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, 1997
[ ] 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>
<CAPTION>
Maryland 52-1786341
- --------------------------------------------- ------------------------------------
<S> <C>
(State or other jurisdiction of incorporation (IRS Employer Identification Number)
</TABLE>
25 West Fayette Street
Baltimore, Maryland 21201
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
- --------------------------------------------------------------------------------
Registrant's telephone number: (410) 528-1800
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-KSB or any amendment to this Form 10-KSB. [X]
The number of shares outstanding of the issuer's classes of common
stock as of December 31, 1997, were 650,137 shares and 33,333 non-voting 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, 1997 and the Registrant's 1998 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 and in
August, 1997, the Corporation issued 33,333 shares of common non-voting stock
with proceeds totaling $500 thousand. These proceeds were 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. Presently, the total number of ATM machines, including the
Bank's branch locations is nineteen. During May, 1997, The Harbor Bank of
Maryland, opened a De-novo Branch location in the East side of Baltimore City,
creating a new market for the Corporation's services.
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. This subsidiary
had an operating loss of $73 thousand during 1997.
The Bank conducts general banking business in seven (7) 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.
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.
3
<PAGE>
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.
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, 1997, Harbor Bankshares Corporation and its subsidiary
employed 71 individuals, of which 20 were officers and 51 were full-time
employees.
4
<PAGE>
Executive Officers
Information concerning executive officers of the Corporation is listed
below:
Executive Officers Age Position
- ------------------ --- --------
Joseph Haskins, Jr. 50 Chairman, President and Chief Executive
Officer of the Bank and Corporation
John Paterakis 69 Chairman of the Executive Committee of the
Corporation and the Bank
Teodoro J. Hernandez 52 Treasurer of the Corporation and Vice
President and Cashier of the Bank
George F. Vaeth, Jr. 64 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, 1997 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 six (6) leased branch offices; four (4)
located in Baltimore City, one (1) located in Prince George's County, Maryland
and one (1) located in Baltimore County, Maryland.
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, 1997 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,
1997 was 745.
5
<PAGE>
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 7 of the Management Discussion and Analysis section of the
Registrant's Annual Report to Shareholders for the year ended December 31, 1997,
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, 1997
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Coopers & Lybrand L.L.P were appointed as auditors for the year ended
December 31, 1997, replacing Ernst & Young L.L.P.
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 1998 Proxy Statement and page 5 of this report under the
caption of "Executive Officers" of the Registrant.
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 1998 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 1998 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.
6
<PAGE>
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, 1997, are incorporated herein by reference in Item 8:
Consolidated Statements of Condition
As of December 31, 1997 and 1996
Consolidated Statements of Income
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Report of Coopers & Lybrand, L.L.P. Independent Auditors
Harbor Bankshares Corporation 1998 Proxy Statement
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 Condition
Consolidated Statements of Income
Schedule 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.
7
<PAGE>
CONSOLIDATED AVERAGE STATEMENTS OF CONDITION AND RATIOS
(in 000s)
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
---- ---- ----
<S><C>
ASSETS
U.S. Treasury Securities $ --- $ --- $ 1,321
U.S. Government Agencies 21,244 14,880 8,944
Interest-Bearing Deposits with Other Banks 4,408 7,064 7,712
FHLB Stock and Other Securities 599 561 418
Federal Funds Sold 10,752 3,103 4,786
--------- --------- ---------
$ 37,003 $ 25,608 $ 23,181
Commercial Loans 9,592 7,451 4,862
Real Estate Mortgages 68,945 70,697 67,508
Consumer Loans 3,895 3,010 2,541
--------- --------- ---------
Loans Net of Unearned Income 82,432 81,158 74,911
Total Earning Assets 119,435 106,766 98,092
Allowance for Possible Losses (846) (880) (817)
Other Assets 12,531 10,410 9,584
--------- --------- ---------
TOTAL ASSETS $ 131,120 $ 116,296 $ 106,859
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-Interest Bearing Deposits $ 10,209 $ 9,316 $ 8,991
Interest-Bearing Transaction Accounts 14,828 15,798 18,184
Savings 39,485 35,671 33,386
Time - $100,000 or more 18,195 11,792 8,748
Other Time 32,198 28,329 24,648
--------- --------- ---------
TOTAL Deposits $ 114,915 $ 100,906 $ 93,957
Other borrowed money --------- 1,452 1,195
Notes payable 5,796 5,796 5,796
Other Liabilities 820 888 593
--- --- ---
TOTAL Liabilities $ 121,531 $ 109,042 $ 101,541
SHAREHOLDERS' EQUITY 9,589 7,254 5,318
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 131,120 $ 116,296 $ 106,859
========= ========= =========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
RATIOS 1997 1996 1995
---- ---- ----
<S><C>
Average Equity to Average Total Assets 7.31% 6.24% 4.98%
Return on Assets .53% .49% .64%
Return on Equity 7.30% 7.90% 12.8%
Dividend Payout Ratio 18.09% 15.1% 12.7%
</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 $136 million and $130 million at December 31, 1997 and 1996, respectively,
only the capital ratios of the Bank are disclosed below.
The Harbor Bank of Maryland Regulatory Requirements
Primary Capital 9.21% 4.0%
Risk-Based Capital 18.04% 8.0%
9
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(000s except per share data)
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
---- ---- ----
<S><C>
INTEREST AND FEES ON LOANS
Commercial Loans $ 922 $ 732 $ 512
Real Estate Mortgages 6,670 6,702 6,339
Consumer Loans 447 371 311
------- ------- -------
TOTAL Interest and Fees on Loans(1) $ 8,039 $ 7,805 $ 7,162
Interest on Taxable Investment Securities 1,407 976 597
Interest on Other Investments(2) 290 400 431
Interest on Federal Funds Sold 633 165 300
------- ------- -------
TOTAL Interest Income 10,369 9,346 8,490
INTEREST EXPENSE
Savings 1,364 1,235 1,018
Interest-Bearing Transaction Accounts 371 412 462
Time - $100,000 or more 1,011 635 463
Other Time 1,742 1,497 1,275
Other Borrowed Money --- 81 78
Interest on Notes Payable 310 309 335
------- ------- -------
TOTAL Interest Expense 4,798 4,169 3,631
Net Interest Income 5,571 5,177 4,859
Provision for Possible Credit Losses 72 60 183
------- ------- -------
Net Interest Income After Provision for Possible
Credit Losses 5,499 5,117 4,676
Other Income 1,229 759 635
Investment Security Gains 213 --- ---
Other Expenses 5,840 4,888 4,181
------- ------- -------
Income Before Taxes 1,101 988 1,130
Applicable Income Tax 401 415 451
------- ------- -------
NET INCOME $ 700 $ 573 $ 679
======= ======= =======
PER COMMON SHARE
NET INCOME $ 1.07 $ 1.07 $ 1.55
======= ======= =======
Dividends per Share $ .20 $ .20 $ .20
======= ======= =======
</TABLE>
10
<PAGE>
NOTES ON CONSOLIDATED STATEMENTS OF INCOME:
(1) Loan fees, which are included in Interest Income, were $228 in 1997, $291 in
1996, and $232 in 1995.
(2) Certificates of Deposit with other financial institutions.
