SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. ________________)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Easton Bancorp, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
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<PAGE>
EASTON BANCORP, INC.
501 IDLEWILD AVENUE
EASTON, MARYLAND 21601
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 17, 2000
This Proxy Statement is furnished in connection with the solicitation of
proxies for use at the Annual Meeting of Stockholders (the "Meeting") of Easton
Bancorp, Inc. (the "Company") to be held on May 17, 2000, at 4:00 p.m. and at
any adjournment thereof, for the purposes set forth in this Proxy Statement.
THE ACCOMPANYING PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY.
The Meeting shall be held at the Company's principal executive offices which are
located at 501 Idlewild Avenue, Easton, Maryland 21601. This Proxy Statement
and the accompanying form of Proxy were first mailed to the stockholders on or
about April 12, 2000.
VOTING AND REVOCABILITY OF PROXY APPOINTMENTS
The Company has fixed March 17, 2000, as the record date (the "Record
Date") for determining the stockholders entitled to notice of and to vote at the
Meeting. The Company's only class of stock is its Common Stock, par value $0.10
per share (the "Common Stock"). At the close of business on the Record Date,
there were outstanding and entitled to vote 560,318 shares of Common Stock of
the Company, with each share being entitled to one vote. There are no
cumulative voting rights. A majority of the outstanding shares of Common Stock
represented at the Meeting, in person or by proxy, will constitute a quorum.
All proxies will be voted in accordance with the instructions contained in
the proxies. If no choice is specified, proxies will be voted "FOR" the
election to the Board of Directors of all the nominees listed below under
"ELECTION OF DIRECTORS," "FOR" the ratification of the appointment of Rowles &
Company, LLP as independent auditors for the Company for the fiscal year ending
December 31, 2000, and, at the proxy holders' discretion, on any other matter
that may properly come before the Meeting. Any stockholder may revoke a proxy
given pursuant to this solicitation prior to the Meeting by delivering an
instrument revoking it or by delivering a duly executed proxy bearing a later
date to the Secretary of the Company. A stockholder may elect to attend the
Meeting and vote in person even if he or she has a proxy outstanding.
Management of the Company is not aware of any other matter to be presented
for action at the Meeting other than those mentioned in the Notice of Annual
Meeting of Stockholders and referred to in this Proxy Statement. If any other
matters come before the Meeting, it is the intention of the persons named in the
enclosed Proxy to vote on such matters in accordance with their judgment.
SOLICITATION
The costs of preparing, assembling and mailing the proxy materials and of
reimbursing brokers, nominees, and fiduciaries for the out-of-pocket and
clerical expenses of transmitting copies of the proxy materials to the
beneficial owners of shares held of record will be borne by the Company.
Certain officers and regular employees of the Company or its wholly-owned
subsidiary, without additional compensation, may use their personal efforts, by
telephone or otherwise, to obtain proxies in addition to this solicitation by
mail. The Company expects to reimburse brokers, banks, custodians and other
nominees for their reasonable out-of-pocket expenses in handling proxy materials
for beneficial owners of the Common Stock.
<PAGE>
ELECTION OF DIRECTORS
Article Seven of the Company's Articles of Incorporation and Section 3.2 of
the Company's Bylaws provide that the Board of Directors shall be divided into
three classes with each class to be as nearly equal in number as possible.
These provisions also provide that the three classes of directors are to have
staggered terms so that the terms of only approximately one-third of the Board
members will expire at each annual meeting of stockholders. The Company
currently has thirteen directors with four each in Class I and Class II, and
five in Class III.
In accordance with Section 3.8 of the Company's Bylaws, in July 1999 the
Board of Directors increased the size of the Board to thirteen members from
twelve members and elected Myron J. Szczukowski, Jr., M.D. to fill the vacancy
resulting from the newly created directorship and to serve as the new Class III
director until the next annual meeting of stockholders. Accordingly, in
accordance with Section 3.8 of the Company's Bylaws, at the Meeting the
stockholders shall elect a director to serve in this newly created Class III
directorship in connection with the election of the Class III directors.
The current Class I directors are Sheila W. Bateman, W. David Hill, D.D.S.,
R. Michael S. Menzies, Sr., and Mahmood S. Shariff, M.D. The terms of the Class
I directors will expire at the 2001 Annual Meeting of Stockholders. The current
Class II directors are J. Parker Callahan, Jr., J. Fredrick Heaton, D.M.D.,
William C. Hill, and Roger A. Orsini, M.D. The terms of the Class II directors
will expire at the 2002 Annual Meeting of Stockholders. The current Class III
directors are Jack H. Bishop, D.D.S., David F. Lesperance, Vinodrai Mehta, M.D.,
Myron J. Szczukowski, Jr., M.D., and Jerry L. Wilcoxon, C.P.A. The terms of the
Class III directors will expire at the Meeting and each of these five current
Class III directors has been nominated for reelection and will stand for
election at the Meeting for a three-year term. The officers of the Company are
elected annually by the Board of Directors following the annual meeting of
stockholders and serve for terms of one year or until their successors are duly
elected and qualified.
It is the intention of the persons named as proxies in the accompanying
proxy to vote FOR the election of the nominees identified below to serve for a
three-year term, expiring at the 2003 Annual Meeting of Stockholders. If any
nominee is unable or fails to accept nomination or election (which is not
anticipated), the persons named in the proxy as proxies, unless specifically
instructed otherwise in the proxy, will vote for the election in his or her
stead of such other person as the Company's existing Board of Directors may
recommend.
