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, 1998
[ ] 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)
Maryland 52-1786341
----------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation) Number)
25 West Fayette Street 21201
Baltimore, Maryland
---------------------------------------------------------------
(Address of principal executive (Zip Code)
offices)
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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, 1998, were 653,204 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>
HARBOR BANKSHARES CORPORATION
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
SECURITIES AND EXCHANGE COMMISSION
FORM 10-KSB
TABLE OF CONTENTS
- -----------------
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2 -
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . - 2 -
The Harbor Bank of Maryland. . . . . . . . . . . . . . . . . . . - 2 -
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . - 3 -
Supervision and Regulation . . . . . . . . . . . . . . . . . . . - 3 -
Governmental Monetary Policies and Economic Controls . . . . . . - 3 -
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 4 -
Executive Officers . . . . . . . . . . . . . . . . . . . . . . . - 4 -
Statistical Information. . . . . . . . . . . . . . . . . . . . . - 4 -
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . - 4 -
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . - 5 -
Item 4. Submission of Matters to a Vote of Security Holders . . - 5 -
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 5 -
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . .- 5 -
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . - 5 -
Item 7. Financial Statements. . . . . . . . . . . . . . . . . . - 5 -
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure. . .. . . . . . . . - 5 -
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 5 -
Item 9. Directors and Executive Officers of the Registrant. . . - 5 -
Item 10. Executive Compensation . . . . . . . . . . . . . . . . - 6 -
-i-
<PAGE>
HARBOR BANKSHARES CORPORATION
Item 11. Security ownership of certain beneficial owners
and management. . . . . . . . . . . . . . . . . . . . .- 6 -
Item 12. Certain relationships and related transactions . . . . - 6 -
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6 -
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . - 6 -
CONSOLIDATED AVERAGE STATEMENTS OF CONDITION AND RATIOS. . . . . - 8 -
CAPITAL SCHEDULE . . . . . . . . . . . . . . . . . . . . . . . . - 9 -
CONSOLIDATED STATEMENTS OF INCOME. . . . . . . . . . . . . . . .- 10 -
AVERAGE RATES EARNED OR PAID FOR THE YEARS 1998, 1997 AND 1996 .- 11 -
Analysis of Changes in Net Interest Income . . . . . . . . . . .- 12 -
INTEREST VARIANCE ANALYSIS . . . . . . . . . . . . . . . . . . .- 12 -
INVESTMENT SECURITIES. . . . . . . . . . . . . . . . . . . . . .- 13 -
Maturity Distribution . . . . . . . . . . . . . . . . . . .- 13 -
Weighted Average Interest Rate at December 31, 1998 . . . .- 13 -
Carrying amount and the market value at 1998 and 1997:. . .- 13 -
FIVE-YEAR LOAN DISTRIBUTION. . . . . . . . . . . . . . . . . . .- 14 -
Five-Year Loan Distribution at December 31
(dollars in thousands). . . . . . . . . . . . . . . . . . .- 14 -
Five-Year Loan Distribution at December 31
(expressed as percentages). . . . . . . . . . . . . . . . .- 14 -
SUMMARY OF LOAN LOSS EXPERIENCE. . . . . . . . . . . . . . . . .- 15 -
RISK ELEMENTS OF LOAN PORTFOLIO. . . . . . . . . . . . . . . . .- 16 -
NON-ACCRUAL LOANS AT DECEMBER 31, 1998 AND DECEMBER 31, 1997 . .- 16 -
Potential Problem Loans. . . . . . . . . . . . . . . . . . . . .- 16 -
MATURITY OF LOANS AS OF DECEMBER 31, 1998. . . . . . . . . . . .- 17 -
LOANS CLASSIFIED BY SENSITIVITY TO CHANGES IN INTEREST RATES . .- 17 -
MATURITIES OF TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
OUTSTANDING AT DECEMBER 31, 1998 AND 1997 . . . . . . . . .- 18 -
LONG AND SHORT TERM BORROWINGS . . . . . . . . . . . . . . . . .- 18 -
BORROWINGS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997. . . .- 18 -
-ii-
<PAGE>
HARBOR BANKSHARES CORPORATION
Documents Incorporated by Reference
- -----------------------------------
Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1998 and the Registrant's 1999 Proxy Statement are
incorporated by reference into Parts I and II.
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 May, 1997, The Harbor Bank of Maryland,
opened a de novo Branch location in the East side of Baltimore City, and on
January 19, 1999, a de novo branch was also opened in the West side of the City,
creating a new market area for the Bank.
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
1997, in order to compete with that expanding market. This subsidiary had a
profit of $9 thousand during 1998.
The Bank conducts general banking business in eight (8) 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.
-2-
<PAGE>
HARBOR BANKSHARES CORPORATION
Competition
- -----------
The Corporation's only subsidiary, The Harbor Bank of Maryland, competes
with virtually all banks and savings institutions which offer services in its
market area. The Bank directly competes with branches of most of the State's
largest banks, each of which has greater financial and other resources to
conduct large advertising campaigns and to allocate their investment assets to
regions of higher yield and demand. To attract business in this competitive
environment, the Bank relies heavily on local promotional activities and
personal contact by its officers and directors and by its ability to provide
personalized services.
Supervision and Regulation
- --------------------------
Harbor Bankshares Corporation is a registered bank holding company subject
to regulation and examination by the board of governors of the Federal Reserve
System under the Bank Holding Company Act of 1956 (the "Act"). The Corporation
is required to file with the board of governors quarterly and annual reports and
any additional information that may be required according to the Act. The Act
also requires every bank holding company to obtain the prior approval of the
Federal Reserve Board before acquiring direct or indirect ownership or control
of more than 5% of the voting shares of any bank that is not already majority
owned. The Act also prohibits a bank holding company, with certain exceptions,
from engaging in or acquiring direct or indirect control of more than 5% of the
voting shares of any company engaged in non-banking activities. One of the
principal exceptions to these provisions is for engaging or acquiring shares of
a company engaged in activities found by the Federal Reserve Board to be so
closely related to banking or managing banks to be a proper incident thereto.
The Harbor Bank of Maryland is a state chartered institution insured by the
Federal Deposit Insurance Corporation ("FDIC") and subject to federal and state
laws applicable to commercial banks. The Bank is examined regularly by FDIC and
the State of Maryland Banking Commissioner's office.
In accordance with Federal Reserve regulation, the Bank is limited as to
the amount it may loan affiliates, including the Corporation, unless such loans
are collateralized by specific obligations. Additionally, banking law limits the
amount of dividends that a bank can pay without prior approval from bank
regulators.
Governmental Monetary Policies and Economic Controls
- ----------------------------------------------------
The earnings and growth of the banking industry and ultimately of The
Harbor Bank of Maryland, Harbor Bankshares Corporation's sole subsidiary, are
affected by the credit policies of monetary authorities including the Federal
Reserve System. An important function of the Federal Reserve System is to
regulate the national supply of bank credit in order to control recessionary and
inflationary pressures. Among the instruments of monetary policy used by the
Federal Reserve to implement these objectives are open market operations in U.S.
Government securities, changes in the discount rate of member bank borrowings,
and changes in reserve requirements against member bank deposits. These means
are used in varying combinations to influence overall growth of bank loans and
investments and deposits, and may also affect interest rates charged on loans or
paid for deposits. The monetary policies of the Federal Reserve
-3-
<PAGE>
HARBOR BANKSHARES CORPORATION
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, 1998, Harbor Bankshares Corporation and its subsidiary
employed 75 individuals, of which 26 were officers and 49 were full-time
employees.
Executive Officers
- ------------------
Information concerning executive officers of the Corporation is listed
below:
EXECUTIVE OFFICERS Age Position
Joseph Haskins, Jr. 51 Chairman, President and
Chief Executive
Officer of the Bank and Corporation
John Paterakis 70 Chairman of the Executive
Committee of the
Corporation and the Bank
Teodoro J. Hernandez 53 Treasurer of the
Corporation and Vice
President and Cashier of
the Bank
George F. Vaeth, Jr. 65 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, 1998 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 seven (7) leased branch offices; four (4)
located in Baltimore City, one (1) located in Prince George's County, Maryland
and two (2) located in Baltimore County, Maryland.
-4-
<PAGE>
HARBOR BANKSHARES CORPORATION
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, 1998 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,
1998 was 729.
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 9 of the Management Discussion and Analysis section of the
Registrant's Annual Report to Shareholders for the year ended December 31, 1998,
and from pages 8 through 18 this Form 10-KSB.
