<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-39788
HARBOR BANCORP LOGO
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
Dear Stockholders:
The Boards of Directors of Provident Bankshares Corporation and Harbor
Federal Bancorp, Inc. have approved a merger agreement that provides for the
merger of Harbor into Provident. If we complete the merger, you will receive
1.256 shares of Provident common stock for each share of Harbor common stock
that you own. This represents a value of $17.51 based on Provident's closing
price on the Nasdaq National Market on June 30, 2000. Provident's common stock
is listed on the Nasdaq National Market under the symbol PBKS. We expect that
the merger will be a tax-free transaction for Harbor stockholders.
To complete the merger, Harbor needs your approval. This document is being
furnished to you in connection with the solicitation of proxies by Harbor's
Board of Directors for its use at a special meeting of stockholders, which is
being held to vote upon the merger.
The place, date and time of the stockholders' meeting is as follows:
August 16, 2000
3:00 p.m., local time
Days Inn
Loch Raven Boulevard and Route 695
Towson, Maryland
Your vote is important. Whether or not you plan to attend the meeting,
please take the time to vote by completing and mailing the enclosed proxy card
to us. If you sign, date and mail your proxy card without indicating how you
want to vote, your proxy will be counted as a vote "FOR" the merger and the
transactions contemplated by the merger agreement. If you do not return your
proxy card, or if you do not instruct your broker how to vote any shares held
for you in "street name," the effect will be a vote against the merger.
This document contains detailed information about the stockholders' meeting
and the proposed merger. You should read this document carefully. You may also
obtain information about Provident and Harbor from documents each company has
filed with the Securities and Exchange Commission.
Your Board of Directors believes that the merger is in your best interests
and unanimously recommends that you vote "FOR" the merger. Harbor's financial
advisor, Trident Securities, has issued its opinion to Harbor's Board of
Directors that the exchange ratio is fair from a financial point of view to
Harbor stockholders.
/s/ Robert A. Williams
Robert A. Williams
President and Chief Executive Officer
-------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities to be issued under this
proxy statement-prospectus or determined if this proxy statement-prospectus is
accurate or adequate. Any representation to the contrary is a criminal offense.
The securities being offered through this document are not savings or deposit
accounts or other obligations of any bank or savings association, and they are
not insured by the Federal Deposit Insurance Corporation, the Savings
Association Insurance Fund, the Bank Insurance Fund or any other governmental
agency.
-------------------------------------------------------------------------------
Proxy Statement-Prospectus dated July 5, 2000
and first mailed to stockholders on or about July 7, 2000
<PAGE>
This document incorporates important business and financial information
about Provident and Harbor from documents filed with the Securities and Exchange
Commission that have not been included in or delivered with this document. You
may read and copy these documents at the SEC's public reference facilities.
Please call the SEC at 1-800-SEC-0330 for information about these facilities.
This information is also available at the Internet site the SEC maintains at
http://www.sec.gov. Reports and other information relating to Provident and
Harbor are also available at the offices of the National Association of
Securities Dealers. See "Where You Can Find More Information" on page 54.
You also may request copies of these documents from us. Provident will
provide you with copies of the documents relating to Provident, without charge,
upon written or oral request to:
Provident Bankshares Corporation
114 East Lexington Street
Baltimore, Maryland 21202
Attention: Robert L. Davis
Telephone: (410) 281-7000
Harbor will provide you with copies of the documents relating to Harbor,
without charge, upon written or oral request to:
Harbor Federal Bancorp, Inc.
705 York Road
Baltimore, Maryland 21204
Attention: Dana L. Miller
Telephone: (410) 296-1010
In order to receive timely delivery of the documents in advance of Harbor's
special meeting of stockholders, you should make your requests no later than
August 9, 2000.
<PAGE>
Harbor Federal Bancorp, Inc.
705 York Road
Baltimore, Maryland 21204
(410) 296-1010
-------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
-------------------------
A special meeting of stockholders of Harbor Federal Bancorp, Inc. will be
held at the Days Inn, Loch Raven Boulevard and Route 695, Towson, Maryland on
Wednesday, August 16, 2000, at 3:00 p.m., local time, for the following
purposes:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of May 3, 2000, by and between Provident
Bankshares Corporation and Harbor Federal Bancorp, Inc., pursuant to
which Harbor will merge with and into Provident and each share of common
stock, par value $.01 per share, of Harbor will be converted into the
right to receive 1.256 shares of common stock, par value $1.00 per
share, of Provident, all on and subject to the terms and conditions
contained therein; and
2. To transact any other business as may properly come before the meeting
or any adjournment or postponement.
Only stockholders of record at the close of business on June 30, 2000 will
be entitled to notice of and to vote at the meeting and at any adjournment or
postponement.
By Order of the Board of Directors
/s/ Dana L. Miller
Dana L. Miller
Secretary
Baltimore, Maryland
July 7, 2000
The Board of Directors unanimously recommends that you vote "FOR" the proposal
to approve and adopt the merger agreement. Whether or not you plan to attend the
meeting, please complete, sign, date and return the enclosed proxy in the
accompanying pre-addressed postage-paid envelope.
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Summary............................................................... 1
Comparative Per Share Data............................................ 7
Selected Historical Financial Information............................. 8
Selected Historical Financial Information for Provident............. 8
Selected Historical Financial Information for Harbor................ 9
Market Price And Dividend Information................................. 10
Special Meeting of Harbor Stockholders................................ 12
Place, Date and Time................................................ 12
Purpose of the Meeting.............................................. 12
Who Can Vote at the Meeting......................................... 12
Attending the Meeting............................................... 12
Vote Required....................................................... 12
Voting by Proxy..................................................... 13
Ownership of Harbor Common Stock...................................... 14
The Merger............................................................ 15
The Parties to the Merger........................................... 15
Form of the Merger; Conversion of Harbor Common Stock............... 15
Surrender of Stock Certificates..................................... 16
Treatment of Harbor Stock Options................................... 16
Tax Consequences for Harbor Stockholders............................ 17
Background of the Merger............................................ 18
Recommendation of the Harbor Board; Harbor's Reasons for
the Merger........................................................ 19
Opinion of Harbor's Financial Advisor............................... 20
Rights of Dissenting Stockholders................................... 26
Interests of Harbor's Directors and Officers in the Merger
that Differ From Yours............................................ 26
Regulatory Approvals Needed to Complete the Merger.................. 27
Accounting Treatment of the Merger.................................. 28
Resale of Provident Common Stock.................................... 28
The Merger Agreement.................................................. 29
Terms of the Merger................................................. 29
When Will the Merger be Completed................................... 29
Conditions to Completing the Merger................................. 30
Conduct of Business Before the Merger............................... 31
Covenants of Harbor and Provident in the Merger Agreement........... 34
Representations and Warranties Made by Provident and
Harbor in the Merger Agreement.................................... 35
Terminating the Merger Agreement.................................... 36
Expenses and Termination Fees....................................... 37
Changing the Terms of the Merger Agreement.......................... 37
Information About Provident........................................... 38
A Warning About Forward-looking Statements............................ 38
Description of Provident Common Stock................................. 40
Common Stock........................................................ 40
Preferred Stock..................................................... 40
Provident Rights Plan............................................... 41
Comparison of Rights of Stockholders.................................. 43
Authorized Stock.................................................... 43
Voting Rights....................................................... 43
Required Vote for Authorization of Certain Actions.................. 44
Dividends........................................................... 44
Stockholders' Meetings.............................................. 44
Action by Stockholders Without a Meeting............................ 45
Board of Directors.................................................. 45
Stockholder Rights Plan............................................. 46
Amendment of the Bylaws............................................. 46
Amendment of the Articles of Incorporation.......................... 47
Selected Provisions in the Articles of Incorporation And Bylaws
of Provident........................................................ 48
Business Combinations with Interested Stockholders.................. 48
Board of Directors.................................................. 49
Special Meetings of Stockholders.................................... 49
Advance Notice Provisions for Stockholder Nominations
and Proposals..................................................... 49
Preferred Stock..................................................... 49
Regulation and Supervision of Provident............................... 50
General............................................................. 50
Payment of Dividends................................................ 50
Transactions with Affiliates........................................ 51
Holding Company Liability........................................... 51
Prompt Corrective Action............................................ 51
Capital Adequacy.................................................... 52
Enforcement Powers of the Federal Banking Agencies.................. 53
Control Acquisitions................................................ 53
Future Legislation.................................................. 54
Legal Matters......................................................... 54
Experts............................................................... 54
Where You Can Find More Information.................................... 54
Stockholder Proposals.................................................. 56
</TABLE>
APPENDIX A Agreement and Plan of Merger, dated as of May 3, 2000, between
Provident Bankshares Corporation and Harbor Federal Bancorp, Inc.
APPENDIX B Fairness Opinion of Trident Securities
APPENDIX C Annual Report on Form 10-KSB for Harbor Federal Bancorp, Inc.
<PAGE>
Summary
This summary highlights selected information from this document and may not
contain all of the information that is important to you. You should carefully
read this entire document and the other documents to which this document refers
you to fully understand the merger. See "Where You Can Find More Information" on
page 54.
THE COMPANIES
Provident Bankshares Provident is the bank holding company for
Corporation Provident Bank. Provident serves individuals
114 East Lexington Street and businesses in the Baltimore-Washington
Baltimore, Maryland 21202 corridor through a full range of financial
(410) 281-7000 services and a network of 91 offices in
Maryland, Northern Virginia and southern York
County, Pennsylvania. At March 31, 2000,
Provident had total assets of $5.2 billion,
deposits of $3.8 billion and stockholders'
equity of $274.4 million.
Harbor Federal Bancorp, Inc. Harbor is the savings and loan holding
705 York Road company for Harbor Federal Savings Bank.
Baltimore, Maryland 21204 Harbor Federal operates nine banking offices
(410) 296-1010 in the City of Baltimore and the Counties of
Baltimore and Anne Arundel in Maryland. At
March 31, 2000, Harbor had total assets of
$253.1 million, deposits of $179.4 million,
and stockholders' equity of $25.5 million.
THE HARBOR STOCKHOLDERS' SPECIAL MEETING
Place, Date and Time (page 12) The special meeting of Harbor stockholders
will be held at the Days Inn, Loch Raven
Boulevard and Route 695, Towson, Maryland on
August 16, 2000 at 3:00 p.m., local time.
Purpose of the Meeting At the special meeting, Harbor stockholders
(page 12) will be asked to approve the merger agreement
with Provident and to transact any other
business that may properly come before the
meeting.
Who Can Vote At the Meeting You can vote at the special meeting of Harbor
(page 12) stockholders if you owned Harbor common stock
at the close of business on June 30, 2000.
You will be able to cast one vote for each
share of Harbor common stock you owned at
that time. As of June 30, 2000, there were
1,664,515 shares of Harbor common stock
issued and outstanding.
What Vote is Required for In order to approve the merger agreement, the
Approval of the Merger holders of at least two-thirds of the
Agreement (page 12) outstanding shares of Harbor common stock
entitled to vote must vote in its favor. The
directors of Harbor, who collectively own
15.4% of the issued and outstanding shares of
Harbor common
1
<PAGE>
stock, have agreed to vote their shares in
favor of the merger agreement. You can vote
your shares by attending the special meeting
and voting in person or by completing and
mailing the enclosed proxy card.
