SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the fiscal year ended: December 31, 1999
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the transition period from ________ to ________
Commission File No.: 33-43317
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EASTON BANCORP, INC.
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(Name of small business issuer as specified in its charter)
Maryland 52-1745344
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 Idlewild Avenue, Easton, Maryland 21601
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (410) 819-0300
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Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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(Title of Class)
Check whether the small business issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the small business issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the small business issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State the small business issuer's revenues for its most recent fiscal year:
$4,359,794.
The aggregate market value of the Common Stock held by non-affiliates of the
small business issuer on March 15, 2000, was $2,624,897. This calculation is
based upon an estimation by the Company's Board of Directors of fair market
value of the Common Stock of $11 per share. There is not an active trading
market for the Common Stock and it is not possible to identify precisely the
market value of the Common Stock.
On March 15, 2000, 560,318 shares of the small business issuer's Common Stock
were issued and outstanding.
Transitional Small Business Disclosure Format: YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE
The Company's Annual Report to Stockholders for the year ended December 31,
1999, is incorporated by reference in this Form 10-KSB in Part II Item 5, Item
6, and Item 7. The Company's Proxy Statement for Annual Meeting of Stockholders
to be held on May 17, 2000, is incorporated by reference in this Form 10-KSB in
Part III Item 9, Item 10, Item 11, and Item 12.
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This Report contains statements which constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements appear in a number of
places in this Report and include all statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with respect
to, among other things: (i) the Company's financing plans; (ii) trends affecting
the Company's financial condition or results of operations; (iii) the Company's
growth strategy and operating strategy; and (iv) the declaration and payment of
dividends. Investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors discussed herein and
those factors discussed in detail in the Company's filings with the Securities
and Exchange Commission.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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GENERAL
Easton Bancorp, Inc. (the "Company") was incorporated as a Maryland
corporation on July 19, 1991, primarily to own and control all of the capital
stock of Easton Bank & Trust Company (the "Bank") upon its formation. On
December 31, 1992, the Company completed the initial public offering (the
"Offering") of its Common Stock, par value $0.10 per share (the "Common Stock"),
in which it sold 559,328 shares of Common Stock at a price of $10.00 per share.
Out of the proceeds of the Offering, the Company paid $5.0 million to the Bank
in exchange for all of its outstanding capital stock and retained approximately
$600,000 to cover expenses of the Company and to provide additional capital to
the Bank if required. The Bank commenced business on July 1, 1993, and the only
activity of the Company since then has been the ownership and operation of the
Bank.
The Bank was organized as a nonmember state bank under the laws of the
State of Maryland. The Bank is engaged in a general commercial banking business
from its main office location in its primary service area, Talbot County,
Maryland. In addition, in February 1999, the Bank opened a loan production
office in Denton, Maryland, which is in Caroline County. This office became a
full service branch in October 1999.
The Company's holding company structure can assist the Bank in maintaining
its required capital ratios because the Company may, subject to compliance with
debt guidelines implemented by the Board of Governors of the Federal Reserve
System (the "Board of Governors" or the "Federal Reserve"), borrow money and
contribute the proceeds to the Bank as primary capital. The holding company
structure also permits greater flexibility in issuing stock for cash, property
or services and in reorganization transactions. Moreover, subject to certain
regulatory limitations, a holding company can purchase shares of its own stock,
which the Bank may not do. A holding company may also engage in certain
non-banking activities which the Board of Governors has deemed to be closely
related to banking and proper incidents to the business of a bank holding
company. These activities include making or servicing loans and certain types
of leases; performing certain data processing services; acting as a fiduciary or
investment or financial advisor; acting as a management consultant for other
depository institutions; providing courier, appraisal, and consumer financial
counseling services; providing tax planning and preparation services; providing
check guaranty and collection agency services; engaging in limited real estate
investment activities; underwriting, brokering, and selling credit life and
disability insurance; engaging in certain other limited insurance activities;
providing discount brokerage services; underwriting and dealing in certain
government obligations and money market instruments and providing portfolio
investment advice; acting as a futures commission merchant with respect to
certain financial instrument transactions; providing foreign exchange advisory
and transactional services; making investments in certain corporations for
projects designed primarily to promote community welfare; and owning and
operating certain healthy savings and loan associations. Although the Company
has no present intention of engaging in any of these activities, if
circumstances should lead the Company's management to believe that there is a
need for these services in the Bank's marketing area and that such activities
could be profitably conducted, the management of the Company would have the
flexibility of commencing these activities upon filing notice thereof with the
Board of Governors.
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LOCATION AND SERVICE AREA
The Bank conducts a general commercial banking business in its primary
service area, emphasizing the banking needs of individuals and small to
medium-sized businesses and professional concerns. The Bank operates from a
main office located at 501 Idlewild Avenue in Easton, Maryland, and from branch
offices in the William Hill Manor located on Dutchman Lane in Easton and on
Market Street in Denton, Maryland, which is in Caroline County. See
"Facilities" below. The Bank draws most of its customer deposits and conducts
most of its lending transactions from within its primary service area, which
encompasses Talbot County and Caroline County, Maryland.
Talbot County is centrally located on the eastern shore of the Chesapeake
Bay in eastern Maryland. Easton, the county seat, is approximately 59 miles
southeast of Baltimore and 73 miles east of Washington, D.C. The City of Easton
and Talbot County have experienced growth in population in recent years. The
population of Easton increased from approximately 7,500 in 1980 to approximately
9,000 in 1990, while the population of Talbot County increased from
approximately 25,000 to 30,000 during this period.
The principal components of the economy of Talbot County are manufacturing
(which accounts for approximately 30% of the economic activity), agriculture,
and tourism. Easton also has a strong component of health-care related
businesses. The largest employers in the county include Memorial Hospital,
Black & Decker, Allen Family Foods, a poultry producer, Cadmus Journal Services,
a printing company, and William Hill Manor, Inc., a continuing care retirement
community. The county has had a significant boating industry since colonial
days. At present, this industry is made up of over a dozen builders, numerous
supply companies, dealers and charter companies, and approximately 20 marinas.
Talbot County's colonial homes and historical sites and boating, hunting, and
fishing opportunities have resulted in tourism constituting a significant
segment of the economy.
Caroline County is centrally located on the eastern shore of the Chesapeake
Bay in eastern Maryland. Denton, the county seat, is situated approximately 60
miles from Baltimore and 60 miles from Washington, D.C. Caroline County has
experienced growth in its population in recent years. The population of
Caroline County increased from approximately 24,000 in 1990 to 27,000 in 1998,
while the population of Denton remained steady with a population of
approximately 3,000 during this period.
The principal components of the economy of Caroline County are
manufacturing and agriculture. The largest employers in the county include Solo
Cup and Choptank Electric Company.
BANKING SERVICES
The Bank offers a full range of deposit services that are typically
available in most banks and savings and loan associations, including checking
accounts, NOW accounts, savings accounts and other time deposits of various
types, ranging from daily money market accounts to longer-term certificates of
deposit. The transaction accounts and time certificates are tailored to the
Bank's principal market area at rates competitive to those offered in the area.
In addition, the Bank offers certain retirement account services, such as
Individual Retirement Accounts ("IRAs"). All deposit accounts are insured by
the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum amount
allowed by law (generally, $100,000 per depositor subject to aggregation rules).
The Bank solicits these accounts from individuals, businesses, associations and
organizations, and governmental authorities.
The Bank also offers a full range of short- to medium-term commercial and
personal loans. Commercial loans include both secured and unsecured loans for
working capital (including inventory and receivables), business expansion
(including acquisition of real estate and improvements), and purchase of
equipment and machinery. Consumer loans include secured and unsecured loans for
financing automobiles, home improvements, education, and personal investments.
The Bank also originates and holds or sells into the secondary market fixed and
variable rate mortgage loans and real estate construction and acquisition loans.
The Bank's lending activities are subject to a variety of lending limits imposed
by state and federal law. The Bank may not make any loans to any director,
officer, or employee of the Bank (except for commercial loans to directors who
are not officers or employees) unless the loan is approved by the Board of
Directors of the Bank. Any such loan must be reviewed every six months by the
Board of Directors.
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Other bank services include cash management services, safe deposit boxes,
travelers checks, direct deposit of payroll and social security checks, and
automatic drafts for various accounts. The Bank is associated with the HONOR
network of automated teller machines that may be used by Bank customers
throughout Maryland and other regions. The Bank also offers MasterCard and VISA
credit card services through a correspondent bank as an agent for the Bank.
The Bank does not presently exercise trust powers. The Bank may in the
future offer a full-service trust department, but cannot do so without the prior
approval of the Maryland State Bank Commissioner (the "Commissioner").
COMPETITION
The banking business is highly competitive. The Bank competes as a
financial intermediary with other commercial banks, savings and loan
associations, credit unions, and money market mutual funds operating in Talbot
County, Caroline County and elsewhere. As of December 31, 1999, there were
eight commercial banks operating a total of twenty-one offices in Talbot County,
Maryland. Of these institutions, only The Talbot Bank of Easton is locally
owned and operated. The Talbot Bank has a main office in Easton and three
branches: two located in Easton and one in St. Michaels. St. Michaels Bank,
while locally chartered, is controlled by a holding company in Baltimore. It
operates a main office and three branches in Talbot County. Allfirst Bank and
First Mariner Bank, both with one branch in Talbot County, are both based in
Baltimore. Bank of America, based in Charlotte, North Carolina, operates four
branches in Talbot County. Crestar Bank, based in Richmond, Virginia, operates
one branch in Talbot County and Farmers Bank of Maryland, based in Annapolis,
Maryland, operates two branches in Talbot County. One credit union operates in
the county; however, it has only nominal deposits. Financial service companies,
such as Legg Mason Wood Walker, Inc., Ferris Baker Watts, Inc., Merrill Lynch,
A.G. Edwards & Sons, Inc. and H.C. Wainwright, Inc. also operate offices in
Talbot County.
As of December 31, 1999, there were six commercial banks operating a total
of fourteen offices in Caroline County, Maryland. Of these institutions, only
Provident State Bank of Preston, Maryland, is locally owned and operated.
Provident State Bank has a main office in Preston and three branches located in
Caroline County. Peoples Bank of Denton, while locally chartered, is controlled
by a holding company in Baltimore. It operates a main office and four branches
in Caroline County. Allfirst Bank, based in Baltimore, and Bank of America,
based in Charlotte, North Carolina, each operate one branch in Caroline County.
First Virginia Bank of Richmond, Virginia, operates two branches in Caroline
County.
FACILITIES
The Bank's main office is located at 501 Idlewild Avenue, Easton, Maryland,
on approximately 53,000 square feet of land at the corner of Idlewild Avenue and
Caulk Lane. The Bank also operates a branch facility at William Hill Manor
located on Dutchman's Lane in Easton with approximately 72 square feet of leased
space. This branch is limited to accepting deposits and cashing checks and is
open only for limited hours each business day. See Item 12. "Certain
Relationships and Related Transactions." In addition, the Bank operates an
office in Denton, Maryland from leased facilities with approximately 1,733
square feet. The Company will continue to investigate other branching
possibilities during 2000, but currently has no definite plans for other
branches.
The Bank acquired the site for the main office for $281,000 and spent
approximately $1,081,000 for construction of the building, landscaping, paving,
and sidewalks. Construction of the main office was completed in June 1993. The
main office building is a two story building consisting of approximately 14,000
square feet. The Bank presently occupies only approximately 8,000 square feet
for housing the main branch of the Bank, the operations center of the Bank, and
the executive offices of the Company and the Bank. In July 1997, the Bank
completed improvements to the second floor of the main office building at a cost
of $243,792. The improvements provided approximately 5,100 additional square
feet of office space, of which the Bank occupies approximately 1,500 square
feet. The remaining additional space has been leased to two third parties.
One of the third party leases consists of 1,820 square feet with an initial
lease term of eight years and it commenced August 1, 1997. The annual rent for
this lease is $20,020. The other third party lease consists of 1,800 square
feet with an initial lease term of five years and it commenced on July 1, 1997.
The annual rent for this lease
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is $18,000. The annual rent on both leases is subject to adjustment each year
during the initial term and during the renewal term, if any; provided, however,
the annual rent shall only be increased.
The William Hill Manor branch office space is leased pursuant to a five
year lease dated July 1, 1995. Rent is fixed at $3,600 annually. At the end of
the current term, the lease provides an option to extend with rent increases
contingent on the performance of the Bank and based on the consumer price index.
The Denton branch office space is leased pursuant to a five year lease
dated June 4, 1999, with three five year renewal options. During the original
five year term, monthly rent is fixed at $2,166.
EMPLOYEES
As of March 3, 2000, the Bank had twenty-four full-time employees and four
part-time employees. The Company's operations are conducted through the Bank.
Consequently, the Company does not have any separate employees. None of the
employees of the Bank are represented by any collective bargaining unit. The
Bank considers its relations with its employees to be good.
SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws and
regulations which impose specific requirements or restrictions on, and provide
for general regulatory oversight with respect to, virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not stockholders. The following is a brief summary of certain
statutes, rules and regulations affecting the Company and the Bank. To the
extent that the following summary describes statutory or regulatory provisions,
it is qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws or regulations may have a
material adverse effect on the business and prospects of the Company. Beginning
with the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and following with the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), numerous additional
regulatory requirements have been placed on the banking industry in the past
several years, and additional changes have been proposed. The operations of the
Company and the Bank may be affected by legislative changes and the policies of
various regulatory authorities. The Company is unable to predict the nature or
the extent of the effect on its business and earnings that fiscal or monetary
policies, economic control, or new federal or state legislation may have in the
future.
GRAMM-LEACH-BLILEY ACT
On November 4, 1999, the U.S. Senate and House of Representatives each
passed the Gramm-Leach-Bliley Act, previously known as the Financial Services
Modernization Act of 1999. The Act was signed into law by President Clinton on
November 12, 1999. Among other things, the Act repeals the restrictions on
banks affiliating with securities firms contained in sections 20 and 32 of the
Glass-Steagall Act. The Act also permits bank holding companies to engage in a
statutorily provided list of financial activities, including insurance and
securities underwriting and agency activities, merchant banking, and insurance
company portfolio investment activities. The Act also authorizes activities that
are "complementary" to financial activities.
The Act is intended to grant to community banks certain powers as a matter
of right that larger institutions have accumulated on an ad hoc basis.
Nevertheless, the Act may have the result of increasing the amount of
competition that the Company and the Bank face from larger institutions and
other types of companies. In fact, it is not possible to predict the full
effect that the Act will have on the Company and the Bank. From time to time,
other changes are proposed to laws affecting the banking industry, and these
changes could have a material effect on the business and prospects of the
Company and the Bank. The Company cannot predict the nature or the extent of
the effect on its business and earnings of fiscal or monetary policies, economic
controls, or new federal or state legislation.
THE COMPANY
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Because it owns the outstanding common stock of the Bank, the Company is a
bank holding company within the meaning of the federal Bank Holding Company Act
of 1956 (the "BHCA"). Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve and is required to file periodic reports of
its operations and such additional information as the Federal Reserve may
require. The Company's and the Bank's activities are limited to banking,
managing or controlling banks, furnishing services to or performing services for
its subsidiaries, or engaging in any other activity that the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.
Investments, Control, and Activities. With certain limited exceptions, the
BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring substantial-ly all the assets of any bank,
(ii) acquiring direct or indirect ownership or control of any voting shares of
any bank if after such acquisition it would own or control more than 5% of the
voting shares of such bank (unless it already owns or controls the majority of
such shares), or (iii) merging or consolidating with another bank holding
company.
In addition, and subject to certain exceptions, the BHCA and the Change in
Bank Control Act, together with regulations thereunder, require Federal Reserve
approval (or, depending on the circumstances, no notice of disapproval) prior to
any person or company acquiring "control" of a bank holding company, such as the
Company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company. Because the Company's Common Stock is registered under the Securities
Exchange Act of 1934, under Federal Reserve regulations control will be
rebuttably presumed to exist if a person acquires at least 10%, but less than
25%, of the outstanding shares of any class of voting securities of the Company.
The regulations provide a procedure for challenge of the rebuttable control
presumption.
Under the BHCA, the Company is generally pro-hibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting shares of any
company engaged in, nonbanking activities, unless the Federal Reserve, by order
or regulation, has found those activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Some of the
activities that the Federal Reserve has determined by regulation to be proper
incidents to the business of banking include making or servicing loans and
certain types of leases, engaging in certain insurance and discount brokerage
activities, performing certain data processing services, acting in certain
circumstances as a fiduciary or investment or financial advisor, owning savings
associations, and making investments in certain corporations or projects
designed primarily to promote community welfare.
