<PAGE>
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
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HARBOR BANKSHARES CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1786341
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(State or other jurisdiction of (IRS Employer Identification
incorporation) Number)
25 West Fayette Street 21201
Baltimore, Maryland
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(Address of principal executive (Zip Code)
offices)
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Registrant's telephone number: (410) 528-1800
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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
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<TABLE>
<CAPTION>
<S> <C>
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 -
</TABLE>
- i -
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 -
</TABLE>
- ii -
<PAGE>
HARBOR BANKSHARES CORPORATION
Documents Incorporated by Reference
- -----------------------------------
Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1999 and the Registrant's 2000 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. 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 $2 thousand during 1999.
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 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.
- 3 -
<PAGE>
HARBOR BANKSHARES CORPORATION
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. 52 Chairman, President and Chief Executive
Officer of the Bank and Corporation
John Paterakis 71 Chairman of the Executive Committee of
the Corporation and the Bank
Teodoro J. Hernandez 54 Treasurer of the Corporation and Vice
President and Cashier of the Bank
George F. Vaeth, Jr. 66 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, 1999 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,
1999 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 10 of the Management Discussion and Analysis section of the
Registrant's Annual Report to Shareholders for the year ended December 31, 1999,
and from pages 8 through 18 of this Form 10-KSB.
Item 7. Financial Statements
- -----------------------------
Information required by Item 7 is incorporated by reference from
information appearing on pages 1 through 22 in the Audited Consolidated
Financial Statements section of the Registrant's Annual Report to Shareholders
for the year ended December 31, 1999.
Item 8. Changes In and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
On September 8, 1999, the Corporation dismissed PricewaterhouseCoopers, LLP
as its certifying accountant. PricewaterhouseCoopers, LLP performed the audit
of the Corporation's financial statements for the years ended December 31, 1997
and 1998. During these periods and for the period from January 1, 1999 to
September 8, 1999, there were no disagreements between the Corporation and
PricewaterhouseCoopers, LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which would have
caused PricewaterhouseCoopers, LLP to make reference to such matter in
connection with its audit reports on the Corporation's financial statements.
For each of the years ended December 31, 1997 and 1998, PricewaterhouseCoopers,
LLP issued unqualified audit reports on the Corporation's financial statements.
Neither audit report contained an adverse opinion or disclaimer of opinion, or
was modified as to uncertainty, audit scope or accounting practice.
On November 23, 1999, the Corporation engaged Stegman and Company to audit
the Corporation's financial statements for fiscal year 1999 as its certifying
accountants. The Corporation solicited bids for audit services from a number of
firms. The appointment of Stegman was recommended by the Audit Committee of the
Board of Directors and approved by the Oversight Committee of the Board of
Directors on November 10, 1999. There were no consultations between the
Corporation and Stegman regarding the application of accounting principles to
any matter, or as to any type of opinion that might be issued on the
Corporation's financial statements.
- 5 -
<PAGE>
HARBOR BANKSHARES CORPORATION
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 2000 Proxy Statement and page 4 of this report under the
caption of "Executive Officers" of the Registrant.
Item 10. Executive Compensation
- --------------------------------
Information required by this item is incorporated by reference from
information appearing under the caption "Executive Compensation" on pages 8 and
9 of the Registrant's 2000 Proxy Statement.
Item 11. Security ownership of certain beneficial owners and management
- ------------------------------------------------------------------------
Information required by Item 11 is incorporated by reference from
information appearing on pages 2 to 7 of the Registrant's 2000 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
12 on page 18 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, 1999, are incorporated herein by reference in Item 8:
Consolidated Statements of Condition
As of December 31, 1999 and 1998
Consolidated Statements of Income
Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Report of Stegman & Company, Independent Auditors.
Harbor Bankshares Corporation 2000 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) Reports on Form 8-K
During the fourth quarter of 1999, the Corporation filed a Form 8-K dated
November 10, 1999, relating to the change of the Corporation's certifying
accountants discussed at Item 8 of this report.
- 7 -
<PAGE>
HARBOR BANKSHARES CORPORATION
CONSOLIDATED AVERAGE STATEMENTS OF CONDITION AND RATIOS
(dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
U.S. Treasury Securities $ -- $ -- $ --
U.S. Government Agencies 62,267 36,970 21,244
Interest-Bearing Deposits with Other Banks 654 2,235 4,408
FHLB Stock and Other Securities 554 514 599
Federal Funds Sold 7,881 12,870 10,752
-------- -------- --------
71,356 52,589 37,003
-------- -------- --------
Loans
- -----
Commercial Loans 21,884 14,053 9,592
Real Estate 62,114 63,005 68,945
Consumer Loans 3,341 3,444 3,895
-------- -------- --------
Loans Net of Unearned Income 87,339 80,502 82,432
-------- -------- --------
Total Earning Assets 158,695 133,091 119,435
Allowance for Possible Losses (660) (682) (846)
Other Assets 12,604 12,550 12,531
-------- -------- --------
$170,639 $144,959 $131,120
TOTAL ASSETS ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-Interest Bearing Deposits $ 14,744 $ 12,402 $ 10,209
Interest-Bearing Transaction Accounts 32,225 25,282 14,828
Savings 59,349 37,559 39,485
Time - $100,000 or more 19,653 22,170 18,195
Other Time 28,736 30,313 32,198
-------- -------- --------
TOTAL Deposits 154,707 127,726 114,915
Other Borrowed Money 800 -- --
Notes payable 4,889 5,796 5,796
Other Liabilities 961 911 820
-------- -------- --------
TOTAL Liabilities 161,357 134,433 121,531
SHAREHOLDERS' EQUITY 9,282 10,526 9,589
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $170,639 $144,959 $131,120
======== ======== ========
RATIOS
Average Equity to Average Total Assets 5.44% 7.26% 7.31%
Return on Assets -- .50% .53%
Return on Equity -- 6.86% 7.30%
Dividend Payout Ratio 117.0% 23.4% 18.09%
</TABLE>
- 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 $178 million at December 31, 1999.
Disclosed below are the capital ratios of the Corporation:
<TABLE>
<CAPTION>
Harbor Bankshares
Corporation Regulatory Requirements
----------------- -----------------------
<S> <C> <C>
Primary Capital 4.53% 4.0%
Risk-Based Capital 8.09% 8.0%
</TABLE>
- 9 -
<PAGE>
HARBOR BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
-------------------- -------------------- ---------------------
<S> <C> <C> <C>
INTEREST AND FEES ON LOANS
Commercial Loans $ 1,996 $ 1,326 $ 922
Real Estate Mortgages 5,503 6,009 6,670
Consumer Loans 408 407 447
------- ------- -------
TOTAL Interest and Fees on Loans(1) 7,907 7,742 8,040
Interest on Taxable Investment Securities 4,008 2,513 1,451
Interest on Other Investments(2) 38 126 246
Interest on Federal Funds Sold 389 702 633
------- ------- -------
TOTAL Interest Income 12,342 11,083 10,370
------- ------- -------
INTEREST EXPENSE
Savings 2,060 1,266 1,850
Interest-Bearing Transaction Accounts 918 798 371
Time - $100,000 or more 1,014 1,241 1,011
Other Time 1,390 1,541 1,255
Other Borrowed Money 40 -- --
Interest on Notes Payable 296 297 310
------- ------- -------
TOTAL Interest Expense 5,718 5,143 4,797
------- ------- -------
Net Interest Income 6,624 5,940 5,573
Provision for Possible Credit Losses 803 213 72
------- ------- -------
Net Interest Income After Provision for Possible Credit Losses 5,821 5,727 5,501
------- ------- -------
Other Income 1,470 1,276 1,229
Investment Security Gains -- 26 213
Other Expenses 7,285 5,984 5,840
------- ------- -------
Income Before Taxes 6 1,045 1,101
Applicable Income Tax 5 317 401
------- ------- -------
NET INCOME $ 1 $ 728 $ 700
======= ======= =======
PER COMMON SHARE
NET INCOME $ -- $ 1.06 $ 1.07
======= ======= =======
Dividends per Share $ .25 $ .25 $ .20
======= ======= =======
</TABLE>
NOTES ON CONSOLIDATED STATEMENTS OF INCOME:
(1) Loan fees, which are included in Interest Income, were $387 in 1999, $262
in 1998, $228 in 1997.
(2) Certificates of Deposit with other financial institutions.
