FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
---------------------------------------------------
For quarter ended June 30, 1998
Commission file number 0-20990
HARBOR BANKSHARES CORPORATION
- -----------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 52-1786341
- -------- ----------
(State of other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
25 W. FAYETTE STREET, BALTIMORE, MARYLAND 21201
- ----------------------------------------- -----
(Address of principal executive offices) (Zip code)
(410) 528-1800
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Registrant's telephone number, including area code
NOT APPLICABLE
- --------------
Former name, address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X YES NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
COMMON STOCK, NON-VOTING, $.01 PAR VALUE - 33,333 SHARES AS OF JUNE 30, 1998.
COMMON STOCK, $.01 PAR VALUE -- 653,204 SHARES AS OF JUNE 30, 1998
- ------------------------------------------------------------------
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
- --------------------------------------------------------------------------------
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Condition - June 30, 1998
(Unaudited) and December 31, 1997
Consolidated Statements of Income (Unaudited) Three months
Ended June 30, 1998 and 1997
Consolidated Statements of Income (Unaudited) - Six months
Ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows (Unaudited) - Six months
Ended June 30, 1998 and 1997
Notes to Unaudited Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
June 30 Dec 31
1998 1997
------- ------
(Unaudited)
-----------
Dollars in Thousands
<S><C>
ASSETS
Cash and Due from Banks $ 7,290 $ 8,630
Interest Bearing Deposits in Other Banks 2,346 3,124
Investment Securities:
Held to maturity (market values of $4,018
as of 6/30/98 and $15,020 as of 12/31/97) 4,016 15,017
Available for Sale 32,450 14,496
-------- --------
Total Investment Securities 36,466 29,513
Federal Funds Sold 14,220 9,919
Loans 76,750 78,446
Unearned Income (170) (176)
Reserve for Possible Loan Losses (699) (654)
-------- --------
Net Loans 75,881 77,616
Property and Equipment - Net 1,135 1,268
Goodwill 3,666 3,831
Accrued Interest Receivable and Other Assets 2,549 1,973
-------- --------
TOTAL ASSETS $143,553 $135,874
-------- --------
LIABILITIES
Deposits:
Non-Interest Bearing Demand $ 14,398 $ 10,926
Interest Bearing Transaction Accounts 27,993 14,137
Savings 34,005 42,759
Time, $100,000 or more 21,587 20,947
Other Time 28,558 30,166
-------- --------
Total Deposits 126,541 118,935
Accrued Interest and Other Liabilities 907 842
Notes Payable 5,796 5,796
-------- --------
TOTAL LIABILITIES 133,244 125,573
SHAREHOLDERS' EQUITY
Common stock, - par value $.01 per share:
Authorized 10,000,000 shares; 653,204 issued and outstanding
at 6/30/98 and 641,7321 at 12/31/97 and 33,333 common
non-voting issued and outstanding at 6/30/98 and 12/31/97. 7 7
Capital Surplus 6,442 6,419
Retained Earnings 3,864 3,876
Net accumulated other comprehensive income (4) (1)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 10,309 10,301
-------- --------
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY $143,553 $135,874
-------- --------
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
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HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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Consolidated Statements of Income
<TABLE>
<CAPTION>
Six Months
Ended June 30
1998 1997
---- ----
<S><C>
INTEREST INCOME
Interest and Fees on Loans $3,718 $4,024
Interest on Investment Securities (Taxable) 1,145 612
Interest on Deposits in Other Banks 75 140
------ ------
4,938 4,776
Interest on Federal Funds Sold 351 267
------ ------
TOTAL INTEREST INCOME 5,289 5,043
INTEREST EXPENSE
Interest on Deposits
Savings 670 655
Interest Bearing Transaction Accounts 279 182
Time $100,000 or More 560 479
Other Time 809 865
Interest on Notes Payable 155 155
------ ------
TOTAL INTEREST EXPENSE 2,473 2,336
------ ------
NET INTEREST INCOME 2,816 2,707
Provisions for Possible Loan Losses 75 36
------ ------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 2,741 2,671
OTHER OPERATING INCOME
Service Charges on Deposit Accounts 300 278
Other Income 372 273
------ ------
672 551
OTHER OPERATING EXPENSES
Salaries and Employee Benefits 1,321 1,242
Occupancy Expense of Premises 356 327
Equipment Expense 201 173
Data Processing Expense 301 272
Deposit Assessments & Related Fees 19 17
Goodwill Amortization 166 166
Other Expenses 576 533
------ ------
2,940 2,730
INCOME BEFORE INCOME TAXES 473 492
Applicable Income Taxes 160 178
------ ------
NET INCOME 313 314
------ ------
BASIC EARNINGS PER SHARE $ .45 $ .50
------ ------
DILUTED EARNINGS PER SHARE .42 .45
AVERAGE COMMON SHARES OUTSTANDING 687 634
Dividend Declared per Share $ .25 $ .20
</TABLE>
(See notes to unaudited consolidated Financial Statements)