The directors shall be elected by a plurality of the votes cast at the
Meeting. Abstentions and broker non-votes will not be considered to be either
affirmative or negative votes.
The table below sets forth certain information about the nominees,
including the nominee's age, position with the Company, and position with Easton
Bank & Trust Company (the "Bank"), the Company's wholly-owned banking
subsidiary. All of the nominees are currently serving as directors of the
Company and the Bank and are nominated as Class III directors of the Company,
except for Myron J. Szczukowski, Jr., M.D., who is only serving as a director of
the Company. Each of the nominees has been a director of the Company since its
formation in 1991, except for Myron J. Szczukowski, Jr., M.D., who was first
elected as a director of the Company in July 1999.
<TABLE>
<CAPTION>
Name Age Position with the Company Position with the Bank
- -------------------- --- ------------------------- ----------------------
<S> <C> <C> <C>
Jack H. Bishop 55 Director Director
David F. Lesperance 46 Director Director
Vinodrai Mehta 58 Director Director
Myron J. Szczukowski 47 Director None
Jerry L. Wilcoxon 39 Director, Treasurer Director
</TABLE>
JACK H. BISHOP, D.D.S., 55, serves as a Class III director of the Company
and a director of the Bank. Dr. Bishop has been practicing general dentistry in
Easton, Maryland since 1972. He attended Albright College for his dental
prerequisites and was graduated from the University of Maryland Baltimore
College of Dental Surgery in 1969. He served as a Captain in the U.S. Army
Dental Corps before starting private practice. He is a member of the American
Dental Association, Maryland State Dental Association, and Eastern Shore Dental
Society. Dr. Bishop is an active participant in the Maryland Foundation of
Dentistry for the Handicapped, in which he donates his time and facilities to
elderly, poor, or handicapped individuals for the betterment of their health.
He actively supports the American Heart Association and Talbot County YMCA. Dr.
Bishop is a member of the Oxford United Methodist Church where he is chairman of
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the Administrative Council. In the past, Dr. Bishop has been a partner in an
insurance and real estate company as well as a company selling building
supplies. He maintains several commercial and residential real estate holdings.
DAVID F. LESPERANCE, 46, serves as a Class III director of the Company and
a director of the Bank. Mr. Lesperance is the owner and president of David
Lesperance, Inc., doing business as Lesperance Construction Company. The
company builds residential and commercial projects in Talbot, Queen Anne, and
Dorchester counties. Prior to starting his own construction business, Mr.
Lesperance was employed by Willow Construction and Charles E. Brohawn
Construction Company. Mr. Lesperance has been in the construction field for 27
years.
VINODRAI MEHTA, M.D., 58, has served as a Class III director of the Company
and a director of the Bank since 1992. Dr. Mehta has been practicing internal
medicine at Dorchester General Hospital in Cambridge, Maryland since 1975. He
attended University Tutorial College, London, England, and later attended
Medical College of Rhinische-Friedrich-Wilhelm University in Bonn, Germany. He
received his M.D. in 1968. After working for a year at St. Paul Hospital in
Addis Ababa, Ethiopia, he came to the United States. He completed his training
program for internal medicine at Greater Baltimore Medical Center and Union
Memorial Hospital, both in Baltimore, Maryland. Since 1975, he has been a
member of the Medical and Surgical Society of Maryland.
MYRON J. SZCZUKOWSKI, JR., M.D., 47, has served as a Class III director of
the Company since July 1999. He also served as a director of the Bank from its
formation in 1991 until July 1999. Dr. Szczukowski is a principal and Vice
President of Delmarva Orthopaedic Clinic, a position he has held since 1986.
Delmarva Orthopaedic Clinic is a multi-specialty orthopaedic clinic located in
Easton, Maryland. He is a graduate of Emory University in Atlanta, Georgia,
with a degree in biology. He attended the University of Tennessee Center for
Health Sciences in Memphis, Tennessee, and graduated with a degree of Doctor of
Medicine in December 1978. He did an internship in general surgery at the
Ochsner Clinic in New Orleans, Louisiana. In 1980, he returned to Atlanta,
Georgia and Emory University to complete a four-year residency in orthopaedic
surgery. He was in private practice in Atlanta for two years and subsequently
moved to Easton, Maryland, where he continues as a Board Certified Orthopaedic
Surgeon. Dr. Szczukowski is also Medical Director of Total Joint Center at
Easton Memorial Hospital, a member of the medical staff at Easton Memorial
Hospital and Dorchester General Hospital, and a faculty instructor of
orthopaedic surgery at Johns Hopkins School of Medicine. Dr. Szczukowski has
added proficiency in sports medicine. His charitable activities include serving
on the Board of Directors of the local YMCA and on the Board of the Talbot
Lacrosse Association.
JERRY L. WILCOXON, C.P.A., 39, serves as a Class III Director and Treasurer
of the Company and as a Director of the Bank. Mr. Wilcoxon is a certified
public accountant and is currently Chief Financial Officer of Black Oak Computer
Service, Inc., a technology consulting company located in Salisbury, Maryland.
Prior to that he was a principal of Caulk Management Company, Inc., where he had
served as Chief Financial Officer from August 1989 until March 1998. Prior to
that time, he spent five years as controller for Pioneer Transportation Systems
in Hurlock, Maryland, after a two-year career in public accounting. Mr.