- 10 -
<PAGE>
HARBOR BANKSHARES CORPORATION
AVERAGE RATES EARNED OR PAID FOR THE YEARS 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Commercial Loans 9.12% 9.44% 9.61%
Real Estate 8.86% 9.54% 9.67%
Consumer Loans 12.21% 11.82% 11.48%
Taxable Investment Securities 6.37% 6.69% 6.62%
Other Investments(1) 5.81% 5.59% 5.89%
Federal Funds Sold 4.93% 5.45% 5.89%
----- ----- -----
TOTAL Earning Assets 7.78% 8.33% 8.68%
AVERAGE RATES PAID
Interest Bearing Transaction Accounts 2.85% 3.16% 2.50%
Savings 3.47% 3.38% 3.45%
Time - $100,000 or more 5.16% 5.59% 5.56%
Other Time 4.83% 5.08% 5.41%
Other Borrowed Money 5.00% -- --
Notes Payable 6.05% 5.12% 5.35%
----- ----- -----
TOTAL Interest Bearing Deposits 3.93% 4.25% 4.34%
NET YIELD ON EARNING ASSETS 3.85% 4.08% 4.34%
</TABLE>
(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>
1999 COMPARED TO 1998 1998 COMPARED TO 1997
Increase (Decrease) due to: Increase (Decrease) due to:
------------------------------ -----------------------------
Volume Rate Net Volume Rate Net
-------- ------ ------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 658 $(493) $ 165 $ (188) $(109) $ (297)
Investment Securities 1,698 204 1,494 1,041 28 1,069
Federal Funds Sold (272) (41) (313) 125 (56) 69
Other Interest Bearing Assets (1) (87) -- (87) (130) 2 (128)
------ ----- ------ ------ ----- ------
TOTAL Interest Income $1,997 $(738) $1,259 $ 848 $(135) $ 713
====== ===== ====== ====== ===== ======
INTEREST EXPENSE
Interest-Bearing Transaction
Accounts $ 219 $ (99) $ 120 $ 261 $ 166 $ 427
Savings 736 58 794 (66) (32) (98)
Time - $100,000 or more (141) (86) (227) 221 9 230
Other Time (80) (71) (151) (102) (99) (201)
Other Borrowed Money 40 -- 40 -- -- --
Notes Payable (46) 45 (1) -- (13) (13)
------ ----- ------ ------ ----- ------
TOTAL Interest Expense $ 728 $(153) $ 575 $ 314 $ 31 $ 345
====== ===== ====== ====== ===== ======
NET INTEREST INCOME $1,269 $(585) $ 684 $ 534 $(166) $ 368
====== ===== ====== ====== ===== ======
</TABLE>
Note: Loan fees, which were included in interest income were $387 in 1999, $262
in 1998, and $228 in 1997. 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. Government Other TOTAL
Agencies Securities
<S> <C> <C> <C> <C>
Maturing Within One Year -- $ -- $ -- $ --
Maturing After One But Within -- 1,921 -- 1,921
Five Years
Maturing After Five But Within -- 7,445 -- 7,445
Ten Years
------- ---- -------
Maturing After Ten Years -- 40,408 574 40,982
---- ------- ---- -------
TOTAL $ -- $49,774 $574 $50,348
==== ======= ==== =======
</TABLE>
Weighted Average Interest Rate at December 31, 1999
- ---------------------------------------------------
<TABLE>
<CAPTION>
U.S. Treasury U.S. Government Other TOTAL
Agencies Securities
<S> <C> <C> <C> <C>
Maturing Within One Year -- -- -- --
Maturing After One But Within -- 6.00% -- 6.00%
Five Years
Maturing After Five But Within -- 6.40% -- 6.40%
Ten Years
Maturing After Ten Years -- 6.65% 7.50% 7.08%
---- ---- ---- ----
TOTAL -- 6.35% 7.50% 6.49%
==== ==== ==== ====
</TABLE>
Carrying amount and the market value at 1999 and 1998:
- ------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------------------
Book Market Book Market Book Market
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Agency $49,774 $49,774 $71,768 $71,763 $28,913 $28,915
Other Securities 574 574 485 485 600 600
------- ------- ------- ------- ------- -------
TOTAL $50,348 $50,348 $72,253 $72,248 $29,513 $29,515
======= ======= ======= ======= ======= =======
</TABLE>
- 13 -
<PAGE>
HARBOR BANKSHARES CORPORATION
FIVE-YEAR LOAN DISTRIBUTION
---------------------------
Five-Year Loan Distribution at December 31 (dollars in thousands)
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial Loans $ 32,582 $20,710 $ 9,041 $ 9,612 $ 5,891
Real Estate Mortgages 66,336 61,705 65,461 72,017 69,414
Consumer Loans 3,583 3,382 3,768 3,713 2,804
-------- ------- ------- ------- -------
TOTAL $102,501 $85,797 $78,270 $85,342 $78,109
======== ======= ======= ======= =======
<CAPTION>
Five-Year Loan Distribution at December 31 (expressed as percentages)
- ---------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial Loans 31.78% 24.14% 11.55% 11.26% 7.54%
Real Estate Loans 64.72% 71.92% 83.64% 84.39% 88.87%
Consumer Loans 3.50% 3.94% 4.81% 4.35% 3.59%
-------- ------- ------- ------- -------
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>
Year ended December 31, 1999 1998 1997 1996 1995
------------- ------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Period $ 699 $ 654 $ 889 $ 817 $ 658
Loans Charged Off:
Commercial Loans 291 -- 58 14 ---
Real Estate Mortgages 395 54 95 5 6
Consumer Loans 239 149 160 34 29
------- ------- ------- ------- -------
TOTAL Loans Charged Off 925 203 313 53 35
------- ------- ------- ------- -------
Recoveries of Loans:
Commercial Loans 40 -- 1 57 1
Real Estate Mortgages 26 3 --- --- 6
Consumer Loans 35 32 5 8 4
------- ------- ------- ------- -------
TOTAL Loans Recovered 101 35 6 65 11
------- ------- ------- ------- -------
Net Loans Charged Off 824 168 307 (12) 24
------- ------- ------- ------- -------
Provisions Charged to Operations 803 213 72 60 183
------- ------- ------- ------- -------
Balance at End of Period $ 678 $ 699 $ 654 $ 889 $ 817
======= ======= ======= ======= =======
$87,399 $80,502 $82,432 $81,158 $74,911
Daily Average Amount of Loans ======= ======= ======= ======= =======
Allowance for Possible Loan Losses
to Loans Outstanding .66% .81% .83% 1.04% 1.09%
======= ======= ======= ======= =======
Net Charge Offs to Average Loans
Outstanding .94% .21% .37% (.01%) .03%
======= ======= ======= ======= =======
</TABLE>
- 15 -
<PAGE>
HARBOR BANKSHARES CORPORATION
RISK ELEMENTS OF LOAN PORTFOLIO
-------------------------------
(in thousands)
<TABLE>
<CAPTION>
December 31 1999 1998 1997 1996 1995
-------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Non-Accrual Loans $1,003 $1,107 $ 770 $ 284 none
Accruing Loans Past 47 547 1,948 276 481
Due 90 Days or more
Restructured Loans None none none none none
====== ====== ====== ===== ====
</TABLE>
NON-ACCRUAL LOANS AT DECEMBER 31, 1999 AND DECEMBER 31, 1998
- ------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1998
---- ----
<S> <C> <C>
Interest Income that Would Have Been Recorded
Under Original Terms $ 135 $ 94
Interest Income Recorded during the Period $ -- $ --
----- -----
</TABLE>
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, 1999, the Corporation had $1.0 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, 1999, 64.7% 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
2000 to exceed the 1999 levels.
- 16 -
<PAGE>
HARBOR BANKSHARES CORPORATION
MATURITY OF LOANS AS OF DECEMBER 31, 1999
- -----------------------------------------
<TABLE>
<CAPTION>
Commercial Real Estate Consumer Loans TOTAL
Loans Mortgages
<S> <C> <C> <C> <C>
Maturing Within One Year $ 9,990 $ 7,030 $2,060 $ 19,080
Maturing After One Year But 1,322 1,918 1,523 $ 4,763
Within Five Years
Maturing After Five Years 21,256 57,402 -- $ 78,658
------- ------- ------ --------
TOTAL $32,568 $66,350 $3,583 $102,501
======= ======= ====== ========
</TABLE>
LOANS CLASSIFIED BY SENSITIVITY TO CHANGES IN INTEREST RATES
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Fixed Interest Adjustable Interest
Rate Loans Rate Loans TOTAL
-------------- ------------------- ----------
<S> <C> <C> <C>
Maturing Within One Year $11,874 $33,760 $ 45,634
Maturing After One But Within Five Years 8,337 346 8,683
Maturing After Five Years 48.184 --- 48,184
------- ------- --------
TOTAL $68,395 $34,106 $102,501
======= ======= ========
</TABLE>
- 17 -
<PAGE>
HARBOR BANKSHARES CORPORATION
MATURITIES OF TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE OUTSTANDING AT
- -----------------------------------------------------------------------------
DECEMBER 31, 1999 AND 1998
- --------------------------
1999 1998
---- ----
Three months or less $ 6,733 $12,548
Three to six months 3,298 5,299
Six to twelve months 4,200 9,296
Over twelve months 4,766 4,209
------- -------
TOTAL $18,997 $31,352
======= =======
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 two-year notes from the Federal
Deposit Insurance Corporation (FDIC) for 1998 with quarterly interest payments
based on Treasury Bill rates and principal payment at the end of the fifth year.
Principal payments could have been made without penalty before the maturity of
the notes. These notes matured during 1999 and a one-year replacement note
maturing June 2000 was obtained from the FDIC, with interest based on Treasury
Bill rates plus 3 basis points.
BORROWINGS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
- ---------------------------------------------------------
(dollars in thousands)
1999 1998
----- ----
Amount outstanding at period-end: $3,983 $5,796
Long-term promissory note -- --
Borrowings from FHLB
Average outstanding:
Long-term promissory note $4,889 $5,796
Borrowings from FHLB $ 800 --
Weighted average interest rate during the period:
Long-term promissory note 6.05% 5.12%
Borrowings from FHLB 5.00% --
- 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: 3/23/00
-------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant, and in the
capacities, and on the dates indicated:
By: /s/ Joseph Haskins, Jr.
-------------------------------------
Title: President and CEO
-------------------------------------
Date: 3/25/00
-------------------------------------
By:
-------------------------------------
Title:
-------------------------------------
Date:
-------------------------------------
By:
-------------------------------------
Title:
-------------------------------------
Date:
-------------------------------------
By:
-------------------------------------
Title:
-------------------------------------
Date:
-------------------------------------
- 19 -
<PAGE>
By:
-------------------------------------
Title:
-------------------------------------
Date:
-------------------------------------
By:
-------------------------------------
Title:
-------------------------------------
Date:
-------------------------------------
By:
-------------------------------------
Title:
-------------------------------------
Date:
-------------------------------------
By:
-------------------------------------
Title:
-------------------------------------
Date:
-------------------------------------
- 20 -
<PAGE>
HARBOR BANKSHARES CORPORATION
AND SUBSIDIARIES
REPORT ON AUDITS OF
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
No extracts from this report may be published without our written consent.
Stegman & Company
<PAGE>
TABLE OF CONTENTS
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED FINANCIAL STATEMENTS Page
----
Statements of Condition 1 - 2
Statements of Income 3
Statements of Changes in Stockholders' Equity 4
Statements of Cash Flows 5
Statements of Comprehensive Income 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 - 22
<PAGE>
[LOGO] STEGMAN
& C O M P A N Y
- ---------------------------------
CERTIFIED PUBLIC ACCOUNTANTS AND
MANAGEMENT CONSULTANTS SINCE 1915
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Harbor Bankshares Corporation
We have audited the accompanying consolidated statement of condition of
Harbor Bankshares Corporation and subsidiaries as of December 31, 1999 and the
related consolidated statements of income, changes in stockholders' equity, cash
flows and comprehensive income for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of Harbor Bankshares
Corporation as of December 31, 1998 and for each of the two years then ended
were audited by other independent accountants whose report dated March 12, 1999
expressed an unqualified opinion of those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the accompanying consolidated statement of condition as of
December 31, 1999 and the related consolidated statements of income, changes in
stockholders' equity, cash flows and comprehensive income for the year then
ended present fairly, in all material respects, the financial position of Harbor
Bankshares Corporation and subsidiaries as of December 31, 1999 and the results
of its operations and cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Stegman & Company
---------------------
Baltimore, Maryland
January 14, 2000
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Cash and due from banks $ 6,233,248 $ 5,026,704
Federal funds sold 9,739,780 13,402,275
Interest bearing deposits in other banks 552,730 1,055,029
Investment securities:
Held to maturity at amortized cost (fair value of
$19,999 in 1999 and $17,162,921 in 1998) 19,999 17,167,685
Available for sale - at fair value 50,327,931 55,085,142
------------ -----------
50,347,930 72,252,827
------------ -----------
Loans 102,655,166 85,957,184
Unearned income (154,074) (160,423)
Reserve for possible loan losses (678,567) (699,229)
------------ -----------
Net loans 101,822,525 85,097,532
------------ -----------
Property and equipment, net 1,615,559 1,406,308
Goodwill, net 3,168,770 3,500,042
Accrued interest receivable 1,533,990 1,377,503
Deferred income taxes 1,839,036 301,927
Other assets 764,405 1,302,914
------------ -----------
TOTAL ASSETS $177,617,973 $184,723,061
============ ============
</TABLE>
See accompanying notes.
