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: September 30, 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
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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
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(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 November 1, 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
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EASTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2000 1999
------------ ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 1,699,592 $ 2,576,335
Federal funds sold 2,671,966 824,727
Investment in Federal Home Loan Bank stock 204,200 179,000
Investment securities available-for-sale 4,712,586 4,203,828
Loans held for sale 284,000 70,000
Loans, less allowance for credit losses of
$750,885 and $610,396, respectively 52,986,728 45,936,298
Premises and equipment, net 1,684,810 1,694,652
Intangible assets, net 0 15,691
Accrued interest receivable 407,380 300,536
Deferred income taxes 64,526 177,017
Other assets 102,875 46,004
------------ ------------
Total assets $64,818,663 $56,024,088
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 5,476,170 $ 3,678,246
Interest-bearing 52,172,783 43,448,200
------------ ------------
Total deposits 57,648,953 47,126,446
Accrued interest payable 168,941 108,888
Securities sold under agreements to repurchase 56,549 280,667
Note payable 1,631,819 3,578,493
Other liabilities 66,605 45,964
------------ ------------
Total liabilities 59,572,867 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) 15,537 (322,518)
------------ ------------
5,299,056 4,961,001
Accumulated other comprehensive income (53,260) (77,371)
------------ ------------
Total stockholders' equity 5,245,796 4,883,630
------------ ------------
Total liabilities and stockholders' equity $64,818,663 $56,024,088
============ ============
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See accompanying Notes to Consolidated Financial Statements.
1
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<CAPTION>
EASTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------- ---------------------------
2000 1999 2000 1999
------------------- ------------------- -------------- -----------
<S> <C> <C> <C> <C>
Interest revenue
Loans, including fees $ 1,240,054 $ 1,033,790 $ 3,467,887 $2,666,879
Investment securities 77,868 65,576 222,408 201,346
Due from banks 136 0 136 0
Federal funds sold 51,028 41,113 92,444 119,141
------------------- ------------------- -------------- -----------
Total interest revenue 1,369,086 1,140,479 3,782,875 2,987,366
Interest expense 675,368 483,768 1,776,495 1,354,015
------------------- ------------------- -------------- -----------
Net interest income 693,718 656,711 2,006,380 1,633,351
Provision for loan losses 47,670 (134,547) 166,934 (98,547)
------------------- ------------------- -------------- -----------
Net interest income after
provision for loan losses 646,048 791,258 1,839,446 1,731,898
------------------- ------------------- -------------- -----------
Other operating revenue 69,395 119,542 181,847 206,565
------------------- ------------------- -------------- -----------
Other expenses
Salaries and benefits 295,377 304,569 861,337 829,031
Occupancy 33,135 18,847 82,428 52,678
Furniture and equipment 25,654 19,432 76,067 57,218
Other operating 144,578 135,185 452,136 394,101
------------------- ------------------- -------------- -----------
Total operating expenses 498,744 478,033 1,471,968 1,333,028
------------------- ------------------- -------------- -----------
Income before income taxes 216,699 432,767 549,325 605,435
Income taxes 80,670 147,895 211,270 206,567
------------------- ------------------- -------------- -----------
Net income $ 136,029 $ 284,872 $ 338,055 $ 398,868
=================== =================== ============== ===========
Earnings per common share - basic $ 0.24 $ 0.51 $ 0.60 $ 0.71
=================== =================== ============== ===========
Earnings per common share - diluted $ 0.24 $ 0.47 $ 0.59 $ 0.67
=================== =================== ============== ===========
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See accompanying Notes to Consolidated Financial Statements.