THE MERGER
Harbor Will Merge into We propose a business combination in which
Provident (page 15) Harbor will merge with Provident. Provident
will be the surviving corporation in the
merger.
Each Harbor Share Will Be Upon the closing of the merger, each of your
Exchanged for 1.256 Shares of shares of Harbor common stock will
Provident Common Stock automatically be converted into the right to
(page 15) receive 1.256 shares of Provident common
stock. When used in this document, this
number is referred to as the "exchange
ratio." Provident will not issue fractional
shares in the merger. If the total number of
shares of Provident common stock you will
receive in the merger does not equal a whole
number, you will receive cash instead of the
fractional share.
Because the exchange ratio is fixed, the
value of the shares of Provident common stock
that you will receive in the merger will
change as the price of Provident common stock
changes. On June 30, 2000, Provident common
stock closed at $13.94 per share on the
Nasdaq National Market.
How to Exchange Your Harbor To receive certificates for your shares of
Stock Certificates (page 16) Provident common stock, you will need to
surrender your Harbor stock certificates.
After we complete the merger, Provident's
stock transfer agent will send you written
instructions for exchanging your stock
certificates. Please do not send in your
certificates until you receive these
instructions.
The Merger Generally Will Be Harbor stockholders generally will not
Tax-Free to Harbor recognize gain or loss for U.S. federal
Stockholders (page 17) income tax purposes as a result of the
exchange of all of their shares of Harbor
common stock in the merger. Harbor
stockholders will, however, have to recognize
income or gain with respect to any cash
received instead of a fractional share.
This tax treatment may not apply to all
Harbor stockholders. Determining the actual
tax consequences of the merger to you can be
complicated. You should consult your own tax
advisor for a full understanding of the
merger's tax consequences that are particular
to you.
2
<PAGE>
We will not be obligated to complete the
merger unless we each receive a legal
opinion, dated the closing date, that the
merger will be treated as a transaction of a
type that is generally tax-free to Provident
and Harbor for U.S. federal income tax
purposes. In that case, the U.S. federal
income tax treatment of the merger will be as
we have described it above. This opinion,
however, will not bind the Internal Revenue
Service, which could take a different view.
Harbor's Board of Directors Harbor's Board of Directors believes that the
Unanimously Recommends merger is in your best interests and
that Stockholders Approve the recommends that you vote "FOR" the proposal
Merger (page 19) to approve the merger agreement.
Harbor's Financial Advisor Trident Securities, a division of McDonald
Believes the Merger Investments, Inc., has delivered to Harbor's
Consideration Is Fair to Harbor Board of Directors its opinion that, as of
Stockholders (page 20) the date of this document, the merger
consideration is fair to the holders of
Harbor common stock from a financial point of
view. A copy of this opinion is provided as
Appendix B to this document. You should read
it completely to understand the procedures
followed, assumptions made, matters
considered, and qualifications and
limitations on the review made by Trident in
providing this opinion. Harbor has agreed to
pay Trident a fee for its services in
connection with the merger.
Harbor Stockholders Do Not Under Maryland law, the stockholders of
Have Appraisal Rights in the Harbor do not have any right to an appraisal
Merger (page 26) of the value of their shares in connection
with the merger.
Interests of Harbor's Directors Some of Harbor's directors and officers
and Officers in the Merger that have interests in the merger that are
Differ From Your Interests different from, or are in addition to, their
(page 26) interests as stockholders in Harbor. The
members of Harbor's Board of Directors knew
about these additional interests, and
considered them, when they approved the
merger. These include:
. severance payments that will be made to
certain executive officers of Harbor and
Harbor Federal under the terms of their
employment agreements with Harbor and
Harbor Federal as a result of the
completion of the merger;
. Harbor's President and Chief Executive
Officer and members of the Harbor Federal
Board of Directors who were non-employee
directors of Harbor Federal at the time of
its conversion from mutual to stock form
will be entitled to receive their
retirement
3
<PAGE>
benefits in a lump sum payment as a result
of the completion of the merger; and
. provisions in the merger agreement relating
to indemnification of directors and
officers and insurance for directors and
officers of Harbor for events occurring
before the merger.
Regulatory Approvals Needed We cannot complete the merger unless it is
to Complete the Merger first approved by the Board of Governors of
(page 27) the Federal Reserve System, the Federal
Deposit Insurance Corporation and the
Maryland Commissioner of Financial
Regulation. The U.S. Department of Justice
has input into this approval process. In
addition, we must give prior notice of the
merger to the Office of Thrift Supervision.
Provident has filed the required applications
and notices. As of the date of this document,
we have not received the approval of the
Federal Deposit Insurance Corporation or the
Maryland Commissioner of Financial
Regulation. While we do not know of any
reason why we would not be able to obtain
these approvals in a timely manner, we cannot
be certain when or if we will receive them.
Purchase Accounting Provident will account for the merger
Treatment (page 28) using the purchase method of accounting.
Under this method of accounting, Provident
will record the fair market value of Harbor's
assets and liabilities on its financial
statements as of the date we complete the
merger. The difference between the purchase
price of the merger and the fair market value
of Harbor's identifiable assets net of its
liabilities will be recorded on Provident's
books as "goodwill" and will be amortized
over 15 years as charges to Provident's
earnings.
Forward-Looking Statements This proxy statement-prospectus, including
May Prove Inaccurate (page 38) information included or incorporated by
reference in this document, contains certain
forward-looking statements with respect to
the financial condition, results of
operations, plans, objectives, future
performance and business of each of Provident
and Harbor, as well as certain information
relating to the merger. Also, statements
preceded by, followed by or that include the
words "believes," "expects," "anticipates,"
"estimates" or similar expressions are
forward-looking statements. Actual results
may differ materially from those contemplated
by the forward-looking statements due to
various factors.
4
<PAGE>
THE MERGER AGREEMENT
A copy of the merger agreement is provided as Appendix A to this proxy
statement-prospectus. Please read the entire merger agreement carefully. It is
the legal document that governs the merger.
Conditions to Completing the The completion of the merger depends on a
Merger (page 30) number of conditions being met. These
conditions include:
. approval of the merger agreement by
Harbor's stockholders;
. approval of the merger by regulatory
authorities; and
. receipt of tax opinions that the merger
qualifies as a tax-free reorganization.
Where the law permits, we could decide to
complete the merger even though one or more
of these conditions has not been met. We
cannot be certain when or if the conditions
to the merger will be satisfied or waived, or
that the merger will be completed.
Terminating the Merger We can agree at any time not to complete the
Agreement (page 36) merger, even if the stockholders of Harbor
have approved it. Also, either of us can
decide, without the consent of the other, to
terminate the merger agreement if:
. the stockholders of Harbor do not approve
the merger;
. a required regulatory approval is denied or
a governmental authority blocks the merger;
. we do not complete the merger by December
31, 2000; or
. the other party makes a misrepresentation,
breaches a warranty or fails to satisfy or
fulfill a covenant that would have a
material adverse effect on the party
seeking to terminate the merger agreement
and such breach or misrepresentation is not
cured.
Provident may also terminate the merger
agreement if Harbor's Board of Directors
withdraws or revises its recommendation to
its stockholders to approve the merger
agreement.
Harbor Could Decide Not to According to the terms of the merger
Complete the Merger if agreement, Harbor will have the right not to
Provident's Stock Price complete the merger if (1) the average of the
Decreases Significantly closing prices of Provident's common stock
(page 36) over a specified 20 trading day period prior
to the receipt of the last of the required
regulatory approvals is less than $12.25 and
(2) the average closing price over that 20
5
<PAGE>
trading day period represents a decline from
Provident's closing price of $13.81 on May
10, 2000, that exceeds by more than 15
percentage points the decline in the Standard
& Poor's Regional Bank Index over the same
period.
Any decision by Harbor not to complete the
merger under this provision will not be
effective, however, if Provident elects to
increase the exchange ratio in accordance
with a formula in the merger agreement.
Harbor Must Pay Provident a Harbor will be required to pay Provident a
Termination Fee Under Certain termination fee of:
Circumstances (page 37)
(1) $700,000, plus Provident's reasonable
out-of-pocket expenses, if, within 12
months after May 3, 2000, it receives a
proposal for a competing transaction and
any of the following occur:
. Harbor's Board of Directors changes,
in a manner adverse to Provident, its
recommendation of the merger,
. The merger is not approved by
Harbor's stockholders or Harbor's
stockholder meeting for the purpose
of voting on the merger is canceled
or is not held, or
. Harbor willfully breaches the merger
agreement, and
(2) $1,500,000, plus Provident's reasonable
out-of-pocket expenses, if within 18
months after May 3, 2000, without having
received Provident's consent, Harbor
enters into an agreement to engage in,
or recommends that its stockholders
approve, an acquisition transaction not
permitted under the terms of the merger
agreement.
Any fee payable under clause (2) above will
be reduced dollar-for-dollar by the full
amount of any fee actually paid under clause
(1) above. No fee described above is payable
if the merger agreement is validly terminated
for certain reasons at or prior to the time
that the fee becomes payable.
We May Amend the Terms of We can agree to amend the merger agreement,
the Merger and Waive Some and each of us can waive our right to require
Conditions (page 37) require the other party to adhere to the
terms and conditions of the merger agreement,
where the law allows. However, after Harbor's
stockholders approve the merger agreement,
they must approve any amendment or waiver
that reduces or changes the consideration to
be received by them in the merger.
6
<PAGE>
Comparative Per Share Data
The following table shows information about our income per common share,
dividends per share and book value per share, and similar information reflecting
the merger. The information in the table assumes that Provident will account for
the merger using the purchase method of accounting.
The information listed as "pro forma equivalent" was obtained by
multiplying the pro forma amounts by the exchange ratio of 1.256. This
information reflects the fact that you will receive 1.256 shares of Provident
common stock for each share of Harbor common stock exchanged in the merger. The
pro forma information, while helpful in illustrating the financial
characteristics of Provident following the merger under one set of assumptions,
does not attempt to predict or suggest future results. The pro forma information
also does not necessarily reflect what the historical results of Provident would
have been had our companies been combined during these periods.
The information in the following table is based on, and should be read
together with, the historical financial information that we have presented in
our prior filings with the Securities and Exchange Commission. We have
incorporated our prior filings into this document by reference. See "Where You
Can Find More Information" on page 54.
At
March 31,
2000
---------
Book value per share:
Provident historical................... $10.94
Harbor historical...................... 15.24
Pro forma combined/(1)/................ 11.04
Harbor pro forma equivalent............ 13.86
Three
Months Ended Year Ended
March 31, December 31,
2000 1999
------------ ------------
Cash dividends declared per share:
Provident historical/(2)/............. $0.157 $0.57
Harbor historical..................... 0.130 0.52
Pro forma/(3)/........................ 0.157 0.57
Harbor pro forma equivalent........... 0.197 0.72
Diluted net income per share:
Provident historical/(2)/............. $ 0.43 $1.60
Harbor historical/(4)/................ 0.34 1.23
Pro forma combined/(2) (4)/........... 0.43 1.57
Harbor pro forma equivalent........... 0.54 1.97
________________________
(1) The pro forma combined book value per share of Provident common
stock is based upon the historical total combined common
stockholders' equity for Provident and Harbor divided by total pro
forma common shares of the combined entities.
(2) Adjusted to reflect Provident's 5% stock dividend paid on May 12,
2000.