Item 7. Financial Statements
- -----------------------------
Information required by Item 7 is incorporated by reference from
information appearing on pages 1 through 22 in the Audited Consolidated
Financial Statements section of the Registrant's Annual Report to Shareholders
for the year ended December 31, 1998.
Item 8. Changes In and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
None
PART III
- --------
Item 9. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
Information required by this item is incorporated by reference from
information appearing under the caption, "Election of Directors" on pages 2 to 8
of the Registrant's 1999 Proxy statement and page 4 of this report under the
caption of "Executive Officers" of the Registrant.
-5-
<PAGE>
HARBOR BANKSHARES CORPORATION
Item 10. Executive Compensation
- --------------------------------
Information required by this item is incorporated by reference from
information appearing under the caption "Executive Compensation" on pages 9 to
11 of the Registrant's 1999 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 8 of the Registrant's 1999 Proxy Statement,
under the caption of "Election of Directors" of the Registrant.
Item 12. Certain relationships and related transactions
- --------------------------------------------------------
The information required by Item 12 is incorporated by reference from Note
11 on page 19 in the Audited Consolidated Financial Statements section of the
Registrant's Annual Report to Shareholders.
PART IV
- -------
Item 13. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
(1) The following consolidated financial statements of the Registrant and
its subsidiary, included in the Annual Report to Shareholders for the year ended
December 31, 1998, are incorporated herein by reference in Item 8:
Consolidated Statements of Condition
As of December 31, 1998 and 1997
Consolidated Statements of Income
Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of PricewaterhouseCoopers, LLP, Independent Auditors.
Harbor Bankshares Corporation 1999 Proxy Statement
-6-
<PAGE>
HARBOR BANKSHARES CORPORATION
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>
HARBOR BANKSHARES CORPORATION
CONSOLIDATED AVERAGE STATEMENTS OF CONDITION AND RATIOS
(dollars in thousands)
Year ended December 31,
1998 1997 1996
---- ---- ----
ASSETS
U.S. Treasury Securities $ -- $ -- $ --
U.S. Government Agencies 36,970 21,244 14,880
Interest-Bearing Deposits with 2,235 4,408 7,064
Other Banks
FHLB Stock and Other Securities 514 599 561
Federal Funds Sold 12,870 10,752 3,103
------ ------ ------
$ 52,589 $ 37,003 $ 25,608
LOANS
- -----
Commercial Loans 14,053 9,592 7,451
Real Estate Mortgages 63,005 68,945 70,697
Consumer Loans 3,444 3,895 3,010
------ ------ ------
Loans Net of Unearned Income 80,502 82,432 81,158
------ ------ ------
Total Earning Assets $ 133,091 $ 119,435 $ 106,766
Allowance for Possible Losses (682) (846) (880)
Other Assets 12,550 12,531 10,410
------ ------ ------
TOTAL ASSETS $ 144,959 $ 131,120 $ 116,296
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-Interest Bearing Deposits $ 12,402 $ 10,209 $ 9,316
Interest-Bearing Transaction Accounts 25,282 14,828 15,798
Savings 37,559 39,485 35,671
Time - $100,000 or more 22,170 18,195 11,792
Other Time 30,313 32,198 28,329
--------- --------- --------
TOTAL DEPOSITS $ 127,726 $ 114,915 $100,906
Other Borrowed Money ---- ---- 1,452
Notes payable 5796 5,796 5,796
Other Liabilities 911 820 588
--------- --------- -------
TOTAL LIABILITIES $ 134,433 $ 121,531 $109,042
SHAREHOLDERS' EQUITY $ 10,526 $ 9,589 $ 7,254
--------- --------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 144,959 $ 131,120 $116,296
========= ========= ========
RATIOS
Average Equity to Average Total Assets 7.26% 7.31% 6.24%
Return on Assets .50% .53% .49%
Return on Equity 6.86% 7.30% 7.90%
Dividend Payout Ratio 23.4% 18.09% 15.10%
-8-
<PAGE>
HARBOR BANKSHARES CORPORATION
CAPITAL SCHEDULE
Risk-based guidelines apply on a consolidated basis to bank holding
companies with consolidated assets of $150 million or more. Harbor Bankshares
Corporation had total consolidated assets of $185 million at December 31, 1998.
Disclosed below are the capital ratios of the Corporation:
Harbor Bankshares Regulatory
----------------- ----------
Corporation Requirements
----------- ------------
Primary Capital 3.96% 4.0%
Risk-Based Capital 8.49% 8.0%
Primary capital returned to 4.29% as of January 31. 1999, which is within the
established regulatory requirements.
-9-
<PAGE>
HARBOR BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
Year ended December 31, 1998 1997 1996
---- ---- ----
INTEREST AND FEES ON LOANS
Commercial Loans $ 1,326 $ 922 $ 732
Real Estate Mortgages 6,009 6,670 6,702
Consumer Loans 407 447 371
------- -------- --------
TOTAL Interest and Fees on Loans(1) $ 7,742 $ 8,039 $ 7,805
Interest on Taxable Investment Securities 2,476 1,407 976
Interest on Other Investments(2) 162 290 400
Interest on Federal Funds Sold 702 633 165
------- -------- --------
TOTAL Interest Income 11,082 10,369 9,346
INTEREST EXPENSE
Savings 1,266 1,364 1,235
Interest-Bearing Transaction Accounts 798 371 412
Time - $100,000 or more 1,241 1,011 635
Other Time 1,541 1,742 1,497
Other Borrowed Money -- -- 81
Interest on Notes Payable 297 310 309
------- -------- -------
TOTAL Interest Expense 5,143 4,798 4,169
Net Interest Income 5,939 5,571 5,177
Provision for Possible Credit Losses 213 72 60
Net Interest Income After Provision for 5,726 5,499 5,117
Possible Credit Losses ------- -------- -------
Other Income 1,277 1,229 759
Investment Security Gains 26 213 ----
Other Expenses 5,984 5,840 4,888
------- -------- -------
Income Before Taxes 1,045 1,101 988
Applicable Income Tax 317 401 415
------- -------- -------
NET INCOME $ 728 $ 700 $ 573
======== ======== =======
PER COMMON SHARE
NET INCOME $ 1.06 $1.07 $1.07
======== ======== =======
Dividends per Share $ .25 $ .20 $ .20
======== ======== =======
NOTES ON CONSOLIDATED STATEMENTS OF INCOME:
(1) Loan fees, which are included in Interest Income, were $262 in 1998, $228
in 1997, $291 in 1996.
(2) Certificates of Deposit with other financial institutions.
-10-
<PAGE>
HARBOR BANKSHARES CORPORATION
AVERAGE RATES EARNED OR PAID FOR THE YEARS 1998, 1997 AND 1996
Year ended December 31, 1998 1997 1996
---- ---- ----
Commercial Loans 9.44% 9.61% 9.82%
Real Estate Mortgages 9.57% 9.67% 9.48%
Consumer Loans 11.82% 11.48% 12.33%
Taxable Investment Securities 6.69% 6.62% 6.56%
Other Investments(1) 5.89% 5.79% 5.66%
Federal Funds Sold 5.45% 5.89% 5.32%
----- ----- -----
TOTAL Earning Assets 8.33% 8.68% 8.75%
AVERAGE RATES PAID
Interest Bearing Transaction Accounts 3.16% 2.50% 2.61%
Savings 3.38% 3.45% 3.46%
Time - $100,000 or more 5.59% 5.56% 5.39%
Other Time 5.08% 5.41% 5.28%
Other Borrowed Money -- -- 5.58%
Notes Payable 5.12% 5.35% 5.33%
---- ---- ----
TOTAL Interest Bearing Deposits 4.25% 4.34% 4.55%
NET YIELD ON EARNING ASSETS 4.08% 4.34% 4.20%
(1) Certificates of Deposit with other financial institutions.