The Federal Reserve imposes certain capital requirements on the Company
under the BHCA, including a minimum leverage ratio and a minimum ratio of
"qualifying" capital to risk-weighted assets. These requirements are described
below under "Capital Regulations." Subject to its capital requirements and
certain other restrictions, the Company is able to borrow money to make a
capital contribution to the Bank, and these loans may be repaid from dividends
paid from the Bank to the Company. The Bank's ability to pay dividends is
subject to regulatory restrictions as described below in "Dividends." The
Company is also able to raise capital for contribution to the Bank by issuing
securities without having to receive regulatory approval, subject to compliance
with federal and state securities laws.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
policy, the Company is expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances in which the
Company might not otherwise do so. Under the BHCA, the Federal Reserve may
require a bank holding company to terminate any activity or relinquish control
of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the
Federal Reserve's determination that such activity or control constitutes a
serious risk to the financial soundness or stability of any subsidiary
depository institution of the bank holding company. Further, federal bank
regulatory authorities have additional discretion to require a bank holding
company to divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's financial
condition. The Bank may be required to indemnify, or cross-guarantee, the FDIC
against losses it incurs with respect to any other bank controlled by the
Company, which in effect makes the Company's equity investments in healthy bank
subsidiaries available to the FDIC to assist any failing or failed bank
subsidiary of the Company.
THE BANK
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General. The Bank operates as a state nonmember banking association
incorporated under the laws of the State of Maryland and is subject to
examination by the FDIC and the Commissioner. Deposits in the Bank are insured
by the FDIC up to a maximum amount (generally $100,000 per depositor, subject to
aggregation rules). The Commissioner and the FDIC regulate or monitor all areas
of the Bank's operations, including security devices and procedures, adequacy of
capitalization and loss reserves, loans, investments, borrowings, deposits,
mergers, issuances of securiti-es, payment of dividends, interest rates payable
on deposits, interest rates or fees chargeable on loans, establish-ment of
branches, corporate reorganiza-tions, maintenance of books and records, and
adequacy of staff training to carry on safe lending and deposit gathering
practices. The FDIC requires the Bank to maintain certain capital ratios and
imposes limitations on the Bank's aggregate investment in real estate, bank
premises, and furniture and fixtures. The Bank is required by the FDIC and the
Commissioner to prepare quarterly reports on the Bank's financial condition and
to conduct an annual audit of its financial affairs in compliance with minimum
standards and procedures prescribed by the Commissioner.
Under FDICIA, all insured institutions must undergo periodic on-site
examination by their appropriate banking agency. The cost of examinations of
insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports to
the FDIC and the appropriate agency (and state supervisor when applicable).
FDICIA also directs the FDIC to develop with other appropriate agencies a method
for insured depository institutions to provide supplemental disclosure of the
estimated fair market value of assets and liabilities, to the extent feasible
and practicable, in any balance sheet, financial statement, report of condition,
or other report of any insured depository institution. FDICIA also requires the
federal banking regulatory agencies to prescribe, by regulation, standards for
all insured depository institutions and depository institution holding companies
relating, among other things, to: (i) internal controls, information systems,
and audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; and (v) asset quality.
State nonmember banks which have been newly chartered within the past two
years, and state nonmember banks and their holding companies which have
undergone a change in control within the past two years or which have been
deemed by the FDIC to be troubled institutions, must give the FDIC or the Board
of Governors, respectively, 30 days prior notice of the appointment of any
senior executive officer or director. Within the 30 day period, the FDIC or the
Board of Governors, as the case may be, may disapprove any such appointment.
Transactions with Affiliates and Insiders. The Bank is subject to Section
23A of the Federal Reserve Act, which places limits on the amount of loans or
extensions of credit to, or investments in, or certain other transactions with,
affiliates and on the amount of advances to third parties collateralized by the
securities or obligations of affiliates. The aggregate of all covered
transactions is limited in amount, as to any one affiliate, to 10% of the Bank's
capital and surplus and, as to all affiliates combined, to 20% of the Bank's
capital and surplus. Furthermore, within the foregoing limitations as to
amount, each covered transaction must meet specified collateral requirements.
Compliance is also required with certain provisions designed to avoid the taking
of low quality assets. The Bank is also subject to Section 23B of the Federal
Reserve Act which, among other things, prohibits an institution from engaging in
certain transactions with certain affiliates unless the transactions are on
terms substantially the same, or at least as favorable to such institution or
its subsidiaries, as those prevailing at the time for comparable transactions
with non-affiliated companies. The Bank is subject to certain restrictions on
extensions of credit to executive officers, directors, certain principal
stockholders, and their related interests. Such extensions of credit (i) must
be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
third parties and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features.
Community Reinvestment Act. The Community Reinvestment Act requires that
each insured depository institution shall be evaluated by its primary federal
regulator with respect to its record in meeting the credit needs of its local
community, including low and moderate income neighborhoods, consistent with the
safe and sound operation of those institutions. These factors are also
considered in evaluating mergers, acquisitions, and applications to open a
branch or facility. Failure to adequately meet these criteria would impose
additional requirements and limitations on the Bank. The Bank received a
satisfactory rating in its most recent evaluation.
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Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates. The Bank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help
meet the housing needs of the community it serves, the Equal Credit Opportunity
Act prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit, the Fair Credit Reporting Act of 1978 governing the
use and provision of information to credit reporting agencies, the Fair Debt
Collection Act governing the manner in which consumer debts may be collected by
collection agencies, and the rules and regulations of the various federal
agencies charged with the responsibility of implementing such federal laws. The
deposit operations of the Bank also are subject to the Right to Financial
Privacy Act, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative
subpoenas of financial records, and the Electronic Funds Transfer Act and
Regulation E issued by the Federal Reserve Board to implement that act, which
governs automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
DEPOSIT INSURANCE
The FDIC establishes rates for the payment of premiums by federally insured
banks and thrifts for deposit insurance. A separate Bank Insurance Fund ("BIF")
and Savings Association Insurance Fund ("SAIF") are maintained for commercial
banks and thrifts, respectively, with insurance premiums from the industry used
to offset losses from insurance payouts when banks and thrifts fail. Since
1993, insured depository institutions like the Bank have paid for deposit
insurance under a risk-based premium system. Under this system, until mid-1995
depository institutions paid to BIF or SAIF from $0.23 to $0.31 per $100 of
insured deposits depending on its capital levels and risk profile, as determined
by its primary federal regulator on a semi-annual basis. Once the BIF reached
its legally mandated reserve ratio in mid-1995, the FDIC lowered premiums for
well-capitalized banks, eventually to $.00 per $100, with a minimum semiannual
assessment of $1,000. However, in 1996 Congress enacted the Deposit Insurance
Funds Act of 1996, which eliminated this minimum assessment. It also separated
the Financial Corporation (FICO) assessment to service the interest on its bond
obligations. The amount assessed on individual institutions, including the
Bank, by FICO is in addition to the amount paid for deposit insurance according
to the risk-related assessment rate schedule. Increases in deposit insurance
premiums or changes in risk classification will increase the Bank's cost of
funds, and there can be no assurance that such cost can be passed on to the
Bank's customers.
DIVIDENDS
The principal source of the Company's cash revenues comes from dividends
received from the Bank. The amount of dividends that may be paid by the Bank to
the Company depends on the Bank's earnings and capital position and is limited
by federal and state law, regulations, and policies. The Federal Reserve has
stated that bank holding companies should refrain from or limit dividend
increases or reduce or eliminate dividends under circumstances in which the bank
holding company fails to meet minimum capital requirements or in which earnings
are impaired.
The Company's ability to pay any cash dividends to its stockholders in the
future will depend primarily on the Bank's ability to pay dividends to the
Company. In order to pay dividends to the Company, the Bank must comply with
the requirements of all applicable laws and regulations. Under Maryland law,
the Bank may pay a cash dividend only from the following, after providing for
due or accrued expenses, losses, interest, and taxes: (i) its undivided
profits, or (ii) with the prior approval of the Commissioner, its surplus in
excess of 100% of its required capital stock. Under FDICIA, the Bank may not
pay a dividend if, after paying the dividend, the Bank would be
undercapitalized. See "Capital Regulations" below. See Item 5 below for a
discussion of dividends paid by the Bank in the past two years.
In addition to the availability of funds from the Bank, the future dividend
policy of the Company is subject to the discretion of the Board of Directors and
will depend upon a number of factors, including future earnings, financial
condition, cash needs, and general business conditions. If dividends should be
declared in the future, the
7
<PAGE>
amount of such dividends presently cannot be estimated and it cannot be known
whether such dividends would continue for future periods.
CAPITAL REGULATIONS
The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, account for off-balance sheet exposure,
and minimize disincentives for holding liquid assets. The resulting capital
ratios represent qualifying capital as a percentage of total risk-weighted
assets and off-balance sheet items. The guidelines are minimums, and the
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain ratios well in excess of the minimums. The
current guidelines require all bank holding companies and federally-regulated
banks to maintain a minimum risk-based total capital ratio equal to 8%, of which
at least 4% must be Tier 1 capital. Tier 1 capital includes common
stockholders' equity before the unrealized gains and losses on securities
available for sale, qualifying perpetual preferred stock, and minority interests
in equity accounts of consolidated subsidiaries, but excludes goodwill and most
other intangibles and excludes the allowance for loan and lease losses. Tier 2
capital includes the excess of any preferred stock not included in Tier 1
capital, mandatory convertible securities, hybrid capital instruments,
subordinated debt and intermediate term-preferred stock, and general reserves
for loan and lease losses up to 1.25% of risk-weighted assets.
Under the guidelines, banks' and bank holding companies' assets are given
risk-weights of 0%, 20%, 50%, and 100%. In addition, certain off-balance sheet
items are given credit conversion factors to convert them to asset equivalent
amounts to which an appropriate risk-weight will apply. These computations
result in the total risk-weighted assets. Most loans are assigned to the 100%
risk category, except for first mortgage loans fully secured by residential
property and, under certain circumstances, residential construction loans, both
of which carry a 50% rating. Most investment securities are assigned to the 20%
category, except for municipal or state revenue bonds, which have a 50% rating,
and direct obligations of or obligations guaranteed by the United States
Treasury or United States Government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a leverage
ratio, which is Tier 1 capital as a percentage of average total assets less
intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%, but
most institutions are required to maintain an additional cushion of at least 100
to 200 basis points.
FDICIA established a new capital-based regulatory scheme designed to
promote early intervention for troubled banks and requires the FDIC to choose
the least expensive resolution of bank failures. The new capital-based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as a "well capitalized" institution, a bank must
have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less
than 6%, and a total risk-based capital ratio of no less than 10%, and the bank
must not be under any order or directive from the appropriate regulatory agency
to meet and maintain a specific capital level. As of December 31, 1999, the
Company and the Bank were qualified as "well capitalized." See "Item 6.
Management's Discussion and Analysis or Plan of Operation -- Capital."
Under the FDICIA regulations, the applicable agency can treat an
institution as if it were in the next lower category if the agency determines
(after notice and an opportunity for hearing) that the institution is in an
unsafe or unsound condition or is engaging in an unsafe or unsound practice.
The degree of regulatory scrutiny of a financial institution will increase, and
the permissible activities of the institution will decrease, as it moves
downward through the capital categories. Institutions that fall into one of the
three undercapitalized categories may be required to (i) submit a capital
restoration plan; (ii) raise additional capital; (iii) restrict their growth,
deposit interest rates, and other activities; (iv) improve their management; (v)
eliminate management fees; or (vi) divest themselves of all or part of their
operations. Bank holding companies controlling financial institutions can be
called upon to boost the institutions' capital and to partially guarantee the
institutions' performance under their capital restoration plans.
8
<PAGE>
These capital guidelines can affect the Company in several ways. If the
Bank begins to grow at a rapid pace, a premature "squeeze" on capital could
occur making a capital infusion necessary. The requirements could impact the
Company's ability to pay dividends. The Company's present capital levels are
more than adequate; however, rapid growth, poor loan portfolio performance, or
poor earnings performance or a combination of these factors could change the
Bank's capital position in a relatively short period of time.
Failure to meet these capital requirements would mean that the Bank would
be required to develop and file a plan with its primary federal banking
regulator describing the means and a schedule for achieving the minimum capital
requirements. In addition, the Bank would generally not receive regulatory
approval of any application that requires the consideration of capital adequacy,
such as a branch or merger application, unless the Bank could demonstrate a
reasonable plan to meet the capital requirement within a reasonable period of
time.
Both the Company and the Bank exceeded their respective regulatory capital
requirements at December 31, 1999. See "Management's Discussion and Analysis or
Plan of Operation -- Capital."
INTERSTATE BANKING AND BRANCHING RESTRICTIONS
On September 29, 1994, the federal government enacted the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking
Act"). This Act became effective on September 29, 1995, and permits eligible
bank holding companies in any state, with regulatory approval, to acquire
banking organizations in any other state. Effective June 1, 1997, the
Interstate Banking Act allowed banks with different home states to merge, unless
a particular state opts out of the statute. Consistent with the Interstate
Banking Act, Maryland adopted legislation in 1995 which permits interstate bank
mergers beginning September 29, 1995.
In addition, beginning June 1, 1997, the Interstate Banking Act permitted
national and state banks to establish de novo branches in another state if there
is a law in that state which applies equally to all banks and expressly permits
all out-of-state banks to establish de novo branches. In 1995, Maryland adopted
"opt-in" legislation by which Maryland adopted the federal legislation effective
September 29, 1995, before it automatically took effect on June 1, 1997. The
Maryland legislation permits out-of-state banks to establish branches in
Maryland by opening a de novo branch, by acquiring an existing branch from a
Maryland depository institution, or as a result of an interstate merger with a
Maryland banking organization, as long as such states grant similar privileges
for acquiring banking organizations in their states to banking organizations in
Maryland. Under Maryland law, the Bank may open branches state-wide, subject to
the prior approval of the Commissioner and the FDIC. There are currently no
definite plans for the Company to acquire any bank, but the Company remains open
to acquisitions as part of its strategic growth plan.
ENFORCEMENT POWERS
FIRREA expanded and increased civil and criminal penalties available for
use by the federal regulatory agencies against depository institutions and
certain "institution-affiliated parties." Institution-affiliated parties
primarily include management, employees, and agents of a financial institution,
as well as independent contractors and consultants such as attorneys and
accountants and others who participate in the conduct of the financial
institution's affairs. These practices can include the failure of an
institution to timely file required reports or the filing of false or misleading
information or the submission of inaccurate reports. Civil penalties may be as
high as $1,000,000 a day for such violations. Criminal penalties for some
financial institution crimes have been increased to 20 years. In addition,
regulators are provided with greater flexibility to commence enforcement actions
against institutions and institution-affiliated parties. Possible enforcement
actions include the termination of deposit insurance. Furthermore, banking
agencies' power to issue cease-and-desist orders was expanded. Such orders may,
among other things, require affirmative action to correct any harm resulting
from a violation or practice, including restitution, reimbursement,
indemnification or guarantees against loss. A financial institution may also be
ordered to restrict its growth, dispose of certain assets, rescind agreements or
contracts, or take other actions as determined by the ordering agency to be
appropriate.
EFFECT OF GOVERNMENTAL MONETARY POLICIES
9
<PAGE>
The Company's earnings are affected by domestic economic conditions and the
monetary and fiscal policies of the United States government and its agencies.
The Federal Reserve's monetary policies have had, and are likely to continue to
have, an important impact on the operating results of commercial banks through
its power to implement national monetary policy in order, among other things, to
curb inflation or combat a recession. The monetary policies of the Federal
Reserve have major effects upon the levels of bank loans, investments and
deposits through its open market operations in United States government
securities and through its regulation of the discount rate on borrowings of
member banks and the reserve requirements against member bank deposits. It is
not possible to predict the nature or impact of future changes in monetary and
fiscal policies.
RECENT LEGISLATIVE DEVELOPMENTS
From time to time, various bills are introduced in the United States
Congress and at the state legislative level with respect to the regulation of
financial institutions. Certain of these proposals, if adopted, could
significantly change the regulation of banks and the financial services
industry. The Company cannot predict whether any such proposals will be adopted
or, if adopted, how such proposals would affect the Company.
ITEM 2. DESCRIPTION OF PROPERTY
- -----------------------------------
The Bank's main office is located at 501 Idlewild Avenue, Easton, Maryland
on approximately 53,000 square feet of land at the corner of Idlewild Avenue and
Caulk Lane. The Bank also operates branch facilities at William Hill Manor
located on Dutchman's Lane in Easton and on Market Street in Denton, with
approximately 72 and 1,733 square feet of leased space, respectively. The
William Hill Manor branch is limited to accepting deposits and cashing checks
and is open only for limited hours each business day. See Item 12. "Certain
Relationships and Related Transactions."
The Bank acquired the site for the main office for $281,000 and spent
approximately $1,081,000 for construction of the building, landscaping, paving,
and sidewalks. Construction of the main office was completed in June 1993. The
main office building is a two story building consisting of approximately 14,000
square feet. The Bank presently occupies only approximately 8,000 square feet
for housing the main branch of the Bank, the operations center of the Bank, and
the executive offices of the Company and the Bank. In July 1997, the Bank
completed improvements to the second floor of the main office building at a cost
of $243,792. The improvements provided approximately 5,100 additional square
feet of office space, of which the Bank occupies approximately 1,500 square
feet. The remaining additional space has been leased to two third parties.
One of the third party leases consists of 1,820 square feet with an initial
lease term of eight years and it commenced August 1, 1997. The annual rent for
this lease is $20,020. The other third party lease consists of 1,800 square
feet with an initial lease term of five years and it commenced on July 1, 1997.
The annual rent for this lease is $18,000. The annual rent on both leases is
subject to adjustment each year during the initial term and during the renewal
term, if any; provided, however, the annual rent shall only be increased.
