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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT
UNDER
SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13D OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number __________
HARBOR BANCORP, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1815009
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
300 EAST MARKET STREET
ABERDEEN, WASHINGTON 98520-5244
(360) 533-8870
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes No X
-------- -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
TITLE OF CLASS OUTSTANDING AT SEPTEMBER 30, 1999
-------------- ---------------------------------
Common Stock, par value $1.00 per share 258,381 shares
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1
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999
AND 1998 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 5
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 AND 1998 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
PART II OTHER INFORMATION 18
ITEM 5. OTHER INFORMATION 18
PRO FORMA FINANCIAL STATEMENTS 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
Harbor Bancorp, Inc.
September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks $5,882 $6,345
Interest bearing balances with banks 8,111 4,889
Federal funds sold 3,980 9,145
Investment securities available for sale 32,376 30,769
Loans 83,977 81,555
Allowance for credit losses 1,156 1,147
LOANS, NET 82,821 80,408
Premises and equipment 2,324 2,337
Accrued interest receivable 1,078 1,020
Other assets 852 372
TOTAL ASSETS $137,424 $135,285
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $20,889 $19,415
Interest bearing 102,422 102,321
TOTAL DEPOSITS 123,311 121,736
Accrued interest payable 251 213
Other liabilities 917 1,557
TOTAL LIABILITIES 124,479 123,506
STOCKHOLDERS' EQUITY
Common Stock 259 259
Surplus 5,518 5,518
Retained earnings 7,322 5,871
Accumulated other comprehensive income/loss (154) 131
TOTAL STOCKHOLDERS' EQUITY 12,945 11,779
Total liabilities and stockholders' equity $137,424 $135,285
</TABLE>
3
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans $1,966 $2,076 $5,878 $6,179
Securities available for sale:
Taxable 404 274 1,156 688
Tax-exempt 47 51 141 125
Deposits with banks 121 210 458 507
and federal funds sold
Total interest income 2,538 2,611 7,633 7,499
INTEREST EXPENSE
Deposits 968 974 2,916 2,816
Other borrowings 0 0 0 0
Total interest expense 968 974 2,916 2,816
NET INTEREST INCOME 1,570 1,637 4,717 4,683
Provision for credit losses 15 0 15 0
Net interest income after provision 1,555 1,637 4,702 4,683
NON-INTEREST INCOME
Service charges 103 122 319 330
Other operating income 46 56 132 155
Total non-interest income 149 178 451 485
NON-INTEREST EXPENSE
Salaries and employee benefits 532 521 1,626 1,581
Occupancy and equipment 158 165 461 477
Other 297 322 838 851
Total non-interest expense 987 1,008 2,925 2,909
Income before income taxes 717 807 2,228 2,259
Provision for income taxes 273 278 777 735
NET INCOME $444 $529 $1,451 $1,524
Earnings per common share:
Basic $1.72 $2.05 $5.62 $5.91
Diluted 1.67 1.99 5.46 5.77
Average shares outstanding
Basic 258,381 257,881 258,381 257,874
Diluted 265,940 265,365 265,609 264,290
</TABLE>
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30,
1999 and 1998
<TABLE>
<CAPTION>
1999 1998
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
<S> <C> <C>
Net income 1,451 1,524
Adjustments to reconcile net income to net cash
Provided by operating activities:
Provision for credit losses 15 0
Depreciation and amortization 239 242
Stock dividends received (140) (134)
Amortization(accretion)of premium and
discount on securities (144) 114
(Increase)decrease in accrued interest receivable (58) 35
Increase(decrease)in accrued interest payable 38 6
Other (28) (102)
Net cash provided by operating activities 1,373 1,685
INVESTING ACTIVITIES
Net (increase)decrease in federal funds 5,165 (7,130)
(Increase)decrease in interest bearing
deposits with banks (3,222) (269)
Purchases of securities available for sale (22,635) (19,810)
Proceeds from maturities on investment
securities available for sale 20,880 9,575
Net(increase)decrease in loans (2,428) 385
Additions to premises and equipment (202) (120)
Net cash used in investing activities (2,442) (17,369)
FINANCING ACTIVITIES
Net increase in deposits 1,575 17,637
Issuance of common stock 0 8
Payment of dividends (969) (774)
Net cash provided by financing activities 606 16,871
Net increase(decrease)in cash and due from banks (463) 1,187
CASH AND DUE FROM BANKS
Beginning of period 6,345 6,055
End of period 5,882 7,242
</TABLE>
5
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<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for :
<S> <C> <C>
Interest 2,878 2,810
Income Taxes 665 660
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Unrealized gains(losses)on securities available
For sale, net of tax (285) 84
</TABLE>
6
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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Nine months ended
September 30, 1999 and 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON RETAINED INCOME
STOCK SURPLUS EARNINGS (LOSS) TOTAL
<S> <C> <C> <C> <C> <C>
Balance December 31, 1997 $258 $5,510 $4,767 $55 $10,590
Other comprehensive income:
Net income 1,524 1,524
Change in unrealized gain
on securities available for sale, net 84 84
Comprehensive income 1,608
Issuance of common stock 8 8
Balance September 30, 1998 $258 $5,518 $6,291 $139 $12,206
Balance December 31, 1998 $259 $5,518 $5,871 $131 $11,779
Other comprehensive income:
Net income $1,451 $1,451
Change in unrealized loss
On securities available for sale, net (285) (285)
Comprehensive income 1,166
Balance September 30, 1999 $259 $5,518 $7,322 $(154) $12,945
</TABLE>
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NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with instructions to Form 10Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine months ended
September 30, 1999, are not necessarily indicative of the results anticipated
for the year ending December 31, 1999.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make 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 and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
All dollar amounts in tables, except per share information, are stated in
thousands.
