SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended December 31, 1996
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from ________________ to _______________
Commission File Number: 0-20990
-------
HARBOR BANKSHARES CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S><C>
Maryland 52-1786341
- ---------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation) (IRS Employer Identification Number)
25 West Fayette Street 21201
Baltimore, Maryland
- ---------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
- ---------------------------------------------------------------------------------------
Registrant's telephone number: (410) 528-1800
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Common Stock, Par Value $0.01 per share
---------------------------------------
(Title of Class)
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes XXX No
----------------- -----------------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
The number of shares outstanding of the issuer's classes of common
stock as of December 31, 1996, was 633,444 shares with a par value of $0.01.
(Note: This information is required as of the latest practical date.)
<PAGE>
Documents Incorporated by Reference
- -----------------------------------
Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1996 and the Registrant's 1997 Proxy Statement are
incorporated by reference into Parts I and II.
2
<PAGE>
PART I
- ------
Harbor Bankshares Corporation
- -----------------------------
Item 1. Business
- -----------------
Harbor Bankshares Corporation (the Corporation) is a bank holding
company with one bank subsidiary. The Corporation was organized under the laws
of the State of Maryland in 1992. On November 2, 1992, Harbor Bankshares
Corporation acquired all outstanding stock of The Harbor Bank of Maryland (the
Bank), headquartered in Baltimore, Maryland.
During June 1996, The Corporation completed a common stock offering,
with total sales of 198,481 shares and net proceeds of $2.8 million. These
proceeds will be used for the expansion of the Corporation.
The Harbor Bank of Maryland
- ---------------------------
The Harbor Bank of Maryland is a state chartered institution in the
State of Maryland. The deposits of the Bank are insured by the Federal Deposit
Insurance Corporation.
The Harbor Bank of Maryland is a commercial bank headquartered in
Baltimore, Maryland. The Bank conducts a general commercial and retail business.
The Bank was opened on September 13, 1982 and was incorporated under the laws of
the State of Maryland. During the second and third quarters of 1994, the
Corporation, through its subsidiary, The Harbor Bank of Maryland acquired three
(3) branch locations from the Resolution Trust Corporation; two (2) located in
Baltimore City, and one (1) located in Riverdale, Prince George's County. A new
branch location was opened during December 1995 in Baltimore County, expanding
the market area of the Bank. During 1996, in a partnership with a local
supermarket chain located in Baltimore City, a network of ATM machines was
installed, expanding the market of the Bank to different areas of the Baltimore
Metropolitan area. The total number of ATM machines, including the Bank's branch
locations is nineteen.
Harbor Financial Services, a company dealing with the sale of mutual
funds, stocks, insurance etc., was established as a subsidiary of the Bank
during May 1996, in order to compete with that expanding market, the Company had
an operating loss of $72 thousand.
The Bank conducts general banking business in six (6) locations and
serves primarily the Baltimore Metropolitan area. It offers checking, savings
and time deposits, commercial, real estate, personal, home improvement,
automobile and other installment loans, credit cards and term loans. The Bank is
also a member of a local and national ATM network. The retail nature of the Bank
allows for full diversification of deposits and borrowers so it is not dependent
upon a single or a few customers.
3
<PAGE>
Competition
- -----------
The Corporation's only subsidiary, The Harbor Bank of Maryland,
competes with virtually all banks and savings institutions which offer services
in its market area. The Bank directly competes with branches of most of the
State's largest banks, each of which has greater financial and other resources
to conduct large advertising campaigns and to allocate their investment assets
to regions of higher yield and demand. To attract business in this competitive
environment, the Bank relies heavily on local promotional activities and
personal contact by its officers and directors and by its ability to provide
personalized services.
Supervision and Regulation
- --------------------------
Harbor Bankshares Corporation is a registered bank holding company
subject to regulation and examination by the board of governors of the Federal
Reserve System under the Bank Holding Company Act of 1956 (the "Act"). The
Corporation is required to file with the board of governors quarterly and annual
reports and any additional information that may be required according to the
Act. The Act also requires every bank holding company to obtain the prior
approval of the Federal Reserve Board before acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any bank that is
not already majority owned. The Act also prohibits a bank holding company, with
certain exceptions, from engaging in or acquiring direct or indirect control of
more than 5% of the voting shares of any company engaged in non-banking
activities. One of the principal exceptions to these provisions is for engaging
or acquiring shares of a company engaged in activities found by the Federal
Reserve Board to be so closely related to banking or managing banks to be a
proper incident thereto.
The Harbor Bank of Maryland is a state chartered institution insured by
the Federal Deposit Insurance Corporation ("FDIC") and subject to federal and
state laws applicable to commercial banks. The Bank is examined regularly by
FDIC and the State of Maryland Banking Commissioner's office.
In accordance with Federal Reserve regulation, the Bank is limited as
to the amount it may loan affiliates, including the Corporation, unless such
loans are collateralized by specific obligations. Additionally, banking law
limits the amount of dividends that a bank can pay without prior approval from
bank regulators.
Governmental Monetary Policies and Economic Controls
- ----------------------------------------------------
The earnings and growth of the banking industry and ultimately of The
Harbor Bank of Maryland, Harbor Bankshares Corporation's sole subsidiary, are
affected by the credit policies of monetary authorities including the Federal
Reserve System. An important function of the Federal Reserve System is to
regulate the national supply of bank credit in order to control recessionary and
inflationary pressures. Among the instruments of monetary policy used by the
Federal Reserve to implement these objectives are open market operations in U.S.
Government securities, changes in the discount rate of member bank borrowings,
and changes in reserve requirements against member bank deposits. These means
are used in varying combinations to influence overall growth of bank loans and
investments and deposits, and may also affect interest rates charged on loans or
paid for deposits. The monetary policies of the Federal Reserve authorities have
had a significant effect on the operating results of commercial banks in the
past and are expected to continue to have such an effect in the future.
4
<PAGE>
In view of changing conditions in the national economy and in the money
markets, as well as the effect of actions by monetary and fiscal authorities,
including the Federal Reserve System, no prediction can be made as to possible
future changes in interest rates, deposit levels, and loan demand, or their
effect on the business and earnings of the Corporation and its subsidiary.
Employees
- ---------
At December 31, 1996, Harbor Bankshares Corporation and its subsidiary
employed 63 individuals, of which 20 were officers and 43 were full-time
employees.
Executive Officers
- ------------------
Information concerning executive officers of the Corporation is listed
below:
Executive Officers Age Position
- ------------------ --- --------
Joseph Haskins, Jr. 49 Chairman, President and Chief Executive
Officer of the Bank and Corporation
John Paterakis 68 Chairman of the Executive Committee of the
Corporation and the Bank
Teodoro J. Hernandez 51 Treasurer of the Corporation and Vice
President and Cashier of the Bank
George F. Vaeth, Jr. 63 Secretary of the Corporation and the Bank
Statistical Information
- -----------------------
The statistical information required in this section is incorporated
herein by reference from the Registrant's Annual Report to Shareholders for the
year ended December 31, 1996 and from pages 9 through 21 of this form 10-KSB.
Item 2. Properties
- -------------------
The Corporation's Headquarters is located at 25 West Fayette Street,
Baltimore, Maryland 21201. The lease agreement for this location is
approximately 12,777 square feet with a term of ten (10) years, and a renewable
option of five (5) years.
The Bank also maintains another five (5) leased branch offices; three
(3) located in Baltimore City, one (1) located in Prince George's County,
Maryland and one (1) located in Baltimore County, Maryland.
5
<PAGE>
Item 3. Legal Proceedings
- --------------------------
The Corporation and its subsidiaries, at times, and in the ordinary
course of business, are subject to legal actions. Management does not believe
the outcome of such matters will have a material adverse effect on the financial
condition or results of operations of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None
PART II
- -------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
Information listed under "Shareholder Information" in the Annual Report
to Shareholders for the year ended December 31, 1996 is incorporated herein by
reference with respect to prices for the Registrant's common stock and the
dividends paid thereon. The number of Shareholders of Record as of December 31,
1996 was 740.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Information required by this item is incorporated by reference from
information appearing under the caption, "Corporate Financial Review" appearing
on pages 1 through 10 of the Management Discussion and Analysis section of the
Registrant's Annual Report to Shareholders for the year ended December 31, 1996,
and from pages 9 through 21 of this Form 10-KSB.
Item 7. Financial Statements
- -----------------------------
Information required by Item 7 is incorporated by reference from
information appearing on pages 1 through 15 in the Audited Consolidated
Financial Statements section of the Registrant's Annual Report to Shareholders
for the year ended December 31, 1996
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
None
PART III
- --------
Item 9. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
Information required by this item is incorporated by reference from
information appearing under the caption, "Election of Directors" on pages 2 to 7
of the Registrant's 1997 Proxy Statement and page 5 of this report under the
caption of "Executive Officers" of the Registrant.
6
<PAGE>
Item 10. Executive Compensation
- --------------------------------
Information required by this item is incorporated by reference from
information appearing under the caption "Executive Compensation" on pages 7 to
10 of the Registrant's 1997 Proxy Statement.
Item 11. Security ownership of certain beneficial owners and management
- ------------------------------------------------------------------------
Information required by Item 11 is incorporated by reference from
information appearing on pages 2 to 7 of the Registrant's 1997 Proxy Statement,
under the caption of "Election of Directors" of the Registrant.
Item 12. Certain relationships and related transactions
- --------------------------------------------------------
The information required by Item 12 is incorporated by reference from
Note 11 on page 19 in the Audited Consolidated Financial Statements section of
the Registrant's Annual Report to Shareholders.
PART IV
- -------
Item 13. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
(1) The following consolidated financial statements of the Registrant
and its subsidiary, included in the Annual Report to Shareholders for the year
ended December 31, 1996, are incorporated herein by reference in Item 8:
Consolidated Statements of Financial Condition
As of December 31, 1996 and 1995
Consolidated Statements of Income
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity Years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Ernst & Young, LLP, Independent Auditors
Harbor Bankshares Corporation 1997 Proxy Statement
7
<PAGE>
All other schedules to the consolidated financial statements required
by Article 9 of Regulation S-X and all other schedules to the financial
statements of the Registrant required by Article 5 of Regulation S-X are not
required under the related instructions or are inapplicable and, therefore, have
been omitted.
