31, 1999, and, at the proxy holders' discretion, on any other matter
that may properly come before the Meeting. Any stockholder may revoke a proxy
given pursuant to this solicitation prior to the Meeting by delivering an
instrument revoking it or by delivering a duly executed proxy bearing a later
date to the Secretary of the Company. A stockholder may elect to attend the
Meeting and vote in person even if he or she has a proxy outstanding.
Management of the Company is not aware of any other matter to be
presented for action at the Meeting other than those mentioned in the Notice of
Annual Meeting of Stockholders and referred to in this Proxy Statement. If any
other matters come before the Meeting, it is the intention of the persons named
in the enclosed Proxy to vote on such matters in accordance with their judgment.
SOLICITATION
The costs of preparing, assembling and mailing the proxy materials and
of reimbursing brokers, nominees, and fiduciaries for the out-of-pocket and
clerical expenses of transmitting copies of the proxy materials to the
beneficial owners of shares held of record will be borne by the Company. Certain
officers and regular employees of the Company or its wholly-owned subsidiary,
without additional compensation, may use their personal efforts, by telephone or
otherwise, to obtain proxies in addition to this solicitation by mail. The
Company expects to reimburse brokers, banks, custodians and other nominees for
their reasonable out-of-pocket expenses in handling proxy materials for
beneficial owners of the Common Stock. The Company also has retained the
services of Corporate Investor Communication, Inc. to aid in the solicitation of
proxies, for which the Company will pay a fee not to exceed $1,000 plus
reimbursement of expenses.
<PAGE> 3
ELECTION OF DIRECTORS
Article Seven of the Company's Articles of Incorporation and Section
3.2 of the Company's Bylaws provide that the Board of Directors shall be divided
into three classes with each class to be as nearly equal in number as possible.
These provisions also provide that the three classes of directors are to have
staggered terms so that the terms of only approximately one-third of the Board
members will expire at each annual meeting of stockholders. The Company
currently has twelve directors with four each in Class I, Class II and Class
III.
In accordance with Section 3.8 of the Company's Bylaws, in May 1998 the
Board of Directors increased the size of the Board to twelve members from eleven
members and elected R. Michael S. Menzies, Sr. to fill the vacancy resulting
from the newly created directorship and to serve as the new Class I director
until the next annual meeting of stockholders. Accordingly, in accordance with
Section 3.8 of the Company's Bylaws, at the Meeting the stockholders shall elect
a director to serve in this newly created Class I directorship until the Class I
directors stand for election as a whole at the 2001 Annual Meeting of
Stockholders. R. Michael S. Menzies, Sr. is nominated to serve the remaining
term of this newly created Class I directorship.
The current Class I directors are Sheila W. Bateman, W. David Hill,
D.D.S., R. Michael S. Menzies, Sr., and Mahmood S. Shariff, M.D. The terms of
the Class I directors will expire at the 2001 Annual Meeting of Stockholders,
except for R. Michael S. Menzies, Sr. whose term will expire at the Meeting as
discussed above. R. Michael S. Menzies, Sr. will stand for election at the
Meeting for a two-year term which will expire at the 2001 Annual Meeting of
Stockholders. The current Class II directors are J. Parker Callahan, Jr., J.
Fredrick Heaton, D.M.D., William C. Hill, and Roger A. Orsini, M.D. The terms of
the Class II directors will expire at the Meeting and each of these four current
Class II directors has been nominated for reelection and will stand for election
at the Meeting for a three-year term. The current Class III directors are Jack
H. Bishop, D.D.S., David F. Lesperance, Vinodrai Mehta, M.D., and Jerry L.
Wilcoxon, C.P.A. The terms of the Class III directors will expire at the 2000
Annual Meeting of Stockholders. The officers of the Company are elected annually
by the Board of Directors following the annual meeting of stockholders and serve
for terms of one year or until their successors are duly elected and qualified.
It is the intention of the persons named as proxies in the accompanying
proxy to vote FOR the election of the nominees identified below to serve for a
three-year term, expiring at the 2002 Annual Meeting of Stockholders, except for
R. Michael S. Menzies, Sr. who shall serve for a two-year term expiring at the
2001 Annual Meeting of Stockholders. If any nominee is unable or fails to accept
nomination or election (which is not anticipated), the persons named in the
proxy as proxies, unless specifically instructed otherwise in the proxy, will
vote for the election in his or her stead of such other person as the Company's
existing Board of Directors may recommend.
The directors shall be elected by a plurality of the votes cast at the
Meeting. Abstentions and broker non-votes will not be considered to be either
affirmative or negative votes.
The table below sets forth certain information about the nominees,
including the nominee's age, position with the Company, and position with Easton
Bank & Trust Company (the "Bank"), the Company's wholly-owned banking
subsidiary. All of the nominees are currently serving as directors of the
Company and the Bank and are nominated as Class II directors of the Company,
except for R. Michael S. Menzies, Sr. who is nominated as a Class I director of
the Company. Each of the nominees has been a director of the Company since its
formation in 1991, except for J. Parker Callahan, Jr. who was first elected as a
director of the Company in June 1996, and R. Michael S. Menzies, Sr. who was
first elected as a director of the Company in May 1998.
<TABLE>
<CAPTION>
Name Age Position with the Company Position with the Bank
- ---- --- ------------------------- ----------------------
<S> <C> <C> <C>
J. Parker Callahan, Jr. 66 Director Director
J. Fredrick Heaton 51 Director Director
William C. Hill 74 Director Director
R. Michael S. Menzies, Sr. 51 Director, President Director, President,
Chief Executive Officer
Roger A. Orsini 51 Director Director
</TABLE>
2
<PAGE> 4
J. PARKER CALLAHAN, JR., 66, has served as a Class II director of the
Company since June 1996 and a director of the Bank since its formation. Mr.
Callahan is a farmer and a life-long resident of Talbot County and Easton,
Maryland. Since completing high school in 1952, Mr. Callahan has operated a
diversified farming operation. In recent years, he has expanded his operation
and now is an owner and trainer of race horses. Mr. Callahan also was recently
involved in the development of a residential community.
J. FREDRICK HEATON, D.M.D., 51, serves as a Class II director of the
Company and a director of the Bank. Dr. Heaton is a dentist specializing in
endodontics, practicing in Easton, Maryland. Dr. Heaton is a 1970 graduate of
the U.S. Naval Academy with a B.S. in Naval Science and a minor in Mechanical
Engineering. He served on active duty for five years in nuclear submarines. He
received his D.M.D. degree from the Medical University of South Carolina in
1979. In 1981, he completed advanced specialty training at the University of
Maryland Dental School in Baltimore and was awarded a Post-Graduate Certificate
in Endodontics. Dr. Heaton has practiced in Easton since 1981. He is active in
state and local dental societies and is past president of the Maryland State
Association of Endodontists and the Eastern Shore Dental Society. Dr. Heaton has
served on the Board of Trustees for the Maryland State Dental Association and is
past chairman of the Maryland Dental Association's Council on Dental Education.
He is currently chairman of the Maryland State Dental Association's Political
Action Committee. On a local level, Dr. Heaton is a member of the Easton
Business Management Authority, Elks Lodge 1622, Habitat for Humanity, Tred Avon
Yacht Club, Chesapeake Bay Yacht Club, and Talbot Country Club.
WILLIAM C. HILL, 74, serves as a Class II director of the Company and a
director of the Bank. Since 1957, Dr. Hill has been president of Hill's Drug
Store, Inc., which owns and operates three drug stores in Easton, Maryland. He
is also vice president of William Hill Manor, Inc., a local retirement
community, along with being a partner in Idlewild Associates Limited Partnership
and Eastern Shore Retirement Associates. He served in the United States Marine
Corps and was graduated from the Philadelphia College of Pharmacy and Science.
Dr. Hill has served on the Advisory Board of Maryland National Bank and First
Annapolis Savings Bank. He has served as past president of the Eastern Shore
Pharmaceutical Association, the Maryland State Pharmaceutical Association, and
he received the 1992 Talbot County Businessman of the Year Award. He is an
active member of many other national and local organizations. Dr. Hill is a
native of Talbot County.
R. MICHAEL S. MENZIES, SR., 51, has served as a Class I director and
President of the Company and as a director and the President and Chief Executive
Officer of the Bank since May 1998. From November 1989 until May 1998, Mr.
Menzies served as the President and Chief Executive Officer of First Bank of
Frederick and First Frederick Financial Corporation and as the Chairman of the
Board of First Bank of Frederick for part of that time. Mr. Menzies graduated
with a B.A. in Economics from Randolph Macon College in 1970. He received his
CPA degree from Loyola College in 1974 and he has completed various advanced
banking studies during his twenty-eight years in the banking industry. Mr.
Menzies is actively involved in the community as noted by his service as the
Director of the Easton and Frederick Rotary Clubs, Vice Chairman of the Easton
Memorial Hospital, President of the Frederick United Way, President of the
Frederick Chamber of Commerce, President of the 5th District Agriculture Bankers
Association, and Director of the Independent Bankers Association of America.
ROGER A. ORSINI, M.D., 51, serves as a Class II director of the Company
and a director of the Bank. Dr. Orsini is a plastic and reconstructive surgeon
and has been in solo practice in Easton, Maryland since 1985. He is the owner of
Shore Aesthetic and Reconstructive Associates, a general plastic surgical
practice which includes aesthetic surgery, hand, head and neck surgery,
maxillofacial, microvascular and pediatric surgery. He received his bachelor of
science degree from Georgetown University and pursued graduate studies in
physiology, including marine biology at the University of Connecticut. Dr.
Orsini received his medical degree from the Medical College of Pennsylvania,
then served his internship at Presbyterian-University of Pennsylvania and went
on to complete his surgical residency at Thomas Jefferson Hospital, both in
Philadelphia. He then completed a fellowship in plastic and reconstructive
surgery at the Hospital of the University of Pennsylvania. Dr. Orsini has been a
member of the medical staff at The Memorial Hospital at Easton since 1985, where
he has served as chairman of the Tissue Review Committee and served on
Rehabilitation, Cancer and Utilization Committees. He also completed a year-long
physicians' management course sponsored by Memorial Hospital at Easton. Dr.
Orsini is a member of the American Society of Plastic and Reconstructive
Surgeons, Talbot County Medical Society, the American Medical Society and the
American Cleft Palate-Craniofacial Associations. He is licensed
3
<PAGE> 5
to practice medicine in the State of Maryland. He is the chairman and
coordinator of the Eastern Shore Cleft Lip and Palate Team dedicated to provide
care for children with cleft and craniofacial deformities no matter what their
financial status. He is a Board Certified member of the American Society of
Plastic and Reconstructive Surgeons, a fellow of the American College of
Surgeons and a member of the American Society of Laser Medicine. He was a member
of the Coalition of Ambulatory Care for the State of Maryland and was the former
head of the Governor's Task Force to Care for Eastern European Refugees. He is
also a member of the Talbot Country Club.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE FIVE
NOMINEES NAMED ABOVE.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth the name of each director and executive
officer of the Company, in addition to the directors discussed above who are up
for reelection at the Meeting, his or her age, positions held, and a brief
description of his or her principal occupation and business experience for at
least the preceding five years. Except as otherwise indicated below, each of the
directors has been a director of the Company since its formation in 1991. None
of the directors are related, except that William C. Hill is the father of W.
David Hill.
SHEILA W. BATEMAN, 52, serves as a Class I director and Secretary of
the Company and as a director and Secretary of the Bank. Mrs. Bateman is chief
administrative officer of Caulk Management Company which manages various
companies. She was graduated from Goldey Beacom Junior College in 1967 with an
AA degree. She is a former owner of a word processing and document preparation
service. Mrs. Bateman is a partner in HTB Limited Partnership, a real estate
partnership, and is a director and officer of William Hill Manor, Inc. She is
also an officer in seven other private real estate-related businesses. Mrs.
Bateman is a member of Certified Professional Secretary Associates. Her
charitable activities include the American Heart Association and serving on the
Board of Talbot Philanthropies, Inc. and Mid Atlantic Maritime Festival, Inc.
JACK H. BISHOP, D.D.S., 54, serves as a Class III director of the
Company and a director of the Bank. Dr. Bishop has been practicing general
dentistry in Easton, Maryland since 1972. He attended Albright College for his
dental prerequisites and was graduated from the University of Maryland Baltimore
College of Dental Surgery in 1969. He served as a Captain in the U.S. Army
Dental Corps before starting private practice. He is a member of the American
Dental Association, Maryland State Dental Association, and Eastern Shore Dental
Society. Dr. Bishop is an active participant in the Maryland Foundation of
Dentistry for the Handicapped, in which he donates his time and facilities to
elderly, poor, or handicapped individuals for the betterment of their health. He
actively supports the American Heart Association and Talbot County YMCA. Dr.
Bishop is a member of the Oxford United Methodist Church where he is chairman of
the Administrative Council. In the past, Dr. Bishop has been a partner in an
insurance and real estate company as well as a company selling building
supplies. He maintains several commercial and residential real estate holdings.