Wilcoxon was born in Baltimore, Maryland, and is a graduate of Shepherd College
with a degree in Accounting. Locally he has served on the Board of Governors of
the Talbot County YMCA, and is currently the Treasurer of the Board of Governors
of the Talbot Country Club. Residing in Easton since 1983, he is a member of
the St. Peter and Paul Roman Catholic Church and is a member of the Talbot
Country Club.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF
THE FIVE NOMINEES NAMED ABOVE.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth the name of each director and executive officer of
the Company, in addition to the directors discussed above who are up for
reelection at the Meeting, his or her age, positions held, and a brief
description of his or her principal occupation and business experience for at
least the preceding five years. Except as otherwise indicated below, each of
the directors has been a director of the Company since its formation in 1991.
None of the directors are related, except that William C. Hill is the father of
W. David Hill.
3
<PAGE>
SHEILA W. BATEMAN, 53, serves as a Class I director and Secretary of the
Company and as a director and Secretary of the Bank. Mrs. Bateman is chief
administrative officer of Caulk Management Company which manages various
companies. She was graduated from Goldey Beacom Junior College in 1967 with an
AA degree. She is a former owner of a word processing and document preparation
service. Mrs. Bateman is a partner in HTB Limited Partnership, a real estate
partnership, and is a director and officer of William Hill Manor, Inc. She is
also an officer in seven other private real estate-related businesses. Mrs.
Bateman is a member of Certified Professional Secretary Associates. Her
charitable activities include the American Heart Association and serving on the
Board of Talbot Philanthropies, Inc. and Mid Atlantic Maritime Festival, Inc.
J. PARKER CALLAHAN, JR., 67, has served as a Class II director of the
Company since June 1996 and a director of the Bank since its formation. Mr.
Callahan is a farmer and a life-long resident of Talbot County and Easton,
Maryland. Since completing high school in 1952, Mr. Callahan has operated a
diversified farming operation. In recent years, he has expanded his operation
and now is an owner and trainer of race horses. Mr. Callahan also was recently
involved in the development of a residential community.
J. FREDRICK HEATON, D.M.D., 52, serves as a Class II director of the
Company and a director of the Bank. Dr. Heaton is a dentist specializing in
endodontics, practicing in Easton, Maryland. Dr. Heaton is a 1970 graduate of
the U.S. Naval Academy with a B.S. in Naval Science and a minor in Mechanical
Engineering. He served on active duty for five years in nuclear submarines. He
received his D.M.D. degree from the Medical University of South Carolina in
1979. In 1981, he completed advanced specialty training at the University of
Maryland Dental School in Baltimore and was awarded a Post-Graduate Certificate
in Endodontics. Dr. Heaton has practiced in Easton since 1981. He is active in
state and local dental societies and is past president of the Maryland State
Association of Endodontists and the Eastern Shore Dental Society. Dr. Heaton
has served on the Board of Trustees for the Maryland State Dental Association
and is past chairman of the Maryland Dental Association's Council on Dental
Education. He is currently chairman of the Maryland State Dental Association's
Political Action Committee. On a local level, Dr. Heaton is a member of the
Easton Business Management Authority, Elks Lodge 1622, Habitat for Humanity,
Tred Avon Yacht Club, Chesapeake Bay Yacht Club, and Talbot Country Club.
WILLIAM C. HILL, 75, serves as a Class II director of the Company and a
director of the Bank. Since 1957, Dr. Hill has been president of Hill's Drug
Store, Inc., which owns and operates three drug stores in Easton, Maryland. He
is also vice president of William Hill Manor, Inc., a local retirement
community, along with being a partner in Idlewild Associates Limited Partnership
and Eastern Shore Retirement Associates. He served in the United States Marine
Corps and was graduated from the Philadelphia College of Pharmacy and Science.
Dr. Hill has served on the Advisory Board of Maryland National Bank and First
Annapolis Savings Bank. He has served as past president of the Eastern Shore
Pharmaceutical Association, the Maryland State Pharmaceutical Association, and
he received the 1992 Talbot County Businessman of the Year Award. He is an
active member of many other national and local organizations. Dr. Hill is a
native of Talbot County.
W. DAVID HILL, D.D.S., 58, serves as a Class I Director and Chief Executive
Officer of the Company and a director of the Bank. Dr. Hill has served as
Chairman of the Board of the Bank from the inception of the Company and the
Bank, except for the period from December 1994 until April 1995. Dr. Hill is
the majority stockholder and President of William Hill Manor, Inc., a continuing
care retirement community in Easton, Maryland, which serves the needs of the
elderly population through the provision of skilled nursing, convalescent and
rehabilitative care. Dr. Hill is the owner and president of the Manor Discovery
Center, a day care center; and a general partner in Idlewild Associates Limited
Partnership, a limited partnership that owns land and income-producing
properties. He is the president of Caulk Management Company and a director of
Hill's Drug Store, Inc. Dr. Hill donated land to the local Red Cross unit,
provided accommodations for the Talbot County Paramedics and is a member of the
Board of Directors of the Talbot County Paramedic Foundation, Inc. Dr. Hill is
the Chairman of the Advisory Board of the Talbot County YMCA and he has served
as a fundraiser for the Talbot County Branch of the American Heart Association,
Easton Memorial Hospital, and the Talbot County Historical Society. Dr. Hill
was voted the Small Business Person of the Year in 1989. He is a life-long
resident of Talbot County.
R. MICHAEL S. MENZIES, SR., 52, has served as a Class I director and
President of the Company and as a director and the President and Chief Executive
Officer of the Bank since May 1998. From November 1989 until May 1998, Mr.
