FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
_______________________________________________
For quarter ended June 30, 2002
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Commission file number 0-20990
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Harbor Bankshares Corporation
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(Exact name of registrant as specified in its charter)
Maryland 52-1786341
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(State of other jurisdiction of (IRS Employer identification No.)
incorporation or organization)
25 W. Fayette Street, Baltimore, Maryland 21201
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(Address of principal executive offices) (Zip code)
(410) 528-1800
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Registrant's telephone number, including area code
Not Applicable
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Former name, address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X YES___ NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common stock, non-voting, $.01 Par value - 33,795 shares as of June 30, 2002.
Common stock, $.01 Par value - 697,980 shares as of June 30, 2002.
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HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
INDEX
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PART I FINANCIAL INFORMATION
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Item 1 Financial Statements
Consolidated Statements of Condition - June 30, 2002
(Unaudited) and December 31, 2001
Consolidated Statements of Income, (Unaudited) - Six
months Ended June 30, 2002 and 2001
Consolidated Statements of Income, (Unaudited) - Three
months Ended June 30, 2002 and 2001
Consolidated Statement of Cash Flows (Unaudited) - Three
months Ended June 30, 2002 and 2001
Notes to Unaudited Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II OTHER INFORMATION
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Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
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2
HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
June 30 December 31
2002 2001
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(Unaudited)
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Dollars in Thousands
ASSETS
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Cash and Due from Banks $ 5,974 $ 6,992
Interest Bearing Deposits in Other Banks 2,494 1,162
Investment Securities:
Held to maturity (market values of $2,139
as of June 30, 2002 and $2,121 as of December 31,2001) 2,061 2,064
Available for Sale 58,313 48,932
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Total Investment Securities 60,374 50,996
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Federal Funds Sold 9,099 10,553
Loans (Net of unearned income) 110,136 106,807
Allowance for Loan Losses (974) (960)
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Net Loans 109,162 105,847
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Property and Equipment - Net 1,055 996
Other Real Estate Owned 14 14
Intangible Assets 3,081 2,506
Accrued Interest Receivable and Other Assets 7,793 7,520
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TOTAL ASSETS $ 199,046 $ 186,586
========= =========
LIABILITIES
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Deposits:
Non-Interest Bearing Demand $ 24,695 $ 19,979
Interest Bearing Transaction Accounts 20,715 21,206
Savings 82,086 75,330
Time, $100,000 or more 24,722 29,222
Other Time 30,903 25,795
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Total Deposits 183,121 171,532
Accrued Interest and Other Liabilities 778 813
Notes Payable 2,000 2,000
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TOTAL LIABILITIES 185,899 174,345
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STOCKHOLDERS' EQUITY
Common stock, non-voting, - par value $.01 per share:
Authorized 10,000,000 shares; at 697,980 at June 30, 2002
and 688,632 at December 31, 2001 and 33,795 common
non-voting at June 30, 2002 and 33,333 at December 31, 2001 7 7
Capital Surplus 6,986 6,986
Retained Earnings 5,998 5,538
Accumulated other comprehensive income (deficit) 156 (290)
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TOTAL STOCKHOLDERS' EQUITY 13,147 12,241
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 199,046 $ 186,586
========= =========
See Notes to Unaudited Consolidated Financial Statements
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HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
June 30,
2002 2001
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(Unaudited)
In Thousands
Except per Share Data
INTEREST INCOME
Interest and Fees on Loans $ 2,311 $ 2,336
Interest on Investment Securities (Taxable) 572 945
Interest on Deposits in Other Banks 13 13
Interest on Federal Funds Sold 80 294
Other Interest Income 8 12
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TOTAL INTEREST INCOME 2,984 3,600
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INTEREST EXPENSE
Interest on Deposits
Savings 306 720
Interest Bearing Transaction Accounts 13 38
Time $100,000 or More 213 479
Other Time 303 408
Interest on Notes Payable 35 35
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TOTAL INTEREST EXPENSE 870 1,680
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NET INTEREST INCOME 2,114 1,920
Provision for Loan Losses 82 100
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,032 1,820
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NON-INTEREST INCOME
Service Charges on Deposit Accounts 238 254
Other Income 208 225
Gain on Sale of Loans 1 --
Realized Gains on Available for Sale Securities -- 28
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447 507
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NON-INTEREST EXPENSES
Salaries and Employee Benefits 1,041 1,009
Occupancy Expense of Premises 193 192