W. DAVID HILL, D.D.S., 57, serves as a Class I director and Chief
Executive Officer of the Company and a director of the Bank. Dr. Hill has served
as Chairman of the Board of the Company and Chairman of the Board of the Bank
from the inception of the Company and the Bank, except for a brief period when
he took a temporary leave of absence from such positions. Dr. Hill is the
majority stockholder and president of William Hill Manor, Inc., a continuing
care retirement community in Easton, Maryland, which serves the needs of the
elderly population through the provision of skilled nursing, convalescent, and
rehabilitative care. Dr. Hill is the owner and president of the Manor Discovery
Center, a day care center; and a general partner in Idlewild Associates Limited
Partnership, a limited partnership that owns land and income-producing
properties. He is the president of Caulk Management Company and a director of
Hill's Drug Store, Inc. Dr. Hill donated land to the local Red Cross unit,
provided accommodations for the Talbot County Paramedics, is a member of the
Board of Directors of the Talbot County Paramedic Foundation, Inc. and the
chairman of the Talbot County YMCA Advisory Board. He has served as a fund
raiser for the Talbot County Branch of the American Heart Association, Memorial
Hospital at Easton, Talbot County Historical Society, and was voted the Small
Business Person of the Year in 1989. He is a life-long resident of Talbot
County.
4
<PAGE> 6
DAVID F. LESPERANCE, 45, serves as a Class III director of the Company
and a director of the Bank. Mr. Lesperance is the owner and president of David
Lesperance, Inc., doing business as Lesperance Construction Company. The company
builds residential and commercial projects in Talbot, Queen Anne, and Dorchester
counties. Prior to starting his own construction business, Mr. Lesperance was
employed by Willow Construction and Charles E. Brohawn Construction Company. Mr.
Lesperance has been in the construction field for 27 years.
VINODRAI MEHTA, M.D., 57, has served as a Class III director of the
Company and a director of the Bank since 1992. Dr. Mehta has been practicing
internal medicine at Dorchester General Hospital in Cambridge, Maryland since
1975. He attended University Tutorial College, London, England, and later
attended Medical College of Rhinische-Friedrich-Wilhelm University in Bonn,
Germany. He received his M.D. in 1968. After working for a year at St. Paul
Hospital in Addis Ababa, Ethiopia, he came to the United States. He completed
his training program for internal medicine at Greater Baltimore Medical Center
and Union Memorial Hospital, both in Baltimore, Maryland. Since 1975, he has
been a member of the Medical and Surgical Society of Maryland.
MAHMOOD S. SHARIFF, M.D., 62, has served as a Class I director of the
Company and a director of the Bank since 1992. Dr. Shariff is an internist and a
cardiologist. He has been in solo practice in Cambridge, Maryland since 1973. He
received his training in New York City. He is Board Certified in Internal
Medicine and Cardiology. He served as Assistant Professor of Clinical Medicine
at the Mount Sinai School of Medicine in New York City. Dr. Shariff is a Fellow
of the American College of Physicians and the American College of Cardiology. He
is a member of the medical staff at Dorchester General Hospital where he has
been the Chief of Medicine for several years. He also has served in various
other capacities on the executive committee of the medical staff and is
presently serving as the Chief of Medicine. He was elected and served on the
board of directors of Dorchester General Hospital for a six-year period.
JERRY L. WILCOXON, C.P.A., 38, serves as a Class III director and
Treasurer of the Company and as a director of the Bank. Mr. Wilcoxon is a
certified public accountant and is currently Chief Financial Officer of Black
Oak Computer Service, Inc., a technology consulting company located in
Salisbury, Maryland. Prior to that, he was a principal of Caulk Management
Company, Inc., where he served as Chief Financial Officer from August 1989 until
March 1998. Prior to that time, he spent five years as controller for Pioneer
Transportation Systems in Hurlock, Maryland, after a two-year career in public
accounting. Mr. Wilcoxon was born in Baltimore, Maryland and is a graduate of
Shepherd College with a degree in Accounting. Locally he has served on the board
of the Talbot County YMCA and is currently the treasurer of the Board of
Governors of the Talbot Country Club. Residing in Easton since 1983, he is a
member of the St. Peter and Paul Roman Catholic Church and is a member of the
Talbot Country Club.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth for the fiscal years ended December 31,
1996, 1997 and 1998, the cash compensation paid or accrued by the Company and
the Bank, as well as certain other compensation paid or accrued for those years,
for services in all capacities to the chief executive officers of the Company
and the Bank. No executive officer of the Company or the Bank earned total
annual compensation, including salary and bonus, for the fiscal year ended
December 31, 1998, in excess of $100,000.
5
<PAGE> 7
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
----------------------------------------------------------
Name and Securities
Principal Underlying
Position (1) Year Salary ($)(2) Bonus ($) Options (#)
-------------------------- ---- ------------- --------- -----------
<S> <C> <C> <C> <C>
W. David Hill - 1998 $ 1,375 $ -- 0
Chief Executive Officer
of the Company; 1997 $ 1,025 $ -- 0
Chairman of the Board
of the Company and the 1996 $ -- $ -- 0
Bank
R. Michael S. Menzies - 1998 $ 66,667 $ -- 0
President of the
Company; President 1997 $ -- $ -- 0
and Chief Executive
Officer of the Bank 1996 $ -- $ -- 0
Thomas P. McDavid - 1998 $ 91,740 $ -- 2,797
President of the
Company; President 1997 $ 90,073 $15,370 2,797
and Chief Executive
Officer of the Bank 1996 $ 88,046 $10,720 5,593
</TABLE>
- --------------------------
(1) On March 6, 1998, Thomas P. McDavid resigned from all
positions he held with the Company and the Bank. Pursuant to the terms of Mr.
McDavid's resignation, he received his full compensation through March 6, 1999.
Effective May 1, 1998, R. Michael S. Menzies was hired by the Company and the
Bank to take the positions formerly held by Mr. McDavid. Accordingly, the
compensation reflected above for Mr. Menzies reflects the compensation for the
eight-month period of 1998 during which he was employed by the Company and the
Bank.
(2) No directors' fees were paid to Dr. Hill, Mr. Menzies or Mr.
McDavid during the fiscal years ended December 31, 1996, 1997 or 1998, except
for $1,375 paid to Dr. Hill during 1998 and $1,025 paid to Dr. Hill during 1997
for his attendance at meetings of committees of the Board of Directors of the
Bank.
STOCK OPTIONS
The following table sets forth the options granted during the fiscal
year ended December 31, 1998, to Mr. McDavid. There were no other option grants
by the Company during the fiscal year ended December 31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- ----------------------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options Market Price
Underlying Granted to Exercise or at Date of
Options Employees in Base Price Grant Expiration
Name Granted(#)(1) Fiscal Year ($/share) ($)(2) Date(3)
---------------------- ------------- -------------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Thomas P. McDavid 2,797 100% $10.00 $12.50 4/6/98
</TABLE>
6
<PAGE> 8
- ----------------------------
(1) These options were exercisable as of the grant date.
(2) There is no active trading market for the Company's Common
Stock; therefore, the market price of the Common Stock as of February 10, 1998,
the date of grant of the options, is not readily discernible. Based on the sale
of the Common Stock nearest February 10, 1998, of which the Company is aware,
which sale was at $12.50 per share on February 1, 1998, the Company believes
that the market price of the Common Stock was approximately $12.50 per share on
February 10, 1998.
(3) The contractual expiration date for these options was
February 10, 2005; provided, however, these options expired thirty days after
termination of Mr. McDavid's employment for any reason. As stated above, Mr.
McDavid resigned from the Company and the Bank on March 6, 1998, and thus these
options expired on April 6, 1998.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to Mr. McDavid
concerning the exercise of options during the last fiscal year and unexercised
options held as of the end of the fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year End Fiscal Year End
Shares Acquired Exercisable/ Exercisable/
Name on Exercise(1) Value Realized Unexercisable (2) Unexercisable (2)
- ------------------------- ---------------- --------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Thomas P. McDavid 990 $1,980 -0- / -0- -0- / -0-
</TABLE>
- -----------------------
(1) Mr. McDavid exercised options to acquire 150 shares on March
5, 1998, and then on April 6, 1998 exercised options to acquire an additional
840 shares.
(2) All of the options granted to Mr. McDavid expired thirty days
after termination of Mr. McDavid's employment for any reason. As stated above,
Mr. McDavid resigned from the Company and the Bank on March 6, 1998, and thus
all of the outstanding options held by Mr. McDavid expired on April 6, 1998.
COMPENSATION OF DIRECTORS
Directors of the Company received no compensation for their services as
directors during 1998. Directors of the Bank received no compensation for their
services as directors during 1998 except that the outside directors of the Bank
who were not organizers of the Company (Charles T. Capute, Walter E. Chase, Sr.,
and Thomas E. Hill) received a fee of $100 per meeting for each meeting of the
Board of Directors of the Bank they attended during 1998, and each director of
the Bank who was a member of a committee of the Board of Directors of the Bank
received $25 for each committee meeting attended during 1998.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Mr. Thomas P. McDavid, who served as a Class I director and President
of the Company and as a director, President and Chief Executive Officer of the
Bank, resigned from his positions with the Company and the Bank on March 6,
1998. Prior to his employment with the Bank, Mr. McDavid entered into an
Employment Agreement (the "Agreement") with the Company. The Agreement provided
for a base salary as well as bonuses and stock options to be paid to Mr. McDavid
based upon the achievement of certain goals by the Bank. In this regard, in 1998
Mr. McDavid was granted stock options to acquire 2,797 shares of the Company's
Common
7
<PAGE> 9
Stock at $10.00 per share related to the Bank's achievement of certain goals for
the fiscal year ended December 31, 1997.
In connection with Mr. McDavid's resignation, Mr. McDavid received his
base salary as well as health and disability insurance from the Bank through
March 6, 1999. In addition, in accordance with the terms of the Agreement and
the terms of his resignation, Mr. McDavid is restricted from engaging in certain
banking activities within Talbot County for a period of two years from the date
of his resignation. Pursuant to the Agreement, all outstanding options held by
Mr. McDavid expired on April 6, 1998, thirty days after the termination of his
employment with the Company and the Bank.
STOCK OPTION PLAN
The Company has adopted a Stock Option Plan, covering 35,000 shares of
the Common Stock, which is intended to qualify for favorable tax treatment under
Section 422 of the Internal Revenue Code. The Stock Option Plan will be
administered by the Board of Directors of the Company and will provide for the
granting of options to purchase shares of the Common Stock to officers and other
key employees of the Company and the Bank. The purchase price under all such
options intended to qualify as incentive options will not be less than the fair
market value of the shares of Common Stock on the date of grant. Options will be
exercisable upon such terms as may be determined by the body administering the
Stock Option Plan, but in any event, options intended to qualify as incentive
options will be exercisable no later than ten years after the date of grant. As
of the Record Date, no options have been granted under this Stock Option Plan.
COMPLIANCE WITH BENEFICIAL OWNERSHIP REPORTING RULES
Section 16(a) of the Securities Exchange Act of 1934 requires (i) the
Company's directors and executive officers and (ii) persons who own more than
10% of a registered class of the Company's equity securities to file with the
Securities and Exchange Commission (the "SEC"), within certain specified time
periods, reports of ownership and changes in ownership. Such officers, directors
and stockholders are required by SEC regulations to furnish the Company with
copies of all such reports that they file.
To the Company's knowledge, based solely upon a review of copies of
such reports furnished to the Company and representations that no other reports
were required with respect to the year ended December 31, 1998, all persons
subject to the reporting requirements of Section 16(a) filed the required
reports on a timely basis with respect to 1998.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of outstanding
shares of the Company's Common Stock beneficially owned at the Record Date by
(a) each executive officer of the Company, (b) each director of the Company, (c)
all executive officers and directors of the Company as a group, and (d) each
person or entity known to the Company to own more than five percent of the
outstanding Common Stock.
8
<PAGE> 10
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) CLASS(2)
- ------------------------ --------------------- ----------
<S> <C> <C>
Sheila W. Bateman(3) 5,969(5) 1.06%
Jack H. Bishop, D.D.S.(3) 39,586(6) 6.86%
J. Parker Callahan, Jr.(3) 19,189(7) 3.38%
J. Fredrick Heaton, D.M.D.(3) 13,236(8) 2.34%
William C. Hill(3) 35,254(9) 6.10%
W. David Hill, D.D.S.(3) 109,096(10) 18.41%
David F. Lesperance(3) 25,784(11) 4.51%
Vinodrai Mehta, M.D.(3) 42,973(12) 7.43%
R. Michael S. Menzies(3) 1,900 *
Roger A. Orsini, M.D.(3) 25,882(13) 4.53%
Mahmood S. Shariff, M.D.(3) 58,973(14) 10.10%
Jerry L. Wilcoxon, C.P.A.(3) 1,969(15) *
Idlewild Associates(4) 68,758(16) 11.67%
Executive officers and directors of
the Company as a group (12 persons) 379,811(17) 53.80%
</TABLE>
- ------------------------------------
(1) Information relating to beneficial ownership of the Common Stock is
based upon "beneficial ownership" concepts set forth in rules of the
SEC under Section 13(d) of the Securities Exchange Act of 1934. Under
these rules a person is deemed to be a "beneficial owner" of a security
if that person has or shares "voting power," which includes the power
to vote or direct the voting of such security, or "investment power,"
which includes the power to dispose or to direct the disposition of
such security. A person is also deemed to be a beneficial owner of any
security of which that person has the right to acquire beneficial
ownership within 60 days. Under the rules, more than one person may be
deemed to be a beneficial owner of the same securities, and a person
may be deemed to be a beneficial owner of securities as to which he has
no beneficial interest. For instance, beneficial ownership includes
spouses, minor children and other relatives residing in the same
household, and trusts, partnerships, corporations or deferred
compensation plans which are affiliated with the principal.
