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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X]QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 1996
[ ]TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transitions period from_________to______________
Commission file number 2-79912
HARBOR BANCORP
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(Exact name of small business issuer as specified in its charter)
California 95-3764395
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11 Golden Shore
Long Beach, CA 90802
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(Address of principal executive offices)
(310) 491-1111
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(Issuer's telephone number)
Not applicable
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(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter periods that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes x No
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Check whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 after
the distribution of securities under a plan confirmed by a court.
Yes No Other N/A
------ ------ --------
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practical date. Common stock, no par value - 1,415,214
shares as of September 30, 1996
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HARBOR BANCORP AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - September 30,
1996 and December 31, 1995
Condensed consolidated statements of income - three months ended September
30, 1996 and 1995; and nine months ended September 30, 1996 and 1995
Condensed consolidated statements of cash flows nine months ended September
30, 1996 and 1995
Notes to condensed consolidated financial statements -
September 30, 1996
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities
ITEM 3. Defaults Upon Service Securities
ITEM 4. Submission of Matter to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
PART III. SIGNATURES
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ITEM I: FINANCIAL INFORMATION
HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
(000's omitted)
ASSETS
Cash and due from banks $ 18,093 $ 20,964
Federal funds sold and securities
purchased under resale agreements 8,800 5,200
-------- --------
Cash and cash equivalents 26,893 26,164
Time certificates of deposit 495 495
Investment securities:
Held to maturity securities (market value
of $7,315,562 in 1996 and $10,190,673
in 1995) 7,297 10,187
Available for sale securities 26,766 24,796
Loans 139,366 130,412
Less allowance for loan losses 2,856 3,003
-------- --------
Net loans 136,510 127,409
Bank premises and equipment:
Land 159 159
Buildings and improvements 4,246 4,068
Furniture, fixtures and equipment 3,552 3,428
-------- --------
7,957 7,655
Less accumulated depreciation
and amortization 6,040 5,727
-------- --------
1,917 1,928
Other real estate owned 1,047 516
Accrued interest receivable 1,135 998
Other assets 2,048 2,599
-------- --------
Total assets $204,108 $195,092
======== ========
(Continued)
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HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
September 30, December 31,
1996 1995
------------ -----------
(Unaudited)
(000's omitted)
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Interest bearing $ 98,994 $ 87,201
Noninterest bearing 88,666 92,003
--------- ---------
Total deposits 187,660 179,204
Accrued expenses and other liabilities 1,109 1,331
--------- ---------
Total liabilities 188,769 180,535
Stockholders' equity:
Common stock, no par value; 5,000,000
shares authorized; issued and out-
standing, 1,415,214 shares in 1996
and 1,348,021 shares in 1995 13,963 13,258
Retained earnings 1,514 1,382
Net unrealized security losses (138) (83)
--------- ---------
Total stockholders' equity 15,339 14,557
--------- ---------
Total liabilities and
stockholders' equity $ 204,108 $ 195,092
========= =========
See notes to unaudited consolidated financial statements.
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HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
(000's omitted, except per share data)
Interest income:
Interest and fees on loans $ 9,348 $ 8,411 $ 3,249 $ 2,921
Interest on U.S. government
and agency obligations 1,104 1,320 346 395
Interest on obligations of
states and political
subdivisions 11 16 3 10
Interest on other investments 61 67 21 21
Interest on federal funds sold
and securities purchased under
agreements to resale 600 490 213 291
------- ------- ------- -------
Total interest income 11,124 10,304 3,832 3,638
Interest expense:
Interest on deposits 2,220 1,918 811 686
Interest on mortgage payable -0- 17 -0- 2
Interest on borrowed funds 4 26 -0- -0-
------- ------- ------- -------
Total interest expense 2,224 1,961 811 688
Net interest income 8,900 8,343 3,021 2,950
Provision for loan
losses 724 217 280 167
Net interest income after
provision for loan
losses 8,176 8,126 2,741 2,783
Other operating income:
Service charges on deposit
accounts 721 645 235 213
Loan servicing fees and other
fees and charges 159 174 47 93
Gain on sale of securities 19 54 19 -0-
------- ------- ------- -------
Total other operating
income 899 873 301 306
(Continued)
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HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Continued)
Nine Months Ended Three Months Ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
------ ------ ------ ------
(000's omitted, except per share data)
Noninterest expense:
Salaries, wages and employee
benefits 2,785 2,671 933 943
Occupancy expenses 1,637 1,582 537 525
Equipment expenses 310 225 103 71
Data processing expenses 424 460 124 155
Other operating expenses 2,592 2,477 758 886
------ ------ ------ ------
Total noninterest
expense 7,748 7,415 2,455 2,580
------ ------ ------ ------
Income before taxes based on
income 1,327 1,584 587 509
Provision for taxes based
on income 489 573 210 139
------ ------ ------ ------
Net income $ 838 $1,011 $ 377 $ 370
====== ====== ====== ======
Earnings per share:
Basic $ 0.59 $ 0.75 $ 0.27 $ 0.27
====== ====== ====== ======
Diluted $ 0.58 $ 0.72 $ 0.26 $ 0.26
====== ====== ====== ======
See notes to unaudited consolidated financial statements.