2
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<CAPTION>
EASTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
---------------------------------
<S> <C> <C>
2000 1999
------------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 3,649,218 $ 2,913,211
Other revenue received 166,691 242,866
Cash paid for operating expenses (1,394,960) (1,331,566)
Loan sales net proceeds (214,000) 0
Taxes pad (111,200) 0
Interest paid (1,716,442) (1,353,870)
------------------- ------------
379,307 470,641
------------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for premises, equipment and software (72,549) (109,420)
Loans originated, net of principal repayments (7,192,249) (9,170,334)
Purchase of investment securities (3,855,909) (1,473,035)
Proceeds from sales/maturities of investments 3,360,181 1,733,725
Receipt of funds held in escrow 0 1,175,000
Proceeds from sale of other real estate owned 0 61,699
Purchase of other real estate owned 0 (60,450)
------------------- ------------
(7,760,526) (7,842,815)
------------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in time deposits 5,130,516 213,758
Net increase in other deposits 5,391,991 1,795,396
Net increase in other debt 0 578,687
Net proceeds from other borrowings (1,946,674) 0
Net increase (decrease) in securities sold under
agreements to repurchase (224,118) (209,804)
------------------- ------------
8,351,715 2,378,037
------------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 970,496 (4,994,137)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,401,062 8,246,585
------------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,371,558 $ 3,252,448
=================== ============
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3
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<CAPTION>
EASTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Nine Months Ended
September 30,
------------------------------
2000 1999
------------------- ---------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 338,055 $ 398,868
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 87,051 71,265
Provision for loan losses 166,934 (98,547)
Decrease (increase) in accrued interest receivable and
other assets (152,684) (53,734)
Increase (decrease) in operating accounts payable and
other liabilities 80,641 (43,611)
Increase (decrease) in deferred loan origination fees (25,115) (11,449)
Decrease in deferred income taxes 100,070 206,568
Securities amortization/accretion, net (12,036) 2,530
Loss on securities sold 10,338 0
Loans originated for sale (3,777,840) 0
Proceeds from loan sales 3,563,840 0
Gain on sale of other real estate 0 (1,249)
------------------- ---------
$ 379,307 $470,641
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</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
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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
nine months ended September 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:
Nine Months Ended
September 30,
-------------------
2000 1999
-------- ---------
Net Income $338,055 $398,868
Unrealized gain (loss) on
investment Securities
available for sale, net of
income taxes 24,111 (51,798)
-------- ---------
Comprehensive Income $362,166 $347,070
======== =========
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
unaudited 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 September 30, 2000,
was $136,029, compared to $284,872 during the corresponding period of 1999. Net
income for the nine months ended September 30, 2000, was $338,055, compared to
$398,868 for the corresponding period of 1999. Net income before income taxes
was $216,699 for the three months ended September 30, 2000, compared to
$432,767 during the corresponding period of 1999. Net income before income
taxes was $549,325 for the nine months ended September 30, 2000, compared to
$605,435 during the corresponding period of 1999.
6
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The decrease in earnings before income taxes for the nine month period
ended September 30, 2000, can be attributed to an increase of approximately
$265,000 in the provision for loan losses, an increase of approximately $139,000
in total operating expenses and a decrease of approximately $25,000 in other
operating income, offset by an increase in net interest income of approximately
$373,000. The increase in the provision for loan losses is primarily the result
of a reduction in the provision in 1999 of approximately $197,000 as a result of
the recovery by the Bank in 1999 of a significant amount on a loan that had been
charged off in 1995. In addition, the Bank has continued to increase the
allowance for loan losses in 2000 as the loan portfolio has continued to grow.
The increase in total operating expenses is primarily attributed to an increase
in salaries and benefits of approximately $32,000, an increase in occupancy
expenses of $30,000, an increase of $19,000 in furniture and equipment expense
and an increase in other operating expenses of approximately $58,000. These
increases are due to the opening of the branch office in Denton, Maryland in
October 1999. The increase in net interest income is primarily due to an
increase of approximately $801,000 on the interest earned on growth in the loan
portfolio and increasing yields, offset by an increase of approximately $422,000
in interest paid on deposit accounts due to growth in deposits and rising
interest rates.
The Bank's loan portfolio increased from $45.9 million at December 31,
1999, to $53.0 million at September 30, 2000. The allowance for loan losses was
$750,885 at September 30, 2000, or 1.40% of total loans, compared to $731,553 at
June 30, 2000, or 1.39% of total loans, and $610,396 at December 31, 1999, or
1.31% of total loans. In September 1999, the Bank received a recovery of
$408,069 on a loan that was charged off in 1995. Of the amount recovered,
$341,988 was applied to increase the allowance for loan losses and the balance
of $66,081 was credited to other income. The Bank subsequently analyzed its
allowance for loan losses and determined that the allowance should be reduced,
resulting in a reduction in the allowance of $196,547, and a corresponding
reduction in the 1999 provision for loan losses. As a result, the Bank's
provision for loan losses was an expense of $47,670 for the three months ended
September 30, 2000, and an expense of $166,934 for the nine months ended
September 30, 2000, compared to a credit of $134,547 for the three months ended
September 30, 1999, and a credit of $98,547 for the nine months ended September
30, 1999. 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.