1
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
LIABILITIES:
Deposits:
Noninterest bearing demand $ 15,594,690 $ 11,482,647
Interest bearing transaction accounts 32,070,102 32,519,581
Savings 71,913,068 64,729,759
Time, $100,000 or more 18,997,420 31,351,227
Other time 26,965,233 27,398,757
------------ ------------
Total deposits 165,540,513 167,481,971
Accrued interest payable 449,799 626,172
Notes payable 3,982,547 5,795,547
Other liabilities 181,248 150,822
------------ ------------
Total liabilities 170,154,107 174,054,512
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock (par value $0.01):
Authorized 10,000,000 shares; issued 689,577
and 686,537 at December 31, 1999 and 1998,
including 33,333 common non-voting,
respectively 6,895 6,852
Capital surplus 6,497,416 6,447,458
Retained earnings 4,243,825 4,413,992
Accumulated other comprehensive loss, net (3,284,270) (199,753)
------------ ------------
Total stockholders' equity 7,463,866 10,668,549
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $177,617,973 $184,723,061
============ ============
</TABLE>
2
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 7,906,795 $ 7,742,308 $ 8,039,471
Interest on investments - taxable 4,007,950 2,513,146 1,451,010
Interest on deposits in other banks 38,294 125,494 246,023
Interest on federal funds sold 389,193 701,728 633,236
----------- ----------- -----------
Total interest income 12,342,232 11,082,676 10,369,740
----------- ----------- -----------
INTEREST EXPENSE:
Interest bearing transaction accounts 917,933 798,432 371,392
Savings 2,059,447 1,266,053 1,849,749
Time, $100,000 or more 1,014,091 1,241,186 1,010,974
Other time 1,390,490 1,540,603 1,255,474
Notes payable 296,172 296,678 309,623
Interest on federal funds purchased 40,141 - -
----------- ----------- -----------
Total interest expense 5,718,274 5,142,952 4,797,212
----------- ----------- -----------
NET INTEREST INCOME 6,623,958 5,939,724 5,572,528
PROVISION FOR POSSIBLE LOAN LOSSES 803,000 213,000 72,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 5,820,958 5,726,724 5,500,528
----------- ----------- -----------
OTHER OPERATING INCOME:
Service charges on deposit accounts 845,728 608,728 609,667
Other service charges 458,088 623,260 483,884
Gain on sale of real estate 112,000 - -
Gain on sales of loans 6,846 - 41,641
Other income 15,885 2,137 2,742
Gain on security sales - 26,296 212,866
Originated mortgage servicing rights 31,781 41,779 90,389
----------- ----------- -----------
1,470,328 1,302,200 1,441,189
----------- ----------- -----------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 3,220,083 2,672,302 2,610,968
Occupancy expense of premises 831,238 737,190 678,397
Data processing fees 679,124 604,071 564,582
Equipment expense 728,676 407,927 386,284
FDIC insurance 44,141 37,019 35,693
Stationery and supplies 191,974 167,745 184,897
Professional fees 199,466 146,425 131,279
Postage 76,509 67,897 70,120
Courier transportation 89,076 84,431 86,920
Goodwill amortization 331,272 331,272 331,272
Other expenses 892,890 727,760 759,794
----------- ----------- -----------
7,284,449 5,984,039 5,840,206
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 6,837 1,044,885 1,101,511
APPLICABLE INCOME TAXES 5,370 316,824 401,148
----------- ----------- -----------
NET INCOME $ 1,467 $ 728,061 $ 700,363
=========== =========== ===========
BASIC EARNINGS PER SHARE $ - $1.06 $1.07
=== ===== =====
DILUTED EARNINGS PER SHARE $ - $ .91 $ .99
=== ===== =====
</TABLE>
See accompanying notes.
3
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Accumu-
lated
Other
Compre- Total
Common Capital Retained hensive Stockholders'
Stock Surplus Earnings Income Equity
------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $6,334 $5,720,069 $3,283,153 $ (8,350) $ 9,001,206
Net income for the year - - 700,363 - 700,363
Unrealized gains on debt securities, net
of reclassification adjustment - - - 7,191 7,191
Stock dividend (8,290 shares) 83 124,267 (124,350) - -
Stock options - tax benefit - 19,955 - - 19,955
Exercise of stock options 84 74,934 - - 75,018
Proceeds from issuance of common stock -
nonvoting (33,333 shares) 333 499,662 - - 499,995
Cash dividends - fractional - - (2,368) - (2,368)
------ ---------- ---------- ----------- -----------
Balance at December 31, 1997 6,834 6,438,887 3,856,798 (1,159) 10,301,360
Net income for the year - - 728,061 - 728,061
Unrealized losses on debt securities, net
of reclassification adjustment - - - (198,594) (198,594)
Exercise of stock options 31 24,147 - - 24,178
Treasury stock (13) (24,987) - - (25,000)
Stock options - tax benefit - 9,411 - - 9,411
Cash dividends - $.25 per share - - (170,867) - (170,867)
------ ---------- ---------- ----------- -----------
Balance at December 31, 1998 6,852 6,447,458 4,413,992 (199,753) 10,668,549
Net income for the year - - 1,467 - 1,467
Unrealized losses on debt securities, net
of reclassification adjustment - - - (3,084,517) (3,084,517)
Exercise of stock options 30 24,971 - - 25,001
Proceeds from select treasury stock 13 24,987 - - 25,000
Cash dividends - $.25 per share - - (171,634) - (171,634)
------ ---------- ---------- ----------- -----------
Balance at December 31, 1999 $6,895 $6,497,416 $4,243,825 $(3,284,270) $ 7,463,866
====== ========== ========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,467 $ 728,061 $ 700,363
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized gains on security sales - (26,296) (212,866)
Gains on sales of loans (6,846) (2,196) (41,641)
Provision for possible loan losses 803,000 213,000 72,000
Provision for foreclosed real estate 218,987 - -
Deferred income taxes 29,563 (124,496) 154,752
Gain on sale of real estate (112,000) - -
Origination of loans held for sale (7,799,310) (2,437,631) (7,431,144)
Proceeds of sale of loan held for sale 7,806,158 2,439,827 7,472,785
Depreciation and amortization 957,267 743,190 715,640
Increase in accrued interest receivable and other assets (854,078) (875,446) (590,848)
(Decrease) increase in accrued interest payable and other liabilities (145,219) (64,963) 110,797
------------ ------------ ------------
Net cash provided by operating activities 898,989 593,050 949,838
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in deposits at other banks 502,299 2,069,336 2,449,464
Purchases of investment securities held to maturity - (16,621,755) (2,999,200)
Purchases of investment securities available for sale (5,000,000) (66,128,364) (22,526,603)
Proceeds from sales of investment securities available for sale - 1,837,987 3,817,982
Proceeds from maturities of investment securities held to maturity 17,238,000 2,000,000 9,000,000
Proceeds from called securities available for sale 5,000,000 23,000,000 -
Proceeds from called securities held to maturity - 13,000,000 -
Net (increase) decrease in loans (16,697,982) (7,694,910) 6,765,194
Proceeds from sales of foreclosed real estate 630,027 - -
Foreclosed real estate acquired (427,946) - -
Purchases of premises and equipment - net (723,246) (550,057) (594,382)
------------ ------------ ------------
Net cash provided (used) by investing activities 521,152 (49,087,763) (4,087,545)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest bearing demand deposits 4,112,043 556,430 1,972,545
Net (decrease) increase in interest bearing transaction accounts (449,479) 18,382,176 381,855
Net increase in savings deposits 7,183,309 21,971,086 1,769,122
Net (decrease) increase in time deposits (12,787,331) 7,636,994 688,258
Proceeds from sale of common stock 50,000 24,178 575,013
Payments of cash dividends (171,634) (170,867) (2,368)
Acquisition of treasury stock - (25,000) -
Repayment of notes payable (1,813,000) - -
------------ ------------ ------------
Net cash (used) provided by financing activities (3,876,092) 48,374,997 5,384,425
------------ ------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,455,951) (119,716) 2,246,718
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 18,428,979 18,548,695 16,301,977
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 15,973,028 $ 18,428,979 $ 18,548,695
============ ============ ============
</TABLE>
See accompanying notes.
5
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31
1999 1998 1997
----------- --------- ---------
NET INCOME $ 1,467 $ 728,061 $ 700,363
OTHER COMPREHENSIVE (LOSS)
INCOME, NET:
Net unrealized loss on debt securities (3,084,517) (214,724) (123,381)
Less reclassification adjustment for
gains included in net income,
net of income taxes - 16,130 130,572
----------- --------- ---------
OTHER COMPREHENSIVE (LOSS)
INCOME, NET (3,084,517) (198,594) 7,191
----------- --------- ---------
NET COMPREHENSIVE (LOSS) INCOME $(3,083,050) $ 529,467 $ 707,554
=========== ========= =========
See accompanying notes.
6
<PAGE>
HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
--------
Harbor Bankshares Corporation (the "Corporation") is a bank holding
company organized under the laws of the State of Maryland in 1992. The
Corporation owns all of the outstanding stock of the Harbor Bank of Maryland
(the "Bank") and Harbor Financial Services.
The Bank is a commercial bank headquartered in Baltimore, Maryland.
The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank conducts general banking business in eight
locations and primarily serves the Baltimore, Maryland metropolitan area. The
Bank also has a branch in Riverdale, Prince George's County, Maryland. It
offers checking, savings and time deposits, commercial real estate, personal,
home improvement, automobile, and other installment and term loans. The Bank is
also a member of a local and national ATM network. The retail nature of the
Bank allows for diversification of depositors and borrowers so it is not
dependent upon a single or a few customers.
Basis of Presentation
---------------------
The accompanying consolidated financial statements include the
accounts of the Corporation and the subsidiaries and have been prepared in
accordance with generally accepted accounting principles. All significant
intercompany activity has been eliminated.
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
that are particularly susceptible to change in the near term relate to the
reserve for possible loan losses.
Investment Securities
---------------------
The Corporation accounts for its investments securities in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting
for Certain Investments in Debt and Equity Securities. Debt securities that the
Corporation has the intent and ability to hold until maturity, are classified as
held to maturity and are carried at historical cost adjusted for any
amortization of premium or accretion of discount. Trading securities are
carried at fair value with unrealized gain and losses included in earnings.
(The Corporation does not maintain a trading securities portfolio). Marketable
equity securities and debt securities which are not classified as held to
maturity or trading are classified as "available for sale" and are carried at
fair value with the unrealized gain and losses, net of tax, reported in other
comprehensive income.
7
<PAGE>
Realized gains and losses and declines in value judged to be other
than temporary are included in earnings. The specific identification method is
utilized in determining the cost of a security which has been sold. Premiums
and discounts are amortized and accreted, respectively, as an adjustment of the
securities' yield using the interest method.
Loans
-----
Loans are generally stated at their outstanding unpaid principal
balance net of any deferred fees or costs on originated loans, and net of any
unamortized premiums or discounts on purchased loans. Interest income is
accrued and recognized as income based upon the principal amount outstanding.
Loan origination and commitment fees net of certain direct origination costs are
deferred, and the net amounts are amortized over the contractual life of the
loans as adjustments of the yield. The accrual of interest income is
discontinued when reasonable doubt exists as to the full collectibility of
interest or principal.
Reserve for Possible Loan Losses
--------------------------------
The reserve for possible loan losses is established through a
provision for loan losses charged to income. Losses are charged against the
reserve when management believes that the collectibility of a loan's principal
is unlikely. The reserve is an amount that management believes will be adequate
to absorb possible losses on existing loans that may become uncollectible, based
upon evaluations of the collectibility of loans and prior loan loss experience.
Evaluations of collectibility take into consideration such factors as changes in
the nature and volume of the loan portfolio, overall portfolio quality, review
of specific problem loans and current economic conditions that may affect the
borrowers' ability to pay.
Effective January 1, 1995, the Corporation adopted SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures.
Under these Statements, reserves for possible loan loss related to impaired
loans are required to be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or the fair value of
the collateral dependent loans.
Property and Equipment
----------------------
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method. Maintenance and repairs are charged to operations
when incurred, and the cost of improvements is capitalized.