11
<PAGE>
The following is a chart that illustrates the average rates earned or paid
for the years 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
---- ---- ----
<S><C>
AVERAGE RATES EARNED
Commercial Loans 9.61% 9.82% 10.53%
Real Estate Mortgages 9.67% 9.48% 9.39%
Consumer Loans 11.48% 12.33% 12.23%
Taxable Investment Securities 6.62% 6.56% 5.59%
Other Investments(1) 5.79% 5.66% 5.59%
Federal Funds Sold 5.89% 5.32% 6.27%
------ ------ ------
TOTAL Earning Assets 8.68% 8.75% 8.65%
AVERAGE RATES PAID
Interest Bearing Transaction Accounts 2.50% 2.61% 2.54%
Savings 3.45% 3.46% 3.05%
Time - $100,000 or more 5.56% 5.39% 5.29%
Other Time 5.41% 5.28% 5.17%
Other Borrowed Money --- 5.58% 6.53%
Notes Payable 5.35% 5.33% 5.78%
------ ----- -----
TOTAL Interest Bearing Deposits 4.34% 4.55% 3.96%
NET YIELD ON EARNING ASSETS 4.34% 4.20% 4.69%
</TABLE>
(1) Certificates of Deposit with other financial institutions.
12
<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>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
Increase (Decrease) due to: Increase (Decrease) due to:
-------------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
<S><C>
INTEREST INCOME
Loans $ 122 $ 112 $234 $ 1,032 $(389) $ 643
Investment Securities 417 14 431 268 111 379
Federal Funds Sold 407 61 468 (89) (46) (135)
Other Interest Bearing
Assets (1) (148) 38 (110) (85) 54 (31)
----- ------- ----- ----- ---- ----
TOTAL Interest
Income $ 798 $ 225 $ 1,023 $ 1,126 $ (270) $ 856
===== ===== ======= ======= ======= =====
INTEREST EXPENSE
Interest-Bearing
Transaction Accounts $ 23 ($ 64) $ (41) $ (182) $ 132 $ (50)
Savings 131 (2) 129 80 137 217
Time - $100,000 or
more 345 31 376 163 9 172
Other Time 204 41 245 195 27 222
Other Borrowed Money (81) (81) 14 (11) 3
Notes Payable 1 1 --- (26) (26)
------- ----- ----- ---- ----
TOTAL Interest
Expense $ 622 $ 7 $ 629 $ 270 $ 268 $ 538
===== ======= ======= ===== ===== =====
NET INTEREST
INCOME $ 176 $ 218 $ 394 $ 856 $ (538) $ 318
===== ===== ===== ===== ======= =======
</TABLE>
Note: Loan fees, which were included in interest income were $228 in 1997, $291
in 1996 and $232 in 1995.
A change in Rate/Volume has been allocated to the change in rate.
(1) Certificates of Deposit with other financial institutions.
13
<PAGE>
The following table shows the Corporation's investment security maturity
distribution as of December 31, 1997:
INVESTMENT SECURITIES
(in 000s)
<TABLE>
<CAPTION>
U.S. Treasury U.S. Government Other Securities TOTAL
Agencies
<S><C>
Maturing Within One Year --- $ 2,003 $ --- $ 2,003
Maturing After One But --- 13,998 --- 13,998
Within Five Years
Maturing After Five But --- 6,893 --- 6,893
Within Ten Years
Maturing After Ten Years --- 6,019 600 6,619
------ -------- ---- -------
TOTAL $ --- $ 28,913 $ 600 $29,513
======= ======== ===== =======
</TABLE>
The following table shows a weighted average interest rate for the
Corporation's investment securities as of December 31, 1997:
INVESTMENT SECURITIES
(Weighted Average)
<TABLE>
<CAPTION>
U.S. Treasury U.S. Government Other Securities TOTAL
Agencies
<S><C>
Maturing Within One Year --- 5.98% --- 5.98%
Maturing After One But --- 6.30% --- 6.30%
Within Five Years
Maturing After Five But --- 7.98% --- 7.98%
Within Ten Years
Maturing After Ten Years --- 7.06% 7.38% 7.38%
------ ----- ------- -------
TOTAL --- 6.83% 7.38% 6.91%
==== ===== ===== =====
</TABLE>
14
<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>
1997 1996 1995
---- ---- ----
Book Market Book Market Book Market
---- ------ ---- ------ ---- ------
<S><C>
U.S. Treasury $ --- $ --- $ --- $ --- $ --- $ ---
U.S. Government 28,913 28,915 15,992 15,876 10,447 10,485
Agency
Other Securities 600 600 593 593 447 447
-------- -------- -------- -------- -------- --------
TOTAL $ 29,513 $ 29,515 $ 16,585 $ 16,469 $ 10,894 $ 10,932
======== ======== ======== ======== ======== ========
</TABLE>
15
<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 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S><C>
Commercial Loans $ 9,041 $ 9,612 $ 5,891 $ 3,761 $ 3,190
Real Estate 65,461 72,017 69,414 52,418 31,156
Mortgages
Consumer Loans 3,768 3,713 2,804 2,122 1,734
-------- -------- -------- -------- --------
TOTAL $ 78,270 $ 85,342 $ 78,109 $ 58,301 $ 36,080
======== ======== ======== ======== ========
</TABLE>
LOAN DISTRIBUTION
<TABLE>
<CAPTION>
December 31 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S><C>
Commercial Loans 11.55% 11.26% 7.54% 6.45% 8.84%
Real Estate Loans 83.64% 84.39% 88.87% 89.91% 86.35%
Consumer Loans 4.81% 4.35% 3.59% 3.64% 4.81%
------ ------ ------- ------ -------
TOTAL 100.0% 100.0% 100.0% 100.0% 100.0%
======
</TABLE>
16
<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, 1997:
SUMMARY OF LOAN LOSS EXPERIENCE
(in 000s)
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S><C>
Balance at Beginning of
Period $ 889 $ 817 $ 658 $ 428 $ 344
Loans Charged Off:
Commercial Loans 58 14 --- 4 1
Real Estate Mortgages 95 5 6 19 16
Consumer Loans 160 34 29 8 16
------- ----- --- -- ---
TOTAL Loans Charged Off $ 313 $ 53 $ 35 $ 31 $ 33
Recoveries of Loans:
Commercial Loans 1 57 1 2 1
Real Estate Mortgages --- --- 6 --- 8
Consumer Loans 5 8 4 11 12
---- -- ---- ----- -----
TOTAL Loans Recovered 6 65 11 13 21
---- ----- ----- ----- -----
Net Loans Charged Off 307 (12) 24 18 12
------ ------- ----- ----- ---
Provisions Charged to
Operations 72 60 183 248 96
---- ------ ------ ----- ---
Balance at End of Period $ 654 $ 889 $ 817 $ 658 $ 428
===== ===== ===== ===== =====
Daily Average Amount of
Loans $ 82,432 $ 81,158 $ 74,911 $ 42,271 33,546
======== ======== ======== ======== ======
Allowance for Possible Loan
Losses to Loans Outstanding .83% 1.04% 1.09% 1.13% 1.18%
==== ===== ===== ===== =====
Net Charge Offs to Average
Loans Outstanding .37% (.01%) .03% .04% .04%
==== ====== ==== ==== ====
</TABLE>
17
<PAGE>
RISK ELEMENTS OF LOAN PORTFOLIO
(in 000s)
<TABLE>
<CAPTION>
December 31 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S><C>
Non-Accrual Loans $ 770 $284 none $ 200 $200
----- ---- ---- ----- ----
Accruing Loans Past
Due 90 Days or more 1,948 276 481 143 34
Restructured Loans none none none none none
</TABLE>
The following is information with respect to non-accrual loans at December
31, 1997 and December 31, 1996:
1997 1996
---- ----
Interest Income that Would Have Been Recorded $ 13 $ 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, 1997, the Corporation had $1.8 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, 1997, 83.6% 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
based on the experience method and actual potential losses. 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
1998 to exceed the 1997 levels.