(2) List of financial items attached:
Consolidated Average Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Average Rates
Interest Variance Analysis
Investment Securities -- Book Value
Investment Securities -- Weighted Rate by Maturity
Investment Securities -- Market Value
Investment Securities -- Maturities
Loan Distribution
Risk Elements of Loan Portfolio
Summary of Loan Loss Experience
Loan Maturities and Sensitivity
Time Certificates -- $100,000 Maturities
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
8
<PAGE>
CONSOLIDATED AVERAGE STATEMENTS OF FINANCIAL CONDITION AND RATIOS
(in 000s)
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
---- ---- ----
<S><C>
ASSETS
U.S. Treasury Securities $ ---- $ 1,321 $ 3,627
U.S. Government Agencies 14,880 8,944 7,717
Interest-Bearing Deposits with Other Banks 7,064 7,712 9,190
FHLB Stock and Other Securities 561 418 270
Federal Funds Sold 3,103 4,786 20,784
--------- --------- --------
$ 25,608 $ 23,181 $ 41,588
Commercial Loans 7,451 4,862 3,324
Real Estate Mortgages 70,697 67,508 37,062
Consumer Loans 3,010 2,541 1,885
--------- --------- --------
Loans Net of Unearned Income 81,158 74,911 42,271
Total Earning Assets 106,766 98,092 83,859
Allowance for Possible Losses (880) (817) (499)
Other Assets 10,410 9,584 5,566
--------- --------- --------
TOTAL ASSETS $ 116,296 $ 106,859 $ 88,926
========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-Interest Bearing Deposits $ 9,316 $ 8,991 $ 8,640
Interest-Bearing Transaction Accounts 15,798 18,184 19,434
Savings 35,671 33,386 26,541
Time - $100,000 or more 11,792 8,748 7,557
Other Time 28,329 24,648 18,816
--------- --------- --------
TOTAL Deposits $ 100,906 $ 93,957 80,988
Other borrowed money 1,452 1,195 ----
Notes payable 5,796 5,796 2,724
Other Liabilities 888 593 584
--------- --------- --------
TOTAL Liabilities $ 109,042 $ 101,541 $ 84,296
SHAREHOLDERS' EQUITY 7,254 5,318 4,630
--------- --------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 116,296 $ 106,859 $ 88,926
========= ========= ========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
RATIOS 1996 1995 1994
---- ---- ----
<S><C>
Average Equity to Average Total Assets 6.24% 4.98% 5.21%
Return on Assets .49% .64% .70%
Return on Equity 7.90% 12.8% 13.5%
Dividend Payout Ratio 15.1% 12.7% 14.0%
</TABLE>
CAPITAL SCHEDULE
Risk-based guidelines apply on a consolidated basis to bank holding companies
with consolidated assets of $150 million or more. For those holding companies
with less than $150 million in assets, the guidelines will be applied on a
bank-only basis. As Harbor Bankshares Corporation had total consolidated assets
of $130 million and $113 million at December 31, 1996 and 1995, respectively,
only the capital ratios of the Bank are disclosed below.
The Harbor Bank of Maryland Regulatory Requirements
Primary Capital 8.93% 4.0%
Risk-Based Capital 15.75% 8.0%
10
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(000s except per share data)
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
---- ---- ----
<S><C>
INTEREST AND FEES ON LOANS
Commercial Loans $ 732 $ 512 $ 289
Real Estate Mortgages 6,702 6,339 4,034
Consumer Loans 371 311 211
------- ------- -------
TOTAL Interest and Fees on Loans(1) $ 7,805 $ 7,162 $ 4,534
Interest on Taxable Investment Securities 976 597 558
Interest on Other Investments(2) 400 431 508
Interest on Federal Funds Sold 165 300 937
------- ------- -------
TOTAL Interest Income 9,346 8,490 6,537
INTEREST EXPENSE
Savings 1,235 1,018 896
Interest-Bearing Transaction Accounts 412 462 490
Time - $100,000 or more 635 463 289
Other Time 1,497 1,275 727
Other Borrowed Money 81 78 ----
Interest on Notes Payable 309 335 124
------- ------- -------
TOTAL Interest Expense 4,169 3,631 2,526
Net Interest Income 5,177 4,859 4,011
Provision for Possible Credit Losses 60 183 248
------- ------- -------
Net Interest Income After Provision for Possible
Credit Losses 5,117 4,676 3,763
Other Income 759 635 786
Investment Security Gains (Losses) ---- ---- ----
Other Expenses 4,888 4,181 3,554
------- ------- -------
Income Before Taxes 988 1,130 995
Applicable Income Tax 415 451 370
------- ------- -------
NET INCOME $ 573 $ 679 $ 625
===== ===== =====
PER COMMON SHARE
NET INCOME $ 1.09 $ 1.59 $ 1.46
====== ====== ======
Dividends per Share $ .20 .20 $ .14
====== ====== ======
</TABLE>
11
<PAGE>
NOTES ON CONSOLIDATED STATEMENTS OF INCOME:
(1) Loan fees, which are included in Interest Income, were $291 in 1996, $232
in 1995, and $210 in 1994.
(2) Certificates of Deposit with other financial institutions.
12
<PAGE>
The following is a chart that illustrates the average rates earned or paid
for the years 1996, 1994 and 1993:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
---- ---- ----
<S><C>
AVERAGE RATES EARNED
Commercial Loans 9.82% 10.53% 8.69%
Real Estate Mortgages 9.48% 9.39% 10.88%
Consumer Loans 12.33% 12.23% 11.19%
Taxable Investment Securities 6.56% 5.59% 4.92%
Other Investments(1) 5.66% 5.59% 5.53%
Federal Funds Sold 5.32% 6.27% 4.51%
------ ------ ------
TOTAL Earning Assets 8.75% 8.65% 7.79%
AVERAGE RATES PAID
Interest Bearing Transaction Accounts 2.61% 2.54% 2.52%
Savings 3.46% 3.05% 3.38%
Time - $100,000 or more 5.39% 5.29% 3.82%
Other Time 5.28% 5.17% 3.86%
Other Borrowed Money 5.58% 6.53% ----
Notes Payable 5.33% 5.78% 4.51%
------ ------ ------
TOTAL Interest Bearing Deposits 4.55% 3.96% 3.46%
NET YIELD ON EARNING ASSETS 4.20% 4.69% 4.33%
</TABLE>
(1) Certificates of Deposit with other financial institutions.
13
<PAGE>
The following table sets forth, for the periods indicated, a summary of
the changes in interest earned and interest paid resulting from changes in
volume and changes in rates:
INTEREST VARIANCE ANALYSIS
(in 000s)
<TABLE>
<CAPTION>
1996 COMPARED TO 1995 1995 COMPARED TO 1994
Increase (Decrease) due to: Increase (Decrease) due to:
-------------------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S><C>
INTEREST INCOME
Loans $ 1,032 $ (389) $ 643 $ 3,118 $(490) $ 2,628
Investment Securities 268 111 379 (53) 92 39
Federal Funds Sold (89) (46) (135) (1,002) 365 (637)
Other Interest Bearing
Assets (1) (85) (54) (31) (132) 55 (77)
------- ------ ----- ------- ----- -------
TOTAL Interest
Income $ 1,126 $ (270) $ 856 $ 1,931 $ 22 $ 1,953
======= ======= ===== ======= ===== =======
INTEREST EXPENSE
Interest-Bearing
Transaction Accounts $ (182) $ 132 $ (50) $ (66) $ 38 $ (28)
Savings 80 137 217 210 (88) 122
Time - $100,000 or
more 163 9 172 63 111 174
Other Time 195 27 222 302 246 548
Other Borrowed Money 14 (11) 3 78 ---- 78
Notes Payable ---- (26) (26) 176 35 211
------- ------ ----- ------- ----- -------
TOTAL Interest
Expense $ 270 $ 268 $ 538 $ 763 $ 342 $ 1,105
======= ====== ===== ======= ===== =======
NET INTEREST
INCOME $ 856 $ (538) $ 318 $ 1,168 $(320) $ 848
======= ======= ===== ======= ===== =======
</TABLE>
Note: Loan fees, which were included in interest income were $291 in 1996,
$232 in 1995 and $210 in 1994. A change in Rate/Volume has been
allocated to the change in rate.
(1) Certificates of Deposit with other financial institutions.