-11-
<PAGE>
HARBOR BANKSHARES CORPORATION
ANALYSIS OF CHANGES IN NET INTEREST INCOME
- ------------------------------------------
INTEREST VARIANCE ANALYSIS
--------------------------
(in thousands)
<TABLE>
<CAPTION>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
Increase (Decrease) due to: Increase (Decrease) due to:
--------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ (188) $ (109) $ (297) $ 122 $ 112 $ 234
Investment Securities 1,041 28 1,069 417 14 431
Federal Funds Sold 125 (56) 69 407 61 468
Other Interest Bearing
Assets (1) (130) 2 (128) (148) 38 (110)
-------- ------- ------- ------ ----- ---------
TOTAL Interest Income $ 848 $ (135) $ 713 $ 798 $ 225 $ 1,023
======== ======= ======= ====== ===== =========
INTEREST EXPENSE
Interest-Bearing
Transaction Accounts $ 261 $ 166 $ 427 $ 23 $ (64) $ (41)
Savings (66) (32) (98) 131 (2) 129
Time - $100,000 or more 221 9 230 345 31 376
Other Time (102) (99) (201) 204 41 245
Other Borrowed Money -- -- -- (81) -- (81)
Notes Payable -- (13) (13) -- 1 1
-------- -------- -------- ------- ------- ----------
TOTAL INTEREST EXPENSE $ 314 $ 31 $ 345 $ 622 $ 7 $ 629
======== ======== ======== ======= ======= ==========
NET INTEREST INCOME $ 534 $ (166) $ 368 $ 176 $ 218 $ 394
======== ======== ======== ======= ======= ==========
</TABLE>
Note: Loan fees, which were included in interest income were $262 in 1998,
$228 in 1997, and $291 in 1996.
A change in Rate/Volume has been allocated to the change in rate.
(1) Certificates of Deposit with other financial institutions.
-12-
<PAGE>
HARBOR BANKSHARES CORPORATION
INVESTMENT SECURITIES (dollars in thousands)
---------------------
Maturity Distribution
- ---------------------
<TABLE>
<CAPTION>
U.S. Treasury U.S. Other TOTAL
Government Securities
Agencies
<S> <C> <C> <C> <C>
Maturing Within -- $ 17,152 $ -- $ 17,152
One Year
Maturing After -- -- -- --
One But Within Five Years
Maturing After -- 9.925 -- 9,925
Five But Within Ten Years
Maturing After Ten Years -- 44,690 485 45,175
---- --------- ------ ---------
TOTAL $ -- $ 71,767 $ 485 $ 72,252
===== ========= ====== =========
</TABLE>
Weighted Average Interest Rate at December 31, 1998
- ---------------------------------------------------
<TABLE>
<CAPTION>
U.S.
Government Other
U.S. Treasury Agencies Securities TOTAL
---------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Maturing Within -- 4.95% -- 4.95%
One Year
Maturing After -- -- -- --
One But
Within Five Years
Maturing After -- 6.20% -- 6.20%
Five But
Within Ten Years
Maturing After -- 6.71% 7.25% 6.98%
Ten Years ---- ------ ----- -------
TOTAL -- 5.95% 7.25% 6.60%
==== ====== ===== =======
</TABLE>
Carrying amount and the market value at 1998 and 1997:
- ------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Book Market Book Market Book Market
------- -------- ------- -------- ------- ---------
U.S. Treasury $ -- $ -- $ -- $ -- $ -- $ --
U.S. Government Agency 72,092 71,763 28,913 28,915 15,992 15,876
Other Securities 485 485 600 600 593 593
------ ------ ------- ------- ------- -------
TOTAL $72,577 72,248 $29,513 $29,515 $16,585 $16,469
======= ====== ======= ======= ======= =======
</TABLE>
-13-
<PAGE>
HARBOR BANKSHARES CORPORATION
FIVE-YEAR LOAN DISTRIBUTION
---------------------------
Five-Year Loan Distribution at December 31 (dollars in thousands)
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial Loans $ 20,710 $ 9,041 $ 9,612 $ 5,891 $ 3,761
Real Estate 61,705 65,461 72,017 69,414 52,418
Mortgages
Consumer Loans 3,382 3,768 3,713 2,804 2,122
-------- -------- -------- -------- --------
TOTAL $ 85,797 $ 78,270 $ 85,342 $ 78,109 $ 58,301
======== ======== ======== ======== ========
Five-Year Loan Distribution at December 31 (expressed as percentages)
- ---------------------------------------------------------------------
1998 1998 1997 1996 1994
---- ---- ---- ---- ----
Commercial Loans 24.14% 11.55% 11.26% 7.54% 6.45%
Real Estate Loans 71.92% 83.64% 84.39% 88.87% 89.91%
Consumer Loans 3.94% 4.81% 4.35% 3.59% 3.64%
------ ------ ------ ------ ------
TOTAL 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
</TABLE>
-14-
<PAGE>
HARBOR BANKSHARES CORPORATION
SUMMARY OF LOAN LOSS EXPERIENCE
-------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
BALANCE AT BEGINNING OF PERIOD $ 654 $ 889 $ 817 $ 658 $ 428
LOANS CHARGED OFF:
Commercial Loans -- 58 14 --- 4
Real Estate Mortgages 54 95 5 6 19
Consumer Loans 149 160 34 29 8
----- ----- ------ ----- -----
TOTAL LOANS CHARGED OFF $ 203 $ 313 $ 53 $ 35 $ 31
RECOVERIES OF LOANS:
Commercial Loans -- 1 57 1 2
Real Estate Mortgages 3 --- --- 6 ---
Consumer Loans 32 5 8 4 11
----- ----- ----- ------ -----
TOTAL LOANS RECOVERED 35 6 65 11 13
Net Loans Charged Off 168 307 (12) 24 18
----- ----- ----- ------ -----
Provisions Charged to Operations 213 72 60 183 248
----- ----- ----- ------ -----
Balance at End of Period $ 699 $ 654 $ 889 $ 817 $ 658
======== ======== ======== ======== ========
Daily Average Amount of Loans $ 80,502 $ 82,432 $ 81,158 $ 74,911 $ 42,271
======== ======== ======== ======== ========
Allowance for Possible Loan
Losses to Loans Outstanding .81% .83% 1.04% 1.09% 1.13%
======== ======== ======== ======== ========
Net Charge Offs to Average .21% .37% (.01%) .03% .04%
Loans Outstanding ======== ======== ======== ======== ========
</TABLE>
-15-
<PAGE>
HARBOR BANKSHARES CORPORATION
RISK ELEMENTS OF LOAN PORTFOLIO
-------------------------------
(in thousands)
December 31 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Non-Accrual Loans $ 1,107 $ 770 $ 284 none $ 200
Accruing 547 1,948 276 481 143
Loans Past
Due 90 Days
or more
Restructured Loans none none none none none
======= ====== ====== ====== =======
NON-ACCRUAL LOANS AT DECEMBER 31, 1998 AND DECEMBER 31, 1997
- ------------------------------------------------------------
1998 1997
---- ----
Interest Income that Would $ 94 $ 13
Have Been Recorded ---- ----
Under Original Terms
Interest Income Recorded $ -- $ --
during the Period ---- ----
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, 1998, the Corporation had $2.0 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, 1998, 71.9% 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
1999 to exceed the 1998 levels.
-16-
<PAGE>
HARBOR BANKSHARES CORPORATION
MATURITY OF LOANS AS OF DECEMBER 31, 1998
- -----------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Commercial Real Estate Consumer TOTAL
Loans Mortgages Loans
Maturing Within One Year $ 10,491 $ 6,455 $ 1,750 $ 18,696
Maturing After One Year 5,031 1,759 1,196 $ 7,986
But Within Five Years
Maturing After Five Years 5,188 53,491 436 $ 59,115
--------- -------- ------- --------
TOTAL $ 20,710 $ 61,705 $ 3,382 $ 85,797
========= ======== ======= ========
</TABLE>
LOANS CLASSIFIED BY SENSITIVITY TO CHANGES IN INTEREST RATES
- ------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Fixed Interest Adjustable Interest TOTAL
Rate Loans Rate Loans -----
-------------- ----------
Maturing Within One Year $ 11,303 $ 26,847 $ 38,150
Maturing After One 6,781 210 6,991
But Within Five Years
Maturing After Five Years 40.656 --- 40,656
-------- -------- --------
TOTAL $ 58,740 $ 27,057 $ 85,797
======== ======== ========
</TABLE>
-17-
<PAGE>
HARBOR BANKSHARES CORPORATION
MATURITIES OF TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE OUTSTANDING AT
- -----------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997
- --------------------------
1998 1997
---- ----
Three months or less $ 12,548 $ 4,521
Three to six months 5,299 1,980
Six to twelve months 9,296 2,939
Over twelve months 4,209 11,506
-------- --------
TOTAL $ 31,352 $ 20,946
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.