Menzies served as the President and Chief Executive Officer of First Bank of
Frederick and First Frederick Financial Corporation and as the Chairman of the
Board of First Bank of Frederick for part of that time. Mr. Menzies graduated
with a B.A. in Economics from Randolph Macon College in 1970. He received his
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<PAGE>
CPA degree in 1974 and he has completed various advanced finance and banking
studies at Loyola College and The Darden School at The University of Virginia.
Mr. Menzies is actively involved in the community as a past director of the
Easton and Frederick Rotary Clubs, Vice Chairman of Easton Memorial Hospital,
President of the Frederick United Way, President of the Frederick Chamber of
Commerce, director of Frederick Memorial Hospital, President of the 5th District
Agricultural Bankers Association, and director of the Independent Community
Bankers of America. Mr. Menzies presently serves as director of the United Fund
of Talbot County, director of Pickering Creek Audubon Center, director of the
Talbot County Historical Society and President-Elect of the Talbot County
Chamber of Commerce.
ROGER A. ORSINI, M.D., 52, serves as a Class II Director of the Company and
a Director of the Bank. Dr. Orsini is a plastic and reconstructive surgeon and
has been in solo practice in Easton, Maryland since 1985. He is the owner of
Shore Aesthetic and Reconstructive Associates, a general plastic surgical
practice which includes aesthetic surgery, hand, head and neck surgery,
maxillofacial, microvascular and pediatric surgery. He received his Bachelor of
Science degree from Georgetown University and pursued graduate studies in
physiology, including marine biology at the University of Connecticut. Dr.
Orsini received his medical degree from the Medical College of Pennsylvania,
then served his internship at Presbyterian-University of Pennsylvania and went
on to complete his surgical residency at Thomas Jefferson Hospital, both in
Philadelphia. He then completed a fellowship in plastic and reconstructive
surgery at the Hospital of the University of Pennsylvania. Dr. Orsini has been
a member of the medical staff at The Memorial Hospital at Easton since 1985,
where he has served as Chairman of the Tissue Review Committee and served on
Rehabilitation, Cancer and Utilization Committees. He also completed a
year-long physician's management course sponsored by Memorial Hospital at
Easton. Dr. Orsini is a member of the American Society of Plastic and
Reconstructive Surgeons, Talbot County Medical Society, the American Medical
Association and the American Cleft Palate-Craniofacial Association. He is
licensed to practice medicine in the state of Maryland. He is the chairman and
coordinator of the Eastern Shore Cleft Lip and Palate Team dedicated to provide
care for children with cleft and craniofacial deformities no matter what their
financial status. He is the Head/Chief of the Department of Surgery at Memorial
Hospital in Easton. He is a Board Certified member of the American Society of
Plastic and Reconstructive Surgeons and a fellow of the American College of
Surgeons and a member of the American Society of Laser Medicine. Dr. Orsini was
a member of the Coalition of Ambulatory Care for the State of Maryland and was
the former head of the Governor's Task Force to Care for Eastern European
Refugees. He is also a member of the Talbot Country Club.
MAHMOOD S. SHARIFF, M.D., 63, has served as a Class I director of the
Company and a director of the Bank since 1992. Dr. Shariff is an internist and
a cardiologist. He has been in solo practice in Cambridge, Maryland since 1973.
He received his training in New York City. He is Board Certified in Internal
Medicine and Cardiology. He served as Assistant Professor of Clinical Medicine
at the Mount Sinai School of Medicine in New York City. Dr. Shariff is a Fellow
of the American College of Physicians and the American College of Cardiology.
He is a member of the medical staff at Dorchester General Hospital and Memorial
Hospital in Easton. He has been the Chief of Medicine for several years at
Dorchester General Hospital. He has also served in various other capacities on
the executive committee of the medical staff at Dorchester General Hospital and
is presently serving as the Chief of Medicine at Dorchester General Hospital.
He was elected and served on the board of directors of Dorchester General
Hospital for a six-year period.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth for the fiscal years ended December 31,
1997, 1998 and 1999, the cash compensation paid or accrued by the Company and
the Bank, as well as certain other compensation paid or accrued for those years,
for services in all capacities to the chief executive officers of the Company
and the Bank. Other than R. Michael S. Menzies, Sr. and Jeffrey N. Heflebower,
no executive officer of the Company or the Bank earned total annual
compensation, including salary and bonus, for the fiscal year ended December 31,
1999, of $100,000 or more.
5
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
---------------------------------------
Name and Securities
Principal Underlying
Position Year Salary ($)(1) Bonus ($) Options (#)
- ----------------------------- ------------------- -------------- ---------- -----------
<S> <C> <C> <C> <C>
W. David Hill -
Chief Executive Officer 1999 $ 1,350 $ -- 0
of the Company;
Chairman of the Board 1998 $ 1,375 $ -- 0
of the Company and the
Bank 1997 $ 1,025 $ -- 0
R. Michael S. Menzies, Sr.(2) 1999 $ 100,000 $ -- 56,000
President of the
Company; President 1998 $ 66,667 $ -- 0
and Chief Executive
Officer of the Bank 1997 $ -- $ -- 0
1999 $ 80,000 $ 22,000 0
Jeffrey N. Heflebower (3) - 1998 $ -- $ -- 0
Executive Vice President
of the Bank 1997 $ -- $ -- 0
<FN>
(1) No directors' fees were paid to Mr. Menzies or Mr. Heflebower for their
service on the Board of Directors of the Company or the Bank. Dr. Hill received $1,350
during 1999, $1,375 during 1998 and $1,025 during 1997 for his attendance at meetings of
committees of the Board of Directors of the Bank.
