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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 June 30, 1997
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[ ] 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
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HARBOR BANCORP
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(Exact name of small business issuer as specified in its charter)
California 95-3764395
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(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)
(562) 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
------- -------
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 June 30, 1997
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HARBOR BANCORP AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - June 30,
1997 and December 31, 1996
Condensed consolidated statements of income - three months ended June 30,
1997 and 1996; and six months ended June 30, 1997 and 1996
Condensed consolidated statements of cash flows six months ended June 30,
1997 and 1996
Notes to condensed consolidated financial statements -
June 30, 1997
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
June 30, December 31,
1997 1996
-------- --------
(Unaudited)
(000's omitted)
ASSETS
------
Cash and due from banks $ 20,083 $ 20,143
Federal funds sold and securities
purchased under resale agreements 30,500 8,400
-------- --------
Cash and cash equivalents 50,583 28,543
Time certificates of deposit 495 495
Investment securities:
Held to maturity(market value of
$5,466,784 in 1997 and $6,094,994
in 1996) 5,428 6,065
Available for sale 5,791 18,788
Loans 148,671 143,988
Less allowance for loan losses 2,829 2,738
-------- --------
Net loans 145,842 141,250
Bank premises and equipment:
Land 159 159
Buildings and improvements 4,271 4,249
Furniture, fixtures and equipment 3,664 3,572
-------- --------
8,094 7,980
Less accumulated depreciation
and amortization 6,311 6,132
-------- --------
1,783 1,848
Other real estate 549 329
Accrued interest receivable 864 856
Other assets 1,518 1,929
-------- --------
Total assets $212,853 $200,103
======== ========
(Continued)
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HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
June 30, December 31,
1997 1996
--------- ---------
(Unaudited)
(000's omitted)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Interest bearing $ 104,818 $ 90,442
Noninterest bearing 90,585 92,989
--------- ---------
Total deposits 195,403 183,431
Accrued expenses and other liabilities 1,151 972
--------- ---------
Total liabilities 196,554 184,403
Stockholders' equity:
Common stock, no par value; 5,000,000
shares authorized; issued and out-
standing, 1,415,214 shares in 1997
and 1996 13,963 13,963
Retained earnings 2,471 1,871
Unrealized losses on securities
available for sale, net of tax (135) (134)
--------- ---------
Total stockholders' equity 16,299 15,700
--------- ---------
Total liabilities and
stockholders' equity $ 212,853 $ 200,103
========= =========
See notes to unaudited consolidated financial statements.
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HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
------ ------ ------ ------
(000's omitted, except per share data)
Interest income:
Interest and fees on loans $6,901 $6,099 $3,545 $3,074
Interest on U.S. government
and agency obligations 315 758 154 354
Interest on obligations of
states and political
subdivisions 11 7 5 4
Interest on other investments 40 41 20 20
Interest on federal funds sold
and securities purchased under
agreements to resale 502 387 296 242
------ ------ ------ ------
Total interest income 7,769 7,292 4,020 3,694
Interest expense:
Interest on deposits 1,588 1,409 833 753
Interest on borrowed funds -- 4 -- --
------ ------ ------ ------
Total interest expense 1,588 1,413 833 753
Net interest income 6,181 5,879 3,187 2,941
Provision for loan
losses 435 444 285 248
Net interest income after
provision for loan losses 5,746 5,435 2,902 2,693
Other operating income:
Service charges on deposit
accounts 466 486 245 226
Loan servicing fees and other
fees and charges 99 112 48 78
------ ------ ------ ------
Total other operating
income 565 598 293 304
(Continued)
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HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Continued)
Six Months Ended Three Months Ended
June 30, June 30,
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(000's omitted, except per share data)
Noninterest expense:
Salaries, wages and employee
benefits 1,912 1,852 925 961
Occupancy expenses 1,069 1,100 531 559
Equipment expenses 160 207 78 101
Data processing expenses 266 300 133 147
Other operating expenses 1,660 1,834 876 841
---------- ---------- ---------- ----------
Total noninterest
expense 5,067 5,293 2,543 2,609
---------- ---------- ---------- ----------
Income before taxes based on
income 1,244 740 652 388
Provision for taxes based
on income 467 279 251 154
---------- ---------- ---------- ----------
Net income $ 777 $ 461 $ 401 $ 234
========== ========== ========== ==========
Weighted average number of
common shares and common
share equivalents 1,448,725 1,448,725 1,448,725 1,448,725
Earnings per share $ 0.54 $ 0.32 $ 0.28 $ 0.16
========== ========== ========== ==========
See notes to unaudited consolidated financial statements.