(2) Percentage is determined on the basis of 560,318 shares of Common Stock
issued and outstanding plus shares subject to options or warrants held
by the named individual for whom the percentage is calculated which are
exercisable within the next 60 days as if outstanding, but treating
shares subject to warrants or options held by others as not
outstanding. An asterisk (*) indicates less than 1% ownership.
(3) Address is 501 Idlewild Avenue, P. O. Box 629, Easton, Maryland 21601.
(4) Address is 501 Dutchman's Lane, Easton, Maryland 21601.
(5) Includes 1,869 shares Mrs. Bateman has the right to acquire within 60
days pursuant to the exercise of warrants. Also includes 1,500 shares
owned by Mrs. Bateman's husband in which she shares voting and
investing power.
(6) Includes 16,557 shares Dr. Bishop has the right to acquire directly or
indirectly within 60 days pursuant to the exercise of warrants. Also
includes 8,000 shares for which the beneficial ownership is
attributable to him as a result of his 20% interest in Idlewild
Associates Limited Partnership.
(7) Includes 7,189 shares Mr. Callahan has the right to acquire within 60
days pursuant to the exercise of warrants.
(8) Includes 5,515 shares Dr. Heaton has the right to acquire within 60
days pursuant to the exercise of warrants. Also includes 230 shares
owned by Dr. Heaton's wife in which he shares voting and investing
power.
9
<PAGE> 11
(9) Includes 17,254 shares Mr. Hill has the right to acquire directly or
indirectly within 60 days pursuant to the exercise of warrants. Also
includes 8,000 shares for which the beneficial ownership is
attributable to him as a result of his 20% interest in Idlewild
Associates Limited Partnership.
(10) Includes 32,353 shares Dr. Hill has the right to acquire directly or
indirectly within 60 days pursuant to the exercise of warrants. Also
includes 10,000 shares for which the beneficial ownership is
attributable to him as a result of his 25% interest in Idlewild
Associates Limited Partnership and 100 shares owned by Dr. Hill's wife
in which he shares voting and investing power.
(11) Includes 10,784 shares Mr. Lesperance has the right to acquire within
60 days pursuant to the exercise of warrants. Also includes 1,449
shares owned by Mr. Lesperance's wife in which he shares voting and
investing power.
(12) Includes 17,973 shares Dr. Mehta has the right to acquire within 60
days pursuant to the exercise of warrants.
(13) Includes 10,825 shares Dr. Orsini has the right to acquire within
60 days pursuant to the exercise of warrants.
(14) Includes 23,413 shares Dr. Shariff has the right to acquire within 60
days pursuant to the exercise of warrants. Also includes 3,783 shares
owned by Dr. Shariff's wife in which he shares voting and investing
power and 10,000 shares held for the benefit of their children in which
he shares voting and investing power with his wife.
(15) Includes 1,869 shares Mr. Wilcoxon has the right to acquire within 60
days pursuant to the exercise of warrants.
(16) Includes 28,758 shares Idlewild Associates Limited Partnership has the
right to acquire within 60 days pursuant to the exercise of warrants.
Partners in Idlewild Associates Limited Partnership include Dr. Bishop,
Mr. Hill, and Dr. Hill, and a proportionate interest of these 28,758
shares are also included as beneficially owned by such persons.
(17) Includes 145,601 total shares the officers and directors have the right
to acquire directly or indirectly within 60 days pursuant to the
exercise of warrants.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank leases approximately 600 square feet of office space in the
main office to William Hill Manor, Inc. ("WHM") at a rate of $14.00 per square
foot for five years. Rent received totalled $7,938 for each of the years ended
December 31, 1996, 1997 and 1998. Dr. W. David Hill, a director of the Bank and
the Company, is the Chief Executive Officer, founder and principal stockholder
of WHM. Two other directors of the Company and the Bank, Sheila W. Bateman and
William C. Hill, are officers and directors of WHM. Sheila W. Bateman also is
the Secretary of the Company and the Bank. The Bank currently leases
approximately 72 square feet of space from WHM in which it operates a branch
office at WHM's retirement facility. Activities at this branch are limited to
receiving checks and accepting deposits. The lease has a term of two years with
rent of $3,600 per year. The terms of the lease were based upon terms upon which
this space was previously leased to another bank. In 1997 the Company engaged
David Lesperance, Inc. ("DLI") to complete the construction of the second floor
of the Bank's main office. David F. Lesperance, a director of the Company and
the Bank, is the owner of DLI. The total cost for the construction contract was
approximately $237,000. DLI completed the construction in 1997. DLI was selected
through a competitive bidding process. Management believes that the terms of the
above-described transactions are at least as favorable to the Company and the
Bank as could have been obtained in negotiated transactions with independent
third parties.
The Company and the Bank have banking and other transactions in the
ordinary course of business with the directors and officers of the Company and
the Bank and their affiliates, including members of their families or
corporations, partnerships, or other organizations in which such officers or
directors have a controlling interest, on substantially the same terms
(including price, or interest rates and collateral) as those prevailing at the
time for comparable transactions with unrelated parties. Such transactions do
not involve more than the normal risk of collectibility or present other
unfavorable features to the Company and the Bank. Loans to individual directors
and officers must comply with the Bank's lending policies and statutory lending
limits and directors with a personal interest in any loan application are
excluded from the consideration of such loan application.
10
<PAGE> 12
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Because all of the Company's operations are conducted through the Bank,
the Bank, but not the Company, has an Audit and Compliance Committee and a
Compensation Committee. In 1998, the Audit and Compliance Committee was composed
of R. Michael S. Menzies, Vinodrai Mehta, M.D., and Jerry L. Wilcoxon, C.P.A.
The Audit and Compliance Committee met once in 1998. This committee has the
responsibility for reviewing the financial statements, evaluating internal
accounting controls, reviewing reports of regulatory authorities, and
determining that all audits and examinations required by law are performed. The
committee recommends to the Board the appointment of the independent auditors
for the next fiscal year, reviews and approves the auditors' audit plans, and
reviews with the independent auditors the results of the audit and management's
response thereto. The committee is responsible for overseeing the entire audit
function and appraising the effectiveness of internal and external audit
efforts. The committee reports its findings to the Board of Directors.
The Compensation Committee is responsible for establishing the
compensation plans for the Bank. Its duties include the development with
management of all benefit plans for employees of the Bank, the formulation of
bonus plans, incentive compensation packages, and medical and other benefit
plans. This committee met four times in 1998. In 1998 the Compensation Committee
was composed of Jack H. Bishop, D.D.S., J. Parker Callahan, Jr., J. Fredrick
Heaton, D.M.D., W. David Hill, D.D.S., R. Michael S. Menzies, and Jerry L.
Wilcoxon, C.P.A.
The Company does not have a nominating committee. The entire Board of
Directors is responsible for nominating individuals for election to the
Company's Board of Directors and welcomes recommendations made by stockholders
of the Company. Any recommendations for the 2000 Annual Meeting of Stockholders
should be made in writing addressed to the Company's Board of Directors, P. O.
Box 629, Easton, Maryland 21601, and should be made prior to December 16, 1999.
The Board of Directors of the Company held eight meetings, and the
Board of Directors of the Bank held fourteen meetings, during the year ended
December 31, 1998. All of the directors of the Company attended at least 75% of
the aggregate of such board meetings and the meetings of each committee on which
they served, except for J. Parker Callahan, Jr., Vinodrai Mehta, M.D., Roger A.
Orsini, M.D., and Mahmood S. Shariff, M.D.
RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS
Subject to ratification by the stockholders, the Board of Directors has
reappointed Rowles & Company as independent auditors to audit the financial
statements of the Company for the 1999 fiscal year. Rowles & Company has served
as the independent auditors for the Company since 1992.
A representative of Rowles & Company is expected to be present at the
Meeting and will have an opportunity to make a statement, if the representative
so desires, and will be available to respond to any appropriate questions
stockholders may have.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF
ROWLES & COMPANY AS INDEPENDENT AUDITORS.
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING OF STOCKHOLDERS
Notices of stockholder proposals intended to be presented at the
Meeting should have been provided to the Company by no later than March 1, 1999.
With respect to stockholder proposals for which notices were not provided to the
Company by March 1, 1999, the person or persons designated as proxies in
connection with the Company's solicitation of proxies shall have the
discretionary voting authority to vote the shares of the Company's Common Stock
represented by the proxy cards returned to the Company in accordance with their
judgment on such matter when such proposal is presented at the Meeting.
11
<PAGE> 13
STOCKHOLDER PROPOSALS FOR 2000 ANNUAL MEETING OF STOCKHOLDERS
Stockholder proposals intended to be presented at the 2000 Annual
Meeting of Stockholders and included in the Company's Proxy Statement and form
of proxy for that meeting must be received by the Company no later than December
16, 1999. Any stockholder of the Company who intends to present a proposal at
the 2000 Annual Meeting of Stockholders, which proposal is not included in the
Company's Proxy Statement, must deliver notice of such proposal to the Company
no later than March 1, 2000. If the proposing stockholder fails to deliver
notice of such proposal to the Company by such date, then the person or persons
designated as proxies in connection with the Company's solicitation of proxies
shall have the discretionary voting authority to vote the shares of the
Company's Common Stock represented by the proxy cards returned to the Company in
accordance with their judgment on such matter when such proposal is presented at
the 2000 Annual Meeting. Any such notice of a stockholder proposal must be made
in writing addressed to Sheila W. Bateman, Easton Bancorp, Inc., P.O. Box 629,
Easton, Maryland 21601.
ANNUAL REPORTS
COPIES OF THE COMPANY'S 1998 ANNUAL REPORT ARE BEING MAILED TO ALL
STOCKHOLDERS TOGETHER WITH THIS PROXY STATEMENT. THE COMPANY WILL PROVIDE,
WITHOUT CHARGE, TO ANY STOCKHOLDER OF RECORD AS OF MARCH 19, 1999, WHO SO
REQUESTS IN WRITING A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE
YEAR ENDED DECEMBER 31, 1998, AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. ANY SUCH REQUESTS SHOULD BE DIRECTED TO SHEILA W. BATEMAN, EASTON
BANK & TRUST COMPANY, 501 IDLEWILD AVENUE, P.O. BOX 629, EASTON, MARYLAND 21601.
OTHER MATTERS
The Board of Directors knows of no business other than that set forth
above to be transacted at the Meeting, but if other matters requiring a vote of
the stockholders arise, the persons designated as proxies will vote the shares
of Common Stock represented by the proxy cards in accordance with their judgment
on such matters.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ W. David Hill
W. David Hill, D.D.S.
Chief Executive Officer
Easton, Maryland
April 15, 1999
12
<PAGE> 14
Appendix A
ANNUAL REPORT TO STOCKHOLDERS
DECEMBER 31, 1998
EASTON BANCORP, INC.
<PAGE> 15
Easton Bancorp, Inc.
March 1999
To our Stockholders:
As we approach the new millenium, your community bank is positioning to
deliver meaningful value to all of our stakeholders: stockholders, customers,
associates, and community. The attached financial statements reflect improved
earnings based mostly on the realization of a deferred tax credit that was
recognized in 1998. This credit is essentially a financial statement reward for
12 consecutive quarters of profitability and offsets increased loan loss
provisions. This produced a return on equity of 10.55% and earnings per share of
$0.79, up from $0.52 in 1997.
At year end your Board of Directors decided to expand our community
bank services to Caroline County and approved the formation of Denton Bank and
Trust, a division of Easton Bank & Trust Company. Mr. Jeffrey Heflebower was
elected Executive Vice President/Director and will spearhead our Caroline County
initiative that will begin as a loan production office and become a full service
banking branch upon receipt of regulatory approval. This effort, combined with
strategic objectives developed in our 1998 planning session, will significantly
expand our ability to grow earnings and stockholder value over the long term. We
celebrated our fifth anniversary this year with a commitment to deliver
personal, private, and professional banking services to the communities we
serve. By selecting Easton Bank & Trust for your banking needs, you too can
participate in our future success. On behalf of your Board of Directors and
associates, we thank you for your continued support.
/s/ W. David Hill /s/ R. Michael S. Menzies, Sr.
W. David Hill, DDS R. Michael S. Menzies, Sr.
Chairman of the Board President
501 Idlewild Avenue, P.O. Box 619, Easton, MD 21601
410-819-0300 FAX 410-819-8091
<PAGE> 16
EASTON BANCORP, INC.
EASTON BANK & TRUST COMPANY
OUR MISSION
Easton Bank & Trust Company is a community bank dedicated to the
delivery of personal, private, and professionally designed financial solutions
for individual and small business needs. Easton Bank & Trust is committed to
attaining superior results for its stockholders, customers, associates, and
community.
CORE VALUES
At Easton Bank & Trust, we believe our success is founded upon these
core values:
- - PROFITABILITY: We will constantly pursue profitability for the
stakeholders of the Company, including its stockholders, customers,
associates, and community.