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HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
June 30
1998 1997
---- ----
(Unaudited)
In Thousands
Except per Share Data
<S><C>
INTEREST INCOME
Interest and Fees on Loans $1,903 $2,013
Interest on Investment Securities (Taxable) 606 324
Interest on Deposits in Other Banks 35 68
------ ------
$2,544 $2,405
Interest on Federal Funds Sold 187 146
------ ------
TOTAL INTEREST INCOME 2,731 2,551
INTEREST EXPENSE
Interest on Deposits
Savings 320 330
Interest Bearing Transaction Accounts 190 98
Time $100,000 or More 299 238
Other Time 396 444
Interest on Notes Payable 77 79
------ ------
TOTAL INTEREST EXPENSE 1,282 1,189
------ ------
NET INTEREST INCOME 1,449 1,362
Provision for Possible Loan Losses 37 18
------ ------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES 1,412 1,344
OTHER OPERATING INCOME
Service Charges on Deposit Accounts 151 143
Other Income 184 72
------ ------
335 215
OTHER OPERATING EXPENSES
Salaries and Employee Benefits 672 644
Occupancy Expense of Premises 180 169
Equipment Expense 100 91
Data Processing Expense 152 140
Deposit Assessments and Related Fees 10 9
Goodwill Amortization 83 83
Other Expenses 288 236
------ ------
1,485 1,372
INCOME BEFORE INCOME TAXES 262 187
Applicable Income Taxes 89 58
------ ------
NET INCOME $ 173 $ 129
------ ------
BASIC EARNINGS PER SHARE $ .25 $ .20
DILUTED EARNINGS PER SHARE .23 .19
AVERAGE COMMON SHARES
OUTSTANDING 687 634
Dividends Declared per Share $ -- $ --
</TABLE>
(See notes to unaudited consolidated Financial Statements)
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30
1998 1997
---- ----
(Unaudited)
Dollars in Thousands
<S><C>
OPERATING ACTIVITIES
Net Income $ 313 $ 314
Adjustments to Reconcile Net Income to Net Cash
and Cash Equivalents Provided by Operating
Activities:
Gains on sales of securities (26) --
Gains on sale of loans (2) (42)
Provision for Possible Loan Losses 75 36
Depreciation and Amortization 368 343
(Increase) in Interest Receivable and Other Assets (576) (305)
Increase (Decrease) in Interest Payable and Other
Liabilities 65 (22)
-------- -------
Net Cash Provided (used in) Operating Activities 217 324
INVESTING ACTIVITIES
Net Decrease in Deposits at Other Banks 778 1,059
Purchase of Investments securities available for sale (22,993) (5,982)
Proceeds from Called Investments securities held
to maturity 11,000 2,000
Proceeds from Sale of Securities available for sale 1,839 --
Proceeds from Called Securities available for sale 3,000 --
Proceeds from the sale of loans 608 1,873
Net Decrease in Loans 1,278 (504)
Purchase of Premises and Equipment (70) (495)
-------- -------
Net Cash and Cash Provided by (4,560) (2,049)
(Used in) Investing Activities
FINANCING ACTIVITIES
Net Increase (Decrease) in Non-Interest Bearing
Transaction Accounts 3,472 1,050
Net Increase in Interest Bearing
Transaction Accounts 13,856 1,984
Net Increase (Decrease) in Savings Deposits (8,754) (3,246)
Net Increase (Decrease) in Time Deposits (968) (1,877)
Exercised Options 24 --
Payment of Cash Dividends (326) (158)
-------- -------
Net Cash (Used in) Provided by Financing Activities 7,304 (2,247)
Increase (Decrease) in Cash and Cash Equivalents 2,961 (3,972)
Cash and Cash Equivalents at Beginning of Period 18,549 16,302
-------- -------
Cash and Cash Equivalents at End of Period $ 21,510 $12,330
</TABLE>
(See Notes to Unaudited Consolidated Financial Statements)
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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EXHIBIT II
Statement Regarding Computation of 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 standards, 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
period indicated:
<TABLE>
<CAPTION>
YTD Qualifying Basic EPS Basic Dilutive Diluted EPS Diluted
June 30 Net Income Shares EPS Shares Shares EPS
- ------- ---------- --------- ----- -------- ----------- -------
<S><C>
1998 $ 312,676 686,537 $.45 50,865 737,402 $ .42
1997 $ 314,172 633,516 $.50 58,340 691,856 $ .45
<CAPTION>
Qtr ended
June 30
<S><C>
1998 $173,139 686,537 $.25 50,865 737,402 $ .23
1997 $128,767 633,602 $.20 56,189 689,791 $ .19
</TABLE>
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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Notes to Unaudited Consolidated Financial Statements
June 30, 1998
Note A: Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all the information and
footnotes required for complete footnotes required for complete
financial statements. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair presentation have
been included. Operating results for the six month period ended June
30, 1998, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. The enclosed unaudited
consolidated financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto
incorporated by reference in the Corporation's Annual Report on Form
10-KSB for the year ended December 31, 1997.
