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 March 31, 1999
Commission file number 0-20990
Harbor Bankshares Corporation
(Exact name of registrant as specified in its charter)
Maryland 52-1786341
(State of other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
25 W. Fayette Street, Baltimore, Maryland 21201
(Address of principal executive offices) (Zip code)
(410) 528-1800
Registrant's telephone number, including area code
Not Applicable
Former name, address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X YES NO
___ ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common stock, non-voting, $.01 Par value - 33,333 shares as of March 31, 1999.
Common stock, $.01 Par value -- 653,204 shares as of March 31, 1999
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Condition - March 31, 1999
(Unaudited) and December 31, 1998
Consolidated Statements of Income (Unaudited) Three months
Ended March 31, 1999 and 1998
Consolidated Statement of Cash Flows (Unaudited) - Three months
Ended March 31, 1999 and 1998
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
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
March 31 Dec 31
1999 1998
----- ------
(Unaudited)
Dollars in Thousands
<S><C>
ASSETS
Cash and Due from Banks $ 2,871 $ 5,027
Interest Bearing Deposits in Other Banks 671 1,055
Investment Securities:
Held to maturity (market values of $16,857
as of 3/31/99 and $17,163 as of 12/31/98) 16,864 17,168
Available for Sale 54,730 55,085
------- -------
Total Investment Securities 71,594 72,253
Federal Funds Sold 2,316 13,402
Loans 85,419 85,957
Unearned Income (159) (160)
Reserve for Possible Loan Losses (848) (699)
------- -------
Net Loans 84,412 85,098
Property and Equipment - Net 1,802 1,406
Other Real Estate Owned 1,053 638
Goodwill 3,417 3,500
Accrued Interest Receivable and Other Assets 3,121 2,344
------- -------
TOTAL ASSETS $ 171,257 $ 184,723
------- -------
LIABILITIES
Deposits:
Non-Interest Bearing Demand $ 12,530 $ 11,483
Interest Bearing Transaction Accounts 29,464 32,520
Savings 56,027 64,730
Time, $100,000 or more 23,840 31,351
Other Time 27,691 27,398
------- -------
Total Deposits 149,552 167,482
Accrued Interest and Other Liabilities 639 777
Short Term Borrowings 5,000 ---
Notes Payable 5,796 5,796
------- -------
TOTAL LIABILITIES 160,987 174,055
SHAREHOLDERS' EQUITY
Common stock, non voting, - par value $.01 per share:
Authorized 10,000,000 shares; at 653,204
at 3/31/99 and 3/31/98 and 33,333 common
non-voting 3/31/99 and 12/31/98. 7 7
Capital Surplus 6,447 6,447
Retained Earnings 4,280 4,414
Net accumulated other comprehensive income (464) (200)
------- -------
TOTAL SHAREHOLDERS' EQUITY 10,270 10,668
------- -------
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY $ 171,257 $ 184,723
------- -------
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
---- ----
(Unaudited)
In Thousands
Except per Share Data
<S><C>
INTEREST INCOME
Interest and Fees on Loans $ 1,888 $ 1,815
Interest on Investment Securities (Taxable) 1,100 539
Interest on Deposits in Other Banks 12 40
Interest on Federal Funds Sold 66 164
------ ------
TOTAL INTEREST INCOME 3,066 2,558
INTEREST EXPENSE
Interest on Deposits
Savings 551 350
Interest Bearing Transaction Accounts 216 89
Time $100,000 or More 314 261
Other Time 304 413
Interest on Borrowed Funds 22 -
Interest on Notes Payable 65 78
------ ------
TOTAL INTEREST EXPENSE 1,472 1,191
------ ------
NET INTEREST INCOME 1,594 1,367
Provision for Possible Loan Losses 151 38
------ ------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES 1,443 1,329
OTHER OPERATING INCOME
Service Charges on Deposit Accounts 170 149
Other Income 113 188
------ ------
283 337
OTHER OPERATING EXPENSES
Salaries and Employee Benefits 761 649
Occupancy Expense of Premises 199 176
Equipment Expense 130 101