The William Hill Manor branch office space is leased pursuant to a five
year lease dated July 1, 1995. Rent is fixed at $3,600 annually. At the end of
the current term, the lease provides an option to extend with rent increases
contingent on the performance of the Bank and based on the consumer price index.
The office space for the branch office in Denton is leased pursuant to a
five year lease which commenced June 4, 1999. Rent for this space is $2,166 per
month. This lease provides for three five-year renewals at the discretion of
the Bank.
ITEM 3. LEGAL PROCEEDINGS
- ----------------------------
There are no material pending legal proceedings to which the Company or the
Bank or any of their properties are subject. Neither the Company nor the Bank
is aware of any proceeding that a governmental authority is contemplating.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
10
<PAGE>
There were no matters submitted to a vote of the stockholders of the
Company during the fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -------------------------------------------------------------------------
In response to this Item, the information included on page 16 of the
Company's Annual Report to Stockholders for the year ended December 31, 1999, is
incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- --------------------------------------------------------------------------
In response to this Item, the information included on pages 3 through 15 of
the Company's Annual Report to Stockholders for the year ended December 31,
1999, is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
- -------------------------------
In response to this Item, the information included on pages 17 through 40
of the Company's Annual Report to Stockholders for the year ended December 31,
1999, is incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- ---------------------
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(A) OF THE
- --------------------------------------------------------------------------------
EXCHANGE ACT
- -------------
In response to this Item, the information included on pages 2 through 5 and
page 8 of the Company's Proxy Statement for the Annual Meeting of Stockholders
to be held on May 17, 2000, is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
- ----------------------------------
In response to this Item, the information included on pages 6 through 8 of
the Company's Proxy Statement for the Annual Meeting of Stockholders to be held
on May 17, 2000, is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
In response to this Item, the information included on pages 8 through 10 of
the Company's Proxy Statement for the Annual Meeting of Stockholders to be held
on May 17, 2000, is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------------
In response to this Item, the information included on page 10 of the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
May 17, 2000, is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------------
<TABLE>
<CAPTION>
(a) Exhibits.
---------
<C> <S>
3.1 Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of Registration
Statement on Form S-18, File No. 33-43317).
11
<PAGE>
3.2 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-QSB filed on August 12, 1999 for the quarter ended
June 30, 1999).
10.1 Easton Bancorp, Inc. 1991 Stock Option Plan (incorporated by reference to Exhibit 10.2 of
Registration Statement on Form S-18, File No. 33-43317).
10.2 Form of Warrant Agreement (incorporated by reference to Exhibit 10.3 of Registration Statement
on Form S-18, File No. 33-43317).
10.3 Lease Agreement dated June 4, 1999, between the Bank and ZNB, LLP.
10.4 Non-Qualified Stock Option Agreement with R. Michael S. Menzies dated May 1, 1999.
13 Annual Report to Stockholders for the year ended December 31, 1999.
21 Subsidiaries of the Company.
27 Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K
----------------------
No reports on Form 8-K were filed by the Company during the fourth quarter
of the year ended December 31, 1999.
12
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
EASTON BANCORP, INC.
----------------------
(Registrant)
By:/s/ R. Michael S. Menzies
-----------------------------
R. Michael S. Menzies
President
Date: March 27, 2000
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------- -------------------------------- --------------
<S> <C> <C>
/s/ Sheila W. Bateman Director; Secretary March 27, 2000
- -----------------------------
Sheila W. Bateman
/s/ Jack H. Bishop Director March 27, 2000
- -----------------------------
Jack H. Bishop
/s/ J. Parker Callahan, Jr. Director March 27, 2000
- -----------------------------
J. Parker Callahan, Jr.
/s/ J. Fredrick Heaton Director March 27, 2000
- -----------------------------
J. Fredrick Heaton
/s/ William C. Hill Director March 27, 2000
- -----------------------------
William C. Hill
Director; Chairman of the
/s/ W. David Hill Board; Chief Executive Officer March 27, 2000
- ----------------------------- (principal executive officer)
W. David Hill
/s/ David F. Lesperance Director March 27, 2000
- -----------------------------
David F. Lesperance
/s/ Vinodrai Mehta Director March 27, 2000
- -----------------------------
Vinodrai Mehta
/s/ R. Michael S. Menzies Director; President March 27, 2000
- -----------------------------
R. Michael S. Menzies
Director
- -----------------------------
Roger A. Orsini
/s/ Mahmood S. Shariff Director March 27, 2000
- -----------------------------
Mahmood S. Shariff
Director
- -----------------------------
Myron J. Szczukowski, Jr.
13
<PAGE>
Signature Title Date
- --------------------------- -------------------------------- --------------
Director; Treasurer (principal
/s/ Jerry L. Wilcoxon financial officer and principal March 27, 2000
- --------------------------- accounting officer)
Jerry L. Wilcoxon
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit Sequential
Number Description Page Number
- ------- ------------------------------------------------------------------------- -----------
<C> <S> <C>
3.1 Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of Registration Statement on Form S-18,
File No. 33-43317).
3.2 Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.1 of the Company's Quarterly Report on Form 10-QSB filed on
August 12, 1999 for the quarter ended June 30, 1999).
10.1 Easton Bancorp, Inc. 1991 Stock Option Plan (incorporated by reference to
Exhibit 10.2 of Registration Statement on Form S-18, File No. 33-43317).
10.2 Form of Warrant Agreement (incorporated by reference to Exhibit 10.3 of
Registration Statement on Form S-18, File No. 33-43317).
10.3 Lease Agreement dated June 4, 1999, between the Bank and ZNB,
LLP.
10.4 Non-Qualified Stock Option Agreement with R. Michael S.
Menzies dated May 1, 1999.
13 Annual Report to Stockholders for the year ended December 31, 1999.
21 Subsidiaries of the Company.
27 Financial Data Schedule (for SEC use only).
</TABLE>
<PAGE>
THIS LEASE is made this 4 day of June, 1999, by and between ZNB, LLP, a
- ----
Maryland limited liability partnership, by Hill Management Company, Inc., its
agent, (hereinafter referred to as "Lessor"); and Easton Bank & Trust Company, a
------------------------------
Maryland corporation, whose address is 300 Market Street, Denton, Maryland
- --------------------- ------------------------------------
21629, (hereinafter referred to as "Lessee").
- -----
WITNESSETH, that for and in consideration of the mutual covenants contained
herein, the parties agree as follows:
1. GRANT- In consideration of the rents, covenants and agreements
-----
hereinafter set forth, Lessor leases to Lessee and Lessee rents from Lessor,
those certain Premises located 300 Market Street, Denton, Maryland 21629, being
more particularly described in Paragraph 2 below.
2. DESCRIPTION OF PREMISES - The leased Premises are located at 300
-------------------------
Market Street, Denton, Maryland 21629 and known as Suite 300 of the Carter
Building, containing approximately 1733 square feet outlined on the attached
----
plat labeled "Exhibit A" (hereinafter referred to as "the Premises").
3. TERM - The term of this Lease shall be for a period of 5 years,
---- -
which shall commence on the 1st day of Sept., 1999, and shall terminate on the
-----
last day of August, 2004. Provided the lessee is not in default under the
------
Lease, the Lessee shall have the option to lease the premises for up to three
(3) additional five (5) year terms, consecutive to the initial term. In the
event that the first option period is not exercised the remaining two (2) option
periods shall immediately terminate. In the event that the second option period
is not exercised, the third option period shall immediately terminate. The
option shall be exercised, in writing, delivered to the Lessor as provided
herein no later than the ninetieth day prior to the end of each term then
existing. The rent for each option term shall be increased ten (10%) percent
over and above the immediate preceding term; otherwise, all other terms and
provisions herein will remain the same from term to term.
4. RENT
----
4.1. Base Rent - Original Term. Lessee agrees to pay to Lessor
----------------------------
Base Rent in the sum of One Hundred twenty-nine thousand nine hundred
seventy-five ($129,975.00) Dollars, base rent shall be paid in equal monthly
installments of $2,166.25, on or before the first day of each calendar month
hereunder, without demand being made therefor. Monthly payments of rent shall
be made payable to Lessor and mailed or delivered to Lessor at 315 High Street,
Charleston, Maryland 21620, or to such other person, or at such other place, as
Lessor may, from time to time, designate in writing.
4.2. Payment of Rent. It is agreed and understood by all parties
----------------
to this Lease that any rental payment not received by Lessor within fifteen (15)
days of the due date shall be subject to imposition of a late charge of ten
percent (10%) of the monthly rental. Said late charge, if not remitted with the
delinquent rental payment shall be due and payable with the following rental
payment and shall constitute Additional Rent.
<PAGE>
4.3. Taxes and Assessments. Lessor agrees to pay all real estate
----------------------
taxes and assessments against the property. The parties hereto recognize that
this Lease is entered into based on a tax assessment and rate established on
July 1 of the year this Lease is executed. The Lessee hereby agrees that, upon
demand from Lessor, the Lessee will pay as Additional Rent, an amount equal to
its proportionate share of any increase of real estate taxes assessed against or
attributable to the premises if any such increases are made during the term of
this Lease.
4.4 First Right of Refusal. During the term of this Lease or
-------------------------
during any of the renewal terms called for herein, in the event the principal of
the Lessor elects to sell the Carter Building to a third party (which is defined
to be a person not a member of the Zebulon J. Brodie family or entity of which
no member of the Brodie family is a principal), Lessor agrees to transmit by
regular mail to the address stated herein, a copy of terms related to the sale
of the Carter Building to the Lessee. The Lessee shall have the right for a
period of seven (7) days after the terms of the sale are transmitted to the
Lessee as provided therein, to purchase the Carter Building upon the exact same
terms upon which the principal is willing to sell the Carter Building to a third
party, provided Lessee delivers written confirmation thereof to Lessor within
said seven (7) days, which written election must include the cash deposit called
for in the terms of the offer, otherwise this right shall terminate without any
further action by any party and be of no further force or effect. The provision
does not apply to gifts, inter-family or inter-entity transfers, and is
subordinate to all existing liens, including refinances. In the event that the
Lessee defaults under this Lease or declines to exercise any of the options
called for herein, the right of first refusal shall immediately terminate on the
earliest of these dates.
5. USE - The Premises are to be used for the purpose of retail
---
financial services and for no other purposes whatsoever without prior written
consent of Lessor. Lessee shall, at its own cost and expense, obtain any and
all licenses and permits for such use and shall satisfy any and all laws,
regulations, and ordinances applicable thereto.
6. PARKING - This Lease does not include the right to parking.
-------
7. MAINTENANCE
-----------
7.1. Lessee, at Lessee's expense, shall keep and maintain the
interior of the Premises in good order and repair, and shall return same to
Lessor at the termination of this Lease (and/or any renewal) in the same
condition as received, reasonable wear and tear excepted.
7.2. Lessee agrees to replace any plate, window or door glass
broken in the Premises, with glass of like kind and quality, except when said
plate, window or door glass is broken by reason of defective construction of the
Building, or due to negligent repair of this Building by Lessor. Lessee shall
further obtain and maintain during the term of this Lease and any renewal, at
Lessee's expense, plate glass insurance on the Premises in such amount and with
such insurer as may be satisfactory to Lessor. If Lessor so requires, Lessor
shall be designated as a named insured on any such policy of insurance and
Lessee shall provide Lessor with proof of such insurance upon Lessor's request.
In the alternative, and at Lessor's option, Lessor may purchase such insurance
and Lessee shall pay Lessee's Proportionate Share of the cost of such insurance
to Lessor as Additional Rent hereunder.
2
<PAGE>
8. ALTERATIONS, ADDITIONS AND IMPROVEMENTS
------------------------------------------
8.1. Lessor shall prepare the Premises in accordance with Exhibit
A at Lessee's expense. All such alterations, additions and improvements shall
become the property of Lessor.
8.2. Upon Lessor's completion of the work provided for in Section
8.1., or at such earlier time as Lessor may agree, Lessee may make such other
improvements to the Premises in preparation for and in the conduct of its
business as Lessee deems necessary and/or appropriate, at Lessee's expense.
Lessee, however, shall make no further alterations to and/or additions to the
Premises without Lessor's prior written consent. Lessee warrants that any and
such alterations, additions and/or improvements made pursuant to this subsection
shall be made in a good, workmanlike manner and in full and complete compliance
with all laws, rules, regulations, and ordinances and in satisfaction of the
requirements of such building, fire, safety, health and other codes as may now
be or hereafter become applicable, without cost to Lessor. All alterations,
additions and improvements shall become the property of the Lessor; however,
upon written notice by Lessor to Lessee, Lessee shall remove such alterations,
additions and improvements prior to the expiration of this Lease and/or renewal
term and restore the Premises to their original condition at Lessee's expense.
8.3. If any mechanics lien, materialmen's lien or other lien is
filed against the Premises, the Building, the property upon which the Building
is located and/or any portions thereof, by reason of any work, labor, equipment,
materials and/or services, furnished and/or alleged to have been furnished to or
for Lessee or for any changes, alterations, additions, improvements and/or
repairs made by Lessee, Lessee shall cause said lien to be released of record
within five (5) days after the filing of such lien. Lessee shall further
indemnify and hold Lessor harmless from any and all claims, demands, suits,
actions, losses, liability and damages arising out of and/or relating to any
such lien or claim of lien.
9. TRADE AND OTHER FIXTURES - Lessee may, at Lessee's expense, install
-------------------------
or cause to be installed such equipment, machinery, trade and/or other fixtures
as are reasonably necessary for the operation and conduct of Lessee's business.
Any such trade fixtures shall remain Lessee's personal property and may be
removed by Lessee, provided that Lessee shall repair at Lessee's expense any
damage to the Premises resulting from the installation and/or removal of such
trade fixtures.
10. CASUALTY DAMAGE - Upon the occurrence of any casualty, damage or
----------------
destruction affecting the Premises, Lessee shall give immediate notice to
Lessor. If, in the opinion of Lessor, the Premises are rendered substantially
unfit for occupancy or use by any such casualty, damage or destruction, or
Lessor should decide not to rebuild or remodel the Premises, this Lease shall
cease and Base Rent and Additional Rent shall abate from the occurrence of such
casualty or vacation of the Premises, whichever is later. If, in the opinion of
Lessor, the Premises are not hereby rendered substantially unfit for occupancy
or use, Lessor shall promptly and diligently restore so much of the Premises as
was damaged to its condition at the commencement of this Lease, exclusive of the
tenant Improvement Items, at the cost of any negligent party or its insurer,
with no abatement of rent.
3
<PAGE>
11. FIRE INSURANCE - Lessor shall provide, and pay the premiums for,
---------------
fire and extended coverage to protect the Building with coverage amounts and
with an insurer satisfactory to Lessor. Lessee will not do anything in or about
the Premises that will contravene or affect any insurance which Lessor may place
thereon.
12. INSURANCE AND LIABILITY
-------------------------
12.1 Lessee, at Lessee's sole expense, shall maintain in force
continuously throughout the term of this Lease and/or any renewal, a
comprehensive general liability policy with respect to the Premises and Lessee's
occupancy, use and/or time to time but in no event less than $500,000.00 for any
one person and $1,000,000.00 for any one occurrence with respect to death,
bodily injury and/or personal injury and $100,000.00 for each occurrence with
respect to damage and/or destruction of property; such insurance shall be with
an insurer satisfactory to Lessor and shall include coverage for and/or against
assumed and/or contractual liability under this Lease. Such insurance shall
include Lessor and Lessor's management agent as named insured and Lessee shall
promptly furnish Lessor with a Certificate from the insurer that such insurance
is in effect. In the event that the insurer imposes any premium charge on
Lessor and/or Lessor pays the premium for such insurance, Lessee shall reimburse
Lessor for such charges; Lessee shall pay such charges as Additional Rent.
12.2 Lessor and its management agent shall not be liable and/or
responsible for, and Lessee shall indemnify and hold Lessor and its management
agent harmless against any and all damages and claims for damages, including but
not limited to damages and/or claims for damages for the death, bodily injury
and/or personal injury to any person and/or any injury, loss and/or damage to
any property occurring on and/or relating to or arising out of Lessee's
occupancy and/or use of the Premises, the Building and/or their appurtenances,
unless such death, bodily injury, personal injury and/or injury, loss or damage
to property and other damage was proximately caused by the negligent and/or
intentionally tortious act or omission of the Lessor, its management agent
and/or some agent, servant, and/or employee for whose conduct they are legally
responsible. Notwithstanding the foregoing, Lessor and its management agent
shall not be liable and/or responsible for any such damages and/or claims for
damages for any such injury, loss and/or damage occurring on or about the
Premises, the Building and/or their appurtenances, regardless of whether such
injury, loss and/or damage was proximately caused by the negligent act or
omission of Lessor and its management agent and/or an agent, servant, and/or
employee for whose conduct they are legally responsible where such Premises,
Building and/or appurtenances are within the exclusive control of Lessee.
12.3. Lessee further agrees that Lessor shall not be liable and/or
responsible for, and to hold Lessor harmless against any and all intentionally
tortious and/or negligent act and/or omissions of any other persons leasing from
Lessor and their agents, servants, employees, contractors, invitees, and/or
visitors.