(3) Pro forma dividends per share represent Provident's historical
dividends per share.
(4) Historical information for Harbor under the column labeled "Year
Ended December 31, 1999" is for its fiscal year ended March 31,
2000. Pro forma diluted net income per share for the year ended
December 31, 1999 is based on Provident's income for its fiscal
year ended December 31, 1999 and Harbor's net income for its fiscal
year ended March 31, 2000.
7
<PAGE>
Selected Historical Financial Information
The following tables show summarized historical financial data for
Provident and Harbor. The information in the following tables is based on
historical financial information that we have presented in our prior filings
with the Securities and Exchange Commission. You should read this summary
financial information in connection with our historical financial information.
This historical financial information is also incorporated into this document by
reference. See "Where You Can Find More Information" on page 54.
Interim financial data as of March 31, 2000 and 1999 for Provident is
unaudited. You should not rely on the information for the three months ended
March 31, 2000 as being indicative of the results expected for the entire year.
SELECTED HISTORICAL FINANCIAL INFORMATION FOR PROVIDENT
<TABLE>
<CAPTION>
March 31, December 31,
------------------------- ----------------------------------------------------------------
2000 1999 1999 1998 1997/(1)/ 1996 1995
------------ ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income
(tax-equivalent).................. $ 98,255 $ 81,652 $ 353,341 $ 319,240 $ 280,167 $ 248,311 $ 224,236
Interest expense.................. 57,595 47,531 204,261 187,509 156,718 137,354 122,819
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income
(tax-equivalent).................. 40,660 34,021 149,080 131,731 123,449 110,957 101,417
Provision for loan losses......... 4,300 1,961 11,570 12,027 9,953 10,011 1,517
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses...... 36,360 32,060 137,510 119,704 113,496 100,946 99,900
Non-interest income............... 14,216 15,475 60,734 55,995 41,672 44,509 34,573
Net securities gains (losses)..... -- -- 312 6,749 2,337 5,556 (2,683)
Merger related expenses/(1)/...... -- -- -- -- 10,047 -- --
Non-interest expense.............. 34,876 32,180 132,243 122,914 107,816 110,323 97,416
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes........ 15,700 15,355 66,313 59,534 39,642 40,688 34,374
Income tax expense
(tax-equivalent).................. 4,835 5,030 22,163 20,504 14,683 14,500 12,242
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before extraordinary item.. 10,865 10,325 44,150 39,030 24,959 26,188 22,132
Extraordinary item--gain on debt
extinguishment, net............ 770 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........................ $ 11,635 $ 10,325 $ 44,150 $ 39,030 $ 24,959 $ 26,188 $ 22,132
========== ========== ========== ========== ========== ========== ==========
Per Share Amounts:
Net income -- Basic............ $ 0.44 $ 0.38 $ 1.65 $ 1.45 $ 0.95 $ 1.01 $ 0.87
Net income -- Diluted.......... 0.43 0.37 1.60 1.40 0.92 0.97 0.84
Cash dividends paid............ 0.16 0.13 0.57 0.47 0.38 0.30 0.22
Tax-equivalent adjustment/(2)/.... $ 241 $ 280 $ 964 $ 1,133 $ 1,055 $ 832 $ 754
Total assets...................... $5,247,507 $4,867,601 $5,094,477 $4,675,897 $3,926,739 $3,485,618 $3,170,390
Total stockholders' equity........ 274,405 294,658 274,599 296,077 270,182 238,798 223,048
Total common equity/(3)/.......... 319,089 297,975 318,922 290,769 265,449 240,171 215,910
Return on average assets.......... 0.90% 0.88% 0.90% 0.90% 0.68% 0.79% 0.75%
Return on average equity.......... 17.33 14.29 15.46 13.75 9.90 11.53 11.14
Stockholders' equity to assets.... 5.23 6.05 5.39 6.33 6.88 6.85 7.04
Average equity to average assets.. 5.34 6.16 5.83 6.52 6.89 6.85 6.70
Dividend payout ratio............. 37.21 35.14 35.63 33.57 41.30 30.93 26.19
</TABLE>
____________________________________
(1) Exclusive of after-tax merger related expenses incurred during 1997, net
income would have been $33.6 million. Return on average assets and return on
average equity for 1997 would have been 0.92% and 13.33%, respectively.
Basic earnings per share and diluted earnings per share would have been
$1.28 and $1.23, respectively.
(2) Tax-advantaged income has been adjusted to a tax-equivalent basis using the
combined statutory federal and state income tax rate in effect of 35% in
1999 and 39.55% for 1998 through 1995.
(3) Common equity excludes net accumulated other comprehensive income which is
comprised of unrealized gains or losses on available for sale securities.
8
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION FOR HARBOR
<TABLE>
<CAPTION>
March 31,
------------------------------------------------------
2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income...................................... $ 18,370 $ 17,023 $ 16,401 $ 15,369 $ 11,783
Interest expense..................................... 10,999 10,269 9,839 9,371 6,213
-------- -------- -------- -------- --------
Net interest income.................................. 7,371 6,754 6,562 5,998 5,570
Provision for loan losses............................ 65 75 110 33 --
-------- -------- -------- -------- --------
Net interest income after provision for loan losses.. 7,306 6,679 6,452 5,965 5,570
Non-interest income.................................. 431 638 489 229 142
Non-interest expense................................. 4,343 4,255 4,132 4,726 4,070
-------- -------- -------- -------- --------
Income before income taxes........................... 3,395 3,062 2,809 1,468 1,642
Income tax expense................................... 1,358 1,277 1,140 567 638
-------- -------- -------- -------- --------
Net income........................................... $ 2,038 $ 1,785 $ 1,669 $ 901 $ 1,004
======== ======== ======== ======== ========
Per Share Amounts:
Net income -- Basic............................... $ 1.25 $ 1.03 $ 0.96 $ 0.50 $ 0.49
Net income -- Diluted............................. 1.23 0.99 0.93 0.49 0.48
Cash dividends paid............................... 0.52 0.51 0.43 0.36 0.18
Total assets......................................... $253,112 $239,298 $231,140 $219,462 $196,762
Total stockholders' equity........................... 25,497 26,802 29,323 28,225 27,889
Return on average assets............................. 0.82% 0.77% 0.75% 0.44% 0.62%
Return on average equity............................. 7.90 6.14 5.86 3.23 3.17
Stockholders' equity to assets....................... 10.07 11.20 12.69 12.86 14.17
Average equity to average assets..................... 10.24 12.53 12.84 13.30 19.69
Dividend payout ratio................................ 42.28 51.52 46.24 73.47 37.50
</TABLE>
9
<PAGE>
Market Price And Dividend Information
Provident common stock is listed on the Nasdaq National Market under the
symbol PBKS. Harbor common stock is listed on the Nasdaq National Market under
the symbol HRBF. The following table lists the high and low prices per share for
Provident common stock and Harbor common stock and the cash dividends declared
by Provident and Harbor for the periods indicated. The market price and dividend
information for Provident have been retroactively restated to reflect
Provident's 5% stock dividends that were paid in May 2000, May 1999 and May 1998
and a two-for-one stock split in February 1998. The market price and dividend
information for Harbor have been retroactively restated to reflect Harbor's 10%
stock dividend paid in July 1998.
<TABLE>
<CAPTION>
Provident Common Stock Harbor Common Stock
-------------------------------------------------------
High Low Dividends High Low Dividends
-------- ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
1998
Quarter ended March 31, 1998................... $31.10 $25.70 $0.108 $22.95 $19.55 $0.109
Quarter ended June 30, 1998.................... 30.95 26.19 0.112 23.41 19.20 0.118
Quarter ended September 30, 1998............... 27.10 20.01 0.122 21.25 17.00 0.118
Quarter ended December 31, 1998................ 25.17 18.14 0.127 21.75 18.44 0.130
1999
Quarter ended March 31, 1999................... 27.74 22.39 0.132 20.38 15.81 0.130
Quarter ended June 30, 1999.................... 27.10 20.48 0.136 16.88 15.25 0.130
Quarter ended September 30, 1999............... 23.33 19.22 0.148 17.13 13.38 0.130
Quarter ended December 31, 1999................ 21.25 16.49 0.152 15.06 12.63 0.130
2000
Quarter ended March 31, 2000................... 16.90 13.21 0.157 15.25 11.25 0.130
Quarter ended June 30, 2000.................... 17.63 13.00 0.160 18.25 12.50 0.130
</TABLE>
The following table shows the closing prices of Provident common stock and
Harbor common stock on May 3, 2000, which is the day before the merger was
announced, and June 30, 2000. The table also shows the value of the Provident
common stock to be received by you, had the merger been completed on those
dates, for each share of Harbor common stock that you own. This amount was
computed by multiplying the price of Provident common stock by the 1.256
exchange ratio.
Value of Merger
Consideration
Provident Harbor Per Share of
Common Stock Common Stock Harbor Stock
---------------------------------------------
May 3, 2000............. $14.31 $14.25 $17.97
June 30, 2000........... $13.94 $16.50 $17.51
You should obtain current market quotations for Provident common stock as
the market price of Provident common stock will fluctuate between the date of
this document and the date on which the merger is completed, and thereafter. You
can get these quotations from a newspaper, on the Internet or by calling your
broker.
As of June 30, 2000, there were approximately 3,041 holders of record of
Provident common stock. As of June 30, 2000, there were approximately 364
holders of record of Harbor common stock. These numbers do not reflect the
number of persons or entities who may hold their stock in nominee or "street"
name through brokerage firms.
10
<PAGE>
Following the merger, the declaration of dividends will be at the
discretion of Provident's Board of Directors and will be determined after
consideration of various factors, including earnings, cash requirements, the
financial condition of Provident, applicable state law and government
regulations and other factors deemed relevant by Provident's Board of Directors.
Federal and Maryland law limit the ability of Provident Bank to pay dividends to
Provident. The merger agreement limits cash dividends payable on Harbor common
stock pending consummation of the merger to $0.13 per share per quarter (and
prohibits Harbor stockholders from receiving two cash dividends during the same
quarter). See "The Merger Agreement--Conduct of Business Before the Merger."
11
<PAGE>
Special Meeting of Harbor Stockholders
Place, Date and Time
The meeting will be held at the Days Inn, Loch Raven Boulevard and Route
695, Towson, Maryland on Wednesday, August 16, 2000, at 3:00 p.m., local time.
Purpose of the Meeting
The purpose of the meeting is to consider and vote on a proposal to approve
and adopt the merger agreement and to act on any other matters brought before
the meeting.
Who Can Vote at the Meeting
You are entitled to vote your Harbor common stock if the records of Harbor
showed that you held your shares as of the close of business on June 30, 2000.
As of the close of business on that date, a total of 1,664,515 shares of Harbor
common stock were issued and outstanding. Each share of common stock has one
vote.
Attending the Meeting
If you are a beneficial owner of Harbor common stock held by a broker, bank
or other nominee (i.e., in "street name"), you will need proof of ownership to
be admitted to the meeting. A recent brokerage statement or letter from a bank
or broker are examples of proof of ownership. If you want to vote your shares
of Harbor common stock held in street name in person at the meeting, you will
have to get a written proxy in your name from the broker, bank or other nominee
who holds your shares.