(2) Effective May 1, 1998, R. Michael S. Menzies, Sr. was hired by the Company to
serve as its President, and by the Bank to serve as its President and Chief Executive
Officer. Accordingly, the compensation reflected above for Mr. Menzies for 1998 reflects
the compensation for the eight-month period of 1998 during which he was employed by the
Company and the Bank.
(3) Effective January 1, 1999, Jeffrey N. Heflebower was hired by the Bank to
serve as its Executive Vice President. Accordingly, the compensation reflected above for
Mr. Heflebower for 1999 reflects the compensation for the entire year of 1999 during which
he was employed by the Bank.
</TABLE>
STOCK OPTIONS
The following table sets forth the options granted during the fiscal year
ended December 31, 1999, to Mr. Menzies. There were no other option grants by
the Company during the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
- ------------------------------------------------------------------------------------------------
Number of % of Total Market
Securities Options Price at
Underlying Granted to Exercise or Date of
Options Employees in Base Price Grant Expiration
Name Granted (#)(1) Fiscal Year ($/share) ($)(2) Date
- -------------------------- -------------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C>
R. Michael S. Menzies, Sr. 56,000 100% $10.00 $11.00 12/31/09
<FN>
(1) These options vest and become exercisable on May 1 of each year at the rate of 10% per year,
beginning May 1, 1999, such that on each May 1 an additional 5,600 shares of Common Stock can be acquired by
Mr. Menzies through the exercise of the options. In the event of a change of control of the Company, as that
term is defined in the Stock Option Agreement, the options become immediately exercisable. As of March 17,
2000, only 5,600 shares may be acquired by Mr. Menzies through the exercise of vested options
(2) There is no active trading market for the Company's Common Stock; therefore, the market price of
the Common Stock as of May 1, 1999, the date of grant of the options, is not readily discernible. Based on the
sale of the Common Stock nearest May 1, 1999, of which the Company is aware, which sale was at $11.00 per share
on May 5, 1999, the Company believes that the market price of the Common Stock was approximately $11.00 per
share on May 1, 1999.
</TABLE>
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<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to Mr. Menzies
concerning the exercise of options during the last fiscal year and unexercised
options held as of the end of the fiscal year.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of
Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year End Fiscal Year End
Shares Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized Unexercisable Unexercisable (1)
- -------------------------- --------------- -------------------- --------------- -----------------
<S> <C> <C> <C> <C>
R. Michael S. Menzies, Sr. -- -- 5,600/50,400 -0- / -0-
<FN>
- ----------------------------------------------------
(1) There is no active trading market for the Company's Common Stock; therefore, the fair
market value of the Common Stock as of December 31, 1999, is not readily discernible. Based on the
sale of the Common Stock nearest December 31, 1999, of which the Company is aware, which sale was
at $8.50 per share on December 27, 1999, the Company believes that the fair market value of the
Common Stock was approximately $8.50 per share on December 31, 1999. The exercise price for the
options is $10.00 per share and thus based on a fair market value of $8.50 per share, all of the
options are out-of-the-money as of December 31, 1999.
</TABLE>
COMPENSATION OF DIRECTORS
Directors of the Company received no compensation for their services as
directors during 1999. Directors of the Bank received no compensation for their
services as directors during 1999 except that the outside directors of the Bank
who were not organizers of the Company (Charles T. Capute, Walter E. Chase, Sr.,
and Thomas E. Hill) received a fee of $100 per meeting for each meeting of the
Board of Directors of the Bank they attended during 1999, and each director of
the Bank who was a member of a committee of the Board of Directors of the Bank
received $25 for each committee meeting attended during 1999.
STOCK OPTION PLAN
The Company has adopted a Stock Option Plan, covering 35,000 shares of the
Common Stock, which is intended to qualify for favorable tax treatment under
Section 422 of the Internal Revenue Code. The Stock Option Plan will be
administered by the Board of Directors of the Company and will provide for the
granting of options to purchase shares of the Common Stock to officers and other
key employees of the Company and the Bank. The purchase price under all such
options intended to qualify as incentive options will not be less than the fair
market value of the shares of Common Stock on the date of grant. Options will
be exercisable upon such terms as may be determined by the body administering
the Stock Option Plan, but in any event, options intended to qualify as
incentive options will be exercisable no later than ten years after the date of
grant. As of the Record Date, no options have been granted under this Stock
Option Plan.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires (i) the
Company's directors and executive officers and (ii) persons who own more than
10% of a registered class of the Company's equity securities to file with the
Securities and Exchange Commission (the "SEC"), within certain specified time
periods, reports of ownership and changes in ownership. Such officers,
directors and stockholders are required by SEC regulations to furnish the
Company with copies of all such reports that they file.