2. INVESTMENT SECURITIES
Investment securities consist principally of short and intermediate term debt
instruments issued by the U.S. Treasury, other U.S. government agencies, State
and local government units, and other corporations. The company is a stockholder
in the Federal Home Loan Bank of Seattle (FHLB). All securities are held as
available for sale.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE AMORTIZED UNREALIZED FAIR
COST GAINS VALUE
(LOSSES)
September 30, 1999
<S> <C> <C> <C>
U.S. Treasury Securities 1,004 (1) 1,003
U.S. Government Securities 15,811 (108) 15,703
State and Municipal Securities 3,955 (13) 3,942
Corporate Securities 9,229 (114) 9,115
Equity Securities 2,613 -0- 2,613
TOTAL 32,612 (236) 32,376
</TABLE>
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3. ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Balances at beginning of period 1,149 1,138 1,147 1,137
Provision for possible credit losses 15 0 15 0
Charge-offs 10 8 23 12
Recoveries 2 2 17 7
Net recoveries (charge-offs) (8) (6) (6) (5)
Balances at end of period 1,156 1,132 1,156 1,132
</TABLE>
4. SUBSEQUENT EVENT - BUSINESS COMBINATION
On December 15, 1999, the company effected a business combination with
Pacific Financial Corporation by exchanging 230,389 shares of its common stock
for all of the common stock of Pacific Financial Corporation. Pacific Financial
Corporation is a one-bank holding company based in Long Beach, Washington. Its
bank subsidiary is Bank of the Pacific, which will continue to operate as a
separate subsidiary of the Company for the foreseeable future. Following the
merger, the Company changed its name to Pacific Financial Corporation. The
combination has been accounted for as a pooling of interests and, accordingly,
all prior financial statements will be restated to include Pacific Financial
Corporation. The results of operations of the separate companies for periods
prior to the combination (through September 30, 1999) are summarized as follows:
<TABLE>
<CAPTION>
Net Interest
Income Net Income
Nine months ended September 30, 1999:
<S> <C> <C>
Harbor Bancorp, Inc. $4,717 $1,451
Pacific Financial Corporation $3,706 $1,478
Year ended December 31, 1998:
Harbor Bancorp, Inc. $6,273 $2,073
Pacific Financial Corporation $4,827 $1,921
</TABLE>
9
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5. COMPUTATION OF BASIC EARNINGS PER SHARE:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Income $444,000 $529,000 $1,451,000 $1,524,000
Shares Outstanding,
Beginning of Period 258,381 257,881 258,381 257,860
Shares Issued During Period Times
Average Time Outstanding - - - -
Average Shares Outstanding 258,381 257,881 258,381 257,860
Basic Earnings Per Share $1.72 $2.05 $5.62 $5.91
6. COMPUTATION OF DILUTED EARNINGS PER SHARE:
Net Income $444,000 $529,000 $1,451,000 $1,524,000
Options Outstanding 14,000 14,500 14,000 14,500
Proceeds Were Options Exercised $869,500 $877,000 $869,500 $877,000
Average Share Price During Period $135.00 $125.00 $128.39 $108.48
Proceeds Divided By Average Share Price 6,441 7,016 6,772 8,084
Incremental Shares 7,559 7,484 7,228 6,416
Average Shares Outstanding 258,381 257,881 258,381 257,874
Incremental Shares
Plus Outstanding Shares 265,940 265,365 265,609 264,290
Diluted Earnings Per Share $1.67 $1.99 $5.46 $5.77
</TABLE>
10
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A WARNING ABOUT FORWARD-LOOKING INFORMATION
We have made forward-looking statements in this document that are
subject to risks and uncertainties. These statements are based on the beliefs
and assumptions of our management, and on information currently available to
them. Forward-looking statements include the information concerning our possible
or assumed future results of operations set forth under "Management's Discussion
and Analysis of Financial Condition And Results of Operations" and statements
preceded by, followed by or that include the words "believes," "expects,"
"anticipates," "intends," "plans," "estimates" or similar expressions.