Vote Required
The special meeting will be held if one-third of the outstanding shares of
common stock entitled to vote is represented in person or by proxy at the
meeting. If you return valid proxy instructions or attend the meeting in
person, your shares will be counted for purposes of determining whether there is
a quorum, even if you abstain from voting. Broker non-votes also will be
counted for purposes of determining the existence of a quorum. A broker non-
vote occurs when a broker, bank or other nominee holding shares for a beneficial
owner does not vote on a particular proposal because the nominee does not have
discretionary voting power with respect to that item and has not received voting
instructions from the beneficial owner. Under applicable rules, brokers, banks
and other nominees may not exercise their voting discretion on the proposal to
approve and adopt the merger agreement and, for this reason, may not vote shares
held for beneficial owners without specific instructions from the beneficial
owners.
Approval and adoption of the merger agreement requires the affirmative vote
of the holders of at least two-thirds of the outstanding shares of Harbor common
stock entitled to vote at the meeting. Failure to return a properly executed
proxy card or to vote in person will have the same effect as a vote against the
merger agreement. Abstentions and broker non-votes will have the same effect as
a vote against the merger agreement.
As of June 30, 2000, directors and executive officers of Harbor, and
persons closely associated with them, beneficially owned 256,813 shares of
Harbor common stock, not including shares that may be acquired upon the exercise
of stock options. This equals 15.4% of the issued and outstanding shares of
Harbor common stock. As of the same date, Provident and its directors and
executive officers did not beneficially own any shares of Harbor common stock.
12
<PAGE>
In connection with the merger agreement, the directors of Harbor entered
into agreements under which they agreed to vote in favor of the merger all
shares of Harbor common stock beneficially owned by them. At June 30, 2000,
these individuals beneficially owned a total of 188,764 shares of Harbor common
stock, excluding shares that may be acquired upon the exercise of stock options,
which represents 11.3% of the shares entitled to vote at the meeting.
Voting by Proxy
This document is being sent to you by the Board of Directors of Harbor for
the purpose of requesting that you allow your shares of Harbor common stock to
be represented at the special meeting by the persons named in the enclosed proxy
card. All shares of Harbor common stock represented at the meeting by properly
executed proxies will be voted in accordance with the instructions indicated on
the proxy card. If you sign and return a proxy card without giving voting
instructions, your shares will be voted as recommended by Harbor's Board of
Directors. Harbor's Board of Directors unanimously recommends a vote "FOR"
approval of the merger agreement.
If any matters not described in this document are properly presented at the
special meeting, the persons named in the proxy card will use their own judgment
to determine how to vote your shares. This includes a motion to adjourn or
postpone the meeting in order to solicit additional proxies. However, no proxy
voted against the proposal to approve the merger agreement will be voted in
favor of an adjournment or postponement to solicit additional votes in favor of
the merger agreement. Harbor does not know of any other matters to be presented
at the meeting.
You may revoke your proxy at any time before the vote is taken at the
meeting. To revoke your proxy you must either advise the Secretary of Harbor in
writing before your common stock has been voted at the special meeting, deliver
proxy instructions with a later date, or attend the meeting and vote your shares
in person. Attendance at the special meeting will not in itself constitute
revocation of your proxy.
If your Harbor common stock is held in street name, you will receive
instructions from your broker, bank or other nominee that you must follow in
order to have your shares voted. Your broker or bank may allow you to deliver
your voting instructions via the telephone or the Internet. Please see the
instruction form that accompanies this document.
Harbor will pay the cost of this proxy solicitation. In addition to
soliciting proxies by mail, directors, officers and employees of Harbor may
solicit proxies personally and by telephone. None of these persons will receive
additional or special compensation for soliciting proxies. Harbor will, upon
request, reimburse brokers, banks and other nominees for their expenses in
sending proxy materials to their customers who are beneficial owners and
obtaining their voting instructions. Harbor has retained Regan & Associates,
Inc. to assist in soliciting proxies for a fee of $6,500 including reimbursable
expenses.
13
<PAGE>
Ownership of Harbor Common Stock
The following table provides information as of June 30, 2000 with respect
to persons known to Harbor to be the beneficial owners of more than 5% of
Harbor's outstanding common stock. A person may be considered to beneficially
own any shares of common stock over which he or she has, directly or indirectly,
sole or shared voting or investing power.
Percent of
Number of Common Stock
Name and Address Shares Owned Outstanding
---------------- ------------ ------------
Harbor Federal Bancorp, Inc. 174,208/(1) 10.47%
Employee Stock Ownership Plan
705 York Road
Baltimore, Maryland 21204
-----------------------------
(1) These shares are held in a suspense account for future allocation
among participating employees as the loan used to purchase the
shares is repaid. The ESOP trustees, currently Directors Lacy,
Riehl and Stieff, vote all allocated shares in accordance with
instructions of the participants. Unallocated shares and shares
for which no instructions have been received are voted by the ESOP
trustees in the same ratio as participants who direct the voting
of allocated shares or, in the absence of such direction, in the
ESOP trustee's best judgment. As of June 30, 2000, 129,425 shares
of Harbor common stock had been allocated to ESOP participants.
The following table provides information about the shares of Harbor common
stock that may be considered to be owned by each director and by all directors
and executive officers of Harbor as a group as of June 30, 2000.
Percent of
Number of Common Stock
Name Shares Owned/(1)/ Outstanding
---- ---------------- -----------
J. Kemp Roche....................... 4,719 0.28%
Gideon N. Stieff, Jr................ 22,779 1.37
Joseph J. Lacy...................... 29,940 1.80
John H. Riehl, III.................. 34,699 2.09
Lawrence W. Williams................ 65,535 3.86
Robert A. Williams.................. 114,452 6.67
All directors and executive officers 339,991/(2)/ 19.45%
as a group (7 persons)
------------------------
(1) Excludes unallocated shares held by the ESOP; includes 31,976 and
51,202 shares which Messrs. L. Williams and R. Williams,
respectively, had a right to purchase pursuant to the exercise of
stock options.
(2) Excludes 174,208 shares held by the ESOP (see above). Includes
83,678 shares which all directors and executive officers as a
group had a right to purchase pursuant to the exercise of stock
options.
14
<PAGE>
The Merger
The following discussion of the merger is qualified by reference to the
merger agreement, which is attached to this proxy statement-prospectus as
Appendix A. You should read the entire merger agreement carefully. It is the
legal document that governs the merger.
The Parties to the Merger
Provident Bankshares Corporation. Provident, through its wholly owned
subsidiary, Provident Bank, offers consumer and commercial banking services.
Provident operates in the dynamic Baltimore-Washington corridor through a
network of 91 offices in Maryland and Northern Virginia, as well as southern
York County, Pennsylvania. Provident Bank offers related financial services
through its wholly owned subsidiaries, including mortgages through Provident
Mortgage Corp., mutual funds, annuities and insurance products through Provident
Investment Center and leases through Court Square Leasing and Provident Lease
Corp.
For additional information about Provident, see "Where You Can Find More
Information" on page 52.
Harbor Federal Bancorp, Inc. Harbor is the savings and loan holding
company for Harbor Federal. As a savings and loan holding company, Harbor is
subject to regulation by the Office of Thrift Supervision. Since its formation,
Harbor's principal activity has been to direct and coordinate the business of
Harbor Federal.
Harbor Federal is a federally chartered savings bank headquartered in
Baltimore, Maryland. Harbor Federal is regulated by the Office of Thrift
Supervision and its deposits are insured by the Federal Deposit Insurance
Corporation up to applicable limits. Harbor Federal operates nine banking
offices in the City of Baltimore and the Counties of Baltimore and Anne Arundel,
Maryland. Harbor Federal operates as a retail financial institution dedicated to
financing home ownership and other consumer needs.
Harbor's Annual Report on Form 10-KSB for the year ended March 31, 2000,
which includes a discussion of the business and recent results of operations of
Harbor, is included in this document as Appendix C.
Form of the Merger; Conversion of Harbor Common Stock
Our Boards of Directors each have unanimously approved a merger agreement
that provides for the combination of Provident and Harbor. The combination will
be accomplished through the merger of Harbor into Provident. Provident will
survive the merger. As a result of the merger:
. Provident will exchange shares of its common stock for shares of
Harbor common stock;
. Harbor will cease to exist as a separate company; and
. Harbor stockholders will become Provident stockholders, with their
rights governed by Maryland law and Provident's articles of
incorporation and bylaws. See "Comparison of Stockholder Rights."
Upon completion of the merger, each share of Harbor common stock will be
converted into the right to receive 1.256 shares of Provident common stock. The
common stock of Provident will continue to trade on the Nasdaq National Market
under the symbol PBKS after completion of the merger. On June 30, 2000,
15
<PAGE>
the closing price of Provident common stock was $13.94. Harbor can give you no
assurance as to what the market price of Provident common stock will be if and
when the merger is completed, and you are advised to obtain current market
quotations for Provident common stock and Harbor common stock.
Provident has issued Class A Preferred Stock Purchase Rights to Provident
stockholders under a Stockholder Protection Rights Agreement, dated as of
January 18, 1995, as amended as of July 15, 1998, between Provident and
Provident Bank, as rights agent. When you surrender your shares of Harbor
common stock in exchange for Provident common stock after the merger is
completed, each share of Provident common stock you receive in exchange will
include a Provident stockholder right. The Provident stockholder rights are
described in more detail under "Description of Provident Common Stock-Provident
Rights Plan."
Surrender of Stock Certificates
After the completion of the merger, Provident's transfer agent will mail to
each Harbor stockholder a form of letter of transmittal, together with
instructions on how to surrender certificates representing shares of Harbor
common stock.
Please do not send in your Harbor stock certificates until you receive the
letter of transmittal and instructions from the transfer agent. DO NOT SEND IN
YOUR CERTIFICATES WITH THE ENCLOSED PROXY.
After you mail the letter of transmittal and your Harbor stock certificates
to the transfer agent, a stock certificate representing the number of whole
shares of Provident common stock that you are entitled to receive and a check in
the amount of cash for any fractional shares will be mailed to you. The Harbor
certificates that you surrender will be canceled.
Until you surrender your Harbor stock certificates for exchange after
completion of the merger, you will not be paid dividends or other distributions
declared after the merger with respect to any Provident common stock into which
your Harbor shares have been converted. When you surrender your Harbor stock
certificates, Provident will pay any unpaid dividends or other distributions,
without interest. After the completion of the merger, there will be no further
transfers of Harbor common stock. Harbor stock certificates presented for
transfer after the completion of the merger will be canceled and exchanged for
the merger consideration.
If your Harbor stock certificates have been lost, stolen or destroyed, you
will have to prove your ownership of these certificates and that they were lost,
stolen or destroyed before you receive any consideration for your shares. Upon
request, Provident's transfer agent will send you instructions on how to provide
evidence of ownership.
Treatment of Harbor Stock Options
Each stock option to acquire Harbor common stock granted under Harbor's
stock option plan that is outstanding and unexercised immediately before the
completion of the merger will automatically become a stock option to purchase
shares of common stock of Provident and will continue to be governed by the
terms of the Harbor stock option plan under which it was granted. Provident
will assume the Harbor stock option plan. In each case, the number of shares of
Provident common stock subject to the new Provident stock option will be equal
to the product of the number of shares of Harbor common stock subject to the
Harbor stock option and the exchange ratio, rounded to the nearest whole share.