- - TEAMWORK: As a team we will work together to produce a happy, healthy,
and fun work environment which results in the accomplishment of our
strategic objectives.
- - ABSOLUTE INTEGRITY: We will always treat customers, prospects, and
associates with respect, honesty, and confidentiality regarding
everything we say or do.
- - PROFESSIONALISM: As professionals we are committed to continuous,
lifelong learning, responsive and reliable quality service, personal
responsibility, and the courage to seek ambitious aspirations.
- - RELATIONSHIPS: We are in the business of personal service, which is
based upon trusting relationships.
- - EXCELLENCE: Our Core Values exist in pursuit of excellence and the
practice of the 7 Habits: Be Proactive, Begin with an End in Mind, Put
First Things First, Think Win Win, Seek First to Understand, Find
Synergy, and Keep the Saw Sharp.
2
<PAGE> 17
This Annual Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements appear in a
number of places in this Annual Report and include all statements regarding the
intent, belief or current expectations of the Company, its directors or its
officers with respect to, among other things: (i) the Company's financing plans;
(ii) trends affecting the Company's financial condition or results of
operations; (iii) the Company's growth strategy and operating strategy; and (iv)
the declaration and payment of dividends. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various factors
discussed herein and those factors discussed in detail in the Company's filings
with the Securities and Exchange Commission.
BUSINESS OF THE COMPANY
Easton Bancorp, Inc. (the "Company") was incorporated as a Maryland
corporation on July 19, 1991, to become a one-bank holding company by acquiring
all of the capital stock of Easton Bank & Trust Company (the "Bank") upon its
formation. The Bank commenced business on July 1, 1993, and the only activity of
the Company since then has been the ownership and operation of the Bank. The
Bank was organized as a nonmember state bank under the laws of the State of
Maryland. The Bank is engaged in a general commercial banking business,
emphasizing in its marketing the Bank's local management and ownership, from its
main office location in its primary service area, Talbot County, Maryland. In
addition, in February 1999 the Bank opened a loan production office in Denton,
Maryland, which is in Caroline County. 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 1998 represented the Bank's fifth full year of
operations. The Bank has shown net income since the fourth quarter of 1995.
Based on this sustained history of profits, the Company has recorded its
deferred tax asset. As a result, the Company is reporting net income of $444,044
for 1998, compared to $289,921 for 1997.
RESULTS OF OPERATIONS
The Company reported net income of $444,044, or $.79 per share, for the
year ended December 31, 1998, which represents an increase of $154,123, or $.27
per share, from $289,921, or $.52 per share, for the year ended December 31,
1997. The primary reason for the change in profitability is the recognition of
the deferred tax asset. Management evaluated the need for an allowance to write
the deferred tax asset down and determined that since the Company had reported
net income for all quarters of the last three years, the deferred taxes were
realizable.
Net interest income increased $16,405, or 1.01%, to $1,645,852 in 1998
from $1,629,447 in 1997. This increase in net interest income was the result of
a $248,661 increase in interest income and a $232,256 increase in
3
<PAGE> 18
interest expense associated with the Bank's continued development of its deposit
and loan base. During the year, the Company experienced a decreasing net
interest spread to 3.69% in 1998 from 4.23% in 1997. The net interest margin
decreased to 3.84% in 1998 from 4.40% in 1997. The retarded growth in net
interest income and the declines in the interest spread and interest margin,
were the result of placing one loan, in the amount of $2.3 million, on
non-accrual status as of March 31, 1998. Lost interest on this nonperforming
asset totals in excess of $200,000 for 1998. The loan is secured by real estate
and is partially guaranteed by the U. S. Department of Agriculture Rural
Community & Development Program. The U. S. Government is responsible for 80% of
any deficiency after liquidation of the collateral. The largest real estate
parcel was sold in October, 1998, with settlement occurring on December 30,
1998. Because the sale was not ratified by the bankruptcy court, the proceeds
are held in escrow. Most of the funds are held in a noninterest-bearing account
with the Company. The other real estate that is collateral for the loan is under
contract of sale with settlement expected to occur by March 31, 1999.
The provision for loan losses was $224,281 in 1998, an increase of
$142,474 from the $81,807 provision in 1997. The provision increased because of
the nonperforming loan discussed above and because in 1998 the Company
experienced net charge-offs of $72,281 compared to net charge-offs for 1997 of
$36,060.
The Company had loans over ninety days delinquent on which the accrual
of interest had been discontinued totaling $1,143,251 and $42,446 as of December
31, 1998 and 1997, respectively. At December 31, 1998, the accrual of interest
had been discontinued on loans totaling $107,157 where the loans were less than
ninety days delinquent. The Company's allowance for loan losses as a percentage
of its year-end loans was 1.57% at December 31, 1998, compared to 1.08% at
December 31, 1997. Net charge-offs of $72,281 during 1998 resulted in a ratio of
net charge-offs to average loans of .21%. During 1997, the Company had net
charge-offs of $36,060 which was .11% of average loans.
Noninterest income increased $41,305, or 43.29%, to $136,720 in 1998
from $95,415 in 1997. Management increased the return and overdraft charges and
took a more aggressive position on waiving fees during 1998, which increased
these fees by $30,510. In June 1997, the Company implemented a service charge on
NOW accounts. The 1998 fees increased as the volume of NOW accounts increased
and as a result of a full year of these fees.
Noninterest expense increased $159,064, or 11.76%, to $1,512,198 in
1998 from $1,353,134 in 1997. The increase was the result of an increase of
$164,671 of compensation and related expenses due to annual increases and the
hiring of one full-time employee and one part-time employee. Also, on March 6,
1998, the Bank's former President and Chief Executive Officer, Thomas P.
McDavid, and the Company entered into a mutual agreement to accept the
resignation of Mr. McDavid, while honoring his employment contract through March
6, 1999. Mr. McDavid's compensation during his severance period was accrued in
1998 and totals $77,114 for the period from May 1, 1998 until March 6, 1999. On
May 1, 1998, the Bank hired a new President and Chief Executive Officer, R.
Michael S. Menzies, Sr.
The Company's efficiency ratio, which is noninterest expense as a
percentage of the sum of net interest income and noninterest income,
deteriorated to 84.83% in 1997, compared to 78.45% in 1997. This deterioration
is the result of other expenses increasing at a faster rate than the net
interest income.
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
1998 and 1997 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
4
<PAGE> 19
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 1998 was 3.84%,
compared to 4.40% for 1997. The decrease is due primarily to the decline in
mortgage loan yields as a result of the large nonperforming loan discussed under
Results of Operations. As a result of the significant amount of fixed rate
loans, the Bank's income may increase in a falling interest rate environment and
decrease in a rising interest rate environment. Management of the Company
expects to increase the net margin on interest-earning assets to a level
comparable to the 1997 results. The net margin may decline or stay the same,
however, if competition increases, loan demand or quality 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 1998 and 1997.
5
<PAGE> 20
AVERAGE BALANCES, INCOME AND EXPENSES, AND RATES
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1998 December 31, 1997
---------------------------------------- ----------------------------------------
Average Income/ Yield/ Average Income/ Yield/
ASSETS Balance Expenses Rate Balance Expenses Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 5,426,336 $ 292,264 5.39% $ 4,061,651 $ 223,281 5.50%
Interest-bearing deposits 33,010 1,723 5.22% 3,819 211 5.53%
Investment securities:
U.S. Government agency 2,768,164 159,044 5.75% 1,302,055 77,907 5.98%
Other 140,860 10,487 7.44% 123,898 8,982 7.25%
----------- ---------- ----- ----------- ---------- -----
Total investment securities 2,909,024 169,531 5.83% 1,425,953 86,889 6.09%
----------- ---------- ----- ----------- ---------- -----
Loans:
Demand and time 3,247,262 278,469 8.58% 3,198,500 314,191 9.82%
Mortgage 29,060,941 2,499,682 8.60% 26,558,797 2,437,593 9.18%
Installment 2,633,811 284,975 10.82% 2,131,907 215,818 10.12%
----------- ---------- ----- ----------- ---------- -----
Total loans 34,942,014 3,063,126 8.77% 31,889,204 2,967,602 9.31%
Allowance for loan losses 446,883 -- -- 347,325 -- --
----------- ---------- ----- ----------- --------- -----
Total loans, net of allowance 34,495,131 3,063,126 8.88% 31,541,879 2,967,602 9.41%
----------- ---------- ----- ----------- ---------- -----
Total interest-earning assets 42,863,501 3,526,644 8.23% 37,033,302 3,277,983 8.85%
----------- ---------- ----- ----------- ---------- -----
Cash and due from banks 794,618 732,418
Premises and equipment 1,682,370 1,624,800
Other assets 446,850 330,160
----------- -----------
Total assets $45,787,339 $39,720,680
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings and NOW deposits $ 8,498,077 $ 260,562 3.07% $ 7,806,635 $ 243,536 3.12%
Money market 4,600,749 164,972 3.59% 4,065,734 158,799 3.91%
Other time deposits 24,713,617 1,404,089 5.68% 21,408,000 1,224,459 5.72%
----------- ---------- ----- ----------- ---------- -----
Total interest-bearing deposits 37,812,443 1,829,623 4.84% 33,280,369 1,626,794 4.89%
Noninterest-bearing deposits 2,649,700 -- -- 1,947,430 -- --
----------- ---------- ----- ----------- ---------- -----
Total deposits 40,462,143 1,829,623 4.52% 35,227,799 1,626,794 4.62%
Borrowed funds 952,924 49,249 5.17% 478,005 21,742 4.55%
----------- ---------- ----- ----------- ---------- -----
41,415,067 1,878,872 4.54% 35,705,804 1,648,536 4.62%
---------- ----- ---------- -----
Other liabilities 161,931 143,505
Stockholders' equity 4,210,341 3,871,371
----------- -----------
Total liabilities and
stockholders equity $45,787,339 $39,720,680
=========== ===========
Net interest spread 3.69% 4.23%
===== =====
Net interest income $1,647,772 $1,629,447
========== ==========
Net interest income/margin 3.84% 4.40%
===== =====
</TABLE>
6
<PAGE> 21
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31, 1997
Compared with 1997 Compared with 1996
Variance Due To Variance Due To
------------------------------------------ -------------------------------------------
Total Rate Volume Total Rate Volume
----- ---- ------ ----- ---- ------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Interest-bearing deposits $ 1,512 $ (102) $ 1,614 $ (319) $ 16 $ (335)
Federal funds sold 68,983 (6,075) 75,058 (141,046) 7,075 (148,121)
Investment Securities:
U.S. Government Agency 81,137 (6,536) 87,673 39,044 7,346 31,698
Other 1,505 275 1,230 8,982 -- 8,982
Loans:
Demand and time (35,722) (40,510) 4,788 13,687 11,897 1,790
Mortgage 62,089 (167,608) 229,697 545,293 (4,947) 550,240
Installment 69,157 18,364 50,793 24,829 (8,760) 33,589
-------- --------- -------- --------- ------- ---------
Total interest income 248,661 (202,192) 450,853 490,470 12,627 477,843
-------- --------- -------- --------- ------- ---------
INTEREST-BEARING LIABILITIES
Savings and NOW deposits 17,026 (4,547) 21,573 7,372 (9,970) 17,342
Money-market deposits 6,173 (14,746) 20,919 70,617 15,260 55,357
Time deposits 179,630 (9,451) 189,081 67,168 (6,768) 73,936
Borrowed funds 27,507 5,898 21,609 9,511 6,704 2,807
-------- --------- -------- --------- ------- -------
Total interest expense 230,336 (22,846) 253,182 154,668 5,226 149,442
-------- --------- -------- --------- ------- ---------
Net interest income $ 18,325 $(179,346) $197,671 $ 335,802 $7,401 $ 328,401
======== ========= ======== ========= ======= =========
</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 $34,495,131 and
$31,541,879 during 1998 and 1997, respectively, which constituted 80.48% and
85.17%, respectively, of average interest-earning assets for the periods. At
December 31, 1998, the Company's loan to deposit ratio was 75.38%, compared to
91.06% at December 31, 1997. The Bank extends loans primarily to customers
located in and near Talbot County. In addition, the Bank opened a loan
production office in Denton, Maryland, in Caroline County, in February 1999.
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.
7
<PAGE> 22
The following table sets forth the composition of the Company's loan
portfolio as of December 31, 1998 and 1997, respectively.
COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1998 1997
------------------------ ------------------------
Percent Percent
Amount of Total Amount Of Total
------ -------- ------ --------
<S> <C> <C> <C> <C>
Commercial $ 3,626,829 10.72% $ 2,270,375 6.46%
Real estate 22,544,807 66.64% 24,273,513 69.10%
Construction 2,459,321 7.27% 3,658,528 10.41%
Home equity 2,067,068 6.11% 2,067,995 5.89%
Consumer 3,133,773 9.26% 2,859,345 8.14%
----------- ------ ----------- -------
Total loans 33,831,798 100.00% 35,129,756 100.00%
====== =======
Less deferred loan origination fees 46,990 69,477
Less allowance for credit losses 530,000 378,000
----------- -----------
Net loans $33,254,808 $34,682,279
=========== ===========
</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, 1998.