Total operating expenses increased $20,711 to $498,744 for the quarter
ended September 30, 2000, from $478,033 for the quarter ended September 30,
1999. The increase was primarily related to the increase in occupancy expenses
of $14,288 and the increase in furniture and equipment expenses of $6,222. The
increase in occupancy expenses and furniture and equipment expenses was due to
the opening of the branch office in Denton, Maryland in October 1999. The
increase in occupancy expenses was also caused by one of the tenants in the
Bank's main facility vacating the premises. A decision was made not to obtain
another tenant and for the Bank to use the space.
Return on average assets and average equity, on an annualized basis, for
the quarter ended September 30, 2000, was .84% and 10.48%, respectively,
compared to 1.64% and 18.72%, respectively, for the same quarter of 1999.
Return on average assets and average equity, on an annualized basis, for the
nine months ended September 30, 2000, was .75% and 9.99%, respectively, compared
to 1.06% and 13.06%, respectively, for the same period of 1999. Earnings per
share on a fully diluted basis for the quarter and the nine months ended
September 30, 2000 were $.24 and $.59, respectively, compared to $.47 and $.67,
respectively, for the same periods of 1999.
The Company's assets ended the third quarter of 2000 at $64.8 million, an
increase of $8.8 million, or 15.7%, from $56.0 million at December 31, 1999.
This increase can be attributed primarily to the increase in the Bank's loans of
$7.1 million and an increase in federal funds sold of $1.8 million. The Company
repaid approximately $2.0 million in borrowings from the Federal Home Loan Bank
of Atlanta, reducing total borrowings from the Federal Home Loan Bank of Atlanta
to $1.6 million. These borrowings 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.
7
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Liquidity and Sources of Capital
------------------------------------
The $10.5 million increase in deposits from December 31, 1999, to September
30, 2000, is primarily reflected in the increase of the Bank's loans of $7.1
million, the $1.8 million increase in federal funds sold, and the $2.0 million
decrease in borrowings from the Federal Home Loan Bank of Atlanta. The Company's
primary source of liquidity is cash on hand plus short term investments. At
September 30, 2000, the Company's liquid assets totaled $8.8 million, or 13.6%
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 $5 million reverse repurchase
line of credit and $500,000 unsecured federal funds line of credit the Company
has from another correspondent bank, of which $50,000 is pledged to secure
repurchase agreements and $250,000 is pledged to secure a certificate of
deposit. If additional liquidity is needed, the Bank will sell participations
in its loans.
The capital of the Company and the Bank exceed all prescribed regulatory
capital guidelines at September 30, 2000. At September 30, 2000, the Tier 1
leverage ratio for the Bank was 8.22%. At September 30, 2000, the Bank had a
risk-weighted total capital ratio of 11.73%, and a Tier 1 risk-weighted capital
ratio of 10.48%. 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.
Dividends
---------
In the past, the Company and the Bank were unable to pay dividends due to
regulations that require the recapture of certain capital invested in the
formation and start-up of the Bank. Earnings over the last few years have
produced the capital levels which, on October 23, 2000, allowed the Board of
Directors of the Company to declare a $0.05 per share cash dividend on the
Company's outstanding shares of common stock. The dividend will be paid to
shareholders of record on October 31, 2000, and the Company anticipates the
payment date for the dividend will be on or about November 15, 2000. The
declaration and payment of future dividends will depend upon the Company's
financial performance and capital requirements.
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 an increase in net
interest income of $12,021 if all assets and liabilities maturing within that
period were adjusted for the rate change. If prime were to increase 100 basis
points, the Company would experience a decrease in net interest income of
$33,676 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.
8
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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 a vote of security holders during the
quarter ended September 30, 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 September 30, 2000.
9
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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: November 3, 2000 By: /s/ R. Michael S. Menzies, Sr.
------------------ -------------------------------------
R. Michael S. Menzies, Sr.
President
Date: November 3, 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).
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