BORROWINGS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------
(dollars in thousands)
1998 1997
---- ----
Amount outstanding at period-end: $ 5,796 $ 5,796
Long-term promissory note
Borrowings from FHLB
Average outstanding: $ 5,796 $ 5,796
Long-term promissory note
Borrowings from FHLB
Weighted average interest rate 5.12% 5.34%
during the period:
Long-term promissory note
Borrowings from FHLB
-18-
<PAGE>
HARBOR BANKSHARES CORPORATION
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
__________________________________________________
Title: Treasurer
__________________________________________________
Date: 3/25/99
__________________________________________________
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: __________________________________________________
Title: __________________________________________________
Date: __________________________________________________
By: __________________________________________________
Title: __________________________________________________
Date: __________________________________________________
By: __________________________________________________
Title: __________________________________________________
Date: __________________________________________________
-19-
<PAGE>
HARBOR BANKSHARES CORPORATION
By: __________________________________________________
Title: __________________________________________________
Date: __________________________________________________
By: __________________________________________________
Title: __________________________________________________
Date: __________________________________________________
By: __________________________________________________
Title: __________________________________________________
Date: __________________________________________________
By: __________________________________________________
Title: __________________________________________________
Date: __________________________________________________
By: __________________________________________________
Title: __________________________________________________
Date: __________________________________________________
-20-
<PAGE>
HARBOR BANKSHARES CORPORATION
- --------------------------------------------------------------------------------
HARBOR BANKSHARES CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
TABLE OF CONTENTS: CORPORATE FINANCIAL REVIEW
---------------------------------------------
CONSOLIDATED FIVE-YEAR SELECTED FINANCIAL DATA . . . . . . . . . . .- 1 -
OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .- 2 -
NET INTEREST INCOME. . . . . . . . . . . . . . . . . . . . . . . . .- 2 -
PROVISION FOR LOAN LOSSES. . . . . . . . . . . . . . . . . . . . . .- 3 -
OTHER OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . .- 3 -
OTHER OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . .- 3 -
Non-Interest Expenses Summary . . . . . . . . . . . . . . . . .- 4 -
APPLICABLE INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . .- 4 -
CREDIT RISK ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . .- 4 -
ASSET AND LIABILITY MANAGEMENT . . . . . . . . . . . . . . . . . . .- 5 -
INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . .- 5 -
LIQUIDITY . . . . . . . . . . . . . . . . . . . . . . . . . . .- 5 -
INTEREST RATE SENSITIVITY . . . . . . . . . . . . . . . . . . .- 6 -
Cumulative Interest Sensitive Gap. . . . . . . . . . . . .- 7 -
LONG AND SHORT TERM BORROWINGS . . . . . . . . . . . . . . . . . . .- 7 -
CAPITAL RESOURCES. . . . . . . . . . . . . . . . . . . . . . . . . .- 7 -
CHANGES IN FINANCIAL POSITION. . . . . . . . . . . . . . . . . . . .- 8 -
FINANCIAL ANALYSIS - 1997 AND 1996 . . . . . . . . . . . . . . . . .- 8 -
-1-
<PAGE>
HARBOR BANKSHARES CORPORATION
- --------------------------------------------------------------------------------
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . .- 9 -
YEAR 2000 COMPLIANCE. . . . . . . . . . . . . . . . . . . . . - 10 -
SUPPLEMENT TO 1998 ANNUAL REPORT TO STOCKHOLDERS . . . . . . . . . - 11 -
BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . - 11 -
EXECUTIVE OFFICERS. . . . . . . . . . . . . . . . . . . . . . - 11 -
ADVISORY BOARD. . . . . . . . . . . . . . . . . . . . . . . . - 11 -
SHAREHOLDER INFORMATION. . . . . . . . . . . . . . . . . . . . . . - 12 -
MARKET SUMMARY OF STOCK . . . . . . . . . . . . . . . . . . . - 12 -
CASH DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . - 12 -
TRANSFER AGENT AND REGISTRAR. . . . . . . . . . . . . . . . . - 12 -
SEC FORM 10-KSB . . . . . . . . . . . . . . . . . . . . . . . - 12 -
- --------------------------------------------------------------------------------
TABLE OF EXHIBITS
- -----------------
A Consolidated Five-year Statement: Average Balances, Yields/Rates and
Income Expense at December 31 for each of the five years from 1994
through 1998
B Summary of Loan Loss Experience and Allocation of Allowance for Loan
Losses
C Interest Variance Analysis: A summary of the changes in interest earned
and interest paid resulting from changes in volume and changes in rates
D Data and information at December 31, 1998 as to: 1) Maturities of
Certificates of Deposit of $100,000 or more, 2) the Corporation's loan
portfolio by type of loan, and 3) a Summary of the Corporation's
Investment Securities portfolio as of that date.
E Consolidated Quarterly Results of Operations, Market Prices and Dividends
-ii-
<PAGE>
HARBOR BANKSHARES CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED FIVE-YEAR SELECTED FINANCIAL DATA
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
(In thousands, except per share data)
Year ended December 31,
1998 1997 1996 1995 1994
------- ------- ------- ------ -------
OPERATING DATA
- --------------
Interest Income $11,083 $10,369 $ 9,345 $ 8,490 $ 6,537
Interest Expense 5,143 4,797 4,170 3,631 2,526
------- ------ ----- ----- -----
Net Interest Income $ 5,940 $ 5,572 $ 5,175 $ 4,859 $ 4,011
Provision for Loan Losses 213 72 60 183 248
Other Operating Income 1,302 1,441 760 635 786
Other Operating Expenses 5,984 5,840 4,912 4,181 3,554
------- ----- ----- ----- -----
Income Before Taxes $ 1,045 $ 1,101 $ 963 $ 1,130 $ 995
Income Taxes 317 401 390 451 370
----- ----- --- --- ---
Net Income $ 728 $ 700 $ 573 $ 679 $ 625
====== ===== === === ===
PER SHARE DATA
- --------------
Net Income - Basic $ 1.06 $ 1.07 $ 1.07 $ 1.59 1.46
Net Income - Diluted $ .91 $ .99 $ .97 $ 1.51 $ 1.37
Dividend $ .25 $ .20 $ .20 $ .20 $ .14
Book Value $ 15.54 $ 15.07 $ 14.21 $ 13.17 $ 11.77
BALANCE SHEET DATA
- ------------------
Total Assets $184,723 $135,874 $129,651 $113,316 $106,069
Deposits 167,482 118,935 114,124 101,098 94,726
Total Net Loans 85,097 77,616 84,453 77,292 57,643
Total Shareholders' Equity 10,669 10,301 9,001 5,641 5,059
Return on Average Assets .50% .53% .49% .64% .70%
Return on Average Equity 6.9% 7.3% 7.9% 12.8% 13.5%
Stockholders' Equity to Assets 3.9% 7.6% 6.9% 4.9% 4.8%
Average Equity to Average Assets 4.9% 7.3% 6.2% 4.9% 5.2%
Dividend payout ratio% 23.4% 18.1% 15.1% 12.7% 14.0%
-1-
<PAGE>
HARBOR BANKSHARES CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
CORPORATE FINANCIAL REVIEW
--------------------------
OVERVIEW
- --------
Harbor Bankshares Corporation (the "Corporation") continued its
development during 1998, achieving a record growth in total assets of $49
million, or 36.0%. Total assets for the Corporation as of December 31, 1998 were
$185 million compared to $136 million for 1997. Deposits also achieved a record
growth of $48 million or 40.3%. Total deposits as of year end 1998 were $167
million.
The Corporation also continued during 1998 to develop and implement plans
in order to assess and correct the problem that the new millennium may bring,
including testing of present systems as well as evaluation of service providers
and borrowers.
Net earnings for Harbor Bankshares Corporation, were $728 thousand for
1998, compared to $700 thousand for 1997, an increase of $28 thousand or 4.0%.
The Corporation's subsidiary, the Harbor Bank of Maryland, achieved earnings of
$924 thousand in 1998, with a Return on Average Assets of .64%.
The Corporation's Return on Average Assets (ROAA) was .50%, compared to
.53% earned during 1997, reflecting the continued cost of expansions. Return on
Average Equity (ROAE) was 6.9% for 1998 compared to 7.3% for 1997.
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 $5.9 million in 1998 from $5.6
million in 1997.
Total interest income increased by $714 thousand or 6.9% to $11.1 million
for 1998 when compared to the $10.4 million earned during 1997. A growth in
total average earning assets of 11.4% mainly in the investment portfolio was the
main reason for the increase.