LOAN MATURITY SCHEDULE AND SENSITIVITY TO CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
Over One
One Year Through Over Five
Or Less Five Years Years Total
------- ---------- ----- -----
<S> <C> <C> <C> <C>
Commercial $ 2,274,796 $ 1,318,052 $ 33,981 $ 3,626,829
Real estate 9,574,814 11,895,963 1,074,030 22,544,807
Construction 2,459,321 -- -- 2,459,321
Home equity 2,067,068 -- -- 2,067,068
Consumer 663,759 2,470,014 -- 3,133,773
----------- -------------- ----------- --------------
Total $17,039,758 $ 15,684,029 $ 1,108,011 $ 33,831,798
=========== ============== =========== ==============
Fixed interest rate $11,863,124 $ 15,195,762 $ 1,074,030 $ 28,132,916
Variable interest rate 5,176,634 488,267 33,981 5,698,882
----------- -------------- ----------- --------------
Total $17,039,758 $ 15,684,029 $ 1,108,011 $ 33,831,798
=========== ============== =========== ==============
</TABLE>
As of December 31, 1998, $28,132,916, or 83.16%, 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.
8
<PAGE> 23
The Company has the following commitments, lines of credit, and letters
of credit outstanding as of December 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Construction loans $1,639,393 $1,319,956
Lines of credit 2,012,998 1,472,709
Overdraft protection lines 186,670 144,026
Standby letters of credit 535,166 382,767
---------- ----------
Total $4,374,227 $3,319,458
========== ==========
</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 but has included in the allowance for credit losses a provision for
losses.
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, 1998 and 1997, 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 1998, the allowance for loan losses was
1.57% of outstanding loans, compared to 1.08% at year-end 1997.
9
<PAGE> 24
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1998 1997
-------------- ------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Commercial $ 59,183 11.17% $ 17,926 4.74%
Real estate 348,660 65.78% 214,117 56.64%
Construction 12,297 2.32% 18,293 4.84%
Home equity 12,842 2.42% 12,958 3.43%
Consumer 57,340 10.82% 31,445 8.32%
Commitments 39,678 7.49% 33,912 8.97%
General -- 0.00% 49,349 13.06%
-------- ------ -------- ------
Total $530,000 100.00% $378,000 100.00%
======== ====== ======== ======
</TABLE>
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Balance at beginning of year $ 378,000 $ 332,253
Loan losses:
Commercial 44,331 8,244
Real Estate -- 18,278
Consumer 53,450 23,290
----------- -----------
Total loan losses 97,781 49,812
----------- -----------
Recoveries on loans previously charged off
Commercial 16,453 1,885
Real Estate -- 7,500
Consumer 9,047 4,367
----------- -----------
Total loan recoveries 25,500 13,752
----------- -----------
Net loan losses 72,281 36,060
Provision for loan losses charged to expense 224,281 81,807
----------- -----------
Balance at end of year $ 530,000 $ 378,000
=========== ===========
Total loans outstanding at end of year $33,831,799 $35,129,756
Allowance for loan losses to loans outstanding
at end of year 1.57% 1.08%
Net charge-offs to average loans .21% 0.11%
</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.
10
<PAGE> 25
The Company had nonperforming loans totaling $1,250,408 and $42,466 as
of December 31, 1998 and 1997, 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, 1998.
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, 1998, the Company had forty-two borrowers with loans considered by
management to be potential problem loans totaling approximately $645,656. 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
22.65% of average deposits for 1998, compared to 17.67% of average deposits for
1997. 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, 1998, is
presented in the table "Interest Sensitivity Analysis." The difference between
rate-sensitive assets and rate-sensitive liabilities, or the interest rate
sensitivity gap, is shown at the bottom of the table. The Company was
liability-sensitive through the one-year period but asset-sensitive for longer
time horizons. For liability-sensitive institutions, if interest rates should
increase, the net
11
<PAGE> 26
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, 1998
--------------------------------------------------------------------------
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 $ 7,269,903 $ -- $ -- $ -- $ 7,269,903
Investment securities
available for sale -- 451,673 4,137,728 396,225 4,985,626
Loans 9,330,334 8,349,045 15,728,660 423,759 33,831,798
------------ ------------ ----------- ----------- -----------
Total earning assets $ 16,600,237 $ 8,800,718 $19,866,388 $ 819,984 $46,087,327
============ ============ =========== =========== ===========
LIABILITIES
Interest-bearing liabilities:
Money market and NOW $ 9,008,316 $ -- $ -- $ -- $ 9,008,316
Savings deposits 4,497,360 -- -- -- 4,497,360
Club accounts -- 26,434 -- -- 26,434
Certificates $100,000 and over 1,890,405 1,949,654 1,238,331 -- 5,078,390
Certificates under $100,000 4,724,440 9,111,601 6,944,488 45,313 20,825,842
Note payable -- -- -- 1,000,000 1,000,000
Securities sold under
agreements to repurchase 281,019 -- -- -- 281,019
------------ ------------ ----------- ----------- -----------
Total interest-bearing liabilities $ 20,401,540 $ 11,087,689 $ 8,182,819 $ 1,045,313 $40,717,361
============ ============ =========== =========== ===========
Period gap $ (3,801,303) $ (2,286,971) $11,683,569 $ (225,329) $ 5,369,966
Cumulative gap $ (3,801,303) $ (6,088,274) $ 5,595,295 $ 5,369,966 $ 5,369,966
Ratio of cumulative gap to total
earning assets (8.25)% (13.21)% 12.14% 11.65% 11.65%
</TABLE>
As noted in the table "Loan Maturity Schedule and Sensitivity to Changes
in Interest Rates," as of December 31, 1998, approximately $6,086,150, or
17.99%, of the loan portfolio consisted of commercial loans and real estate
construction loans. Of this amount, $4,734,117, or 77.79%, matures within one
year.
The table "Investment Securities Maturity Distribution and Yields" shows
that as of December 31, 1998, $451,673 of the investment portfolio matures in
one year or less. Most of the debt securities mature within five years. All
debt securities of the Company have been classified as "available-for-sale."
The equity securities are comprised of Federal Home Loan Bank stock which is
also classified as "available-for-sale" even though the Company must hold this
stock to borrow from the Federal Home Loan Bank. Another source of liquidity is
the $6,000,000 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. The Company has used $1,000,000 of the Federal
Home Loan Bank line.
12
<PAGE> 27
INVESTMENT SECURITIES MATURITY DISTRIBUTION AND YIELDS
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
---------------------- -----------------------
Year-end Year-end
Book Value Yields Book Value Yields
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
U.S. Government Agency securities
One year or less $ 451,673 5.7% $ 500,000 5.9%
Over one through five years 4,137,728 5.5% 1,000,000 6.1%
Over five years 250,625 5.8% -- --%
---------- ----- ---------- -----
Total U.S. Government Agency securities $4,840,026 5.6% $1,500,000 6.0%
========== ===== ========== =====
</TABLE>
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Average interest-bearing liabilities increased $5,006,993, or 14.83%,
to $38,765,367 in 1998, from $33,758,374 in 1997. Average interest-bearing
deposits increased $4,532,074, or 13.62%, to $37,812,443 in 1998, from
$33,280,369 in 1997. These increases resulted from increases in all categories
of interest-bearing deposits, except money market accounts, resulting from the
continued promotional efforts of management to increase the deposits and loans
of the Bank. At December 31, 1998, total deposits were $44,118,960, compared to
$38,088,152 at December 31, 1997, an increase of 15.84%.
The following table sets forth the deposits of the Company by category
as of December 31, 1998 and 1997, respectively.
DEPOSITS
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1998 1997
--------------------------------- -----------------------------
Percent of Percent of
Amount Deposits Amount Deposits
------ -------- ------ --------
<S> <C> <C> <C> <C>
Demand deposit accounts $ 4,682,618 10.61% $ 2,060,848 5.41%
NOW accounts 4,886,335 11.08% 4,270,427 11.21%
Money market accounts 4,121,981 9.34% 5,057,846 13.28%
Savings accounts 4,523,794 10.25% 3,581,048 9.40%
Time deposits less than
$100,000 20,825,842 47.21% 18,969,383 49.81%
Time deposits of $100,000
or over 5,078,390 11.51% 4,148,600 10.89%
----------- ------ ----------- ------
Total deposits $44,118,960 100.00% $38,088,152 100.00%
=========== ====== =========== ======
</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
$5,101,018 during 1998. 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 75.38% at December 31, 1998,
and 91.06% at the end of 1997, with a 1998 ratio of average loans to average
deposits of 85.25%. The maturity distribution of the Company's time deposits
over $100,000 at December 31, 1998, is shown in the following table.
13
<PAGE> 28
MATURITIES OF CERTIFICATES OF DEPOSIT
AND OTHER TIME DEPOSITS OF $100,000 OF MORE
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------------------
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 $1,890,405 $1,334,971 $614,683 $1,238,331 $5,078,390
</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 $396,897 and
$478,055 during 1998 and 1997, 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 1998 was $136,720, compared to noninterest
income in 1997 of $95,415, an increase of $41,305, or 43.29%. Of this increase,
$30,510 is a result of the increase in return check and overdraft charges.
Management increased the return and overdraft charges and took a more aggressive
position on waiving fees during 1998 which increased these fees by $30,510. In
June 1997, the Company implemented a service charge on NOW accounts. The 1998
fees increased as the volume of NOW accounts increased and as a result of a full
year of these fees.
The following table presents the principal components of noninterest
income for the years ended December 31, 1998 and 1997, respectively.
NONINTEREST INCOME
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Service charges on deposit accounts $ 99,654 $62,588
Other noninterest revenue 37,066 32,827
-------- -------
Total noninterest income $136,720 $95,415
======== =======
Noninterest income as a percentage of average total assets 0.30% 0.24%
======== =======
</TABLE>
14
<PAGE> 29
NONINTEREST EXPENSE
Noninterest expense increased $159,064, or 11.76%, to $1,512,198 in
1998 from $1,353,134 in 1997. The increase was the result of an increase of
$164,671 of compensation and related expenses due to annual increases and the
hiring of one full-time employee and one part-time employee. Also, on March 6,
1998, the Bank's former President and Chief Executive Officer, Thomas P.
McDavid, and the Company entered into a mutual agreement to accept the
resignation of Mr. McDavid, while honoring his employment contract through March
6, 1999. Mr. McDavid's compensation during his severance period was accrued in
1998 and totals $77,114 for the period from May 1, 1998 until March 6, 1999. On
May 1, 1998, the Bank hired a new President and Chief Executive Officer, R.
Michael S. Menzies, Sr.
The following table presents the principal components of noninterest
expense for the years ended December 31, 1998 and 1997 respectively.
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Compensation and related expenses $ 909,209 $ 744,538
Occupancy expense 70,782 71,871
Furniture and equipment expense 87,647 99,050
Advertising 41,667 47,417
Professional fees 72,110 58,421
Data processing 84,332 77,487
Deposit assessment 4,620 3,712
Insurance 13,023 14,830
Loan reports and collection costs 6,598 8,086
Organizational expense amortization 23,482 46,964
Stationery and supplies 46,339 44,833
Telephone and postage 44,353 35,751
Other 108,036 100,174
---------- ----------
Total noninterest expense $1,512,198 $1,353,134
========== ==========
Noninterest expense as a percentage of average total assets 3.30% 3.41%
========== ==========
</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, 1998, 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 12.6% 12.5% 4.0%
Total risk-based capital ratio 13.9% 13.7% 8.0%
Tier 1 leverage ratio 10.1% 10.0% 3.0%
</TABLE>
15
<PAGE> 30
ACCOUNTING RULE CHANGES
Statement No. 130 of the Financial Accounting Standards Board
("FASB"), Reporting Comprehensive Income, requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income of the
Company would include unrealized gains and losses on securities available for
sale, net of tax. FASB 130 is effective for years beginning after December 15,
1997. The Company adopted FASB 130 in the financial statements for the
year-ended December 31, 1998 with restatement of prior periods.
FASB Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information, requires that a public company report
financial and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by management in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. FASB 131 was effective for financial statements for
periods beginning after December 15, 1997. The standard had no effect on the
Company's financial statements.
FASB Statement No. 132, Employers' Disclosures about Pension
and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88,
and 106, standardizes the disclosure requirements for pension and postretirement
benefits. It requires additional information on the changes in benefit
obligations and fair values of plan assets and eliminates certain disclosures
that are no longer useful. It was effective for fiscal years beginning after
December 15, 1997. FASB 132 had no effect on the financial statements of the
Company since the Company does not have a defined benefit plan or offer
postretirement benefits.
FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. FASB 133 is effective for fiscal years
beginning after June 15, 1999. The Company elected early adoption of this
pronouncement, taking advantage of a provision in the Statement allowing a one
time transfer of securities from the held-to-maturity portfolio.
FASB Statement No. 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise, is an amendment of FASB Statement No. 65. After
the securitization of a mortgage loan held for sale, any retained
mortgage-backed securities shall be classified in accordance with the provisions
of FASB 115. However, a mortgage banking enterprise must classify as trading any
mortgage-backed securities that it commits to sell before or during the
securitization process. This Statement shall be effective for the first fiscal
quarter beginning after December 15, 1998. The Company's financial statements
were not impacted by this Statement.