14
<PAGE>
The following table shows the Corporation's investment security maturity
distribution as of December 31, 1996:
INVESTMENT SECURITIES
(in 000s)
<TABLE>
<CAPTION>
U.S. Treasury U.S. Government Other Securities TOTAL
Agencies
<S><C>
Maturing Within One Year ---- ---- ---- $ ----
Maturing After One But ---- $ 15,992 ---- $15,992
Within Five Years
Maturing After Five But ---- ---- ---- ----
Within Ten Years
Maturing After Ten Years ---- ---- $ 593 $ 593
---- ------ ----- -------
TOTAL $ ---- $ 15,992 $ 593 $16,585
======= ======== ===== =======
</TABLE>
The following table shows a weighted average interest rate for the
Corporation's investment securities as of December 31, 1995:
INVESTMENT SECURITIES
(Weighted Average)
<TABLE>
<CAPTION>
U.S. Treasury U.S. Government Other Securities TOTAL
Agencies
<S><C>
Maturing Within One Year ---- ---- ---- ----
Maturing After One But ---- 6.22% ---- 6.22%
Within Five Years
Maturing After Five But ---- ---- ---- ----
Within Ten Years
Maturing After Ten Years ---- ---- 7.38% 7.38%
------ ----- ----- -----
TOTAL ---- 6.22% 7.38% 6.80%
====== ===== ===== =====
</TABLE>
15
<PAGE>
The following table sets forth the carrying amount and the market value of
the Corporation's investment securities at the dates indicated:
INVESTMENT SECURITIES
(in 000s)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Book Market Book Market Book Market
---- ------ ---- ------ ---- ------
<S><C>
U.S. Treasury ---- ---- ---- ---- $ 3,002 $ 2,957
U.S. Government 15,992 15,876 10,447 10,485 10,493 10,283
Agency
Other Securities 593 593 447 447 300 300
------- ------- ------- ------- ------- -------
TOTAL $16,585 $16,469 $10,894 $10,932 $13,795 $13,540
======= ======= ======= ======= ======= =======
</TABLE>
16
<PAGE>
The following is a table that shows the Corporation's loan distribution at
the end of each of the last five years:
LOAN DISTRIBUTION
(in 000s)
<TABLE>
<CAPTION>
December 31 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S><C>
Commercial Loans $ 9,612 $ 5,891 $ 3,761 $ 3,190 $ 2,854
Real Estate 72,017 69,414 52,418 31,156 27,914
Mortgages
Consumer Loans 3,713 2,804 2,122 1,734 1,527
-------- -------- -------- -------- --------
TOTAL $ 85,342 $ 78,109 $ 58,301 $ 36,080 $ 32,295
======== ======== ======== ======== ========
</TABLE>
LOAN DISTRIBUTION
(Percent)
<TABLE>
<CAPTION>
December 31 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S><C>
Commercial Loans 11.26% 7.54% 6.45% 8.84% 8.84%
Real Estate Loans 84.39% 88.87% 89.91% 86.35% 86.43%
Consumer Loans 4.35% 3.59% 3.64% 4.81% 4.73%
------ ------ ------ ------ ------
TOTAL 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
</TABLE>
17
<PAGE>
The following is a chart that gives the summary of the loan loss
experience for each year in the five year period ended December 31, 1996:
SUMMARY OF LOAN LOSS EXPERIENCE
(in 000s)
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S><C>
Balance at Beginning of
Period $ 817 $ 658 $ 428 $ 344 $ 286
Loans Charged Off:
Commercial Loans 14 --- 4 1 27
Real Estate Mortgages 5 6 19 16 15
Consumer Loans 34 29 8 16 30
------ ------ --- ---- ---
TOTAL Loans Charged Off $ 53 $ 35 $ 31 $ 33 $ 72
Recoveries of Loans:
Commercial Loans 57 1 2 1 1
Real Estate Mortgages --- 6 --- 8 2
Consumer Loans 8 4 11 12 21
------- ------- ----- ----- -----
TOTAL Loans Recovered 65 11 13 21 24
------- ------- ----- ----- -----
Net Loans Charged Off (12) 24 18 12 48
------- ------- ----- ----- ----
Provisions Charged to
Operations 60 183 248 96 106
----- ----- ----- ----- -----
Balance at End of Period $ 889 $ 817 $ 658 $ 428 $ 344
===== ===== ===== ===== =====
Daily Average Amount of
Loans $ 81,158 $ 74,911 $ 42,271 $ 33,546 29,802
======== ======== ======== ======== ======
Allowance for Possible Loan
Losses to Loans Outstanding 1.04% 1.09% 1.13% 1.18% 1.07%
===== ===== ===== ===== =====
Net Charge Offs to Average
Loans Outstanding (.01%) .03% .04% .04% .16%
====== ==== ==== ==== ====
</TABLE>
18
<PAGE>
RISK ELEMENTS OF LOAN PORTFOLIO
(in 000s)
December 31 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Non-Accrual Loans $ 284 none $ 200 $ 200 none
----- ---- ----- ----- ----
Accruing Loans Past
Due 90 Days or More 276 481 143 34 42
----- ---- ----- ----- ----
Restructured Loans none none none none none
===== ==== ===== ===== ====
The following is information with respect to non-accrual loans at December
31, 1996 and December 31, 1995:
1996 1995
---- ----
Interest Income that Would Have Been Recorded $ 22 $----
----- -----
Under Original Terms
Interest Income Recorded during the Period $ 3 ----
----- -----
It is the policy of the Corporation to place a loan on non-accrual status
whenever there is substantial doubt about the ability of a borrower to pay
principal or interest on any outstanding credit. Management considers such
factors as payment history, the nature of the collateral securing the loan, and
the overall economic situation of the borrower when making a non-accrual
decision. Non-accrual loans are closely monitored by management. A non-accruing
loan is restored to accrual status when principal and interest payments have
been brought current or it becomes well-secured or is in the process of
collection and the prospects of future contractual payments are no longer in
doubt.
Potential Problem Loans
At December 31, 1996, the Corporation had $1.7 million in loans for which
the borrowers are experiencing financial difficulties. Those loans are subject
to constant management attention and their classification is reviewed monthly.
As of December 31, 1996, 84.4% of the Corporation's loan portfolio was
secured by real estate, mainly, 1-to-4 family residential properties.
Management analyzes the reserve for possible loan losses on a quarterly
basis. Those factors considered in determining the adequacy of the reserve
include specific identification of known risk loans, adequacy of collateral on
specific past due and non-accrual loans, past experience, the ratio of the
reserve to net loans and current and anticipated economic conditions affecting
the customer base in the area the Bank serves.
Management allocates the reserve for possible loan losses by type of loan.
Both performing and non-performing loans are also reviewed periodically to
identify high risk assets and their potential impact upon the reserve. Based on
all information known to date, management does not expect net losses as a
percentage of average loans in 1997 to exceed the 1996 levels.
19
<PAGE>
The following is a table that shows the maturity of loans as of December
31, 1996:
<TABLE>
<CAPTION>
Commercial Real Estate Consumer
Loans Mortgages Loans TOTAL
---------- ----------- -------- -----
<S><C>
Maturing Within One Year $ 7,603 $ 22,657 $ 684 $ 30,944
Maturing After One Year
But Within Five Years 2,009 8,729 632 $ 11,370
Maturing After Five Years --- 40,631 2,397 $ 43,028
------ --------- -------- --------
TOTAL $ 9,612 $ 72,017 $ 3,713 $ 85,342
======= ======== ======= ========
</TABLE>
Classified By Sensitivity To Changes In Interest Rates:
<TABLE>
<CAPTION>
Adjustable
Fixed Interest Interest
Rate Loans Rate Loans TOTAL
-------------- ---------- -----
<S><C>
Maturing Within One Year $ 1,869 $ 29,075 $ 30,944
Maturing After One But Within
Five Years 7,585 3,785 11,370
Maturing After Five Years 43,028 ---- 43,028
-------- -------- --------
TOTAL $ 52,482 $ 32,860 $ 85,342
======== ======== ========
</TABLE>
20
<PAGE>
Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1996 and 1995 are summarized as follows:
TIME CERTIFICATES OVER $100,000
(in 000s)
MATURING: 1996 1995
---- ----
Three months or less $ 3,434 $ 3,870
Three to six months 2,354 3,310
Six to twelve months 3,283 3,494
Over twelve months 8,309 674
-------- -----
TOTAL $ 17,380 $ 11,348
Long and Short Term Borrowings
Short term borrowings consist of borrowings from the FHLB. These
borrowings reprice daily, have maturities of one year or less and may be prepaid
without penalty. Long term borrowings consist of a five-year note from the
Resolution Trust Company with quarterly interest payments based on Treasury Bill
rates and principal payment at the end of the fifth year. Principal payments can
be made without penalty before the maturity of the note.
The table below presents certain information with respect to the
borrowings:
Years ended December 31,
------------------------
1996 1995
---- ----
(Dollars in Thousands)
Amount outstanding at period-end:
Long-term promissory note $ 5,796 $ 5,796
Borrowings from FHLB --- ---
Average outstanding:
Long-term promissory note $ 5,796 $ 5,796
Borrowings from FHLB 1,452 1,195
Weighted average interest rate during the period:
Long-term promissory note 5.33% 5.93%
Borrowings from FHLB 5.58% 6.56%
21
<PAGE>
Pursuant to the requirements of Section 13 or 15(D) 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 BANKSHARES CORPORATION
/s/ Teodoro J. Hernandez
By: __________________________________________________
Treasurer
Title: __________________________________________________
March 27, 1997
Date: __________________________________________________
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant, and in the
capacities, and on the dates indicated:
/s/ Stanley W. Tucker
By: __________________________________________________
Director
Title: __________________________________________________
March 27, 1997
Date: __________________________________________________
/s/ John Paterakis
By: __________________________________________________
Director
Title: __________________________________________________
March 27, 1997
Date: ________________________________________________
/s/ Louis J. Grasmick
By: __________________________________________________
Director
Title: __________________________________________________
March 27, 1997
Date: __________________________________________________
22
<PAGE>
/s/Joseph Haskins, Jr.
By: __________________________________________________
Chairman, President and CEO
Title: __________________________________________________
March 27, 1997
Date: __________________________________________________
23
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operation
Corporate Financial Review
OVERVIEW
Harbor Bankshares Corporation continued its expansion during 1996,
through its subsidiary, The Harbor Bank of Maryland. A network of fifteen ATM
Machines was established during September 1996 in a partnership with Stop, Shop
and Save, a Supermarket chain located in Baltimore City creating a new market
for the services of the Corporation. In addition, two other ATM locations were
added, bringing the total of machines in the network, including existing branch
locations, to nineteen.
During May of 1996, the Corporation's only subsidiary, The Harbor Bank
of Maryland, established Harbor Financial Services, a company dealing with the
sales of Insurance, Mutual Funds and other financial services. The Company was
established to provide additional financial services to the Bank's customer
base.
During July 1996, a secondary common stock offering of 198,481 shares
was concluded. The net proceeds of $2.8 million were raised to help continue the
growth of the Corporation through the establishment of additional branches to
better serve its customer base. The secondary offering of common stock increased
average shares outstanding by approximately 100,000 shares, and accordingly
reduced earnings per share.
Net earnings for Harbor Bankshares Corporation, were $573 thousand for
1996, compared to $679 for 1995, a decrease of $106 thousand or 15.6%. The
Corporation's only subsidiary, The Harbor Bank of Maryland, achieved earnings of
$777 thousand in 1996, with a Return on Average Assets of .67%.
1
<PAGE>
HARBOR BANKSHARES CORORATION AND SUBSIDIARY
The Corporation's Return on Average Assets (ROAA) was .49%, compared to
.64% earned during 1995, reflecting the cost of the expansions and the one time
assessment fee from the FDIC which totaled $235 thousand. Return on Average
Equity (ROAE) was 7.9% for 1996 compared to 12.8% for 1995.
Earnings per average outstanding share, adjusted retroactively for the
1 1/3% stock dividend declared January 15, 1997, payable February 28, 1997 to
common stockholders or record on January 31, 1997 for the years ended 1996 and
1995, decreased to $1.07 in 1996 from $1.55 the previous year.
FDIC ASSESSMENT AND ACQUISITIONS
The FDIC has implemented a risk-related assessment system for deposit
insurance premiums. All depository institutions have been assigned to one of
nine risk assessment classifications based upon certain capital and supervisory
measures.
As a result of the acquisition of branch offices and related insured
deposits of John Hanson Federal Savings Bank and Second National Federal Savings
Bank, approximately 49.5% of the Bank's "average assessment base" (as defined in
the FDIC's regulations) was subject to the deposit assessment rates of the
Savings Association Insurance Fund ("SAIF") of the FDIC. Because the SAIF
remained substantially undercapitalized, legislation was introduced in Congress
to recapitalize SAIF by a one-time special assessment on SAIF assessable
deposits (including those held by banks). The one-time assessment, recognized in
the Corporation's consolidated financial statements as of September 30, 1996,
was $235 thousand. This assessment had a negative impact on the Corporation's
earnings for 1996.