4
<PAGE>
13. COMPLIANCE WITH LAWS - Lessee agrees to promptly comply with all
----------------------
applicable and valid laws, ordinances and regulations of any and all Federal,
State, County, Municipal or other lawful authorities pertaining to the use and
occupancy of the Premises. Lessee warrants and represents that no materials or
substances which, under Federal, State, or Local law, statute, ordinance, or
regulation or court order or private agreement which require special handling
and collection, storage, treatment, or disposal will be placed or located in or
near the premises.
14. ASSIGNMENT AND SUBLETTING - Lessee shall not assign this Lease or
---------------------------
allow the same to be assigned by operation of law or otherwise, or sublet the
Premises or any part thereof, or use permit same to be used for any purpose
other than as above specified, without Lessor's prior written consent, which
consent will not be unreasonably withheld. Any such assignment or sublease
without Lessor's consent shall be void and of no force and effect. Any
permitted assignment or sublease shall be subject to all of the terms and
conditions of this Lease and Lessee shall remain primarily liable for the
payment of the rent and the performance of all of the terms and conditions
hereof. If any partnership interest or corporate share of stock of Lessee are
transferred by sale, assignment, bequest, inheritance, operation of law or
otherwise, so as to result in a change of the voting control of Lessee by those
owning a majority of the interest in Lessee as of the date hereof, such transfer
shall constitute an assignment for the purposes hereof and shall require
Lessor's prior written consent thereto. In any event, Lessee shall notify
Lessor of such change of control and Lessor may terminate this Lease at any time
thereafter upon sixty (60) days' prior written notice to Lessee.
15. BANKRUPTCY - Should Lessee make an assignment for benefit of
----------
creditors, file for bankruptcy, or have any involuntary petition in bankruptcy
filed against it, such action shall constitute a breach of the Lease, which
shall automatically terminate all rights of Lessee under this Lease. Upon the
filing of a petition by or against Lessee under the Federal Bankruptcy Code (or
any successor federal bankruptcy statute), Lessee, as debtor and/or as debtor in
possession, and any trustee who may be appointed, agree to perform each and
every obligation of Lessee under this Lease, including, but not limited to, the
payment of all monetary obligation hereunder, until such time as this Lease is
either rejected or assumed by order of a United States Bankruptcy Court, or
other federal court having jurisdiction over bankruptcy matters.
16. EMINENT DOMAIN- If all or any part of the Premises known as The
---------------
Carter Building, Denton, Maryland are the subject of a "quick take" proceeding
or are taken under power of eminent domain or conveyed under threat of
condemnation proceedings, and in its sole discretion, Lessor shall determine
that the Premises are unsatisfactory for the purpose of this Lease, then this
Lease shall terminate effective as of the date Lessor is required to give up the
right to occupy or use the Premises or any portion thereof. Lessee shall have
no right to make any claim against Lessor because of such termination, nor to
participate in any awards, and its sole remedy shall be removal of trade
fixtures placed therein and abatement of future rent.
17. ATTORNEYS FEES - Lessee shall pay Lessor all costs, expenses and
---------------
charges incurred by Lessor in collecting any sums due Lessor under this Lease,
and/or enforcing any provisions of this Lease, and/or recovering any damages
and/or losses from Lessee to which Lessor is legally entitled, including, but
not limited to attorney's fees in the amount of 25% of the amount of any unpaid
rent.
5
<PAGE>
18. DEFAULT
-------
18.1 In the case of any default by Lessee in any of the terms
and/or conditions of this Lease (other than any default occasioned by the
institution of bankruptcy proceedings and/or an assignment for the benefit of
creditors which shall be governed by Section 15 of this Lease), Lessor, at
Lessor's option, may recover the Premises if such default continues uncured for
a period of thirty (30) days after Lessor notifies Lessee of such default and of
Lessor's intention to recover the Premises. Upon the giving of such notice and
the expiration of such thirty (30) day period, unless Lessee shall have cured
the default during that time, Lessor shall be entitled to the benefit, without
further notice (all statutory notice requirements being hereby expressly
waived), of all the provisions of law for speedy recovery of lands and tenements
as now are in force or which may hereafter be enacted and/or to reenter,
repossess and/or relet the Premises as the agent of Lessee for any balance of
the then term and collect rent therefor. And in any event, the Lessor may
distrain, by any legal means, for any overdue installment of rent or rental
payment and may enter the property for such purpose by force if necessary
without liability, which liability is hereby expressly waived. In the event of
reletting by the Lessor as agent for the Lessee, the reletting shall be on such
terms, conditions and rentals as the Lessor deems proper, and the proceeds that
may be collected from same, less the expense of reletting, including any
broker's commission and costs for the repair, restoration and/or preparation of
the Premises for reletting, shall be applied against the rental to be paid by
Lessee, and Lessee shall be liable for any balance that may be due under this
Lease or any renewal, and such reletting shall not operate as termination of
this Lease or any renewal or as a waiver or postponement of any right of the
Lessor against the Lessee. Any recovery of the Premises, institution of
proceedings to recover the Premises, reentry, repossession and/or reletting
hereunder shall not operate as, nor shall it be interpreted or construed as a
termination of this Lease or any renewal, and shall not relieve Lessee of its
liability and obligations under this Lease and Lessee shall in all events remain
liable for the full amount of Base Rent and Additional Rent provided for in this
Lease and for any deficiency or loss of such rent; Lessor, at Lessor's option,
may recover such rent and/or damages for the loss of rent in separate actions
from time to time as Lessee's liability and/or obligation to pay rent accrue or
would have accrued had Lessee not defaulted. Any such recovery, institution of
legal proceedings, reentry, repossession, and/or reletting shall be in addition
to and without prejudice to any rights and/or remedies which Lessor may
otherwise have.
18.2 Notwithstanding any provision of Section 18.1 to the
contrary, Lessor shall be entitled immediately upon a default by Lessee to avail
himself of all rights and remedies afforded Lessor by this Lease and/or law,
without any notice to Lessee and without giving Lessee any grace period if such
default arises under Section 15 of this Lease, or if Lessee has defaulted in
and/or breached the same and/or any other term and/or condition of this Lease
during the twelve (12) months preceding such current default and for which
notice was given (whether or not subsequently cured), or if such default is of
such a nature as to give rise to an emergency situation which in Lessor's
reasonable judgment requires Lessor to take immediate action to cure default.
6
<PAGE>
19. HOLDING OVER - Should Lessee continue to occupy the Premises, or
-------------
any portion thereof, after the termination of this Lease (and/or any renewal)
and unless otherwise agreed in writing, Lessee shall pay Lessor on demand an
amount equal to one hundred percent (100%) of the rent due for the last full
month of the then term of this Lease (or renewal) for each month or portion
thereof that Lessee continues to occupy all or any part of the Premises. Such
payments shall not be deemed to be rent and acceptance of any such payments by
Lessor shall not be deemed or construed to convert Lessee into a month to month
tenant or otherwise grant Lessee any right to remain in possession of the
Premises or so as to otherwise impair Lessor's right to the immediate possession
of the Premises. Similarly, any such payments shall be in addition to and
without prejudice to Lessor's right to recover any damage to which Lessor
otherwise would be entitled as a result of Lessee's holding over.
20. RIGHT OF ENTRY - Notwithstanding any other provisions of this Lease
--------------
to the contrary, Lessor and its agents shall have the right to enter the
Premises at any reasonable times to inspect the Premises, to exhibit the
Premises to any existing or prospective purchasers, lessees and/or mortgagees,
to make any alterations, improvements and/or repairs, or for any other purpose
relating to the operation and/or maintenance of the Premises and/or Building.
Unless it would otherwise be impractical because of any emergency, Lessor shall
give Lessee at least twenty-four (24) hours notice of Lessor's intention to
enter the Premises and Lessor shall use reasonable efforts to avoid interfering
with Lessee.
21. SUBORDINATION - This Lease is subject and subordinate to all
-------------
mortgages, deeds of trust, or other debt instruments which may now or hereafter
affect such Lease, the Building, site or other improvements thereon. The
foregoing provisions shall be self operative and no further instrument of
subordination shall be required by any mortgagee or other interested partly,
provided, however, that in confirmation of such subordination Lessee shall, upon
request of Lessor, execute and deliver, in recordable form, any instrument of
subordination required by Lessor, and Lessee hereby does constitute and appoint
Lessor as Lessee's attorney-in-fact to execute any such subordination instrument
on behalf of Lessee.
22. CONTINUOUS USE - Anything herein to the contrary notwithstanding,
---------------
this Lease shall be deemed in default if Lessee shall discontinue the business
referred to in Paragraph 5 herein, and Premises shall become or appear vacant,
or Lessee abandons or appears to abandon the Premises. Under any of the
aforesaid conditions, the Lessor may exercise its rights as stated in Paragraph
18 herein.
23. NO PARTNERSHIP - By execution of this Lease, Lessor does not in any
--------------
way become for any purpose a partner, principal, master, agent, servant, and/or
employee of the Lessee in the operation and/or conduct of Lessee's business, nor
does Lessor assume, nor become subject to any responsibility or liability
therefor and Lessee agrees to indemnify and hold Lessor harmless against any and
all claims or demands, of whatever nature, arising out of the operation and
conduct of Lessee's business.
24. NOTICES - Any notice required or permitted hereunder shall be in
-------
writing and delivered either in person against hand receipt to the other party
or other party's authorized agent, or by the United States Certified Mail Return
7
<PAGE>
Receipt Requested, postage fully paid, to the address set forth hereinafter, or
to such other address as either party may designate in writing and delivered as
herein provided.
LESSEE: William David Hill
501 Idlewilde Avenue
Easton, Maryland 21601
R. Michaels Menzies
501 Idlewilde Avenue
Easton, Maryland 21601
Jeff Heflebower
300 Market Street
Denton, Maryland 21629
LESSOR: HILL MANAGEMENT COMPANY, INC.
315 High Street
Chestertown, MD 21620
25. SEVERABILITY - No determination by any court, governmental body or
------------
otherwise that any provision of and/or amendment to this Lease is invalid or
unenforceable in any instance shall affect the validity or enforceability of
such provision and/or amendment in any other instance not controlled by such
determination and no such determination as to any provision and/or amendment
shall affect the validity or enforceability of any other provisions, the terms
and conditions of this Lease being severable.
26. COMPLETE AGREEMENT - This Lease constitutes the complete agreement
-------------------
between the Lessor and Lessee and supersedes any and all other agreements,
understandings, representations, and/or statements between them as to the
subject matter of this Lease.
27. WAIVER - Any waiver of any term or condition of this Lease shall
------
extend to the particular case only, and only in the manner specified and shall
not be construed as applying to or in any way waiving any further rights under
this Lease. No waiver of any term or condition of this Lease by Lessor shall be
effective unless in writing and signed by Lessor and/or its management agent.
28. AMENDMENTS - This Lease may be amended or modified only by written
----------
agreement signed by all parties.
29. RULES AND REGULATIONS - Lessor shall have the option to establish
-----------------------
at its sole discretion, reasonable rules and regulations governing the use of
the Premises, Building and the Property by all tenants, their visitors, invitees
and employees, and to amend the same from time to time, and a violation thereof
may constitute a default hereunder, at the option of Lessor.
8
<PAGE>
30. PERSONAL PROPERTY - All personal property placed or moved in the
------------------
premises above described shall be at the risk of the Lessee or owner thereof,
and Lessor shall not be liable for any damage to said personal property, or to
the Lessee arising from the bursting or leaking of water pipes, or from any act
of negligence of any co-tenant or occupants of the Building or of other person
whomsoever.
31. HEIRS AND ASSIGNS - This Lease shall be binding upon the parties
-------------------
hereto and their respective heirs, personal representatives, successors in
interest and assigns.
32. VENUE AND JURISDICTION - Lessor and Lessee agree that any claim
------------------------
and/or controversy arising out of and/or relating to this Lease shall be brought
only in the District Court of Maryland for Caroline County and/or Circuit Court
of Maryland for Caroline County, to whose jurisdiction the parties hereby agree
and submit; nothing in this Section however, shall preclude either party from
bringing any appropriate Third Party Claim, Cross Claim or other claim against
the other in any action or suit instituted in any other Court by anyone not a
party to this Lease. Lessor and Lessee hereby mutually waive any right to trial
by jury in any action instituted by or against the other arising out of this
Lease.
33. QUIET ENJOYMENT - Lessor covenants that Lessee, so long as it
----------------
complies with terms hereof, shall peaceably and quietly hold and enjoy the
Premises for the term of this Lease.
WITNESS the hands and seals of the parties hereto as of the day and year
first above written.
WITNESS: LESSEE:
EASTON BANK AND TRUST COMPANY, A
Maryland Banking Association
/s/ Kelly A. Tebbitt BY:/s/ Jeff Heflebower (SEAL)
- ----------------------- ---------------------------------
Ex Vice President
WITNESS: LESSOR:
HILL MANAGEMENT COMPANY, INC., For
ZNB, LLP
/s/ Kelly A. Tebbitt BY: /s/ Zebulon J. Brodie (SEAL)
- ----------------------- --------------------------------
9
<PAGE>
Easton Bancorp, Inc.
AMENDED AND RESTATED
NON-QUALIFIED STOCK OPTION
THIS AMENDED AND RESTATED NON-QUALIFIED STOCK OPTION (this Option) is
effective as of May 1, 1999 by and between Easton Bancorp, Inc and R. Michael S.
Menzies, Sr. (the "Optionee").
WHEREAS, the purpose of this Option is to promote the growth of Easton Bank
and Trust and Easton Bancorp, Inc (the Bank) by providing the Optionee with an
incentive to achieve objectives of the Bank; and
WHEREAS, the Board of Directors of Easton Bancorp, Inc has approve the
grant to the Qptionee of a non-qualified stock option to purchase up to 56,000
shares of Common Stock of Easton Bancorp, Inc, subject to and in accordance with
the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and covenants and
agreements hereinafter set forth, the parties hereto hereby mutually covenant
and agree as follows:
1. Definitions.
-----------
(a) "Cause" means an intentional failure to perform personal
stated duties, personal dishonesty which results in a loss to the Bank or one of
its affiliates, a willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or an intentional or grossly negligent
act which directly leads to a final order which results in substantial loss to
the Bank or one of its affiliates.
(b) "Common Stock" means the Common Stock of Easton Bancorp, Inc,
par value $.10 per share.
(c) "Disability" means the permanent and total inability by reason
of mental or physical infirmity, or both, of the Optionee to perform work
customarily assigned to him. Additionally, a medical doctor selected or approved
by the Board of Directors must advise the Bank that it is either not possible to
determine when such disability will terminate or that it appears probable that
such Disability will be permanent during the remainder of the Optionee's
lifetime.
(d) "Market Value" means when used in connection with the Common
Stock on a certain date, the average of the bid and asked price of the Common
Stock reported in the over-the-counter market, or if not so reported, the
average of the bid and asked prices of the market maker(s) for the Common Stock.
If no firm is making a market in the Common Stock on a certain date, then the
"Market Value" will be determined by the Board of Directors in its sole
discretion.
<PAGE>
2. Grant of Option.
-----------------
(a) Subject to the terms and conditions set forth herein, the Bank
hereby grants to the Optionee during the period commencing May 1, 1999 and
ending on the applicable date specified in Paragraph 6 ( the "Option Period")
the option to purchase from the Bank an aggregate of 56,000 shares of Common
Stock, such number being subject to adjustment as provided herein. The Common
Stock issuable upon exercise of the Option are referred to herein as the "Option
Shares."
3. Exercise Price.
---------------
(a) The exercise price per Option Share shall be $10.00 with
respect to any full or partial exercise of the Option.
4. Vesting and Exercisability of Options.
-----------------------------------------
(a) Except as set forth in this Paragraph and in Paragraph 6, ten
percent (10%) of the Option Shares shall vest and be exercisable at any time on
or after May 1, 1999, and an additional ten percent (10%) of the Option Shares
shall vest and be exercisable at any time on or after each subsequent May 1, on
a cumulative basis.
(b) In the event of a Change in Control of the Bank, this Option
shall become immediately exercisable with respect to all Option Shares at any
time on or after such event. For purposes of this Option, a "Change in Control"
means any of the following:
(1) at any time after the effective date of this Option:
(i) any "person" (as such term is used in Section 14(d)
of the Securities Exchange Act of 1934 [the "Exchange Act"]) is or becomes the
beneficial owner, directly or indirectly, of securities of the Bank representing
thirty percent (30%) or more of the combined voting power of the then
outstanding securities of the Bank; or
(ii) a change in the composition of a majority of the
Board of Directors within twelve 12 months after any "person" (as defined above)
is or becomes the beneficial owner, directly or indirectly, of securities of the
Bank representing thirty percent (30%) of the combined voting power of the
securities of the then outstanding securities of the Bank; or
(iii) a change in control of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934, as in effect on the
date of this Option: or
(2) there shall be consummated:
2
<PAGE>
(i) any consolidation or merger or share exchange of the
Bank in which the Bank is not the continuing or surviving corporation or
pursuant to which shares of the Bank's Common Stock would be converted into
cash, securities or other property, other than a merger of the Bank in which the
holders of the Bank's Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving entity immediately
after the merger, or
(ii) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or a substantial
portion, of the assets of the Bank other than to its wholly-owned subsidiaries;
or
(3) the stockholders of the Bank approve a plan or proposal
for the complete or partial liquidation, dissolution or divisive reorganization
of the Bank.