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HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
----------------------
1996 1995
------- -------
(000's omitted)
Operating activities:
Net income $ 838 $ 1,011
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for depreciation and
amortization 371 140
Provision for loan
losses 724 217
Increase in
interest receivable (137) (240)
Increase (decrease) in
interest payable (11) 54
Other 283 (360)
------- -------
Net cash provided by operating
activities 2,068 822
Investing activities:
Proceeds from maturities, sales
and calls of investment
securities 19,850 25,291
Purchases of investment securities (18,987) (30,951)
Net increase in loans (9,825) (11,181)
Capital expenditures (302) (140)
Other real estate (530) 1,918
------- -------
Net cash used in
investing activities (9,794) (15,063)
(Continued)
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HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
Nine Months Ended
September 30,
---------------------
1996 1995
------- -------
(000's omitted)
Financing activities:
Net increase in commercial and
other demand deposits, savings
and money market deposits and
certificates of deposit 8,455 26,853
------- -------
Net cash provided by
financing activities 8,455 26,853
Increase in cash
and cash equivalents 729 12,612
Cash and cash equivalents at
beginning of period 26,164 21,377
------- -------
Cash and cash equivalents at
end of period $26,893 $33,989
======= =======
See notes to unaudited consolidated financial statements.
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HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1996
1. Summary of Significant Accounting Policies:
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
1996 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996.
Certain reclassifications have been made in the 1995 financial statements to
conform to the presentations used in 1996.
The balance sheet on December 31, 1995 has been derived from the audited
financial statements at that date. The accompanying notes are an integral part
of these financial statements.
Principles of consolidation
Harbor Bancorp ("HB") was formed on July 23, 1982. The unaudited condensed
consolidated financial statements include all the accounts of HB and its
wholly-owned subsidiaries, Harbor Bank and Harbor Bank Properties. All
intercompany accounts and transactions have been eliminated.
Investment securities
The Company adopted Statement of Financial Accounting Standard No. 115
"Accounting for Certain Investments in Debt and Equity Securities" as of
January 1, 1994.
Investment securities held to maturity are securities which the Company has the
ability and intent to hold until maturity.
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Accordingly, these securities are stated at cost adjusted for amortization of
premiums and accretion of discounts. Unrealized gains and losses are not
reported in the financial statements until realized or until a decline in fair
value below cost is deemed to be other than temporary.
Available for sale securities include debt securities and mutual funds. These
securities are stated at fair value with unrealized gains and losses reflected
as a component of stockholders' equity, net of applicable income taxes. Gains
and losses are determined on the specific identification method.
Impaired loans
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended, effective January 1, 1995. This statement requires that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rates or the fair value of the
underlying collateral, and specifies alternative methods for which there are
credit concerns. For purposes of applying this standard, impaired loans have
been defined as all non-accrual loans. The Company's policy for income
recognition was not affected by adoption of the standard. The adoption of SFAS
No. 114 did not have any effect on the total reserve for credit losses or
related provision.
Allowance for loan losses
The allowance for loan losses represents management's evaluation of the quality
of the loan portfolio. The allowance is maintained at a level considered to be
adequate for potential loan losses based on management's assessment of various
factors affecting the loan portfolio, which includes a review of problem loans,
business conditions and the overall quality of the loan portfolio.
The allowance is increased by the provision for loan losses charged to
operations and reduced by loans charged off to the allowance, net of recoveries.
Other Real Estate
Other real estate ("ORE") is stated at the lower of cost or fair market value,
net of estimated selling costs.
Income taxes
Income tax expense is the current and deferred tax consequence, of events that
have been recognized in the financial statements, as measured by the provisions
of enacted tax law.
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Bank premises and equipment
Bank premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets which
range from 10 to 30 years for buildings and improvement and 3 to 10 years for
furniture, fixtures and equipment.
Stock Dividend
On March 26, 1996, the Bank declared a 5% stock dividend on outstanding shares
of 1,348,021 that was paid on April 19, 1996 to shareholders of record as of
April 8, 1996. In addition, cash was issued in lieu of fractional shares
totaling $2,069.