Any forward-looking statements in this document are subject to risks
relating to, among other things, the following:
1. effective December 15, 1999 Harbor Bancorp, Inc. completed
the merger of equals with Pacific Financial Corporation; anticipated
cost savings from the merger may not be fully realized or realized
within the expected time frame (the transaction was treated as a
pooling for accounting purposes, and accordingly, all prior results of
operations will be restated. See Note "Subsequent Event" and "Item 5"
of this report for additional information);
2. competitive pressures among depository and other financial
institutions may increase significantly;
3. changes in the interest rate environment may reduce
margins;
4. general economic or business conditions, either nationally
or in the state or regions in which we do business, may be less
favorable than expected, resulting in, among other things, a
deterioration in credit quality or a reduced demand for credit;
5. legislative or regulatory changes may adversely affect the
businesses in which we are engaged; and
6. adverse changes may occur in the securities markets.
Our management believes the forward-looking statements are reasonable;
however, you should not place undue reliance on them. Forward-looking statements
are not guarantees of performance. They involve risks, uncertainties and
assumptions. The future results and shareholder values of the combined
corporation following completion of the merger may differ materially from those
expressed or implied in these forward-looking statements. Many of the factors
that will determine these results and values are beyond our ability to control
or predict.
NET INCOME. For the nine months ended September 30, 1999, Harbor's net income
was $1,451,000 compared to $1,524,000 for the same period in 1998. Major
contributing factors for the decline were a $134,000 decrease in interest
income, a $134,000 decrease in non-interest income, an increase of $16,000 in
operating expenses, and $42,000 in increased provision for income taxes.
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Net income for the three months ending September 30, 1999 was $444,000, which
compared to $529,000 for the same period in 1998. The decline was attributable
primarily to a decrease in interest income of $73,000 and a $29,000 decline in
non-interest income.
NET INTEREST INCOME. Net interest income for the three months ended September
30, 1999 decreased $67,000 compared to the same period in 1998. This is due
primarily to placing one loan on non-accrual status and reversing interest
accruals totaling approximately $60,000. Net interest income for the nine months
ended September 30, 1999 increased $34,000 over the comparable period in 1998.
Net interest margin for the nine months ended September 30, 1999 was 4.60%, a
decrease of .61% compared to the comparable period of 1998. The average return
on loans was approximately 67 basis points less for the period ended September
30, 1999 compared to the same period in 1998, while average deposit rates were
approximately 13 basis points less for the same periods.
Interest income for the three months ended September 30, 1999, decreased $73,000
or 2.9% compared to the comparable period in 1998, and for the nine months
period increased $134,000 or 1.8% over the same period in 1998. Average
securities balances increased for the nine months ended September 30, 1999 by
$14,623,000 or 80% higher than for the comparable period in 1998. This is the
result of lower lending volume, which has decreased interest income due to
investment securities having lower yields than loans. Average loans outstanding
for the nine months ended September 30, 1999 were $82,881,000, or 1.3% higher
than for the comparable period in 1998.
Interest expense for the three months ended September 30, 1999 decreased $6,000
compared to the same period in 1998, and increased $100,000 for the nine months
ending September 30, 1999 over the comparable period in 1998. The average
deposit balances for the nine months ended September 30, 1999 were $125,269,000
or 7.5% higher than for the comparable period in 1998.
