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: June 30, 2000
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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
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EASTON BANCORP, INC.
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(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
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(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 August 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)
June 30, December 31,
2000 1999
------------ --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,745,331 $ 2,576,335
Federal funds sold 1,611,976 824,727
Investment in Federal Home Loan Bank stock 204,200 179,000
Investment securities available-for-sale 4,420,055 4,203,828
Loans held for sale 193,000 70,000
Loans, less allowance for credit losses of
$731,553 and $610,396, respectively 51,775,009 45,936,298
Premises and equipment, net 1,669,564 1,694,652
Intangible assets, net 12,880 15,691
Accrued interest receivable 355,440 300,536
Other assets 40,227 46,004
Deferred income taxes 48,226 177,017
------------ --------------
Total assets $62,075,908 $ 56,024,088
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 4,506,248 $ 3,678,246
Interest-bearing 50,617,928 43,448,200
------------ --------------
Total deposits 55,124,176 47,126,446
Accrued interest payable 117,033 108,888
Securities sold under agreements to repurchase 62,545 280,667
Note payable 1,633,516 3,578,493
Other liabilities 56,492 45,964
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Total liabilities 56,993,762 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) ( 120,491) (322,518)
------------ --------------
5,163,028 4,961,001
Accumulated other comprehensive income (80,882) (77,371)
------------ --------------
Total stockholders' equity 5,082,146 4,883,630
------------ --------------
Total liabilities and stockholders' equity $62,075,908 $ 56,024,088
============ ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
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<TABLE>
<CAPTION>
EASTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ----------------------
2000 1999 2000 1999
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Interest revenue
Loans, including fees $1,170,706 $866,152 $2,227,833 $1,633,089
Investment securities 76,312 63,111 144,540 135,770
Federal funds sold 12,260 15,629 41,416 78,028
---------- -------- ---------- ----------
Total interest revenue 1,259,278 944,892 2,413,789 1,846,887
Interest expense 567,022 423,570 1,101,127 870,247
---------- -------- ---------- ----------
Net interest income 692,256 521,322 1,312,662 976,640
Provision for loan losses 65,331 18,000 119,264 36,000
---------- -------- ---------- ----------
Net interest income after
provision for loan losses 626,925 503,322 1,193,398 940,640
---------- -------- ---------- ----------
Other operating revenue 57,189 48,715 112,452 87,023
---------- -------- ---------- ----------
Other expenses
Salaries and benefits 285,365 272,265 565,960 524,462
Occupancy 24,157 16,400 49,293 33,831
Furniture and equipment 23,289 19,626 50,413 37,786
Other operating 174,070 139,306 307,558 258,916
---------- -------- ---------- ----------
Total operating expenses 506,881 447,597 973,224 854,995
---------- -------- ---------- ----------
Income before income taxes 177,233 104,440 332,626 172,668
Income taxes 75,600 34,872 130,600 58,672
---------- -------- ---------- ----------
Net income $ 101,633 $ 69,568 $ 202,026 $ 113,996
========== ======== ========== ==========
Earnings per common share - basic $ 0.18 $ 0.12 $ 0.36 $ 0.20
========== ======== ========== ==========
Earnings per common share - diluted $ 0.17 $ 0.12 $ 0.35 $ 0.19
========== ======== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
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<TABLE>
<CAPTION>
EASTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 2000 1999
------------ ------------
<S> <C> <C>
Interest received $ 2,338,528 $ 1,833,801
Other revenue received 112,452 19,813
Cash paid for operating expenses (903,346) (877,444)
Interest paid (1,092,982) (888,672)
Taxes paid (123,000) 0
------------ ------------
331,652 87,498
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for premises, equipment and software (28,945) (62,326)
Net loans to customers (5,930,910) (6,314,050)
Receipt of funds held in escrow 0 1,175,000
Proceeds from sales/maturities of investments 691,778 1,721,697
Purchase of investment securities (945,232) (1,128,113)
Proceeds from sale of other real estate owned 0 61,699
Purchase of other real estate owned 0 (60,450)
------------ ------------
(6,213,309) (4,606,543)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in time deposits 5,089,094 (3,551,399)