Data Processing Expense 173 149
Deposit Assessments and Related Fees 10 9
Goodwill Amortization 83 83
Other Expenses 311 288
------ ------
1,667 1,455
INCOME BEFORE INCOME TAXES 59 211
Applicable Income Taxes 21 71
------ ------
NET INCOME $ 38 $ 140
------ ------
BASIC EARNINGS PER SHARE $ .05 $ .20
DILUTED EARNINGS PER SHARE $ .04 $ .19
AVERAGE COMMON SHARES
OUTSTANDING 686 684
Dividends Declared per Share $ .25 $ .25
</TABLE>
(See notes to unaudited consolidated Financial Statements)
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
---- -----
(Unaudited)
Dollars in Thousands
<S><C>
OPERATING ACTIVITIES
Net Income $ 38 $ 140
Adjustments to Reconcile Net Income to Net Cash
and Cash Equivalents Provided by (Used in) Operating
Activities:
Gains on sales of securities --- (26)
Gains on sale of loans (4) (2)
Provision for Possible Loan Losses 151 38
Depreciation and Amortization 209 185
(Increase) in Interest Receivable and Other Assets (1,192) (284)
Increase (Decrease) in Interest Payable and Other
Liabilities (138) (171)
------- -------
Net Cash Provided by (Used in) Operating Activities (936) (120)
INVESTING ACTIVITIES
Net Decrease in Deposits at Other Banks 384 593
Purchase of Investments held to maturity (84) ---
Purchase of Investments Securities available for sale (5,000) (14,000)
Proceeds from Investment Securities held to maturity 500 ---
Proceeds from Called Investments Securities held
to maturity --- 4,000
Proceeds from Sale of Securities available for sale --- 1,839
Proceeds from Called Securities available for sale 5,000 3,000
Proceeds from the sale of loans 864 459
Net (Increase) Decrease in Loans (346) 1,574
Purchase of Premises and Equipment (522) (43)
------- -------
Net Cash and Cash Provided by 796 (2,578)
(Used in) Investing Activities
FINANCING ACTIVITIES
Net Increase in Non-Interest Bearing
Transaction Accounts 1,047 288
Net Increase (Decrease) in Interest Bearing
Transaction Accounts (3,056) 2,734
Net Increase (Decrease) in Savings Deposits (8,703) (316)
Net Increase (Decrease) in Time Deposits (7,218) (148)
Short Term Borrowings 5,000 ---
Acquisition of Common Stock --- 24
Payment of Cash Dividends (172) (171)
------- -------
Net Cash (Used in) Provided by Financing Activities (13,102) 3,043
------- -------
Increase (Decrease) in Cash and Cash Equivalents (13,242) 345
Cash and Cash Equivalents at Beginning of Period 18,429 18,549
------- -------
Cash and Cash Equivalents at End of Period $ 5,187 $18,894
======= =======
</TABLE>
(See Notes to Unaudited Consolidated Financial Statements)
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
March 31, 1999
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 three month
period ended March 31, 1999, are not necessarily indicative of
the results that may be expected for the year ending December
31, 1999. 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, 1998.
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>
Three Months Ended March 31,
1999 1998
---- ----
<S><C>
Net Income $ 38 $ 140
- Other Comprehensive Income:
Unrealized Holding Gains (Losses)
Arising During the period (354) (31)
- Less: Reclassified Adjustments for
gains included in Net Income --- ---
-------- --------
Other Comprehensive Income, Before
Tax (354) (31)
Income Tax Expense Related to items
of Other Comprehensive Income (90) (8)
Other Comprehensive Income (264) (23)
-------- --------
Comprehensive Income $ (226) $ 117
======== ========
</TABLE>
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
Note C: In June 1988, 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, and
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. 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 was conducted during
March 1999 and no Y2-K issues were identified. Systems appeared to be ready to
function beyond the year 2000.
