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 September 30, 1998
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Commission file number 0-20990
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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
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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 September 30,
1998. Common stock, $.01 Par value -- 653,204 shares as of September 30, 1998
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Condition - September 30, 1998
(Unaudited) and December 31, 1997
Consolidated Statements of Income (Unaudited) Three months
Ended September 30,1998 and 1997
Consolidated Statement of Income (Unaudited) - Nine
months Ended September 30, 1998 and 1997
Consolidated Statement of Cash Flows (Unaudited) - Nine months
Ended September 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>
Sept 30 Dec 31
1998 1997
--------- ---------
(Unaudited)
Dollars in Thousands
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 4,195 $ 8,630
Interest Bearing Deposits in Other Banks 2,063 3,124
Investment Securities:
Held to maturity (market values of $4,016
as of 9/30/98 and $15,020 as of 12/31/97) 4,015 15,017
Available for Sale 32,605 14,496
--------- ---------
Total Investment Securities 36,620 29,513
Federal Funds Sold 9,920 9,919
Loans 84,218 78,446
Unearned Income (168) (176)
Reserve for Possible Loan Losses (684) (654)
--------- ---------
Net Loans 83,366 77,616
Property and Equipment - Net 1,124 1,268
Goodwill 3,583 3,831
Other Real Estate Owned 492
Accrued Interest Receivable and Other Assets 2,382 1,973
--------- ---------
TOTAL ASSETS $ 143,745 $ 135,874
--------- ---------
LIABILITIES
Deposits:
Non-Interest Bearing Demand $ 13,898 $ 10,926
Interest Bearing Transaction Accounts 31,013 14,137
Savings 30,704 42,759
Time, $100,000 or more 22,875 20,947
Other Time 28,101 30,166
--------- ---------
Total Deposits 126,591 118,935
Accrued Interest and Other Liabilities 657 842
Notes Payable 5,796 5,796
--------- ---------
TOTAL LIABILITIES 133,044 125,573
SHAREHOLDERS' EQUITY
Common stock, - par value $.01 per share:
Authorized 10,000,000 shares; 653,204
issued and outstanding at 9/30/98 and 650,137
at 12/31/97 and 33,333 common non-voting
issued and outstanding at 9/30/98 and 7 7
Capital Surplus 6,442 6,419
Retained Earnings 4,142 3,876
Net accumulated other comprehensive income 110 (1)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 10,701 10,301
--------- ---------
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY $ 143,745 $ 135,874
--------- ---------
</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 INCOME
<TABLE>
<CAPTION>
Three Months Ended
September 30
1998 1997
-------- --------
(Unaudited)
In Thousands
Except per Share Data
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 1,984 $ 2,196
Interest on Investment Securities (Taxable) 648 350
Interest on Deposits in Other Banks 31 58
-------- --------
$ 2,663 $ 2,604
Interest on Federal Funds Sold 149 150
-------- --------
TOTAL INTEREST INCOME 2,812 2,754
INTEREST EXPENSE
Interest on Deposits
Savings 301 716
Interest Bearing Transaction Accounts 262 97
Time $100,000 or More 335 240
Other Time 326 64
Interest on Other Borrowed Money - -
Interest on Long Term Debt 76 79
-------- --------
TOTAL INTEREST EXPENSE 1,300 1,196
-------- --------
NET INTEREST INCOME 1,512 1,558
Provision for Possible Loan Losses 38 18
-------- --------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES 1,474 1,540
OTHER OPERATING INCOME
Service Charges on Deposit Accounts 146 163
Other Income 151 126
-------- --------
297 289
OTHER OPERATING EXPENSES
Salaries and Employee Benefits 634 657
Occupancy Expense of Premises 192 178
Equipment Expense 93 101
Data Processing Expense 155 144
Deposit Assessments and Related Fees 9 9
Goodwill Amortization 82 82
Other Expenses 306 310
-------- --------
1,471 1,481
INCOME BEFORE INCOME TAXES 300 348
Applicable Income Taxes 98 126
-------- --------
NET INCOME $ 202 $ 222
-------- --------
EARNINGS PER SHARE $ .29 $ .34
AVERAGE COMMON SHARES
OUTSTANDING $ 687 $ 659
Dividends Declared per S are $ - $ -
</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 Income
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1998 1997
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<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 5,702 $ 6,220
Interest on Investment Securities (Taxable) 1,793 962
Interest on Deposits in Other Banks 106 198
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7,601 $ 7,380
Interest on Federal Funds Sold 500 417
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TOTAL INTEREST INCOME $ 8,101 $ 7,797
INTEREST EXPENSE
Interest on Deposits
Savings 971 1,371
Interest Bearing Transaction Accounts 541 279
Time $100,000 or More 895 719
Other Time 1,135 929
Federal Funds Purchased -- --
Interest on Notes Payable 231 234
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TOTAL INTEREST EXPENSE 3,773 3,532
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NET INTEREST INCOME 4,328 4,265
Provisions for Possible Loan Losses 113 54
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NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 4,215 4,211
OTHER OPERATING INCOME
Service Charges on Deposit Accounts 446 441
Other Income 523 399