(c) Notwithstanding any other provision to the contrary the
Optionee must be in the employment of the Bank on the relevant vesting date set
forth in Subparagraph (a) hereof in order for vesting to occur.
5. Method of Exercising Options and Payment of Option Price.
----------------------------------------------------------------
(a) This Option may be exercised by the Optionee from time to
time, in whole or in part, by written notice delivered by the Optionee or his
successor, personal representative or beneficiary. A form of written notice is
attached hereto as exhibit 1. Such notice shall state the number of Option
Shares of Common Stock with respect to which this Option is being exercised and
the Exercise Price for such Option Shares and shall include the written
covenants, agreements and representations as may from time to time be necessary
or desirable in order to ensure compliance with applicable laws, regulations of
governmental authorities and the requirements of any exchange or stock market
upon which the Common Stock is listed or traded. Such notice shall be
accompanied by payment of the full Exercise Price for the number of Option
Shares which are being purchased hereunder and all applicable withholding taxes.
(b) Payment of the Exercise Price shall be made in cash or by
check,or, in whole or in part, through the surrender of shares of Common Stock,
which shares shall be valued at the Market Value on the date of the exercise of
this Option. The Board of Directors may, in its sole discretion, place
limitations on the extent to which shares of Common Stock of the Bank may be
tendered by the Optionee as payment of the Exercise Price.
(c) In no event shall this Option be exercisable for a fractional
share.
(d) The Optionee shall execute the following agreement at the
election of the Bank:
I hereby represent and warrant that I am purchasing said shares
solely with a view to bona fide investment for my own individual
3
<PAGE>
account and not with any present intention to resell the same. I
further represent and warrant that I will dispose of said shares
only in compliance with the applicable laws or regulations relating
to the sale of securities.
(e) After receipt of a properly completed exercise form and full
payment of the Exercise Price, the Bank shall deliver a certificate or
certificates representing the number of shares of Common Stock with respect to
which this Option was exercised in the name of the person or persons exercising
this Option at the election of the Bank, the certificate may bear the following
legend:
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be sold or
transferred unless a registration statement has become and is then
effective with respect to the proposed sale or transfer of shares
or an opinion that the proposed sale or transfer is exempt from
registration under the Act has been rendered by counsel for the
Bank.
(f) If the Optionee could be subject to liability under Section
16B of the Securities Exchange Act of 1934, and the Option makes an election in
a timely manner under Section 83(b) of the Internal Revenue Code to recognize
income for tax purposes when this Option is first exercised, the Optionee shall
notify the Bank within ten days of making such election.
6. Termination.
-----------
This Option shall terminate and be of no further force or effect
from and after December 31 2009 unless terminated prior to such time as provided
below .
If the Optionee ceases employment with the Bank, this Option shall
terminate or be exercisable as follows:
(a) Termination of Emplovment. In the event that the Optionee's
---------------------------
employment is terminated without Cause, the right to purchase the Option Shares
that have vested as of the date of termination shall be exercisable by the
Optionee or the Optionee's representatives for a period of ninety (90) days
after such termination, but in no event after the expiration of the Option
Period. If the Optionee's terminated for Cause, this Option shall expire
immediately upon such removal.
(b) Disability. In the event that the Optionee's employment is
----------
terminated due to a Disability, the right to purchase the Option Shares that
have vested as of the date of Disability shall be exercisable by the Optionee or
the Optionee's representatives or beneficiaries (as applicable) at any time upon
or after such an event until the expiration of the Option Period.
(c) Death. In the event the Optionee dies while in the employment
-----
of the Bank, the Optionee's estate, personal representative or beneficiary (as
applicable) shall have the right to purchase the Option Shares that have vested
as of the date of the Optionee's Death at any time upon or after such event and
until the expiration of the Option Period or within such shorter time as may be
provided by law.
4
<PAGE>
7. Optionee. Whenever the word "Optionee" is used in any provision of
--------
this Option under circumstances where the provision should logically be
construed to apply to the estate, personal representative or beneficiary to whom
this option may be transferred by will or by laws of descent and distribution,
the word "0ptionee" shall be deemed to include such person.
8. Assignability. Except as otherwise provided herein, this Option is
-------------
not transferable by the Optionee otherwise than by will or the laws of descent
and distribution and is exercisable during the Optionee's lifetime only by the
Optionee. No assignment or transfer of this Option, or of the rights represented
thereby, whether voluntary or involuntary, by operation of law or otherwise,
except by will or the 1aws of descent and distribution, shall vest in the
assignee or transferee any interest or right herein whatsoever, but immediately
upon an attempt to assign or transfer this option the same shall terminate and
be of no force or effect.
9. Rights as a Stockholder. The Optionee shall not be deemed for any
--------------------------
purpose to be a stockholder of the Bank with respect to the shares represented
by this Option until this Option shall have been properly exercised.
10. The Bank's Rights. The existence of this Option shall not affect
-------------------
in any way the right or power of the Bank or its stockholders to make or
authorize any or all adjustments, recapitalizations, reorganizations or other
changes in the Bank's capital structure or its business, or any merger or
consolidation of the Bank, or any issue of bonds, debentures, preferred or other
stock with preference ahead of or convertible in to, or otherwise affecting the
Common Stock of the Bank or the rights thereof, or the dissolution or
liquidation of the Bank, or any sale or transfer of all or any part of the
Bank's assets or business, or any other corporate act or proceedings, whether of
a similar character or otherwise.
11. Recapitalization; Dissolution or Liquidation.
-----------------------------------------------
(a) If the shares of the Bank's Common Stock as a whole are
increased, decreased or changed into, or exchanged for, a different number or
kind of shares or securities of the Bank, whether through merger, consolidation,
reorganization, recapitalization, reclassification, stock dividend, stock split,
combination of shares, exchange of shares, change in corporate structure or the
like, an appropriate and proportionate adjustment shall be made in the number of
kinds of shares subject to this Option and in the number and per share exercise
price of shares subject to this option. Any such adjustment, however, shall be
made without a change in the total price applicable to the unexercised portion
of this Option, but with a corresponding adjustment in the price for each share
of stock covered by this Option. No fractional shares shall be issued as a
result of any such adjustment.
(b) Upon dissolution or liquidation of the Bank, this Option shall
be exercisable in full for all Option Shares that have vested for at least
30days prior to the effective date of such dissolution or liquidation, whether
or not otherwise exercisable during such period, but in no event after the
expiration of the Option Period.
5
<PAGE>
12. Preemption by Applicable Laws or Regulations. Anything in this
-------------------------------------------------
Option to the contrary notwithstanding, if, at any time specified herein for the
issue of Common Stock to the Optionee, any law, regulation or requirements of
any governmental authority having appropriate jurisdiction shall require either
the Bank or the Optionee to take any action prior to or in connection with the
Common Stock, the issuance of such Common Stock shall be deferred until such
action shall be taken.
13. Optionee Acknowledgment. The Optionee hereby acknowledges that
-------------------------
all decisions, determinations and interpretation of the Board of Directors
of the Bank, or a designated committee thereof, in respect of this Option shall
be final and conclusive.
14. Notice. Any notice required or permitted under this Agreement
------
shall be deemed given when delivered in person or when mailed by registered mail
with return receipt requested to the Bank addressed to P.O. Box 629, Easton,
Maryland 21601, attention: Office of the Secretary, and to the Optionee or
beneficiary at his or address in the records of the Bank.
15. Modification and Waiver. This Option cannot be changed,
-------------------------
modified, amend, discharged, terminated or waived orally or by any course of
dealing or purported course of dealing, but only by an agreement in writing
signed by the Optionee or the Optionee's personal representative and the Bank.
The waiver of or failure to enforce a breach of this Option shall not be deemed
to be a waiver or acquiescence in any other breech thereof.
16. Tax Withholding. The Bank may deduct from any distribution the
-----------------
amount required by any governmental authority to be withheld for income and
withholding tax purposes.
17. Fractional Shares. Any fractional shares which would otherwise
------------------
result from the exercise of all or a part of this Option shall be eliminated at
the time of exercise by rounding down for fractions of less than and
rounding up for fractions of equal to or more than . No cash settlements
shall be made with respect to fractional shares eliminated by rounding.
18. Governing Law. All matters relating to this Agreement shall be
---------------
governed by the State of Maryland, without regard to principles of conflict of
laws except to the extent preempted by the laws of the United States.
19. Non-qualified Nature of Option. This Option is intended to be an
--------------------------------
agreement concerning a Stock Option arrangement which is not qualified under
Section 422A of the Code, and this Option shall be so construed.
20. General. The Bank shall at all times during the term of this
--------
Option reserve and keep available such number of shares of Common Stock as will
be sufficient to satisfy the requirements herein, shall pay all original issue
and transfer taxes with respect to the issue and transfer of shares pursuant
hereto and all other fees and expenses necessarily incurred by the Bank in
connection herewith, and will from time to time use all reasonable efforts to
6
<PAGE>
comply with all laws and regulations which, in the opinion of counsel for the
Bank, shall be applicable thereto.
IN WITNESS WHEREOF, the Bank has caused this Option to be executed by its
duly authorized officer and its seal to be affixed hereto, and the Optionee has
hereunto set the Optionee's hand and seal, effective on the day and year first
above written.
Attest: Easton Bancorp, Inc.
/s/ Sheila W. Bateman By: /s/ W. David Hill
- ------------------------ ------------------
William David Hill
Chairman of the Board
7
<PAGE>
Easton Bancorp, Inc
Non-Qualified Stock Option
Exercise for Subscription
At this time, I wish to purchase______shares of the Common Stock of Easton
Bancorp, Inc. at an Exercise Price of $_________ per share through the
exercise of the Non-Qualified Stock Option effective May 1, 1999.
Please issue this stock in the following manner and mail the certificate(s)
to the following address, which will also be the mailing address for dividends.
Name
Street
City
State
Zip Code
I hereby represent and warrant that I am purchasing said share view to bona
fide investment for my own individual account and not with any immediate
intention to resell the same. I further represent and warrant that I will
dispose of said shares only in compliance with the applicable laws or
regulations relating to the sale of securities.
I understand that at the option of the Bank, the certificate deliver the
exercise of the Non-Qualified Stock Option may bear the following legend:
The Shares represented by this certificate have no t been
registered under the Securities Act of 1944, as amended, and may not
be sold or transferred unless a registration statement has become and is
then effective with respect to the proposed sale or transfer of shares
or a opinion that the proposed sale or transfer is exempt from
registration under the Act has been rendered by counsel for the Bank.
My Social Security Number is __________ I am attaching my check payable to
Easton Bancorp, Inc., and/or _____ number of shares of Common Stock in payment
for the stock, along with my copy of the Non-Qualified Stock Option for notation
of this purchase and return.
Very truly yours,
---------------------------------
Signature Date
---------------------------------
Optionee's Name
<PAGE>
ANNUAL REPORT TO STOCKHOLDERS
DECEMBER 31, 1999
EASTON BANCORP, INC.
<PAGE>
Easton Bancorp, Inc.
March 2000
To our Stockholders:
Last year was a good year for Easton Bank & Trust and Easton Bancorp, Inc.
Major accomplishments included improved earnings, solid and sound balance sheet
growth, improved asset quality, and expanded positions in new markets.
Our entry into Denton, Maryland via Denton Bank & Trust, a division of
Easton Bank & Trust, has significantly enhanced the value of our franchise.
Earnings per share increased from $.79 to $.88, while assets grew 12%
and deposits grew 7%. Operating performance was enhanced by a meaningful loan
recovery during 1999 while our core earnings grew nicely.
In the face of a rising interest rate environment during the year 2000, we
and the entire banking industry will be forced to deal with margin pressure. We
are optimistic we can sustain our core earnings while growing our customer base.
During the first quarter of 2000, we will launch our Visa Check Card, which
gives our customers worldwide access to their checking accounts wherever Visa is
accepted. Several technology initiatives will contribute to both future expense
control and an increased level of customer service.
As we begin the 21st Century, Easton Bank & Trust is poised to form
stockholder value by delivering personal, private, and professional financial
solutions to individuals and small businesses. We are proud of our team of
associates who are making us the Community Bank of Choice in the markets we
serve.
/s/ R. Michael S. Menzies, Sr. /s/ W. David Hill
R. Michael S. Menzies, Sr. Dr. William David Hill
President/CEO Chairman of the Board
501 Idlewild Avenue, P.O. Box 619, Easton, MD 21601
410-819-0300 FAX 410-819-8091
<PAGE>
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>
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.
During 1999, the Bank opened a full-service branch 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. Income before income taxes increased from $46,093 in 1998 to $755,137
in 1999. Because the Company recognized the benefits of its deferred tax asset
in 1998, net income was $494,345 for 1999, compared to $444,044 for 1998.
RESULTS OF OPERATIONS
The Company reported net income of $494,345, or $.88 per share, for the
year ended December 31, 1999, which represents an increase of $50,301, or $.09
per share, from $444,044, or $.79 per share, for the year ended December 31,
1998. An increase in net interest income of $610,668 was offset by an increase
in income taxes of $658,743.
Net interest income increased $610,668, or 37.10%, to $2,256,520 in 1999
from $1,645,852 in 1998. This increase in net interest income was the result of
a $592,261 increase in interest income accompanied by a $18,407 decrease in
interest expense. During the year, the Company experienced an increasing net
interest spread to 4.70% in 1999 from 3.69% in 1998. The net interest margin
increased to 4.79% in 1999 from 3.84% in 1998. The interest spread and interest
margin increased because the 1999 level of nonperforming loans was well below
the 1998 level, which increased interest revenues. The reduction in
nonperforming loans in 1999 was the result of a $2.3 million nonperforming loan
from 1998 being repaid in the first quarter of 1999.
3
<PAGE>
During 1999, the Company recorded net loan loss recoveries primarily as a
result of a settlement received on a fraudulent loan that had been charged-off
in prior years. The recovery of this prior charge-off totaled $341,988.
Proceeds of $66,081 in excess of charge-offs related to this loan are included
in other noninterest revenue. As a result of these loan recoveries and the
decrease in nonperforming loans, the Company reversed prior provisions for
credit losses of $98,547 during 1999, compared to a provision for loan losses of
$224,281 in 1998. The net decrease in the provision recorded in 1999 compared
to the provision recorded in 1998 was $322,828. During 1999, the Company
experienced net recoveries of $178,943, compared to net charge-offs for 1998 of
$72,281.
The Company had loans over ninety days delinquent on which the accrual of
interest had been discontinued totaling $102,407 and $1,143,251 as of December
31, 1999 and 1998, respectively. At December 31, 1999, the accrual of interest
had been discontinued on loans totaling $6,363 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 1.31% at December 31, 1999, compared to 1.57% at
December 31, 1998. Net recoveries of $178,943 during 1999 resulted in a ratio
of net recoveries to average loans of .45%. During 1998, the Company had net
charge-offs of $72,281 which was .21% of average loans.
Noninterest income increased $104,169, or 76.19%, to $240,889 in 1999 from
$136,720 in 1998. Management increased the return and overdraft charges by
$23,287 in 1999 as a result of an increased fee structure and an increase in the
volume of accounts. During 1999, the Company recorded $66,081 as noninterest
income from funds recovered in excess of the charge-off of a fraudulent loan in
prior years.
Noninterest expense increased $328,621, or 21.73%, to $1,840,819 in 1999
from $1,512,198 in 1998. The increase was the result of an increase of $204,770
in compensation and related expenses due to annual increases and the hiring of
four full-time employees, including an executive officer, to staff the new
Denton office. Data processing, supplies and telephone expenses also increased
as a result of the new branch office.
The Company's efficiency ratio, which is noninterest expense as a
percentage of the sum of net interest income and noninterest income, decreased
to 73.71% in 1999, compared to 84.83% in 1998. This improvement is the result
of faster growth in net interest income than in other expenses.
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 1999 and 1998 and
related interest income/expense and yields. Changes in net interest income from
period to period result from increases or decreases in the volume of
interest-earning assets and interest-bearing liabilities, and increases or
decreases in the average rates earned and paid on such assets and liabilities.
The volume of interest-earning assets and interest-bearing liabilities is
affected by the ability to manage the earning-asset portfolio (which includes
loans) and the availability of particular sources of funds, such as noninterest
bearing deposits. The table "Analysis of Changes in Net Interest Income" shows
the amount of net interest income change from rate changes and from activity
changes.
The key performance measure for net interest income is the "net margin on
interest-bearing assets," or net interest income divided by average
interest-earning assets. The Company's net interest margin for 1999 was 4.79%,
compared to 3.84% for 1998. The increase is due primarily to the increase in
loan yields while deposit yields declined. As a result of the significant
amount of fixed rate loans, the Bank's income may increase in a falling interest
rate environment and decrease in a rising interest rate environment. Management
of the Company expects to maintain this net margin on interest-earning assets.
The net margin may decline, however, if competition increases, loan demand or
quality decreases, or the cost of funds rises faster than the return on loans.
4
<PAGE>
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 1999 and 1998.