Equipment Expense 121 169
Data Processing Expense 236 244
Amortization of Intangible Assets 93 83
Other Expenses 469 441
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Total Non- Interest Expenses 2,153 2,138
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2,138
INCOME BEFORE INCOME TAXES 326 189
Applicable Income Taxes 92 58
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NET INCOME $ 234 $ 131
========= =========
BASIC EARNINGS PER SHARE $ .32 $ .19
DILUTED EARNINGS PER SHARE $ .31 $ .18
AVERAGE COMMON SHARES OUTSTANDING 732 697
See notes to unaudited consolidated Financial Statements
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HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended
June 30,
2002 2001
---- ----
(Unaudited)
In Thousands
Except per Share Data
INTEREST INCOME
Interest and Fees on Loans $ 4,509 $ 4,771
Interest on Investment Securities (Taxable) 1,081 1,863
Interest on Deposits in Other Banks 24 22
Interest on Federal Funds Sold 170 511
Other Interest Income 17 23
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TOTAL INTEREST INCOME 5,801 7,190
INTEREST EXPENSE
Interest on Deposits
Savings 576 1,566
Interest Bearing Transaction Accounts 25 76
Time $100,000 or More 491 899
Other Time 574 830
Interest on Borrowed Funds -- 9
Interest on Notes Payable 70 70
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TOTAL INTEREST EXPENSE 1,736 3,450
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NET INTEREST INCOME 4,065 3,740
Provision for Loan Losses 175 200
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,890 3,540
NON-INTEREST INCOME
Service Charges on Deposit Accounts 450 508
Other Income 425 490
Gain on Sales of Loans 23 5
Realized Gains on Available for Sale Securities 28 46
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926 1049
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NON-INTEREST EXPENSES
Salaries and Employee Benefits 2,036 1,996
Occupancy Expense of Premises 380 389
Equipment Expense 251 342
Data Processing Expense 455 463
Amortization of Intangible Assets 176 166
Other Expenses 877 825
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Total Non-Interest Expenses 4,175 4,181
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INCOME BEFORE INCOME TAXES 641 408
Applicable Income Taxes 178 125
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NET INCOME $ 463 283
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BASIC EARNINGS PER SHARE $ .63 .40
DILUTED EARNINGS PER SHARE .61 .39
AVERAGE COMMON SHARES OUTSTANDING $ 728 $ 693
See notes to uanaudited consolidated Financial Statements
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HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30
2002 2001
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(Unaudited)
In Thousands
OPERATING ACTIVITIES
Net Income $ 463 $ 283
Adjustments to Reconcile Net Income to Net Cash And Cash Equivalents
Provided by (Used in) Operating Activities:
Origination of Loans Held for Sale (2,025) (1,124)
Proceeds from the Sale of Loans Held for Sale 2,048 1,129
Gains on sale of loans (23) (5)
Gains on sale of securities (28) --
Provision for Possible Loan Losses 175 200
Depreciation and Amortization 409 474
Increase in Interest Receivable and Other (848) (891)
(Decrease) Increase in Interest Payable and Other Liabilities (35) 131
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Net Cash (Used in) Provided by Operating Activities 136 197
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INVESTING ACTIVITIES
Net Increase in Deposits at Other Banks (1,332) (454)
Purchase Investment Securities held to Maturity -- (2,000)
Purchase of Investments Securities Available for Sale (20,093) (14,914)
Proceeds from Investment Securities Available for Sale -- 8,243
Proceeds from Securities called 4,000 2,000
Proceeds from sale of Investment Securities Available for sale 7,029 --
Net (Increase) Decrease in Loans (3,624) 9,194
Purchase of Premises and Equipment (174) (118)
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Net Cash (Used in) Provided by Investing Activities (14,194) 1951
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FINANCING ACTIVITIES
Net Increase in Non-Interest Bearing Transaction Accounts 4,716 5,853
Net (Decrease) Increase in Interest Bearing Transaction Accounts (491) 2,217
Net Increase in Savings Deposits 6,756 5,382
Net Increase in Time Deposits 608 3,411
Payment of Cash Dividends (3) --
Sale of Common Stock -- 346
Short Term Borrowings -- (2,000)
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Net Cash Provided by Financing Activities 11,586 15,209
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(Decrease) in Cash and Cash Equivalents 2,472 17,357
Cash and Cash Equivalents at Beginning of Period 17,545 3,932
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Cash and Cash Equivalents at End of Period $ 15,073 $ 21,289
========= =========
See notes to unaudited consolidated Financial Statements
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HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
June 30, 2002
Note A: Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles generally accepted in the United States
of America for interim financial information and with the
instructions to Form 10 - QSB. Accordingly, they do not
include all the information required for complete financial
statements. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair presentation
have been included. Operating results for the six-month period
ended June 30, 2002, are not necessarily indicative of the
results that may be expected for the year ending December 31,
2002. The enclosed unaudited consolidated financial statements
should be read in conjunction with the consolidated financial
statements and footnotes thereto incorporated by reference in
the Corporation's Annual Report on Form 10 - KSB for the year
ended December 31, 2001.