2
<PAGE>
HARBOR BANKSHARES COPORATION AND SUBSIDIARY
NET INTEREST INCOME
Net interest income is the difference between interest income and
related fees on earning assets and the interest expense incurred on deposits.
Net Interest Income continued to be the Corporation's main source of earnings.
Net interest income increased to $5.2 million in 1996 from$4.9 million in 1995.
Total interest income increased by $855 thousand or 10.1% to $9.3
million for 1996 when compared to the $8.5 million earned during 1995. A growth
in total average earning assets of 8.8%, mainly in the loan portfolio, was the
main reason for the increase.
Total interest expense increased by $539 thousand or 14.8% to $4.2
million in 1996 from $3.6 million in 1995. This increase was mainly due to the
growth in interest bearing deposits and higher interest rates paid on deposits,
used to fund the loan growth discussed above.
Net interest margin for 1996 was 4.92% compared to 5.05% for 1995.
3
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
The following table compares the components of the net interest margin
and the changes occurring in those components from 1996 to 1995.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Net Interest Margin
(as percent of earning assets)
1996 1995 Basis Point
---- ------ -----------
Change
------
<S><C>
Yield on earning assets 8.75% 8.65% .10%
Rate paid on interest bearing liabilities 4.22% 3.96% .26%
Net benefit of non-interest bearing funds .39% .36% .03%
Average cost of funds 3.83% 3.60% .23%
Net interest margin 4.92% 5.05% (.13%)
- ---------------------------------------------------------------------------------------------------
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses was $60 thousand for 1996, a decrease of
$123 thousand from the $183 thousand provided in 1995. The reserve level is
monitored closely by management on a quarterly basis based on charge-off
experience and management's risk rating on past due and non-performing loans.
The reserve level as of December 31, 1996, is considered adequate. The
Corporation maintains a highly collateralized loan portfolio consisting mainly
of residential and commercial mortgage loans. Charge-offs increased from $35
thousand in 1995 to $53 thousand in 1996. Recoveries for 1996 totaled $65
thousand compared to $10 thousand for 1995. The ratio of the loan loss reserve
to outstanding loans was 1.04% for 1996 compared to 1.05% for 1995.
OTHER OPERATING INCOME
Non-interest income increased by $124 thousand or 19.6% to $760
thousand in 1996. Increased fees and service charges contributed to the
increase.
4
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
OTHER OPERATING EXPENSES
Non-interest expenses, at $4.9 million in 1996, increased by 17.5% as
compared to $4.2 million in 1995 . Salaries and benefit expenses increased to
$2.2 million in 1996 from $1.9 million in 1995. The increase was caused by
additional staff, salary increases and benefit costs. Other expenses increased
by $481 thousand or 21.1%. The $235,000 FDIC assessment discussed above caused
the majority of the increase in other operating expenses. Costs such as,
occupancy, legal , and data processing fees due to higher account activity also
contributed to the increase in other operating expenses.
APPLICABLE INCOME TAXES
Applicable income taxes includes current and deferred portions which
are detailed in Note 8 of the audited consolidated financial statements. At $391
thousand, taxes represented 40.5% of income before taxes for 1996 and $451
thousand or 39.9% for 1995.
CREDIT RISK ANALYSIS
The Corporation, through its subsidiary, The Harbor Bank of Maryland,
has in place credit policies and procedures designed to control and monitor
credit risk. Credit analysis and loan review functions have provided a check and
balance system for assessing initial and ongoing risk associated with the
lending process.
Non-performing loans, comprised of non-accruing loans and accruing
loans 90 days or more past due, were $559 thousand or .65% of gross loans
outstanding at the end of 1996. This compares with $481 thousand or .62% of
gross loans outstanding at the end of 1995.
5
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
The reserve for possible loan losses increased from $817 thousand at
the end of 1995 to $889 thousand at the end of 1996. As of year end, the reserve
represented 1.04% of gross loans outstanding. Based on quarterly analyses
conducted throughout the year, this reserve is considered adequate by
management.
ASSET AND LIABILITY MANAGEMENT
Introduction
The Investment Committee of the Corporation reviews policies regarding
the sources and uses of funds, maturity distribution, and associated interest
rate sensitivities. This effort is aimed at minimizing risks associated with
fluctuating interest rates, as well as maintaining sufficient liquidity.
Liquidity
Liquidity describes the ability of the Corporation to meet financial
obligations, including lending commitments and contingencies, that arise during
the normal course of business. Liquidity is primarily needed to meet the
borrowing and deposit withdrawal requirements of the customers of the
Corporation, as well as to meet current and planned expenditures. The
Corporation through the Bank, is required to maintain adequate sources of cash
in order to meet its financial commitments in an organized manner without
incurring substantial losses. These commitments relate principally to changes in
the Bank's deposit base through withdrawals and changes in funds required to
meet normal and seasonal loan demands. The Bank, and thereby the Corporation,
derives liquidity through the maturity distribution of the investment portfolio,
loan repayments and income from earning assets. The Bank maintains a portion of
its investment portfolio as a liquidity reserve which can be converted to cash
on an immediate basis with minimal loss.
6
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
The Bank has also established secured lines of credit with the FHLB
as an additional source of liquidity. Collateral must be pledged to the FHLB
before advances can be obtained. At December 31, 1996, The Corporation had
sufficient collateral in order to borrow up to an aggregate of $13.0 million
from the FHLB under the established lines of credit, if necessary. Liquidity is
also provided through the Corporation's portfolio of liquid assets, consisting
of cash and due from banks, interest-bearing deposits in other banks and
investment securities available for sale. Such assets totaled $12.5 million or
9.6% of total assets at December 31, 1996.
The Corporation derives its cash from a combination of operating
activities, investing activities and financing activities as disclosed in the
consolidated statement of cash flows. Cash flow from operating activities
consists of interest income collected on loans and investments, interest expense
paid on deposits and other borrowings, other income collected such as cash
received relating to service charges, and cash payments for other operating
expenses including income taxes. Cash flows from investing activities include
the purchase, sale and maturity of investments and interest bearing deposits in
other banks, the net increase in the level of loans, and purchases of premises
and equipment. Cash flows from financing activities consist of movements in the
level of deposits and other borrowings, proceeds from the issuance of stock, and
payment of cash dividends.
7
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
For the year ended December 31, 1996, net cash provided by operating
activities totaled $1.1 million. Net cash used in investing for the same period
totaled $11.6 million resulting primarily from a net increase in loans of $7.2
million and purchases of securities totaling $9.0 million offset by the
maturities of investments and interest bearing deposits in other banks totaling
$5.4 million. Purchases of premises and equipment totaled $664 thousand. Net
cash provided by financing activities for the year ended December 31, 1996
totaled $15.8 million resulting primarily from a net increase in deposits of
$8.3 million and net proceeds from the stock offering of $2.9 million.
INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to the degree that earnings will be
affected by changes in the general level of interest rates. Interest sensitive
assets are typically loans which have interest rates related to the prime
interest rate or other type of index. Interest sensitive liabilities have
interest rates which likewise vary based upon market changes. Reducing the net
interest rate sensitivity of the Corporation's balance sheet is the goal of the
asset/liability management process.
One measure of interest rate sensitivity is the difference between
interest sensitive assets and interest sensitive liabilities, called the
"interest sensitivity gap". The following table shows an analysis of the
Corporation's cumulative interest sensitivity gap position. In those time frames
where the interest sensitive gap is negative, a decline in interest rates will
improve the interest margins. For those periods where the interest sensitivity
gap is positive, the net interest margins should improve as interest rates rise.
8
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
- -------------------------------------------------------------------------------
Cumulative Interest Sensitive Gap
Repricing or Maturity
-----------------------------------------
December 31, 1996 (in millions) 3 months 6 months 1 year
-------- -------- ------
Interest sensitive assets $ 40 $ 45 $ 53
Interest sensitive liabilities 33 44 56
-- ----- ------
Interest sensitivity gap $ 7 $ 1 $ (3)
==== ===== ======
Gap to total assets 5.4% .8% (2.3%)
- --------------------------------------------------------------------------------
LONG AND SHORT TERM BORROWINGS
During 1994 the Corporation borrowed from the Resolution Trust
Corporation $5.8 million to invest as tier one capital in its subsidiary, The
Harbor Bank of Maryland. This borrowing was necessary to maintain adequate
capital levels due to the growth achieved through the purchase of three (3)
branches from the Resolution Trust Corporation. These borrowings require
quarterly interest payments based on Treasury bill rates and a principal payment
at the end of the fifth year. Principal payments can be made at any time before
the end of the term. The interest paid on the debt for 1996 was $309 thousand.
Short term borrowings consist of borrowings from the FHLB. These borrowings
reprice daily, have maturities of one year or less and may be prepaid without
penalty. During 1996, the Company borrowed up to a total of $3.5 million of
these short term borrowings in order to finance its loan demand. These
borrowings were repaid during the third quarter of 1996. There were no
outstanding short term borrowings as of year ended December 31, 1996.
9
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
Capital Resources
Shareholders' equity grew by $3.4 million or 59.9% to $9.0 million.
This increase was mainly due to the stock offering that took place during June
1996 which increased shareholders equity by $2.8 million and the earnings
retained by the Corporation. Shareholder's equity was 6.9% of total assets as of
the year end. The Tier 1 capital ratio as of December 31, 1996 was 15.75%, and
the risk based capital ratio was 17.00%. Both ratios were above the minimum
requirements established by regulators which were 4.0% for tier 1 capital and
8.0% for total risk based capital. The book value of each share of common stock
rose from $13.17 at the end of 1995 to $14.21 at the end of 1996, a 7.9%
increase.
Changes in Financial Position
The Corporation through its subsidiary, The Harbor Bank of Maryland,
continued its growth during 1996. An ATM network was established in Baltimore
City in partnership with a supermarket chain, as well as the establishment of a
financial service company.
Assets grew by $16.3 million or 14.4% to $129.7 million from $113.3
million in 1995. Deposits increased by $13.0 million to $114.1 million or 12.9%
from $101.1 million in 1995, and net loans increased by $7.1 million to $84.5
million or 9.3% over $77.3 million in 1995.
The Corporation plans to continued its expansion through marketing
efforts by its management and board of directors.
10
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
Deposit growth provided the major source of additional funds. Use of
these funds was reflected in the growth of the investment and loan portfolio.
FINANCIAL ANALYSIS - 1995 AND 1994
Net income for 1995 increased by $54 thousand or 8.7% to $679 thousand
from $625 thousand in 1994.