Net increase in other deposits 2,911,907 261,402
Net decrease in securities sold under agreements
to repurchase (218,122) (170,563)
Net proceeds from borrowings (1,944,977) 1,009,193
------------ ------------
5,837,902 (2,451,367)
------------ ------------
NET INCREASE (DECREASE) IN CASH (43,755) (6,970,412)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,401,062 8,246,585
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,357,307 $ 1,276,173
============ ============
</TABLE>
3
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<TABLE>
<CAPTION>
EASTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Six Months Ended
June 30,
-----------------------
2000 1999
------------ ---------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED (USED) FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 202,026 $113,996
Adjustments to reconcile net income to net cash
provided (used) from operating activities:
Depreciation and amortization 56,843 44,790
Provision for loan losses 119,264 36,000
Loans originated for sale (2,424,340) 0
Proceeds from loan sales 2,301,340 0
Decrease (increase) in accrued interest receivable
and other assets (52,398) (31,126)
Increase (decrease) in operating accounts payable and
other liabilities 18,674 (75,777)
Deferred loan origination fees (27,065) (2,764)
Deferred Income taxes 130,600 0
Loss on sale of securities 9564 0
Investment amortization, net of accretion (2,856) 2,379
------------ ---------
$ 331,652 $ 87,498
============ =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<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
six months ended June 30, 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:
Six Months Ended
June 30,
2000 1999
--------- ---------
Net Income $202,026 $113,996
Unrealized gain (loss) on investment
securities available for sale, net of
income taxes (3,511) (47,080)
--------- ---------
Comprehensive Income $198,515 $ 66,916
========= =========
5
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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.
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, travelers 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 June 30, 2000, was
$101,663, compared to $69,568 during the corresponding period of 1999. Net
income for the six months ended June 30, 2000, was $202,026, compared to
$113,996 for the corresponding period of 1999. Net income before income taxes
was $177,233 for the three months ended June 30, 2000, compared to $104,440
during the corresponding period of 1999. Net income before income taxes was
$332,626 for the six months ended June 30, 2000, compared to $172,668 during the
corresponding period of 1999.
The increase in earnings before income taxes for the six month period ended
June 30, 2000 can be attributed to an increase in net interest income of
approximately $336,000 and an increase of approximately $25,000 in other
operating income, offset by an increase of approximately $83,000 in provision
for loan losses and approximately $118,000 in total operating expenses. The
increase in net interest income is primarily due to an increase of approximately
$595,000 in interest earned on the growth in the loan portfolio and increasing
yields, offset by an increase of approximately $231,000 in interest paid on
deposit accounts due to growth in deposits and rising rates. The increase in
total operating expenses is primarily attributed to an increase in salaries and
benefits of approximately $41,000 and an increase in other operating expenses of
$49,000. Occupancy expenses and furniture and equipment expenses increased
approximately $28,000 due to the opening of the Denton branch in September 1999.
6
<PAGE>
The Bank's loan portfolio increased from $45.9 million at December 31,
1999, to $51.8 million at June 30, 2000. The Bank's provision for loan losses
was $65,331 for the quarter ended June 30, 2000, and $119,264 for the six months
ended June 30, 2000, compared to $18,000 for the quarter ended June 30, 1999,
and $36,000 for the six months ended June 30, 1999.
The allowance for loan losses was $731,553 at June 30, 2000, or 1.39% of
total loans, compared to $670,000 at March 31, 2000, or 1.38% of total loans,
and $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 $59,284 to $506,881 for the quarter ended
June 30, 2000, from $447,597 for the quarter ended June 30, 1999. The increase
was primarily related to the increases in salaries and benefits of $13,100 and
an increase in occupancy expenses and furniture and equipment expenses of
$11,420 due to the opening of the Denton branch in September 1999. The increase
in salaries and benefits was due to annual salary increases and two new
part-time employees hired for the Main Office since the second quarter of 1999.