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969 840
OTHER OPERATING EXPENSES
Salaries and Employee Benefits 1,955 1,899
Occupancy Expense of Premises 548 505
Equipment Expense 294 274
Data Processing Expense 456 416
Deposit Assessments & Related Fees 28 26
Goodwill Amortization 248 248
Other Expenses 882 843
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4,411 4,211
INCOME BEFORE INCOME TAXES 773 840
Applicable Income Taxes 258 304
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NET INCOME $ 515 $ 536
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EARNINGS PER SHARE $ .75 $ .82
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AVERAGE COMMON SHARES OUTSTANDING 687 659
Dividend Declared per Share $ .25 $ .20
</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>
Nine Months Ended
June 30
1998 1997
-------- --------
(Unaudited)
Dollars in Thousands
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 515 $ 536
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 (1) 42
Provision for Possible Loan Losses 113 54
Depreciation and Amortization 551 527
(Increase) in Interest Receivable and Othe (901) (280)
Increase (Decrease) in Interest Payable and Other
Liabilities (185) 215
-------- --------
Net Cash Provided (used in) Operating Activities 66 1,094
INVESTING ACTIVITIES
Net Decrease in Deposits at Other Banks 1,061 1,832
Purchase of Investments securities available for sale (31,946) (14,874)
Proceeds from Called Investments securities held
to maturity 11,000 5,000
Proceeds from Sale of Securities available for sale 1,839 --
Proceeds from Called Securities available for sale 12,000 --
Proceeds from the sale of loans 1,498 1,873
Net (Increase) Decrease in Loans (7,006) 4,700
Purchase of Premises and Equipment (224) (588)
-------- --------
Net Cash and Cash Provided by (11,778) (2,057)
(Used in) Investing Activities
FINANCING ACTIVITIES
Net Increase in Non-Interest Bearing
Transaction Accounts 2,972 2,879
Net Increase in Interest Bearing
Transaction Accounts 16,876 202
Net (Decrease) in Savings Deposits (12,055) (551)
Net Increase (Decrease) in Time Deposits (137) 2,145
Proceeds from Issuance of Common Stock -- 530
Exercised Options 24 --
Payment of Cash Dividends (402) (236)
-------- --------
Net Cash (Used in) Provided by Financing Activities 7,278 4,969
Increase (Decrease) in Cash and Cash Equiv (4,434) 4,006
Cash and Cash Equivalents at Beginning of Period 18,549 16,302
-------- --------
Cash and Cash Equivalents at End of Period $ 14,115 $ 20,308
</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 Diluted Diluted EPS Diluted
Sept 30 Net Income Shares EPS Shares Shares EPS
- ------- ---------- ------- --- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C>
1998 $ 514,521 686,537 $.75 50,865 737,402 $ .70
1997 $ 535,766 648,533 $.82 57,494 706,027 $ .76
<CAPTION>
Qtr ended
Sept 30
- -------
<S> <C> <C> <C> <C> <C> <C>
1998 $ 201,845 686,537 $.29 50,865 737,402 $ .27
1997 $ 221,594 648,533 $.40 57,494 706,027 $ .31
</TABLE>
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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Notes to Unaudited Consolidated Financial Statements
September 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 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 nine month period ended September 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:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Net Income $ 515 $ 536
- Other Comprehensive Income:
Unrealized Holding Gains (Losses)
Arising During the period 192 214
- Less: Reclassified Adjustments for
gains included in Net Income (26) --
Other Comprehensive Income, Before
Tax 166 214
Income Tax Expense Related to items
of Other Comprehensive Income (56) (73)
Other Comprehensive Income 110 141
Comprehensive Income 625 677
</TABLE>
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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"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 hedge, 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.
Year 2000, Compliance
The Board of Directors has established a Year 2000 committee to
monitor progress with achieving and certifying Year 2000 compliance.
In addition, the Company has utilized an external consulting firm to
assist with its Year 2000 program. Validation testing with the
Company's primary data processor is scheduled for January 1999.
The Company and its subsidiary have no internally generated
programmed software coding to correct, as substantially all of the
software utilized by the Company and its subsidiary is purchased or
licensed from external providers.
The Company and its subsidiary have initiated formal communications
with all of its significant suppliers and customers to determine the
extent to which the company is vulnerable to those third parties'
failure to remediate their own Year 2000 issues. The Company is
requesting that third party vendors represent their products and
services to be Year 2000 compliant and that they have a program to
test for that compliance. However, the response of certain third
parties is beyond the control of the Company. To the extent that the
Company does not receive adequate responses by December 31, 1998, it
is prepared to develop contingency plans, with completion of these
plans scheduled for June, 1999.