The exercise price per share of Provident common stock subject to the new
Provident stock option will be equal to the exercise price per share of Harbor
common stock under the Harbor stock option divided by the exchange ratio,
rounded to the nearest whole cent. The duration and other terms of each new
Provident stock option will be the same as
16
<PAGE>
the prior stock option. In any event, stock options that are incentive stock
options under the Internal Revenue Code will be adjusted in the manner
prescribed by the Internal Revenue Code.
Tax Consequences for Harbor Stockholders
The following is a discussion of the material federal income tax
consequences of the merger to holders of Harbor common stock. The discussion is
based upon the Internal Revenue Code, Treasury regulations, IRS rulings, and
judicial and administrative decisions in effect as of the date of this proxy
statement-prospectus. This discussion assumes that the Harbor common stock is
generally held for investment. In addition, this discussion does not address
all of the tax consequences that may be relevant to you in light of your
particular circumstances or to Harbor stockholders subject to special rules,
such as foreign persons, financial institutions, tax-exempt organizations,
dealers in securities or foreign currencies or insurance companies. The
opinions of counsel referred to in this section will be based on facts existing
at the completion of the merger. In rendering their opinions, counsel will
require and rely upon representations contained in certificates of officers of
Provident, Harbor and others.
It is a condition to the obligation of Provident and Harbor to complete the
merger that Provident receive an opinion of Muldoon, Murphy & Faucette LLP and
that Harbor receive an opinion of Stradley Ronon Housley Kantarian & Bronstein,
LLP, dated as of the completion of the merger, that the merger will be treated
as a reorganization within the meaning of the Internal Revenue Code. If either
of us waives the requirement of receiving a tax opinion and there is a material
change in tax consequences to Harbor stockholders, you will be notified and
given the opportunity to confirm or change your vote. Because the merger will
be treated as a reorganization, neither Provident nor Harbor will recognize any
gain or loss as a result of the merger.
The tax opinions to be delivered to us in connection with the merger are
not binding on the Internal Revenue Service or the courts, and we do not intend
to request a ruling from the Internal Revenue Service with respect to the
merger.
The tax consequences of the merger to you may vary depending upon your
particular circumstances. Therefore, you should consult your tax advisor to
determine the particular tax consequences of the merger to you, including those
relating to state and/or local taxes.
Receipt of Provident Common Stock in Exchange for Harbor Common Stock. No
gain or loss will be recognized by a Harbor stockholder who receives solely
shares of Provident common stock (except for cash received in lieu of fractional
shares, as discussed below) in exchange for all of his or her shares of Harbor
common stock. The tax basis of the shares of Provident common stock received by
a Harbor stockholder in such exchange will be equal (except for the basis
attributable to any fractional shares of Provident common stock, as discussed
below) to the basis of the Harbor common stock surrendered in exchange for the
Provident common stock. The holding period of the Provident common stock
received will include the holding period of shares of Harbor common stock
surrendered in exchange for the Provident common stock, provided that such
shares were held as capital assets of the Harbor stockholder at the effective
time of the merger.
Cash in Lieu of Fractional Shares. A Harbor stockholder who holds Harbor
common stock as a capital asset and who receives in the merger, in exchange for
such stock, solely Provident common stock and cash in lieu of a fractional share
interest in Provident common stock will be treated as having received such cash
in full payment for such fractional share of stock and as capital gain or loss.
17
<PAGE>
Background of the Merger
In October 1999, a representative of Trident Securities met with Harbor's
Board of Directors to discuss possible strategic alternatives available to
Harbor. The Board had begun the process of considering its alternatives and
believed it was appropriate to inform itself regarding the potential value of
Harbor in a business combination. At that meeting the representative from
Trident made a presentation to the Board of the current status of Harbor and
indicated that, based on a preliminary analysis and the current state of the
market, a range of value for Harbor in a business combination would be
approximately $18.00 to $22.00 per share.
On November 12, 1999, Harbor's Board of Directors retained Trident to
explore the possibility of a business combination involving Harbor and
authorized Trident to prepare an information memorandum containing financial and
other information regarding Harbor. The Board also authorized Trident to
contact potentially interested parties to determine their interest in a
potential business combination with Harbor and the valuation they would place on
Harbor in such a transaction.
On December 17, 1999, representatives of Trident met with the Board to
discuss a list of potentially interested parties. Trident had contacted several
institutions to assess their level of interest in acquiring Harbor, although
Trident did not specifically identify Harbor to these institutions. Trident
indicated that it had developed a list of ten possible candidates to which it
wanted to provide the information memorandum, provided that such parties
executed a confidentiality agreement.
In January 2000, Trident provided an information memorandum to the ten
companies it had previously identified. On February 7, 2000, a representative
of Trident met with Harbor's Board of Directors to discuss the three preliminary
indications of interest it had received (one of which was from Provident). The
Trident representative discussed the terms of these three proposals and also
discussed the market for bank stocks generally, which had continued to decline
since the time Trident had made its initial estimate of a possible range of
value for Harbor in a business combination. The Board directed Trident to
contact all three parties in writing to request that the price indicated in the
three non-binding proposals be increased and requesting that each party provide
certain additional information regarding the terms being proposed.
On February 28, 2000, Harbor's Board of Directors met again with a
representative of Trident who informed the Board of the three revised
indications of interest it had received (including one from Provident). One
party had submitted two proposals, one for cash and the other for a combination
of cash and stock. Provident submitted a proposal consisting of all stock
consideration while the third proposal consisted of a mixture of cash and stock.
The Board considered all of the terms of the three proposals and considered the
stock price history of the companies as well as the liquidity of the market for
the potential acquirors' stock. The Board determined that it should proceed with
discussions with the two companies proposing the highest value at that point in
time, one of which was Provident. The Board adjourned its meeting to the
following day at which time it met with representatives from these two companies
to discuss their respective proposals in greater detail. The Board then
directed Trident and legal counsel to contact the two parties to discuss certain
terms of the proposals as well as to contact the appropriate banking regulators
on a confidential basis to inquire as to how a proposed capital raising
transaction anticipated by one of the parties would affect the regulatory
approval process.
On March 6, 2000, the Board held a meeting to discuss the status of the two
proposals. The representative from Trident indicated that the stock price for
Provident had declined since the date it submitted its proposal but that
Provident was unwilling to increase the proposed exchange ratio to provide the
equivalent value. Legal counsel stated that he had spoken with the appropriate
regulatory authorities regarding the proposed capital raising requirement by the
other interested party and indicated that it should not have a major impact on
the approval process for the proposed transaction. After consideration of these
18
<PAGE>
factors, the Board authorized Trident and legal counsel to pursue the all-cash
proposal that had been presented.
During the month of March both parties conducted due diligence on the
other. After a preliminary draft agreement was circulated, the potential
acquiror indicated that it was no longer willing to pay the price stated in its
previous indication of interest. The Board determined that it would be
appropriate to contact the other two companies that had previously submitted
proposals (one of which was Provident), to determine their continuing level of
interest in pursuing a possible transaction.
Both of these parties indicated that they continued to be interested.
During the month of April, Provident and Harbor conducted due diligence on each
other. After submitting new proposals, the Board on April 26, 2000 determined
that the proposal submitted by Provident was the superior proposal and
authorized the negotiation of a definitive agreement.
On May 3, 2000, Harbor's Board of Directors met to consider the merger
agreement. Representatives of Trident and legal counsel were present at the
meeting and reviewed the terms of the merger agreement and the ancillary
agreements in detail with the Board. Further, the representative of Trident
presented the opinion of his firm that the consideration to be received by
Harbor's stockholders was fair from a financial point of view. After extensive
discussion, the Board of Directors unanimously approved the merger agreement.
Recommendation of the Harbor Board; Harbor's Reasons for the Merger
Harbor's Board of Directors believes that the merger is in the best
interests of Harbor stockholders. Harbor's Board of Directors considered a
number of factors in deciding to approve and recommend the terms of the merger
to Harbor stockholders, including:
. the value being offered Harbor's stockholders by Provident in relation
to the market value, book value and earnings per share of Harbor's
common stock;
. information concerning the financial condition, results of operations
and prospects of Provident and Harbor, including the long term equity
growth potential of Harbor as compared to and in connection with
Provident and, in particular, Provident's dividend yield, earnings per
share, and stock price history;
. the competitive environment for financial institutions generally;
. the compatibility of the respective business management philosophies
of Harbor and Provident;
. the ability of Provident and its subsidiary bank to provide
comprehensive financial services in relevant markets;
. the financial terms of other recent business combinations in the local
financial services industry;
19
<PAGE>
. the fact that the consideration to be received in the merger by
Harbor's stockholders reflects a premium for Harbor's common stock
over the value at which it has traded in the market during the last
year; and
. the opinion of Harbor's financial advisor, Trident Securities, that
the consideration to be received by Harbor's stockholders in the
merger is fair to such stockholders from a financial point of view.
The foregoing discussion of the information and factors considered by
Harbor's Board of Directors is not intended to be exhaustive but includes all of
the material factors considered by Harbor's Board of Directors. Harbor's Board
of Directors did not assign any relative or specific weights to the foregoing
factors, and individual directors may have given different weights to different
factors.
Opinion of Harbor's Financial Advisor
Merger - General. Pursuant to an engagement letter dated November 12, 1999
between Harbor and Trident, Harbor retained Trident to act as its sole financial
advisor in connection with a possible merger and related matters. As part of
its engagement, Trident agreed, if requested by Harbor, to render an opinion
with respect to the fairness, from a financial point of view, to the holders of
Harbor common stock, of the financial consideration as set forth in the merger
agreement. Trident is a nationally recognized specialist in the financial
services industry. Trident is regularly engaged in evaluations of similar
businesses and in advising institutions with regard to mergers and acquisitions,
as well as raising debt and equity capital for such institutions. Harbor
selected Trident as its financial advisor based upon Trident's qualifications,
expertise and reputation in such capacity.
On May 3, 2000, Trident delivered its oral opinion that the financial
consideration was fair to Harbor stockholders, from a financial point of view,
as of the date of such opinion. Trident also delivered to Harbor's Board of
Directors a written opinion dated as of May 3, 2000, confirming its oral opinion
as of such date. Trident updated its May 3, 2000 opinion as of the date of this
proxy statement-prospectus. No limitations were imposed by Harbor on Trident
with respect to the investigations made or the procedures followed in rendering
its opinion.
The full text of Trident's written opinion to Harbor's Board of Directors,
dated as of the date of this proxy statement-prospectus, which sets forth the
assumptions made, matters considered and extent of review by Trident, is
attached as Appendix B and is incorporated herein by reference. You should read
Trident's opinion carefully and in its entirety in conjunction with this proxy
statement-prospectus. The following summary of Trident's opinion is qualified
in its entirety by reference to the full text of the opinion. Trident's opinion
is addressed to Harbor's Board of Directors and does not constitute a
recommendation as to how you should vote at the Harbor special meeting described
in this document.