Total interest expense increased by $346 thousand or 7.2% to $5.1 million
in 1998 from $4.8 million in 1997. This increase was mainly due to the growth in
savings and time deposits. The growth in the deposit area is reflected in the
increase of the investment portfolio.
Net interest margin for 1998 was 4.46% compared to 4.71% for 1997.
-2-
<PAGE>
HARBOR BANKSHARES CORPORATION
- --------------------------------------------------------------------------------
The table attached as Exhibit A compares the consolidated average
balances, interest income, interest expense and yields for a five-year period.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses was $213 thousand for 1998, an increase of
$141 thousand from the $72 thousand provided in 1997. 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, 1998 is considered adequate. The Corporation maintains
a highly collateralized loan portfolio consisting mainly of residential and
commercial mortgage loans; charge-offs decreased from $313 thousand in 1997 to
$203 thousand in 1998. Recoveries totaled $35 thousand for 1998. The ratio of
the loan loss reserve to outstanding loans was .81% for 1998 and .84% for 1997.
Exhibit B is illustrative of the Loan Loss Experience and Allocation for Loan
Loss over a five-year period.
OTHER OPERATING INCOME
- ----------------------
Non-interest income decreased by $139 thousand or 9.6% to $1.3 million in
1998. ATM fees were $336 thousand for 1998, representing 25.8% of total
operating income. 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 1998 non-interest income only
reflected $26 thousand of securities sales and $42 thousand of originated
servicing rights.
Non-Interest Income Summary (in thousands)
1998 1997 1996 1995 1994
-------- ------- ------ ----- -----
Service charges on deposit accounts $ 609 $ 610 $591 $491 $464
ATM fees 336 299 25 -- --
Gain on sale of loans -- 42 -- -- 218
Gain on sale of securities 26 212 -- -- --
Originated mortgage servicing rights 42 90 -- -- --
Other non-interest income 289 188 144 144 104
-------- ----- ------ ----- -----
Total non-interest income $1,302 $1,441 $760 $635 $786
======== ===== ====== ===== =====
OTHER OPERATING EXPENSES
- ------------------------
Non-interest expenses of $6.0 million in 1998, increased by $144 thousand
or 2.5% when compared to $5.8 million in 1997. Salaries and benefits of $2.6
million in 1998 reflect an increase of $61 thousand or 2.3% when compared to the
prior year salary and benefit cost. Other expenses increased by $83 thousand or
2.6%. Constant monitoring of controllable expenses by management
-3-
<PAGE>
HARBOR BANKSHARES CORPORATION
- --------------------------------------------------------------------------------
resulted in the modest increase in the non-interest expenses. Goodwill
amortization of $331 thousand in 1998 remained the same as 1997.
Non-Interest Expenses Summary (In thousands)
1998 1997 1996 1995 1994
Salaries and employee benefits $ 2,672 $ 2,611 $ 2,152 $ 1,903 $ 1,550
Occupancy expense, net 737 678 533 434 356
Furniture and Equipment 408 386 249 201 122
Data Processing Fees 604 565 398 338 267
Professional Fees 117 131 101 99 96
Goodwill Amortization 331 331 331 331 144
FDIC Insurance 37 36 318 166 147
Other Non-Interest Expense 1,078 1,102 830 709 872
------- ------- ------- ------- -------
Total Non-Interest Expense $ 5,984 $ 5,840 $ 4,912 $ 4,181 $ 3,554
======= ======= ======= ======= =======
APPLICABLE INCOME TAXES
- -----------------------
Applicable income taxes includes current and deferred portions which are
detailed in Note 7 of the audited consolidated financial statements. At $317
thousand, taxes represented 30.3% of income before taxes for 1998 and $401
thousand or 36.4% for 1997, which is attributable to the change in the treatment
of interest on U.S. Treasury securities for state tax purposes.
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 $1.6 million or 1.9% of gross loans outstanding
at the end of 1998. This compares with $2.7 million or 3.5% of gross loans
outstanding at the end of 1997. The decrease in non-performing loans reflects
management increased efforts in resolving troubled debt. Other Real Estate Owned
(OREO) at December 31, 1998 was $631 thousand consisting of four foreclosed
properties. There was no outstanding OREO as of December 31, 1997.
The reserve for possible loan losses increased from $654 thousand at the
end of 1997 to $699 thousand at the end of 1998. As of year end, the reserve
represented .81% of gross loans
-4-
<PAGE>
HARBOR BANKSHARES CORPORATION
- --------------------------------------------------------------------------------
outstanding. Based on quarterly analyses conducted throughout the year, and a
review conducted by an independent consultant at year end, the reserve is
considered adequate by Management.
Non-Performing Assets (in thousands)
1998 1997 1996 1995 1994
------ ------ ---- ----- -----
Non-accrual loans $1,107 $ 770 $284 none $200
------ ------ ---- ----- -----
Accruing Loans Past Due 90 Days
or more 547 1,948 276 481 143
------ ------ ---- ------ -----
Restructured Loans none none none none none
OREO 638 none none none none
------ ------ ---- ------ -----
Total Non-performing assets and
Past Due Loans $2,292 $ 2,718 $560 $481 $343
Total Non-performing assets and
Past Due Loans to Year-End Assets 1.2% 2.0% .43% .42% .32%
Total Non-performing Loans to
Year-End Loans 1.9% 3.5% .65% .62% .59%
ASSET AND LIABILITY MANAGEMENT
- ------------------------------
INTRODUCTION
------------
The Investment Committee of the Corporation reviews policies regarding the
sources and uses of funds, maturity distribution, and associated interest rate
sensitivities. This effort is aimed at minimizing risks associated with
fluctuating interest rates, as well as maintaining sufficient liquidity.
LIQUIDITY
---------
Liquidity describes the ability of the Corporation to meet financial
obligations, including lending commitments and contingencies, that arise during
the normal course of business. Liquidity is primarily needed to meet the
borrowing and deposit withdrawal requirements of the customers of the
Corporation, as well as to meet current and planned expenditures. The
Corporation through the Bank, is required to maintain adequate sources of cash
in order to meet its financial commitments in an organized manner without
incurring substantial losses. These commitments relate principally to changes in
the Bank's deposit base through withdrawals and changes in funds required to
meet normal and seasonal loan demands. The Bank, and thereby the Corporation,
derives liquidity through the maturity distribution of the investment portfolio,
loan repayments and income from
-5-
<PAGE>
HARBOR BANKSHARES CORPORATION
- --------------------------------------------------------------------------------
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, 1998, 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 $61.0 million or 32.8% of total assets
at December 31, 1998.
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 flows 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, 1998, net cash provided by operating
activities totaled $591 thousand. Net cash used in investing for the same period
totaled $49 million resulting primarily from the purchases of securities
totaling $82.7 million offset by the maturities or calls on investment
securities and maturities on interest bearing deposits in other banks totaling
$41.8 million and a net increase in loans of $10.1 million. Purchases of
premises and equipment totaled $550 thousand. Net cash provided by financing
activities for the year ended December 31, 1998 totaled $48.4 million resulting
primarily from a net increase in deposits of $48.5 million.
INTEREST RATE SENSITIVITY
-------------------------
Interest rate sensitivity refers to the degree that earnings will be
affected by changes in the general level of interest rates. Interest sensitive
assets are typically loans which have interest rates related to the prime
interest rate or other type of index. Interest sensitive liabilities have
interest rates which likewise vary based upon market changes. Reducing the net
interest rate sensitivity of the Corporation's balance sheet is the goal of the
asset/liability management process.
One measure of interest rate sensitivity is the difference between
interest sensitive assets and interest sensitive liabilities, called the
"interest sensitivity gap." The following table shows an analysis of the
Corporation's cumulative interest sensitivity gap position. In those time frames
where the interest sensitive gap is negative, a decline in interest rates will
improve the interest margins. For those periods where the interest sensitivity
gap is positive, the net interest margins should improve as interest rates rise.
-6-
<PAGE>
HARBOR BANKSHARES CORPORATION
- --------------------------------------------------------------------------------
Cumulative Interest Sensitive Gap
REPRICING OR MATURITY
DECEMBER 31, 1998
-----------------------------
3 MONTHS 6 MONTHS 1 YEAR
-------- -------- -------
Interest sensitive assets $ 52 $ 75 $ 88
Interest sensitive liabilities 70 81 96
---- ---- ---
Interest sensitivity gap $(18) $ (6) $ (9)
==== === ====
Gap to total assets (9.7%) (3.2%) (4.8%)
Exhibit C, "Interest Variance Analysis", sets forth, for the period indicated, a
summary of the changes in interest earned and interest paid resulting from
changes in volume and changes in rates.
