U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2000
-----------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number: 33-43317
----------
EASTON BANCORP, INC.
---------------------------------------------
(Exact name of small business issuer as specified in its charter)
Maryland 52-1745344
--------- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
501 Idlewild Avenue, Easton, Maryland 21601
--------------------------------------------
(Address of principal executive offices)
(410) 819-0300
--------------
(Issuer's telephone number)
Not Applicable
--------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
On May 4, 2000, 560,318 shares of the issuer's common stock, par value $.10
per share, were issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
EASTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2000 1999
------------ --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,294,985 $ 2,576,335
Federal funds sold 891,786 824,727
Investment in Federal Home Loan Bank stock 179,000 179,000
Investment securities available for sale 4,469,534 4,203,828
Loans held for sale 376,600 70,000
Loans, less allowance for credit losses of
$670,000 and $610,396, respectively 48,043,512 45,936,298
Premises and equipment, net 1,685,843 1,694,652
Intangible assets, net 14,403 15,691
Accrued interest receivable 330,234 300,536
Other assets 43,283 46,004
Deferred income taxes 127,516 177,017
------------ --------------
Total assets $57,456,696 $ 56,024,088
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 4,011,007 $ 3,678,246
Interest-bearing 46,683,858 43,448,200
------------ --------------
Total deposits 50,694,865 47,126,446
Accrued interest payable 100,587 108,888
Securities sold under agreements to repurchase 57,658 280,667
Note payable 1,584,995 3,578,493
Other liabilities 45,241 45,964
------------ --------------
Total liabilities 52,483,346 51,140,458
------------ --------------
Stockholders' equity
Common stock, par value $.10 per share;
authorized 5,000,000 shares; 560,318
shares issued and outstanding 56,032 56,032
Additional paid-in-capital 5,227,487 5,227,487
Retained earnings (deficit) (222,124) (322,518)
------------ --------------
5,061,395 4,961,001
Accumulated other comprehensive income (loss) (88,045) (77,371)
------------ --------------
Total stockholders' equity 4,973,350 4,883,630
------------ --------------
Total liabilities and stockholders' equity $57,456,696 $ 56,024,088
============ ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
<TABLE>
<CAPTION>
EASTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
--------------------
2000 1999
---------- --------
<S> <C> <C>
Interest revenue
Loans, including fees $1,057,127 $766,937
Investment securities 68,228 72,659
Federal funds sold 29,156 62,399
---------- --------
Total interest revenue 1,154,511 901,995
Interest expense 534,105 446,677
---------- --------
Net interest income 620,406 455,318
Provision for loan losses 53,933 18,000
---------- --------
Net interest income after
provision for loan losses 566,473 437,318
---------- --------
Other operating revenue 55,263 38,308
---------- --------
Other expenses
Salaries and benefits 280,595 252,197
Occupancy 25,136 17,431
Furniture and equipment 27,124 18,160
Other operating 133,488 119,610
---------- --------
Total operating expenses 466,343 407,398
---------- --------
Net income before income taxes 155,393 68,228
Income taxes 55,000 23,800
---------- --------
Net income $100,393 $44,428
========== ========
Earnings per common share - basic $0.18 $0.08
========== ========
Earnings per common share - diluted $0.17 $0.07
========== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
EASTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 2000 1999
------------ ------------
<S> <C> <C>
Interest received $1,103,203 $872,599
Other revenue received 55,263 87,711
Cash paid for operating expenses (440,094) (537,755)
Interest paid (542,406) (452,344)
Loans originated for sale (969,240) 0
Proceeds from loan sales 662,640 0
------------ ------------
(130,634) 29,789
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for premises and equipment (17,812) (32,959)
Net loans to customers (2,140,198) (2,200,386)
Investment securities purchased (298,063) (968,613)
Proceeds from sales/maturities of investments 16,845 759,284
Purchase of Foreclosed Property 0 (60,450)
------------ ------------
(2,439,228) (2,503,124)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in time deposits 993,187 (2,069,243)
Net increase (decrease) in other deposits 2,578,891 (389,745)
Net increase (decrease) in securities sold
under agreements to repurchase (223,009) (200,888)
Debt advances 1,993,498 308,522
------------ ------------
1,355,571 2,351,354
------------ ------------
NET INCREASE (DECREASE) IN CASH (1,214,291) (4,884,267)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,401,062 8,246,585
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,186,771 $ 3,362,318
============ ============
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED (USED) IN OPERATING ACTIVITIES
Net income $100,393 $44,428
Adjustments to reconcile net income to net cash
provided (used) in operating activities:
Depreciation and amortization 27,909 24,182
Provision for loan losses 53,933 18,000
Loan sales net proceeds (306,600) 0
Decrease (increase) in accrued interest receivable
and other assets 23,704 (68,579)
Increase (decrease) in operating accounts payable
and other liabilities (29,973) (45,151)
Increase (decrease) in deferred loan origination fees 0 (2,669)
------------ ------------
($130,634) $29,789
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
1. Basis of Presentation
-----------------------
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B of the Securities and Exchange Commission. Accordingly, they
do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 2000, are not necessarily indicative of the results
that may be expected for the year ended December 31, 2000. For further
information, refer to the consolidated financial statements and footnotes
thereto for the Company's fiscal year ended December 31, 1999, included in the
Company's Form 10-KSB for the year ended December 31, 1999.