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
identified remedial steps will be completed by the end of the second 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. The Corporation has received
responses from the majority of its vendors, who appear to be substantially
compliant. The Corporation will continue to ensure that all of its business
partners are Y2-K ready.
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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 $300
thousand. The following is an update of the Corporation's strategic plan:
<TABLE>
<CAPTION>
Awareness Assessment Renovation Validation Implementation Contingency
--------- ---------- ---------- ---------- -------------- -----------
<S><C>
Internal 100% Internal 100% Internal 90% Internal 95% Internal 95% Internal 90%
External 100% External 95% External 85% External 85% External 90% External 85%
</TABLE>
The Corporation has formulated a contingency plan for its mission critical
process and is prepared to execute same if the need arises. The progress of the
corporations' year 2000 Plan is being monitored by its regulators. A full
examination of the Corporation's plan was conducted by the FDIC during January
1999 with a follow-up in March 1999.
Subsequent Events
On May 3, 1999 loans totaling $462 thousand were charged-off with a
corresponding reduction in the reserve for possible loan losses. In anticipation
of these charge-offs, management increased the provision for loan losses by $167
thousand as of the end of April.
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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 first quarter
of 1999 totaled $38 thousand, a decrease of $102 thousand or
72.8 percent when compared to the first quarter of 1998. A
provision of $151 thousand in the allowance for loan losses
for the first quarter of 1999, reflecting an increase of $113
thousand over the first quarter of 1998, coupled with
increased overhead expenses due to expansion and Y2-K updates
in equipment and systems, resulted in the reported lower
earnings. Return on average assets (ROAA) and return on
average shareholders equity (ROAE) during the first quarter
were .09 percent and 1.41 percent, respectively.
Net interest income increased by $227 thousand or 16.6 percent
over last year's first quarter. Interest on Investment
securities increased by $561 thousand or 104.1 percent
reflecting the investment of the proceeds from the deposit
growth in that area. Interest and fees on loans increased by
$73 thousand or 4.0 percent. Interest expense increased by
$281 thousand or 23.6 percent. Interest expense on interest
bearing transaction accounts increased by $127 thousand or
142.6 percent reflecting the increased balance on those types
of deposits. Interest on time deposits decreased by $56
thousand or 8.3 percent and interest on savings deposits
increased by $201 thousand or 57.4 percent. There were also
$22 thousand of interest on borrowings from the Federal Home
Loan Bank of Atlanta. The interest on the long term debt
decreased by 16.6 percent to $65 thousand from $78 thousand
paid for the first quarter of 1998.
The provision for possible Loan Losses was $151 thousand for
the first quarter of 1998. The $113 thousand increase
represents the allocation for certain losses identified by
management. Charge-offs for the quarter totaled $41 thousand
and recoveries $39 thousand.
Other operating income decreased by $54 thousand basically in
the category of ATM fees. The ATM network the bank had
established was outsourced to an outside company in order to
mitigate the risk of the operation. This move, although had a
negative impact in the fees category, also reduces the
overhead cost of the operation. Management expects to increase
the net profits of the ATM operations with this change.
Service charges on deposit accounts increased by $21 thousand
or 14.1 percent as a result of increased activity. Fee income
from the subsidiary of the Bank, Harbor Financial Services,
was $35 thousand. They had an operating loss of $2 thousand
for the quarter ended March 31, 1999. NonInterest expense
increased by $222 thousand or 15.3 percent mainly due to a
recent expansion of a branch facility established during
January 1999. Salary and benefits increased by $112 thousand
or 17.3 percent reflecting the additional staff associated
with the expansion as well as salary increases. Occupancy and
equipment expenses increased by $23 thousand and $29 thousand
each or 13.1 percent and 28.7 percent, respectively,
reflecting the cost of the expansion and
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
cost associated with the purchase and upgrade of equipment due
to the Y2-K compliance efforts by management. Data processing
fees increased by $24 thousand or 16.1 percent due to higher
transaction volume. Goodwill amortization at $83 thousand
remained the same as the previous year first quarter. Other
expenses increased by $23 thousand or 8.0 percent basically
due to the branch expansion and growth in other areas of the
Bank.