Trident, in connection with rendering its opinion:
. Reviewed Harbor's Annual Reports to Stockholders and Annual Reports on
Form 10-KSB for each of the years ended March 31, 1999, March 31, 1998
and March 31, 1997, including the audited financial statements
contained in those documents, and Harbor's Quarterly Reports on Form
10-QSB for the first, second and third quarters of fiscal 2000;
. Reviewed Provident's Annual Reports to Stockholders and Annual Reports
on Form 10-K for each of the years ended December 31, 1999, December
31, 1998 and December 31, 1997, including the audited financial
statements contained in those documents;
. Reviewed certain other public and non-public information, primarily
financial in nature, relating to the respective businesses, earnings,
assets and prospects of Harbor and Provident provided to Trident or
publicly available;
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. Participated in meetings and telephone conferences with members of
senior management of Harbor and Provident concerning the financial
condition, business, assets, and financial prospects of the respective
companies, as well as other matters Trident believed relevant to its
inquiry;
. Reviewed certain stock market information regarding Harbor common
stock and Provident common stock and compared it with similar
information for certain companies, the securities of which are
publicly traded;
. Compared the results of operations and financial condition of Harbor
and Provident with that of certain companies, which Trident deemed to
be relevant for purposes of its opinion;
. Reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions, which Trident deemed to be relevant
for purposes of its opinion;
. Reviewed the merger agreement dated May 3, 2000 and certain related
documents; and
. Performed such other reviews and analyses as Trident deemed
appropriate.
The oral and written opinions provided by Trident to Harbor were
necessarily based upon economic, monetary, financial market and other relevant
conditions as of the dates thereof.
In connection with its review and arriving at its opinion, Trident relied
upon the accuracy and completeness of the financial information and other
pertinent information provided by Harbor and Provident to Trident for purposes
of rendering its opinion. Trident did not assume any obligation to
independently verify any of the provided information as being complete and
accurate in all material respects. With regard to the financial forecasts
established and developed for Harbor and Provident with the input of the
respective managements, as well as projections of cost savings, revenue
enhancements and operating synergies, Trident assumed that these materials had
been reasonably prepared on bases reflecting the best available estimates and
judgments of Harbor and Provident as to the future performance of the separate
and combined entities and that the projections provided a reasonable basis upon
which Trident could formulate its opinion. Neither Harbor nor Provident
publicly discloses such internal management projections of the type utilized by
Trident in connection with Trident's role as financial advisor to Harbor with
respect to the review of the merger. Therefore, such projections cannot be
assumed to have been prepared with a view towards public disclosure. The
projections were based upon numerous variables and assumptions that are
inherently uncertain, including, among others, factors relative to the general
economic and competitive conditions facing Harbor and Provident. Accordingly,
actual results could vary significantly from those set forth in the respective
projections.
Trident does not claim to be an expert in the evaluation of loan portfolios
or the allowance for loan losses with respect thereto and therefore assumes that
such allowances for Harbor and Provident are adequate to cover such losses. In
addition, Trident does not assume responsibility for the review of individual
credit files and did not make an independent evaluation, appraisal or physical
inspection of the assets or individual properties of Harbor or Provident, nor
was Trident provided with such appraisals. Furthermore, Trident assumes that
the merger will be consummated in accordance with the terms set forth in the
merger agreement, without any waiver of any material terms or conditions by
Harbor, and that obtaining the necessary regulatory approvals for the merger
will not have an adverse effect on either separate institution or the combined
entity. Trident assumes that the merger will be recorded as a "purchase" in
accordance with generally accepted accounting principles.
In connection with rendering its May 3, 2000 opinion to Harbor's Board of
Directors, Trident performed a variety of financial and comparative analyses,
which are briefly summarized below.
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<PAGE>
Such summary of analyses does not purport to be a complete description of the
analyses performed by Trident. Moreover, Trident believes that these analyses
must be considered as a whole and that selecting portions of such analyses and
the factors considered by it, without considering all such analyses and factors,
could create an incomplete understanding of the scope of the process underlying
the analyses and, more importantly, the opinion derived from them. The
preparation of a financial advisor's opinion is a complex process involving
subjective judgments and is not necessarily susceptible to partial analyses or a
summary description of such analyses. In its full analysis, Trident also
included assumptions with respect to general economic, financial market and
other financial conditions. Furthermore, Trident drew from its past experience
in similar transactions, as well as its experience in the valuation of
securities and its general knowledge of the banking industry as a whole. Any
estimates in Trident's analyses were not necessarily indicative of actual future
results or values, which may significantly diverge more or less favorably from
such estimates. Estimates of company valuations do not purport to be appraisals
nor to necessarily reflect the prices at which companies or their respective
securities actually may be sold. None of the analyses performed by Trident were
assigned a greater significance by Trident than any other in deriving its
opinion.
Comparable Company Analysis. Trident reviewed and compared actual stock
market data and actual estimated selected financial information for Harbor with
corresponding information for seven publicly traded thrifts with assets between
$200 million and $300 million and a return on average assets between 0.50% and
1.0%, (the "Harbor Peer Group"). The Harbor Peer Group is listed below:
1. Community Financial Corporation............... Staunton, VA
2. First Federal Bancorp, Inc.................... Zanesville, OH
3. First Franklin Corporation.................... Cincinnati, OH
4. Landmark Bancshares, Inc...................... Dodge City, KS
5. FirstBank NW Corp............................. Lewiston, ID
6. LSB Financial Corp............................ Lafayette, IN
7. Hemlock Federal Financial Corporation......... Oak Forest, IL
The following table represents a summary analysis of the Harbor Peer Group
based on market prices as of April 26, 2000 and the latest publicly available
financial data as of or for the last twelve months ended March 31, 2000:
Mean Median Harbor
---- ------ ------
Price to last twelve month earnings............. 11.0x 9.7x 11.0x
Price to 2000 estimated earnings................ 8.9x 8.6x N/A
Price to book value............................. 83.6% 81.8% 88.1%
Price to tangible book value.................... 83.7% 81.8% 88.1%
Dividend yield.................................. 3.3% 3.3% 3.9%
Return on average assets........................ 0.78% 0.79% 0.82%
Return on average equity........................ 8.00% 7.00% 7.90%
Leverage ratio.................................. 9.40% 9.38% 10.07%
Efficiency ratio................................ 68.5% 66.8% 56.1%
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Trident reviewed and compared actual stock market data and actual and
estimated selected financial information for Provident with corresponding
information for 10 publicly traded banks with assets between $5.0 billion and
$9.5 billion and a return on average equity between 12.0% and 19.0%, (the
"Provident Peer Group"). The Provident Peer Group is listed below:
1. BOK Financial Corp. ..................... Tulsa, OK
2. BancorpSouth, Inc. ...................... Tupelo, MS
3. Community First Bankshares, Inc. ........ Fargo, ND
4. Cullen/Frost Bankers, Inc. .............. San Antonio, TX
5. First Midwest Bancorp, Inc. ............. Itasca, IL
6. First Virginia Banks, Inc. .............. Falls Church, VA
7. International Bancshares Corp. .......... Laredo, TX
8. Old National Bancorp. ................... Evansville, IN
9. Sky Financial Group, Inc. ............... Bowling Green, OH
10. Trustmark Corp. ......................... Jackson, MS
The table below represents a summary analysis of the Provident Peer Group
based on market prices as of April 26, 2000 and the latest publicly available
financial data as of or for the last twelve months ended March 31, 2000:
<TABLE>
<CAPTION>
Mean Median Provident
-------- ---------- -------------
<S> <C> <C> <C>
Price to last twelve month earnings................ 13.8x 13.2x 9.0x
Price to 2000 estimated earnings................... 12.2x 12.5x 8.3x
Price to book value................................ 214.9% 199.5% 144.0%
Price to tangible book value....................... 247.5% 214.7% 144.0%
Dividend yield..................................... 3.3% 3.3% 4.3%
Return on average assets........................... 1.26% 1.28% 0.90%
Return on average equity........................... 16.0% 16.1% 15.3%
Leverage ratio..................................... 7.64% 7.00% 5.23%
Efficiency ratio................................... 61.0% 62.0% 67.4%
</TABLE>
Comparable Transaction Analysis. Trident reviewed and compared actual
information for groups of comparable pending (last twelve months ending April
26, 2000) transactions deemed pertinent to an analysis of the merger. The
implied acquisition price was compared to the median ratios of (1) price to last
twelve months earnings, (2) price to book value, (3) price to tangible book
value, and (4) price to assets for each of the following pending and recently
completed transaction comparable groups:
. all thrift acquisitions with the selling thrift headquartered in the
Mid-Atlantic Region ("Comparable Regional Deals");
. all thrift acquisitions with the selling thrift having assets between
$200 million and $300 million ("Comparable Asset Size");
. all thrift acquisitions with the selling thrift having an equity to
assets ratio between 9.0% and 13.0% ("Comparable Capitalization");
. all thrift acquisitions with the selling thrift having a return on
average equity between 6.0% and 10.0% ("Comparable Profitability");
. all thrift acquisitions with the selling thrift having a nonperforming
assets to assets ratio of between 0.01% and 0.50% ("Comparable Asset
Quality"); and
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. recent thrift transactions (announced since January 1, 2000) with
similar size and performance characteristics ("Guideline").
The following table represents a summary analysis of the comparable
transactions analyzed by Trident based on the announced transaction values (last
twelve months ending April 24, 2000):
<TABLE>
<CAPTION>
Median Price to
-----------------------------------------
Book Tangible LTM
Number Value Book EPS Assets
----- ----- -------- --- ------
<S> <C> <C> <C> <C> <C>
Comparable Regional Deals
Pending and Completed.................... 14 152% 152% 20.2x 16.8%
Comparable Asset Size
Pending and Completed.................... 8 135% 151% 19.8x 20.1%
Comparable Capitalization
Pending and Completed.................... 15 149% 149% 25.7x 15.9%
Comparable Profitability
Pending and Completed.................... 20 158% 158% 20.8x 17.9%
Comparable Asset Quality
Pending and Completed.................... 37 157% 157% 23.8x 19.3%
Guideline Transactions
Pending.................................. 8 131% 131% 19.2x 15.2%
Harbor/(1)/................................. N/A 120% 120% 14.8x 12.5%
</TABLE>
________________________
/(1)/ Harbor pricing data based on closing price for Provident common stock of
$14 3/8 on April 24, 2000.
Based on the above information, Trident concluded that this analysis showed
an imputed reference range of $19.65 to $23.42 per share, based on the Guideline
transactions. Trident noted that during periods of declining bank stock prices,
as had recently been experienced, the comparable transaction analysis tends to
indicate somewhat higher prices than may be reflective of current market
conditions.
Contribution Analysis. Trident analyzed the contribution of each party to
the merger to Provident on a pro forma basis after the merger relative to the
approximate ownership of the resulting company. The analysis indicated that
Harbor stockholders would hold approximately 7.4% of the pro forma diluted
shares of Provident. Harbor's approximate contributions are listed below by
category:
Harbor
--------
Assets............................ 4.7%
Loans............................. 4.9%
Deposits.......................... 4.5%
Equity............................ 9.9%
Last twelve month earnings........ 5.5%
2000 estimated earnings........... 4.1%
Accretion/Dilution Analysis. On the basis of financial projections and
estimates of ongoing cost savings accruing to the pro forma company, as well as
estimated one-time costs related to the transaction, Trident compared pro forma
per share equivalent earnings, cash dividends, book value and tangible book
value to the stand-alone projections for Harbor and Provident.