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HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
-------------------------
1997 1996
-------- --------
(000's omitted)
Operating activities:
Net income $ 777 $ 461
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for depreciation and
amortization 219 244
Provision for loan
losses 435 444
Increase in interest
receivable (8) (157)
Increase in interest
payable 23 32
Other 528 438
-------- --------
Net cash provided by operating
activities $ 1,974 $ 1,462
Investing activities:
Proceeds from maturities, sales
and calls of investment
securities 18,624 16,504
Purchases of investment securities (4,991) (5,000)
Net increase in loans (5,027) (3,023)
Capital expenditures (114) (226)
Other real estate (221) (1,097)
-------- --------
Net cash provided by
investing activities $ 8,271 $ 7,158
(Continued)
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HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
Six Months Ended
June 30,
--------------------------
1997 1996
-------- --------
(000's omitted)
Financing activities:
Net increase in commercial and
other demand deposits, savings
and money market deposits and
certificates of deposit $ 11,972 $ 3,400
Cash dividends paid (177) --
-------- --------
Net cash provided by
financing activities $ 11,795 $ 3,400
Increase in cash
and cash equivalents 22,040 12,020
Cash and cash equivalents at
beginning of period 28,543 26,164
-------- --------
Cash and cash equivalents at
end of period $ 50,583 $ 38,184
======== ========
See notes to unaudited consolidated financial statements.
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HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1997
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 six month period ended June 30, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
Certain reclassifications have been made in the 1996 financial statements to
conform to the presentations used in 1997.
The balance sheet on December 31, 1996 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 (the "Company") was formed on July 23, 1982. The unaudited
condensed consolidated financial statements include all the accounts of the
Company 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.
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Investment securities held to maturity are securities which the Company has the
positive intent and ability to hold until maturity. Accordingly, these
securities are carried at amortized cost. Unrealized holding gains and losses
are not recognized in the financial statements until realized or until a decline
in fair value below cost is deemed to be other than temporary.
Investment securities available for sale include debt securities and mutual
funds. These securities are stated at fair value with unrealized holding gains
and losses reflected as a separate component of stockholders' equity, net of
income taxes. Gains and losses are determined on the specific identification
method. Any decline in the fair value of the investments which is deemed to be
other than temporary is charged against current earnings.
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.
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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.
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.
Earnings per share
Earnings per share was computed by dividing net income by the weighted average
number of common stock and common stock equivalents (stock options) outstanding
during each period. The number of shares used in the per share calculations for
the periods ended June 30, 1997 and 1996 was 1,448,725.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact for the second quarter ended June 30,
1997 and June 30, 1996 is $0.01 and $0.01 per share, 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 six months of 1997
shows improvement which is supported by overall 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
During the first six months of 1997, the Company experienced a net increase in
liquid assets. Cash and cash equivalents increased $22,040,000, or 77.22%, from
$28,543,000 at December 31, 1996 to $50,583,000 at June 30, 1997. Investment
securities declined $13,634,000, or 54.86%, from $24,853,000 at December 31,
1996 to $11,219,000 at June 30, 1997. This net increase in liquid assets is
primarily a result of maintaining liquidity in the form of short term and
overnight investments in anticipation of growth in loan volume in the remainder
of 1997. During the second quarter of 1997, loan volume increased with loans at
$148,671,000 at June 30, 1997 compared to loans at $143,988,000 at December 31,
1996. Loans increased $4,683,000, or 3.25%, as a result of the Company's
decision to maintain a conservative posture with respect to lending in view of
the current economic condition. Total assets of the Company increased from
$200,103,000 at December 31, 1996 to $212,853,000 at June 30, 1997. This
increase of $12,750,000, or 6.37%, in total assets occurred primarily in cash
and cash equivalents.
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 June 30, 1997, the bank had $5,428,000 in
securities classified as held to maturity and $5,791,000 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 $11,972,000, or 6.52%, for the first six months
of 1997. This is a result of an increase in interest bearing deposits which
increased $14,376,000, or 15.9%, from $90,442,000 at December 31, 1996 to
$104,818,000 at June 30, 1997. This increase in interest bearing deposits is
primarily the result of an increase of
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approximately $8,900,000 in short-term certificate of deposit for a single
customer relationship. In addition, there was a decrease of noninterest bearing
deposits of $2,404,000, or 2.59%, from $92,989,000 at December 31, 1996 to
$90,585,000 at June 30, 1997.