<TABLE>
<CAPTION>
AVERAGE BALANCES, INCOME AND EXPENSES, AND RATES
For the Year Ended For the Year Ended
December 31, 1999 December 31, 1998
---------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Income/ Yield/ Average Income/ Yield/
ASSETS Balance Expenses Rate Balance Expenses Rate
--------------- ---------- ----------- ----------- ---------- -------
Federal funds sold $ 2,879,881 $ 143,159 4.97% $ 5,426,336 $ 292,264 5.39%
Interest-bearing deposits - - - 33,010 1,723 5.22%
Investment securities:
U.S. Government agency 4,514,306 256,150 5.67% 2,768,164 159,044 5.75%
Other 151,407 11,456 7.57% 140,860 10,487 7.44%
--------------- ---------- ---------- ----------- ---------- -------
Total investment securities 4,665,713 267,606 5.74% 2,909,024 169,531 5.83%
--------------- ---------- ---------- ----------- ---------- -------
Loans:
Demand and time 6,979,521 604,014 8.65% 3,247,262 278,469 8.58%
Mortgage 30,149,874 2,802,118 9.29% 29,060,941 2,499,682 8.60%
Installment 3,045,187 302,008 9.92% 2,633,811 284,975 10.82%
----------------- ---------- ---------- ----------- ---------- -------
Total loans 40,174,582 3,708,140 9.23% 34,942,014 3,063,126 8.77%
Allowance for loan losses 572,494 - - 446,883 - -
--------------- ---------- ----------- ----------- ---------- -------
Total loans, net of allowance 39,602,088 3,708,140 9.36% 34,495,131 3,063,126 8.88%
--------------- ---------- ---------- ----------- ---------- -------
Total interest-earning assets 47,147,682 4,118,905 8.74% 42,863,501 3,526,644 8.23%
--------------- ---------- ---------- ----------- ---------- -------
Cash and due from banks 1,039,218 794,618
Premises and equipment 1,709,974 1,682,370
Other assets 1,080,394 446,850
--------------- -----------
Total assets $ 50,977,268 $45,787,339
=============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings and NOW deposits $ 9,600,988 $ 247,963 2.58% $ 8,498,077 $ 260,562 3.07%
Money market 5,304,801 189,752 3.58% 4,600,749 164,972 3.59%
Other time deposits 25,392,048 1,320,764 5.20% 24,713,617 1,404,089 5.68%
--------------- ---------- ---------- ----------- ---------- -------
Total interest-bearing deposits 40,297,837 1,758,479 4.36% 37,812,443 1,829,623 4.84%
Noninterest-bearing deposits 3,823,863 - - 2,649,700 - -
--------------- ---------- ---------- ----------- ---------- -------
Total deposits 44,121,700 1,758,479 3.99% 40,462,143 1,829,623 4.52%
Borrowed funds 1,943,786 103,906 5.35% 952,924 49,249 5.17%
--------------- ---------- ---------- ----------- ---------- -------
46,065,486 1,862,385 4.04% 41,415,067 1,878,872 4.54%
---------- ---------- --------- ------
Other liabilities 181,083 161,931
Stockholders' equity 4,730,699 4,210,341
--------------- -----------
Total liabilities and
stockholders equity $ 50,977,268 $45,787,339
=============== ===========
Net interest spread 4.70% 3.69%
========== ======
Net interest income $2,256,520 $1,647,772
========== ==========
Net interest income/margin 4.79% 3.84%
========== ======
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
ANALYSIS OF CHANGES IN NET INTEREST INCOME
Year Ended December 31, 1999 Year Ended December 31, 1998
Compared with 1998 Compared with 1997
Variance Due To Variance Due To
---------------------------------- -------------------------------
Total Rate(1) Volume Total Rate(1) Volume
---------- ---------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Interest-bearing deposits $ (1,723) $ - $ (1,723) $ 1,512 $ (102) $ 1,614
Federal funds sold (149,105) (11,851) (137,254) 68,983 (6,075) 75,058
Investment Securities:
U.S. Government Agency 97,106 (3,297) 100,403 81,137 (6,536) 87,673
Other 969 184 785 1,505 275 1,230
Loans:
Demand and time 325,545 5,317 320,228 (35,722) (40,510) 4,788
Mortgage 302,436 208,788 93,648 62,089 (167,608) 229,697
Installment 17,033 (27,478) 44,511 69,157 18,364 50,793
---------- ---------- ---------- --------- ---------- --------
Total interest income 592,261 171,663 420,598 248,661 (202,192) 450,853
---------- ---------- ---------- --------- ---------- --------
INTEREST-BEARING LIABILITIES
Savings and NOW deposits (12,599) (46,458) 33,859 17,026 (4,547) 21,573
Money-market deposits 24,780 (495) 25,275 6,173 (14,746) 20,919
Time deposits (83,325) (121,860) 38,535 179,630 (9,451) 189,081
Borrowed funds 54,657 3,429 51,228 27,507 5,898 21,609
---------- ---------- ---------- --------- ---------- --------
Total interest expense (16,487) (165,384) 148,897 230,336 (22,846) 253,182
---------- ---------- ---------- --------- ---------- --------
Net interest income $ 608,748 $ 337,047 $ 271,701 $ 18,325 $(179,346) $197,671
========== ========== ========== ========= ========== ========
<FN>
______________________________________________
(1) The variance that is both rate/volume related is included in the rate variance.
</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 $39,602,088 and $34,495,131
during 1999 and 1998, respectively, which constituted 84.00% and 80.48%,
respectively, of average interest-earning assets for the periods. At December
31, 1999, the Company's loan to deposit ratio was 97.47%, compared to 75.38% at
December 31, 1998. The Bank extends loans primarily to customers located in and
near Talbot and Caroline Counties. There are no industry concentrations in the
Bank's loan portfolio. The Bank does, however, have a substantial portion of
its loans in real estate and its performance may be influenced by the real
estate market in the region.
6
<PAGE>
The following table sets forth the composition of the Company's loan
portfolio as of December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
COMPOSITION OF LOAN PORTFOLIO
December 31,
------------------------------------------------
1999 1998
------------------------ ----------------------
Percent Percent
Amount of Total Amount of Total
- ----------------------------------- ----------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Commercial $ 7,476,729 16.05% $ 3,626,829 10.72%
Real estate 29,441,565 63.22% 22,544,807 66.64%
Construction 3,177,267 6.82% 2,459,321 7.27%
Home equity 2,421,584 5.20% 2,067,068 6.11%
Consumer 4,054,684 8.71% 3,133,773 9.26%
----------- ------------ ----------- -------
Total loans 46,571,829 100.00% 33,831,798 100.00%
============ =======
Less deferred loan origination fees 25,135 46,990
Less allowance for credit losses 610,396 530,000
----------- -----------
Net loans $45,936,298 $33,254,808
=========== ============
</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, 1999.
<TABLE>
<CAPTION>
LOAN MATURITY SCHEDULE AND SENSITIVITY TO CHANGES IN INTEREST RATES
December 31, 1999
------------------
Over One
One Year Through Over Five
Or Less Five Years Years Total
------------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Commercial $ 4,212,852 $ 3,138,708 $ 125,169 $ 7,476,729
Real estate 7,193,593 18,949,413 3,298,561 29,441,567
Construction 3,177,265 - - 3,177,265
Home equity 2,421,584 - - 2,421,584
Consumer 1,022,238 2,648,420 384,026 4,054,684
------------------ ----------- ---------- -----------
Total $ 18,027,532 $24,736,541 $3,807,756 $46,571,829
================== =========== ========== ===========
Fixed interest rate 10,900,158 24,246,737 3,749,881 38,896,776
Variable interest rate 7,127,374 489,804 57,875 7,675,053
------------------ ----------- ---------- -----------
Total $ 18,027,532 $24,736,541 $3,807,756 $46,571,829
================== =========== ========== ===========
</TABLE>
As of December 31, 1999, $38,896,776, or 83.52%, 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.
7
<PAGE>
The Company has the following commitments, lines of credit, and letters of
credit outstanding as of December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Construction loans $1,561,318 $1,639,393
Lines of credit 3,456,452 2,012,998
Overdraft protection lines 275,035 186,670
Standby letters of credit 86,244 535,166
---------- ----------
Total $5,379,049 $4,374,227
========== ==========
</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, 1999 and 1998, 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 1999, the allowance for loan losses was 1.31% of
outstanding loans, compared to 1.57% at year-end 1998.
8
<PAGE>
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
1999 1998
---------------- -----------------
Amount Percent Amount Percent
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Commercial $ 94,209 15.43% $ 59,183 11.17%
Real estate 230,382 37.74% 348,660 65.78%
Construction 15,886 2.60% 12,297 2.32%
Home equity 61,608 10.09% 12,842 2.42%
Consumer 82,013 13.44% 57,340 10.82%
Commitments 55,268 9.06% 39,678 7.49%
General 71,030 11.64% - 0.00%
-------- ------- -------- -------
Total $610,396 100.00% $530,000 100.00%
======== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
1999 1998
------------ ------------
<S> <C> <C>
Balance at beginning of year $ 530,000 $ 378,000
Loan losses:
Commercial 41,536 44,331
Real Estate 80,942 -
Consumer 128,647 53,450
------------ ------------
Total loan losses 251,125 97,781
------------ ------------
Recoveries on loans previously charged off
Commercial 362,751 16,453
Real Estate - -
Consumer 67,317 9,047
------------ ------------
Total loan recoveries 430,068 25,500
------------ ------------
Net loan losses/(recoveries) (178,943) 72,281
Provision for loan losses charged to expense (98,547) 224,281
------------ ------------
Balance at end of year $ 610,396 $ 530,000
============ ============
Total loans outstanding at end of year $46,571,829 $33,831,798
Allowance for loan losses to loans outstanding
at end of year 1.31% 1.57%
Net charge-offs/(recoveries) to average loans (.45)% .21%
</TABLE>
As a result of management's ongoing review of the loan portfolio, loans are
classified as nonaccrual when it is not reasonable to expect collection of
interest under the original terms. These loans are classified as nonaccrual
even though the presence of collateral or the borrower's financial strength may
be sufficient to provide for ultimate repayment. Interest on nonaccrual loans
is recognized only when received. A delinquent loan is generally placed in
nonaccrual status when it becomes 90 days or more past due. When a loan is
placed in nonaccrual status, all interest which has been accrued on the loan but
remains unpaid is reversed and deducted from earnings as a reduction of reported
interest income. No additional interest is accrued on the loan balance until
the collection of both principal and interest becomes reasonably certain. When
a problem loan is finally resolved, there ultimately may be an actual writedown
or charge-off of the principal balance of the loan which would necessitate
additional charges to earnings.
9
<PAGE>
The Company had nonperforming loans totaling $108,770 and $1,250,408 as of
December 31, 1999 and 1998, 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, 1999.
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, 1999, the Company had forty-two borrowers with loans considered by
management to be potential problem loans totaling approximately $1,673,556. 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
19.46% of average deposits for 1999, compared to 22.65% of average deposits for
1998. 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, 1999, 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
10
<PAGE>
liability-sensitive through the one-year period but asset-sensitive for longer
time horizons. For liability-sensitive institutions, if interest rates should
increase, the net interest margins should decline. Since all interest rates and
yields do not adjust at the same velocity, the gap is only a general indicator
of rate sensitivity.
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS
December 31, 1999
-------------------------------------------------------------------------------
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 $ 824,727 $ - $ - $ - $ 824,727
Investment securities
available for sale - - 4,203,828 - 4,203,828
Loans 10,882,052 7,145,480 24,736,541 3,807,756 46,571,829
------------------- ------------- --------------- ------------ ------------
Total earning assets $ 11,706,779 $ 7,145,480 $ 28,940,369 $ 3,807,756 $51,600,384
=================== ============= =============== ============ ============
LIABILITIES
Interest-bearing liabilities:
Money market and NOW $ 11,673,854 $ - $ - $ - $11,673,854
Savings deposits 3,885,348 - - - 3,885,348
Club accounts - 30,432 - - 30,432
Certificates $100,000 and over 4,224,208 1,814,162 1,888,262 - 7,926,632
Certificates under $100,000 4,735,032 6,929,690 8,202,987 64,225 19,931,934
Note payable 1,000,000 - - 1,578,493 3,578,493
Securities sold under
agreements to repurchase 280,667 1,000,000 - - 280,667
------------------- ------------- --------------- ------------ ------------
Total interest-bearing liabilities $ 25,799,109 $ 9,774,284 $ 10,091,249 $ 1,642,718 $47,307,360
=================== ============= =============== ============ ============
Period gap $ (14,092,330) $ (2,628,804) $ 18,849,120 $ 2,165,038 $ 4,293,024
Cumulative gap $ (14,092,330) $(16,721,134) $ 2,127,986 $ 4,293,024 $ 4,293,024
Ratio of cumulative gap to total
earning assets (27.31)% (32.41)% 4.12% 8.32% 8.32%
</TABLE>
As noted in the table "Composition of Loan Portfolio," as of December 31,
1999 approximately $10,653,996, or 22.88%, of the loan portfolio consisted of
commercial loans and real estate construction loans. Of this amount,
$7,390,117, or 69.36%, matures within one year.
The table "Investment Securities Maturity Distribution and Yields" shows
that as of December 31, 1999, all of the investment portfolio matures in more
than one year but 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 $6,750,000 lines of credit the
Company has from a correspondent bank. The Company may borrow up to $8,773,000
from the Federal Home Loan Bank.
11
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT SECURITIES MATURITY DISTRIBUTION AND YIELDS
December 31, 1999 December 31, 1998
---------------------------------- ---------------------
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%
Over one through five years 4,203,828 5.6% 4,137,728 5.5%
Over five years - - 250,625 5.8%
------------------ ------------- ----------- -------
Total U.S. Government Agency securities $ 4,203,828 5.6% $ 4,840,026 5.6%
================== ============= =========== =======
</TABLE>
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Average interest-bearing liabilities increased $3,476,256, or 8.97%, to
$42,241,623 in 1999, from $38,765,367 in 1998. Average interest-bearing
deposits increased $2,485,394, or 6.57%, to $40,297,837 in 1999, from
$37,812,443 in 1998. 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, 1999, total deposits were $47,126,446, compared to
$44,118,960 at December 31, 1998, an increase of 6.82%.
The following table sets forth the deposits of the Company by category as
of December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
DEPOSITS
December 31,
--------------------------------------------------
1999 1998
------------------------- ------------------------
Percent of Percent of
Amount Deposits Amount Deposits
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Demand deposit accounts $ 3,678,246 7.81% $ 4,682,618 10.61%
NOW accounts 5,116,224 10.86% 4,886,335 11.08%
Money market accounts 6,557,630 13.91% 4,121,981 9.34%
Savings accounts 3,915,780 8.31% 4,523,794 10.25%
Time deposits less than
$100,000 19,931,934 42.29% 20,825,842 47.21%
Time deposits of $100,000
or over 7,926,632 16.82% 5,078,390 11.51%
----------- ----------- ------------ -----------
Total deposits $47,126,446 100.00% $44,118,960 100.00%
=========== =========== ============ ===========
</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 $159,244 during
1999. 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 97.47% at December 31, 1999, and 75.38% at
the end of 1998, with a 1999 ratio of average loans to average deposits of
89.76%. The maturity distribution of the Company's time deposits over $100,000
at December 31, 1999, is shown in the following table.
12
<PAGE>
<TABLE>
<CAPTION>
MATURITIES OF CERTIFICATES OF DEPOSIT
AND OTHER TIME DEPOSITS OF $100,000 OR MORE
December 31, 1999
-------------------------------------------------------------------
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 $4,224,208 $1,356,513 $457,649 $1,888,262 $7,926,632
</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 notes from the Federal Home
Loan Bank. Average borrowings were $1,943,786 and $952,924 during 1999 and
1998, 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 1999 was $240,889, compared to noninterest income in
1998 of $136,720, an increase of $104,169, or 76.19%. Return item and overdraft
charges increased $23,287 in 1999 as a result of an increased fee structure and
an increase in the volume of accounts. During 1999, the Company recorded
$66,081 as noninterest income from funds recovered in excess of the charge-off
of a fraudulent loan in prior years.
The following table presents the principal components of noninterest income
for the years ended December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
NONINTEREST INCOME
1999 1998
--------- ---------
<S> <C> <C>
Service charges on deposit accounts $128,705 $ 99,654
Other noninterest revenue 112,184 37,066
--------- ---------
Total noninterest income $240,889 $136,720
========= =========
Noninterest income as a percentage of average total assets 0.47% 0.30%
========= =========
</TABLE>
13
<PAGE>
NONINTEREST EXPENSE
Noninterest expense increased $328,621, or 21.73%, to $1,840,819 in 1999
from $1,512,198 in 1998. The increase was the result of an increase of $204,770
of compensation and related expenses due to annual increases and the hiring of
four full-time employees, including an executive officer, to staff the new
Denton office. Data processing, supplies and telephone expenses also increased
as a result of the new branch office.
The following table presents the principal components of noninterest
expense for the years ended December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
NONINTEREST EXPENSE
1999 1998
----------- -----------
<S> <C> <C>
Compensation and related expenses $1,113,979 $ 909,209
Occupancy expense 75,793 70,782
Furniture and equipment expense 80,626 87,647
Advertising 47,446 41,667
Professional fees 109,104 72,110
Data processing 103,784 84,332
Training 22,103 13,024
Travel and entertainment 33,358 13,658
Loan reports and collection costs 10,095 6,598
Organizational expense amortization - 23,482
Stationery and supplies 72,800 46,339
Telephone and postage 59,458 44,353
Other 112,273 98,997
----------- -----------
Total noninterest expense $1,840,819 $1,512,198
=========== ===========
Noninterest expense as a percentage of average total assets 3.61% 3.30%
=========== ===========
</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, 1999, the Company and the Bank exceeded their regulatory
capital ratios, as set forth in the following table.