Note B: Comprehensive Income
Comprehensive income is defined as the change in equity from
transactions and other events and circumstances from non-owner sources.
Presented below is a reconciliation of net income to comprehensive
income indicating the component of other comprehensive income:
Six Months Ended June 30,
-------------------------
1998 1997
-------- --------
Net Income $ 313 $ 314
- Other Comprehensive Income:
Unrealized Holding Gains (Losses)
Arising During the period (32) (38)
- Less: Reclassified Adjustments for
gains included in Net Income (26) --
Other Comprehensive Income, Before
Tax (6) (38)
Income Tax Expense Related to items
of Other Comprehensive Income 2 14
Other Comprehensive Income (4) (24)
Comprehensive Income 309 290
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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Note C: In June 1998, the Financial Accounting Standards Board ("FASB") issued
statement 133 ("SFAS No. 133), "Accounting for Derivative Instruments and
hedging activity." This Statement establishes accounting and reporting standards
for derivative instruments and hedging activity. Under the standard, all
derivatives must be measured at fair value and recognized as either assets or
liabilities in the financial statements.
The accounting for changes in fair value (gains and losses) of a derivative is
dependent on the intended use of the derivative and its designation. Derivatives
may be used to: 1) hedge exposure to change the fair value of a recognized asset
or liability or a firm commitment, referred to as a fair value hedge, 2) hedge
exposure to variable cash flow of forecasted transactions, referred to as a cash
flow hedge, 3) hedge foreign currency exposure.
The corporation only engages in fair value and cash flow hedges. In both types
of hedges, the effective portions of the hedges, although included in earnings,
do not affect corporate net income. Ineffective portions of hedges are reported
in and affect net earnings immediately. Derivatives not designed as a hedging
instrument have the changes in their fair value recognized in earnings in the
period of change. Management is currently assessing the potential impact of SFAS
No. 133 on future corporate operations.
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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Part I. FINANCIAL INFORMATION
Item II. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Harbor Bankshares Corporation's earnings for the second quarter of 1998
totaled $173 thousand, an increase of $44 thousand or 34.1 percent,
when compared to the second quarter of 1997. Net interest income
increased by $87 thousand or 6.4 percent and other operating income
increased by $120 thousand mainly due to fees generated by the ATM
network. Total expenses for the quarter increased by $113 thousand or
8.4 percent when compared to the same period for 1997. The net effect
of the income and expense increases resulted in the $44 thousand
variance.
Year-to-date earnings as of June 30, 1998, were $313 thousand or $.45
basic earnings per share reflecting basically flat revenues when
compared to the six months ending June 30, 1997, which were $314
thousand or $.50 basic earning per share. Return on Average Assets
(ROAA) and Return on Average Shareholder's Equity (ROAE) were .45
percent and 5.93 percent respectively.
Net Interest income increased by $109 thousand or 4.7 percent when
compared to the same period last year. Total loan revenues decreased by
$306 thousand or 7.6 percent reflecting the sale of Real Estate loans
that took place during 1997. Investment income increased by $533
thousand or 87.1 percent. This increase reflects the investment of the
funds resulting from the loan sales and deposit growth. Total interest
expense for the period was $2.5 million compared to $2.3 million for
the same period last year.
Time and saving deposits were the main source of interest expense
totaling $1.4 million and $670 thousand respectively. Together they
represent 82.4 percent of total interest expense. Included in the
interest expense are $155 thousand of interest related to the
borrowings of the Corporation from the former Resolution Trust
Corporation, now FDIC, for the Interim Capital Assistance Programs
related to acquisitions that took place during 1994.