18
<PAGE>
The following is a table that shows the maturity of loans as of December
31, 1997:
<TABLE>
<CAPTION>
Commercial Real Estate Consumer
Loans Mortgages Loans TOTAL
---------- ----------- -------- -----
<S><C>
Maturing Within One Year $ 5,964 $ 25,363 $ 1,475 $ 32,802
Maturing After One Year
But Within Five Years 3,379 4,813 1,612 $ 9,804
Maturing After Five Years --- 34,722 942 $ 35,664
------ --------- ------ --------
TOTAL $ 9,343 $ 64,898 $ 4,029 $ 78,270
======= ======== ======= ========
</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 $ 3,446 $ 29,413 $ 32,859
Maturing After One But Within
Five Years 6,505 2.562 9,067
Maturing After Five Years 36,344 --- 36,344
-------- -------- --------
TOTAL $ 46,295 $ 31,975 $ 78,270
======== ======== ========
</TABLE>
19
<PAGE>
Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1997 and 1996 are summarized as follows:
TIME CERTIFICATES OVER $100,000
(in 000s)
MATURING:
1997 1996
---- ----
Three months or less $ 4,521 $ 3,434
Three to six months 1,980 2,354
Six to twelve months 2,939 3,283
Over twelve months 11,506 8,309
-------- --------
TOTAL $ 20,946 $ 17,380
Long and Short Term Borrowings
Short term borrowings consist of borrowings from the FHLB. These
borrowings re-price 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,
------------------------
1997 1996
---- ----
(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
Weighted average interest rate during the period:
Long-term promissory note 5.34% 5.33%
Borrowings from FHLB --- 5.58%
-20-
<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
By: /s/ Teodoro J. Hernandez
__________________________________________________
Teodoro J. Hernandez
Title: Treasurer
Date: 03/23/98
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:
By: /s/ Joseph Haskins, Jr.
__________________________________________________
Joseph Haskins, Jr.
Title: President and CEO
Date: 03/23/98
By: /s/ Erick W. March
__________________________________________________
Erick W. March
Title: Director
Date: 03/23/98
By: /s/ Louis J. Grasmick
__________________________________________________
Louis J. Grasmick
Title: Director
Date: 03/23/98
By: /s/ George F. Vaeth, Jr.
__________________________________________________
George F. Vaeth, Jr.
Title: Director
Date: 03/23/98
-21-
<PAGE>
By: /s/ Stanley W. Tucker
__________________________________________________
Stanley W. Tucker
Title: Director
Date: 03/23/98
By: __________________________________________________
Title: __________________________________________________
Date: __________________________________________________
By: __________________________________________________
Title: __________________________________________________
Date: __________________________________________________
By: __________________________________________________
Title: __________________________________________________
Date: __________________________________________________
-22-
<PAGE>
HARBOR BANKSHARES CORPORATION
--------
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
----------
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 subsidiaries as of December 31,
1997 and the related consolidated statement of income, changes in shareholders'
equity and cash flows for the year then ended. 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 audit. The
financial statements of Harbor Bankshares Corporation and subsidiaries for the
years ended December 31, 1996 and 1995 were audited by other auditors, whose
report, dated March 7, 1997, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 subsidiaries at December 31, 1997 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
_______________________________
Baltimore, Maryland
March 13, 1998
1
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
----------
<TABLE>
<CAPTION>
December 31
ASSETS 1997 1996
---- ----
<S> <C>
Cash and due from banks $ 8,629,510 $ 5,372,949
Federal funds sold 9,919,185 10,929,028
Interest bearing deposits in other banks 3,124,365 5,573,829
Investment securities:
Held to maturity at amortized cost (market value of
$15,019,778 in 1997 and $14,889,839 in 1996) 15,017,293 15,015,715
Available for sale 14,495,700 1,569,400
------------ ------------
29,512,993 16,585,115
Loans 78,446,414 85,509,102
Unearned income (176,494) (166,895)
Reserve for possible loan losses (654,298) (889,391)
------------ ------------
Net loans 77,615,622 84,452,816
Property and equipment, net 1,268,169 1,058,155
Goodwill, net 3,831,314 4,162,586
Accrued interest receivable 1,198,547 993,481
Other assets 774,444 523,459
------------ ------------
Total assets $135,874,149 $129,651,418
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing demand $ 10,926,217 $ 8,953,672
Interest bearing transaction accounts 14,137,405 13,755,550
Savings 42,758,673 40,989,551
Time, $100,000 or more 20,946,582 17,380,717
Other time 30,166,408 33,044,015
------------ ------------
Total deposits 118,935,285 114,123,505
Accrued interest payable 520,830 520,837
Notes payable 5,795,547 5,795,547
Other liabilities 321,127 210,323
------------ ------------
Total liabilities 125,572,789 120,650,212
Shareholders' equity:
Common voting stock-par value $.01 per share:
authorized 10,000,000 shares; 683,470, (including
33,333 common non-voting), and 633,444 shares
issued and outstanding at December 31, 1997 and
1996, respectively 6,834 6,334
Capital surplus 6,418,932 5,720,069
Retained earnings 3,876,753 3,283,153
Net unrealized loss on investment
securities available for sale, net of taxes (1,159) (8,350)
------------ ------------
Total shareholders' equity 10,301,360 9,001,206
------------ ------------
Total liabilities and shareholders' equity $135,874,149 $129,651,418
============ ============
</TABLE>
The accompanying notes are an integral
part of these statements.
2
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
----------
<TABLE>
<CAPTION>
Years ended December 31
1997 1996 1995
---- ---- ----
<S> <C>
Interest income:
Interest and fees on loans $ 8,039,471 $7,804,575 $7,161,412
Interest on investments - taxable 1,451,010 976,471 597,379
Interest on deposits in other banks 246,023 399,686 431,602
Interest on federal funds sold 633,236 164,826 300,152
----------- ---------- ----------
Total interest income 10,369,740 9,345,558 8,490,545
Interest expense:
Interest bearing transaction accounts 371,392 412,014 383,347
Savings 1,849,749 1,235,344 1,470,806
Time, $100,000 or more 1,010,974 635,499 463,330
Other time 1,255,474 1,497,072 900,462
Notes payable 309,623 309,205 334,778
Interest on federal funds purchased - 80,806 78,349
----------- ---------- ----------
Total interest expense 4,797,212 4,169,940 3,631,072
----------- ---------- ---------
Net interest income 5,572,528 5,175,618 4,859,473
Provision for possible loan losses 72,000 60,000 183,337
----------- ---------- ----------
Net interest income after provision for
possible loan losses 5,500,528 5,115,618 4,676,136
Other operating income:
Service charges on deposit accounts 609,667 591,003 490,842
Other service charges 483,884 165,940 92,955
Gain on sales of loans 41,641 - -
Other income 2,742 2,818 51,559
Gain on security sales 212,866 - -
Originated mortgage servicing rights 90,389 - -
----------- ---------- ----------
1,441,189 759,761 635,356
Other operating expenses:
Salaries and employee benefits 2,610,968 2,152,040 1,902,807
Occupancy expense of premises 678,397 533,285 433,764
Data processing fees 564,582 397,696 338,077
Equipment expense 386,284 249,376 201,249
FDIC insurance 35,693 318,097 165,991
Stationery and supplies 184,897 173,939 138,895
Professional fees 131,279 100,646 99,032
Postage 70,120 66,162 64,038
Courier transportation 86,920 74,160 68,972
Goodwill amortization 331,272 331,272 331,272
Other expenses 759,794 515,228 437,160
----------- ---------- ----------
5,840,206 4,911,901 4,181,257
----------- ----------
Income before income taxes 1,101,511 963,478 1,130,235
Applicable income taxes 401,148 390,701 450,804
----------- ---------- ----------
Net income $ 700,363 $ 572,777 $ 679,431
=========== ========== ==========
Basic earnings per share $ 1.07 $ 1.07 $ 1.55
=========== ========== ==========
Diluted earnings per share $ 0.99 $ 0.97 $ 1.45
=========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of these statements.