Other operating expenses increased $34,764.
Return on average assets and average equity, on an annualized basis, for
the quarter ended June 30, 2000, was .68% and 8.21%, respectively, compared to
.59% and 6.26%, respectively, for the same quarter of 1999. Return on average
assets and average equity, on an annualized basis, for the six months ended June
30, 2000, was .74% and 9.18%, respectively, compared to .56% and 6.14%,
respectively, for the same quarter of 1999. Earnings per share on a fully
diluted basis for the quarter and the six months ended June 30, 2000 was $.17
and $.35, respectively, compared to $.12 and $.19, respectively, for the same
periods of 1999.
The Company's assets ended the second quarter of 2000 at $62.1 million, an
increase of $6.1 million, or 10.8%, from $56.0 million at December 31, 1999.
This increase can be attributed primarily to the $5.8 million increase in the
Bank's loan portfolio. 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 profitability 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 $8.0 million increase in deposits from December 31, 1999, to June 30,
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 $5.8
million. The Company's primary source of liquidity is cash on hand plus
short-term investments. At June 30, 2000, the Company's liquid assets totaled
$7.8 million, or 12.5% 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 currently 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 of the $1.5 million line of credit is pledged to secure repurchase
agreements. If additional liquidity is needed, the Bank will sell
participations in its loans.
7
<PAGE>
The capital of the Company and the Bank exceeded all prescribed regulatory
capital guidelines at June 30, 2000. At June 30, 2000, the Tier 1 leverage
ratio for the Bank was 8.55%. At June 30, 2000, the Bank had a risk-weighted
total capital ratio of 11.75%, and a Tier 1 risk-weighted capital ratio of
10.49%. 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.
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 $1,689 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.
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.
The Company held its Annual Meeting of Stockholders on May 17, 2000, at
which meeting all five of management's nominees for the Board of Directors were
reelected, with all five individuals reelected to serve as Class III Directors
for a three-year term. The individuals reelected as Class III Directors were:
Jack H. Bishop, receiving 397,441 votes for and no votes against or withheld,
with no votes abstaining; David F. Lesperance, receiving 397,441 votes for and
no votes against or withheld, with no votes abstaining; Vinodrai Mehta,
receiving 397,441 votes for and no votes against or withheld, with no votes
abstaining; Myron J. Szczukowski, receiving 386,481 votes for and 10,960 votes
against or withheld, with no votes abstaining; and Jerry L. Wilcoxon, receiving
385,481 votes for and 11,960 votes against or withheld, with no votes
abstaining. Class I and Class II Directors continuing in office are: Sheila W.
Bateman, J. Parker Callahan, Jr., J. Fredrick Heaton, William C. Hill, W. David
Hill, R. Michael S. Menzies, Sr., Roger A. Orsini, and Mahmood S. Shariff.
8
<PAGE>
ITEM 5. OTHER INFORMATION.
Any stockholder of the Company who intends to present a proposal at the
2001 Annual Meeting of Stockholders, which proposal is not included in the
Company's Proxy Statement, must deliver notice of such proposal to the Company
no later than March 1, 2001. If the proposing stockholder fails to deliver
notice of such proposal to the Company by such date, then the person or persons
designated as proxies in connection with the Company's solicitation of proxies
shall have the discretionary voting authority to vote the shares of the
Company's Common Stock represented by the proxy cards returned to the Company in
accordance with their judgment on such matter when such proposal is presented at
the 2001 Annual Meeting. Any such notice of a stockholder proposal must be made
in writing addressed to Sheila W. Bateman, Easton Bancorp, Inc., P.O. Box 629,
Easton, Maryland 21601.
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 June 30, 2000.
9
<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: August 10, 2000 By: /s/ R. Michael S. Menzies, Sr.
--------------- -------------------------------
R. Michael S. Menzies, Sr.
President
Date: August 10, 2000 By: /s/ Pamela A. Mussenden
--------------- -------------------------------
Pamela A. Mussenden
Assistant Treasurer
(Principal Financial Officer)
10
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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>