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<PAGE>
The accretion/dilution analysis demonstrated, among other things, that the
merger would result in:
. 79% accretion to earnings per share for Harbor stockholders in fiscal
2001, the assumed first full year of combined operations, and
increasing to 104% over a four year period of the analysis;
. 0.05% dilution to earnings per share for Provident stockholders in
fiscal 2001 and remaining constant over the period of the analysis;
. 55.8% higher cash dividends for Harbor stockholders, assuming that
Provident's Board of Directors maintained its current dividend policy;
. no change in cash dividends for Provident stockholders;
. 10.0% and 12.9% dilution to book value and tangible book value per
share for Harbor stockholders initially, and decreasing over the
period of the analysis; and
. 2.7% accretion to book value and 0.67% dilution to tangible book value
per share for Provident stockholders over the period of the analysis.
Discounted Cash Flow Analysis. Trident performed a discounted cash flow
analysis with regard to Harbor in a stand-alone scenario. This analysis
utilized a range of discount rates of 10.5% to 13.5% and a range of terminal
earnings multiples of 8.0x to 13.0x. The analysis resulted in a range of
present values of $17.4 million to $26.8 million for Harbor. This analysis was
based on estimates considering market and company specific events and is not
necessarily indicative of actual values or actual future results and does not
purport to reflect the prices at which any securities may trade at the present
or at any time in the future. Trident noted that the discounted cash flow
analysis was included because it is a widely used valuation methodology, but
noted that the results of such methodology are highly dependent upon the
numerous assumptions that must be made, including earnings growth rates,
discount rates, and terminal values.
Other Analyses. Trident also reviewed certain other information including
pro forma estimated balance sheet composition, pro forma financial performance
and pro forma deposit market share.
No company used as a comparison in the above analyses is identical to
Harbor, Provident or the combined entity, and no other transaction is identical
to the merger. Accordingly, an analysis of the results of the foregoing is not
purely mathematical; rather, such analyses involve complex considerations and
judgments concerning differences in financial market and operating
characteristics of the companies and other factors that could affect the public
trading volume of the companies to which Harbor, Provident and the combined
entity are being compared.
In connection with delivery of its opinion dated as of the date of this
proxy statement-prospectus, Trident performed procedures to update, as
necessary, certain of the analyses described above and reviewed the assumptions
on which such analyses described above were based and the factors considered in
connection therewith. Trident did not perform any analyses in addition to those
described above in updating the opinion.
For its financial advisory services provided to Harbor, Trident has been
paid fees of $35,000 to date and will be paid a fee of 1.40% of the value of the
merger less $35,000 (approximately $425,000) at the time of closing of the
merger. In addition, Harbor has agreed to reimburse Trident for all reasonable
out-of-pocket expenses, incurred by it on Harbor's behalf, as well as indemnify
Trident against certain liabilities, including any which may arise under the
federal securities laws.
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Trident is a member of all principal securities exchanges in the United
States and in the conduct of its broker-dealer activities has from time to time
purchased securities from, and sold securities to, Harbor and/or Provident. As
a market maker, Trident may also have purchased and sold the securities of
Harbor and Provident for Trident's own account and for the accounts of its
customers.
Rights of Dissenting Stockholders
Under Maryland law, Harbor's stockholders do not have any right to dissent
from the merger and receive the appraised value of their shares.
Interests of Harbor's Directors and Officers in the Merger that Differ From
Yours
Some members of Harbor's management and Board of Directors may have
interests in the merger that are in addition to or different from the interests
of Harbor stockholders. Harbor's Board of Directors was aware of these
interests and considered them in approving the merger agreement.
Severance Payments to Executive Officers. Harbor and Harbor Federal have
entered into separate employment agreements with Robert A. Williams. In
addition, Harbor Federal has entered into employment agreements with Lawrence W.
Williams and Thomas F. Constantini and severance agreements with Debra Epps,
Norbert Luken and Calvin Anthony. Under these agreements, each individual will
be entitled to certain payments and benefits if, following a change in control
of Harbor or Harbor Federal, the individual is involuntarily terminated or
voluntarily terminates employment under specified conditions. For purposes of
the employment and severance agreements, the merger will constitute a "change in
control."
The amount payable to each individual generally will be equal to the
difference between (1) the product of 2.99 times the individual's "base amount"
compensation, as defined in the Internal Revenue Code, and (2) the sum of any
other parachute payments, as defined in the Internal Revenue Code, that the
individual receives as a result of the change in control. Each individual with
an employment agreement will generally also be entitled to receive the cost of
health, life and disability insurance coverage for the remaining term of the
agreement.
The estimated total value of the payments and benefits to be provided under
the employment and severance agreements to the persons named above, assuming
each person terminates employment following the merger, is $2.3 million. Robert
A. Williams will also be entitled to a salary continuation benefit equal to
approximately $130,000.
Supplemental Executive Retirement Agreement. Harbor Federal has entered
into a supplemental executive retirement agreement with Robert A. Williams.
Under this agreement, Mr. Williams is entitled to receive a retirement benefit
for 10 years equal to 60% of his average annual compensation for the last three
calendar years, less offsets for retirement benefits under Harbor Federal's
money purchase pension plan. As a result of a change in control of Harbor
Federal, Mr. Williams will be entitled to receive the present value of the
benefits payable under the agreement in a single payment. This amount will be
approximately $366,000.
Director Retirement Plan. Harbor Federal maintains a retirement plan for
persons who were members of Harbor Federal's Board of Directors at the time
Harbor Federal converted from mutual to stock form and who were not then
employees of Harbor Federal. All four of Harbor Federal's non-employee
directors are participants in this plan. Under the director retirement plan, a
participant will receive an annual payment for 10 years equal to a percentage of
the annual fee he received during the calendar year preceding retirement. Based
on their years of service, directors Roche, Stieff and Lacy are entitled to
receive a benefit equal to 100% of their annual fee. As a result of the change
in control of Harbor Federal, director Riehl will also be entitled to a benefit
equal to 100% of his annual fee. In addition, as a result of the change in
control
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<PAGE>
of Harbor Federal, the directors will be entitled to receive the present value
of their benefits payable under the plan in a single payment. This amount will
be approximately $371,000.
Stock Options. The merger agreement provides that, upon completion of the
merger, each outstanding and unexercised option to acquire shares of Harbor
common stock granted under the Harbor stock option plan will cease to represent
the right to acquire shares of Harbor common stock and will be converted into
and become a right with respect to Provident common stock, and the Harbor stock
option plan will be assumed by Provident. See "--Treatment of Harbor Stock
Options."
Upon completion of the merger, all shares subject to previously granted
stock options will become exercisable in accordance with the terms of the grants
under the Harbor stock option plan.
Termination of Harbor Federal ESOP. Harbor Federal will terminate its
employee stock ownership plan upon completion of the merger. The plan will repay
its existing loan from Harbor and will allocate any surplus Provident common
stock to the accounts of the plan participants, including Mr. Williams and the
other executive officers of Harbor Federal, in proportion to their account
balances, to the extent allowed under applicable law and the governing documents
of the plan.
Protection of Harbor Directors and Officers Against Claims. Provident has
agreed to indemnify and hold harmless each present and former director and
officer of Harbor for a period of six years from liability and expenses arising
out of matters existing or occurring at or before the consummation of the merger
to the fullest extent allowed under applicable law as in effect at the time of
closing. This indemnification extends to liability arising out of the
transactions contemplated by the merger agreement. Provident has also agreed to
advance any costs to each of these persons as they are incurred. Provident has
also agreed that it will maintain a policy of directors' and officers' liability
insurance coverage for the benefit of Harbor's directors and officers for three
years following consummation of the merger, subject to certain limitations on
the amount of premiums to be paid.
Regulatory Approvals Needed to Complete the Merger
Completion of the merger and the bank merger are subject to a number of
regulatory approvals and consents. The acquisition of Harbor Federal by
Provident is subject to the approval of the Board of Governors of the Federal
Reserve System or the Federal Reserve Bank of Richmond under the Bank Holding
Company Act. Provident filed a request for a waiver of this application
requirement and the Federal Reserve granted the waiver request on June 29, 2000.
The bank merger is subject to the prior approval of the Federal Deposit
Insurance Corporation under the Bank Merger Act. In reviewing applications under
the Bank Merger Act, the FDIC must consider, among other factors, the financial
and managerial resources and future prospects of the existing and resulting
institutions, and the convenience and needs of the communities to be served. In
addition, the FDIC may not approve a transaction if it will result in a monopoly
or otherwise be anticompetitive. Provident filed an application with the FDIC on
June 21, 2000. In addition, Provident must give notice of the merger to the
Office of Thrift Supervision. This notice has been given.
Further, under Maryland law, the bank merger is subject to the prior
approval of the Commissioner of Financial Regulation. Provident filed an
application with the Commissioner of Financial Regulation on June 21, 2000.
Under the Community Reinvestment Act of 1977, the FDIC must take into
account the record of performance of Provident Bank and Harbor Federal in
meeting the credit needs of the entire community, including low- and moderate-
income neighborhoods, served by each institution. As part of the review process,
the banking agencies frequently receive comments and protests from community
groups and others. Provident Bank and Harbor Federal each received at least an
overall "Satisfactory" rating during their last respective federal Community
Reinvestment Act examinations.
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<PAGE>
In addition, a period of 15 to 30 days must expire following approval by
the FDIC, within which period the United States Department of Justice may file
objections to the merger under the federal antitrust laws. While Provident
believes that the likelihood of such action by the Department of Justice is
remote in this case, there can be no assurance that the Department of Justice
will not initiate such proceeding, or that the Attorney General of the State of
Maryland will not challenge the merger, or if such proceeding is instituted or
challenge is made, as to the result of the challenge.
The merger and the bank merger cannot proceed in the absence of the
requisite regulatory approvals. See "The Merger Agreement--Conditions to
Completing the Merger" and "--Terminating the Merger Agreement." There can be
no assurance that the requisite regulatory approvals will be obtained, and if
obtained, there can be no assurance as to the date of any such approval. There
can also be no assurance that any such approvals will not contain a condition or
requirement that causes such approvals to fail to satisfy any of the conditions
set forth in the merger agreement and described under "The Merger Agreement--
Conditions to Completing the Merger."
Provident is not aware of any other regulatory approvals that would be
required for completion of the merger, except as described above. Should any
other approvals be required, it is presently contemplated that such approvals
would be sought. There can be no assurance that any other approvals, if
required, will be obtained.
The approval of any application merely implies the satisfaction of
regulatory criteria for approval, which does not include a review of the merger
from the standpoint of the adequacy of the consideration to be received by
Harbor stockholders. Furthermore, regulatory approvals do not constitute an
endorsement or recommendation of the merger.
Accounting Treatment of the Merger
Provident will use the purchase method of accounting to account for the
merger. Under the purchase method of accounting, all of the assets and
liabilities of Harbor will be recorded on Provident's consolidated balance sheet
at their estimated fair value at the effective date of the merger. The amount
by which the purchase price paid by Provident exceeds the fair value of the net
tangible and identifiable intangible assets acquired by Provident through the
merger will be recorded as goodwill. This amount will be amortized over 15
years as charges to Provident's earnings.
Resale of Provident Common Stock
The shares of Provident common stock to be issued to stockholders of Harbor
in the merger have been registered under the Securities Act of 1933. Shares of
Provident common stock issued in the merger may be traded freely and without
restriction by those stockholders not deemed to be "affiliates" of Harbor, as
that term is defined in the rules under the Securities Act. Provident common
stock received by those stockholders of Harbor who are deemed to be "affiliates"
of Harbor at the time the merger is submitted for vote of the stockholders of
Harbor may be resold without registration under the Securities Act only to the
extent provided for by Rule 145 promulgated under the Securities Act, which
permits limited sales under certain circumstances, or pursuant to another
exemption from registration. An affiliate of Harbor is an individual or entity
that controls, is controlled by or is under common control with, Harbor, and may
include the executive officers and directors of Harbor, as well as certain
principal stockholders of Harbor. The same restrictions apply to certain
relatives or the spouse of those persons and any trusts, estates, corporations
or other entities in which those persons have a 10% or greater beneficial
interest.