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 1998 was $297 thousand. There were no
short term borrowings during 1998.
CAPITAL RESOURCES
- -----------------
Shareholders' equity grew by $368 thousand or 4.6% to $10.7 million. This
increase was due principally to the retained earnings of the Corporation.
Shareholder's equity was 5.8% of total assets as of the year end. The Tier 1
capital ratio as of December 31, 1998 was 3.96%, and the risk based capital
ratio was 8.49%. The requirements established by regulators are 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 $15.07 at the end of 1997 to $15.54 at the end of 1998.
Tier I capital returned to 4.29% as of January 31, 1999, which is within
regulatory guidelines.
The Tier I capital ratio for the Corporation's subsidiary, The Harbor Bank
of Maryland as of December 31, 1998 was 7.1% and the risk based capital ratio
was 14.6%, both above the established regulatory requirements.
-7-
<PAGE>
HARBOR BANKSHARES CORPORATION
- --------------------------------------------------------------------------------
CHANGES IN FINANCIAL POSITION
- -----------------------------
The Corporation through its subsidiary, The Harbor Bank of Maryland,
continued its growth during 1998.
Assets grew by $48.8 million or 36.0% to $184.7 million from $135.9
million in 1997. Deposits increased by $48 million to $167.5 million or 40.3%
from $118.9 million in 1997 and net loans increased by $7.6 million to $85.2
million or 9.8% compared to $77.6 million in 1997.
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.
Exhibit D presents data and information at December 31, 1998 as to: 1)
Maturities of Certificates of Deposit of $100,000 or more, 2) the Corporation's
loan portfolio by type of loan, and 3) a Summary of the Corporation's Investment
Securities portfolio as of that date.
FINANCIAL ANALYSIS - 1997 AND 1996
- ----------------------------------
Net income for 1997 increased by $127 thousand or 22.1% to $700 thousand
due to the growth in average earning assets which increased by $12.7 million or
11.9%. The increase in average earning assets is reflected in the increase of
net interest income which totaled $5.6 million for 1997, an increase of $397
thousand or 7.7% when compared to the $5.2 million earned during 1996.
During 1997, the provision for possible loan losses was $72 thousand
compared to $60 thousand for 1996. Charge-offs for 1997 were $313 thousand
compared to $53 thousand for 1996 and recoveries were $6 thousand compared to
$66 thousand the prior year.
Non-interest income increased by $681 thousand or 89.6% during 1997 when
compared to 1996. ATM fees for 1997 increased to $297 thousand, compared to $25
thousand in 1996. In addition, there was a gain of $213 thousand in security
sales. These two items were the main reason for the increase.
Non-interest expenses, at $5.8 million in 1997, increased by 18.4% when
compared to $4.9 million in 1996. Salaries and benefit expenses increased to
$2.6 million in 1997 from $2.2 million in 1996. The increase was caused by
additional staff, salary increases and benefit costs. Other
-8-
<PAGE>
HARBOR BANKSHARES CORPORATION
- --------------------------------------------------------------------------------
expenses increased by $470 thousand or 17.0%. Costs such as, occupancy, legal,
and data processing fees due to higher account activity also contributed to the
increase in other operating expenses.
At $401 thousand, taxes represented 36.4% of income before taxes for 1997
and $391 thousand or 40.6% for 1996.
Deposits grew by $4.8 million or 4.2%, loans decreased by $6.8 million or
8.0% due to the sale of Real Estate Loans, and investment securities increased
by $12.9 million or 77.8%. Investment Securities was the main user of the source
of funds provided by the deposit growth and the loan decreases.
Shareholders' Equity grew by $1.3 million or 14.4% due to a stock
purchases and retained earnings.
The Bank's Tier 1 capital ratio as of December 31, 1997 was 9.21%, and the
risk based capital ratio was 18.04%; both were well above minimum regulatory
requirements.
OTHER INFORMATION
- -----------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement 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) and hedge foreign currency
exposure.
The Corporation does not engage in fair value, cash flow or foreign
exchange hedges. Management is currently assessing the potential impact of SFAS
No. 133 on future corporate operations.
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 134 ("SFAS No. 134"), "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise", during October 1998, which
becomes effective for all periods beginning after December 15, 1998. SFAS No.
134 conforms the accounting by mortgage banking enterprises for mortgage-backed
securities subsequent to the securitization of other types of assets by
non-mortgage
-9-
<PAGE>
HARBOR BANKSHARES CORPORATION
- --------------------------------------------------------------------------------
banking enterprises. This statement should not have a material impact on the
Corporation's results of 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. The majority of the Bank data systems are provided through an
outsourcing relationship with Electronic Data Systems (EDS). These systems were
upgraded during July, 1998 and validation testing with EDS is scheduled for
March, 1999.
The Corporation 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. An
inventory of this software has been completed and scheduled for testing by the
end of the first quarter of 1999.
The Corporation and its subsidiary have initiated formal communications
with all of its significant suppliers and borrowers 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 March 31, 1999, it is prepared to
implement its contingency plans which provides for alternative vendors to supply
the necessary services.
The cost incurred to date in implementing the year 2000 Plan is
approximately $75 thousand and the estimated cost to completion is expected to
be $250 thousand. The following is an update of the Corporation's strategic
plan:
Awareness Assessment Renovation Validation Implementation Contingency
- ----------- ------------ ---------- ----------- -------------- -----------
Internal 100% Internal 100% Internal 90% Internal 90% Internal 90% Internal 80%
External 95% External 85% External 80% External 75% External 85% External 80%
The Corporation has formulated a contingency plan for its mission critical
processes and is prepared to execute same if the need arises. The progress of
the Corporation's year 2000 Plan is being monitored by its regulators. An
examination of the Corporation's plan was conducted by the FDIC during January,
1999.
-10-
<PAGE>
HARBOR BANKSHARES CORPORATION
- --------------------------------------------------------------------------------
HARBOR BANKSHARES CORPORATION
SUPPLEMENT TO 1998 ANNUAL REPORT TO STOCKHOLDERS
BOARD OF DIRECTORS
- ------------------
Joseph Haskins, Jr. Chairman, President and Chief Executive Officer
J.P. Blase Cooke President/Harkins Builders, Inc.
James H. DeGraffenreidt, Jr. Chairman and C.E.O./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.
Sachinder Gupta President/E2CR, 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.
Ronald Scott Retiree, U.S. Postal Service
Stanley W. Tucker Managing General Partner, MMG Ventures, L.P.
George F. Vaeth, Jr. President/George Vaeth Associates, Inc.
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 - Senior Vice President
and Cashier/Bank
George F. Vaeth, Jr. Secretary/Corporation and Bank
ADVISORY BOARD
- --------------
Gary L. Attman Principal, Attman Properties Company
Henry Baines President/Stop, Shop and Save
Kenneth Banks President/Banks Contracting Co., Inc.
Francine Diggs President/VSI Group, 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.
Dr. Derek Lindsey Physician/C.E.O. True Health Care
Joshua Matthews President/JCM Systems, Inc.
Hassan Murphy Attorney, William H. Murphy Jr. and Associates,
P.A.
Marilyn M. Rawlings President/Cameo Electronics Company, 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
-11-
<PAGE>
HARBOR BANKSHARES CORPORATION
- --------------------------------------------------------------------------------
Kenneth O. Wilson President and Owner/Inner Harbor Marina
-12-
<PAGE>
HARBOR BANKSHARES CORPORATION
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
- -----------------------
MARKET SUMMARY OF STOCK
-----------------------
Harbor Bankshares Corporation is traded privately and is not listed by any
exchange. During 1998 and 1997, there was little trading activity in the stock.
The bid and ask prices during 1998 varied from $16.00 to $18.00 per share.
During 1997 the bid and ask price varied from $13.00 to $15.00 per share. At
December 31, 1998 the Corporation had 729 common stockholders of record.
CASH DIVIDENDS
--------------
Harbor Bankshares Corporation paid a stock dividend equivalent to $.25 per
share during the first quarter of 1998. During 1997 The Corporation paid cash
dividends of $.20 per share during the first quarter of 1997. Exhibit E sets
forth "Consolidated Quarterly Results of Operations, Market Prices and
Dividends".
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 West 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.