Foreclosed Real Estate
----------------------
Foreclosed real estate represents assets that have been acquired
through foreclosure. These assets are recorded on the books of the Corporation
at the lower of cost or fair value less estimated costs to dispose and are
included in other assets.
8
<PAGE>
Goodwill
--------
Goodwill represents the premium paid in excess of the fair value of
assets and liabilities acquired in branch purchase transactions with the
Resolution Trust Corporation (RTC). These premiums are being amortized on a
straight line basis over 15 years. On a periodic basis, management reviews
goodwill and other intangible assets to determine if events or changes in
circumstances indicate the carrying value of such assets is not recoverable, in
which case an impairment charge would be recorded.
Income Taxes
------------
The Corporation and its subsidiaries file a consolidated federal
income tax return. The provision for income taxes is based upon income for
financial statement purposes, rather than amounts reported on the Corporation's
income tax return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income or
expense in the period that includes the enactment date.
Comprehensive Income
--------------------
Effective January 1, 1998, the Corporation adopted SFAS No. 130,
Reporting Comprehensive Income. Comprehensive income for the Corporation
includes net income plus the change in unrealized gains and losses is on
securities available for sale.
Statement of Cash Flows
-----------------------
The Corporation has defined cash and cash equivalents in the
statements of cash flows as those amounts included in the consolidated
statements of condition captions "cash and due from banks" and "federal funds
sold".
For the years ended December 31, 1999, 1998 and 1997, the Corporation
paid interest of $5,718,274, $5,037,610 and $4,797,219, respectively, and income
taxes of $5,370, $342,646 and $385,910, respectively.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to confirm to the
current year presentation.
Advertising
-----------
Advertising costs are expensed as incurred. Advertising expense was
$133,041, $127,425 and $134,342 for the years ended December 31, 1999, 1998 and
1997, respectively.
9
<PAGE>
2. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments and Hedging Activities
------------------------------------------------------------
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133, requires derivative instruments be carried at fair value on the balance
sheet. The statement continues to allow derivative instruments to be used to
hedge various risks and sets forth specific criteria to be used to determine
when hedge accounting can be used. The statement also provides for offsetting
changes in fair value or cash flows of both the derivative and the hedged asset
or liability to be recognized in earnings in the same period; however, any
changes in fair value or cash flow that represent the ineffective portion of a
hedge are required to be recognized in earnings and cannot be deferred. For
derivative instruments not accounted for as hedges, changes in fair value are
required to be recognized in earnings.
The Corporation plans to adopt the provisions of this statement, as
amended, for its quarterly and annual reporting beginning January 1, 2001, the
statement's effective date. These statements should not have a material impact
on the Corporation's results of operations.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discloses the fair value of financial instruments held by
the Corporation, whether or not recognized in the Consolidated Statements of
Condition. In cases in which quoted market prices were not available, fair
values were based upon estimates using present value or other valuation
techniques. These techniques were significantly affected by the assumptions
used, including the discount rate and estimates of cash flows. Consequently,
these fair values cannot be substantiated by comparisons with independent
markets and, in many cases, may not be realized upon the immediate sale of the
instrument. Since generally accepted accounting principles exclude certain
financial instruments and all nonfinancial instruments from this presentation,
the aggregated fair value amounts do not represent the underlying value of the
Corporation.
The carrying amounts reported under the caption "Cash and due from
banks", "Interest bearing time deposits in other banks", and "Federal funds
sold" approximate the fair value of those assets.
Investment Securities
---------------------
The fair values of securities are based upon quoted market prices when
available. If quoted market prices are not available, fair values are based
upon quoted market prices of comparable instruments.
Loans
-----
The fair values of variable-rate loans and fixed-rate loans that
reprice within one year, with no significant credit risk, are based upon their
carrying amounts. The fair values of all other loans are estimated using
discounted cash flow analysis, which utilizes interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
The reserve for possible loan losses is allocated to the various components of
the loan portfolio in determining the fair value.
10
<PAGE>
Deposits
--------
The fair value for demand deposits are, by definition, equal to the
amount payable on demand at the reporting date. The carrying amounts for
variable rate deposits and fixed-rate certificates of deposit that reprice
within one year approximates their fair values at the reporting date. Fair
values for longer-term fixed-rate certificates of deposit are estimated using
discounted cash flow analysis that applies interest rates currently being
offered on certificates.
Accrued Interest Payable
------------------------
Accrued interest payable includes interest expensed but not yet paid
for deposits and notes payable. The carrying amount approximates its fair
value.
Notes Payable
-------------
Notes payable have interest rates that vary in line with the 13 week
U.S. Treasury Bill rate. The carrying amount of the notes payable approximates
their fair value.
Off-Balance Sheet Financial Instruments
---------------------------------------
In the normal course of business, the Corporation makes commitments to
extend credit and issues commercial letters of credit. As a result of excessive
costs, the Corporation considers estimation of fair values for commitments to
extend credit and commercial letters of credit to be impracticable.
The carrying values and estimated fair values of the Corporation's
financial assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------- ---------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 6,233,248 $ 6,233,248 $ 5,026,704 $ 5,026,704
Federal funds sold 9,739,780 9,739,780 13,402,275 13,402,275
Interest bearing deposits
in other banks 552,730 552,730 1,055,029 1,055,029
Investment securities 50,347,930 50,347,930 72,252,827 72,248,063
Loans, net of reserves 101,822,525 101,832,174 85,097,532 85,611,521
Accrued interest receivable 1,533,990 1,533,990 1,377,503 1,377,503
Financial liabilities:
Deposits 165,540,513 165,592,968 167,481,971 167,561,932
Accrued interest payable 449,799 449,799 626,172 626,172
Notes payable 3,982,547 3,982,547 5,795,547 5,795,547
</TABLE>
11
<PAGE>
4. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments securities
are as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Gross Gross Fair Value
---------------------- Unrealized Unrealized ----------------------
Debt Equity Gains Losses Debt Equity
----------- -------- ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999
Available for sale:
U.S. Treasury and government agencies $54,749,598 $ - $ - $(4,976,167) $49,773,431 $ -
Federal Home Loan Bank stock - 554,500 - - - 554,500
----------- -------- ---------- ----------- ----------- --------
Total $54,749,598 $554,500 $ - $(4,976,167) $49,773,431 $554,500
=========== ======== ========== =========== =========== ========
Held to maturity:
U.S. Treasury and government agencies $ - $ - $ - $ - $ - $ -
Other 19,999 - - - 19,999 -
----------- -------- ---------- ----------- ----------- --------
Total $ 19,999 $ - $ - $ - $ 19,999 $ -
=========== ======== ========== =========== =========== ========
Balance at December 31, 1998
Available for sale:
U.S. Treasury and government agencies $54,939,291 $ - $ - $ (324,249) $54,615,042 $ -
Federal Home Loan Bank stock - 470,100 - - - 470,100
----------- -------- ---------- ----------- ----------- --------
Total $54,939,291 $470,100 $ - $ (324,249) $54,615,042 $470,100
=========== ======== ========== =========== =========== ========
Held to maturity:
U.S. Treasury and government agencies $17,152,365 $ - $ - $ (4,764) $17,147,601 $ -
Other 15,320 - - - 15,320 -
----------- -------- ---------- ----------- ----------- --------
Total $17,167,685 $ - $ - $ (4,764) $17,162,921 $ -
=========== ======== ========== =========== =========== ========
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1999, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers have the
right to call or repay obligations without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Available for sale:
Due in one year or less $ - $ -
Due after one year through five years 2,000,000 1,920,690
Due after five years through ten years 8,000,000 7,444,560
Due after ten years 44,749,598 40,408,181
----------- -----------
Total $54,749,598 $49,773,431
=========== ===========
Held to maturity:
Due in one year or less $ - $ -
Due after one year through five years - -
Due after ten years 19,999 19,999
----------- -----------
Total $ 19,999 $ 19,999
=========== ===========
</TABLE>
12
<PAGE>
Proceeds from the sales of available for sale securities during 1999,
1998 and 1997 were $ -0-, $1,837,987 and $3,817,982, respectively, resulting in
the realization of gross gains of $ -0-, $26,296 and $212,866, respectively.
Securities with a value of $23,848,779 at December 31, 1999 have been
pledged as collateral for several money market deposit accounts.
5. LOANS AND RESERVE FOR POSSIBLE LOAN LOSSES
The composition of loans, net of unearned income at December 31 is as
follows:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Real estate - mortgage $ 66,350,984 $61,704,705
Commercial 32,567,603 20,710,307
Consumer 2,293,359 2,013,015
Credit card loans 1,289,146 1,368,734
------------ -----------
$102,501,092 $85,796,761
============ ===========
</TABLE>
Transactions in the reserve for possible loan losses are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
Balance at January 1 $ 699,229 $ 654,298 $ 889,391
---------- ---------- -----------
Provision charged to operating expense 803,000 213,000 72,000
---------- ---------- -----------
Loans charged-off (924,746) (203,252) (312,692)
Recovery on loans previously charged-off 101,084 35,183 5,599
---------- ---------- -----------
Net loans charged-off (823,662) (168,069) (307,093)
---------- ---------- -----------
Balance at December 31 $ 678,567 $ 699,229 $ 654,298
========== ========== ===========
</TABLE>
The following is an analysis of impaired loans, comprising non-accruing
and past due loans:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
Non-accruing loans at December 31 $1,002,647 $1,106,576 $ 769,896
Interest income which would have been
recognized under original terms 135,263 94,240 12,751
Interest income recognized during the period - - -
Loans past 90 days accruing 47,000 546,522 1,948,000
</TABLE>
13
<PAGE>
6. PROPERTY AND EQUIPMENT
The major classes of property and equipment at December 31 are summarized
as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land $ 30,000 $ 63,000
Buildings 129,510 129,510
Furniture, fixtures and equipment 2,529,903 2,197,001
Leasehold improvements 558,024 600,309
---------- ----------
3,247,437 2,989,820
Less accumulated depreciation and amortization 1,631,878 1,583,512
---------- ----------
Total $1,615,559 $1,406,308
========== ==========
</TABLE>
Depreciation expense was $625,995, $411,918 and $384,368 for the years
ended December 31, 1999, 1998 and 1997, respectively.
The Bank leases its branch and office facilities. The lease agreements
provide for the payment of utilities and taxes by the lessee. Future minimum
payments in the aggregate and for each of the five succeeding years under
noncancelable operating leases consisted of the following December 31, 1999:
2000 $ 472,078
2001 403,566
2002 384,166
2003 378,166
2004 378,166
Thereafter 1,910,630
----------
$3,926,772
==========
Total rental expense under operating leases amounted to $508,447,
$404,521 and $376,328 in 1999, 1998 and 1997, respectively.
7. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required by the Federal Reserve to maintain a reserve balance
based principally on deposit liabilities. The balance maintained is included in
cash and due from banks. The reserve balances kept at the Federal Reserve Bank
during 1999 was $25,000.