7
<PAGE>
To the Company's knowledge, based solely upon a review of copies of such
reports furnished to the Company and representations that no other reports were
required with respect to the year ended December 31, 1999, all persons subject
to the reporting requirements of Section 16(a) filed the required reports on a
timely basis with respect to 1999 except for R. Michael S. Menzies, Sr. who
filed one report late with respect to one transaction and Myron J. Szczukowski,
Jr., M.D. who filed his initial report late after joining the Company's Board of
Directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of outstanding
shares of the Company's Common Stock beneficially owned at the Record Date by
(a) each executive officer of the Company and the Bank, (b) each director of the
Company, (c) all such executive officers and directors as a group, and (d) each
person or entity known to the Company to own more than five percent of the
outstanding Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) CLASS(2)
- -------------------------------------------------------- --------------------- -----------
<S> <C> <C>
Sheila W. Bateman(3) 4,469(5) *
Jack H. Bishop, D.D.S.(3) 39,586(6) 6.86%
J. Parker Callahan, Jr.(3) 19,189(7) 3.38%
Delia B. Denny(3) 603 *
J. Fredrick Heaton, D.M.D.(3) 13,236(8) 2.34%
Jeffrey N. Heflebower(3) 2,898(9) *
William C. Hill(3) 35,254(10) 6.10%
W. David Hill, D.D.S.(3) 99,096(11) 16.72%
David F. Lesperance(3) 25,784(12) 4.51%
Vinodrai Mehta, M.D.(3) 42,973(13) 7.43%
R. Michael S. Menzies, Sr.(3) 6,500(14) 1.15%
Roger A. Orsini, M.D.(3) 25,882(15) 4.53%
Mahmood S. Shariff, M.D.(3) 58,973(16) 10.10%
Myron J. Szczukowski, Jr., M.D.(3) 8,594(17) 1.52%
Jerry L. Wilcoxon, C.P.A.(3) 1,969(18) *
Idlewild Associates(4) 68,758(19) 11.67%
Executive officers and directors as a group (15 persons) 385,006(20) 53.77%
<FN>
- ---------------------------------------
(1) Information relating to beneficial ownership of the Common Stock is based upon
"beneficial ownership" concepts set forth in rules of the SEC under Section 13(d) of the
Securities Exchange Act of 1934. Under these rules a person is deemed to be a "beneficial
owner" of a security if that person has or shares "voting power," which includes the power
to vote or direct the voting of such security, or "investment power," which includes the
power to dispose or to direct the disposition of such security. A person is also deemed to
be a beneficial owner of any security of which that person has the right to acquire
beneficial ownership within 60 days. Under the rules, more than one person may be deemed to
be a beneficial owner of the same securities, and a person may be deemed to be a beneficial
owner of securities as to which he has no beneficial interest. For instance, beneficial
ownership includes spouses, minor children and other relatives residing in the same
household, and trusts, partnerships, corporations or deferred compensation plans which are
affiliated with the principal.
(2) Percentage is determined on the basis of 560,318 shares of Common Stock issued and
outstanding plus shares subject to options or warrants held by the named individual for whom
the percentage is calculated which are exercisable within the next 60 days as if
outstanding, but treating shares subject to warrants or options held by others as not
outstanding. An asterisk (*) indicates less than 1% ownership.
8
<PAGE>
(3) Address is 501 Idlewild Avenue, P. O. Box 629, Easton, Maryland 21601.
(4) Address is 501 Dutchman's Lane, Easton, Maryland 21601.
(5) Includes 1,869 shares Mrs. Bateman has the right to acquire within 60 days pursuant
to the exercise of warrants.
(6) Includes 16,557 shares Dr. Bishop has the right to acquire directly or indirectly
within 60 days pursuant to the exercise of warrants. Also includes 8,000 shares for which
the beneficial ownership is attributable to him as a result of his 20% interest in Idlewild
Associates Limited Partnership.
(7) Includes 7,189 shares Mr. Callahan has the right to acquire within 60 days pursuant
to the exercise of warrants.
(8) Includes 5,515 shares Dr. Heaton has the right to acquire within 60 days pursuant to
the exercise of warrants. Also includes 230 shares owned by Dr. Heaton's wife in which he
shares voting and investing power.
(9) Includes 898 shares Mr. Heflebower has the right to acquire within 60 days pursuant
to the exercise of warrants.
(10) Includes 17,254 shares Mr. Hill has the right to acquire directly or indirectly
within 60 days pursuant to the exercise of warrants. Also includes 8,000 shares for which
the beneficial ownership is attributable to him as a result of his 20% interest in Idlewild
Associates Limited Partnership.
(11) Includes 32,353 shares Dr. Hill has the right to acquire directly or indirectly
within 60 days pursuant to the exercise of warrants. Also includes 10,000 shares for which
the beneficial ownership is attributable to him as a result of his 25% interest in Idlewild
Associates Limited Partnership and 100 shares owned by Dr. Hill's wife in which he shares
voting and investing power.
(12) Includes 10,784 shares Mr. Lesperance has the right to acquire within 60 days
pursuant to the exercise of warrants. Also includes 1,449 shares owned by Mr. Lesperance's
wife in which he shares voting and investing power.
(13) Includes 17,973 shares Dr. Mehta has the right to acquire within 60 days pursuant
to the exercise of warrants.
(14) Includes 5,600 shares Mr. Menzies has the right to acquire within 60 days pursuant
to the exercise of options.
(15) Includes 10,825 shares Dr. Orsini has the right to acquire within 60 days pursuant
to the exercise of warrants.
(16) Includes 23,413 shares Dr. Shariff has the right to acquire within 60 days pursuant
to the exercise of warrants. Also includes 3,283 shares owned by Dr. Shariff's wife in
which he shares voting and investing power and 10,000 shares held for the benefit of their
children in which he shares voting and investing power with his wife.
(17) Includes 3,594 shares Dr. Szczukowski has the right to acquire within 60 days
pursuant to the exercise of warrants.
(18) Includes 1,869 shares Mr. Wilcoxon has the right to acquire within 60 days pursuant
to the exercise of warrants.
(19) Includes 28,758 shares Idlewild Associates Limited Partnership has the right to
acquire within 60 days pursuant to the exercise of warrants. Partners in Idlewild
Associates Limited Partnership include Dr. Bishop, Mr. Hill, and Dr. Hill, and a
proportionate interest of these 28,758 shares are also included as beneficially owned by
such persons.