<PAGE>
HARBOR BANKSHARES CORPORATION
- -------------------------------------------------------------------------------
EXHIBIT A - 1 OF 2
HARBOR BANKSHARES CORPORATION
CONSOLIDATED FIVE-YEAR STATEMENT:
AVERAGE BALANCES, YIELDS/RATES AND INCOME EXPENSE
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended December 31, 1998 1997
Average Yields/ Income Average Yields/ Income
Balances Rates Expense Balances Rates Expense
--------- -------- ------- --------- -------- -------
ASSETS
U.S. Treasury Securities $ -- --% $ -- $ --% $ --% $ --
U.S. Government Agencies 36,970 6.69 2,476 21,244 6.62 1,407
Interest-Bearing
Deposits with Other Banks 2,235 5.59 125 4,408 5.58 246
FHLB Stock and Other Securities 514 7.20 37 599 7.34 44
Federal Funds Sold 12,870 5.45 702 10,752 5.89 633
--------- ------ --------- --------- ------- -------
52,589 6.35% 3,340 37,003 6.30% 2,330
LOANS
Commercial Loans 14,053 9.44 1,326 9,592 9.61 922
Real Estate Mortgages 63,005 9.54 6,010 68,945 9.67 6,670
Consumer Loans 3,444 11.82 407 3,895 11.48 447
--------- ------ --------- --------- ------- -------
Loans Net of Unearned Income 80,502 9.62 7,743 82,432 9.75 8,039
--------- --------- --------- -------
Total Earning Assets 133,091 8.33% $ 11,083 119,435 8.68% $10,369
========= =======
Allowance for Possible Losses (682) (846)
Other Assets 12,550 12,531
--------- ---------
TOTAL ASSETS $ 144,959 $ 131,120
========= =========
LIABILITIES AND SHAREHOLDERS'EQUITY
Non-Interest Bearing Deposits $ 12,402 --% $ -- $ 10,209 --% $ --
Interest-Bearing 25,282 3.16 798 14,828 2.50 371
Transaction Accounts
Savings 37,559 3.38 1,266 39,485 3.45 1,364
Time - $100,000 or more 22,170 5.59 1,241 18,195 5.56 1,011
Other Time 30,313 5.08 1,541 32,198 5.41 1,742
--------- ------ --------- --------- ------- --------
Savings and Time Deposits 115,324 3.79% 4,846 104,706 4.29% 4,488
--------- ---------
TOTAL DEPOSITS 127,726 114,915
Other Borrowed Money -- --% -- -- --% --
Notes payable 5,796 5.12 297 5,796 5.35 310
Other Liabilities 911 -- -- 820 -- 888
--------- ------ --------- --------- ------- --------
TOTAL LIABILITIES 134,433 4.25% $ 5,143 121,531 4.34% $ 4,798
========= =======
SHAREHOLDERS' EQUITY 10,526 9,589
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 144,959 $131,120
========= ========
Net Yield on Interest
Earning Assets 4.08% 4.34%
Benefit of Non-Interest
Bearing Funds .38% .37%
Net Interest Margin 4.46% 4.71%
Year ended December 31, 1996
Average Yields/ Income
Balances Rates Expense
--------- -------- -------
ASSETS
U.S. Treasury Securities $ -- --% $ --
U.S. Government Agencies 14,880 6.28 935
Interest-Bearing
Deposits with Other Banks 7,064 5.66 400
FHLB Stock and Other Securities 561 7.31 41
Federal Funds Sold 3,103 5.32 165
-------- ------ -------
25,608 6.02% 1,541
LOANS
Commercial Loans 7,451 9.82 732
Real Estate Mortgages 70,697 9.48 6,702
Consumer Loans 3,010 12.33 371
-------- ------ -------
Loans Net of Unearned Income 81,158 9.62 7,805
-------- -------
Total Earning Assets 106,766 8.75% $ 9,346
=======
Allowance for Possible Losses (880)
Other Assets 10,410
--------
TOTAL ASSETS $116,296
========
LIABILITIES AND SHAREHOLDERS'EQUITY
Non-Interest Bearing Deposits $ 9,316 --% $ --
Interest-Bearing 15,798 2.61 412
Transaction Accounts
Savings 35,671 3.46 1,235
Time - $100,000 or more 11,792 5.39 635
Other Time 28,329 5.28 1,497
-------- ------ -------
Savings and Time Deposits 91,590 4.13% 3,779
--------
TOTAL DEPOSITS 100,906
Other Borrowed Money 1,452 5.58% 81
Notes payable 5,796 5.33 309
Other Liabilities 888 -- --
-------- ------ -------
TOTAL LIABILITIES 109,042 4.55% $ 4,169
=======
SHAREHOLDERS' EQUITY 7,254
--------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $116,296
========
Net Yield on Interest
Earning Assets 4.20%
Benefit of Non-Interest
Bearing Funds .34%
Net Interest Margin 4.54%
</TABLE>
- 13 -
<PAGE>
HARBOR BANKSHARES CORPORATION
- -------------------------------------------------------------------------------
EXHIBIT A - 2 OF 2
HARBOR BANKSHARES CORPORATION
CONSOLIDATED FIVE-YEAR STATEMENT:
AVERAGE BALANCES, YIELDS/RATES AND INCOME EXPENSE
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended December 31, 1995 1994
Average Yields/ Average Yields/
Balances Rates Income Expense Balances Rates Income Expense
--------- -------- -------------- --------- -------- --------------
ASSETS
U.S. Treasury Securities $ 1,321 4.47% $ 59 $ 3,627 4.47% $ 162
U.S. Government Agencies 8,944 5.66 506 7,717 4.91 379
Interest-Bearing Deposits with 7,712 5.60 432 9,190 5.53 508
FHLB Stock and Other Securities 418 7.42 31 270 6.29 17
Federal Funds Sold 4,786 6.27 300 20,784 4.51 937
--------- ---- ------- -------- ---- -------
23,181 5.73% 1,328 41,588 4.82% 2,003
LOANS
Commercial Loans 4,862 10.53 512 3,324 8.69 289
Real Estate Mortgages 67,508 9.39 6,339 37,062 10.88 4,034
Consumer Loans 2,541 12.23 311 1,885 11.19 211
--------- ---- ------- -------- ---- -------
Loans Net of Unearned Income 74,911 9.56 7,162 42,271 10.73 4,534
--------- ------- -------- -------
Total Earning Assets 98,092 8.65% $ 8,490 83,859 7.79% $ 6,537
======= =======
Allowance for Possible Losses (817) (499)
Other Assets 9,584 5,566
--------- --------
TOTAL ASSETS $ 106,859 $ 88,926
========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Non-Interest Bearing Deposits $ 8,991 2.54% $ -- $ 8,640 --% $ --
Interest-Bearing Transaction 18,184 3.16 462 19,434 2.50 490
Savings 33,386 3.38 1,018 26,541 3.45 896
Time - $100,000 or more 8,748 5.59 463 7,557 5.56 289
Other Time 24,648 5.08 1,275 18,816 5.41 727
--------- ---- ------- -------- ---- -------
Savings and Time Deposits 84,966 3.42% 3,218 72,348 3.32% 2,402
--------- --------
TOTAL DEPOSITS 93,957 80,988
Other Borrowed Money 1,195 6.53% 78 -- --% --
Notes payable 5,796 5.78 335 2,724 4.51 124
Other Liabilities 593 -- -- 584 -- --
--------- ---- ------- -------- ---- -------
TOTAL LIABILITIES 101,541 3.96% $ 3,631 84,296 3.36% $ 2,526
======= =======
SHAREHOLDERS' EQUITY 5,318 4,630
--------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $106,859 $ 88,926
======== =========
Net Yield on Interest Earning 4.69% 4.43%
Assets
Benefit of Non-Interest Bearing .36% .34%
Funds
Net Interest Margin 5.05% 4.77%
</TABLE>
- 14 -
<PAGE>
HARBOR BANKSHARES CORPORATION
- -------------------------------------------------------------------------------
EXHIBIT B
SUMMARY OF LOAN LOSS EXPERIENCE
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
BALANCE AT BEGINNING $ 654 $ 889 $ 817 $ 658 $ 428
OF PERIOD
LOANS CHARGED OFF:
Commercial Loans -- 58 14 -- 4
Real Estate Mortgages 54 95 5 6 19
Consumer Loans 149 160
34 29 8
------- -------- -------- -------- --------
TOTAL LOANS CHARGED OFF 203 313 53 35 31
RECOVERIES OF LOANS:
Commercial Loans -- 1 57 1 2
Real Estate Mortgages 3 -- -- 6 --
Consumer Loans 32 5 8 4 11
------- -------- -------- -------- --------
TOTAL LOANS RECOVERED 35 6 65 11 13
Net Loans Charged Off 168 307 (12) 24 18