Note B: Comprehensive Income
Comprehensive income is defined as the change in equity from
transactions and other events and circumstances from non-owner
sources. Presented below is a reconciliation of net income to
comprehensive income indicating the component of other
comprehensive income:
Six Months Ended June 30,
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2002 2001
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Net Income $ 463 $ 283
- Other Comprehensive Income:
Unrealized Holding Gains (Losses) Arising During
the period 260 (1,017)
- Less: Reclassified Adjustments for gains included
in Net Income (23) (5)
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Other Comprehensive Income (Loss) before Tax 237 (1,022)
Income Tax Expense Related to items of Other
Comprehensive Income 81 (348)
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Other Comprehensive Income 156 (674)
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Comprehensive Income $ 619 $ (391)
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HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
Note C: New Accounting Pronouncement
On January 1, 2002, Harbor Bankshares Corporation (the
"Company") adopted Statement of Financial Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets." SFAS No. 142
provides that goodwill shall not be amortized but should be
tested for impairment on an annual basis, using criteria
prescribed in the statement. If the carrying amount of
goodwill exceeds its implied fair value, as recalculated, an
impairment loss equal to the excess shall be recognized.
Recognized intangible assets other than goodwill should be
amortized over their useful lives and reviewed for impairment
in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (superseded by SFAS No. 144, which
substantially carries over the applicable provisions of SFAS
No. 121).
The Company's intangible assets at June 30, 2002 are
classified as "intangible assets other than goodwill" and
primarily represent the unamortized intangible related to the
Company's acquisitions of branch offices from other banks. At
June 30, 2002, the carrying amount of this intangible was $3.1
million, and is being amortized on a straight line basis in
accordance with SFAS No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions", which was not
superseded by SFAS No. 142.
On May 10, 2002, the Financial Accounting Standards Board
issued an exposure draft titled "Acquisition of Certain
Financial Institutions", which amends certain provisions of
SFAS No. 72. If adopted, the proposal will remove acquisitions
of financial institutions from the scope of SFAS No. 72 and
will require that such acquisitions be accounted for in
accordance with SFAS No. 141, "Business Combinations". If the
acquisition meets the definition of a business combination, it
shall be accounted for by the purchase method in accordance
with the provisions of SFAS No. 141. Any goodwill that results
will be accounted for in accordance with the provisions of
SFAS No. 142. If the acquisition does not meet the definition
of a business combination, the cost of the assets acquired
shall be allocated to the individual assets acquired and
liabilities assumed based on their relative fair values and
shall not give rise to goodwill. In addition, this proposed
statement would amend SFAS No. 144 to include in its scope
long-term customer-relationship intangible assets of financial
institutions such as depositor--and borrower--relationship
intangible assets and credit-cardholder intangible assets.
Consequently, those intangible assets would be subject to the
same undiscounted cash flow recoverability tests and
impairment loss recognition and measurement provisions that
SFAS No. 144 requires for long-term tangible assets and other
finite-lived intangible assets and other finite-lived
intangible assets that are held and used.
Existing unidentifiable intangible assets, as that term is
defined in SFAS No. 72, previously recognized under the
provisions of SFAS No. 72 shall continue to be amortized
(consistent with the existing clarifying provisions of
Emerging Issues Task Force Topic D-100) unless:
a. The transaction in which the intangible asset arose met
the definition of a business combination, and
b. Intangible assets acquired in the transaction were
recognized apart
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HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
from the unidentifiable intangible asset and those
intangible assets were accounted for separately from the
unidentifiable intangible asset after the date of
acquisition.