2. Cash Flows
-----------
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, unrestricted amounts due from banks, overnight investments in
repurchase agreements, and federal funds sold.
3. Comprehensive Income
---------------------
Comprehensive income consists of :
Three Months Ended
March 31,
2000 1999
-------- --------
Net Income $100,393 $44,428
Unrealized gain (loss) on investment
securities available for sale net of
income taxes (10,674) (14,706)
-------- --------
Comprehensive Income $ 89,719 $29,722
========= ========
4
<PAGE>
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Easton Bancorp, Inc. (the "Company") was incorporated in Maryland 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, traveler's checks, direct deposit
of payroll and social security checks, and automatic drafts for various
accounts.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
financial statements and related notes and other statistical information
included elsewhere herein.
Results of Operations
- -----------------------
Net income for the Company for the three months ended March 31, 2000, was
$100,393, compared to $44,428 during the corresponding period of 1999. The
increase in earnings can be attributed to an increase in net interest income of
approximately $165,000 and an increase of approximately $17,000 in other
operating income, offset by an increase of approximately $36,000 in provision
for loan losses, $59,000 in total operating expenses and $31,000 in income
taxes. The increase in net interest income is primarily due to an increase of
approximately $290,000 in interest earned on the growth in the loan portfolio
less a decrease of approximately $33,200 in interest earned on federal funds
sold and an increase of approximately $87,000 in interest expense primarily due
to the increase in deposits. The increase in total operating expenses is
primarily attributed to an increase in salaries and benefits of approximately
$28,400.
5
<PAGE>
The Bank's loan portfolio increased from $45.9 million at December 31,
1999, to $48.0 million at March 31, 2000. The Bank's provision for loan losses
was $53,933 for the quarter ended March 31, 2000, compared to $18,000 for the
quarter ended March 31, 1999. The allowance for loan losses was $670,000 at
March 31, 2000, or 1.38% of total loans, compared to $610,396 at December 31,
1999, or 1.31% of total loans. The level of the allowance for loan losses
represents management's current estimate of future losses in the loan portfolio;
however, there can be no assurance that loan losses in future periods will not
exceed the allowance for loan losses or that additional increases in the
allowance will not be required.
Noninterest expense increased $58,945 to $466,343 for the quarter ended
March 31, 2000, from $407,398 for the quarter ended March 31, 1999. The
increase was primarily related to the increases in salaries and benefits of
$28,398. The increase in salaries and benefits was due to annual salary
increases, one new full-time employee and two new part-time employees hired for
the main office, and two new full-time employees hired to staff the new Denton
office.
Return on average assets and average equity, on an annualized basis, for
the quarter ended March 31, 2000, were .72% and 8.35%, respectively, compared to
.43% and 4.74%, respectively, for the same quarter of 1999. Earnings per share
on a fully diluted basis for the quarters ended March 31, 2000, and March 31,
1999, amounted to $.17 and $.07.
The Company's assets ended the first quarter of 2000 at $57.5 million, an
increase of $1.4 million, or 2.56%, from $56.0 million at December 31, 1999.
This increase can be attributed primarily to the decrease in cash and due from
banks of $1.3 million, offset by the increase in the Bank's loans of $2.4
million and an increase in the investment portfolio of $300,000. The Company
repaid approximately $2 million in borrowings from the Federal Home Loan Bank of
Atlanta that brings total borrowings from the Federal Home Loan Bank of Atlanta
to $1.6 million that are match funded on two loans.
Management expects that its 2000 income will exceed expenses. Although
management expects that the Company's current profitably will continue, future
events, such as an unanticipated deterioration in the loan portfolio, could
reverse this trend. Management's expectations are based on management's best
judgment and actual results will depend on a number of factors that cannot be
predicted with certainty and thus fulfillment of management's expectations
cannot be assured.