Stockholders' equity increased by 11.5% to $5.6 million during 1995,
and assets increased by 6.9% to $113.3 million. Repricing of liabilities and
substantial growth in earning assets contributed to the increase.
On a per share basis, adjusted retroactively for the 1 1/3% stock
dividend declared January 15, 1997, payable February 28, 1997, to common
stockholders of record on January 31, 1997, for the years ended 1995 and 1994,
net income was $1.55 in 1995 up $0.12 from $1.43 in 1994.
Net interest income for 1995 increased by $848 thousand or 21.1% to
$4.9 million due to the growth in the loan and investment areas. Average earning
assets increased by $25.9 million or 35.9% to $98.1 million in 1995. The
increased net interest income during 1995, when compared to 1994, was mainly due
to the effect of increased balances in earning assets.
During 1995, the provision for possible loan losses decreased by $65
thousand or 26.1%. The decrease in 1995 reflects the need for less provision due
to the quality of the loan portfolio, although, outstanding loans continue to
increase during the year.
11
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
Non-interest income decreased by $151 thousand or 19.2% during 1995
when compared to 1994. During 1994, revenues due to the sale of real estate
loans totaled $218 thousand. There were no sale of loans during 1995.
Non-interest expenses increased by $627 thousand or 17.6% over the
previous year. Salaries and benefits increased by $352 thousand or 22.7% due to
increased staff, and salary increases for existing staff. Occupancy expense
increased by $77 thousand or 21.7% over the previous year, equipment expense
increased by $79 thousand or 64.5% and other expenses increased by $119 thousand
or 7.8%. These increases were mainly related to branch expansions, as a result
of the opening of one branch during December 1995 and the acquisition of three
branch locations from the Resolution Trust Corporation during June and September
1994. The full cost of the operations of the three locations purchased, is
reflected in the 1995 operating expenses.
Applicable income taxes for 1995 increased by $81 thousand or 21.7% due
to increased earnings.
Deposits grew by $6.4 million or 6.7%. This increase was the result of
the continued effort of the Corporation to attract new business.
Net loans increased by $19.6 million or 34.1%, and investment
securities decreased by $2.9 million or 20.9%. Both of these asset categories
were the main user of the source of funds provided by the deposit growth.
Shareholders' Equity grew by $583 thousand or 11.5% due to retained
earnings.
12
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
The Tier 1 capital ratio as of December 31, 1995 was 11.92%, and the
risk based capital ratio was 13.17%; both were well above minimum regulatory
requirements.
OTHER INFORMATION
Effective January 1, 1996, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," SFAS No. 122,
"Accounting for Mortgage Servicing Rights - an Amendment of SFAS 65," and SFAS
No. 123, "Accounting for Stock Based Compensation." The adoption of these new
accounting pronouncements did not have a material effect on the consolidated
financial statements of the Corporation.
In June of 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, which provides new accounting and reporting standards for sales,
securitization and servicing of receivables and other financial assets and
extinguishments of liabilities. The provisions of the Statement are to be
applied to transactions occurring after December 31, 1996. The Corporation is
currently reviewing the provisions of the Statement to determine what, if any,
impact there will be on the Corporation.
The Corporation continues with its plans for expansion during 1997. A
branch location is planned for early Spring near the Inner Harbor in Baltimore
City. The addition of other ATM machines to the network is also being
considered.
13
<PAGE>
CONSOLIDATED FIVE-YEAR FINANCIAL HIGHLIGHTS
HARBOR BANKSHARES CORPORATION AND SUBISDIARY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1996 1995 1994 1993 1992
<S><C>
BALANCE SHEET DATA
Total Assets $129,651 $113,316 $106,069 $ 61,741 $ 56,575
Deposits 114,124 101,098 94,726 56,868 52,037
Total Net Loans 84,453 77,292 57,643 35,653 31,951
Total Shareholders' Equity 9,001 5,641 5,059 4,479 4,046
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING DATA (for the full year)
Interest Income $ 9,345 $ 8,490 $ 6,537 $ 4,369 $ 4,163
Interest Expense 4,170 3,631 2,526 1,659 1,907
-------- -------- -------- -------- --------
Net Interest Income $ 5,175 $ 4,859 $ 4,011 $ 2,710 $ 2,256
Provision for Loan Losses 60 183 248 96 106
Other Operating Income 760 635 786 515 517
Other Operating Expenses 4,912 4,181 3,554 2,343 2,100
-------- -------- -------- -------- --------
Income Before Taxes $ 963 $ 1,130 $ 995 $ 786 $ 567
Income Taxes 390 451 370 311 221
-------- -------- -------- -------- --------
Net Income $ 573 $ 679 $ 625 $ 475 $ 346
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Income(*) $ 1.07 $ 1.55 $ 1.43 $ 1.09 $ 0.80
Dividend $ .20 $ .20 $ .14 $ .10 $ ---
Book Value $ 14.21 $ 13.17 $ 11.77 $ 10.51 $ 9.50
</TABLE>
(*)Net income per share is based upon average shares outstanding, adjusted
retroactively for the 1 1/3% stock dividend declared January 15, 1997, payable
February 28, 1997 to common stockholders of record on January 31, 1997 for all
years presented.
14
<PAGE>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Harbor Bankshares
Corporation
Years ended December 31, 1996, 1995 and 1994
with Report of Independent Auditors
<PAGE>
Harbor Bankshares Corporation
Audited Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
Contents
Report of Independent Auditors ............................................ 1
Audited Consolidated Financial Statements
Consolidated Statements of Condition....................................... 2
Consolidated Statements of Income.......................................... 3
Consolidated Statements of Changes in Shareholders' Equity................. 4
Consolidated Statements of Cash Flows...................................... 5
Notes to Consolidated Financial Statements................................. 6
<PAGE>
Report of Independent Auditors
To the Shareholders and the Board of Directors
Harbor Bankshares Corporation
We have audited the accompanying consolidated statements of condition of Harbor
Bankshares Corporation and subsidiary as of December 31, 1996 and 1995 and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996 These
financial statements are the responsibility of the Corporation'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 audits 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Harbor Bankshares
Corporation and subsidiary at December 31, 1996 and 1995 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
As described in Note 1 to the financial statements, effective January 1, 1994,
the Corporation changed its method of accounting for investments.
/s/ Ernst & Young LLP
---------------------
March 7, 1997
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Consolidated Statements of Condition
<TABLE>
<CAPTION>
December 31
1996 1995
----------------------------------------
<S><C>
Assets
Cash and due from banks $ 5,372,949 $ 6,682,427
Federal funds sold 10,929,028 4,308,285
Interest bearing deposits in other banks 5,573,829 7,517,733
Investment securities:
Held to maturity at amortized cost (market value of
$14,889,839 in 1996 and $9,653,542 in 1995) 15,015,715 9,437,205
Available for sale (at market value, amortized cost in 1996
of $1,583,000 and $1,443,708 in 1995) 1,569,400 1,460,861
----------------------------------------
Total investment securities 16,585,115 10,898,066
Loans 85,509,102 78,238,442
Unearned income (166,895) (129,754)
Reserve for possible loan losses (889,391) (816,853)
----------------------------------------
Net loans 84,452,816 77,291,835
Property and equipment--net 1,058,155 805,669
Goodwill--net 4,162,586 4,493,858
Accrued interest receivable 993,481 775,911
Other assets 523,459 542,516
----------------------------------------
Total assets $129,651,418 $ 113,316,300
========================================
Liabilities and shareholders' equity
Liabilities:
Deposits:
Noninterest bearing demand $ 8,953,672 $ 12,682,591
Interest bearing transaction accounts 13,755,550 15,337,116
Savings 40,989,551 34,139,846
Time, $100,000 or more 17,380,717 11,348,015
Other time 33,044,015 27,590,556
----------------------------------------
Total deposits 114,123,505 101,098,124
Accrued interest payable 520,837 639,541
Notes payable 5,795,547 5,795,547
Other liabilities 210,323 141,256
----------------------------------------
Total liabilities 120,650,212 107,674,468
Shareholders' equity:
Common stock--par value $.01 per share: authorized 10,000,000
shares; 633,444 and 428,488 shares issued and outstanding at
December 31, 1996 and 1995, respectively 6,334 4,285
Capital surplus 5,720,069 2,829,026
Retained earnings 3,283,153 2,796,918
Net unrealized gain (loss) on investment securities available
for sale, net of taxes (8,350) 11,603
----------------------------------------
Total shareholders' equity 9,001,206 5,641,832
----------------------------------------
Total liabilities and shareholders' equity $129,651,418 $ 113,316,300
========================================
</TABLE>
See accompanying notes.