8. INCOME TAX
The Corporation's provision for income taxes for the years ended December
31, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- --------
<S> <C> <C> <C>
Taxes currently payable $(24,193) $ 441,320 $246,396
Deferred taxes (benefit) 29,563 (124,496) 154,752
-------- --------- --------
Income tax expense for the year $ 5,370 $ 316,824 $401,148
======== ========= ========
</TABLE>
14
<PAGE>
A reconciliation between the total income tax expense and the income tax
expense and the income tax expense computed by applying the statutory federal
income tax rate to earnings before income taxes for the years ended December is
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ----------- -----------
<S> <C> <C> <C>
Income before income taxes $6,837 $1,044,885 $1,101,511
Statutory income tax rate 34% 34% 34%
------ ---------- ----------
Income tax at statutory rate 2,325 355,261 374,513
State tax, net of federal tax benefit - (42,733) 24,334
Other 3,045 4,296 2,301
------ ---------- ----------
Income tax expense for the year $5,370 $ 316,824 $ 401,148
====== ========== ==========
</TABLE>
Significant components of the Corporation's deferred tax liabilities and
assets included in other assets at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Deferred tax liabilities:
Deferred loan origination fees $ (45,273) $ (63,730)
Prepaid expenses (26,413) (26,594)
Other (14,744) (12,260)
---------- ---------
Total deferred tax liabilities (86,430) (102,584)
---------- ---------
Deferred tax assets:
Loan loss reserve 161,732 224,556
Depreciation 71,837 47,937
Unrealized loss on investment securities
available for sale 1,691,897 125,225
Other - 6,793
---------- ---------
Total deferred tax assets 1,925,466 404,511
---------- ---------
Net deferred tax asset $1,839,036 $ 301,927
========== =========
</TABLE>
No valuation allowance was recorded for the deferred tax assets at
December 31, 1999 or 1998.
15
<PAGE>
9. NOTES PAYABLE
Notes payable consist of amounts due to the FDIC which assisted the
Corporation in financing branch acquisitions. Terms of the notes payable are as
follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Note payable - due June 10, 1999 with interest
payable quarterly indexed to the 13 week
U.S. Treasury Bill rate
(5.19% as of December 31, 1998) $ - $3,982,547
Note payable - due June 10, 1999 with interest
payable quarterly indexed to the 13 week
U.S. Treasury Bill rate
(4.49% as of December 31, 1998) - 1,813,000
Note payable - due June 10, 2000 with interest
payable quarterly indexed to the 13 week
U.S. Treasury Bill rate
(8.02% as of December 31, 1999) 3,982,547 -
---------- ----------
$3,982,547 $5,795,547
========== ==========
</TABLE>
10. STOCK OPTION PLAN
Under the 1992 Stock Option Plan, the Corporation has reserved 30,000
shares of common stock for options granted or available for grant to certain
directors and officers. Options granted under this plan become exercisable at
date of grant and expire ten years after the date of grant.
In September 1995, the Corporation adopted the 1995 Director Stock Option
Plan for certain directors and officers. Under the plan, directors and officers
may be granted options to purchase 44,579 shares of the Bank's outstanding
common stock. Options granted under this plan become exercisable one year from
the date of grant and expire ten years after the date of grant.
In August 1998, the directors approved the issuance of a further 123,000
stock options exercisable at the date of grant, expiring in ten years from the
date of grant to directors and management under individual option agreements.
16
<PAGE>
Stock option transactions, adjusted for stock dividends, were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Options outstanding at beginning of year $173,839 $ 54,879 $63,285
Options granted at market price per share at time 1,000 122,000 -
Options exercise at $6.51 to $14.80 per share (3,040) (3,040) (8,406)
-------- -------- -------
Options outstanding at end of year $171,799 $173,839 $54,879
======== ======== =======
Options exercisable at December 31 at
$9.864 to $15.24 $171,799 $173,839 $54,879
======== ======== =======
</TABLE>
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123) which defines a fair-value based method of
accounting for stock options granted to employees.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Corporation had
accounted for its employee stock options under the minimum value method. The
minimum value for these options was estimated at the date of grant by
calculating the excess of the fair value of the stock at the date of grant over
the present value of both the exercise price and the expected dividend payments,
each discounted at the risk-free interest rate, over the expected life of the
option. The following weighted average assumptions were used for 1998: risk-
free interest rate of 5.31%, weighted average expected life of the options of 5
years and 1.39% dividend yield. There were no options granted during the years
ended December 31, 1999 or 1997.
For purpose of pro forma disclosures, the estimated minimum value of the
options is amortized to expense over the options' vesting period. Note that the
effects of applying SFAS No. 123 for pro forma disclosure in the current year
are not necessarily representative of the effects on pro forma net income for
future years.
Options under the Plans are granted with an exercise price equal to the
fair value of the shares of the date of grant. As allowed by SFAS No. 123, the
Bank has elected to continue applying Accounting Principles Board Opinion No.
25. Accordingly, no compensation cost has been recognized for the Plans. Had
compensation cost for the Plans been determined consistent with SFAS No. 123,
the Corporation's net income and earnings per share on a pro forma basis in
1999, 1998 and 1997 would have been as set out below follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ -------- --------
<S> <C> <C> <C>
Net income, as reported $1,467 $728,061 $700,363
Pro forma net income 1,467 146,271 700,363
Pro forma basic earnings per share - .21 1.07
Pro forma diluted earnings per share - .18 .99
</TABLE>
No options were granted or vested in 1999 or 1997.
17
<PAGE>
11. CONCENTRATIONS OF CREDIT RISK
Real estate mortgages comprise $66,350,984 and $61,704,705 of the total
loan portfolio at December 31, 1999 and 1998, respectively. Substantially all
loans are collateralized by real property and or other assets.
12. LOANS TO RELATED PARTIES
The Bank has granted loans to certain officers and directors of the Bank
and their associates. Related party loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated persons and do not involve more than
the normal risk of collectibility. The aggregate dollar amount of these loans
was $7,702,578 and $7,113,405 at December 31, 1999 and 1998, respectively.
During 1999, $4,529,370 of new loans were made while repayments totaled
$3,940,197.
13. FINANCIAL ARRANGEMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Corporation is a party to financial
arrangements with off-balance-sheet risk designed to meet the financing needs of
its customers. These financial arrangements include commitments to extend
credit and commercial letters of credit. The Bank uses the same credit policies
in making commitments and conditional obligations as it does for on-balance-
sheet arrangements.
Financial arrangements whose contract amount involve credit risk at
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Unused commitments to extend credit:
Revolving lines of credit $ 943,234 $ 676,990
Credit card lines 2,009,000 1,612,304
Commercial real estate and construction 5,512,000 6,032,000
Other unused commitments 9,099,000 7,498,000
Commercial letters of credit 293,353 493,353
</TABLE>
Management conducts regular reviews of the above credit arrangements on
an individual customer basis, and the results are considered in assessing the
adequacy of the Bank's allowance for possible loan losses.
14. CONTINGENT LIABILITIES
The Corporation and its subsidiary at times, and in the ordinary course
of business, are subject to legal actions. Management does not believe the
outcome of such matters will have a material adverse effect on the financial
condition, results of operations, or cash flows of the Corporation.
18
<PAGE>
15. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). As of December 31, 1999, the capital
levels of the Company and the Bank exceed all capital adequacy requirements to
which they are subject.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ------------------- -------------------
Minimum Required Minimum Required
Amount Ratio Amount Ratio Amount Ratio
------- ------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital (to risk-weighted total assets)
Harbor Bankshares Corporation $ 8,258 8.09% $8,164 8.0% N/A N/A
Harbor Bank of Maryland 12,140 11.89 8,164 8.0% $10,205 10%
Tier 1 Capital (to risk weighted assets)
Harbor Bankshares Corporation 7,579 7.42% 4,082 4.0% N/A N/A
Harbor Bank of Maryland 11,461 11.23% 4,082 4.0% 6,123 6%
Tier 1 Capital (to average assets)\
Harbor Bankshares Corporation 7,579 4.53% 6,693 4.0% N/A N/A
Harbor Bank of Maryland 11,461 6.85% 6,826 4.0% 8,532 5%
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ------------------- -------------------
Minimum Required Minimum Required
Amount Ratio Amount Ratio Amount Ratio
------- ------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to risk-weighted total assets)
Harbor Bankshares Corporation $ 7,868 8.49% $7,412 8.0% N/A N/A
Harbor Bank of Maryland 13,499 14.57% 7,412 8.0% $9,265 10%
Tier 1 Capital (to risk weighted assets)
Harbor Bankshares Corporation 7,169 7.74% 3,706 4.0% N/A N/A
Harbor Bank of Maryland 13,068 14.10% 3,706 4.0% 5,559 6%
Tier 1 Capital (to average assets)
Harbor Bankshares Corporation 7,169 5.07% 5,625 4.0% N/A N/A
Harbor Bank of Maryland 13,068 9.01% 5,798 4.0% 4,748 5%
</TABLE>
The ability of the Corporation to pay dividends is limited by the level
of dividends which can be paid by the Bank. The ability of the Bank to pay
dividends is limited by the provisions of Maryland law, which requires the
maintenance of a capital surplus account equal to the par value of the
outstanding common stock.
The Bank may make dividend distributions to the Corporation up to 100% of
its net income in the calendar year. At December 31, 1999, the total allowable
dividend distributions was $197,021.
16. EARNINGS PER SHARE
The Corporation adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS No. 128") on December 31, 1997. SFAS No. 128
requires the Corporation to change the method of computing, presenting and
disclosing earnings per share information. Accordingly, all prior period data
presented has been restated to conform to the provisions of SFAS No. 128. Under
the revised provisions of the new standard, primary earnings per share has been
replaced with basic earnings per share. Basic earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Basic earnings per share does not include the effect of
potentially dilutive transactions or conversions. Additionally, under the
standard, diluted earnings per share replaces fully diluted earnings per share
from prior years. This computation reflects the potential dilution of earnings
per share under the treasury stock method which could occur if contracts to
issue common stock were exercised, such as stock options, and shared in
corporate earnings.