Statement of Position 98-5 of the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants,
Reporting on the Costs of Start-up Activities, requires that start-up costs and
organization costs be expensed as incurred. Prior to 1998, organization costs
were amortized over five years. This Statement, which is effective for fiscal
years beginning after December 15, 1998, requires that the unamortized balance
of organization costs be written off when the Statement is adopted. Although
this had no current effect in the financial statements of the Company, it will
require startup costs of new ventures to be expensed as incurred.
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
16
<PAGE> 31
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 Year 2000 issue relates to computer programs that use only two
digits to identify a year in the date field. Unless corrected, these programs
could read the year 2000 as the year 1900 and likely would adversely affect any
number of calculations that are made using the date field. Financial
institutions are highly computerized organizations and the Year 2000 issue
represents a significant risk to the industry. The Company faces the same risks
as the industry. The failure of a major loan or deposit system due to the Year
2000 issue could result in interest and balances being calculated inaccurately.
Such failures could have a significant impact on a financial institution's
operations and liquidity.
Management has a Year 2000 Committee, which reports to the Board,
responsible for assessing progress in the Company's plans to minimize the
effects of the Year 2000 issue. In its assessment of the Year 2000 issue, the
committee identified five major phases: Awareness, Assessment, Renovation,
Validation and Implementation.
The awareness phase is a continuing effort to educate employees,
customers, business partners and vendors of the impact of the Year 2000 issue.
The effort is well under way through communication with the appropriate
constituencies and training for all employees. During the assessment phase,
which was completed by March 31, 1998, a detailed list was compiled of all
vendors, hardware, software, and equipment owned or used by the Company. Each
item was assigned a priority based on its importance to the operations of the
Company and the risk associated with non-compliance. All manufacturers, software
providers and vendors were requested to provide information relating to the
readiness of their product or process for the Year 2000. The mission critical
areas were identified as the third party data processor, the loan documentation
and compliance software, the new accounts platform software, the proof machines,
the microfilmer and fische reader and the security system. The Company has also
assessed non-information technology systems, including the alarm systems of the
Company.
The validation phase consisted of testing all mission critical hardware
and software for Year 2000 readiness. Validation of the core banking systems has
been completed. Test transactions were processed on loan and deposit accounts to
validate the accuracy of our third party data processing service provider.
Validation tests were also run on the loan and compliance software and the
Federal Reserve Bank FedLine system. All tests were successful and no Year 2000
problems were indicated. Contingency planning for all mission critical functions
is underway and will be completed by June 1999.
Of concern to management is the amount of funds which may be necessary
to have in the Bank and the ATM at the end of 1999 in the event customers desire
to withdraw extra cash. The Company is currently working to estimate the most
likely level of cash requirements, the source of these funds, and the required
level of security and insurance for the additional cash. It may be necessary to
build significant levels of cash at the end of 1999 which could reduce earning
assets or increase borrowings for a period of time, thereby negatively affecting
earnings. In addition, it may be necessary to purchase commitments from current
cash sources to guarantee funds availability and to purchase commitments from
vendors who transport cash.
Another concern is the preparedness of the Bank's customers for the
Year 2000 issue. For example, commercial loan customers may be unable to repay
their loans from the Bank if their business is negatively impacted by the Year
2000 issue. Management continues to attempt to address this issue by educating
its customers as to the possible consequences of not being prepared for the Year
2000 issue. In addition, loan underwriting for the past year has included issues
relating to the customer's preparedness for the Year 2000 and their reliance on
computers in their business operations.
17
<PAGE> 32
The Company's total costs associated with the Year 2000 issue will
primarily include the costs incurred to upgrade the existing software and
hardware not currently Year 2000 compliant. The Company expects that these costs
will be incurred in the normal course of business as software and hardware is
ordinarily upgraded to keep pace with technological advances. The Company
estimates that $1,000 has been spent to date which could be related to the Year
2000 issue. The Company does not track internal costs for personnel devoted to
the Year 2000 issue; however, one individual has spent significant time on the
project and many individuals have spent numerous hours working on the Year 2000
issue.
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.
As of March 19, 1999, there were approximately 500 holders of record of
the Common Stock and 560,318 shares of Common Stock issued and outstanding. In
addition, there were approximately 236,557 shares of Common Stock issuable
pursuant to warrants which may be issued in the next 60 days. There is no
established public trading market in the stock, and there is no likelihood that
a trading market will develop in the near future. The development of a trading
market may be inhibited because a large portion of the Company's shares is held
by insiders. Transactions in the Common Stock are infrequent and are negotiated
privately between the persons involved in those transactions.
All outstanding shares of Common Stock of the Company are entitled to
share equally in dividends from funds legally available, when, as, and if
declared by the Board of Directors. No dividends have been paid to date on the
Common Stock, and it is anticipated that earnings will be retained for the
foreseeable future in order to expand the Bank's capital base to support
deposit growth. The Company currently has no source of income other than
dividends and other payments received from the Bank. It is unlikely that any
cash dividends will be paid in the near future.
18
<PAGE> 33
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Easton Bancorp, Inc. and Subsidiary
Easton, Maryland
We have audited the consolidated balance sheets of Easton Bancorp, Inc.
and Subsidiary as of December 31, 1998, 1997, and 1996, and the related
consolidated statements of income, 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, 1998, 1997, and 1996, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Rowles & Company LLP
Salisbury, Maryland
January 26, 1999
19
<PAGE> 34
EASTON BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
------------ ------------ ------------
Assets
<S> <C> <C> <C>
Cash and due from banks $ 976,682 $ 642,726 $ 1,211,182
Federal funds sold 7,269,903 3,739,622 2,824,727
Investment in Federal Home Loan Bank stock 145,600 124,500 121,600
Investment securities available for sale 4,840,026 -- --
Investment securities held to maturity (market value of
$1,502,794 and $1,247,275) -- 1,500,000 1,250,000
Loans, less allowance for credit losses of
$530,000, $378,000, and $332,253 33,254,808 34,682,279 30,062,431
Premises and equipment 1,662,127 1,713,683 1,515,354
Intangible assets 1,853 30,261 84,503
Accrued interest receivable 246,470 248,303 181,009
Loan payment held in escrow 1,175,000 -- --
Other assets 92,924 58,323 44,134
Deferred income taxes 401,551 -- --
------------ ------------ ------------
Total assets $ 50,066,944 $ 42,739,697 $ 37,294,940
============ ============ ============
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing $ 4,682,618 $ 2,060,848 $ 1,719,187
Interest-bearing 39,436,342 36,027,304 31,039,372
------------ ------------ ------------
Total deposits 44,118,960 38,088,152 32,758,559
Accrued interest payable 95,611 99,980 93,684
Securities sold under agreements to repurchase 281,019 481,490 574,328
Note payable 1,000,000 -- --
Other liabilities 111,685 57,363 145,578
------------ ------------ ------------
Total liabilities 45,607,275 38,726,985 33,572,149
------------ ------------ ------------
Stockholders' equity
Common stock, par value $.10 per share; authorized
5,000,000 shares, issued and outstanding 560,318
in 1998 and 559,328 in 1997 and 1996 56,032 55,933 55,933
Additional paid-in capital 5,227,487 5,217,686 5,217,686
Retained earnings (deficit) (816,863) (1,260,907) (1,550,828)
------------ ------------ ------------
4,466,656 4,012,712 3,722,791
Accumulated other comprehensive income (6,987) -- --
------------ ------------ ------------
Total stockholders' equity 4,459,669 4,012,712 3,722,791
------------ ------------ ------------
Total liabilities and stockholders' equity $ 50,066,944 $ 42,739,697 $ 37,294,940
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 35
EASTON BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST REVENUE
Loans, including fees $3,063,126 $2,967,602 $2,383,793
Deposits in banks 1,723 211 530
U.S. Government agency securities 159,044 77,907 38,863
Federal funds sold 292,264 223,281 364,327
Other 10,487 8,982 --
---------- ---------- ----------
Total interest revenue 3,526,644 3,277,983 2,787,513
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 1,831,543 1,626,794 1,481,637
Interest on borrowed funds 49,249 21,742 12,231
---------- ---------- ----------
Total interest expense 1,880,792 1,648,536 1,493,868
---------- ---------- ----------
Net interest income 1,645,852 1,629,447 1,293,645
PROVISION FOR CREDIT LOSSES 224,281 81,807 18,699
---------- ---------- ----------
Net interest income after provision for credit losses 1,421,571 1,547,640 1,274,946
---------- ---------- ----------
OTHER OPERATING REVENUE
Service charges on deposit accounts 99,654 62,588 68,660
Other noninterest revenue 37,066 32,827 44,428
---------- ---------- ----------
Total other operating revenue 136,720 95,415 113,088
---------- ---------- ----------
OTHER EXPENSES
Compensation and related expenses 909,209 744,538 673,944
Occupancy 70,782 71,871 75,310
Furniture and equipment 87,647 99,050 92,704
Other operating 444,560 437,675 354,962
---------- ---------- ----------
Total other expenses 1,512,198 1,353,134 1,196,920
---------- ---------- ----------
Income before income taxes 46,093 289,921 191,114
Income tax benefit 397,951 -- --
---------- ---------- ----------
NET INCOME $ 444,044 $ 289,921 $ 191,114
========== ========== ==========
Earnings per common share
Basic $ 0.79 $ 0.52 $ 0.34
Diluted $ 0.74 $ 0.48 $ 0.32
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 36
EASTON BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Additional Retained other
Common stock paid-in earnings comprehensive Comprehensive
Shares Par value capital (deficit) income income
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 559,328 $55,933 $5,217,686 $(1,741,942) $ --
Net income -- -- -- 191,114 -- $ 191,114
-------- ------- ---------- ----------- ------- =========
Balance, December 31, 1996 559,328 55,933 5,217,686 (1,550,828) --
Net income -- -- -- 289,921 -- $ 289,921
-------- ------- ---------- ----------- ------- =========
Balance, December 31, 1997 559,328 55,933 5,217,686 (1,260,907) --
Net income -- -- -- 444,044 -- $ 444,044
Unrealized loss on investment
securities available for sale net
of income taxes -- -- -- -- (6,987) (6,987)
---------
Comprehensive income $ 437,057
=========
Stock options exercised 990 99 9,801 -- --
-------- ------- ---------- ----------- -------
BALANCE, DECEMBER 31, 1998 560,318 $56,032 $5,227,487 $ (816,863) $(6,987)
======== ======= ========== =========== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 37
EASTON BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 3,506,575 $ 3,224,496 $ 2,758,551
Fees, commissions, and rent received 145,640 37,312 112,868
Interest paid (1,885,161) (1,642,240) (1,501,293)
Payments to suppliers and employees (1,376,221) (1,240,368) (918,846)
----------- ----------- -----------
390,833 379,200 451,280
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated, net of principal repayments 50,677 (4,715,462) (5,948,662)
Purchase of investment securities
Available for sale (5,772,279) -- --
Held to maturity (250,100) (1,502,900) (871,600)
Proceeds from maturities of investment securities
Available for sale 1,400,081 -- --
Held to maturity 1,250,000 1,250,000 --
Proceeds from sale of other real estate owned -- -- 113,804
Purchase of premises and equipment, including
construction in progress (44,234) (298,893) (15,287)
Cash paid for organization costs and software (978) (2,261) (2,456)
----------- ----------- -----------
(3,366,833) (5,269,516) (6,724,201)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in
Time deposits 2,786,249 2,994,134 1,783,022
Other deposits 3,244,559 2,335,459 2,737,542
Securities sold under agreements to repurchase (200,471) (92,838) 296,965
Advance under note payable 1,000,000 -- --
Proceeds from stock options exercised 9,900 -- --
----------- ----------- -----------
6,840,237 5,236,755 4,817,529
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,864,237 346,439 (1,455,392)
Cash and cash equivalents at beginning of year 4,382,348 4,035,909 5,491,301
----------- ----------- -----------
Cash and cash equivalents at end of year $ 8,246,585 $ 4,382,348 $ 4,035,909
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 38
EASTON BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net income $ 444,044 $ 289,921 $ 191,114
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Provision for credit losses 224,281 81,807 18,699
Depreciation 95,790 100,564 97,411
Amortization of intangibles 29,386 56,503 55,797
Securities amortization, net of accretion 2,812 -- --
Deferred income taxes (397,951) -- --
Gain on sale of other real estate owned -- -- (4,061)
Gain on calls of securities (2,227) -- --
Decrease (increase) in
Accrued interest receivable 1,833 (67,294) (24,526)
Other assets (34,601) (14,189) (6,864)
Increase (decrease) in
Deferred loan origination fees (22,487) 13,807 (4,436)
Accrued interest payable (4,369) 6,296 (7,425)
Other liabilities 54,322 (88,215) 135,571
--------- --------- ---------
$ 390,833 $ 379,200 $ 451,280
========= ========= =========
NONCASH ACTIVITY
Other real estate acquired in lieu of foreclosure $ -- $ -- $ 109,743
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 39
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.
Securities which may be sold before maturity are classified as available
for sale and carried at fair value with unrealized gains and losses
included in stockholders' equity on an after tax basis.
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, which established accounting and reporting standards for
derivative instruments. The Statement also provided an opportunity, at
adoption only, to transfer securities from the held to maturity
portfolio with no adverse consequences.