<TABLE>
<CAPTION>
ANALYSIS OF CAPITAL
Required
Company Bank Minimums
-------- ----- ---------
<S> <C> <C> <C>
Tier 1 risk-based capital ratio 11.4% 11.2% 4.0%
Total risk-based capital ratio 12.6% 12.4% 8.0%
Tier 1 leverage ratio 9.0% 8.9% 3.0%
</TABLE>
ACCOUNTING RULE CHANGES
FASB Statement No. 137, Accounting for Derivative Instruments and Hedging
14
<PAGE>
Activities - Deferral of the Effective Date of FASB Statement No. 133, delays
the effective date of FASB Statement No. 133 for one year to fiscal years
beginning after June 15, 2000. The Company elected early adoption of FASB
Statement No. 133 in 1998.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial
institutions, such as the Company and the Bank, are primarily monetary in
nature. Therefore, interest rates have a more significant affect on the
Company's performance than do the effects of changes in the general rate of
inflation and changes in prices. In addition, interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services. As discussed previously, management seeks to manage the relationships
between interest sensitive assets and liabilities in order to protect against
wide interest rate fluctuations, including those resulting from inflation. See
"Liquidity and Interest Rate Sensitivity" above.
INDUSTRY DEVELOPMENTS
Certain recently enacted and proposed legislation could have an effect on
both the costs of doing business and the competitive factors facing the
financial institutions industry. The Company is unable at this time to assess
the impact of this legislation on its financial condition or results of
operations.
YEAR 2000 ISSUES
The 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, which include a continuing effort to educate
employees, customers, business partners and vendors of the impact of the Year
2000 issue and testing all critical hardware and software for Year 2000
readiness.
As of March 15, 2000, the Company has not experienced any significant Year
2000 issues relating to the Company's internal systems, interfaces with third
parties or products or services. In addition, as of March 15, 2000, information
and products from third parties provided to the Company have not had any adverse
effects on the Company's operations as a result of Year 2000 issues. To date,
the costs incurred in connection with Year 2000 compliance projects have not
been material to the Company's results of operations or liquidity. In addition,
the Company does not anticipate incurring any additional significant costs to
remain compliant.
The Company's total costs to date associated with the Year 2000 issue
primarily include the costs incurred to upgrade the software and hardware that
was not Year 2000 compliant. The Company has incurred these costs in the normal
course of business as software and hardware has been 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.
15
<PAGE>
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 15, 2000, there were approximately 475 holders of record of the
Common Stock and 560,318 shares of Common Stock issued and outstanding. In
addition, there were approximately 242,157 shares of Common Stock issuable
pursuant to options and warrants which may be issued in the next 60 days. There
is no established public trading market in the stock, and there is no likelihood
that a trading market will develop in the near future. The development of a
trading market may be inhibited because a large portion of the Company's shares
is held by insiders. Transactions in the Common Stock are infrequent and are
negotiated privately between the persons involved in those transactions.
All outstanding shares of Common Stock of the Company are entitled to share
equally in dividends from funds legally available, when, as, and if declared by
the Board of Directors. No dividends have been paid to date on the Common
Stock, and it is anticipated that earnings will be retained for the foreseeable
future in order to expand the Bank's capital base to support deposit growth.
The Company currently has no source of income other than dividends and other
payments received from the Bank. It is unlikely that any cash dividends will be
paid in the near future.
16
<PAGE>
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, 1999, 1998, and 1997, 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 Company'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, 1999, 1998, and 1997, 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 21, 2000
17
<PAGE>
<TABLE>
<CAPTION>
Easton Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
December 31,
1999 1998 1997
-------------- -------- -----------
<S> <C> <C> <C>
Assets
Cash and due from banks 2576335 976682 642726
Federal funds sold 824727 7269903 3739622
Investment in Federal Home Loan Bank stock 179000 145600 124500
Investment securities available for sale 4203828 4840026 0
Investment securities held to maturity (market value of
$1,502,794) 0 0 1500000
Loans held for sale 70000 0 0
Loans, less allowance for credit losses of
$610,396, $530,000, and $378,000 45936298 33254808 34682279
Premises and equipment 1694652 1662127 1713683
Intangible assets 15691 1853 30261.32
Accrued interest receivable 300536 246470 248303
Loan payment held in escrow 0 1175000 0
Other assets 46004 92924 58323
Deferred income taxes 177017 401551 0
---------- -------- -----------
Total assets 56024088 50066944 42739697.32
========== ======== ===========
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing 3678246 4682618 2060848
Interest-bearing 43448200 39436342 36027304
---------- -------- -----------
Total deposits 47126446 44118960 38088152
Accrued interest payable 108888 95611 99980
Securities sold under agreements to repurchase 280667 281019 481490
Notes payable 3578493 1000000 0
Other liabilities 45964 111685 57363
---------- -------- -----------
Total liabilities 51140458 45607275 38726985
---------- -------- -----------
Stockholders' equity
Common stock, par value $.10 per share; authorized
5,000,000 shares, issued and outstanding 560,318 in 1999
and 1998, and 559,328 in 1997 56032 56032 55933
Additional paid-in capital 5227487 5227487 5217686
Retained earnings (deficit) -322518 -816863 -1260907
--------- -------- -----------
4961001 4466656 4012712
Accumulated other comprehensive income -77371 -6987 0
---------- -------- -----------
Total stockholders' equity 4883630 4459669 4012712
---------- -------- -----------
Total liabilities and stockholders' equity 56024088 50066944 42739697
========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
Easton Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended December 31,
1999 1998 1997
------------ --------- --------
<S> <C> <C> <C>
Interest revenue
Loans, including fees 3708140 3063126 2967602
Deposits in banks 0 1723 211
U.S. Government agency securities 256150 159044 77907
Federal funds sold 143159 292264 223281
Other 11456 10487 8982
-------- ---------- -------
Total interest revenue 4118905 3526644 3277983
-------- ---------- -------
Interest expense
Interest on deposits 1758479 1831543 1626794
Interest on borrowed funds 103906 49249 21742
-------- ---------- -------
Total interest expense 1862385 1880792 1648536
-------- ---------- -------
Net interest income 2256520 1645852 1629447
Provision for credit losses -98547 224281 81807
-------- ---------- -------
Net interest income after provision for credit losses 2355067 1421571 1547640
-------- ---------- -------
Other operating revenue
Service charges on deposit accounts 128705 99653.67 62588
Other noninterest revenue 112184 37066.33 32827
-------- ---------- -------
Total other operating revenue 240889 136720 95415
-------- ---------- -------
Other expenses
Compensation and related expenses 1113979 909209 744538
Occupancy 75793 70782 71871
Furniture and equipment 80626 87647 99050
Other operating 570421 444560 437675
-------- ---------- -------
Total other expenses 1840819 1512198 1353134
-------- ---------- -------
Income before income taxes 755137 46093 289921
Income tax expense (benefit) 260792 -397951 0
-------- ---------- -------
Net income 494345 444044 289921
======== ========== =======
Earnings per common share
Basic $ 0.88 $ 0.79 $ 0.52
Diluted $ 0.88 $ 0.74 $ 0.48
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
Easton Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
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, 1996 559328 55933 5217686 -1550828 0
Net income 0 0 0 289921 0 289921
------ ----- -------- -------- -------- ======
Balance, December 31, 1997 559328 55933 5217686 -1260907 0
Net income 0 0 0 444044 0 444044
Unrealized loss on investment
securities available for sale net
of income taxes 0 0 0 0 -6987 -6987
------
Comprehensive income 437057
=======
Stock options exercised 990 99 9801 0 0
------ ----- -------- -------- ------
Balance, December 31, 1998 560318 56032 5227487 -816863 -6987
Net income 0 0 0 494345 0 494345
Unrealized loss on investment
securities available for sale net
of income taxes 0 0 0 0 -70384 -70384
------ ----- -------- -------- ------ ------
Comprehensive income 423961
=======
Balance, December 31, 1999 560318 56032 5227487 -322518 -77371
====== ===== ======== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
Easton Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31,
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Interest received 4059452 3506575 3224496
Fees, commissions, and rent received 290292 145640 37312
Loans originated for sale -70000 0 0
Interest paid -1849108 -1885161 -1642240
Payments to suppliers and employees -1812384 -1376221 -1240368
--------- -------- --------
618252 390833 379200
--------- -------- --------
Cash flows from investing activities
Loans originated, net of principal repayments -12575193 50677 -4715462
Receipt of funds held in escrow 1175000 0 0
Purchase of investment securities
Available for sale -1502035 -5772279 0
Held to maturity 0 -250100 -1502900
Proceeds from maturities of investment securities
Available for sale 1995828 1400081 0
Held to maturity 0 1250000 1250000
Proceeds from sale of other real estate 61699 0 0
Purchase of premises, equipment, and software -144251 -44234 -298893
Purchase of other real estate -60450 -978 -2261
--------- -------- --------
-11049402 -3366833 -5269516
--------- -------- --------
Cash flows from financing activities
Increase (decrease) in
Time deposits 1954334 2786249 2994134
Other deposits 1053152 3244559 2335459
Securities sold under agreements to repurchase -352 -200471 -92838
Advance under note payable 2578493 1000000 0
Proceeds from stock options exercised 0 9900 0
--------- -------- --------
5585627 6840237 5236755
--------- -------- --------
Net increase (decrease) in cash and cash equivalents -4845523 3864237 346439
Cash and cash equivalents at beginning of year 8246585 4382348 4035909
--------- -------- --------
Cash and cash equivalents at end of year 3401062 8246585 4382348
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
Easton Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31,
1999 1998 1997
------ ------- ------
<S> <C> <C> <C>
Reconciliation of net income to net cash provided by
operating activities
Net income 494345 444044 289921
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for credit losses -98547 224281 81807
Depreciation 94890 95790 100564
Amortization of intangibles 2998 29386 56503
Securities amortization, net of accretion 2363 2812 0
Deferred income taxes 260792 -397951 0
Gain on sale of other real estate owned -1249 0 0
Gain on calls of securities 0 -2227 0
Net loans originated for sale -70000 0 0
Decrease (increase) in
Accrued interest receivable -54066 1833 -67294
Other assets 46920 -34601 -14189
Increase (decrease) in
Deferred loan origination fees -7750 -22487 13807
Accrued interest payable 13277 -4369 6296
Other liabilities -65721 54322 -88215
------ ------- ------
618252 390833 379200
====== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
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 and
Caroline Counties. 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.
23
<PAGE>
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.
Loans held for sale
----------------------
The Company originates loans which are sold to an investor. Because
of the short holding period, these loans are carried at cost, which approximates
market value.
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").
24
<PAGE>
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
$1,736,947, $5,244,225, and $4,069,486 for 1999, 1998, and 1997, 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, 1999 - Available for sale
U.S. Government agencies 4321057 0 117229 4203828
========= ========= ========= =======
December 31, 1998 - Available for sale
U.S. Government agencies 4850613 7311 17898 4840026
========= ========= ========= =======
December 31, 1997 - Held to maturity
U.S. Government agencies 1500000 2794 0 1502794
========= ========= ========= =======
</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.
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. Mortgage pass-through securities are due in monthly
installments.
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
Amortized Market Amortized Market Amortized Market
cost value cost value cost value
--------- --------- --------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Due
One year or less 0 0 449898 451673 500000 500771
After one year
through five years 4106822 3997034 4150155 4137728 1000000 1002023
After five years 0 0 250560 250625 0 0
Mortgage pass-through
securities 214235 206794 0 0 0 0
------- --------- ------- --------- ------- -------
4321057 4203828 4850613 4840026 1500000 1502794
======= ========= ======= ========= ======= =======
</TABLE>
Securities were pledged as collateral for repurchase agreements.
25
<PAGE>
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Major classifications of loans are as follows:
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Commercial 7476729 4405479 2270375
Real estate 29441565 22174739 24273513
Construction 3177267 2459322 3658528
Home equity 2421584 2067068 2067995
Consumer 4054684 2725190 2859345
-------- -------- --------
46571829 33831798 35129756
Less deferred loan origination fees 25135 46990 69477
Less allowance for credit losses 610396 530000 378000
-------- -------- --------
Loans, net 45936298 33254808 34682279
======== ======== ========
</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>
<CAPTION>
<S> <C> <C> <C>
Immediately 7113209 3558109 4110743
Within one year 10914323 14121270 12664592
Over one to five years 24736541 15728660 18346404
Over five years 3807756 423759 8017
-------- -------- --------
46571829 33831798 35129756
======== ======== ========
</TABLE>
Transactions in the allowance for credit losses are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Beginning balance 530000 378000 332253
Provision charged to operation -98547 224281 81807
Recoveries 430068 25500 13752
------ ------ ------
861521 627781 427812
Charge-offs 251125 97781 49812
------ ------ ------
Ending balance 610396 530000 378000
====== ====== ======
</TABLE>
Management has identified no significant impaired loans.
26
<PAGE>
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>
1999 1998 1997
------ ------- ------
<S> <C> <C> <C>
Nonaccrual
Commercial 0 64707 13785
Mortgage 100000 2184971 0
Installment 8770 68574 28661
------ ------- ------
108770 2318252 42446
====== ======= ======
Interest not accrued 4658 237114 1388
====== ======= ======
Loans past due ninety days or more,
still accruing interest 4942 25022 218055
====== ======= ======
</TABLE>
The interest not accrued in 1998 includes $113,226 of interest from
the nonaccrual loan which was 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>
<S> <C> <C> <C>
Construction loans 1561318 1639393 1319956
Lines of credit, including home equities 3456452 2012998 1472709
Overdraft protection lines 275035 186670 144026
Standby letters of credit 86244 535166 382767
------- ------- -------
5379049 4374227 3319458
======= ======= =======
</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.
27
<PAGE>
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 1999 1998 1997
------------- ------- ------- -------
<S> <C> <C> <C> <C>
Land - 295211 295211 295211
Land improvements 20 years 40512 40512 40512
Building 10-40 years 1304503 1298872 1298872
Furniture, fixtures, and equipment 5-10 years 663715 542701 518624
------- ------- -------
2303941 2177296 2153219
Accumulated depreciation 609289 515169 439536
----------- ------- -------
Net premises and equipment 1694652 1662127 1713683
=========== ======= =======
Depreciation expense 94890 95790 100564
=========== ======= =======
</TABLE>
6. INTANGIBLE ASSETS
A summary of intangible assets and the related amortization follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- ------
<S> <C> <C> <C>
Organization costs 0 0 234820
Computer software 60007 44340 44032
----- ----- ------
60007 44340 278852
Accumulated amortization 44316 42487 248591
----- ----- ------
Net intangible assets 15691 1853 30261
===== ===== ======
Amortization expense 2998 29386 56503
===== ===== ======
</TABLE>
7. DEPOSITS
Major classifications of interest-bearing deposits are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Money market and NOW 11673854 9008316 9328273
Savings 3915780 4523794 3581048
Other time 27858566 25904232 23117983
-------- -------- --------
43448200 39436342 36027304
======== ======== ========
</TABLE>
28
<PAGE>
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>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Three months or less 4224208 1890405 1116056
Three to twelve months 1814162 1949654 1452974
One to five years 1888262 1238331 1579570
------- ------- -------
7926632 5078390 4148600
======= ======= =======
Interest expense 291479 265607 234217
======= ======= =======
</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, 1999, 1998 and 1997, the following applied to these repurchase agreements:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Maximum amount outstanding 387868 540941 594632
Average amount outstanding 139200 466466 478005
Average rate paid during the year 3.79% 4.81% 4.55%
Investment securities underlying the agreements at year end
Carrying value 317212 426649 675000
Estimated fair value 317212 426649 676095
</TABLE>
9. NOTES PAYABLE AND LINES OF CREDIT
The Company may borrow up to $8,773,000 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.
29
<PAGE>
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
9. NOTES PAYABLE AND LINES OF CREDIT (Continued)
Maturities of the Company's borrowings from the Federal Home Loan Bank
are summarized:
<TABLE>
<CAPTION>
Maturity Interest
date Balance Rate frequency
-------- --------- -----------
<S> <C> <C> <C>
January 14, 2000 1000000 6.03% At maturity
May 4, 2000 1000000 5.30% Monthly
June 23, 2008 1000000 5.51% Quarterly
February 11, 2019 578493 5.00% Monthly
--------
3578493
========
</TABLE>
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 $6,750,000.
10. INCOME TAXES
The Company has not incurred any income tax liability since its
inception. The Company had net operating loss carryforwards of $389,317,
$931,128, and $1,147,924 available to offset future taxable income as of
December 31, 1999, 1998, and 1997, respectively.