PROVISION AND ALLOWANCE FOR CREDIT LOSSES. During the three months period ending
September 30, 1999 $15,000 was provided for possible credit losses, compared to
none for the same period in 1998. For the nine months ended September 30, 1999
$15,000 was provided for possible credit losses compared to none for the
comparable period in 1998. Management considers the allowance for possible
credit losses to be adequate for the periods indicated. However, during the
third quarter of 1999, management determined it be prudent to initiate
provisions for possible credit losses due to the economic uncertainties within
the fishing industry thereby insuring an adequate reserve to cover the growing
loan portfolio and to cover potential credit losses in the portfolio. For the
nine months period ending September 30, 1999 net charge-offs were $6,000
compared to net charge-offs of $5,000 during the same period in 1998.
At September 30, 1999, the allowance for credit losses stood at $1,156,000
compared to $1,147,000 at December 31, 1998, and $1,132,000 at September 30,
1998. The ratio of the allowance to total loans outstanding was 1.38%, 1.41% and
1.41% respectively at September 30, 1999, December 31, 1998, and September 30,
1998.
NON-PERFORMING ASSETS AND OTHER REAL ESTATE OWNED. Non-performing assets totaled
$730,000 at September 30, 1999. This represents .87% of total loans compared to
none at December 31, 1998, and $189,000 or .23% at September 30, 1998. Accruing
loans past due 90 days or more at September 30, 1999 includes fishing vessel
loans totaling $105,000 whose interest payable is
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current, however principal payments are delinquent. Non-accrual loans at
September 30, 1999 total $625,000 and consist of fishing vessel loans.
Management believes losses will be minimal regarding these loans.
<TABLE>
<CAPTION>
ANALYSIS OF
NONPERFORMING ASSETS SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
(in thousands) 1999 1998 1998
<S> <C> <C> <C>
Accruing loans past due 90 days
Or more $105 - $5
Non-accrual loans 625 - 184
Foreclosed loans - - -
TOTAL 730 - 189
</TABLE>
NON-INTEREST INCOME AND EXPENSES. Non-interest income for the three and nine
months ended September 30, 1999 decreased $29,000 and $34,000 compared to the
same periods in 1998. Service charges on deposit accounts decreased $19,000 and
$11,000 for the same three and nine month periods in 1998. This was due
primarily to less overdraft charges. Other operating income for the three and
nine months ended September 30, 1999 declined $10,000 and $23,000 compared to
the same period in 1998. This was attributable primarily to decreased loan
servicing fees due to participation loans being paid off, check cashing fees
being less, and less ATM fees.
Non-interest expense for the three and nine months ended September 30, 1999
decreased $21,000 and increased $16,000 respectively compared to the same
periods in 1998. For the three-month period, salaries and benefits increased
$11,000 while occupancy expense decreased $7,000, and other expenses declined
$25,000 compared to the same period in 1998. The primary reason for the increase
in non-interest expense for the nine months ended September 30, 1999 compared to
the same period in 1998 was salaries and benefits, which increased $45,000 due
to normal merit and inflationary increases, while occupancy expense decreased
$16,000, and other expense decreased $13,000 compared to the same period in
1998.
INCOME TAXES. Federal income tax provision for the nine months ending September
30, 1999 was $777,000 an increase of $42,000 compared to the same period in
1998. The effective tax rate for the current period is 34.9% compared to 32.5%
in 1998.
FINANCIAL CONDITION. Total assets were $137,424,000 at September 30, 1999, an
increase of $2,139,000 or 1.6% over year-end 1998. Loans were $83,977,000 at
September 30, 1999 an increase of $2,422,000 over year-end 1998. Total deposits
were $123,479,000 at September 30, 1999, an increase of $1,575,000 compared to
December 31, 1998.
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LOANS. Loan detail by category as September 30, 1999 and December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
<S> <C> <C>
Commercial and industrial $39,301 $35,823
Agricultural 1,337 1,433
Real estate mortgage 39,100 40,833
Real estate construction 1,906 1,303
Installment 1,362 1,339
Credit cards and other 971 824
Total Loans 83,977 81,555
Allowance for credit losses (1,156) (1,147)
Net Loans 82,821 80,408
</TABLE>
LIQUIDITY. Adequate liquidity is available to accommodate fluctuations in
deposit levels, funds operations, and provide for customer credit needs and meet
obligations and commitments on a timely basis. The Company has no brokered
deposits. It generally has been a net seller of federal funds. When necessary,
the liquidity can be quickly increased by taking advances available from the
Federal Home Loan Bank.
SHAREHOLDERS' EQUITY. Total shareholders' equity was $12,945,000 at September
30, 1999, an increase of $1,166,000 or 9.9% compared to December 31, 1998. Book
value per share increased to $50.10 at September 30, 1999 compared to $45.59 at
December 31, 1998. Book value is calculated by dividing total equity capital by
total shares outstanding.