------- -------- -------- -------- --------
Provisions Charged to Operations 213 72 60 183 248
------- -------- -------- -------- --------
BALANCE AT END OF PERIOD $ 699 $ 654 $ 889 $ 817 $ 658
======= ======== ======== ======== ========
Daily Average Amount $80,502 $ 82,432 $ 81,158 $ 74,911 $ 42,271
======= ======== ======== ======== ========
of Loans
Allowance for Possible .81% .83% 1.04% 1.09% 1.13%
=== === ==== ==== ====
Loan Losses to
Loans Outstanding
Net Charge Offs to
Average Loans Outstanding .21% .37% (.01%) .03% .04%
=== === ==== === ===
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Commercial Loans $ 59 $ 118 $ 33 $ 35 $ 27
Real Estate Loans 34 45 58 90 84
Consumer Loans 34 46 36 37 23
Credit Cards 37 35 90 56 26
Unallocated 535 410 672 599 498
------ ----- ------ ------ ------
TOTAL ALLOWANCE FOR
LOAN LOSSES $ 699 $ 654 $ 889 $ 817 $ 658
===== ===== ===== ===== =====
</TABLE>
- 15 -
<PAGE>
HARBOR BANKSHARES CORPORATION
- -------------------------------------------------------------------------------
ANALYSIS OF CHANGES IN NET INTEREST INCOME EXHIBIT C
INTEREST VARIANCE ANALYSIS
(dollars in thousands)
<TABLE>
<CAPTION>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
Increase (Decrease) due to: Increase (Decrease) due to:
--------------------------- ---------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
INTEREST INCOME
<S> <C> <C> <C> <C> <C> <C>
Loans $ (188) $ (109) $ (297) $ 122 $ 112 $ 234
Investment Securities 1,041 28 1,069 417 14 431
Federal Funds Sold 125 (56) 69 407 61 468
Other Interest
Bearing Assets (130) 2 (128) (148) 38 (110)
------- ------- ------- ------- ------- -------
TOTAL Interest Income $ 848 $ (135) $ 713 $ 798 $ 225 $ 1,023
======= ======= ======= ======= ======= =======
INTEREST EXPENSE
Interest-Bearing Transaction
Accounts $ 261 $ 166 $ 427 $ 23 $ (64) $ (41)
Savings (66) (32) (98) 131 (2) 129
Time - $100,000
or more 221 9 230 345 31 376
Other Time (102) (99) (201) 204 41 245
Other Borrowed Money -- -- -- (81) -- (81)
Notes Payable -- (13) (13) -- 1 177
------- ------- ------- ------- ------- -------
TOTAL INTEREST EXPENSE $ 314 $ 31 $ 345 $ 622 $ 7 $ 629
======= ======= ======= ======= ======= =======
NET INTEREST INCOME $ 534 $ (166) $ 368 $ 176 $ 218 $ 394
======= ======= ======= ======= ======= =======
</TABLE>
Note: Loan fees, which were included in interest income were $262 in 1998, $228
in 1997, and $291 in 1996. A change in Rate/Volume has been allocated to
the change in rate.
(1) Certificates of Deposit with other financial institutions.
- 16 -
<PAGE>
HARBOR BANKSHARES CORPORATION
- -------------------------------------------------------------------------------
EXHIBIT D
PROFILE OF INVESTMENT PORTFOLIO AT DECEMBER 31, 1998
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
(dollars in Thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
MATURITIES THREE MONTHS OR LESSN OVER THREE MONTHS TO OVER SIX MONTHS TO 12 OVER 12 MONTHS TOTAL
SIX MONTHS MONTHS
- ---------- --------------------- -------------------- --------------------- -------------- ---------
BALANCE $12,548 $ 5,299 $ 9,296 $ 4,208 $ 31,351
PERCENT TO TOTAL 40.0% 16.9% 29.6% 13.5% 100.0%
LOAN PORTFOLIO BY TYPE OF LOAN
(dollars in Thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Commercial $20,711 24.7% $ 9,041 11.6% $ 9,611 11.3% $ 5,785 7.4% $ 3,761 6.5%
Real Estate Commercial 17,026 19.8% 17,014 22.9% 13,667 16.0% 13,014 16.7% 12,513 21.5%
Real Estate Construction 2,014 2.3% 2,020 2.6% 1,349 1.6% 995 1.3% 178 0.3%
Real Estate Residential 42,664 49.7% 45,527 58.2% 57,002 66.8% 55,510 71.1% 39,727 68.1%
Consumer 3,382 4.1% 3,768 4.7% 3,713 4.3% 2,804 3.5% 2,122 3.6%
----------------- ----------------- ---------------- ---------------- ---------------
TOTAL LOANS $85,797 100.0% $77,370 100.0% $85,342 100.0% $78,108 100.0% $58,301 100.0%
INVESTMENTS SECURITIES SUMMARY
(dollars in Thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury and
Government Agency $38,771 $11,993 $ 986 $ 1,009 $ 1,980
Mortgage Backed Securities 15,845 1,917 -- -- --
Equity Securities 470 585 583 441 277
------- ------- ------- ------- ---------
TOTAL Securities Available
for Sale 55,086 14,495 1,569 1,450 2,257
------- ------- ------- ------- ---------
SECURITIES HELD TO MATURITY:
U.S. Treasury and
Government Agencies 17,152 14,002 15,006 9,442 11,521
Mortgage Backed Securities -- 1,000 -- -- --
Other Debt Securities 15 15 10 6 3
------- ------- ------- ------- ---------
TOTAL Securities Held to Maturity 17,167 15,017 15,016 9,448 11,524
------- ------- ------- ------- ---------
TOTAL INVESTMENT SECURITIES PORTFOLIO $72,253 $29,512 $16,585 $10,898 $ 13,781
======= ======= ======= ======= =========
TOTAL PORTFOLIO YIELD 6.7% 6.6% 6.5% 5.6% 4.9%
</TABLE>
- 17 -
<PAGE>
HARBOR BANKSHARES CORPORATION
- -------------------------------------------------------------------------------
EXHIBIT E
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS, MARKET PRICES AND DIVIDENDS
(in thousands except per share data)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---------------------------------- ---------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ---------------
Interest Income $2,981 $ 2,812 $ 2,731 $2,558 $2,573 $2,754 $2,551 $2,492
Interest Expense 1,370 1,300 1,282 1,191 1,265 1,196 1,189 1,147
---------------------------------- ---------------------------------
Net Interest Income 1,611 1,512 1,449 1,367 1,308 1,558 1,362 1,345
Provision for Loan Losses 100 38 37 38 18 18 18 18
---------------------------------- ---------------------------------
Net Interest Income 1,511 1,474 1,412 1,329 1,290 1,540 1,344 1,327
after Provision
for Loan Losses
Non-Interest Income 334 297 335 311 388 289 215 294
---------------------------------- ---------------------------------
Net Security Gains (Losses) -- -- 26 -- -- -- -- --
Gains on Sale of Loans -- -- -- -- 213 -- -- 42
Non-Interest Expense 1,573 1,471 1,485 1,455 1,630 1,481 1,372 1,358
---------------------------------- ---------------------------------
Income Before Taxes 272 300 262 211 261 348 187 305
Income Tax Expense 59 98 89 71 97 126 58 120
---------------------------------- ---------------------------------
Net Income $ 213 $ 202 $ 173 $ 140 $ 164 $ 222 $ 129 $ 185
---------------------------------- ---------------------------------
PER SHARE AMOUNT
Net Income - Basic $ .32 $ .29 $ .25 $ .20 $ .24 $ .34 $ .20 $ .29
Net Income - Diluted $ .22 $ .27 $ .23 $ .19 $ .23 $ .31 $ .19 $ .26
---------------------------------- ---------------------------------
HARBOR BANKSHARES CORPORATION
Market Price - High
Low
Dividends Paid* $. 25 $ .20
---------------------------------- ---------------------------------
</TABLE>
* Stock dividend paid in 1997, equivalent to $.20 per share.
- 18 -
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000889608
<NAME> HARBOR BANKSHARES CORPORATION
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6,838
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