2
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------
1996 1995 1994
--------------------------------------------------
<S><C>
Interest income
Interest and fees on loans $7,804,575 $7,161,412 $4,533,975
Interest on investments - taxable 976,471 597,379 557,588
Interest on deposits in other banks 399,686 431,602 508,113
Interest on federal funds sold 164,826 300,152 937,193
--------------------------------------------------
Total interest income 9,345,558 8,490,545 6,536,869
Interest expense
Interest bearing transaction accounts 412,014 383,347 359,960
Savings 1,235,344 1,470,806 1,025,994
Time, $100,000 or more 635,499 463,330 288,650
Other time 1,497,072 900,462 727,445
Notes payable 309,205 334,778 123,558
Interest on federal funds purchased 80,806 78,349
--------------------------------------------------
Total interest expense 4,169,940 3,631,072 2,525,607
--------------------------------------------------
Net interest income 5,175,618 4,859,473 4,011,262
Provision for possible loan losses 60,000 183,337 248,000
--------------------------------------------------
Net interest income after provision for possible loan losses 5,115,618 4,676,136 3,763,262
Other operating income
Service charges on deposit accounts 591,003 490,842 464,303
Other service charges 165,940 92,955 98,347
Gain on sales of loans 218,329
Other income 2,818 51,559 5,370
--------------------------------------------------
759,761 635,356 786,349
Other operating expenses
Salaries and employee benefits 2,152,040 1,902,807 1,550,403
Occupancy expense of premises 533,285 433,764 356,431
Data processing fees 397,696 338,077 267,192
Equipment expense 249,376 201,249 122,371
FDIC insurance 318,097 165,991 147,381
Stationery and supplies 173,939 138,895 94,479
Professional fees 100,646 99,032 95,982
Postage 66,162 64,038 65,823
Courier transportation 74,160 68,972 61,016
Goodwill amortization 331,272 331,272 143,970
Other expense 515,228 437,160 649,004
--------------------------------------------------
4,911,901 4,181,257 3,554,052
--------------------------------------------------
Income before income taxes 963,478 1,130,235 995,559
Applicable income taxes 390,701 450,804 370,449
--------------------------------------------------
Net income $ 572,777 $ 679,431 $ 625,110
==================================================
Net income per share $ 1.07 $ 1.55 $ 1.43
==================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Common Capital Retained Unrealized Shareholders'
Stock Surplus Earnings Gain (Loss) Equity
-------------------------------------------------------------------------------
<S><C>
Balance at January 1, 1994 $4,261 $ 2,836,309 $ 1,638,224 $ - $ 4,478,794
Adjustment to beginning balance for
change in accounting method, net
of income taxes of $7,801 12,399 12,399
Net income for the year 625,110 625,110
Exercise of stock options 36 23,988 24,024
Cash dividends - $ .14 per share (59,905) (59,905)
Change in unrealized gain (loss) on
investment securities available
for sale, net of income tax
benefit of $13,481 (21,427) (21,427)
-------------------------------------------------------------------------------
Balance at December 31, 1994 4,297 2,860,297 2,203,429 (9,028) 5,058,995
Net income for the year 679,431 679,431
Exercise of stock options 30 24,970 25,000
Retirement of treasury stock (42) (56,241) (56,283)
Cash dividends - $.20 per share (85,942) (85,942)
Change in unrealized gain (loss) on
investment securities available
for sale, net of income taxes of
$11,230 20,631 20,631
-------------------------------------------------------------------------------
Balance at December 31, 1995 4,285 2,829,026 2,796,918 11,603 5,641,832
Net income for the year 572,777 572,777
Exercise of stock options 65 45,435 45,500
Proceeds from issuance of common
stock 1,984 2,845,608 2,847,592
Cash dividends - $.20 per share (86,542) (86,542)
Change in unrealized gain (loss) on
investment securities available
for sale, net of income tax
benefit of $7,706 (19,953) (19,953)
-------------------------------------------------------------------------------
Balance at December 31, 1996 $6,334 $5,720,069 $3,283,153 $ (8,350) $ 9,001,206
===============================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-------------------------------------------------------
<S><C>
Operating activities
Net income $ 572,777 $ 679,431 $ 625,110
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for possible loan losses 60,000 183,337 248,000
Depreciation and amortization 598,541 537,681 319,993
Gains on sales of loans (218,329)
(Increase) decrease in interest receivable and other (198,513) 47,629 (568,095)
assets
Increase in interest payable and other liabilities 60,067 321,583 64,942
-------------------------------------------------------
Net cash provided by operating activities 1,092,872 1,769,661 471,621
Investing activities
Net decrease in deposits at other banks 1,943,904 1,272,519 933,257
Purchases of investment securities held to maturity (8,113,716) (7,947,964) (5,872,816)
Purchases of investment securities available for sale (1,000,000) (165,857) (986,880)
Proceeds from maturities of investment securities
available for sale 1,000,000 1,000,000 1,000,000
Proceeds from maturities of investment securities held to
maturity 2,426,667 10,000,000 1,000,000
Purchase of branches (4,969,100)
Purchase of loans (17,319,820) (32,340,441)
Net increase in loans (7,160,981) (2,506,881) (5,273,641)
Proceeds from sales of loans 15,449,407
Purchases of premises and equipment (663,912) (523,054) (228,542)
-------------------------------------------------------
Net cash used in investing activities (11,568,038) (16,191,057) (31,288,756)
Financing activities
Net (decrease) increase in noninterest bearing transaction
accounts (3,728,919) 3,975,713 1,736,682
Net (decrease) increase in interest bearing transaction
accounts (1,581,566) (2,147,732) 8,869,268
Net increase (decrease) in savings deposits 6,849,705 (3,030,972) 15,336,109
Net increase in time deposits 11,486,161 7,575,007 11,916,205
Proceeds from common stock issuance 2,847,592 25,000 24,024
Proceeds from issuance of notes payable 5,795,547
Payments of cash dividends (86,542) (85,942) (59,905)
Acquisition of common stock (56,283)
-------------------------------------------------------
Net cash provided by financing activities 15,786,431 6,254,791 43,617,930
-------------------------------------------------------
Increase (decrease) in cash and cash equivalents 5,311,265 (8,166,605) 12,800,795
Cash and cash equivalents at beginning of year 10,990,712 19,157,317 6,356,522
-------------------------------------------------------
Cash and cash equivalents at end of year $ 16,301,977 $ 10,990,712 $ 19,157,317
=======================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Business
Harbor Bankshares Corporation (the Corporation), is a bank holding company
organized under the laws of the State of Maryland in 1992. The Corporation owns
all of the outstanding stock of the Harbor Bank of Maryland (the Bank), the
Corporation's sole subsidiary.
The Bank is a commercial bank headquartered in Baltimore, Maryland. The deposits
of the Bank are insured by the FDIC. The Bank conducts general banking business
in six locations and primarily serves the Baltimore, Maryland metropolitan area.
The Bank also has a branch in Riverdale, Prince George's County, Maryland. It
offers checking, savings and time deposits, commercial real estate, personal,
home improvement, automobile, and other installment and term loans. The Bank is
also a member of a local and national ATM network. The retail nature of the Bank
allows for diversification of deposits and borrowers so it is not dependent upon
a single or a few customers.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Corporation and the Bank and have been prepared in accordance with generally
accepted accounting principles. All significant intercompany activity has been
eliminated.
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 reporting period.
Actual results could differ from those estimates. Estimates that are
particularly susceptible to change in the near term relate to the reserve for
possible loan losses.
Investment Securities
The Corporation accounts for its investment securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Debt securities that the
Corporation has the intent and ability to hold until maturity, are classified as
"held to maturity" and are carried at
6
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Investment Securities (continued)
historical cost adjusted for any amortization of premium or accretion of
discount. Trading securities are carried at fair value with unrealized gains and
losses included in earnings. (The Corporation does not maintain a trading
securities portfolio). Marketable equity securities and debt securities which
are not classified as held to maturity or trading are classified as "available
for sale" and are carried at fair value with the unrealized gains and losses,
net of tax, reported as a separate component of shareholders' equity. In
accordance with the Statement, prior period financial statements have not been
restated to reflect the change in accounting principle. The cumulative effect as
of January 1, 1994 of adopting the Statement increased the opening balance of
shareholders' equity by $12,399 (net of $7,801 in deferred income taxes) to
reflect the net unrealized holding gains on securities classified as available
for sale which were previously carried at amortized cost or lower of cost or
market value.
Realized gains and losses and declines in value judged to be other than
temporary are included in earnings. The specific identification method is
utilized in determining the cost of a security which has been sold. Premiums and
discounts are amortized and accreted, respectively, as an adjustment of the
securities' yield using the interest method.
Loans
Loans are generally stated at their outstanding unpaid principal balance net of
any deferred fees or costs on originated loans, and net of any unamortized
premiums or discounts on purchased loans. Interest income is accrued and
recognized as income based upon the principal amount outstanding. Loan
origination and commitment fees net of certain direct origination costs are
deferred, and the net amounts are amortized over the contractual life of the
loans as adjustments of the yield. The accrual of interest income is
discontinued when reasonable doubt exists as to the full collectibility of
interest or principal.
Reserve for Possible Loan
The reserve for possible loan losses is established through a provision for loan
losses charged to income. Losses are charged against the reserve when management
believes that the collectibility of a loan's principal is unlikely. The reserve
is an amount that management believes will be adequate to absorb possible losses
on existing loans that may
7
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Reserve for Possible Loan (continued)
become uncollectible, based upon evaluations of the collectibility of loans and
prior loan loss experience. Evaluations of collectibility 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.
Effective January 1, 1995, the Corporation adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." Under these
Statements, reserves for possible loan loss related to impaired loans are
required to be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or the fair value of the
collateral for collateral dependent loans. Since the total amount of impaired
loans was not significant, the adoption of the new standards did not materially
impact the Corporation's financial condition or results of operations.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method. Maintenance and repairs are charged to operations when incurred, and the
cost of improvements is capitalized.
Goodwill
Goodwill represents the premium paid in excess of the fair value of assets and
liabilities acquired in branch purchase transactions with the Resolution Trust
Corporation (RTC). These premiums are being amortized on a straight line basis
over 15 years.
Income Taxes
The Corporation uses the liability method of accounting for income taxes
in accordance with SFAS No. 109, "Accounting for Income Taxes."
8
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Income Taxes (continued)
Under the liability method, deferred tax assets and liabilities are determined
based upon the differences between financial statement carrying amounts and the
tax bases of existing assets and liabilities. These temporary differences are
measured at prevailing enacted tax rates that will be in effect when the
differences are settled or realized. The Corporation and its subsidiary file a
consolidated federal income tax return.
Statements of Cash Flows
The Corporation has defined cash and cash equivalents in the statements of cash
flows as those amounts included in the consolidated statements of condition
captions "Cash and due from banks" and "Federal funds sold".
For the years ended December 31, 1996, 1995 and 1994, the Company paid interest
of $4,288,644 $3,339,027, and $2,456,487, respectively, and income taxes of
$410,029 $443,991, and $537,674, respectively.
Other Real Estate Owned
Other real estate owned represents assets that have been acquired through
foreclosure. These assets are recorded on the books of the Corporation at the
lower of cost or fair value less estimated costs to dispose.
Earnings Per Share
Earnings per share is based upon average shares outstanding of 527,045, 429,404,
and 427,644, adjusted retroactively for the 1 1/3% stock dividend declared
January 15, 1997, payable February 28, 1997 to common stockholders of record on
January 31, 1997, for the years ended December 31, 1996, 1995 and 1994,
respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
9
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Reclassifications (continued)
Recently Issued Accounting Guidance
In June 1996, the Financial Accounting Standards Board issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." The Corporation is required to adopt this standard for
transactions occurring after December 31, 1996. The impact of adopting Statement
No. 125 will not have a material effect on the Corporation's financial position
and results of operations.
2. Acquisitions
In 1994, the Corporation purchased approximately $32.3 million in real estate
mortgage loans from the RTC. $15.4 million of these loans were subsequently sold
to a third party for a gain of $218,329. In February 1995, the Corporation
purchased an additional $17.3 million in real estate mortgage loans from the
RTC. There remains $1,001,868 of unamortized discounts on purchased loans
retained by the Corporation at December 31, 1996.