3
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------
<TABLE>
<CAPTION>
Common Capital Retained Unrealized Shareholders'
Stock Surplus Earnings Gain (Loss) Equity
------ ------- -------- ----------- -------------
<S> <C>
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 - - - 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 invest-
ment securities available for sale - - - (19,953) (19,953)
------ ---------- ---------- -------- -----------
Balance at December 31, 1996 6,334 5,720,069 3,283,153 (8,350) 9,001,206
Net income for the year - - 700,363 - 700,363
Stock dividend (8,290 shares) 83 124,267 (124,350) -
Stock options-tax benefit - - 19,955 - 19,955
Exercise of stock options 84 74,934 - - 75,018
Proceeds from issuance of common stock -
nonvoting (33,333 shares) 333 499,662 - - 499,995
Cash dividends - fractional - - (2,368) - (2,368)
Change in unrealized gain (loss) on invest-
ment securities available for sale - - - 7,191 7,191
------ ---------- ---------- -------- -----------
Balance at December 31, 1997 $6,834 $6,418,932 $3,876,753 $ (1,159) $10,301,360
====== ========== ========== ======== ===========
</TABLE>
The accompanying notes are an integral
part of these statements.
4
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
---- ---- ----
<S> <C>
Operating activities:
Net income $ 700,363 $ 572,777 $ 679,431
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized net securities (gains) (212,866) - -
Gains on sales of loans (41,641) - -
Provision for possible loan losses 72,000 60,000 183,337
Depreciation and amortization 715,640 598,541 537,681
(Increase) decrease in interest receivable and
other assets (436,096) (198,513) 47,629
Increase in interest payable and other liabilities
Net cash provided by operating activities 110,797 60,067 321,583
----------- ----------- -----------
908,197 1,092,872 1,769,661
Investing activities:
Net decrease in deposits at other banks 2,449,464 1,943,904 1,272,519
Purchases of investment securities held to maturity (2,999,200) (8,113,716) (7,947,964)
Purchases of investment securities available for sale (22,526,603) (1,000,000) (165,857)
Proceeds from sales of investment
securities available for sale 3,817,982 1,000,000 1,000,000
Proceeds from maturities of investment
securities held to maturity 9,000,000 2,426,667 10,000,000
Purchase of loans - - (17,319,820)
Net increase in loans (665,950) (7,160,981) (2,506,881)
Proceeds from sales of loans 7,472,785 - -
Purchases of premises and equipment (594,382) (663,912) (523,054)
Net cash used in investing activities ----------- ----------- -----------
(4,045,904) (11,568,038) (16,191,057)
Financing activities:
Net (decrease) increase in noninterest bearing demand 1,972,545 (3,728,919) 3,975,713
Net (decrease) increase in interest bearing
transaction accounts 381,855 (1,581,566) (2,147,732)
Net increase (decrease) in savings deposits 1,769,122 6,849,705 (3,030,972)
Net increase in time deposits 688,258 11,486,161 7,575,007
Proceeds from common stock issuance 575,013 2,847,592 25,000
Payments of cash dividends (2,368) (86,542) (85,942)
Acquisition of common stock - - (56,283)
----------- ----------- -----------
Net cash provided by financing activities 5,384,425 15,786,431 6,254,791
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents 2,246,718 5,311,265 (8,166,605)
Cash and cash equivalents at beginning of year 16,301,977 10,990,712 19,157,317
----------- ----------- -----------
Cash and cash equivalents at end of year $18,548,695 $16,301,977 $10,990,712
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these statements.
5
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
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,
Price 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 depositors 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 the 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 investments 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
historical cost adjusted for any amortization of premium or accretion
of discount. Trading securities are carried at fair value with
unrealized
Continued
6
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
1. Summary of Significant Accounting Policies, continued:
Investment Securities, continued:
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.
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 Losses:
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 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.
Continued
7
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
1. Summary of Significant Accounting Policies, continued:
Reserve for Possible Loan Losses, continued:
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.
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."
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.
Continued
8
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
1. Summary of Significant Accounting Policies, continued:
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, 1997, 1996 and 1995, the Company paid
interest of $4,797,212, $4,288,644 and $3,339,027, respectively, and
income taxes of $385,910, $410,029 and $443,991, 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.
Reclassifications:
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Recently Issued Accounting Guidance:
In June 1997, the Financial Accounting Standards (FASB) issued
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
"Reporting Comprehensive Income." The statement establishes
requirements for the disclosure and presentation of comprehensive
income and its components in full sets of financial statements.
Comprehensive income is defined as transactions and other occurrences
which are the result of nonowner changes in equity. Nonowner equity
changes, such as unrealized gains or losses on debt securities for
example, will be accumulated with net income in determining
comprehensive income. This statement will not impact the historical
financial results of the Corporation's operations. This statement is
effective for years beginning after December 15, 1997 and
reclassification of financial statements for earlier periods provided
for comparative purposes is required.
Continued
9
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
1. Summary of Significant Accounting Policies, continued:
Recently Issued Accounting Guidance, continued:
The FASB also issue Statement of Financial Accounting Standards No. 131
(SFAS No. 131"), "Disclosures about Segments of an Enterprise and
Related Information" during June 1997 which becomes effective for all
periods beginning after December 15, 1997. This statement provides
standards for reporting information of the operating segments of public
businesses in their annual and interim reports to shareholders. SFAS
No. 131 requires that selected financial information be provided for
segments meeting specific criteria. This statement will not impact the
presentation of the Corporation's financial results as no segments meet
the specific reporting criteria.
2. 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.
Continued
10
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
2. Fair Value of Financial Instruments, continued:
Investment Securities:
The fair values 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 value 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 approximates 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.
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.