Liquidity and Sources of Capital
- ------------------------------------
The $3.6 million increase in deposits from December 31, 1999, to March 31,
2000, is primarily reflected in the $2.0 million decrease in borrowings from the
Federal Home Loan Bank of Atlanta, and the increase in the Bank's loans of $2.4
million, offset by the $1.3 million decrease in cash and due from banks. The
Company's primary source of liquidity is cash on hand plus short-term
investments. At March 31, 2000, the Company's liquid assets totaled $6.7
million, or 11.58% of total assets, compared to $7.6 million, or 13.57% of total
assets, at December 31, 1999. Another source of liquidity is the $7.0 million
secured line of credit the Company has from the Federal Home Loan Bank of
Atlanta, of which $1.6 million is used, the $1.0 million unsecured line of
credit the Company has from a correspondent bank, and the $1.5 million secured
line of credit the Company has from another correspondent bank, of which $75,000
is pledged to secure repurchase agreements. If additional liquidity is needed,
the Bank will sell participations in its loans.
6
<PAGE>
The capital of the Company and the Bank exceeded all prescribed regulatory
capital guidelines at March 31, 2000. At March 31, 2000, the Tier 1 leverage
ratio for the Bank was 8.76%. At March 31, 2000, the Bank had a risk-weighted
total capital ratio of 12.30%, and a Tier 1 risk-weighted capital ratio of
11.04%. The Company expects that its current capital and short-term investments
will satisfy the Company's cash requirements for the foreseeable future.
However, no assurance can be given in this regard as rapid growth, deterioration
in the loan quality or poor earnings, or a combination of these factors, could
change the Company's capital position in a relatively short period of time.
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 April 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 April 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.
Market Risk
- ------------
Net interest income of the Company is one of the most important factors in
evaluating the financial performance of the Company. The Company uses interest
sensitivity analysis to determine the effect of rate changes. Net interest
income is projected over a one-year period to determine the effect of an
increase or decrease in the prime rate of 100 basis points. If prime were to
decrease 100 basis points, the Company would experience a decrease in net
interest income of $534 if all assets and liabilities maturing within that
period were adjusted for the rate change. The sensitivity analysis does not
consider the likelihood of these rate changes nor whether management's reaction
to this rate change would be to reprice its loans and deposits.
7
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company or the
Bank is a party or of which any of their property is the subject.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to security holders for a vote during the
quarter ended March 31, 2000.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
11.1 Computation of Earnings Per Share.
27.1 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company during the
quarter ended March 31, 2000.
8
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EASTON BANCORP, INC.
------------------------
(Registrant)
Date: May 5, 2000 By: /s/ R. Michael S. Menzies
--------------- ------------------------------
R. Michael S. Menzies
President
Date: May 5, 2000 By: /s/ Pamela A. Mussenden
--------------- ---------------------------
Pamela A. Mussenden
Assistant Treasurer
(Principal Financial Officer)
9
<PAGE>
INDEX TO EXHIBITS
Exhibit Sequential
Number Description Page Number
- ------ ----------- ------------
11.1 Computation of Earnings Per Share.
27.1 Financial Data Schedule (for SEC use only).
<PAGE>
EXHIBIT 11.1
EASTON BANCORP, INC.
COMPUTATION OF EARNINGS PER SHARE
QUARTER ENDED MARCH 31, 2000
Net income
$ 100,393
==========
Average shares outstanding 560,318
Basic earnings per share $ 0.18
==========
Average shares outstanding 560,318
Dilutive average shares outstanding under
warrants and options 263,800
Exercise price $ 10.00
Assumed proceeds on exercise $2,638,000
Average market value $ 10.60
Less: Treasury stock purchased with assumed proceeds
from exercise of warrants and options 248,868
Adjusted average shares - diluted 575,250
Diluted earnings per share $ 0.17
==========
The stock of the Company is not traded on any public exchange. The average
market value is derived from trades with one broker. Private sales may occur
where management of the Company is unaware of the sales price.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1294985
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 891786
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4469534
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 48420112
<ALLOWANCE> 670000
<TOTAL-ASSETS> 57456696
<DEPOSITS> 50694865
<SHORT-TERM> 57658
<LIABILITIES-OTHER> 145828
<LONG-TERM> 1584995
0
0
<COMMON> 56032
<OTHER-SE> 4917318
<TOTAL-LIABILITIES-AND-EQUITY> 57456696
<INTEREST-LOAN> 1057127
<INTEREST-INVEST> 68228
<INTEREST-OTHER> 29156
<INTEREST-TOTAL> 1154511
<INTEREST-DEPOSIT> 507101
<INTEREST-EXPENSE> 534105
<INTEREST-INCOME-NET> 620406
<LOAN-LOSSES> 53933
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 466343
<INCOME-PRETAX> 155393
<INCOME-PRE-EXTRAORDINARY> 155393
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100393
<EPS-BASIC> .18
<EPS-DILUTED> .17
<YIELD-ACTUAL> 4.02
<LOANS-NON> 236529
<LOANS-PAST> 171692
<LOANS-TROUBLED> 46011
<LOANS-PROBLEM> 659357
<ALLOWANCE-OPEN> 610396
<CHARGE-OFFS> 0
<RECOVERIES> 5671
<ALLOWANCE-CLOSE> 670000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 670000
</TABLE>