YEAR 2000
The year 2000 ("Year 2000") issue is the result of the inability of
computers to distinguish "00" as 2000. Computer programs that were written with
only two-digit year may not function accurately or at all when the date changes
from 1999 to 2000. Year 2000 issues will potentially affect anything that
contains an embedded microchip.
The Bank operates an in-house computer system utilizing the "Liberty
Banking System" software provided by Jack Henry and Associates to perform its
most mission critical data processing functions relating to its loans, deposits,
general ledger and shareholder information applications. Jack Henry and
Associates has completed the renovation and validation phases of its Year 2000
plan, and has received Year 2000 certification for the Liberty Banking System
from the Information Technology Association of America (ITAA). The Bank
physically tested all applications of the Liberty Banking System at its disaster
recovery site in November 1998. The test results all proved successful and were
reviewed and audited by McGladrey & Pullen, an independent audit and consulting
firm.
The Bank also performs item-processing services for its customers
utilizing "VisualImpact" software provided by Unisys Corporation. The
VisualImpact software has been
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tested and certified Year 2000 compliant by the vendor. The Bank successfully
tested the software onsite in August.
PROJECT MANAGEMENT. The Bank initiated a Year 2000 Project early in
1997 to address year 2000 issues. The Bank's Year 2000 Project Plan has been set
up following the Federal Financial Institutions Examination Council recommended
five-phase format: Awareness; Assessment; Renovation; Validation;
Implementation. In addition to the recommended five phases, the Bank's plan has
been expanded to include Contingency Plans and year-end plans.
AWARENESS
AWARENESS PHASE STATUS. The awareness phase of the Bank's Year 2000
Plan continues to be the most active phase. The continuing need to communicate
the potential Year 2000 impact will last through the end of 1999. The Bank will
continue to communicate the status of its Year 2000 efforts and the steps it is
taking to insure the safety and accuracy of customer funds and records.
ASSESSMENT
As of March 1, 1999, all of the Bank's loans of $100,000 or more have
been Year 2000-risk assessed. The review was designed to identify borrowers that
may experience potential disruptions as a result of a failure of their systems,
external systems or suppliers that in turn could impact cash flow and affect
their financial strength. There were no loans that were rated as Year 2000
high-risk. All loans are being monitored on a quarterly basis by the lenders per
the Bank's policy.
The Bank has added to its loan criteria the requirement to evaluate the
applicant's Year 2000 compliance rating as another consideration in determining
the final decision on the loan application. A high Year 2000 risk rating may not
disqualify the applicant in and of itself. If the applicant has a Year 2000
project plan, the plan is on schedule and the risk factors have been addressed
to the satisfaction of the Bank, the Year 2000 risk may not disqualify the
application.
The Bank's investment portfolio has been reviewed for maturity dates.
The money derived from the maturing of some bonds may become part of the total
cash plan for the bank. A contingency plan for cash has been developed and
addresses the level of cash the Bank will retain over the Century Date Change
weekend.
ASSESSMENT PHASE STATUS. The initial assessment of loans, investments
and large funds providers as well as the Bank's information systems and
environmental systems have been completed with positive results. The main
activity for the balance of the year will be monitoring the existing accounts
and reviewing the new ones.
RENOVATION
The Bank of Grays Harbor's automatic teller machines (ATM) and Bank By
Phone (VRU) Systems were successfully tested to be Year 2000 compliant.
RENOVATION PHASE STATUS. All new programs will be subjected to the full
range of Year 2000 testing prior to final acceptance and installation in our
production environment. Only new programs critical to the Bank's systems will be
installed prior to 2000.
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VALIDATION
As listed above, testing of the Bank's mission critical core mainframe
computer software was completed in November 1998. Following extensive and
exhaustive review of the output data by the Bank's technical staff, internal
audit and the users of the systems, the data was determined to be accurate in
all aspects. All non-critical software has been tested and determined to be
accurate in all respects.
VALIDATION PHASE STATUS. Year 2000 validation efforts have been
completed with positive results. Testing will continue in a maintenance mode.
IMPLEMENTATION
IMPLEMENTATION PHASE STATUS. The implementation phase of the Bank's
Year 2000 project is considered to be in an ongoing maintenance mode. The Bank
currently does not plan to install any new systems prior to the year 2000.