Continued
11
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
2. Fair Value of Financial Instruments, continued:
Off-Balance Sheet Financial Instruments, continued:
The carrying values and estimated fair values of the Corporation's
financial assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------------------------- ----------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
---------------- ---------------- ---------------- ----------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C>
Financial assets:
Cash and due from banks $ 8,629,510 $ 8,629,510 $ 5,372,949 $ 5,372,947
Federal funds sold 9,919,185 9,919,185 10,929,028 10,929,028
Interest bearing deposits
in other banks 3,124,365 3,124,365 5,573,829 5,573,829
Investment securities 29,512,993 29,515,478 16,585,115 16,459,239
Loans, net of reserves 77,615,622 78,899,783 84,452,816 86,464,868
Accrued interest
receivable 1,198,547 1,198,547 993,481 993,481
Financial Liabilities:
Deposits 118,935,285 119,503,400 114,123,505 116,689,961
Accrued interest payable 520,830 520,830 520,837 520,837
Notes payable 5,795,547 5,795,547 5,795,547 5,795,547
</TABLE>
Continued
12
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
3. Investment Securities:
The amortized cost and estimated market values of investments
securities are as follows:
<TABLE>
<CAPTION>
Amortized
Cost Estimated
Cost Gross Market Value
----------------------- Unrealized Unrealized --------------------------
Debt Equity Gains Losses Debt Equity
----------- ------- ---------- ----------- ----------- ----------
<S> <C>
Balance at December 31, 1997
Investment securities available for sale:
U.S. Treasury and government agencies $13,912,688 $ - $ - $ (1,888) $13,910,800 $ -
Other securities - 584,900 - - - 584,900
----------- -------- ------- --------- ----------- --------
Total $13,912,688 $584,900 $ - $ (1,888) $13,910,800 $584,900
=========== ======== ======= ========= =========== ========
Investment securities held to maturity:
U.S. Treasury and government agencies $15,017,293 $ - $ 2,485 $ - $15,019,778 $ -
----------- -------- ------- --------- ----------- --------
Total $15,017,293 $ - $ 2,485 $ - $15,019,778 $ -
=========== ======== ======= ========= =========== ========
Balance at December 31, 1996
Investment securities available for sale:
U.S. Treasury and government 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 $ -
----------- -------- ------- --------- ----------- --------
Total $15,015,715 $ - $ - $(125,876) $14,889,839 $ -
=========== ======== ======= ========= =========== ========
</TABLE>
Continued
13
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
3. Investment Securities, continued:
The amortized cost and estimated market value of debt securities at
December 31, 1997 and 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>
1997 1996
---- ----
Amortized Market Amortized Market
Cost Value Cost Value
------------------ ----------------- ----------------- ----------------
<S> <C>
Debt securities available
for sale:
Due in one year or
less $ - $ - $ - $ -
Due after one year
through five
years 1,000,000 998,949 1,000,000 986,400
Due after five years through
ten years 6,893,169 6,931,777 - -
Due after ten years 6,019,519 5,980,074 - -
----------- ----------- ----------- -----------
Total $13,912,688 $13,910,800 $ 1,000,000 $ 986,400
=========== =========== =========== ===========
Debt securities held to
maturity:
Due in one year or
less $ 2,002,637 $ 2,003,910 $ - $ -
Due after one year
through five
years 13,014,656 13,015,868 15,015,715 14,889,839
----------- ----------- ------------ -----------
Total $15,017,293 $15,019,778 $15,015,715 $14,889,839
=========== =========== =========== ===========
</TABLE>
There were no sales of investment securities during 1996. Proceeds
from the sales of available for sale securities during 1997 were
$3,817,982, resulting in the realization of gross gains of $212,866.
Securities with a value of $5,000,000 at December 31, 1997 have been
pledged as collateral for a customer's money market deposit account.
Continued
14
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
4. Loans and Reserve for Possible Loan Losses:
The composition of loans at December 31 is as follows:
1997 1996
---- ----
Real estate - mortgage $65,461,718 $72,183,697
Commercial 9,040,363 9,611,937
Consumer 2,472,000 2,494,111
Credit card loans 1,295,838 1,219,357
----------- -----------
$78,269,919 $85,509,102
=========== ===========
Transactions in the reserve for possible loan losses are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Balance at January 1 $ 889,391 $816,853 $ 658,387
Provision charged to operating expense 72,000 60,000 183,337
Loans charged-off (312,692) (53,313) (34,957)
Recovery on loans previously charged-off 5,599 65,851 10,086
--------- -------- --------
Net loans charged-off (307,093) 12,538 (24,871)
--------- -------- --------
Balance at December 31 $ 654,298 $889,391 $816,853
========= ======== ========
</TABLE>
The following is an analysis of interest on non accruing and past due
loans:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Non accruing loans at December 31 $ 769,896 $284,295 $ -
Interest income which would have been
recognized under original terms 12,751 22,126 -
Interest income recognized during the
period - 2,671 -
Loans past due 90 days accruing 1,948,000 276,000 481,000
</TABLE>
Continued
15
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
5. Property and Equipment:
The major classes of property and equipment at December 31 are
summarized as follows:
1997 1996
---- ----
Furniture, fixtures and equipment $1,857,118 $1,414,942
Leasehold improvements 582,645 441,036
---------- ----------
2,439,763 1,855,978
Less: Accumulated depreciation and
amortization 1,171,594 797,823
---------- ----------
Total $1,268,169 $1,058,155
========== ==========
Depreciation expense was $384,368, $211,375 and $150,286, for the years
ended December 31, 1997, 1996 and 1995, 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, 1997:
1998 $ 388,695
1999 372,650
2000 272,205
2001 242,064
2002 and thereafter 413,664
----------
Total $1,689,278
Total rental expense under operating leases amounted to $376,328,
$279,055 and $216,733 in 1997, 1996 and 1995, respectively.
6. 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 1997.
Continued
16
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
7. Income Tax:
The Corporation's provision for income taxes for the years ended
December 31, is summarized as follows:
1997 1996 1995
---- ---- ----
Taxes currently payable $246,396 $369,330 $504,849
Deferred taxes (benefit) 154,752 21,371 (54,045)
-------- -------- --------
Income tax expense for the year $401,148 $390,701 $450,804
======== ======== ========
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>
1997 1996 1995
---- ---- ----
<S> <C>
Income before income taxes $1,101,511 $963,478 $1,130,235
Statutory income tax rate 34% 34% 34%
---------- ------- ----------
Income tax at statutory rate 374,513 327,583 384,280
State franchise tax, net of federal tax
benefit 24,334 67,443 73,903
Other 2,301 (4,325) (7,379)
---------- -------- ----------
Income tax expense for the year $ 401,148 $390,701 $ 450,804
========== ======== ==========
</TABLE>
Significant components of the Corporation's deferred tax liabilities
and assets are as follows:
1997 1996
---- ----
Deferred tax liabilities:
Deferred loan origination fees $ (83,040) $ (77,172)
Prepaid expenses (28,308) (18,490)
Mortgage servicing rights (33,045) -
Other (12,260) (12,260)
--------- ---------
Total deferred tax liabilities (156,653) (107,922)
Deferred tax assets:
Loan loss reserve 216,048 288,371
Depreciation 5,599 39,157
Unrealized loss on investment
securities available for sale 729 5,252
Other 6,793 6,793
---------- ---------
Total deferred tax assets 229,169 339,573
---------- ---------
Net deferred tax asset $ 72,516 $ 231,651
========== =========
No valuation allowance was recorded for the deferred tax assets at
December 31, 1997 or 1996.
Continued
17
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
8. 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, 1997 and 1996 the
interest rate on the notes was 5.19% and 5.18%, respectively. 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.
9. 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 at date of grant and expire 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
1997 1996 1995
---- ---- ----
Options outstanding at beginning
of year 62,311 68,897 27,358
Options granted at $14.80 per share - - 44,579
Options exercised at $6.57 to
$14.80 per share (8,406) (6,586) (3,040)
------ ------ ------
Options outstanding at end of year 53,905 62,311 68,897
====== ====== ======
Options exercisable at December 31
at $8.22 to $14.80 per share 53,905
======
Options available for granting
under the Plan 28,175
======
Continued
18
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
9. Stock Option Plan, continued:
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 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. No options were granted or vested in
1997.