As a result of the Federal Deposit Insurance Corporation ("the FDIC")
examination at December 31, 1993, the Bank and the Federal Deposit Insurance
Corporation executed a Memorandum of Understanding ("FDIC Memorandum") dated
August 3, 1994.
As a result of an examination conducted by the FDIC as of January 8, 1996, the
FDIC determined the Bank was in compliance with the terms of the FDIC
Memorandum, and the FDIC removed the FDIC Memorandum on May 22, 1996.
On January 3, 1995, the Bank and the Superintendent executed a Memorandum of
Understanding ("Superintendent's Memorandum) as a result of an examination at
December 31, 1993.
As a result of a request made by the Board of Directors of Harbor Bank on May
28, 1996, the Superintendent determined that the Bank was in compliance with the
terms of the Superintendent's Memorandum, and the Superintendent removed the
Superintendent's Memorandum on June 12, 1996.
As a result of an examination conducted by the Federal Reserve Bank of San
Francisco ("FRB") as of March 31, 1994, the Company and the FRB executed a
memorandum of Understanding (the "FRB Memorandum") dated October 25, 1994.
Based on the Company's overall improved financial condition and the adoption of
certain resolutions by the Company's Board of Directors, the FRB terminated the
FRB Memorandum effective December 3, 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.
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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 31.88% and 29.38% as of June 30,
1997 and December 31, 1996, 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. However, as part
of management's liquidity plan for the second quarter of 1997, federal funds
sold was maintained at higher than normal levels in anticipation of loan funding
and to maximize yield on short-term investments due to the shape of the current
yield curve. 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 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
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fluctuations in inflation and resultant changes in interest rates.
Results of Operations
The Company reported net income of $777,000, or $0.54 per share, for the six
months ended June 30, 1997, compared to net income of $461,000, or $0.32 per
share, for the same period in 1996.
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 $6,181,000 for the six months ended June 30, 1997,
reflects an increase of $302,000 or 5.14%, from $5,879,000 for the same period
of 1996. Rising interest rates and net earning assets, which increased from
$177,736,000 at December 31, 1996 to $190,885,000 at June 30, 1997, are the
primary reason for the improvement in net interest income.
The Company recorded $435,000 in provision for loan losses during the first six
months of 1997 compared to $444,000 for the six months ended June 30, 1996. The
decrease in the provision for possible loan losses, despite an increase in loan
volume, is a result of the overall improvement of the quality of the loan
portfolio and anticipated decline in other real estate.
During the first six months of 1997, 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, data processing expense and other operating expense,
decreased $226,000 or 4.30%, during the six months ended June 30, 1997 over
the same period in 1996.
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 June 30, 1997, loans on
non-accrual status were $3,210,000, or 2.16% of total loans, compared to
$3,783,000, or 2.63%, at December 31, 1996. Accruing loans which are
contractually past due ninety (90) days or more were $29,000 at June 30, 1997
compared to $170,000 at December 31, 1996.
At June 30, 1997, the Company was not aware of information regarding performing
loans which would cause them to have serious
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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 to ensure that the Company is within
established regulatory guidelines and industry standards. In 1996, stockholders'
equity increased $1,143,192 due to retention of the Company's 1996 net income.
The Company's capital plan for 1997 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 Total Capital. At December 31, 1996 the Company had Tier 1
Capital of 10.33% and Total Capital of 11.58% and at June 30, 1997 the company
had Tier 1 Capital of 10.62% and Total Capital of 11.87%.
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HARBOR BANCORP AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Except as noted below, due to the nature of their business, the
Company, the Bank, and their subsidiaries are subject to legal actions
threatened or filed which arise from the normal course of their business.
Management believes that such litigation is incidental to the business of the
Company and the Bank and 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.
The Bank has been named in a litigation matter
between the State of California Department of Insurance and a certified public
accounting firm concerning the public accounting firm's audit of a failed
insurance company. At December 31, 1996, the Bank believed it had meritorious
defenses, that it was covered by comprehensive general liability insurance and
had accrued no liability for the matter. During the first quarter of 1997, the
Bank was notified by its insurance carrier that it has presently declined
insurance for this matter. No estimate can be made of the range of loss that is
reasonably possible and no accrual has been made as of the date of this filing.
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
Exhibit 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: August 12, 1997 /s/ DALLAS E. HAUN
----------------------- --------------------------
DALLAS E. HAUN
Vice President
Dated: August 12, 1997 /s/ MELISSA LANFRE'
----------------------- --------------------------
MELISSA LANFRE'
Vice President & CFO
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