Earnings per share
Earnings per share was computed by dividing net income by the following methods.
The number of shares used in the diluted earnings per share calculations for the
periods ended September 30, 1996 and 1995 were 1,433,603 and 1,403,121
respectively. The number of shares used in the per share calculation for basic
earnings per share were 1,415,214 and 1,348,021 respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Harbor Bancorp's ("Company") performance during the first nine months of 1996
shows continued stability which is supported by improvement in the local and
national economic environment. The purpose of the following discussion is to
focus on the above mentioned performance and other information about the
Company's financial condition and results of operations which is not otherwise
apparent from the consolidated financial statements included in this quarterly
report. Reference should be made to those statements and the condensed financial
data presented herein for an understanding of the following discussion and
analysis.
Financial Condition
Since December 31, 1995, the Company has experienced an increase in loan volume
and cash and cash equivalents which has resulted in total assets of the Company
increasing from $195,092,000 at December 31, 1995 to $204,108,000 at September
30, 1996. This increase of $9,016,000 or 4.62%, in total assets occurred
primarily in cash and cash equivalents and loans. Cash and cash equivalents
increased $729,000, or 2.79% , from $26,164,000 at December 31, 1995 to
$26,893,000 at September 30, 1996. Additionally, investment securities decreased
2.63% from $34,983,000 at December 31, 1995 to $34,063,000 at September 30,
1996. Generally, the moderate increase in liquidity is the result of growth in
core deposits. Loans increased $8,954,000, or 6.87%, from $130,412,000 at
December 31, 1995 to $139,366,000 at September 30, 1996. The increase in loan
volume continues to be moderate as a result of the Company's decision to
maintain a conservative posture with respect to lending in view of the slowly
improving economic environment.
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". As of September 30, 1996, the bank had $26,766,000
in securities classified as available for sale.
Substantially all of the Company's deposits are local, core deposits. The
Company does not have any out-of-area brokered deposits included in the deposit
base. Total deposits increased $8,456,000, or 4.72%, for the first nine months
of 1996. The primary component of this increase is interest bearing deposits
which increased $11,793,000, or 13.52%, from $87,201,000 at December 31, 1995 to
$98,994,000 at September 30, 1996.
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As a result of the Federal Deposit Insurance Corporation examination at December
31, 1993, the bank and the Federal Deposit Insurance Corporation executed a
Memorandum of Understanding ("FDIC Memorandum") dated August 3, 1994, and the
Bank and the California State Banking Department executed a Memorandum of
Understanding (Department MOU) dated January 31, 1995.
Based upon the January 8, 1996, FDIC examination of the Bank as of November 30,
1995, the Bank has been notified that the FDIC Memorandum was removed effective
May 22, 1996 and the Department Memorandum was removed effective June 12, 1996.
Liquidity and Interest Rate Sensitivity Management
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest sensitive earning
assets and interest bearing liabilities. Liquidity management involves the
ability to meet the cash flow requirements of customers who may be either
depositors wanting to withdraw funds or borrowers who may need assurance that
sufficient funds will be available to meet their credit needs. Interest rate
sensitivity management seeks to avoid fluctuating interest margins and to
enhance consistent growth of net interest income through periods of changing
interest rates.
Historically, the overall liquidity of the Company has been enhanced by a
significant aggregate amount of core deposits. As described in the analysis of
financial condition, the Bank has not relied on large-denomination time
deposits.
To meet short-term liquidity needs, the Bank has maintained adequate balances in
federal funds sold, certificates of deposits with other financial institutions
and investment securities having maturities of five years or less.
Liquid assets (cash, federal funds sold and securities purchased under
agreements to resale, deposits in other financial institutions and investment
securities) as a percent of total deposits are 32.7% and 34.4% as of September
30, 1996 and December 31, 1995, respectively.
The Bank's goal is to maintain federal funds sold at $7 to $10 million dollars
on an average with minimum daily investments monitored closely. Deposits with
other institutions and securities purchased under agreements to resale will be
maintained as alternative short-term investment products.
Interest rate sensitivity varies with different types of
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interest-earning assets and interest-bearing liabilities. Harbor Bank intends to
maintain interest-earning assets, comprised primarily of both loans and
investments, and interest-bearing liabilities, comprised primarily of deposits,
maturing or repricing evenly in order to eliminate any impact from interest rate
changes. In this way, both assets and liabilities can be substantially repriced
simultaneously with interest rate changes.