(20) Includes 155,693 total shares the officers and directors have the right to acquire
directly or indirectly within 60 days pursuant to the exercise of warrants and options.
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank leases approximately 600 square feet of office space in the main
office to William Hill Manor, Inc. ("WHM") at a rate of $14.00 per square foot
for five years. Rent received totalled $7,938 for each of the years ended
December 31, 1997, 1998 and 1999. Dr. W. David Hill, a director of the Bank and
the Company, is the Chief Executive Officer, founder and principal stockholder
of WHM. Two other directors of the Company and the Bank, Sheila W. Bateman and
William C. Hill, are officers and directors of WHM. Sheila W. Bateman also is
the Secretary of the Company and the Bank. Management believes that the terms
of the above-described transaction are at least as favorable to the Company and
the Bank as could have been obtained in a transaction negotiated with an
independent third party.
9
<PAGE>
The Company and the Bank have banking and other transactions in the
ordinary course of business with the directors and officers of the Company and
the Bank and their affiliates, including members of their families or
corporations, partnerships, or other organizations in which such officers or
directors have a controlling interest, on substantially the same terms
(including price, or interest rates and collateral) as those prevailing at the
time for comparable transactions with unrelated parties. Such transactions do
not involve more than the normal risk of collectibility or present other
unfavorable features to the Company and the Bank. Loans to individual directors
and officers must comply with the Bank's lending policies and statutory lending
limits and directors with a personal interest in any loan application are
excluded from the consideration of such loan application.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Because all of the Company's operations are conducted through the Bank, the
Bank, but not the Company, has an Audit and Compliance Committee and a
Compensation Committee. However, the Compensation Committee was terminated in
July 1999 and its duties were assigned to the Executive Committee. In 1999, the
Audit and Compliance Committee was composed of Charles T. Capute, Stephen W.
Chitty, Delia B. Denny, Pamela H. Lappen, Vinodrai Mehta, M.D., R. Michael S.
Menzies, Sr., and Jerry L. Wilcoxon, C.P.A. The Audit and Compliance Committee
met once in 1999. This committee has the responsibility for reviewing the
financial statements, evaluating internal accounting controls, reviewing reports
of regulatory authorities, and determining that all audits and examinations
required by law are performed. The committee recommends to the Board the
appointment of the independent auditors for the next fiscal year, reviews and
approves the auditors' audit plans, and reviews with the independent auditors
the results of the audit and management's response thereto. The committee is
responsible for overseeing the entire audit function and appraising the
effectiveness of internal and external audit efforts. The committee reports its
findings to the Board of Directors.
The Compensation Committee is responsible for establishing the compensation
plans for the Bank. Its duties include the development with management of all
benefit plans for employees of the Bank, the formulation of bonus plans,
incentive compensation packages, and medical and other benefit plans. This
committee met one time in 1999. As previously stated, the Compensation
Committee was terminated in July 1999 and its duties were assigned to the
Executive Committee. In 1999 the Compensation Committee was composed of Jack H.
Bishop, D.D.S., J. Parker Callahan, Jr., Walter E. Chase, Sr., Thomas E. Hill,
W. David Hill, D.D.S., William R. Houck, L. Linda Kildea, R. Michael S. Menzies,
Sr., Marian H. Shannahan, and Jerry L. Wilcoxon, C.P.A.
The Company does not have a nominating committee. The entire Board of
Directors is responsible for nominating individuals for election to the
Company's Board of Directors and welcomes recommendations made by stockholders
of the Company. Any recommendations for the 2001 Annual Meeting of Stockholders
should be made in writing addressed to the Company's Board of Directors, P. O.
Box 629, Easton, Maryland 21601, and should be made prior to December 12, 2000.
The Board of Directors of the Company held seven meetings, and the Board of
Directors of the Bank held twelve meetings, during the year ended December 31,
1999. All of the directors of the Company attended at least 75% of the
aggregate of such board meetings and the meetings of each committee on which
they served, except for J. Parker Callahan, Jr., Vinodrai Mehta, M.D., Roger A.
Orsini, M.D., Mahmood S. Shariff, M.D., Myron J. Szczukowski, Jr., M.D., and
Jerry L. Wilcoxon, C.P.A.
RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS
Subject to ratification by the stockholders, the Board of Directors has
reappointed Rowles & Company, LLP as independent auditors to audit the financial
statements of the Company for the 2000 fiscal year. Rowles & Company, LLP has
served as the independent auditors for the Company since 1992.
A representative of Rowles & Company, LLP is expected to be present at the
Meeting and will have an opportunity to make a statement, if the representative
so desires, and will be available to respond to any appropriate questions
stockholders may have.
10
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION
OF ROWLES & COMPANY, LLP AS INDEPENDENT AUDITORS.
STOCKHOLDER PROPOSALS FOR 2000 ANNUAL MEETING OF STOCKHOLDERS
Notices of stockholder proposals intended to be presented at the Meeting
should have been provided to the Company by no later than March 1, 2000. With
respect to stockholder proposals for which notices were not provided to the
Company by March 1, 2000, the person or persons designated as proxies in
connection with the Company's solicitation of proxies shall have the
discretionary voting authority to vote the shares of the Company's Common Stock
represented by the proxy cards returned to the Company in accordance with their
judgment on such matter when such proposal is presented at the Meeting.
STOCKHOLDER PROPOSALS FOR 2001 ANNUAL MEETING OF STOCKHOLDERS
Stockholder proposals intended to be presented at the 2001 Annual Meeting
of Stockholders and included in the Company's Proxy Statement and form of proxy
for that meeting must be received by the Company no later than December 12,
2000. 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.