NON-TECHNICAL ISSUES
The Year 2000 also gives rise to non-technical issues that have the
potential to create problems. The Bank's environmental systems have been
reviewed and determined to be Year 2000 ready. Only limited changes were
required with minimal expense incurred. The Bank's mission critical equipment
such as vault doors and security systems have been evaluated and are considered
to be Year 2000 ready.
The Bank has evaluated its major third party vendors and its borrowers.
Management has determined that the majority of services provided by vendors are
either Year 2000 compliant, not date sensitive or are not mission critical.
CONTINGENCY AND YEAR END PLANS
Contingency and year-end plans have been completed for all areas of the
Bank. Both plans are considered to be "living documents" and will be refined and
updated to reflect changes and conditions that evolve or develop as time passes.
The Bank has conducted, and continues to conduct, bank-wide walkthrough tests.
Based on results of the tests to date, the walkthrough tests
successfully addressed the objectives of the exercise from several directions.
The plans themselves were well thought out and complete and the process the Bank
designed for handling the issues worked as expected. An independent audit was
performed on the test results.
The Bank has concluded, based on its review of information available to
it, that it cannot now accurately assess the most reasonably likely worst-case
scenario in which the Bank could find itself as a result of Year 2000 issues.
Indeed, the scope of the Year 2000 situation is the subject of worldwide
speculation, and there is no clear picture of the most reasonably likely
worst-case scenario from any source. Management believes that the "living
document" approach described above, and the regular attention to evolving Year
2000 issues and challenges that is necessary for this approach, is the optimal
way to approach the possible worst case scenarios at this point in time. As
noted above, the Bank has in place contingency and year-end plans, which outline
the steps to be taken to minimize the effect on customers and losses to the bank
if
16
<PAGE>
unforeseen circumstances beyond the Bank's control adversely affect its ability
to provide financial services to customers.
AUDIT
Knight, Vale & Gregory Inc., P.S., a public accounting firm, has
completed a review of the Bank's Year 2000 project and provided the Bank with a
report of its findings. The report indicated that Harbor's plan addressed the
Year 2000 issue as expected and was following the FFIEC guidelines. Overall, the
Bank is on schedule with its Year 2000 planning activities and does not have any
significant problems related to its Year 2000 compliance efforts.
SUMMARY
The Bank continues to meet its Year 2000 plan milestones and move
toward its goal of becoming Year 2000 compliant. The Bank remains firm in its
commitment to provide the needed resources to address the Year 2000 issues and
continue to serve its customers into the next century.
ESTIMATED COSTS TO ADDRESS YEAR 2000 ISSUES
The total financial effect that the Year 2000 issues may have on the
Bank cannot be predicted with any certainty at this time. The single largest
Year 2000 expense involves the identification and upgrading of hardware.
Management expects the costs related to Year 2000 issues to amount to
approximately $200,000. The direct costs attributable to Year 2000 efforts
through September 1999 were approximately $40,000. Based upon the information
currently available to it, the Bank does not believe that the costs related to
Year 2000 issues will be material to the Bank's financial condition or results
of operations.
RISKS RELATED TO YEAR 2000 ISSUES
The Year 2000 poses certain risks to the Bank and its operations. Like
the operations of many other companies, the Bank's operations can be adversely
affected by the Year 2000-triggered failures of other companies upon whom it
depends for the functioning of its automated systems and other services.
Accordingly, the Bank's operations could be materially affected if the
operations of mission-critical third party service providers are adversely
affected. The Bank has identified all of its mission-critical vendors and set up
a process to carry out ongoing monitoring of their Year 2000 compliance efforts.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Interest rate,
credit, and operations risks are the most significant market risks, which impact
the company's performance. The company relies on loan review, prudent loan
underwriting standards and an adequate allowance for possible credit losses to
mitigate credit risk.
An asset/liability management simulation model is used to measure interest rate
risk. The model produces regulatory oriented measurements of interest rate risk
exposure. The model quantifies interest rate risk through simulating forecasted
net interest income over a 12 month time period under various interest rate
scenarios, as well as monitoring the change in the present value of equity under
the same rate scenarios. The present value of equity is defined as the
difference between the market value of assets less current liabilities. By
measuring the change in the present value of equity under various rate
scenarios, management is able to identify interest rate risk that may not be
evident in changes in forecasted net interest income.
17
<PAGE>
The company is currently asset sensitive, meaning that interest earning assets
mature or reprice more quickly than interest-bearing liabilities in given
period. Therefore, a significant increase in market rates of interest could
improve net interest income. Conversely, a decreasing rate environment may
adversely affect net interest income.