Management does not believe these criteria have been met and
intends to continue amortizing the intangible, subject to
periodic review of its useful life.
In June 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations" ("Statement 143"), which
addresses financial accounting and reporting for legal
obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs.
Statement 143 is effective for fiscal years beginning after
June 15, 2002. This Statement is not expected to have a
material impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment of Long-Lived Assets" ("Statement 144"), which
supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("Statement 121") and the accounting and reporting provisions
of APB No. 30, "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business.
While Statement 144 retains many of the fundamental provisions
of Statement 121, it establishes a single accounting model for
long-lived assets to be disposed of by sale, and resolves
certain implementation issues not previously addressed by
Statement 121. Statement 144 is effective for fiscal years
beginning after December 15, 2001. This Statement did not have
a material impact on the Company's financial statements.
Note D: PER SHARE DATA - Basic net income per common share are
determined by dividing net income by the weighted average of
shares of common stock outstanding giving retroactive effect
to any stock dividends and splits declared. Diluted earnings
per share is determined by adjusting average shares of common
stock outstanding by the potentially dilutive effects of stock
options outstanding. The dilutive effects of stock options are
computed using the "treasury stock" method.
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HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
The following table presents a summary of per share data and amounts for the
period indicated:
Six Months Ended Three Months Ended
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June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Basic:
Net income applicable to common stock $463,111 $282,922 $234,075 $130,909
======== ======== ======== ========
Average common shares outstanding 731,775 702,692 731,775 702,692
======== ======== ======== ========
Basic net income per share $ .63 $ .40 $ .32 $ .19
======== ======== ======== ========
Diluted:
Net income applicable to common stock $463,111 $282,922 $234,075 $130,909
======== ======== ======== ========
Average common shares outstanding 731,775 702,692 731,775 702,692
Stock option adjustment 24,097 18,246 24,097 15,861
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Diluted average common shares outstanding 755,872 720,938 751,918 718,553
======== ======== ======== ========
Diluted net income per share $ .61 $ .39 $ .31 $ .18
======== ======== ======== ========
Average common shares outstanding for 2001 have been adjusted to reflect a stock
dividend paid in March 2002.
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HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
Part I. FINANCIAL INFORMATION
Item II. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Harbor Bankshares Corporation earnings for the second quarter
of 2002 totaled $234 thousand, an increase of $103 thousand or
78.6 percent when compared to the second quarter of 2001. Net
Interest income increased by $194 thousand or 10.1 percent.
Non-interest income decreased by $60 thousand or 11.8 percent.
Included in the non-interest income for 2001, are gains on
available for sale securities of $28 thousand. Non-interest
expenses for the quarter increased by $15 thousand or .7
percent. The provision for loan losses decreased by $18
thousand or 18.0 percent.
Year to date earnings as of June 30, 2002, were $463 thousand,
reflecting an increase of $180 thousand or 63.6 percent when
compared to the first six months of 2001. The earnings
increase is principally attributed to the re-pricing of
liabilities, which decreased the cost of funds substantially.
Return on Average Assets (ROAA) and Return on Average Equity
(ROAE) were .48 percent and 7.22 percent respectively.
Net income increased by $325 thousand or 8.7 percent over last
year's second quarter. The increase in net interest income
reflects a lower cost of funds due to the re-pricing of
liabilities, mainly in the time deposit category.
Interest on investment securities decreased by $782 thousand
or 42.0 percent, attributed mainly to the "Calls" feature of
some of the securities which were re-invested at lower rates.
Interest and fees on loans also decreased by $262 thousand or
14.1 percent due to lower interest rates, reflecting the
various drops experienced during the later part of 2001.
Interest expense on savings accounts decreased by $990
thousand or 14.1 percent and the cost of time deposits
decreased by $664 thousand or 38.4 percent. Both categories
reflect the re-pricing due to lower rates during 2001.
Interest on notes payable, at $70 thousand, remained the same
for both periods.
