1
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, 1997
-------------------------------------
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITIONS PERIOD FROM_________TO______________
COMMISSION FILE NUMBER 0-22733
HARBOR BANCORP
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(562) 491-1111
- --------------------------------------------------------------------------------
(ISSUER'S TELEPHONE NUMBER)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(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 SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
2
HARBOR BANCORP AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - September 30,
1997 and December 31, 1996
Condensed consolidated statements of income - three months ended September
30, 1997 and 1996; and nine months ended September 30, 1997 and 1996
Condensed consolidated statements of cash flows nine months ended September
30, 1997 and 1996
Notes to condensed consolidated financial statements -
September 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
1
3
ITEM I: FINANCIAL INFORMATION
HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
(000's omitted)
ASSETS
Cash and due from banks $ 22,632 $ 20,143
Federal funds sold and securities
purchased under resale agreements 55,300 8,400
-------- --------
Cash and cash equivalents 77,932 28,543
Time certificates of deposit 495 495
Investment securities:
Held to maturity (market value of
$5,213,567 in 1997 and $6,094,994
in 1996) 5,168 6,065
Available for sale securities 5,805 18,788
Loans 150,382 143,988
Less allowance for loan losses 2,914 2,738
-------- --------
Net loans 147,468 141,250
Bank premises and equipment:
Land 159 159
Buildings and improvements 4,285 4,249
Furniture, fixtures and equipment 3,681 3,572
-------- --------
8,125 7,980
Less accumulated depreciation
and amortization 6,404 6,132
-------- --------
1,721 1,848
Other real estate owned 329 329
Accrued interest receivable 904 856
Other assets 1,461 1,929
-------- --------
Total assets $241,283 $200,103
======== ========
(Continued)
2
4
HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
(000's omitted)
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Interest bearing $ 108,838 $ 90,442
Noninterest bearing 114,414 92,989
--------- ---------
Total deposits 223,252 183,431
Accrued expenses and other liabilities 1,038 972
--------- ---------
Total liabilities 224,290 184,403
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 3,157 1,871
Unrealized losses on securities
available for sale, net of tax (127) (134)
--------- ---------
Total stockholders' equity 16,993 15,700
--------- ---------
Total liabilities and
stockholders' equity $ 241,283 $ 200,103
========= =========
See notes to unaudited consolidated financial statements.
3
5
HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------- ------------------
1997 1996 1997 1996
------- ------- ------ ------
(000's omitted, except per share data)
Interest income:
Interest and fees on loans $10,578 $ 9,348 $3,677 $3,249
Interest on U.S. government
and agency obligations 466 1,104 151 346
Interest on obligations of
states and political
subdivisions 17 11 6 3
Interest on other investments 60 61 20 21
Interest on federal funds sold
and securities purchased under
agreements to resale 1,008 600 506 213
------- ------- ------ ------
Total interest income 12,129 11,124 4,360 3,832
Interest expense:
Interest on deposits 2,573 2,220 985 811
Interest on borrowed funds -0- 4 -0- -0-
------- ------- ------ ------
Total interest expense 2,573 2,224 985 811
Net interest income 9,556 8,900 3,375 3,021
Provision for loan
losses 560 724 125 280
Net interest income after
provision for loan
losses 8,996 8,176 3,250 2,741
Other operating income:
Service charges on deposit
accounts 692 721 226 235
Loan servicing fees and other
fees and charges 152 159 53 47
Gain on sale of securities -0- 19 -0- 19
------- ------- ------ ------
Total other operating
income 844 899 279 301
(Continued)
4
6
HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Continued)
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(000's omitted, except per share data)
Noninterest expense:
Salaries, wages and employee
benefits 2,766 2,785 854 933
Occupancy expenses 1,566 1,637 497 537
Equipment expenses 240 310 80 103
Data processing expenses 394 424 128 124
Other operating expenses 2,592 2,592 932 758
--------- --------- --------- ---------
Total noninterest
expense 7,558 7,748 2,491 2,455
--------- --------- --------- ---------
Income before taxes based on
income 2,282 1,327 1,038 587
Provision for taxes based
on income 818 489 351 210
--------- --------- --------- ---------
Net income $ 1,464 $ 838 $ 687 $ 377
========= ========= ========= =========
Weighted average number of
common shares and common
share equivalents 1,452,663 1,434,245 1,452,663 1,434,245
Earnings per share $ 1.01 $ 0.58 $ 0.47 $ 0.26
========= ========= ========= =========
See notes to unaudited consolidated financial statements.
5
7
HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
------------------------
1997 1996
(000's omitted)
Operating activities:
Net income $ 1,464 $ 838
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for depreciation and
amortization 331 371
Provision for loan
losses 560 724
Increase in
interest receivable (48) (137)
Increase (decrease) in
interest payable 48 (11)
Other 425 283
-------- --------
Net cash provided by operating
activities 2,780 2,068
Investing activities:
Proceeds from maturities, sales
and calls of investment
securities 18,879 19,850
Purchases of investment securities (4,991) (18,987)
Net increase in loans (6,778) (9,825)
Capital expenditures (144) (302)
Other real estate -0- (530)
-------- --------
Net cash used in
investing activities 6,966 (9,794)
(Continued)
6
8
HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
Nine Months Ended
September 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 39,820 8,455
Cash dividends paid (177) -0-
-------- --------
Net cash provided by
financing activities 39,643 8,455
Increase in cash
and cash equivalents 49,389 729
Cash and cash equivalents at
beginning of period 28,543 26,164
-------- --------
Cash and cash equivalents at
end of period $ 77,932 $ 26,893
======== ========
See notes to unaudited consolidated financial statements.