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 proforma 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 in 1996 and 1995 would have
been as set out below follows:
1996 1995
---- ----
Pro forma net income $513,140 $651,077
Pro forma basic earnings per share $ 0.96 $ 1.49
Pro forma diluted earnings per share $ 0.87 $ 1.39
Continued
19
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
10. Concentrations of Credit Risk:
Real estate mortgages comprise $65,461,718 and $72,183,679 of the total
loan portfolio at December 31, 1997 and 1996, respectively.
Substantially all loans are collateralized by real property and or
other assets.
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
$3,408,361 and $3,705,346 at December 31, 1997 and 1996, respectively.
During 1997, $1,409,274 of new loans were made while repayments totaled
$1,706,259.
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 amount involve credit risk at
December 31 are as follows:
1997 1996
---- ----
Unused commitments to extend credit:
Revolving lines of credit $ 647,809 $ 705,336
Credit card lines 972,330 1,191,599
Commercial real estate and construction 2,073,000 2,810,000
Other unused commitments 6,735,000 5,359,000
Commercial letters of credit 456,319 360,319
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.
Continued
20
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
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 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, 1997 and 1996,
the Bank meet all capital adequacy requirement to which it is subject.
At December 31, 1997, 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.
Continued
21
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
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
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ---------------------- ---------------------
Minimum Required Minimum Required
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- ---------- ---------- ---------
<S> <C>
As of December 31, 1997:
Total Capital (to risk-weighted
total assets) $12,812 18.04% $5,682 8.0% $7,103 10.0%
Harbor Bank of Maryland
Tier 1 capital (to risk weighted
assets) 12,162 17.12% 2,841 4.0% 4,262 6.0%
Harbor Bank of Maryland
Tier 1 capital (to average assets)
Harbor Bank of Maryland 12,162 9.28% 5,244 4.0% 6,545 5.0%
As of December 31, 1996:
Total Capital (to risk-weighted
total assets) $11,209 17.00% $5,275 8.0% $6,594 10.0%
Harbor Bank of Maryland
Tier 1 capital (to risk weighted
assets) 10,384 15.75% 2,638 4.0% 6,956 6.0%
Harbor Bank of Maryland
Tier 1 capital (to average assets)
Harbor Bank of Maryland 10,384 8.93% 4,652 4.0% 5,816 5.0%
</TABLE>
Risk-based guidelines apply on a consolidated basis to bank holding
companies with consolidated assets of $150 million in assets, the
guidelines will be applied on a bank-only basis. As Harbor Bankshares
Corporation had total consolidated assets of $136 million and $130
million at December 31, 1997 and 1996, respectively, only the capital
ratios of the Bank are disclosed above.
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, 1997,
the total allowable dividend distributions was $951,592.
Continued
22
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
15. Earnings Per Share:
The Corporation adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS No. 128") on December 31, 1997. SFAS
No. 128 requires the Corporation to change the method of computing,
presenting and disclosing earnings per share information. Accordingly,
all prior period data presented has been restated to conform to the
provisions of SFAS No. 128. Under the revised provisions of the new
standard, primary earnings per share has been replaced with basic
earnings per share. Basic earnings per share is computed by dividing
net income by the weighted average number of common shares outstanding
for the period. Basic earnings per share does not include the effect of
potentially dilutive transactions or conversions. Additionally, under
the standard, diluted earnings per share replaces fully diluted
earnings per share from prior years. This computation reflects the
potential dilution of earnings per share under the treasury stock
method which could occur if contracts to issue common stock were
exercised, such as stock options, and shared in corporate earnings.
The following table presents a summary of per share data and amounts
for the periods indicated:
<TABLE>
<CAPTION>
Year ended Qualifying Basic EPS Basic Dilutive Diluted EPS Diluted
December 31, Net Income Shares EPS Shares Shares EPS
------------ ---------- --------- ----- -------- ----------- -------
<S> <C>
1995 $679,431 437,694 $1.55 31,262 468,956 $1.45
1996 572,777 535,335 1.07 56,122 591,457 0.97
1997 700,363 656,103 1.07 49,189 705,292 0.99
</TABLE>
Continued
23
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
16. Parent Company Only Financial Statements:
CONDENSED STATEMENTS OF CONDITION
December 31,
1997 1996
---- ----
Assets:
Investment in bank subsidiary $15,388,834 $14,537,615
Other 781,040 334,807
----------- -----------
Total assets $16,169,874 $14,872,422
=========== ===========
Liabilities and shareholders' equity
Liabilities:
Notes payable $ 5,795,547 $ 5,795,547
Other 72,967 75,669
----------- -----------
Total liabilities 5,868,514 5,871,216
Shareholders' equity 10,301,360 9,001,206
----------- -----------
Total liabilities and
shareholders' equity $16,169,874 $14,872,422
=========== ===========
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
1997 1996 1995
---- ---- ----
Dividend from subsidiary $ 311,991 $395,747 $ 420,720
Interest expense (309,623) (309,205) (334,778)
Income tax benefit 105,271 105,138 113,824
Equity in undistributed income
of subsidiary 592,724 381,097 479,665
--------- -------- ---------
Net income $ 700,363 $572,777 $ 679,431
========= ======== =========
Continued
24
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______
16. Parent Company Only Financial Statements, continued:
CONDENSED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C>
Operating activities:
Net income $ 700,363 $ 572,777 $ 679,431
Adjustment to reconcile net income to net
cash provided by operating activities:
Change in other assets and liabilities, net (105,271) (105,138) (57,541)
Equity in undistributed income of
subsidiary (592,724) (381,097) (479,665)
--------- ----------- ---------
Net cash provided by operating activities 2,368 86,542 142,225
--------- ----------- ---------
Investing activities:
Investment in subsidiary (813,979) (2,920,929) (25,000)
--------- ----------- ---------
Net cash used in investing activities (813,979) (2,920,929) (25,000)
--------- ----------- ---------
Financing activities:
Acquisition of treasury stock - - (56,283)
Proceeds from common stock issuance 575,013 2,920,929 25,000
Cash dividends (2,368) (86,542) (85,942)
Receivable from Subsidiary 238,966 - -
--------- ----------- ---------
Net cash provided by (used in) financing
activities 811,611 2,834,387 (117,225)
--------- ----------- ---------
Change in cash and cash equivalents - - -
Cash and cash equivalents at beginning of year - - -
--------- ----------- ---------
Cash and cash equivalents at end of year $ - $ - $ -
========= =========== =========
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
CORPORATE FINANCIAL REVIEW
OVERVIEW
The expansion of Harbor Bankshares Corporation continued in 1997
through its subsidiary, The Harbor Bank of Maryland. During May 1997, a de-novo
branch was opened in the East area of the city (Inner Harbor) creating a new
market for the Bank.
Also during 1997, an expansion of the Mortgage lending area took place,
this expansion, has allowed the Corporation through its subsidiary, to offer
additional mortgage products and to reach different markets. These Products
include programs to develop home ownership by residents in low income areas in
partnership with the Federal National Mortgage Association (FNMA). This
partnership has resulted in an additional investment in the Corporation of $500
thousand from the FNMA foundation in order to finance these programs.
Net earnings for Harbor Bankshares Corporation, were $700 thousand for
1997, compared to $573 thousand for 1996, an increase of $127 thousand or 22.2%.