3. Fair Value of Financial Instruments
The following discloses the fair value of financial instruments held by the
Corporation, whether or not recognized in the Consolidated Statements of
Condition. In cases in which quoted market prices were not available, fair
values were based upon estimates using present value or other valuation
techniques. These techniques were significantly affected by the assumptions
used, including the discount rate and estimates of cash flows. Consequently,
these fair values cannot be substantiated by comparisons with independent
markets and, in many cases, may not be realized upon the immediate sale of the
instrument. Since generally accepted accounting principles exclude certain
financial instruments and all nonfinancial instruments from this presentation,
the aggregated fair value amounts do not represent the underlying value of the
Corporation.
The carrying amounts reported under the caption "Cash and due from banks",
"Interest bearing time deposits in other banks", and "Federal funds sold"
approximate the fair value of those assets.
10
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Financial Statements (continued)
3. Fair Value of Financial Instruments (continued)
Investment Securities
The fair values of investment securities are based upon quoted market prices
when available. If quoted market prices are not available, fair values are based
upon quoted market prices of comparable instruments.
Loans
The fair values of fixed and variable-rate loans that reprice within one year,
with no significant credit risk, are based upon their carrying amounts. The fair
values of all other loans are estimated using discounted cash flow analysis,
which utilizes interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. The reserve for possible loan
losses is allocated to the various components of the loan portfolio in
determining the fair value.
Deposits
The fair values for demand deposits are, by definition, equal to the amount
payable on demand at the reporting date. The carrying amounts for variable rate
deposits and fixed-rate certificates of deposit that reprice within one year
approximate their fair values at the reporting date. Fair values for longer-term
fixed-rate certificates of deposit are estimated using discounted cash flow
analysis that applies interest rates currently being offered on certificates.
Accrued Interest Payable
Accrued interest payable includes interest expensed but not yet paid for
deposits and notes payable. The carrying amount approximates its fair value.
Notes Payable
Notes payable have interest rates that vary in line with the 5 week U.S.
Treasury Bill rate. The carrying amount of the notes payable approximates their
fair value.
11
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Financial Statements (continued)
3. Fair Value of Financial Instruments (continued)
Off-Balance Sheet Financial Instruments
In the normal course of business, the Corporation makes commitments to extend
credit and issues commercial letters of credit. As a result of excessive costs,
the Corporation considers estimation of fair values for commitments to extend
credit and commercial letters of credit to be impracticable.
The carrying values and estimated fair values of the Corporation's financial
assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- -----------------------------------------------------------------------------------------------------------
<S><C> (in thousands) (in thousands)
Financial assets:
Cash and due from banks $ 5,372,949 $ 5,372,947 $ 6,682,427 $ 6,682,427
Federal funds sold 10,929,028 10,929,028 4,308,285 4,308,285
Interest bearing deposits in other 5,573,829 5,573,829 7,517,733 7,517,733
banks
Investment securities 16,585,115 16,459,239 10,898,066 11,114,403
Loans, net of reserves 84,452,816 86,464,868 77,291,835 78,902,525
Accrued interest receivable 993,481 993,481 775,911 775,911
Financial Liabilities:
Deposits 114,123,505 116,689,961 101,098,124 101,236,104
Accrued interest payable 520,837 520,837 639,541 639,541
Notes payable 5,795,547 5,795,547 5,795,547 5,795,547
</TABLE>
12
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Financial Statements (continued)
4. Investment Securities
The amortized cost and estimated market values of investments securities are as
follows:
<TABLE>
<CAPTION>
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Market Value
-------------------------------- ------------------------------
Debt Equity Gains Losses Debt Equity
-----------------------------------------------------------------------------------------
<S><C>
Balance at December 31, 1996
Investment securities available
for sale:
U.S. Treasury and
government and agencies $ 1,000,000 $ - $ - $ (13,600) $ 986,400 $ -
Other securities - 583,000 - - - 583,000
-----------------------------------------------------------------------------------------
Total $ 1,000,000 $ 583,000 - $ (13,600) $ 986,400 $ 583,000
=========================================================================================
Investment securities held to
maturity:
U.S. Treasury and
government agencies $ 15,015,715 $ - - $ (125,876) $ 14,889,839
-----------------------------------------------------------------------------------------
Totals $ 15,015,715 $ - - $ (125,876) $ 14,889,839 $ -
=========================================================================================
Balance at December 31, 1995
Investment securities available
for sale:
U.S. Treasury and
government and agencies $ 997,222 $ - $ 17,153 $ - $1,014,375 $ -
Other securities - 446,486 - - - 446,486
-----------------------------------------------------------------------------------------
Total $ 997,222 $ 446,486 $ 17,153 $ - $1,014,375 $ 446,486
=========================================================================================
Investment securities held to
maturity:
U.S. Treasury and
government agencies $ 9,437,205 $ - $ 216,962 $ (625) $9,653,542 $ -
-----------------------------------------------------------------------------------------
Total $ 9,437,205 $ - $ 216,962 $ (625) $ 9,653,542 $ -
=========================================================================================
</TABLE>
13
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Financial Statements (continued)
4. Investment Securities (continued)
The amortized cost and estimated market value of debt securities at December 31,
1996, by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers have the right to call or repay
obligations without call or prepayment penalties.
<TABLE>
<CAPTION>
Debt Securities Debt Securities
Available for sale Held to maturity
----------------------------------- ------------------------------------------
Amortized Market Amortized Market
cost Value cost Value
---------------- --------------- ------------------ ---------------------
<S><C>
Due in one year or less $ - $ - $ - $ -
Due after one year through
five years 1,000,000 986,400 15,006,026 14,880,150
---------------- ---------------- ------------------ ---------------------
$ 1,000,000 $ 986,400 $ 15,006,026 $ 14,880,150
================ ================ ================== =====================
</TABLE>
There were no sales of investment securities during 1996 or 1995.
5. Loans and Reserve for Possible Loan Losses
The composition of loans at December 31 is as follows:
1996 1995
----------------------------------------
Real estate--mortgage $72,183,697 $69,569,648
Commercial 9,611,937 5,785,876
Consumer 2,494,111 2,032,206
Credit card loans 1,219,357 850,712
----------------------------------------
$85,509,102 $78,238,442
========================================
Transactions in the reserve for possible loan losses are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------
<S><C>
Balance at January 1 $816,853 $658,387 $427,664
Provision charged to operating expense 60,000 183,337 248,000
Loans charged-off (53,313) (34,957) (30,828)
Recovery on loans previously charged-off 65,851 10,086 13,550
-------------------------------------
Net loans charged-off 12,538 (24,871) (17,278)
-------------------------------------
Balance at December 31 $889,391 $816,853 $658,386
=====================================
</TABLE>
14
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Financial Statements (continued)
5. Loans and Reserve for Possible Loan Losses (continued)
The following is an analysis of interest on non accruing loans:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------
<S><C>
Non accruing loans at December 31 $284,295 $ - $199,998
Interest income which would have been recognized
under original terms 22,126 - 26,000
Interest income recognized during the period 2,671 - -
6. Property and Equipment
The major classes of property and equipment are summarized as follows:
</TABLE>
<TABLE>
<CAPTION>
December 31
1996 1995
------------------------------------
<S><C>
Furniture, fixtures and equipment $1,788,990 $1,297,967
Leasehold improvements 441,036 411,566
------------------------------------
2,230,026 1,709,533
Less accumulated depreciation and amortization 1,171,871 903,864
------------------------------------
Total $1,058,155 $ 805,669
====================================
</TABLE>
Depreciation expense was $211,375, $150,286, and $110,846, for the years ended
December 31, 1996, 1995, and 1994, respectively.
The Bank leases its branch and office facilities. The lease agreements provide
for the payment of utilities and taxes by the lessee. Future minimum payments in
the aggregate and for each of the five succeeding years under noncancelable
operating leases consisted of the following at December 31, 1996:
1997 $ 362,646
1998 332,237
1999 316,875
2000 273,228
2001 and thereafter 421,082
-------------
Total minimum lease payments $1,706,068
=============
Total rental expense under operating leases amounted to $279,055 $216,733, and
$203,009, in 1996, 1995 and 1994, respectively.
15
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. Restrictions on Cash and Due from Banks
The Bank is required by the Federal Reserve to maintain a reserve balance based
principally on deposit liabilities. The balance maintained is included in cash
and due from banks. The reserve balances were kept at the Federal Reserve Bank
during 1996.
8. Income Tax
The Corporation's provision for income taxes for the years ended December 31, is
summarized as follows:
1996 1995 1994
-----------------------------------------
Taxes currently payable $369,330 $504,849 $449,198
Deferred taxes (benefit) 21,371 (54,045) (78,749)
-----------------------------------------
Income tax expense for the year $390,701 $450,804 $370,449
=========================================
A reconciliation between the total income tax expense and the income tax expense
computed by applying the statutory Federal income tax rate to earnings before
income taxes is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------
<S><C>
Income before income taxes $963,478 $1,130,235 $995,559
Statutory income tax rate 34% 34% 34%
-----------------------------------------------
Income tax at statutory rate 327,583 384,280 338,490
State franchise tax, net of federal tax benefit 67,443 73,903 50,500
Other (4,325) (7,379) (18,541)
-----------------------------------------------
Income tax expense for the year $390,701 $ 450,804 $370,449
===============================================
</TABLE>
16
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. Income Tax (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Corporation's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
------------------------------
<S><C>
Deferred tax liabilities:
Deferred loan origination fees $ (77,172) $ -
Prepaid expenses (18,490) (14,527)
Unrealized gain on investment securities available for sale - (7,964)
Other (12,260) (12,253)
------------------------------
Total deferred tax liabilities (107,922) (34,744)
Deferred tax assets:
Loan loss reserve 288,371 265,852
Depreciation 39,157 1,595
Unrealized loss on investment securities available for sale 5,252 -
Other 6,793 7,134
------------------------------
Total deferred tax assets 339,573 274,581
------------------------------
Net deferred tax asset $ 231,651 $239,837
==============================
</TABLE>
No valuation allowance was recorded for the deferred tax assets at December 31,
1996 or 1995.
9. Notes Payable
Notes payable consists of two notes totaling $5,795,547 which are payable to the
Resolution Trust Corporation on June 10, 1999. The notes each have a term of
five years and have interest rates indexed to the 13 week U.S. Treasury Bill
rate. At December 31, 1996 the interest rate on the notes was 5.18%. Interest
payments are made quarterly. No principal repayments are required prior to
maturity. These loans were made by the Resolution Trust Corporation to assist
the Corporation in financing the branch acquisitions discussed in Note 2.
17
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. Stock Option Plan
Under the 1992 Stock Option Plan, the Corporation has reserved 30,000 shares of
common stock for options granted or available for grant to certain directors and
officers. Options granted under this plan become exercisable over a period of
four to five years on a cumulative basis, beginning on the date of grant, and
expiring ten years after the date of grant.