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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 third quarter
totaled $202 thousand, a decrease of $20 thousand or 9.0 percent
when compared to the third quarter of 1997. Net interest income
decreased by $60 thousand or 3.8 percent. The decrease is a result
of lower interest income on loans due to the sale of Real Estate
loans during 1997. Other operating income increased by $8 thousand
mainly due to ATM transactions. Total expenses decreased by $10
thousand or .67 percent reflecting management efforts in controlling
operating cost. The net effect of lower earnings and expenses
resulted in the $20 thousand variance.
Year-to-date earnings as of September 30, 1998, were $515 thousand
or $.75 basic earnings per share reflecting a decrease in revenues
of $21 thousand or 3.9 percent when compared to the nine months
ending September 30, 1997. Return on Average Assets (ROAA) and
Return on Average Shareholder's Equity (ROAE) were .49 percent and
6.58 percent, respectively.
Net Interest income increased by $63 thousand or 1.5 percent when
compared to the same period last year. Total loan revenues decreased
by $518 thousand or 8.3 percent reflecting the sale of Real Estate
loans that took place during 1997. Investment income increased by
$831 thousand or 86.4 percent. This increase reflects the investment
of the funds resulting from the loan sales and pay-offs as well as
some of the deposit growth. Total interest expenses for the period
was $3.8 million when compared to $3.5 million for the same period
last year, reflecting an increase of $300 thousand or 8.5 percent.
This increase was mainly reflected in the time deposit categories.
Time and saving deposits were the main source of interest expense
totaling $3.0 million. Together they represent 79.5 percent of total
interest expense. The interest expense on transaction accounts was
$541 thousand or 14.3 percent of that total. Included in the
interest are $231 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 $38 thousand for the third
quarter of 1998 and $113 thousand year-to-date. Charge-offs for 1998
were $105 thousand with recoveries of $22 thousand. Charge-offs for
credit cards and related plans were $90 thousand or 85.7 percent of
total charge-offs for the period.
Other operating income increased by $129 thousand or 15.4 percent.
This increase is mainly attributable to ATM fee transactions, which
totaled $267 thousand or 27.6 percent. Service charges on deposit
accounts increased slightly by $5 thousand or 1.1 percent.
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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Included in total operating income is a gain in the sale of
securities of $26 thousand and $104 thousand of fees generated by
Harbor Financial Services, a subsidiary of the Bank which deals on
the sale of securities, insurance mutual funds, etc.
Non-interest expense increased by $200 thousand or 4.7 percent to
$4.4 million from $4.2 million in 1997. Salaries and employee
benefits increased by $56 thousand or 2.9 percent, reflecting
additional staff due to expansion and general salary increases.
Occupancy and equipment expenses increased by $43 thousand and $20
thousand, respectively, as a result of the expansion and equipment
upgrade. Data processing fees increased by $40 thousand mainly due
to the ATM network maintenance cost. Goodwill amortization, at $248
thousand, represents 5.6 percent of total non-interest expense.
Other expenses increased by $41 thousand or 4.7 percent due to
general cost increases in relation to the expansions.
As of September 30, 1998, total deposits were $127 million,
reflecting an increase of $7.8 million or 6.6 percent when compared
to 1997. Net loans increased by $5.4 million or 6.9 percent.
Investment Securities increased by $10.1 million or 38.4 percent in
the available for sale category. There were no borrowings
outstanding as of September 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 $9 thousand as of the third 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 September 30, 1998.
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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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: 11-5-98 /s/ Joseph Haskins, Jr.
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Joseph Haskins, Jr.
President and Chief Executive Officer
Date: 11-5-98 /s/ Teodoro J. Hernandez
------------- -------------------------------------
Teodoro J. Hernandez
Treasurer
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<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,195
<INT-BEARING-DEPOSITS> 2,063
<FED-FUNDS-SOLD> 9,920
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,605
<INVESTMENTS-CARRYING> 4,015
<INVESTMENTS-MARKET> 4,016
<LOANS> 84,050
<ALLOWANCE> 684
<TOTAL-ASSETS> 143,745
<DEPOSITS> 126,591
<SHORT-TERM> 0
<LIABILITIES-OTHER> 657
<LONG-TERM> 5,796
0
0
<COMMON> 7
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 143,745
<INTEREST-LOAN> 5,702
<INTEREST-INVEST> 1,793
<INTEREST-OTHER> 606
<INTEREST-TOTAL> 8,101
<INTEREST-DEPOSIT> 3,542
<INTEREST-EXPENSE> 3,773
<INTEREST-INCOME-NET> 4,328
<LOAN-LOSSES> 113
<SECURITIES-GAINS> 26
<EXPENSE-OTHER> 4,411
<INCOME-PRETAX> 773
<INCOME-PRE-EXTRAORDINARY> 773
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 515
<EPS-PRIMARY> .75
<EPS-DILUTED> .70
<YIELD-ACTUAL> 4,317
<LOANS-NON> 864
<LOANS-PAST> 2,772
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,738
<ALLOWANCE-OPEN> 654
<CHARGE-OFFS> 105
<RECOVERIES> 22
<ALLOWANCE-CLOSE> 684
<ALLOWANCE-DOMESTIC> 684
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 430
</TABLE>