The Corporation's subsidiary, the Harbor Bank of Maryland, achieved earnings of
$905 thousand in 1997, with a Return on Average Assets of .69%.
The Corporation's Return on Average Assets (ROAA) was .53%, compared to
.49% earned during 1996, reflecting the cost of the expansions during both
years. Return on Average Equity (ROAE) was 7.3% for 1997 compared to 7.9% for
1996.
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 and
other borrowings. Net Interest Income continued to be the Corporation's main
source of earnings. Net Interest Income increased to $5.5 million in 1997 from
$5.1 million in 1996.
Total interest income increased by $1.0 million or 10.9% to $10.3
million for 1997 when compared to the $9.3 million earned during 1996. A growth
in total average earning assets of 11.9% mainly in the investment portfolio and
Federal funds sold were the main reasons for the increase.
Total interest expense increased by $627 thousand or 15.0% to $4.8
million in 1997 from $4.2 million in 1996. This increase was mainly due to the
growth in interest bearing time deposits. The growth in the deposit area is
reflected in the increase of the investment portfolio and federal funds sold.
Net interest margin for 1997 was 4.71% compared to 4.59% for 1996.
The following table compares the components of the net interest margin
and the changes occuring in those components from 1997 to 1996.
NET INTEREST MARGIN
(AS PERCENT OF EARNING ASSETS)
1997 1996 BASIS POINT CHANGE
---- ---- ------------------
Yield on earning assets 8.68% 8.75% (.07%)
Rate paid on interest bearing liabilities 4.34% 4.55% .12%
Net benefit of non-interest bearing funds .37% .39% (.02%)
Average Cost of funds 3.97% 4.16% .14%
Net Interest Margin 4.71% 4.59% (.25%)
-1-
<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses was $72 thousand for 1997, an increase of
$12 thousand from the $60 thousand provided in 1996. The reserve level is
monitored closely by management on a quarterly basis based on charge-off
experience and analysis of the past due and non-performing loans. The reserve
level as of December 31, 1997 is considered adequate. The Corporation maintains
a highly collateralized loan portfolio consisting mainly of residential and
commercial mortgage loans, charge-offs increased from $53 thousand in 1996 to
$313 thousand in 1997. Recoveries totaled $6 thousand for 1997. The ratio of the
loan loss reserve to outstanding loans was .84% for 1997 and 1.04% for 1996.
OTHER OPERATING INCOME
Non-interest income increased by $681 thousand or 89.6% to $1.4 million
in 1997. ATM fees were $299 thousand for 1997 compared to $25 thousand in 1996,
representing 20.7% of total operating income. Also included in the 1997
non-interest income were $41 thousand of gain on sale of loans, $213 thousand of
gain on securities sales and $90 thousand of originated servicing rights. The
1996 non-interest income did not include any income derived from the above
listed categories.
OTHER OPERATING EXPENSES
Non-interest expenses, at $5.8 million in 1997, increased by $928
thousand or 18.9% when compared to $4.9 million in 1996. Salaries and benefits
increased to $2.6 million in 1997 from $2.2 million in 1996. The increase was
due to additional staff salary increases and benefit costs. Other expenses
increased by $469 thousand or 17.0%. This increase includes the operating cost
of a new branch facility which opened during May , 1997. Cost such as equipment,
data processing fees, legal cost, etc., also contributed to the increase.
Goodwill amortization of $331 thousand in 1997, remained the same as 1996. The
FDIC insurance cost at $35 thousand for 1997, reflected a lower premium when
compared to 1996 which included a one time fee of $235 thousand due to the
recapitalization of the SAIF fund.
APPLICABLE INCOME TAXES
Applicable income taxes includes current and deferred portions which
are detailed in Note 8 of the audited consolidated financial statements. At $401
thousand, taxes represented 36.4% of income before taxes for 1997 and $391
thousand or 40.5% 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 $2.7 million or 3.5% of gross loans
outstanding at the end of 1997. This compares with $559 thousand or .65% of
gross loans outstanding at the end of 1996.
The reserve for possible loan losses decreased from $889 thousand at
the end of 1996 to $654 thousand at the end of 1997. As of year end, the reserve
represented .84% of gross loans outstanding. Based on quarterly analyses
conducted throughout the year, this reserve is considered adequate by
management.
-2-
<PAGE>
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 relates 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.
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, 1997, 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 $33.0
million or 24.3% of total assets at December 31, 1997.
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.
For the year ended December 31, 1997, net cash provided by
operating activities totaled $900 thousand. Net cash used in
investing for the same period totaled $4.0 million resulting
primarily from the purchases of securities totaling $25.5
million offset by the maturities of investments and interest
bearing deposits in other banks totaling $12.8 million and
proceeds from the sale of loans of $7.5 million.. Purchases of
premises and equipment totaled $594 thousand. Net cash
provided by financing activities for the year ended December
31, 1997 totaled $5.3 million resulting primarily from a net
increase in deposits of $5.2 million and net proceeds from the
sale of non-voting common stock of $500 thousand.
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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.
CUMULATIVE INTEREST SENSITIVE GAP
REPRICING OR MATURITY
---------------------------------
DECEMBER 31, 1997 (IN MILLIONS) 3 MONTHS 6 MONTHS 1 YEAR
------------------------------- -------- -------- ------
Interest sensitive assets $ 47 $ 51 $ 63
Interest sensitive liabilities 41 49 57
---- ---- -----
Interest sensitivity gap $ 6 $ 2 $ 6
==== ==== =====
Gap to total assets 4.7% 1.5% 4.8%
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 1997 was $310 thousand.
There were no short term borrowings during 1997.
CAPITAL RESOURCES
Shareholders' equity grew by $1.3 million or 14.4% to $10.3 million.
This increase was mainly due to the retained earnings of the Corporation and the
sale of 33,333 shares of common non-voting stock with proceeds of $500 thousand.
Shareholder's equity was 7.6% of total assets as of the year end. The Tier 1
capital ratio of the Harbor Bank of Maryland as of December 31, 1997 was 9.21%,
and the risk based capital ratio was 18.04%. 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 $14.21 at the end of 1996 to $15.07 at the end of 1997.
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<PAGE>
CHANGES IN FINANCIAL POSITION
The Corporation through its subsidiary, The Harbor Bank of Maryland,
continued its growth during 1997. A de-novo branch was opened during May, 1997
in the East side of Baltimore as well as the establishment of a Mortgage
Division.
Assets grew by $6.2 million or 4.8% to $135.9 million from $129.7
million in 1996. Deposits increased by $4.8 million to $118.9 million or 4.2%
from $114.1 million in 1996 and net loans decreased by $6.8 million to $77.6
million or 8.1% compared to $84.4 million in 1996. The sale of approximately
$1.8 million of real estate loans and the conversion of $5.6 million of these
loans into FNMA Mortgage back securities were the reason for the decrease.
The Corporation plans to continue its expansion through marketing
efforts by its management and board of directors.
Deposit growth provided the major source of additional funds. Use of
these funds was reflected in the growth of the investment portfolio.
FINANCIAL ANALYSIS - 1996 AND 1995
Net income for 1996 increased by $300 thousand or 6.1% to $5.2 million
due to the growth in the loan and investment areas. Average earning assets
increased by 8.8%, mainly in the loan portfolio. The increased net interest
income during 1996, when compared to 1995, was mainly due to the effect of
increased balances in earning assets.
