A promising start-up bank on Maryland's Eastern Shore has hit a rather unexpected snag: Its chairman has been busted for cocaine possession.

William David Hill 2d, who founded Easton Bank & Trust 18 months ago, was arrested after the federal Drug Enforcement Agency observed him receiving cocaine and marijuana from a local businesswoman.

The arrest has left the bank's chief executive, Thomas P. McDavid, dealing with a public relations disaster just when he should be celebrating the institution's imminent profitability.

"I've been through funner things," Mr. McDavid said.

Accounts of Mr. Hill's arrest have filled the local press. The bank, the first start-up in Maryland in four years, was founded in large part on the good name and financial backing of Mr. Hill and his family, who are pillars of the Easton community. The bank, the first bank founded in Easton in 100 years, signalled the surging fortunes of the town's real estate and professional community.

Easton Bank & Trust At a GlanceHeadquarters Easton, Md.Chairman William David HillCEO Thomas P. Mc- DavidAssets $25 millionBranches TwoFounded 1993

Mr. Hill, a dentist, has interests in a chain of pharmacies and a successful retirement community in Easton, which is located on the largely rural Eastern Shore of Maryland.

The public image of 52-year-old Mr. Hill, however, was shattered when the town was served up details of his arrest in the Sunday paper, right down to the used joint police found in his bathroom waste basket.

According to the Drug Enforcement Agency, which conducted an 11-month investigation of the local drug trade that led to Mr. Hill's arrest, Mr. Hill was observed receiving cocaine and marijuana from a local business-woman named Carol Daffin.

A search of his home later revealed evidence of cocaine and marijuana use on the premises. Ms. Daffin, who owns a local dental supply business, was arrested on drug distribution charges. A search of her office revealed more than 30 grams of cocaine and $100,000 cash.

DEA spokesman Larry Hornstein said Daffin and Hill were the primary targets of the investigation. He said none of Mr. Hill's alleged drug activity was related to the bank.

Mr. Hill was released on his own recognizance and is expected to appear in court for the first time next week. His lawyer said he's still considering his options.

Mr. Hill could not be reached for comment. His lawyer, William McAllister, emphasized that his client was charged with a misdemeanor possession charge, and the allegations against him are completely unrelated to his business interests.

Despite the bad press, Mr. McDavid said the bank is proceeding with its daily business.

"He hasn't been convicted or even entered a plea yet," he said. "He's chairman, but he is not involved in the day-to-day management of the bank. We have four professional bankers here running this bank. Until this matter is resolved, we won't do anything in regards to his position on the board."

Mr. McAllister said Mr. Hill has no plans to step down from his chairmanship of both the bank and its holding company, Easton Bancorp.

"I don't anticipate any affect on his position or relationship with the bank," he said.

Mr. McDavid admits there has been a public-relations fallout from the incident, but said that overall the bank's customers have been assured. "We've had some phone calls, sure," he said. "But most people feel comfortable."

Banking regulators said they would take no action, describing it as a board matter. "We expect that the board would take whatever action is necessary," said Margie Muller, Maryland Bank Commissioner, stressing that Mr. Hill has only been accused. "It's their decision. I've never had this kind of case before, but I'm sure I can count on the board to do what's right for the bank and its reputation."

No provision of federal or state law allows a bank director or officer to be removed for misdemeanor charges, especially if the charge is unrelated to his or her activities at the bank. "Under what is known now, there's not much that the [Federal Deposit Insurance Corp.] would do in the matter," said David Barr, a spokesman for the insurance agency.

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