The impact of inflation on a financial institution differs significantly from
that exerted on an industrial concern, primarily because its assets and
liabilities consist primarily of monetary items. The relatively low proportion
of the Company's fixed assets to total assets reduces both the potential of
inflated earnings resulting from understated depreciation charges and the
potential of significant understatement of absolute asset values. However,
inflation does have a considerable indirect impact on banks, including increased
loan demand, as it becomes necessary for producers and consumers to acquire
additional funds to maintain the same levels of production, consumption and new
investments. Inflation also frequently results in high interest rates which can
affect both yields on earning assets and rates paid on deposits and other
interest-bearing liabilities. The Company monitors inflation rates to insure
that ongoing programs are compatible with fluctuations in inflation and
resultant changes in interest rates.
Results of Operations
The Company reported net income of $838,000, or $0.59 basic earnings per share,
for the nine months ended September 30, 1996, compared to net income of
$1,011,000, or $0.75 basic earnings per share, for the same period in 1995. For
the three months ended September 30, 1996, the Company generated net income of
$377,000, or $0.27 basic earnings per share, compared to $370,000, or $0.27
basic earnings per share, for the three months ended September 30, 1995.
Net interest income is an effective measurement of how well Management has
balanced the Company's interest rate sensitive assets and liabilities as well as
optimizing the allocation of resources.
Net interest income of $8,900,000, for the nine months ended September 30, 1996,
reflects an increase of $557,000, or 6.67%, from $8,343,000 for the same period
of 1995. Net interest income of $3,021,000 for the third quarter in 1996
reflects an increase of $71,000, or 2.41%, from $2,950,000 for the same quarter
in 1995. Rising interest rates and increased net interests in earning assets are
the primary reason for the improvement in net
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interest income.
The Company recorded $724,000 in provision for loan losses during the first nine
months of 1996 compared to $217,000 for the nine months ended September 30,
1995.
During the first nine months of 1996, the Company maintained a strict focus on
controlling noninterest expense. The focus on noninterest expense control began
with a corporate commitment in 1989 and, today, continues to be emphasized and
enforced. As a result of this continued effort, total noninterest expense
categories of salaries, wages and employee benefits, occupancy expense,
equipment expense and data processing expense increased $218,000 or 4.41%,
during the nine months ended September 30, 1996 over the same period in 1995.
Primary factors of the increase were the addition of a Chief Credit Officer in
Fall 1995 and the re-evaluation of FASB 91 which primarily resulted in smaller
salary capitalization per loan. Other operating expense increased $115,000
during the nine months ended September 30, 1996 compared to the same period in
1995 with most of the increase in the area of professional fees analysis.
Risk Elements
The policy of Harbor Bank is that all loans that are past due for ninety (90)
days must be placed on non-accrual status. At September 30, 1996, loans on
non-accrual status were $5,920,000, or 4.25%, compared to $6,746,000, or 5.17%,
of total loans on non-accrual status at December 31, 1995. Accruing loans which
are contractually past due ninety (90) days or more were $86,000 at September
30, 1996 compared to $121,000 at December 31, 1995.
At September 30, 1996, the management was not aware of information regarding
performing loans which would cause them to have serious doubts as to the ability
of the borrowers to comply with loan repayment terms, nor are they aware of any
trends which might have a material impact on future operating results.
Capital Resources
Management seeks to maintain a level of capital adequate to support anticipated
asset growth and credit risks and the ensure that the Company is within
established regulatory guidelines and industry standards. In 1995, stockholders'
equity increased $1,421,497 due to retention of the Company's 1995 net income.
The Company's capital plan for 1996 contemplates continued growth in
stockholders' equity through the retention of net income. Minimum capital ratios
required under the final 1994 risk-based capital regulations are 6.0% for Tier 1
Capital and 8.0% for
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Total Capital. At December 31, 1995 the Company had Tier 1 Capital of 10.31% and
Total Capital of 11.56% and at September 30, 1996 the company had Tier 1 Capital
of 10.26% and Total Capital of 11.52%.
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HARBOR BANCORP AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Due to the nature of their business, the Company, the Bank, and
their subsidiaries are subject to legal action threatened or filed which arise
from the normal course of their business. Management believes that the eventual
outcome of all currently pending legal proceedings against the Bank will not be
material to the Company's or the Bank's financial position or results of
operations.
ITEM 2. Changes in Securities
None
ITEM 3. Defaults Upon Service Securities
None
ITEM 4. Submission of Matter to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-k
27 - Financial Data Schedule
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PART III. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the undersigned
thereto duly authorized.
HARBOR BANCORP
Dated: November 12, 1996 /s/ DALLAS E. HAUN
----------------------- --------------------------
DALLAS E. HAUN
Vice President
Dated: November 12, 1996 /s/ MELISSA LANFRE'
----------------------- --------------------------
MELISSA LANFRE'
Vice President & CFO
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