During 1996, the provision for possible loan losses increased by $72
thousand or 8.8%. The increase in 1996 reflects the build up of the reserves
during that year.
Non-interest income increased by $124 thousand or 19.6% during 1996
when compared to 1995. Increased fees and service charges contributed to the
variance.
Non-interest expenses, at $4.9 million in 1996, increased by 17.5% when
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 one time $235,000 FDIC assessment 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.
At $391 thousand, taxes represented 40.5% of income before taxes for
1996 and $451 thousand or 39.9% for 1995.
Deposits grew by $13.0 million or 9.3%, and investment securities
increased by $3.7 million or 20.3%. Both of these asset categories were the main
user of the source of funds provided by the deposit growth.
Shareholders' Equity grew by $3.4 million or 59.9% due to a stock
offering during June 1996 and retained earnings.
The Tier 1 capital ratio as of December 31, 1996 was 15.75%, and the
risk based capital ratio was 17.0%; both were well above minimum regulatory
requirements.
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OTHER INFORMATION
During June 1997, the Financial Accounting Standards Board ("FASB")
issued statement 130 "Reporting Comprehensive Income." The statement establishes
standards for disclosing comprehensive income and its components in a full set
of financial statements. Comprehensive income is defined as the change in equity
from transactions and other events and circumstances from non-owner sources.
This statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
During June 1997, the Financial Accounting Standards Board ("FASB")
issued statement 131 "Disclosure about Segments of an Enterprise and Related
information." This Statement establishes standards for disclosing information
about operating segments in financial statements. Operating segments are
components of a business about which separate financial information is available
that is evaluated by management in deciding how to allocate resources and in
assessing performance. For year-end disclosure, this Statement is effective for
fiscal years beginning after December 15, 1997. Management has not determined
yet whether additional disclosure will be necessary under the requirements of
SFAS No. 131.
The Corporation continues with its plans for expansion for 1998.
Presently several branch sites are being evaluated in order to expand the
service area to other locations in Baltimore City and Prince George's County,
Maryland.
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<PAGE>
CONSOLIDATED FIVE-YEAR FINANCIAL HIGHLIGHTS
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
(In thousands, except per share data) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S><C>
BALANCE SHEET DATA
Total Assets $ 135,874 $ 129,651 $ 113,316 $ 106,069 $ 61,741
Deposits 118,935 114,124 101,098 94,726 56,868
Total Net Loans 77,616 84,453 77,292 57,643 35,653
Total Shareholders' Equity 10,301 9,001 5,641 5,059 4,479
OPERATING DATA (FOR THE FULL YEAR)
Interest Income $ 10,369 $ 9,345 $ 8,490 $ 6,537 $ 4,369
Interest Expense 4,797 4,170 3,631 2,526 1,659
--------- --------- --------- --------- --------
Net Interest Income $ 5,572 $ 5,175 $ 4,859 $ 4,011 $ 2,710
Provision for Loan Losses 72 60 183 248 96
Other Operating Income 1,441 760 635 786 515
Other Operating Expenses 5,840 4,912 4,181 3,554 2,343
--------- --------- --------- --------- --------
Income Before Taxes $ 1,101 $ 963 $ 1,130 $ 995 $ 786
Income Taxes 401 390 451 370 311
--------- --------- --------- --------- ---------
Net Income $ 700 $ 573 $ 679 $ 625 $ 475
========= ========= ========= ========= ========
PER SHARE DATA
Net Income $ 1.07 $ 1.07 $ 1.55 $ 1.43 $ 1.09
Dividend $ .20 $ .20 $ .20 $ .14 $ .10
Book Value $ 15.07 $ 14.21 $ 13.17 $ 11.77 $ 10.51
</TABLE>
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<PAGE>
HARBOR BANKSHARES CORPORATION
SUPPLEMENT TO 1997 ANNUAL REPORT TO STOCKHOLDERS
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
<S><C>
Joseph Haskins, Jr. Chairman, President and Chief Executive Officer
J.P. Blase Cooke President/Harkins Builders, Inc.
James H. DeGraffenreidt, Jr. President/Washington Gas
Stephen A. Geppi President and C.E.O./Diamond Comic Distributors, Inc.
Joe Louis Gladney President/Gladney Transportation and Oil Company
Louis J. Grasmick President and C.E.O./Louis J. Grasmick Lumber Co., Inc.
Nathaniel Higgs, Th.B., D.D. Pastor/Southern Baptist Church
Delores G. Kelley, Ph.D. Senator/Maryland State Senate
Erich March Vice President/William C. March Funeral Home
John Paterakis President and Chief Executive Officer/H&S Bakery
Edward St. John President and Chief Executive Officer/MIE Investment Co.
Stanley W. Tucker Managing General Partner, MMG Ventures, L.P.
EXECUTIVE OFFICERS
Joseph Haskins, Jr. Chairman, President and C.E.O./Corporation and Bank
John Paterakis Chairman, Executive Committee/Corporation and Bank
Teodoro J. Hernandez Treasurer/Corporation - Vice President and Cashier/Bank
George F. Vaeth, Jr. Secretary/Corporation and Bank
ADVISORY BOARD
Henry Baines President/Stop, Shop and Save
Kenneth Banks President/Banks Contracting Co., Inc.
Floyd Grayson President and Owner/Grayson Homes, Inc.
Robert L. Haynes Pastor/New Pleasant Grove Missionary Baptist Church
Walter W. Hill, Jr. Vice President/ECS Technologies, Inc.
Joshua Matthews President/JCM Systems, Inc.
Marilyn M. Rawlings President/Cameo Electronics Company, Inc.
Robert L. Serio Vice President/Frank A. Serio & Sons, Inc.
Charles M. Solomon, CPA President and Owner/Charles M. Solomon, P,.A.
Walter Thomas Pastor/New Psalmist Church
William Villanueva Vice President/M&W Medical Equipment
James Watkins, (Col.) President/Watkins Security Agency
Kenneth O. Wilson President and Owner/Inner Harbor Marina
</TABLE>
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<PAGE>
SHAREHOLDER INFORMATION
MARKET SUMMARY OF STOCK
Harbor Bankshares Corporation is traded privately and is not listed by
any exchange. During 1997 and 1996, there was little trading activity
in the stock. The bid and ask prices during 1997 varied from $13.00 to
$17.00 per share. During 1996 the bid and ask price was $15.00 per
share. At December 31, 1997 the Corporation had 745 common stockholders
of record.
CASH DIVIDENDS
Harbor Bankshares Corporation paid a stock dividend equivalent to $.20
per share during the first quarter of 1997. During 1996 The Corporation
paid cash dividends of $.20 per share during the first quarter of 1996.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company
40 Wall Street
New York, New York 10005
(210) 936-5100
SEC FORM 10-KSB
The Corporation files an Annual Report on Form 10-KSB with the
Securities and Exchange Commission. A copy of this report will be sent
without charge to any shareholder who submits a request in writing to:
Teodoro J. Hernandez, Treasurer
Harbor Bankshares Corporation
25 W. Fayette Street
Baltimore, Maryland 21201
This report also includes exhibits, a copy of which the Corporation
will furnish its shareholders upon payment or a reasonable fee.
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,630
<INT-BEARING-DEPOSITS> 3,124
<FED-FUNDS-SOLD> 9,919
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,496
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<DEPOSITS> 118,935
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<LONG-TERM> 5,795
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0
0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 135,874
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<LOANS-NON> 770
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