It should be noted that the simulation model does not take into account future
management actions that could be undertaken should actual market rates change
during the year. An important point should be kept in mind; the model simulation
results are not exact measures of the company's actual interest rate risk. They
are rather only indicators of rate risk exposure, based on assumptions produced
in a simplified modeling environment designed to heighten sensitivity to changes
in interest rates. The rate risk exposure results of the simulation model
typically are greater than the company's actual rate risk. That is due to the
conservative modeling environment, which generally depict a worst-case
situation. Management has assessed the results of the simulation reports as of
September 30, 1999, and believes that there has been no material change since
December 31, 1998.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Effective December 15, 1999, Harbor completed its pending merger of
equals with Pacific Financial Corporation, Long Beach, Washington ("Pacific").
Under the terms of an Amended and Restated Agreement and Plan of Merger (the
"Agreement"), Pacific merged with and into Harbor, and the name of the combined
corporation resulting from the merger is "Pacific Financial Corporation". The
Agreement was included as Appendix 1 to the Joint Proxy Statement/Prospectus
dated November 10, 1999, previously filed by Bancorp as part of its Registration
Statement on Form S-4 with the Securities and Exchange Commission. The
transaction was treated as a pooling for accounting purposes, and accordingly,
all prior results of operations will be restated. The required pro forma
financial statements are attached to this Form 10-Q, filed as part of Item 5.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
EXHIBIT NO.
27 Financial Data Schedule for the nine-month period
ending September 30, 1999.
(b) Reports on Form 8-K:
None.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARBOR BANCORP, INC.
DATED: December 22, 1999 By: /s/ ROBERT J. WORRELL
--------------------------------
Robert J. Worrell
President and Chief Executive
Officer
19
<PAGE>
ITEM 5. OTHER INFORMATION (CONTINUED)
PRO FORMA FINANCIAL INFORMATION
PACIFIC FINANCIAL CORPORATION
PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash and due from banks $8,293 $8,634
Interest bearing balances with banks 8,261 6,389
Federal Funds Sold 3,980 12,595
Investment securities held to maturity 1,592 1,725
Investment securities available for sale 63,862 53,125
Loans 149,752 147,280
Allowance for credit losses 1,931 1,864
Loans, net 147,821 145,416
Premises and equipment 3,566 3,668
Foreclosed real estate 133 131
Accrued interest receivable 1,981 1,864
Other assets 3,652 2,817
TOTAL ASSETS $243,141 $236,364
LIABILITIES
Non-interest bearing deposits $35,537 $31,988
Interest bearing deposits 180,774 178,662
Total deposits 216,311 210,650
Other borrowings 1,475 86
Acccrued interest payable 531 483
Other liabilities 1,434 3,660
TOTAL LIABILITIES $219,751 $214,879
STOCKHOLDERS' EQUITY
Common stock 490 490
Surplus 10,971 10,971
Retained earnings 12,585 9,656
Accumulated other comprehensive income (loss) (656) 368
TOTAL STOCKHOLDERS' EQUITY 23,390 21,485
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $243,141 $236,364
</TABLE>
20
<PAGE>
PACIFIC FINANCIAL CORPORATION
PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans $3,509 $3,641 $10,349 $10,848
Securities held to maturity 74 34 81 92
Securities available for sale:
Taxable 792 560 2,188 1,376
Tax-exempt 107 111 463 478
Deposits with banks and
Federal funds sold 124 272 475 637
Total Interest Income 4,606 4,618 13,556 13,431
INTEREST EXPENSE
Deposits 1,687 1,689 4,981 4,927
Other borrowings 56 55 152 226
Total Interest Expense 1,743 1,744 5,133 5,153
NET INTEREST INCOME 2,863 2,874 8,423 8,278
Provision for credit losses 15 30 15 90
Net interest income after provision
For credit losses 2,848 2,844 8,408 8,188
NON-INTEREST INCOME
Service charges 177 201 563 578
Mortgage loan origination fees 4 8 36 18
Gain (loss) on sale of loans 1 9 (2) 24
Gain (loss) on sale of securities
Available for sale 3 4 10 4
Other operating income 122 123 344 354
Total non-interest income 307 345 951 978
NON-INTEREST EXPENSE
Salaries and employee benefits 950 901 2,862 2,738
Occupancy and equipment 257 262 760 769
Other 471 594 1,472 1,516