7
9
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 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
Regu lation S-X. Accordingly, they do not include all of the informa tion 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,
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.
Allowance for loan losses
The allowance for loan losses represents management's evaluation of the quality
of the loan portfolio. The allowance is main tained at a level considered to be
adequate for potential loan losses based on management's assessment of various
factors af fecting 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.
8
10
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.
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 calculation for
the periods ended September 30, 1997 and 1996 was 1,452,663 and 1,434,245
respectively.
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 nine months ended September
30, 1997 and September 30, 1996 is .02 and .01 per share, respectively.
9
11
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 1997
shows continued strength which is supported by the overall stability 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 nine months ended September 30, 1997, the Company has experienced a
net increase in liquid assets. Cash and cash equivalents increased $49,389,000,
or 173% , from $28,543,000 at December 31, 1996 to $77,932,000 at September 30,
1997. Investment securities declined 55.85% from $24,853,000 at December 31,
1996 to $10,973,000 at September 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. Loan volume increased with loans at $150,382,000 at September 30, 1997
compared to loans at $143,988,000 at December 31, 1996. Loans increased
$6,394,000, or 4.44%, as the Company continues to maintain a conservative
posture with respect to lending. Total assets of the Company increased from
$200,103,000 at December 31, 1996 to $241,283,000 at September 30, 1997. This
increase of $41,180,000, or 20.58%, 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 September 30, 1997, the Company had
$5,168,000 in securities classified as held to maturity and $5,805,000 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 $39,821,000, or 21.71%, for the nine months ended
September 30, 1997. This is a result of an increase of noninterest bearing
deposits of $21,425,000, or 23.04%, from $92,989,000 at December 31, 1996 to
$114,414,000 at September 30, 1997 due to a seasonal
10
12
increase in title and escrow deposits at quarter-end. In addition, there was an
increase in interest bearing deposits which increased $18,396,000, or 20.34%,
from $90,442,000 at December 31, 1996 to $108,838,000 at September 30, 1997.
This increase in interest bearing deposits is primarily the result of an
increase of approximately $8,900,000 in short-term certificate of deposit for a
single customer relationship.
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 40% and 29.38% as of September
30, 1997 and December 31, 1996, respectively.
The Bank's goal is to maintain federal funds sold at an average balance of $7 to
$10 million dollars, with minimum daily investments monitored closely. However,
as part of management's liquidity plan for 1997, federal funds sold was
maintained at higher than normal levels in anticipation of increased loan
fundings 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
11
13
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 $1,464,000, or $1.01 per share, for the nine
months ended September 30, 1997, compared to net income of $838,000, or $0.58
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 $9,556,000, for the nine months ended September 30, 1997,
reflects an increase of $656,000, or 7.37%, from $8,900,000 for the same period
of 1996. Rising interest rates and net earning assets, which increased from
$177,736,000 at December 31, 1996 to $217,150,000 at September 31, 1997, are the
primary reason for the improvement in net interest income.
The Company recorded $560,000 in provision for loan losses during the nine
months ended September 30, 1997 compared to $724,000 for the same period in
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.
12
14
During the nine months ended September 30, 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 and data processing expense decreased $190,000 or 3.69%,
during the nine months ended September 30, 1997 over the same period in 1996.
Other operating expense remained the same during the nine months ended September
30, 1997 compared to 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 September 30, 1997, loans on
non-accrual status were $3,048,000, or 2.03%, compared to $3,783,000, or 2.63%,
of total loans at December 31, 1996. Accruing loans which are contractually past
due ninety (90) days or more were $74,000 at September 30, 1997 compared to
$170,000 at December 31, 1996.
At September 30, 1997, 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 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.
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 September 30, 1997 the Company had Tier 1 Capital of 10.49% and Total
Capital of 11.75%.
13
15
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. During the nine months ended September 30, 1997,
there have been no changes and 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 Events
On August 28, 1997, Registrant entered into an Agreement and
Plan of Merger with City National Corp. ("CNC"), pursuant to
which Registrant will be merged with and into CNC. Upon
consummation of the transaction, which is subject to regulatory
14
16
approval and approval by the shareholders of Registrant,
shareholders of Registrant will receive cash, stock or a
combination thereof, valued at $24.10 per share, with a maximum
of 55 percent stock in the aggregate to be issued in the
transaction. Shareholders will have the opportunity to indicate
a preference for the form of consideration to be received in the
merger.
ITEM 6. Exhibits and Reports on Form 8-k
27 - Financial Data Schedule
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, 1997 /s/ DALLAS E. HAUN
----------------------- --------------------------
DALLAS E. HAUN
Vice President
Dated: November 12, 1997 /s/ MELISSA LANFRE'
----------------------- --------------------------
MELISSA LANFRE'
Vice President & CFO
15