ANNUAL REPORTS
COPIES OF THE COMPANY'S 1999 ANNUAL REPORT ARE BEING MAILED TO ALL
STOCKHOLDERS TOGETHER WITH THIS PROXY STATEMENT. THE COMPANY WILL PROVIDE,
WITHOUT CHARGE, TO ANY STOCKHOLDER OF RECORD AS OF MARCH 17, 2000, WHO SO
REQUESTS IN WRITING A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE
YEAR ENDED DECEMBER 31, 1999, AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. ANY SUCH REQUESTS SHOULD BE DIRECTED TO SHEILA W. BATEMAN, EASTON
BANCORP, INC., P.O. BOX 629, EASTON, MARYLAND 21601.
OTHER MATTERS
The Board of Directors knows of no business other than that set forth above
to be transacted at the Meeting, but if other matters requiring a vote of the
stockholders arise, the persons designated as proxies will vote the shares of
Common Stock represented by the proxy cards in accordance with their judgment on
such matters.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ W. David Hill
W. David Hill, D.D.S.
Chief Executive Officer
Easton, Maryland
April 12, 2000
11
<PAGE>
EXHIBIT A
EASTON BANCORP, INC.
POST OFFICE BOX 629
EASTON, MARYLAND 21601
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD
MAY 17, 2000
Dear Stockholder:
The Annual Meeting of Stockholders of Easton Bancorp, Inc. will be held at 4:00
p.m. on Wednesday, May 17, 2000 at Easton Bank & Trust Company, 501 Idlewild
Avenue, Easton, Maryland, for the following purposes:
1. To elect five members to the Board of Directors to serve three-year
terms;
2. To ratify the appointment of Rowles & Company, LLP as independent
auditors for the Company for the fiscal year ending December 31, 2000;
and
3. To consider such other matters as properly may come before the Meeting or
any adjournment of the Meeting.
Only holders of record of Common Stock of Easton Bancorp, Inc. at the close of
business on March 17, 2000, will be entitled to notice of and to vote at the
Meeting or any adjournment thereof.
TO BE SURE THAT YOUR VOTE IS COUNTED, WE URGE YOU TO COMPLETE AND SIGN THE PROXY
CARD BELOW, DETACH IT FROM THIS LETTER AND RETURN IT IN THE POSTAGE PAID
ENVELOPE ENCLOSED IN THIS PACKAGE. The giving of such proxy does not affect
your right to vote in person if you attend the Meeting. The prompt return of
your signed proxy will aid the Company in reducing the expense of additional
proxy solicitation.
If you plan to attend the Annual Meeting in person, detach and bring this letter
to the Meeting as an admission ticket for you and your guests.
BY ORDER OF THE BOARD OF DIRECTORS
April 12, 2000
/s/ W. David Hill
W. David Hill, DDS
Chief Executive Officer
DETACH PROXY CARD HERE
- --------------------------------------------------------------------------------
<PAGE>
1. To elect five members
to the Board of Directors.
FOR all nominees WITHHOLD AUTHORITY to vote
listed below [ ] for all nominees listed below [ ] *EXCEPTIONS [ ]
Nominees: Jack H. Bishop, D.D.S., David F. Lesperance, Vinodrai Mehta, M.D.,
Myron J. Szczukowski, Jr., M.D. and Jerry L. Wilcoxon, C.P.A. to serve
three-year terms.
(*INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK
THE "EXCEPTIONS" BOX AND STRIKE A LINE THROUGH THAT NOMINEE'S NAME.)
2. To ratify the appointment of Rowles & Company, LLP as independent
auditors for the Company for the fiscal year ending December 31, 2000.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. In their discretion, to vote upon such other matters as properly
may come before the Meeting or any adjournment of the Meeting.
Address Change and/or
Comments Mark Here [ ]
Please date and sign exactly as your name appears to the left. All joint owners
should sign. When signing as a fiduciary, representative or corporate officer,
give full title as such. If you receive more than one proxy card, please sign
and return all cards received.
Dated:
--------------------------
- --------------------------------
(Signature)
- --------------------------------
(Signature if held jointly)
VOTES MUST BE INDICATED (X) IN BLACK OR BLUE INK. [X]
PLEASE SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
<PAGE>
EASTON BANCORP, INC.
PROXY CARD VOTING INSTRUCTIONS
- --------------------------------------------------------------------------------
This proxy is solicited on behalf of the Board of Directors
of Easton Bancorp, Inc. For the Annual Meeting on May 17, 2000.
The undersigned appoints Sheila W. Bateman and W. David Hill, and each of them,
with full power of substitution in each, as the proxies of the undersigned to
represent the undersigned and vote all shares of Easton Bancorp, Inc. Common
Stock which the undersigned may be entitled to vote at the Annual Meeting of
Stockholders to be held on May 17, 2000, and at any adjournment or postponement
thereof, as indicated on the reverse side.
This proxy, when properly executed, will be voted in the manner directed herein
By the undersigned stockholder. If no direction is given, this proxy will be
Voted for the election of all listed nominees under proposal 1, for the
Ratification of the appointment of rowles & company, llp under proposal 2 and,
At the discretion of the proxies, on any other matters that may properly come
Before the meeting.
Easton Bancorp, Inc.
501 Idlewild Avenue EASTON BANCORP, INC.
PO Box 629 P.O. BOX 11361
Easton, MD 21601 NEW YORK, N.Y. 10203-0361
<PAGE>
EXHIBIT B
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
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