The following table presents a summary of per share data and amounts for
the periods indicated:
<TABLE>
<CAPTION>
Basic Diluted
Year Ended Qualifying EPS Basic Dilutive EPS Diluted
December 31 Net Income Shares EPS Shares Shares EPS
- ----------- ---------- ------- ----- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1997 $700,363 656,103 $1.07 49,189 704,292 $.99
1998 728,061 686,537 1.06 112,282 798,819 .91
1999 1,467 689,577 .00 171,799 861,376 .00
</TABLE>
20
<PAGE>
17. PARENT COMPANY ONLY FINANCIAL STATEMENTS
Condensed Statements of Condition
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Assets:
Investment in bank subsidiary $11,345,794 $16,388,231
Other 181,125 141,469
----------- -----------
Total assets $11,526,919 $16,529,700
=========== ===========
Liabilities:
Notes payable $ 3,982,547 $ 5,795,547
Other 80,506 65,604
----------- -----------
Total liabilities 4,063,053 5,861,151
Stockholders' equity 7,463,866 10,668,549
----------- -----------
Total liabilities and stockholders' equity $11,526,919 $16,529,700
=========== ===========
</TABLE>
Condensed Statement of Income
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Dividend from subsidiary $ 467,806 $ 467,546 $ 311,991
Interest expense (296,172) (296,678) (309,623)
Income tax benefit 100,624 100,865 105,271
Equity in undistributed income of subsidiary (270,791) 456,328 592,724
--------- --------- ---------
Net income $ 1,467 $ 728,061 $ 700,363
========= ========= =========
</TABLE>
21
<PAGE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,467 $ 728,061 $ 700,363
Adjustment to reconcile net income to net
cash provided by operating activities
Change in other assets and liabilities, net (24,759) 632,208 (105,271)
Equity in undistributed income of subsidiary 270,791 (456,328) (592,724)
---------- --------- ---------
Net cash provided by operating activities 247,499 903,941 2,368
---------- --------- ---------
Investing activities:
Investment in subsidiary 1,443,867 (732,252) (813,979)
---------- --------- ---------
Financing activities:
Proceeds from advances to subsidiaries 1,813,000 - -
Sale of treasury stock 25,000 - -
Acquisition of treasury stock - (25,000) -
Proceeds from common stock issuance 25,000 24,178 575,013
Cash dividends (171,634) (170,867) (2,368)
Receivable from subsidiary - - 238,966
---------- --------- ---------
Net cash provided (used) by financing activities 1,691,366 (171,689) 811,611
---------- --------- ---------
Change in cash and cash equivalents - - -
Cash and cash equivalents at beginning of year - - -
---------- --------- ---------
Cash and cash equivalents at end of year $ - $ - $ -
========== ========= =========
</TABLE>
22
<PAGE>
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 - 1998 AND 1997.................................. - 8 -
- i -
<PAGE>
Harbor Bankshares Corporation
- --------------------------------------------------------------------------------
SUPPLEMENT TO 1999 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 1995
through 1999
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, 1999 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
<TABLE>
<CAPTION>
(In thousands, except per share data)
Year ended December 31,
1999 1998 1997 1996 1995
----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
- --------------
Interest Income $ 12,342 $ 11,083 $ 10,369 $ 9,345 $ 8,490
Interest Expense 5,718 5,143 4,797 4,170 3,631
-------- -------- -------- -------- --------
Net Interest Income 6,624 5,940 5,572 5,175 4,859
Provision for Loan Losses 803 213 72 60 183
Other Operating Income 1,470 1,302 1,441 760 635
Other Operating Expenses 7,284 5,984 5,840 4,912 4,181
-------- -------- -------- -------- --------
Income Before Taxes 7 1,045 1,101 963 1,130
Income Taxes 6 317 401 390 451
-------- -------- -------- -------- --------
Net Income $ 1 $ 728 $ 700 $ 573 $ 679
======== ======== ======== ======== ========
PER SHARE DATA
- --------------
Net Income - Basic $ - $ 1.06 $ 1.07 $ 1.07 $ 1.59
Net Income - Diluted $ - $ .91 $ .99 $ .97 $ 1.51
Dividend $ .25 $ .25 $ .20 $ .20 $ .20
Book Value $ 10.82 $ 15.54 $ 15.07 $ 14.21 $ 13.17
Book Value excluding unrealized $ 15.58 $ 15.83 $ 15.07 $ 14.22 $ 13.13
securities gains (Losses)
BALANCE SHEET DATA
- ------------------
Total Assets $177,618 $184,723 $135,874 $129,651 $113,316
Deposits $165,541 167,482 118,935 114,124 101,098
Total Net Loans 101,823 85,097 77,616 84,453 77,292
Total Stockholder's Equity 7,464 10,669 10,301 9,001 5,641
Return on Average Assets - .50% .53% .49% .64%
Return on Average Equity - 6.9% 7.3% 7.9% 12.8%
Tier 1 Regulatory Capital to Assets 4.3% 3.9% 4.9% 3.9% 1.0%
Dividend Payout Ratio % 117.0% 23.4% 18.1% 15.1% 12.7%
</TABLE>
- 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 1999 with the opening of a de-novo branch in Baltimore County, bringing
the total of number of branches to eight full service facilities. In addition,
the Corporation implemented and successfully completed its Y2K plan, which
resulted in a smooth transition into the new millenium, bringing financial
services to its customers without interruption.
The Corporation had break even earnings for the year, resulting from the
cost associated with the expansion, Y2K upgrades and the allocation to the
reserve for loan losses which totaled $803 thousand reflecting an increase of
$590 thousand or 276.9 percent when compared to the $213 thousand allocated
during 1998. The Corporation's subsidiary, The Harbor Bank of Maryland,
achieved earnings of $197 thousand with a return on average assets of .11
percent.
Since the Corporation earnings were break even for 1999, there are no
ratios of return on average assets (ROAA) and average equity (ROAE) to report.
These ratios were .50%and 6.9% for 1998 respectively.
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 $6.6 million in 1999 from $5.9
million in 1998.
Total interest income increased by $1.3 million or 11.3% to $12.3 million
for 1999 when compared to the $11.1 million earned during 1998. A growth in
total average earning assets of 19.3% mainly in the investment portfolio was the
main reason for the increase.
Total interest expense increased by $575 thousand or 11.2% to $5.7 million
in 1999 from $5.1 million in 1998. This increase was mainly due to the growth
in the money market deposit accounts. The growth in the deposit area is
reflected in the increase of the investment portfolio.
Net interest margin for 1999 was 4.22% compared to 4.46% for 1998.
The table attached as Exhibit A compares the consolidated average balances,
interest income, interest expense and yields for a five-year period.
- 2 -
<PAGE>
Harbor Bankshares Corporation
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses was $803 thousand for 1999, an increase of
$590 thousand from the $213 thousand provided in 1998. 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, 1999 is considered adequate. The Corporation maintains
a highly collateralized loan portfolio consisting mainly of residential and
commercial mortgage loans; charge-offs increased from $203 thousand in 1998 to
$925 thousand in 1999. Recoveries totaled $101 thousand for 1999. The ratio
of the loan loss reserve to outstanding loans was .66% for 1999 and .81% for
1998. 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 increased by $168 thousand or 12.9% to $1.5 million in
1999. ATM fees were $155 thousand for 1999, representing 10.58% of other
operating income. Included in the 1999 non-interest income were $7 thousand of
gains on sale of loans, a $112 thousand gain on a sale of real estate and $32
thousand of originated servicing rights. The 1998 non-interest income reflects
$26 thousand of gains on sale of securities and $42 thousand of originated
servicing rights.
Non-Interest Income Summary (in thousands)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 845 $ 609 $ 610 $ 591 $ 491
ATM fees 155 336 299 25 --
Gain on sale of Real Estate 112 -- -- -- --
Gain on sale of loans 7 -- 42 -- --
Gain on sale of securities -- 26 212 -- --
Originated mortgage servicing rights 32 42 90 -- --
Other non-interest income 319 289 188 144 144
------ ------ ------ ----- -----
Total non-interest income $1,470 $1,302 $1,441 $ 760 $ 635
====== ====== ====== ===== =====
</TABLE>
OTHER OPERATING EXPENSES
- ------------------------
Non-interest expenses of $7.3 million in 1999, increased by $1.3 thousand
or 21.7% when compared to $6.0 million in 1998. Salaries and benefits of $3.2
million in 1999 reflect an increase of $548 thousand or 20.5% when compared to
the prior year salaries and benefits cost. Equipment expense increased by $320
thousand or 78.4% reflecting the Y2K upgrades and equipment purchases. Other
expenses increased by $432 thousand or 14.9% reflecting the cost of the
expansion and general expense increases. Goodwill amortization of $331 thousand
in 1999 remained the same as 1998.
- 3 -
<PAGE>
Harbor Bankshares Corporation
- --------------------------------------------------------------------------------
Non-Interest Expenses Summary (In thousands)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $3,220 $2,672 $2,611 $2,152 $1,903
Occupancy expense, net 831 737 678 533 434
Furniture and Equipment 728 408 386 249 201
Data Processing Fees 679 604 565 398 338
Professional Fees 199 117 131 101 99
Goodwill Amortization 331 331 331 331 331
FDIC Insurance 44 37 36 318 166
Other Non-Interest Expense 1,252 1,078 1,102 830 709
------ ------ ------ ------ ------
Total Non-Interest Expense $7,284 $5,984 $5,840 $4,912 $4,181
====== ====== ====== ====== ======
</TABLE>
APPLICABLE INCOME TAXES
- -----------------------
Applicable income taxes includes current and deferred portions which are
detailed in Note 8 of the audited consolidated financial statements. Taxes for
1999 were $5 thousand compared to $317 thousand or 30.3% for 1998. Both years
reflect 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 $1.1 million or 1.0% of gross loans outstanding at
the end of 1999. This compares with $1.6 million or 1.9% of gross loans
outstanding at the end of 1998. The decrease in non-performing loans reflects
management increased efforts in resolving troubled debt. Foreclosed real estate
at December 31, 1999 was $217 thousand including two foreclosed properties. As
of year end 1998, foreclosed real estate was $631 thousand consisting of four
foreclosed properties.
The reserve for possible loan losses decreased from $699 thousand at the
end of 1998 to $678 thousand at the end of 1999. As of year end, the reserve
represented .66% of gross loans 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.
- 4 -
<PAGE>
Harbor Bankshares Corporation
- --------------------------------------------------------------------------------
Non-Performing Assets (in thousands)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $1,003 $1,107 $ 770 $ 284 none
Accruing Loans Past Due 90 Days
or more 47 547 1,948 276 481
Foreclosed Real Estate 217 638 none none none
------ ------ ------ ----- -----
Total Non-performing assets and
Past Due Loans $1,267 $2,292 $2,718 $ 560 $ 481
====== ====== ====== ===== =====
Total Non-performing assets and
Past Due Loans to Year-End Assets .71% 1.2% 2.0% .43% .42%
Total Non-performing Loans to
Year-End Loans 1.0% 1.9% 3.5% .65% .62%
</TABLE>
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 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.
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, 1999, the Corporation had sufficient
collateral in order to borrow up to an aggregate of $21.0 million from the FHLB
under the established lines of credit, if necessary. Liquidity is also
- 5 -
<PAGE>
Harbor Bankshares Corporation
- --------------------------------------------------------------------------------
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 $66.9 million or 37.6% of
total assets at December 31, 1999.
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, 1999, net cash provided by operating
activities totaled $899 thousand. Net cash provided by investing activities
totaled $521 thousand resulting primarily from the purchases of securities
totaling $5.0 million offset by maturities or calls on investment securities and
interest bearing deposits in other banks totaling $22.7 million and a net
increase in loans of $16.7 million. Purchases of premises and equipment
totaled $723 thousand. Net cash used in financing activities for the year ended
December 31, 1999 totaled $3.9 million resulting primarily from a net decrease
in deposits of $1.9 million and the payment of and FDIC note totaling $1.8
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 a lower and a higher interest
rate horizon.
- 6 -
<PAGE>
Harbor Bankshares Corporation
- --------------------------------------------------------------------------------
Cumulative Interest Sensitive Gap based on a lower interest rate horizon
<TABLE>
<CAPTION>
Repricing or Maturity
December 31, 1999
-------------------------------
3 months 6 months 1 year
-------- -------- ------
<S> <C> <C> <C>
Interest sensitive assets $ 104 $ 105 $ 110
Interest sensitive liabilities 82 92 101
----- ------ ------
Interest sensitivity gap $ 22 $ 13 $ 9
===== ====== ======
Gap to total assets 12.4% 7.3% 5.1%
</TABLE>
Cumulative Interest Sensitive Gap based on a higher interest rate horizon
<TABLE>
<CAPTION>
3 months 6 months 1 year
-------- -------- ------
<S> <C> <C> <C>
Interest sensitive assets $ 66 $ 68 $ 76
Interest sensitive liabilities 82 92 101
----- ------ ------
Interest sensitivity gap $ (16) $ (24) $ (25)
===== ====== ======
Gap to total assets (8.9%) (13.5%) (14.0%)
</TABLE>
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 $5.8 million from the Resolution Trust
Corporation to invest as tier one capital in its subsidiary, The Harbor Bank of
Maryland. These borrowings were necessary to maintain adequate capital levels
due to the growth achieved through the purchase of three (3) branches from the
Resolution Trust Corporation. The borrowings required quarterly interest
payments based on Treasury bill rates and a principal payment at the end of the
fifth year. The notes became due in 1999. On July 1, 1999 a note totaling $1.9
million was paid in full and the remaining $3.9 million note was extended to
June 2000, with an interest rate equivalent to the 13 week U.S. Treasury Bill
rate plus 300 basis points. The interest paid on the debt for 1999 totaled $296
thousand.