Total non-interest expense 1,678 1,757 5,094 5,023
Income before income taxes 1,477 1,432 4,265 4,143
Provision for income taxes 488 443 1,336 1,220
NET INCOME $989 989 $2,929 $2,923
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Earnings per common share:
<S> <C> <C> <C> <C>
Basic $2.02 $2.03 $5.99 $6.00
Diluted 1.99 1.99 5.89 5.90
Average shares outstanding:
Basic 488,969 487,288 488,969 487,281
Diluted 497,914 496,244 497,448 495,169
</TABLE>
22
<PAGE>
PACIFIC FINANCIAL CORPORATION
PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
<S> <C> <C>
Net income 2,929 2,923
Adjustments to reconcile net income to net cash
Provided by operating activities:
Provision for loan losses 15 90
Depreciation and amortization 392 388
Stock dividends received (181) (156)
(Gain) loss on sales of securities (10) (8)
Gain on sales of loans - (15)
Loss on foreclosed real estate - 62
(Increase) decrease in accrued interest receivable (117) (97)
Increase (decrease) in accrued interest payable 48 10
Other (304) (335)
Net cash provided by operating activities 2,772 2,862
INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold 8,615 (7,130)
(Increase) decrease in interest bearing
deposits with banks (1,872) (1,719)
Purchases of securities held to maturity (198) (270)
Proceeds from maturities of investments held to maturity 331 66
Purchases of securities available for sale (38,796) (28,317)
Proceeds from maturities of securities available for sale 25,389 17,080
Proceeds from sales of securities available for sale 1,436 -
Net (increase) decrease in loans (2,451) (1,620)
Proceeds from sales of loans - 1,125
Additions to premises and equipment (266) (211)
Proceeds from sales of foreclosed real estate 28 114
Net cash used in investing activities (7,784) (20,882)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 5,661 25,388
Net increase (decrease) in short-term borrowings 1,389 (2,900)
Issuance of common stock - 8
Payment of dividends (2,379) (2,118)
Net cash provided by financing activities 4,671 20,378
Net increase (decrease) in cash and due from banks (341) 2,358
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
CASH AND DUE FROM BANKS
<S> <C> <C>
Beginning of period 8,634 8,220
End of period 8,293 10,578
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest 5,085 5,143
Income taxes 1,301 1,180
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Unrealized gains (losses) on securities
available for sale, net of tax (1,024) 160
Foreclosed real estate acquired in settlement of loans 30 294
</TABLE>
24
<PAGE>
PACIFIC FINANCIAL CORPORATION
PRO FORMA COMBINED CONDENSED CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON RETAINED INCOME
STOCK SURPLUS EARNINGS (LOSS) TOTAL
<S> <C> <C> <C> <C> <C>
Balance December 31, 1997 $485 $10,881 $8,041 $254 $19,661
Other comprehensive income:
Net income 2,923 2,923
Change in unrealized gain on
Securities available for sale net 160 160
Comprehensive income 3,083
Issuance of common stock 8 8
Balance September 30, 1998 $485 $10,889 $10,964 $414 $22,752
Balance December 31, 1998 $490 $10,971 $9,656 $368 $21,485
Other comprehensive income:
Net income 2,929 2,929
Change in unrealized loss on
Securities available for sale, net (1,024) (1,024)
Comprehensive income 1,905
Balance September 30, 1999 $490 $10,971 $12,585 $(656) $23,390
</TABLE>
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,882
<INT-BEARING-DEPOSITS> 8,111
<FED-FUNDS-SOLD> 3,980
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,376
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 83,977
<ALLOWANCE> 1,156
<TOTAL-ASSETS> 137,424
<DEPOSITS> 123,311
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,168
<LONG-TERM> 0
0
0
<COMMON> 259
<OTHER-SE> 12,686
<TOTAL-LIABILITIES-AND-EQUITY> 137,424
<INTEREST-LOAN> 5,878
<INTEREST-INVEST> 1,297
<INTEREST-OTHER> 458
<INTEREST-TOTAL> 7,633
<INTEREST-DEPOSIT> 2,916
<INTEREST-EXPENSE> 2,916
<INTEREST-INCOME-NET> 4,717
<LOAN-LOSSES> 15
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,925
<INCOME-PRETAX> 2,228
<INCOME-PRE-EXTRAORDINARY> 2,228
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,451
<EPS-BASIC> 5.62
<EPS-DILUTED> 5.46
<YIELD-ACTUAL> 7.67
<LOANS-NON> 625
<LOANS-PAST> 105
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,147
<CHARGE-OFFS> 23
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 1,156
<ALLOWANCE-DOMESTIC> 386
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 770
</TABLE>