Loan payment held in escrow
Loan payment held in escrow represents funds due the Company from a
loan settlement occurring in December, 1998. The funds were placed in an
escrow account pending approval of the transaction by the bankruptcy
court. Most of the funds held in escrow were placed in a
noninterest-bearing account with the Company.
25
<PAGE> 40
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.
Earnings per share
Basic earnings per common share are determined by dividing net
income by the weighted average number of shares of common stock
outstanding. Diluted earnings per share are calculated including the
average dilutive common stock equivalents outstanding during the period.
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.
Stock options
The Company accounts for stock options under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees
("APB No. 25").
Comprehensive income
The Company adopted Statement No. 130 of the Financial Accounting
Standards Board, Reporting Comprehensive Income, in 1998. Comprehensive
income includes net income and the unrealized gains and losses on
securities available for sale. Comprehensive income for the years ended
December 31, 1997 and 1996 was the same as net income.
26
<PAGE> 41
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
2. CASH AND DUE FROM BANKS
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 $5,244,225, $4,069,486, and $6,865,970 for 1998, 1997, and
1996, 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.
3. INVESTMENT SECURITIES
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
cost gains losses value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1998 - Available for sale
U.S. Government agencies $ 4,850,613 $ 7,311 $17,898 $ 4,840,026
=========== ======= ======= ===========
December 31, 1997 - Held to maturity
U.S. Government agencies $ 1,500,000 $ 2,794 $ - $ 1,502,794
=========== ======= ======= ===========
December 31, 1996 - Held to maturity
U.S. Government agencies $ 1,250,000 $ - $ 2,725 $ 1,247,275
=========== ======= ======= ===========
</TABLE>
During 1998, securities with an amortized cost of $500,000 and fair
value of $501,953 were transferred from the held to maturity portfolio
to the available for sale portfolio.
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, 1998 December 31, 1997 December 31, 1996
------------------------ ----------------------- -----------------------
AMORTIZED MARKET Amortized Market Amortized Market
COST VALUE cost value cost value
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Due
One year or less $ 449,898 $ 451,673 $ 500,000 $ 500,771 $ 500,000 $ 499,453
After one year
through five years 4,150,155 4,137,728 1,000,000 1,002,023 750,000 747,822
After five years 250,560 250,625 - - - -
---------- ---------- ---------- ---------- ---------- ----------
$4,850,613 $4,840,026 $1,500,000 $1,502,794 $1,250,000 $1,247,275
========== ========== ========== ========== ========== ==========
</TABLE>
Securities were pledged as collateral for repurchase agreements.
27
<PAGE> 42
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>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Commercial $ 4,405,479 $ 2,270,375 $ 2,473,468
Real estate 22,174,739 24,273,513 21,371,852
Construction 2,459,322 3,658,528 2,624,709
Home equity 2,067,068 2,067,995 1,607,606
Consumer 2,725,190 2,859,345 2,372,719
----------- ----------- -----------
33,831,798 35,129,756 30,450,354
Less deferred loan origination fees 46,990 69,477 55,670
Less allowance for credit losses 530,000 378,000 332,253
----------- ----------- -----------
Loans, net $33,254,808 $34,682,279 $30,062,431
=========== =========== ===========
</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 $ 3,558,109 $ 4,110,743 $ 3,267,806
Within one year 14,121,270 12,664,592 9,864,200
Over one to five years 15,728,660 18,346,404 16,715,036
Over five years 423,759 8,017 603,312
----------- ----------- -----------
$33,831,798 $35,129,756 $30,450,354
=========== =========== ===========
</TABLE>
Transactions in the allowance for credit losses are as follows:
<TABLE>
<S> <C> <C> <C>
Beginning balance $ 378,000 $ 332,253 $ 260,000
Provision charged to operation 224,281 81,807 18,699
Recoveries 25,500 13,752 81,610
----------- ----------- -----------
627,781 427,812 360,309
Charge-offs 97,781 49,812 28,056
----------- ----------- -----------
Ending balance $ 530,000 $ 378,000 $ 332,253
=========== =========== ===========
</TABLE>
Management has identified no significant impaired loans.
28
<PAGE> 43
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>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Nonaccrual
Commercial $ 64,707 $ 13,785 $ 7,333
Mortgage 2,184,971 -- --
Installment 68,574 28,661 5,725
----------- ----------- -----------
$ 2,318,252 $ 42,446 $ 13,058
=========== =========== ===========
Interest not accrued $ 237,114 $ 1,388 $ 449
=========== =========== ===========
Loans past due ninety days or more,
still accruing interest $ 25,022 $ 218,055 $ 261,664
=========== =========== ===========
</TABLE>
The interest not accrued includes $113,226 of interest from the
nonaccrual loan which will be paid off from the loan payment held in
escrow.
The following commitments, lines of credit, and letters of credit
are outstanding as of December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Construction loans $1,639,393 $1,319,956 $1,650,040
Lines of credit, including home equities 2,012,998 1,472,709 1,257,319
Overdraft protection lines 186,670 144,026 93,997
Standby letters of credit 535,166 382,767 44,563
---------- ---------- ----------
$4,374,227 $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 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
Company'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.
29
<PAGE> 44
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 1998 1997 1996
------------ ---------- ---------- ----------
<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 1,298,872 1,050,407
Furniture, fixtures, and equipment 5-10 years 542,701 518,624 468,195
---------- ---------- ----------
2,177,296 2,153,219 1,854,325
Accumulated depreciation 515,169 439,536 338,971
---------- ---------- ----------
Net premises and equipment $1,662,127 $1,713,683 $1,515,354
========== ========== ==========
Depreciation expense $ 95,790 $ 100,564 $ 97,411
========== ========== ==========
</TABLE>
6. INTANGIBLE ASSETS
A summary of intangible assets and the related amortization
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Organization costs $ -- $234,820 $234,820
Computer software 44,340 44,032 42,940
-------- -------- --------
44,340 278,852 277,760
Accumulated amortization 42,487 248,591 193,257
-------- -------- --------
Net intangible assets $ 1,853 $ 30,261 $ 84,503
======== ======== ========
Amortization expense $ 29,386 $ 56,503 $ 55,797
======== ======== ========
</TABLE>
7. DEPOSITS
Major classifications of interest-bearing deposits are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Money market and NOW $ 9,008,316 $ 9,328,273 $ 7,660,738
Savings 4,523,794 3,581,048 3,254,785
Other time 25,904,232 23,117,983 20,123,849
----------- ----------- -----------
$39,436,342 $36,027,304 $31,039,372
=========== =========== ===========
</TABLE>
30
<PAGE> 45
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
7. DEPOSITS (Continued)
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>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Three months or less $1,890,405 $1,116,056 $1,210,112
Three to twelve months 1,949,654 1,452,974 1,547,716
One to five years 1,238,331 1,579,570 1,371,563
---------- ---------- ----------
$5,078,390 $4,148,600 $4,129,391
========== ========== ==========
Interest expense $ 265,607 $ 234,217 $ 296,856
========== ========== ==========
</TABLE>
8. 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, 1998 and 1997, the following applied to these repurchase
agreements:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Maximum amount outstanding $ 540,941 $ 594,632
Average amount outstanding 466,466 478,005
Average rate paid during the year 4.81% 4.55%
Investment securities underlying the agreements at year end
Carrying value $ 424,911 $ 675,000
Estimated fair value 426,649 676,095
</TABLE>
Secured lines of credit of $425,000 from correspondent banks have
been pledged as additional collateral for these agreements.
9. LONG-TERM DEBT AND LINES OF CREDIT
The Company may borrow up to $6,000,000 from the Federal Home Loan
Bank (FHLB) through any combination of notes or line of credit advances.
The line of credit interest rate is a variable rate set daily by the
lender. Both the notes payable and the line of credit are secured by a
floating lien on all of the Company's residential first mortgage loans.
The Company was required to purchase shares of capital stock in the FHLB
as a condition to obtaining the line of credit.
The Company has a note payable to the Federal Home Loan Bank in the
amount of $1,000,000. The loan was advanced June 23, 1998, with interest
fixed at 5.51% and a final maturity of June 23, 2008. The FHLB has the
option to convert the loan to a floating rate note on June 23, 2003.
In addition to the line of credit available from the FHLB, the
Company has federal funds lines and other lines of credit from
correspondent banks totaling $2,500,000.
31
<PAGE> 46
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
10. INCOME TAXES
The Company has not incurred any income tax liability since its
inception. The Company had net operating loss carryforwards of $931,128,
$1,147,924, and $1,432,564 available to offset future taxable income as
of December 31, 1998, 1997, and 1996, respectively.
The statutory federal income tax rate was 34% for 1998, 1997, and
1996. The Company's effective tax rate was zero in each year due to the
net operating losses. The provision (benefit) for income taxes is
reconciled as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Income before income taxes $ 46,093 $ 289,921 $ 191,114
========= ========= =========
Tax provision at statutory rates $ 15,671 $ 98,573 $ 64,979
Increase (decrease) resulting from
State income taxes, less federal benefit -- 13,377 8,822
Nondeductible expenses 2,313 3,346 1,649
Net operating loss carryover and adjustment of
valuation allowance (415,935) (115,296) (75,450)
--------- --------- ---------
Provision (benefit) for income taxes $(397,951) $ -- $ --
========= ========= =========
</TABLE>
The components of the deferred tax assets and liabilities as of
December 31, are as follows:
<TABLE>
<S> <C> <C> <C>
Deferred tax assets
Allowance for credit losses $ 162,357 $ 124,849 $ 93,255
Deferred loan origination fees -- 992 1,033
Net operating loss carryforward 316,584 435,721 553,257
Start-up costs -- 8,238 22,398
Unrealized loss on securities available for sale 3,600 -- --
--------- --------- ---------
482,541 569,800 669,943
--------- --------- ---------
Deferred tax liabilities
Depreciation 44,281 45,537 46,980
Cash method of accounting 36,709 59,417 34,741
--------- --------- ---------
80,990 104,954 81,721
--------- --------- ---------
Net deferred tax asset before valuation allowance 401,551 464,846 588,222
Valuation allowance -- (464,846) (588,222)
--------- --------- ---------
Net deferred tax asset $ 401,551 $ -- $ --
========= ========= =========
</TABLE>
32
<PAGE> 47
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
11. OTHER OPERATING EXPENSES
Other operating expenses are comprised as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Advertising $ 41,667 $47,417 $35,332
Professional fees 72,110 58,421 44,890
Data processing 84,332 77,487 65,372
Deposit assessment 4,620 3,712 2,000
Insurance 13,023 14,830 21,435
Loan reports and collection costs 6,598 8,086 2,491
Organizational expense amortization 23,482 46,964 46,964
Postage 27,128 21,813 21,128
Proxy and transfer agent costs 16,762 15,141 2,701
Software amortization 5,904 9,539 8,833
Stationery and supplies 46,339 44,833 35,119
Telephone 17,225 13,938 12,987
Other 85,370 75,494 55,710
--------- -------- --------
$ 444,560 $437,675 $354,962
========= ======== ========
</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>
1999 $ 3,600
2000 1,800
-------
$ 5,400
=======
</TABLE>
Rent expense was $3,600 for each of the years ended December 31,
1998, 1997, and 1996.
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.
33
<PAGE> 48
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
14. STOCK OPTION PLANS
The Corporation had an employment agreement with an executive
officer that provided 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 had to meet performance criteria
established by the Board of Directors. Each option was exercisable for a
period of seven years following the date of grant, but the options were
forfeited when the officer left the employment of the Company.
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 1998 1997 1996
------------------------------ ------ ----- -----
<S> <C> <C> <C>
Outstanding, beginning of year 8,390 5,593 --
Granted -- 2,797 5,593
Exercised (990) -- --
Forfeited (7,400) -- --
------ ----- -----
Outstanding, end of year -- 8,390 5,593
====== ===== =====
</TABLE>
The Bank applies APB No. 25 in accounting for the stock option
plan. Accordingly, no compensation expense has been recognized for the
stock options granted. Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS No. 123), was issued
in October, 1995 to establish accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 requires
measurement of compensation expense provided by stock-based plans using
a fair value based method of accounting, and recognition of the
compensation expense in the statement of income or disclosure 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>
34
<PAGE> 49
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 during
1997 and 1996 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, the Company granted 2,796 options related to
performance for 1994. 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 to officers and directors follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Beginning balance $ 2,052,138 $ 2,441,843 $ 2,067,392
Advances 412,312 465,854 936,266
Repayments (445,578) (855,559) (561,815)
----------- ----------- -----------
Ending balance $ 2,018,872 $ 2,052,138 $ 2,441,843
=========== =========== ===========
</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 $457 in 1998 and $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, 1998.
During 1998, 1997, and 1996, 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, the Bank paid $897 to this
law firm.
35
<PAGE> 50
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>
Minimum To be
Actual capital adequacy well capitalized
--------------- ------------------ ----------------
(in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
----------------------------
Total capital
(to risk-weighted assets) $ 4,691 13.73% $ 2,733 8.0% $ 3,417 10.0%
Tier 1 capital
(to risk-weighted assets) $ 4,263 12.48% $ 1,367 4.0% $ 2,050 6.0%
Tier 1 capital
(to average fourth
quarter assets) $ 4,263 8.78% $ 1,943 4.0% $ 2,429 5.0%
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.