In September 1995, the Corporation adopted the 1995 Director Stock Option Plan
for certain directors and officers. Under the plan, directors and officers may
be granted options to purchase 44,579 shares of the Bank's outstanding common
stock. Options granted under this plan become exercisable one year from the date
of grant and expire ten years after the date of grant.
Stock option transactions, adjusted for stock dividends, under the Plans were as
follows:
Year Ended December 31
1996 1995 1994
----------------------------------------------
Options outstanding at
beginning of year 64,338 22,799 26,487
Options granted at $15.00
per share - 44,579 -
Options exercised at $6.60 to
$8.33 per share (6,586) (3,040) (3,688)
Options forfeited - - -
----------------------------------------------
Options outstanding at end of
year 57,752 64,338 22,799
==============================================
Options exercisable at
December 31 at $6.60 to
$15.00 per share 57,752
==========
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), which defines a fair-value based method of
accounting for stock options granted to employees.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Corporation had accounted for its
employee stock options under the minimum value method. The minimum value for
these
18
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. Stock Option Plan
options was estimated at the date of grant by calculating the excess of the fair
value of the stock at the date of grant over the present value of both the
exercise price and the expected dividend payments, each discounted at the
risk-free interest rate, over the expected life of the option. The following
weighted average assumptions were used for 1996 and 1995: risk-free interest
rate of 6%, weighted average expected life of the options of 5 years; and 1.33%
dividend yield.
For purpose of pro forma disclosures, the estimated minimum value of the options
is amortized to expense over the options' vesting period. Note that the effects
of applying SFAS No. 123 for pro forma disclosure in the current year are not
necessarily representative of the effects on pro forma net income for future
years.
Options under the Plans are granted with an exercise price equal to the fair
value of the shares of the date of grant. As allowed by SFAS No. 123, the Bank
has elected to continue applying Accounting Principals Board Opinion No. 25.
Accordingly, no compensation cost has been recognized for the Plans. Had
compensation cost for the Plans been determined consistent with SFAS No. 123,
the Corporation's net income and earnings per share on a pro forma basis would
have been as follows:
1996 1995
-----------------------------------
Pro forma net income $513,140 $651,077
Pro forma earnings per share $ 0.96 $ 1.49
11. Loans to Related Parties
The Bank has granted loans to certain officers and directors of the Bank and
their associates. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than the
normal risk of collectibility. The aggregate dollar amount of these loans was
$3,705,346 and $1,922,609 at December 31, 1996 and 1995, respectively. During
1996, $2,507,000 of new loans were made while repayments totaled $724,263.
19
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
12. Financial Arrangements with Off-Balance-Sheet Risk
In the normal course of business, the Corporation is a party to financial
arrangements with off-balance-sheet risk designed to meet the financing needs of
its customers. These financial arrangements include commitments to extend credit
and commercial letters of credit. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
arrangements.
Financial arrangements whose contract amounts involve credit risk at December 31
are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------
<S><C>
Unused commitments to extend credit:
Revolving open-end lines secured by residential properties $ 705,336 $ 917,075
Credit card lines 1,191,599 1,128,041
Commercial real estate & construction 2,810,000 3,011,300
Other unused commitments 5,359,000 2,600,000
Commercial letters of credit 360,319 516,319
</TABLE>
Management conducts regular reviews of the above credit arrangements on an
individual customer basis, and the results are considered in assessing the
adequacy of the Bank's allowance for possible loan losses.
13. Contingent Liabilities
The Corporation and its subsidiary at times, and in the ordinary course of
business, are subject to legal actions. Management does not believe the outcome
of such matters will have a material adverse effect on the financial condition,
results of operations, or cash flows of the Corporation.
14. Stockholders' Equity
The Bank is subject to various regulatory capital requirements administered by
the FDIC. Failure to meet minimum capital requirements can initiate mandatory,
and possible additional discretionary, actions by regulators, that if
undertaken, could have a direct material effect on the consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Bank's
20
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
14. Stockholders' Equity (continued)
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital to risk-weighted assets, and Tier 1 capital
to average assets as defined in the regulations. Management believes that at
December 31, 1996, the Bank meet all capital adequacy requirements to which it
is subject.
At December 31, 1996, the most recent notification from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. There were no conditions or events since that notification that
management believes have changed the Bank's category.
21
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
14. Stockholders' Equity (continued)
The Bank's actual capital amounts and ratios as compared to capital requirements
are presented in the following table.
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
--------------------------------------------------------------------------------
Minimum Required Minimum Required
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------
<S><C>
As of December 31, 1996:
Total Capital (to risk-weighted
total assets)
Harbor Bank of Maryland $11,209 17.00% $5,275 8.0% $6,594 10.0%
Tier 1 capital (to risk weighted
assets)
Harbor Bank of Maryland 10,384 15.75 2,638 4.0 6,956 6.0
Tier 1 capital (to average
assets)
Harbor Bank of Maryland 10,384 8.93 4,652 4.0 5,816 5.0
As of December 31, 1995:
Total Capital (to risk-weighted
total assets)
Harbor Bank of Maryland 7,564 13.17 4,609 8.0 5,761 10.0
Tier 1 capital (to risk weighted
assets)
Harbor Bank of Maryland 6,845 11.92 2,304 4.0 3,457 6.0
Tier 1 capital (to average
assets)
Harbor Bank of Maryland 6,845 6.41 4,274 4.0 5,343 5.0
</TABLE>
Risk-based guidelines apply on a consolidated basis to bank holding companies
with consolidated assets of $150 million or more. For those holding companies
with less than $150 million in assets, the guidelines will be applied on a
bank-only basis. As Harbor Bankshares Corporation had total consolidated assets
of $130 million and $113 million at December 31, 1996 and 1995, respectively,
only the capital ratios of the Bank are disclosed above.
22
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
14. Stockholders' Equity (continued)
The ability of the Corporation to pay dividends is limited by the level of
dividends which can be paid by the Bank. The ability of the Bank to pay
dividends is limited by the provisions of Maryland law, which requires the
maintenance of a capital surplus account equal to the par value of the
outstanding common stock.
The Bank may make dividend distributions to the Corporation up to 100% of its
net income in the calendar year. At December 31, 1996, the total allowable
dividend distribution was $572,777.
15. Parent Company Only Financial Statements
Condensed Statements of Condition
<TABLE>
<CAPTION>
December 31
1996 1995
-------------------------------------
<S><C>
Assets:
Investment in bank subsidiary $14,537,615 $11,334,122
Other 334,807 240,176
-------------------------------------
Total assets $14,872,422 $11,574,298
=====================================
Liabilities and shareholders' equity Liabilities:
Notes payable $ 5,795,547 $ 5,795,547
Other 75,669 136,919
-------------------------------------
Total liabilities 5,871,216 5,932,466
Shareholders' equity 9,001,206 5,641,832
-------------------------------------
Total liabilities and shareholders' equity $14,872,422 $11,574,298
=====================================
</TABLE>
23
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
15. Parent Company Only Financial Statements (continued)
Condensed Statements of Income
<TABLE>
<CAPTION>
Year ended Year ended For the period
December 31, December 31, Nov. 2 through
1996 1995 December 31, 1994
-------------------------------------------------------------------
<S><C>
Dividend from subsidiary $ 395,747 $ 420,720 $ 111,007
Interest expense (309,205) (334,778) (123,558)
Income tax benefit 105,138 113,824 45,716
Equity in undistributed income of subsidiary 381,097 479,665 591,945
-------------------------------------------------------------------
Net income $ 572,777 $ 679,431 $ 625,110
===================================================================
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended Year ended For the period
December 31, December 31, Nov. 2 through
1996 1995 December 31, 1994
----------------------------------------------------------
<S><C>
Operating activities
Net income $ 572,777 $ 679,431 $ 625,110
Adjustment to reconcile net income to net cash
provided by operating activities:
Increase in other (assets) liabilities, net (105,138) (57,541) 26,740
Equity in undistributed income of subsidiary
(381,097) (479,665) (591,945)
-----------------------------------------------------------
Net cash provided by operating activities 86,542 142,225 59,905
-----------------------------------------------------------
Investing activities
Investment in subsidiary (2,920,929) (25,000) (5,819,571)
-----------------------------------------------------------
Net cash provided by (used in) investing activities
(2,920,929) (25,000) (5,819,571)
-----------------------------------------------------------
Financing activities
Acquisition of treasury stock - (56,283) -
Proceeds from issuance of note payable - - 5,795,547
Cash dividends (86,542) (85,942) (59,905)
Proceeds from common stock issuance 2,920,929 25,000 24,024
-----------------------------------------------------------
Net cash provided by (used in) financing activities
2,834,387 (117,225) 5,759,666
-----------------------------------------------------------
Change in cash and cash equivalents - - -
Cash and cash equivalents at beginning of year
- - -
-----------------------------------------------------------
Cash and cash equivalents at end of year $ - $ - $ -
===========================================================
</TABLE>
24
<PAGE>
Harbor Bankshares Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
16. Subsequent Events
On January 15, 1997, the Corporation declared a 1 1/3% stock dividend payable
February 28, 1997 to common stockholders of record on January 31, 1997. All per
share and stock option data has been retroactively adjusted for this stock
dividend.
25
<TABLE> <S> <C>
<ARTICLE> 9
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,373
<INT-BEARING-DEPOSITS> 5,574
<FED-FUNDS-SOLD> 10,929
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,569
<INVESTMENTS-CARRYING> 15,016
<INVESTMENTS-MARKET> 14,890
<LOANS> 85,342
<ALLOWANCE> 889
<TOTAL-ASSETS> 129,651
<DEPOSITS> 114,124
<SHORT-TERM> 0
<LIABILITIES-OTHER> 731
<LONG-TERM> 5,796
0
0
<COMMON> 6
<OTHER-SE> 8,996
<TOTAL-LIABILITIES-AND-EQUITY> 129,651
<INTEREST-LOAN> 7,805
<INTEREST-INVEST> 976
<INTEREST-OTHER> 565
<INTEREST-TOTAL> 9,346
<INTEREST-DEPOSIT> 3,780
<INTEREST-EXPENSE> 390
<INTEREST-INCOME-NET> 5,176
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,912
<INCOME-PRETAX> 963
<INCOME-PRE-EXTRAORDINARY> 963
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 573
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.20
<LOANS-NON> 284
<LOANS-PAST> 284
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,871
<ALLOWANCE-OPEN> 817
<CHARGE-OFFS> 53
<RECOVERIES> 65
<ALLOWANCE-CLOSE> 889
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 601
</TABLE>