The provisions for credit losses was $37 thousand for the second
quarter of 1998 and $75 thousand year-to-date. Charge-offs for 1998
were $37 thousand with recoveries of $7 thousand. Charge-offs for
credit cards and related plans were $34 thousand, representing 91.9
percent of total charge-offs for the period.
Other operating income increased by $121 thousand or 21.9 percent. This
increase is mainly attributable to ATM fees transaction, which were
$182 thousand or 27.1 percent of total operating income. Included in
total operating income is a gain in the sale of securities of $26
thousand and $79 thousand of fees generated by Harbor Financial
Services, a subsidiary of the Bank which deals on the sale of
securities, insurance, mutual funds, etc.
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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Non-interest expense increased by $210 thousand or 7.7 percent to $2.9
million from $2.7 million in 1997. Salaries and employee benefits
increased by $79 thousand or 6.4 percent, reflecting additional staff
due to expansion and general salary increases. Occupancy and equipment
expenses increased by $29 thousand and $28 thousand respectively, as a
result of the expansion and equipment upgrade. Data processing fees
increased by $29 thousand, mainly due to the ATM network maintenance
cost. Goodwill amortization, at $166 thousand, represents 5.6 percent
of total non-interest expense. Other expenses increased by $43 thousand
or 8.1 percent due to general cost increases in relation to the
expansions.
As of June 30, 1998, total deposits were $126 million, reflecting an
increase of $7.6 million or 6.4 percent when compared to 1997. Net
loans decreased by $1.7 million due to the sale of Real Estate loans
during the later part of 1997. Investment Securities increased by $7.0
million or 23.5 percent in the available for sale category. There were
no borrowings outstanding as of June 30, 1998.
Harbor Financial Services, the subsidiary of the Bank which deals with
the sale of insurance, mutual funds, etc. had an operating loss of $5
thousand as of the second quarter of 1998. This loss is reflected in
the consolidated financial statements.
The Corporation stock is traded privately. As of June 30, 1998, only a
few trades were registered ranging from the low of $16.00 per share to
the high of $17.00 per share. During February 1998, the Corporation
paid a cash dividend of $25 per share. This dividend reflects an
increase of $.05 per share from the dividend paid in 1997.
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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Part II. OTHER INFORMATION
Item I. Legal Proceedings
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 of
the Corporation.
Item II. Changes in Securities
None
Item III. Defaults Upon Senior Securities
None
Item IV. Submission of Matters to a Vote of Security Holders
None
Item V. Other Information
None
Item VI. Exhibits and Reports on Form 8-K
Exhibit II - Statement Regarding Computation of per Share
Earnings
The Company did not file any report on Form
8-K for the period ending June 30, 1998.
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARBOR BANKSHARES CORPORATION
Date:
---------------- -------------------------------------
Joseph Haskins, Jr.
President and Chief Executive Officer
Date: 8-12-98 /s/ Teodoro J. Hernandez
---------------- -------------------------------------
Teodoro J. Hernandez
Treasurer
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<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,290
<INT-BEARING-DEPOSITS> 2,346
<FED-FUNDS-SOLD> 14,220
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,450
<INVESTMENTS-CARRYING> 4,016
<INVESTMENTS-MARKET> 4,018
<LOANS> 76,580
<ALLOWANCE> 699
<TOTAL-ASSETS> 143,553
<DEPOSITS> 126,541
<SHORT-TERM> 0
<LIABILITIES-OTHER> 804
<LONG-TERM> 5,796
0
0
<COMMON> 7
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 143,553
<INTEREST-LOAN> 3,718
<INTEREST-INVEST> 1,145
<INTEREST-OTHER> 426
<INTEREST-TOTAL> 5,289
<INTEREST-DEPOSIT> 2,318
<INTEREST-EXPENSE> 2,473
<INTEREST-INCOME-NET> 2,816
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 26
<EXPENSE-OTHER> 2,941
<INCOME-PRETAX> 473
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 313
<EPS-PRIMARY> .45
<EPS-DILUTED> .42
<YIELD-ACTUAL> 4.34
<LOANS-NON> 1,166
<LOANS-PAST> 1,142
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 525
<ALLOWANCE-OPEN> 654
<CHARGE-OFFS> 37
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 699
<ALLOWANCE-DOMESTIC> 699
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 499
</TABLE>