As of March 31, 1999, total deposits were $149.6 million
reflecting a decrease of $18.0 million or 10.7 percent when
compared to December 31, 1998. Noninterest bearing demand
deposits increased by $1.0 million or 9.1 percent. Savings and
time deposits reflected a decrease of $16.0 million or 13.0
percent, mainly, in the time deposits over $100 thousand which
decreased by $7.6 million or 23.9 percent. Net loans decreased
by $686 thousand to $84.4 million or .80 percent.
Shareholders equity decreased by $398 thousand or 3.7 percent,
the cash dividend of $172 thousand during the first quarter of
1999 coupled with an increase of $264 thousand in the
unrealized losses on available-for-sale securities were the
main reasons for the decrease. Primary and risk based capital
for the corporation were 4.3 and 9.5 percent, respectively.
The corporation stock is traded privately. During the first
quarter of 1999, a few trades were registered at $18.00 per
share.
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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
The 1999 Annual Meeting of the Stockholders of
Harbor Bankshares Corporation was held on April 21,
1999.
The stockholders elected the following nominees to
the Corporation's Board of Directors to serve for a
three year term. The following shows the separate
tabulation of votes for each nominee:
<TABLE>
<CAPTION>
Number of Votes
Three Years For Against
----------- --- -------
<S><C>
Joseph Haskins, Jr. 402,070 2,916
James H. DeGraffenreidt, Jr. 402,070 2,916
Joe Louis Gladney 402,070 2,916
Louis J. Grasmick 402,070 2,916
</TABLE>
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 March 31, 1999.
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
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. This computation of diluted earnings per share 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>
Qtr ended Qualifying Basic EPA Basic Dilutive Diluted Diluted
March 31 Net Income Shares EPS Shares Shares EPS
- -------- ---------- ------------ ---- -------- ------ --------
<S><C>
1999 $ 37,759 686,537 $.05 173,839 860,376 $ .04
1998 $139,537 686,537 $.20 50,865 737,402 $ .19
</TABLE>
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<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARBOR BANKSHARES CORPORATION
Date:
_________________ _____________________________________
Joseph Haskins, Jr.
President and Chief Executive Officer
Date: 5/10/99 /s/ Teodoro J. Hernandez
_________________ _____________________________________
Teodoro J. Hernandez
Treasurer
-13-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,807
<INT-BEARING-DEPOSITS> 671
<FED-FUNDS-SOLD> 2,316
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 54,730
<INVESTMENTS-CARRYING> 16,864
<INVESTMENTS-MARKET> 16,857
<LOANS> 85,260
<ALLOWANCE> 848
<TOTAL-ASSETS> 171,257
<DEPOSITS> 149,552
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 639
<LONG-TERM> 5,796
0
0
<COMMON> 7
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 171,257
<INTEREST-LOAN> 1,888
<INTEREST-INVEST> 1,112
<INTEREST-OTHER> 66
<INTEREST-TOTAL> 3,066
<INTEREST-DEPOSIT> 1,385
<INTEREST-EXPENSE> 1,472
<INTEREST-INCOME-NET> 1,594
<LOAN-LOSSES> 151
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,667
<INCOME-PRETAX> 59
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38
<EPS-PRIMARY> .05
<EPS-DILUTED> .04
<YIELD-ACTUAL> 3.877
<LOANS-NON> 1,017
<LOANS-PAST> 754
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,028
<ALLOWANCE-OPEN> 699
<CHARGE-OFFS> 41
<RECOVERIES> 39
<ALLOWANCE-CLOSE> 848
<ALLOWANCE-DOMESTIC> 848
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 395
</TABLE>