The statutory federal income tax rate was 34% for 1999, 1998, and
1997. The provision (benefit) for income taxes is reconciled as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------- -------
<S> <C> <C> <C>
Income before income taxes 755137 46093 289921
====== ======= =======
Tax provision at statutory rates 256747 15671 98573
Increase (decrease) resulting from
State income taxes, less federal benefit 0 0 13377
Nondeductible expenses 4045 2313 3346
Net operating loss carryover and adjustment of
valuation allowance 0 -415935 -115296
------ ------- -------
Provision (benefit) for income taxes 260792 -397951 0
====== ======= =======
</TABLE>
30
<PAGE>
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
10. INCOME TAXES (Continued)
The components of the deferred tax assets and liabilities as of
December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -------
<S> <C> <C> <C>
Deferred tax assets
Allowance for credit losses 128851 162357 124849
Deferred loan origination fees 0 0 992
Net operating loss carryforward 132368 316584 435721
Start-up costs 0 0 8238
Unrealized loss on securities available for sale 39858 3600 0
------ ------ -------
301077 482541 569800
------ ------ -------
Deferred tax liabilities
Depreciation 51356 44281 45537
Cash method of accounting 72704 36709 59417
------ ------ -------
124060 80990 104954
------ ------ -------
Net deferred tax asset before valuation allowance 177017 401551 464846
Valuation allowance 0 0 -464846
------ ------ -------
Net deferred tax asset 177017 401551 0
====== ====== =======
</TABLE>
11. OTHER OPERATING EXPENSES
Other operating expenses are comprised as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Advertising 47446 41667 47417
Professional fees 109104 72110 58421
Data processing 103784 84332 77487
Deposit assessment 4896 4620 3712
Insurance 13042 13023 14830
Loan reports and collection costs 10095 6598 8086
Organizational expense amortization 0 23482 46964
Postage 30677 27128 21813
Proxy and transfer agent costs 16911 16762 15141
Software amortization 2998 5904 9539
Stationery and supplies 72800 46339 44833
Telephone 28781 17225 13938
Training 22103 13024 5286
Travel and entertainment 33358 13658 10283
Other 74426 58688 59925
------ ------ ------
570421 444560 437675
====== ====== ======
</TABLE>
31
<PAGE>
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
12. STOCK OPTION AND STOCK WARRANT PLANS
The Company 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.
During 1999, the Company granted 56,000 non-qualified stock options to
the chief executive officer of the Bank. The options vest at 10% per year.
These options, with an exercise price of $10, expire December 31, 2009.
The Company 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 Company and the Bank. No options have been granted.
The organizers of the Company 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, expiring June 30, 2003.
A summary of the status of the Company's performance-based stock
option plans follows:
<TABLE>
<CAPTION>
Shares 1999 1998 1997
- -------------------------------- ----- ----- ----
<S> <C> <C> <C>
Outstanding, beginning of year 0 8390 5593
Granted 56000 0 2797
Exercised 0 -990 0
Forfeited 0 -7400 0
----- ----- ----
Outstanding, end of year 56000 0 8390
===== ===== ====
Total vested 5600 0 8390
===== ===== ====
</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.
32
<PAGE>
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
12. STOCK OPTION AND STOCK WARRANT PLANS (Continued)
The weighted average fair value of options granted during 1999 and
1997 has been estimated using the Black-Scholes option-pricing model with the
following assumptions:
<TABLE>
<CAPTION>
1999 1997
------ -----
<S> <C> <C>
Dividend yield 0.00% 0.00%
Risk-free interest rate 5.75% 5.75%
Expected volatility 33.01% 4.50%
Expected life in years 10.5 7.0
</TABLE>
Had compensation been determined in accordance with the provisions of
SFAS No. 123, the Company's net income and earning per share during 1999 and
1997 would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1997
------ ------
<S> <C> <C>
Net income
As reported 494345 289921
Pro forma 443614 282955
Basic earnings per share
As reported 0.88 0.52
Pro forma 0.79 0.51
Diluted earnings per share
As reported 0.88 0.48
Pro forma 0.79 0.47
</TABLE>
13. 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 1999 and 1998, the Board of Directors approved contributions matching 25%
of employee contributions that totaled $6,583 and $4,794, respectively. In
1997, the approved contributions matched 10% of employee contributions totaling
$1,913.
14. 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.
The Company leases retail property in which the Denton branch is
located. The lease, dated June 4, 1999, expires August 31, 2004. The lease has
three 5-year renewal options with rent increases of 10% for each renewal period.
The Company is responsible for real estate taxes. If the landlord decides to
sell the building in which the Company's branch is located, the lease provides
the Company the right to purchase the building at terms comparable to third
party offers.
33
<PAGE>
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
14. LEASE COMMITMENTS (Continued)
Lease obligations will require payments as follows:
<TABLE>
<CAPTION>
<S> <C>
Minimum
Period rentals
- --------- -------
2000 25995
2001 25995
2002 25995
2003 25995
2004 17330
-------
121310
=======
</TABLE>
Rent expense was $16,221 for 1999 and $3,600 for each of the years
ended December 31, 1998 and 1997.
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>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Beginning balance 2018872 2052138 2441843
Advances 267372 412312 465854
Repayments -581341 -393577 -855559
Other changes -18675 -52001 0
------- ------- -------
Ending balance 1686228 2018872 2052138
======= ======= =======
</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 $5,631 in 1999, $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, 1999.
During 1999, 1998, and 1997, the Bank leased office space to a
director for $7,938 each year.
A director is a partner in a law firm that periodically provides
services to the Company or Bank. During 1997, the Bank paid $897 to this law
firm.
Deposits of directors and officers with account relationships in
excess of $200,000 total $3,369,825 or 7.15% of total deposits as of December
31, 1999.
34
<PAGE>
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, 1999
- -------------------------------
Total capital
(to risk-weighted assets) 5363 12.44% 3450 8.00% 4312 10.00%
Tier 1 capital
(to risk-weighted assets) 4822 11.18% 1725 4.00% 2587 6.00%
Tier 1 capital
(to average fourth
quarter assets) 4822 8.90% 2167 4.00% 2709 5.00%
December 31, 1998
- -------------------------------
Total capital
(to risk-weighted assets) 4691 13.73% 2733 8.00% 3417 10.00%
Tier 1 capital
(to risk-weighted assets) 4263 12.48% 1367 4.00% 2050 6.00%
Tier 1 capital
(to average fourth
quarter assets) 4263 8.78% 1943 4.00% 2429 5.00%
December 31, 1997
- -------------------------------
Total capital
(to risk-weighted assets) 4303 13.15% 2619 8.00% 3273 10.00%
Tier 1 capital
(to risk-weighted assets) 3925 11.99% 1309 4.00% 1964 6.00%
Tier 1 capital
(to average fourth
quarter assets) 3925 9.18% 1710 4.00% 2137 5.00%
</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.
35
<PAGE>
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,
1999 1998 1997
------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Carrying Fair Carrying Fair Carrying Fair
amount value amount value amount value
------- -------- -------- -------- -------- --------
Financial assets
Cash and due from
banks 2576335 2576335 976682 976682 642726 642726
Federal funds sold 824727 824727 7269903 7269903 3739622 3739622
Investment securities 4382828 4382828 4985626 4985626 1624500 1627294
Loans, net 45936298 45962204 33254808 33271318 34682279 34599709
Accrued interest
receivable 300536 300536 246470 246470 248303 248303
Loan payment held
in escrow 0 0 1175000 1175000 0 0
Financial liabilities
Noninterest-bearing
deposits 3678246 3678246 4682618 4682618 2060848 2060848
Interest-bearing deposits
and securities sold under
agreements to
repurchase 43728867 44018746 39717361 41076792 36508794 36779633
Accrued interest
payable 108888 108888 95611 95611 99980 99980
Note payable 3578493 3342217 1000000 1000000 0 0
</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.
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.
36
<PAGE>
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 1999 1998 1997
------- ------- --------
Assets
<S> <C> <C> <C>
Cash 5988 40648 64491
Investment in subsidiary 4797526 4350689 3945641
Organization costs 0 0 2580
Deferred income taxes 80116 68332 0
------- ------- --------
Total assets 4883630 4459669 4012712
======= ======= ========
Liabilities and Stockholders' Equity
Stockholders' equity
Common stock 56032 56032 55933
Additional paid-in capital 5227487 5227487 5217686
Retained earnings (deficit) -322518 -816863 -1260907
------- ------- --------
4961001 4466656 4012712
Accumulated other comprehensive income -77371 -6987 0
------- ------- --------
Total stockholders' equity 4883630 4459669 4012712
------- ------- --------
Total liabilities and stockholders' equity 4883630 4459669 4012712
======= ======= ========
Years Ended December 31,
Statements of Income 1999 1998 1997
------- ------- --------
Interest revenue 556 1921 3002
Equity in undistributed income of subsidiary 517221 412035 321742
------- ------- --------
517777 413956 324744
------- ------- --------
Expenses
Furniture and equipment 49 68 49
Other 35167 38176 34774
------- ------- --------
35216 38244 34823
------- ------- --------
Income before income taxes 482561 375712 289921
Income taxes 11784 68332 0
------- ------- --------
Net income 494345 444044 289921
======= ======= ========
</TABLE>
37
<PAGE>
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
18. PARENT COMPANY FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
Statements of Cash Flows 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Interest received 556 1921 3002
Cash paid for operating expenses -35216 -35664 -29664
------- ------- -------
-34660 -33743 -26662
------- ------- -------
Cash flows from financing activities
Proceeds from options exercised 0 9900 0
------- ------- -------
Net (decrease) in cash -34660 -23843 -26662
------- ------- -------
Cash and equivalents at beginning of year 40648 64491 91153
------- ------- -------
Cash and equivalents at end of year 5988 40648 64491
======= ======= =======
Reconciliation of net income to net cash
provided by operating activities
Net income 494345 444044 289921
Adjustments to reconcile net income to net
cash used in operating activities
Undistributed net income of subsidiary -517221 -412035 -321742
Deferred income taxes -11784 -68332 0
Amortization 0 2580 5159
------- ------- -------
-34660 -33743 -26662
======= ======= =======
</TABLE>
38
<PAGE>
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
20. EARNINGS PER SHARE
Diluted earnings per share are calculated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- ----------
<S> <C> <C> <C>
NET INCOME 494345 444044 289921
======= ======== ==========
Average shares outstanding 560318 560071 559328
------- -------- ----------
Dilutive average shares
outstanding under options
and warrants 245236 209832 215490
Exercise price 10.00 10.00 10.00
Assumed proceeds on exercise 2452360 2098320 2154900
Average market value 10.16 12.50 12.49
Less: Treasury stock purchased
with assumed proceeds
from exercise 241374 167865.6 172530.024
Average shares and common
stock equivalents 564180 602037 602288
DILUTED EARNINGS PER SHARE 0.88 0.74 0.48
======= ======== ==========
</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.
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."
39
<PAGE>
EASTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
Three months ended
------------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
1999
----
Interest revenue 1131539 1140479 944892 901995
Interest expense 508370 483768 423570 446677
Net interest income 623169 656711 521322 455318
Provision for loan losses 0 -134547 18000 18000
Net income 95477 284872 69568 44428
Comprehensive income 76891 280154 37194 29722
Earnings per share - basic 0.17 0.51 0.12 0.08
Earnings per share - diluted 0.17 0.51 0.12 0.08
1998
----
Interest revenue 918254 920983 857747 829660
Interest expense 482515 488958 461264 448055
Net interest income 435739 432025 396483 381605
Provision for loan losses 61724 91212 34812 36533
Net income 63880 343547 9018 27599
Comprehensive income 54198 347835 7425 27599
Earnings per share - basic 0.11 0.61 0.02 0.05
Earnings per share - diluted 0.1 0.57 0.02 0.05
1997
----
Interest revenue 892249 830754 800830 754150
Interest expense 449961 417765 401518 379292
Net interest income 442288 412989 399312 374858
Provision for loan losses 32056 8285 19608 21858
Net income 89475 73323 63367 63756
Comprehensive income 89475 73323 63367 63756
Earnings per share - basic 0.17 0.13 0.11 0.11
Earnings per share - diluted 0.15 0.12 0.1 0.11
</TABLE>
40
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF
EASTON BANCORP, INC.
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, CPA 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, P.D. PRESIDENT, HILL'S DRUG STORE, INC.
DAVID F. LESPERANCE PRESIDENT,
LESPERANCE CONSTRUCTION, INC.
VINODRAI MEHTA, MD PHYSICIAN, VINODRAI MEHTA, MD
ROGER A. ORSINI, MD PLASTIC & RECONSTRUCTIVE SURGEON
PRESIDENT OF SHORE AESTHETIC
& RECONSTRUCTIVE ASSOCIATES
MAHMOOD S. SHARIFF, MD CARDIOLOGIST, MAHMOOD S. SHARIFF, MD
MYRON J. SZCZUKOWSKI, JR., MD ORTHOPAEDIC SURGEON
DELMARVA ORTHOPAEDIC CLINIC
ALL OF THE PERSONS NOTED ABOVE ARE DIRECTORS OF EASTON BANCORP, INC.
41
<PAGE>
DIRECTORS, OFFICERS AND ASSOCIATES OF
EASTON BANK & TRUST COMPANY
DIRECTORS
---------
W. DAVID HILL, DDS
CHAIRMAN OF THE BOARD
SHEILA W. BATEMAN, CPS - SECRETARY JERRY L. WILCOXON, CPA - TREASURER
JACK H. BISHOP, DDS WILLIAM R. HOUCK, DDS
J. PARKER CALLAHAN, JR. M. LINDA KILDEA
CHARLES T. CAPUTE PAMELA H. LAPPEN
WALTER E. CHASE, SR. DAVID F. LESPERANCE
STEPHEN W. CHITTY VINODRAI MEHTA, MD
DELIA B. DENNY 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.
OFFICERS
--------
R. MICHAEL S. MENZIES, SR. JEFFREY N. HEFLEBOWER
PRESIDENT/CHIEF EXECUTIVE OFFICER EXECUTIVE VICE PRESIDENT
DELIA B. DENNY PAMELA A. MUSSENDEN
EXECUTIVE VICE PRESIDENT SENIOR VICE PRESIDENT/TREASURER
BARBARA M. OSTRANDER ROSE K. KLECKNER
VICE PRESIDENT ASSISTANT TREASURER
SUSAN D. HASCHEN KATHLEEN A. KURTZ
ASSISTANT TREASURER ASSISTANT TREASURER
BETH A. SANDERSON
SENIOR MORTGAGE OFFICER
ASSOCIATES
----------
ROXANNE M. ATWATER, OPERATIONS ASSISTANT
MARCY L. BLAZEJAK, CUSTOMER SERVICE REPRESENTATIVE
TERRI L. BRANNOCK, BRANCH MANAGER
WENDY A. BUCKLER, CREDIT ADMINISTRATIVE ASSISTANT
BRENDA L. FORBES, ADMINISTRATIVE ASSISTANT
LESTA R. GUNTHER, OPERATIONS ADMINISTRATOR
ERIC L. HONTZ, FINANCIAL SERVICE REPRESENTATIVE
ANNE H. HUGHES, CREDIT ADMINISTRATIVE ASSISTANT
LAURA M. KING, CUSTOMER SERVICE REPRESENTATIVE
TRACY T. LEDNUM, CUSTOMER SERVICE REPRESENTATIVE SUPERVISOR
AMY C. LYNCH, CREDIT ADMINISTRATIVE ASSISTANT
KERRI A. MORRIS, CUSTOMER SERVICE REPRESENTATIVE
CAROL S. NOTTINGHAM, RECEPTIONIST
KIMBERLY D. RADA, SENIOR CUSTOMER SERVICE REPRESENTATIVE
KELLY A. REED, FINANCIAL SERVICE REPRESENTATIVE
AVONDA N.F. ROUNDS, CUSTOMER SERVICE REPRESENTATIVE
BRIDGET A. SCHETTINI, CUSTOMER SERVICE REPRESENTATIVE
JACQUELINE D. WILSON, LENDING SPECIALIST
42
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Easton Bank & Trust Company, a state bank organized under the laws of the State
of Maryland.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Financial Statements for the period ended December 31,
1999, and is qualified in its entirety by reference to such financial statements
included as part of Exhibit 13 to this Form 10-KSB.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> DEC-31-2000
<CASH> 2576335
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 824727
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4203828
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 45936298
<ALLOWANCE> 610396
<TOTAL-ASSETS> 56024088
<DEPOSITS> 47126446
<SHORT-TERM> 2280667
<LIABILITIES-OTHER> 154852
<LONG-TERM> 1578493
0
0
<COMMON> 56032
<OTHER-SE> 4827598
<TOTAL-LIABILITIES-AND-EQUITY> 56024088
<INTEREST-LOAN> 3708140
<INTEREST-INVEST> 256150
<INTEREST-OTHER> 154615
<INTEREST-TOTAL> 4118905
<INTEREST-DEPOSIT> 1758479
<INTEREST-EXPENSE> 1862385
<INTEREST-INCOME-NET> 2256520
<LOAN-LOSSES> (98547)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1840819
<INCOME-PRETAX> 755137
<INCOME-PRE-EXTRAORDINARY> 755137
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 494345
<EPS-BASIC> .88
<EPS-DILUTED> .88
<YIELD-ACTUAL> 4.79
<LOANS-NON> 108770
<LOANS-PAST> 4942
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 343678
<ALLOWANCE-OPEN> 530000
<CHARGE-OFFS> 251125
<RECOVERIES> 430068
<ALLOWANCE-CLOSE> 610396
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 610396
<PAGE>
</TABLE>