The provision for possible Loan Losses was $175 thousand for
the six months ended June 30, 2002 compared to $200 thousand
allocated during the same period of 2001. Gross charge-offs
totaled $188 thousand, commercial loan charge-off at $93
thousand, represented 49.4 percent of total gross charge-offs,
followed by consumer loans, which totaled $56 thousand, or
29.8 percent. Recoveries for the period were $28 thousand.
The allowance for loan losses as of June 30, 2002, was $974
thousand or .88 percent of total loans and $815 thousand or
.78 percent at the end of the comparable 2001 period.
Management analyzes the reserves for possible losses on a
quarterly basis. The analysis takes into consideration the
overall loan portfolio and its underlying collateral, the mix
of loans within the portfolio, delinquency trends, economic
conditions, current and prospective trends in real estate
values, and other relevant factors. It is the opinion of
management that as of June 30, 2002, the reserve for possible
loan losses is adequate.
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HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
Non-Interest income decreased by $123 thousand or 11.7 percent. Service charges
on deposit accounts decreased by $58 thousand or 11.4 percent due to new
programs tailored to attract and retain new customers. Other non-interest income
decreased by $65 thousand or 12.0 percent. Included in the non-interest income
were $109 thousand of earnings on cash surrender value of life insurance, $132
thousand of ATM fees, $23 thousand of gains on the sale of loans and $28
thousand on realized gains on the sale of securities. Fee income from the Bank's
subsidiary, Harbor Financial Services, was $43 thousand. They had net earnings
of $2 thousand as of June 30,2002. Non-interest expenses decreased by $6
thousand or .14 percent. Salary and benefits increased by $40 thousand or 2.0
percent, reflecting salary and staff increases. Occupancy expense decreased by
$9 thousand or 2.3 percent, while equipment expense decreased by $91 thousand or
26.7 percent, this decrease was mainly attributed to lower depreciation expense.
Data processing expenses decreased by $8 thousand or 1.7 percent. Goodwill
amortization increased by $10 thousand or 6.0 percent due to additional goodwill
resulting from a branch acquisition from another Bank, which took place on April
29, 2002.
As of June 30, 2002, investment securities reflected a decrease of $9.4 million
or 18.4 percent, while loans at $110.1 million reflected an increase of $3.3
million or 3.1 percent. Federal Funds sold for the period were $9.1 million, a
decrease of 13.8 percent.
Total deposits were $183.1 million, reflecting an increase of $11.6 million, the
increase was basically due to an acquisition of a branch facility in Baltimore
County, on April 29, 2002. The total deposits obtained through this acquisition
totaled $18.8 million, a premium of 4.0 percent or $751 thousand was paid for
those deposits. Non-interest bearing deposits increased by $4.7 million, while
interest bearing transaction deposits showed a decrease of $491 thousand or 2.3
percent. Savings deposits grew by $6.7 million or 8.9 percent. Time deposits
increased by $608 thousand or 1.1 percent. Long term borrowings remained the
same as of the prior year at $2.0 million. There were no short term borrowings
as of June 30, 2002.
Stockholder's equity increased by $906 thousand or 7.4 percent. Net earnings of
$463 thousand coupled with a net gain of $156 thousand in other comprehensive
income were the main reasons for the increase. Primary and risk based capital
for the Corporation was 4.98 percent and 9.03 percent respectively.
The Corporation stock is traded privately. During the period, a few trades were
registered at $18.00 per share.
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HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
Part II. OTHER INFORMATION
Item I. Legal Proceedings
The Corporation and its subsidiary, at times and in the ordinary
course of business, are subject to legal actions. Management does not
believe the outcome of such matters will have a material adverse
effect on the financial condition of the Corporation.
Item II. Changes in Securities
None
Item III. Defaults Upon Senior Securities
None
Item IV. Submission of Matters to a Vote of Security Holders
None
Item V. Other Information
None
Item VI. Exhibits and Reports on Form 8-K
The Company did not file any report on Form 8-K for the
period ending June 30, 2002.
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HARBOR BANKSHARES CORPORATION AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARBOR BANKSHARES CORPORATION
Date: 8/5/02 /s/ Joseph Haskins, Jr.
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Joseph Haskins, Jr.
Chairman and Chief Executive Officer
Date: 8/5/02 /s/ Teodoro J. Hernandez
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Teodoro J. Hernandez
Treasurer
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