36
<PAGE> 51
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company'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,
1998 1997 1996
------------------------- --------------------------- -------------------------
CARRYING FAIR Carrying Fair Carrying Fair
AMOUNT VALUE amount value amount value
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 976,682 $ 976,682 $ 642,726 $ 642,726 $ 1,211,182 $ 1,211,182
Federal funds sold 7,269,903 7,269,903 3,739,622 3,739,622 2,824,727 2,824,727
Investment securities 4,985,626 4,985,626 1,624,500 1,627,294 1,371,600 1,368,875
Loans, net 33,254,808 33,271,318 34,682,279 34,599,709 30,062,431 29,907,317
Accrued interest receivable 246,470 246,470 248,303 248,303 181,009 181,009
Loan payment held
in escrow 1,175,000 1,175,000 -- -- -- --
Financial liabilities
Noninterest-bearing
deposits $ 4,682,618 $ 4,682,618 $ 2,060,848 $ 2,060,848 $ 1,719,187 $ 1,719,187
Interest-bearing deposits
and securities sold under
agreements to repurchase 39,717,361 41,076,792 36,508,794 36,779,633 31,613,700 31,887,840
Accrued interest payable 95,611 95,611 99,980 99,980 93,684 93,684
Note payable 1,000,000 1,000,000 -- -- -- --
</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.
37
<PAGE> 52
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
18. 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,
BALANCE SHEETS 1998 1997 1996
----------- ----------- ----------
Assets
<S> <C> <C> <C>
Cash $ 40,648 $ 64,491 $ 91,153
Investment in subsidiary 4,350,689 3,945,641 3,623,899
Organization costs -- 2,580 7,739
Deferred income taxes 68,332 -- --
----------- ----------- ----------
Total assets $ 4,459,669 $ 4,012,712 $3,722,791
=========== =========== ==========
Liabilities and Stockholders' Equity
Stockholders' equity
Common stock, par value $.10 per share;
authorized 5,000,000 shares; issued
and outstanding 560,318 in 1998 and 559,328
shares in 1997 and 1996 $ 56,032 $ 55,933 $ 55,933
Additional paid-in capital 5,227,487 5,217,686 5,217,686
Retained earnings (deficit) (816,863) (1,260,907) (1,550,828)
----------- ----------- ----------
4,466,656 4,012,712 3,722,791
Accumulated other comprehensive income (6,987) -- --
----------- ----------- ----------
Total stockholders' equity 4,459,669 4,012,712 3,722,791
----------- ----------- ----------
Total liabilities and stockholders' equity $ 4,459,669 $ 4,012,712 $3,722,791
=========== =========== ==========
</TABLE>
38
<PAGE> 53
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
18. PARENT COMPANY FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
STATEMENTS OF INCOME 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest revenue $ 1,921 $ 3,002 $ 3,327
Equity in undistributed income of subsidiary 412,035 321,742 205,534
--------- --------- ---------
413,956 324,744 208,861
--------- --------- ---------
Expenses
Furniture and equipment 68 49 49
Other 38,176 34,774 17,698
--------- --------- ---------
38,244 34,823 17,747
--------- --------- ---------
Income before income taxes 375,712 289,921 191,114
Income taxes 68,332 -- --
--------- --------- ---------
Net income $ 444,044 $ 289,921 $ 191,114
========= ========= =========
STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 1,921 $ 3,002 $ 3,327
Cash paid for operating expenses (35,664) (29,664) (12,588)
--------- --------- ---------
(33,743) (26,662) (9,261)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from options exercised 9,900 -- --
--------- --------- ---------
NET (DECREASE) IN CASH (23,843) (26,662) (9,261)
--------- --------- ---------
Cash and equivalents at beginning of year 64,491 91,153 100,414
--------- --------- ---------
Cash and equivalents at end of year $ 40,648 $ 64,491 $ 91,153
========= ========= =========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $ 444,044 $ 289,921 $ 191,114
Adjustments to reconcile net income to net
cash used in operating activities
Undistributed net income of subsidiary (412,035) (321,742) (205,534)
Deferred income taxes (68,332) -- --
Amortization 2,580 5,159 5,159
--------- --------- ---------
$ (33,743) $ (26,662) $ (9,261)
========= ========= =========
</TABLE>
39
<PAGE> 54
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
19. 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. During 1998, the Board of Directors approved
contributions matching 25% of employee contributions which totaled
$4,794. In 1997 and 1996 the approved contributions matched 10% of
employee contributions totaling $1,913 and $1,605, respectively.
20. EARNINGS PER SHARE
Diluted earnings per share are calculated as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
NET INCOME $ 444,044 $ 289,921 $ 191,114
========== ========== ==========
Average shares outstanding 560,071 559,328 559,328
---------- ---------- ----------
Dilutive average shares
outstanding under options
and warrants 209,832 215,490 209,897
Exercise price $ 10.00 $ 10.00 $ 10.00
Assumed proceeds on exercise $2,098,320 $2,154,900 $2,098,970
Average market value $ 12.50 $ 12.49 $ 12.41
Less: Treasury stock purchased
with assumed proceeds
from exercise 167,866 172,530 169,135
Average shares and common
stock equivalents 602,037 602,288 600,090
DILUTED EARNINGS PER SHARE $ 0.74 $ 0.48 $ 0.32
========== ========== ==========
</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.
40
<PAGE> 55
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,
------------ ------------- -------- ---------
1998
- ----
<S> <C> <C> <C> <C>
Interest revenue $ 918,254 $ 920,983 $ 857,747 $ 829,660
Interest expense 482,515 488,958 461,264 448,055
Net interest income 435,739 432,025 396,483 381,605
Provision for loan losses 61,724 91,212 34,812 36,533
Net income 63,880 343,547 9,018 27,599
Comprehensive income 54,198 347,835 7,425 27,599
Earnings per share - basic 0.11 0.61 0.02 0.05
Earnings per share - diluted 0.10 0.57 0.02 0.05
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
Comprehensive income 89,475 73,323 63,367 63,756
Earnings per share - basic 0.17 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
Comprehensive 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
</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."
41
<PAGE> 56
DIRECTORS AND EXECUTIVE OFFICERS OF
EASTON BANCORP, INC.
<TABLE>
<S> <C>
W. David Hill, DDS President, William Hill Manor, Inc.
Chairman/Chief Executive Officer
R. Michael S. Menzies, Sr. President and Chief Executive Officer
President Easton Bank & Trust Company
Sheila W. Bateman Chief Administrative Officer
Secretary Caulk Management Company
Jerry L. Wilcoxon Chief Financial Officer
Treasurer Black Oak Computer Service, Inc.
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 Company
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
</TABLE>
All of the persons noted above are directors of Easton Bancorp, Inc.
42
<PAGE> 57
DIRECTORS, OFFICERS AND ASSOCIATES OF
EASTON BANK & TRUST COMPANY
DIRECTORS
W. David Hill, DDS
Chairman of the Board
<TABLE>
<S> <C>
Sheila W. Bateman, CPS - Secretary Jerry L. Wilcoxon, CPA - Treasurer
Jack H. Bishop, DDS M. Linda Kildea
J. Parker Callahan, Jr. Pamela H. Lappen
Charles T. Capute David F. Lesperance
Walter E. Chase, Sr. Vinodrai Mehta, MD
Stephen W. Chitty R. Michael S. Menzies, Sr.
J. Fredrick Heaton, DMD Roger A. Orsini, MD
Jeffrey N. Heflebower Marian H. Shannahan
Thomas E. Hill Mahmood S. Shariff, MD
William C. Hill James B. Spear, Sr.
William R. Houck, DDS Myron Szczukowski, Jr. MD
OFFICERS
R. Michael S. Menzies, Sr. Jeffrey N. Heflebower
President/Chief Executive Officer Executive Vice President
Delia B. Denny Pamela A. Mussenden
Senior Vice President Senior Vice President/Treasurer
Gene Fischgrund Barbara M. Ostrander
Senior Vice President Vice President
Rose K. Kleckner
Assistant Treasurer
</TABLE>
ASSOCIATES
Roxanne M. Atwater, Operations Assistant
Terri L. Brannock, Branch Manager
Kathleen K. Cook, Credit Risk Manager
Brenda L. Forbes, Customer Service Representative
Lesta R. Gunther, Operations Assistant
Susan D. Haschen, Operations Administrator
Anne H. Hughes, Credit Administrative Assistant
Laura M. King, Customer Service Representative
Tracy T. Lednum, Customer Service Representative
Amy C. Lynch, Credit Administrative Assistant
Kerri A. Morris, Customer Service Representative
Carol S. Nottingham, Receptionist
Kimberly D. Rada, Senior Customer Service Representative
Bridget A. Schettini, Customer Service Representative
Kelly A. Tibbitt, Financial Service Representative
Jacqueline D. Wilson, Lending Specialist
Sherry L. Winstead, Customer Service Representative
Easton Bank & Trust Company is a member of F.D.I.C.
43
<PAGE> 58
Appendix B
EASTON BANCORP, INC.
POST OFFICE BOX 629
EASTON, MARYLAND 21601
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD
MAY 26, 1999
Dear Stockholder:
The Annual Meeting of Stockholders of Easton Bancorp, Inc. will be held at 4:00
p.m. on Wednesday, May 26, 1999 at Easton Bank & Trust Company, 501 Idlewild
Avenue, Easton, Maryland, for the following purposes:
1. To elect five members to the Board of Directors, four to serve
three-year terms and one to serve a two-year term;
2. To ratify the appointment of Rowles & Company as independent auditors
for the Company for the fiscal year ending December 31, 1999; and
3. To consider such other matters as properly may come before the Meeting
or any adjournment of the Meeting.
Only holders of record of Common Stock of Easton Bancorp, Inc. at the close of
business on March 19, 1999 will be entitled to notice of and to vote at the
Meeting or any adjournment thereof.
TO BE SURE THAT YOUR VOTE IS COUNTED, WE URGE YOU TO COMPLETE AND SIGN THE
PROXY CARD BELOW, DETACH IT FROM THIS LETTER AND RETURN IT IN THE POSTAGE PAID
ENVELOPE ENCLOSED IN THIS PACKAGE. The giving of such proxy does not affect
your right to vote in person if you attend the Meeting. The prompt return of
your signed proxy will aid the Company in reducing the expense of additional
proxy solicitation.
If you plan to attend the Annual Meeting in person, detach and bring this
letter to the Meeting as an admission ticket for you and your guests.
BY ORDER OF THE BOARD OF DIRECTORS
April 15, 1999
/s/ W. David Hill
W. David Hill, DDS
Chief Executive Officer
DETACH PROXY CARD HERE
- -----------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
1. To elect five members FOR all nominees WITHHOLD AUTHORITY to vote <C> <C>
to the Board of Directors. listed below [ ] for all nominees listed below [ ] *EXCEPTIONS [ ]
Nominees: J. Parker Callahan, Jr., J. Fredrick Heaton, William C. Hill, and Roger A. Orsini to serve three-year terms, and R.
Michael S. Menzies, Sr. to serve a two-year term.
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK THE "EXCEPTIONS" BOX AND STRIKE A LINE THROUGH THAT
NOMINEE'S NAME.)
2. To ratify the appointment of Rowles & Company as independent auditors 3. In their discretion, to vote upon such other
for the Company for the fiscal year ending December 31, 1999. matters as properly may come before the Meeting or
any adjournment of the Meeting.
FOR [ ] AGAINST [ ] ABSTAIN [ ] Address Change and/or
Comments Mark Here [ ]
Please date and sign exactly as your name
appears to the left. All joint owners
should sign. When signing as a fiduciary,
representative or corporate officer, give
full title as such. If you receive more
than one proxy card, please sign and return
all cards received.
Dated:
-------------------------------------
--------------------------------------------
(Signature)
--------------------------------------------
(Signature if held jointly)
VOTES MUST BE INDICATED
PLEASE SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED (X) IN BLACK OR BLUE INK. [X]
</TABLE>
<PAGE> 59
EASTON BANCORP, INC.
PROXY CARD VOTING INSTRUCTIONS
- -------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF EASTON BANCORP, INC. FOR THE ANNUAL MEETING ON MAY 26, 1999.
The undersigned appoints Sheila W. Bateman and W. David Hill, and each of them,
with full power of substitution in each, as the proxies of the undersigned to
represent the undersigned and vote all shares of Easton Bancorp, Inc. Common
Stock which the undersigned may be entitled to vote at the Annual Meeting of
Stockholders to be held on May 26, 1999, and at any adjournment or postponement
thereof, as indicated on the reverse side.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED FOR THE ELECTION OF ALL LISTED NOMINEES UNDER PROPOSAL 1, FOR THE
RATIFICATION OF THE APPOINTMENT OF ROWLES & COMPANY UNDER PROPOSAL 2 AND, AT
THE DISCRETION OF THE PROXIES, ON ANY OTHER MATTERS THAT MAY PROPERLY COME
BEFORE THE MEETING.
Easton Bancorp, Inc.
501 Idlewild Avenue EASTON BANCORP, INC.
PO Box 629 P.O. BOX 11361
Easton, MD 21601 NEW YORK, N.Y. 10203-0361