- 7 -
<PAGE>
Harbor Bankshares Corporation
- --------------------------------------------------------------------------------
CAPITAL RESOURCES
- -----------------
Stockholder's equity decreased by $3.2 million or 30.0% to $7.5 million.
This decrease was due to the unrealized losses of securities held for sale net
of income taxes, which as of December 31, 1999 were $3.3 million. The loss,
represent a mark to market value of these securities. Losses would not be
realized unless the securities are sold. As of year end, the Corporation had
sufficient liquidity to withstand any unusual demand of funds without
liquidating these securities, such as $9.8 million in Federal Funds sold and
borrowing arrangements with the Federal Home Loan Bank and Bank of America of
$21.3 million and $2.0 million respectively. Stockholder's equity was 4.2% of
total assets as of the year-end. The Tier 1 capital ratio as of December 31,
1999 was 4.5%, and the risk based capital ratio was 8.1%. 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 excluding the
unrealized losses on securities held for sale was $15.58 as of December 31,
1999.
The Tier I capital ratio for the Corporation's subsidiary, The Harbor Bank
of Maryland as of December 31, 1999 was 6.4% and the risk based capital ratio
was 11.9%, both above the established regulatory requirements.
CHANGES IN FINANCIAL POSITION
- -----------------------------
The Corporation through its subsidiary, The Harbor Bank of Maryland,
continued its growth during 1999. Although total assets reflected a decrease of
$7.1 million or 3.8 percent, a new branch facility was opened in Baltimore
County on January 1999.
Deposits decreased by $2.9 million to $165.5 million or 1.2% from $167.5
million in 1998 and net loans increased by $16.7 million to $101.8 million or
19.6% compared to $85.1 million in 1998.
The Corporation plans to continue its expansion through marketing efforts
by its management and board of directors.
The major usage of funds was reflected in the loan growth, increasing as
stated above, by 19.6 percent.
Exhibit D presents data and information at December 31, 1999 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.
- 8 -
<PAGE>
Harbor Bankshares Corporation
- --------------------------------------------------------------------------------
FINANCIAL ANALYSIS - 1998 AND 1997
- ----------------------------------
Net income for 1998 increased by $27 thousand or 3.9% to $728 thousand.
Net interest income increased by $367 thousand to $5.9 million from $5.6 million
earned during 1997.
During 1998, the provision for possible loan losses was $213 thousand
compared to $72 thousand for 1997. Charge-offs for 1998 were $203 thousand
compared to $313 thousand for 1997 and recoveries were $35 thousand compared to
$6 thousand the prior year.
Other operating income decreased by $139 thousand or 9.6% during 1998 when
compared to 1997. The income for 1997, reflects securities gains of $213
thousand compared to $26 thousand during 1998. This item was the main reason
for the decrease.
Other operating expenses, at $6.0 million in 1998, increased by 2.5% when
compared to $5.8 million in 1997. Salaries and benefit expenses increased to
$2.7 million in 1998 from $2.6 million in 1997. The increase was caused by
additional staff, salary increases and benefits cost. Other expenses increased
by $83 thousand or 2.6%. Higher cost in occupancy, legal, and data processing
also contributed to the increase in other operating expenses.
At $317 thousand, income taxes represented 30.3% of income before taxes for
1998 and $401 thousand or 36.4% for 1997.
Deposits grew by $48.5 million or 40.8%, loans increased by $7.5 million
or 9.6%, and investment securities increased by $42.7 million or 144.8%.
Investment securities were the main user of the source of funds provided by the
deposit growth.
Shareholders' Equity grew by $368 thousand or 3.6% mainly due to retained
earnings.
The Bank's Tier 1 capital ratio as of December 31, 1998 was 7.07% and the
risk based capital ratio was 14.57%; both were well above minimum regulatory
requirements.
OTHER INFORMATION
- -----------------
RECENT ACCOUNT PRONOUNCEMENTS
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, requires
derivative instruments be carried at fair value on the balance sheet. The
statement continues to allow derivative instruments to be used to hedge various
risks and sets forth specific criteria to be used to determine when hedge
accounting can be used. The statement also provides for offsetting changes in
fair value or cash flows of both the
- 9 -
<PAGE>
Harbor Bankshares Corporation
- --------------------------------------------------------------------------------
derivative and the hedge asset or liability to be recognized in earnings in the
same period; however, any changes in fair value or cash flow that represent the
ineffective portion of a hedge are required to be recognized in earnings and
cannot be deferred. For derivative instruments not accounted for as hedges,
changes in fair value are required to be recognized in earnings.
The Corporation plans to adopt the provisions of this statement, as
amended, for its quarterly and annual reporting beginning January 1, 2001, the
statement's effective date. These statements will not have a material impact on
the corporation's results of operations.
- 10 -
<PAGE>
Harbor Bankshares Corporation
- --------------------------------------------------------------------------------
HARBOR BANKSHARES CORPORATION
SUPPLEMENT TO 1999 ANNUAL REPORT TO STOCKHOLDERS
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
- ------------------
<S> <C>
Joseph Haskins, Jr. Chairman, President and Chief Executive Officer
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.
<CAPTION>
EXECUTIVE OFFICERS
- ------------------
<S> <C>
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
<CAPTION>
ADVISORY BOARD
- --------------
<S> <C>
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.
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.
Walter Thomas Pastor/New Psalmist Church
William Villanueva Vice President/M&W Medical Equipment
James Watkins, (Col.) President/Watkins Security Agency
Kenneth O. Wilson President and Owner/Inner Harbor Marina
</TABLE>
- 11 -
<PAGE>
Harbor Bankshares Corporation
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
- -----------------------
MARKET SUMMARY OF STOCK
-----------------------
Harbor Bankshares Corporation is traded privately and is not listed by any
exchange. During 1999 and 1998, there was little trading activity in the stock.
The bid and ask prices during 1999 varied from $17.00 to $18.00 per share.
During 1998 the bid and ask price varied from $16.00 to $18.00 per share. At
December 31, 1999 the Corporation had 728 common stockholders of record.
CASH DIVIDENDS
--------------
Harbor Bankshares Corporation paid a stock dividend equivalent to $.25 per
share during the first quarter of 1999. 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
(718) 921-8206
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.
- 12 -
<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>
Year ended December 31,
1999 1998
Average Yields/ Income Average Yields/ Income
Balances Rates Expense Balances Rates Expense
-------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
U.S. Treasury Securities $ - -% $ - $ - -% $ -
U.S. Government Agencies 62,267 6.37 3,966 36,970 6.69 2,476
Interest-Bearing Deposits with Other Banks 654 5.81 38 2,235 5.59 125
FHLB Stock and Other Securities 554 7.58 42 514 7.20 37
Federal Funds Sold 7,881 4.93 389 12,870 5.45 702
-------- ------- -------- -------
71,356 6.21% 4,435 52,589 6.35% 3,340
-------- ------- -------- -------
Loans
- -----
Commercial Loans 21,884 9.12 1,996 14,053 9.44 1,326
Real Estate Mortgages 62,114 8.86 5,503 63,005 9.54 6,010
Consumer Loans 3,341 12.21 408 3,444 11.82 407
-------- ------- -------- -------
Loans Net of Unearned Income 87,339 9.05 7,907 80,502 9.62 7,743
-------- ------- -------- -------
Total Earning Assets 158,695 7.78% $12,342 133,091 8.33% $11,083
======= =======
Allowance for Possible Losses (660) (682)
Other Assets 12,604 12,550
-------- --------
TOTAL ASSETS $170,639 $144,959
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-Interest Bearing Deposits $ 14,744 -% $ - $ 12,402 -% $ -
-------- --------
Interest-Bearing Transaction Accounts 32,225 2.85 918 25,282 3.16 798
Savings 59,349 3.47 2,060 37,559 3.38 1,266
Time - $100,000 or more 19,653 5.16 1,014 22,170 5.59 1,241
Other Time 28,736 4.83 1,390 30,313 5.08 1,541
-------- ------- -------- -------
Savings and Time Deposits 139,963 3.84% 5,382 115,324 3.79% 4,846
-------- --------
TOTAL Deposits 154,707 127,726
Other Borrowed Money 800 5.00% 40 - -% -
Notes payable 4,889 6.05 296 5,796 5.12 297
Other Liabilities 961 - - 911 - -
-------- -------- -------
TOTAL Liabilities 161,357 3.93% $ 5,718 134,433 4.25% $ 5,143
======= =======
STOCKHOLDERS' EQUITY 9,282 10,526
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER' EQUITY $170,639 $144,959
======== ========
Net Yield on Interest Earning Assets 3.85% 4.08%
Benefit of Non-Interest Bearing Funds .37% .38%
Net Interest Margin 4.22% 4.46%
<CAPTION>
Year ended December 31,
1997
Average Yields/ Income
Balances Rates Expense
-------- ------- -------
<S> <C> <C> <C>
ASSETS
U.S. Treasury Securities $ - -% $ -
U.S. Government Agencies 21,244 6.62 1,407
Interest-Bearing Deposits with Other Banks 4,408 5.58 246
FHLB Stock and Other Securities 599 7.34 44
Federal Funds Sold 10,752 5.89 633
-------- -------
37,003 6.30% 2,330
-------- -------
Loans
- -----
Commercial Loans 9,592 9.61 922
Real Estate Mortgages 68,945 9.67 6,670
Consumer Loans 3,895 11.48 447
-------- -------
Loans Net of Unearned Income 82,432 9.75 8,039
-------- -------
Total Earning Assets 119,435 8.68% $10,369
=======
Allowance for Possible Losses (846)
Other Assets 12,531
--------
TOTAL ASSETS $131,120
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-Interest Bearing Deposits $ 10,209 -% $ -
--------
Interest-Bearing Transaction Accounts 14,828 2.50 371
Savings 39,485 3.45 1364
Time - $100,000 or more 18,195 5.56 1011
Other Time 32,198 5.41 1742
-------- -------
Savings and Time Deposits 104,706 4.29% 4,488
--------
TOTAL Deposits 114,915
Other Borrowed Money - -% -
Notes payable 5,796 5.35 310
Other Liabilities 820 - -
-------- -------
TOTAL Liabilities 121,531 4.34% $ 4,798
=======
STOCKHOLDERS' EQUITY 9,589
--------
TOTAL LIABILITIES AND STOCKHOLDER' EQUITY $131,120
========
Net Yield on Interest Earning Assets 4.34%
Benefit of Non-Interest Bearing Funds .37%
Net Interest Margin 4.71%
</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>
Year ended December 31, 1996 1995
Average Yields/ Average Yields/
Balances Rates Income Expense Balances Rates Income Expense
-------- ------- -------------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
U.S. Treasury Securities - -% $ - $ 1,321 4.47% $ 59
U.S. Government Agencies $ 14,880 6.28 935 8,944 5.66 506
Interest-Bearing Deposits with Other Banks 7,064 5.66 400 7,712 5.60 432
FHLB Stock and Other Securities 561 7.31 41 418 7.42 31
Federal Funds Sold 3,103 5.32 165 4,786 6.27 300
-------- ------ -------- ------
25,608 6.02% 1,541 23,181 5.73% 1,328
Loans
- -----
Commercial Loans 7,451 9.82% 732 4,862 10.53% 512
Real Estate Mortgages 70,697 9.48 6,702 67,508 9.39 6,339
Consumer Loans 3,010 12.33 371 2,541 12.23 311
-------- ------ -------- ------
Loans Net of Unearned Income 81,158 9.62% 7,805 74,911 9.56% 7,162
-------- ------ -------- ------
Total Earning Assets 106,766 8.75% $9,346 98,092 8.65% $8,490
====== ======
Allowance for Possible Losses (880) (817)
Other Assets 10,410 9,584
-------- --------
TOTAL ASSETS $116,296 $106,859
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-Interest Bearing Deposits $ 9,316 -% $ - $ 8,991 2.54% $ -
-------- --------
Interest-Bearing Transaction Accounts 15,798 2.61 412 18,184 3.16 462
Savings 35,671 3.46 1,235 33,386 3.38 1,018
Time - $100,000 or more 11.792 5.39 635 8,748 5.59 463
Other Time 28,329 5.28 1,497 24,648 5.08 1,275
-------- ------ -------- ------
Savings and Time Deposits 91,590 4.13% 3,779 84,966 3.42% 3,218
-------- --------
TOTAL Deposits 100,906 93,957
Other Borrowed Money 1,452 5.58% 81 1,195 6.53% 78
Notes payable 5,796 5.33 309 5,796 5.78 335
Other Liabilities 888 - - 593 - -
-------- ------ -------- ------
TOTAL Liabilities 109,042 4.55% $4,169 101,541 3.96% $3,631
====== ======
STOCKHOLDERS' EQUITY 7,254 5,318
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $116,296 $106,859
======== ========
Net Yield on Interest Earning Assets 4.20% 4.69%
Benefit of Non-Interest Bearing Funds .34% .36%
Net Interest Margin 4.54% 5.05%
</TABLE>
- 14 -
<PAGE>
Harbor Bankshares Corporation
- --------------------------------------------------------------------------------
Exhibit B
SUMMARY OF LOAN LOSS EXPERIENCE
(dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997 1996 1995
--------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Period $ 699 $ 654 $ 889 $ 817 $ 658
Loans Charged Off:
Commercial Loans 291 - 58 14 -
Real Estate Mortgages 395 54 95 5 6
Consumer Loans 239 149 160 34 29
------- ------- ------- ------- -------
TOTAL Loans Charged Off 925 203 313 53 35
------- ------- ------- ------- -------
Recoveries of Loans:
Commercial Loans 40 - 1 57 1
Real Estate Mortgages 26 3 - --- 6
Consumer Loans 35 32 5 8 4
------- ------- ------- ------- -------
TOTAL Loans Recovered 101 35 6 65 11
------- ------- ------- ------- -------
Net Loans Charged Off 824 168 307 (12) 24
------- ------- ------- ------- -------
Provisions Charged to Operations 803 213 72 60 183
------- ------- ------- ------- -------
Balance at End of Period $ 678 $ 699 $ 654 $ 889 $ 817
======= ======= ======= ======= =======
Daily Average Amount of Loans $87,399 $80,502 $82,432 $81,158 $74,911
======= ======= ======= ======= =======
Allowance for Possible Loan Losses to
Loans Outstanding .66% .81% .83% 1.04% 1.09%
======= ======= ======= ======= =======
Net Charge Offs to Average Loans
Outstanding .94% .21% .37% (.01%) .03%
======= ======= ======= ======= =======
<CAPTION>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
1999 1998 1997 1996 1995
--------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Commercial Loans $ 317 $ 59 $ 118 $ 33 $ 35
Real Estate Loans 131 34 45 58 90
Consumer Loans 4 34 46 36 37
Credit Cards 10 37 35 90 56
Unallocated 216 535 410 672 599
----- ----- ----- ----- -----
TOTAL Allowance for
Loan Losses $ 678 $ 699 $ 654 $ 889 $ 817
===== ===== ===== ===== =====
</TABLE>
- 15 -
<PAGE>
Harbor Bankshares Corporation
- --------------------------------------------------------------------------------
Analysis of Changes in Net Interest Income Exhibit C
- ------------------------------------------
INTEREST VARIANCE ANALYSIS
(dollars in thousands)
<TABLE>
<CAPTION>
1999 COMPARED TO 1998 1998 COMPARED TO 1997
Increase (Decrease) due to: Increase (Decrease) due to:
--------------------------- ---------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 658 $(493) $ 165 $ (188) $(109) $ (297)
Investment Securities 1,698 (204) 1,494 1,041 28 1,069
Federal Funds Sold (272) (41) (313) 125 (56) 69
Other Interest Bearing Assets/(1)/ (87) - (87) (130) 2 (128)
------ ----- ------ ------ ----- ------
TOTAL Interest Income $1,997 $(738) $1,259 $ 848 $(135) $ 713
====== ===== ====== ====== ===== ======
INTEREST EXPENSE
Interest-Bearing Transaction
Accounts $ 219 $ (99) $ 120 $ 261 $ 166 $ 427
Savings 736 58 794 (66) (32) (98)
Time - $100,000 or more (141) (86) (227) 221 9 230
Other Time (80) (71) (151) (102) (99) (201)
Other Borrowed Money 40 - 40 - - -
Notes Payable (46) 45 (1) - (13) (13)
------ ----- ------ ------ ----- ------
TOTAL Interest Expense $ 728 $(153) $ 575 $ 314 $ 31 $ 345
====== ===== ====== ====== ===== ======
NET INTEREST INCOME $1,269 $(585) $ 684 $ 534 $(166) $ 368
====== ===== ====== ====== ===== ======
</TABLE>
Note: Loan fees, which were included in interest income, were $387 in 1999,
$262 in 1998, and $228 in 1997. 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, 1999
<TABLE>
<CAPTION>
Maturities of Certificates of Deposit of $100,000 or More
(dollars in Thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
MATURITIES Three months or less Over three months to Over six months to 12 Over 12 months Total
six months months
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance $6,733 $3,298 $4,200 $ 4,766 $18,997
- ---------------------------------------------------------------------------------------------------------------------------------
Percent to Total 35.4% 17.4% 22.1% 25.1% 100.0%
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Loan Portfolio by Type of Loan
(dollars in Thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 31,801 31.0% $20,711 24.1% $ 9,041 11.6% $ 9,611 11.3% $ 5,785 7.4%
Real Estate Commercial 24,789 24.2% 17,026 19.8% 17,014 22.9% 13,667 16.0% 13,014 16.7%
Real Estate Construction 2,992 2.9% 2,014 2.3% 2,020 2.6% 1,349 1.6% 995 1.3%
Real Estate Residential 39,336 38.4% 42,664 49.7% 45,527 58.2% 57,002 66.8% 55,510 71.1%
Consumer 3,583 3.5% 3,382 4.1% 3,768 4.7% 3,713 4.3% 2,804 3.5%
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS $102,501 100.0% $85,797 100.0% $77,370 100.0% $85,342 100.0% $78,108 100.0%
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Investments Securities Summary
(dollars in Thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
1999 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Treasury and Government Agency $49,061 $38,771 $11,993 $ 986 $1,009
Mortgage Backed Securities 712 15,845 1,917 -- --
Equity Securities 555 470 585 583 441
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL Securities Available for Sale 50,328 55,086 14,495 1,569 1,450
- ---------------------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Treasury and Government Agencies -- 17,152 14,002 15,006 9,442
Mortgage Backed Securities -- -- 1,000 -- --
Other Debt Securities 20 15 15 10 6
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL Securities Held to Maturity 20 17,167 15,017 15,016 9,448
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL Investment Securities Portfolio $50,348 $72,253 $29,512 $16,585 $10,898
=================================================================================================================================
TOTAL Portfolio Yield 6.4% 6.7% 6.6% 6.5% 5.6%
- ---------------------------------------------------------------------------------------------------------------------------------
</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>
1999 1998
--------------------------------------- --------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income $3,189 $3,078 $3,009 $3,066 $2,981 $2,812 $2,731 $2,558
Interest Expense 1,401 1,411 1,434 1,472 1,370 1,300 1,282 1,191
--------------------------------------- --------------------------------------
Net Interest Income 1,788 1,667 1,575 1,594 1,611 1,512 1,449 1,367
Provision for Loan Losses 51 400 201 151 100 38 37 38
--------------------------------------- --------------------------------------
Net Interest Income after 1,737 1,267 1,374 1,443 1,511 1,474 1,412 1,329
Provision for Loan Losses
Non-Interest Income 380 360 332 279 333 298 335 309
Gains on sale of Real Estate -- -- 112 -- -- -- -- --
Gains on Securities Sales -- -- -- -- -- -- -- 26
Gains on sale of Loans 5 1 (3) 4 1 (1) -- 2
Non-Interest Expense 1,941 1,869 1,807 1,667 1,573 1,471 1,485 1,455
--------------------------------------- --------------------------------------
Income Before Taxes 181 (241) 8 59 272 300 262 211
Income Tax Expense 64 (81) 2 21 59 98 89 71
--------------------------------------- --------------------------------------
Net Income $ 117 $ (160) $ 6 $ 38 $ 213 $ 202 $ 173 $ 140
--------------------------------------- --------------------------------------
Per Share Amount
- ----------------
Net Income - Basic $ .17 $ (.23) $ 01 $ .05 $ .32 $ .29 $ .25 $ .20
Net Income - Diluted $ .13 $ (.18) $ .01 $ .04 $ .22 $ .27 $ .23 $ .19
--------------------------------------- --------------------------------------
Market Price - High $17.00 $17.00 $18.00 $18.00 $18.00 $16.00 $16.00 $17.00
Low $17.00 $17.00 $17.00 $18.00 $18.00 $18.00 $17.00 $17.00
Dividends Paid $ . 25 $ .25
--------------------------------------- --------------------------------------
</TABLE>
- 18 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,233
<INT-BEARING-DEPOSITS> 553
<FED-FUNDS-SOLD> 9,740
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,328
<INVESTMENTS-CARRYING> 20
<INVESTMENTS-MARKET> 20
<LOANS> 102,501
<ALLOWANCE> 679
<TOTAL-ASSETS> 177,618
<DEPOSITS> 165,541
<SHORT-TERM> 3,983
<LIABILITIES-OTHER> 631
<LONG-TERM> 0
7
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 177,618
<INTEREST-LOAN> 7,907
<INTEREST-INVEST> 4,008
<INTEREST-OTHER> 427
<INTEREST-TOTAL> 12,342
<INTEREST-DEPOSIT> 5,382
<INTEREST-EXPENSE> 5,718
<INTEREST-INCOME-NET> 6,624
<LOAN-LOSSES> 803
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,470
<INCOME-PRETAX> 7
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1
<EPS-BASIC> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4,227
<LOANS-NON> 1,003
<LOANS-PAST> 47
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,790
<ALLOWANCE-OPEN> 699
<CHARGE-OFFS> 925
<RECOVERIES> 101
<ALLOWANCE-CLOSE> 679
<ALLOWANCE-DOMESTIC> 679
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 217
</TABLE>