Harbor has agreed in the merger agreement to use its best efforts to cause
each person who is an affiliate of Harbor for purposes of Rule 145 under the
Securities Act to deliver to Provident a written agreement intended to ensure
compliance with the Securities Act.
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The Merger Agreement
The following describes material provisions of the merger agreement. This
description does not purport to be complete and is qualified by reference to the
merger agreement, which is attached as Appendix A and is incorporated by
reference into this proxy statement-prospectus.
Terms of the Merger
The merger agreement provides for a business combination in which Harbor
will merge with Provident. Provident will be the surviving corporation in the
merger. Under the merger agreement, Provident has the right to revise the
structure of the transaction so long as the revised structure does not change
the amount or kind of consideration being paid to Harbor stockholders, adversely
affect the tax consequences of the merger to Harbor stockholders, or materially
delay or impede the receipt of any required regulatory approval.
As a result of the merger, except as noted below, each outstanding share of
Harbor common stock will be converted into the right to receive 1.256 shares of
Provident common stock. Provident will not issue fractions of shares of
Provident common stock, but instead will pay each holder of Harbor common stock
who would otherwise be entitled to a fraction of a share of Provident common
stock an amount in cash determined by multiplying that fraction by the average
closing price of Provident common stock over a measurement period prior to the
completion of the merger. If there is a change in the number or classification
of shares of Provident or Harbor outstanding as a result of a stock split, stock
dividend, reclassification, recapitalization, or other similar transaction where
the record date for such change is after May 3, 2000, the exchange ratio will be
equitably adjusted. Shares of Harbor common stock held directly or indirectly
by Provident will be canceled and retired upon completion of the merger, and no
payment will be made for them. Canceled shares will not include shares held by
either Harbor or Provident in a fiduciary capacity or in satisfaction of a debt
previously contracted.
In connection with the merger, Provident Bank and Harbor Federal have
entered into a plan of merger under which Provident Bank and Harbor Federal will
merge, with Provident Bank being the surviving bank. The bank merger agreement
may be terminated by mutual consent of the parties at any time and will be
terminated automatically in the event the merger agreement is terminated.
When Will the Merger be Completed
The closing of the merger will take place on a date we agree upon that is
no later than 14 days following the date on which the last waiting period under
the required regulatory approvals expires and all of the conditions to the
merger contained in the merger agreement are satisfied or waived, unless we
agree to a later date. See "--Conditions to Completing the Merger." On the
closing date, Provident will file articles of merger with the Maryland
Department of Assessments and Taxation merging Harbor into Provident. The
merger will become effective at the time stated in the articles of merger.
We expect to complete the merger in the third calendar quarter of 2000.
However, we cannot guarantee when or if the required regulatory approvals will
be obtained. See "The Merger--Regulatory Approvals Needed to Complete the
Merger." Furthermore, either company may terminate the merger agreement if,
among other reasons, the merger has not been completed on or before December 31,
2000, unless failure to complete the merger by that time is due to a
misrepresentation, breach of warranty or failure to fulfill a covenant by the
party seeking to terminate the agreement. See "--Terminating the Merger
Agreement."
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<PAGE>
Conditions to Completing the Merger
Our obligations to consummate the merger are conditioned on the following:
. approval of the merger agreement by Harbor's stockholders;
. receipt of all required regulatory approvals without any materially
adverse conditions and the expiration of all statutory waiting
periods;
. no party to the merger being subject to any legal order that prohibits
consummating any part of the transaction, no governmental entity
having instituted any proceeding for the purpose of blocking the
transaction, and the absence of any statute, rule or regulation that
prohibits completion of any part of the transaction;
. the registration statement of which this proxy statement-prospectus
forms a part being declared effective by the SEC, the absence of any
pending or threatened proceeding by the SEC to suspend the
effectiveness of the registration statement and the receipt of all
required state "blue sky" approvals;
. receipt by us of all consents and approvals from third parties
required to complete the merger, unless failure to obtain those
consents or approvals would not have a material adverse effect on
Provident after completion of the merger;
. receipt by each of us of opinions from our respective legal counsel to
the effect that the merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code;
. the other party having performed in all material respects its
obligations under the merger agreement, the other party's
representations and warranties being true and correct as of the date
of the merger agreement and as of the closing date unless the failure
of the representations and warranties to be true and correct would not
have a material adverse effect on the other party, and receipt of a
certificate signed by the other party's chief executive officer and
chief financial officer to that effect; and
. receipt of certificates from appropriate authorities as to the
corporate existence of the other party and delivery of other documents
and certificates to evidence corporate authority to complete the
transaction and fulfillment of the conditions to the merger as each
party may reasonably require.
The obligation of Harbor to complete the merger is also conditioned on
receipt of a certificate from Provident's transfer agent to the effect that
Provident has authorized the issuance of certificates for the number of shares
needed to complete the merger and that Provident has deposited enough cash with
the transfer agent to pay for fractional shares.
We cannot guarantee whether all of the conditions to the merger will be
satisfied or waived by the party permitted to do so. If the merger is not
completed on or before December 31, 2000, either party may terminate the merger
agreement.
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Conduct of Business Before the Merger
We have each agreed that, until the completion of the merger, each of us
will use commercially reasonable efforts to:
. conduct our business in the regular, ordinary and usual course
consistent with past practice;
. maintain and preserve intact our business organization, properties,
leases, employees and advantageous business relationships and retain
the services of our officers and key employees;
. take no action that would interfere with our ability to perform our
respective covenants and agreements on a timely basis under the merger
agreement;
. take no action that would interfere with our ability to obtain any
necessary approvals, consents or waivers of any governmental authority
required for the transactions contemplated by the merger agreement or
that would reasonably be expected to result in those approvals,
consents or waivers containing any material condition or restriction;
and
. take no action that results in, or is reasonably likely to result in,
a material adverse effect on either of us.
Further, except as otherwise provided in the merger agreement, until the
completion of the merger, Harbor has agreed that, unless agreed to by Provident,
neither Harbor nor its subsidiaries will:
Indebtedness
. incur any indebtedness or become responsible for the obligations of
any individual, corporation or entity, other than in the ordinary
course of business;
Capital stock
. change its capitalization;
. pay any dividends or make any distributions on its capital stock,
other than quarterly cash dividends on Harbor common stock of not more
than $0.13 per share;
. grant any stock appreciation rights or limited rights or grant any
individual, corporation or other entity any right to acquire any
shares of its capital stock;
. issue any shares of its capital stock or any securities convertible or
exercisable for any shares of its capital stock other than shares
issued upon the exercise of outstanding stock options;
Dispositions
. dispose of any of its material assets or cancel or release any
indebtedness, other than in the ordinary course of business or
pursuant to agreements in force at the date of the merger agreement;
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Investments
. make any equity investment, except pursuant to agreements in force at
the date of the merger agreement;
. restructure or materially change its investment portfolio or gap
position;
. make any investment in any debt security other than U.S. government
and U.S. government agency securities with maturities not greater than
five years;
Contracts
. enter into, renew, amend or terminate any contract or agreement, or
make any change in any of its leases or contracts, other than with
respect to those involving the payment of less than $20,000 per year;
Loans
. make, renew, increase, extend or purchase any loans other than in
conformance with existing lending practices in amounts not to exceed
$300,000 with respect to any individual borrower or pursuant to
obligations in effect as of the date of the merger agreement;
. make or increase any loan to any of its officers or directors or any
entity controlled by these persons that is not on terms generally
available to the public;
Employees
. increase the compensation or fringe benefits of any of its employees
or directors, except in the ordinary course of business consistent
with past practice;
. pay any bonus, pension or retirement allowance not required by any
existing plan or agreement to any employees or directors;
. become a party to, amend or commit to any benefit plan or employment
agreement;
. voluntarily accelerate the vesting of, or the lapsing of any
restrictions on, any stock options or other stock-based compensation;
. elect any new senior executive officer or director;
. hire any employee with an annual compensation payment in excess of
$50,000;
Settling claims
. settle any claim against it for more than $25,000 or agree to material
restrictions on its operations;
Governing documents
. amend its articles of incorporation or bylaws;
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Capital expenditures
. make any capital expenditures other than pursuant to binding
commitments existing at the date of the merger agreement and other
than expenditures necessary to maintain existing assets in good repair
or to make payment of necessary taxes;
Branches
. establish or commit to establish any new branch or other office or
file any application to relocate or close any branch;
Accounting
. change its method of accounting, except as required by changes in
generally accepted accounting principles or regulatory guidelines;
Adverse actions
. knowingly take any action that would impede the merger from
qualifying as a reorganization within the meaning of Section 368 of
the Internal Revenue Code;
. take or omit to take any action that is intended or expected to
result in any of its representations and warranties contained in the
merger agreement being or becoming untrue, or in any of the conditions
to the merger not being satisfied, or in a violation of any provision
of the merger agreement;
. engage in any transaction that is not in the usual and ordinary
course of business and consistent with past practices; or
Other agreements
. agree to take or make any commitment to take any of the actions listed
above.
Provident has agreed, that until the completion of the merger unless agreed
to by Harbor, neither it nor any of its subsidiaries will:
. knowingly take any action that would impede the merger from
qualifying as a reorganization within the meaning of Section 368 of
the Internal Revenue Code;
. take or omit to take any action that is intended or expected to
result in any of its representations and warranties contained in the
merger agreement being or becoming untrue, or in any of the conditions
to the merger not being satisfied, or in a violation of any provision
of the merger agreement; or
. agree to take or make any commitment to take any of the actions
listed above.
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Covenants of Harbor and Provident in the Merger Agreement
Agreement Not to Solicit Other Proposals. Harbor has agreed not to
initiate, solicit, encourage, facilitate, obtain or endorse any acquisition
proposal with a third party. An acquisition proposal includes the following:
. any merger, consolidation, share exchange, business combination, or
other similar transaction;
. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 25% or more of the assets of Harbor;
. any tender offer or exchange offer for 25% or more of the outstanding
shares of capital stock of Harbor; and
. any public announcement of a proposal, plan or intention to do any of
these things or any agreement to engage in any of these things.
Despite the agreement of Harbor not to solicit other acquisition proposals,
the Board of Directors of Harbor may generally enter into discussions or
negotiations with anyone who makes an unsolicited, written, bona fide
acquisition proposal that is a financially superior proposal to the merger. A
proposal of this nature is one that Harbor's Board of Directors, after
consultation with its financial advisor, determines is superior to this merger
from a financial point of view. For Harbor to enter into negotiations on a
superior proposal, it would also have to first determine that its fiduciary
duties obligate it to do so. If Harbor enters into negotiations with a third
party regarding a superior proposal, Harbor has to notify Provident and provide
Provident with information about the third party and its proposal.
Employee Matters. Each person who is an employee of Harbor Federal as of
the closing of the merger will become an employee of Provident Bank following
the merger. All Harbor Federal employees who continue as employees of Provident
Bank after the merger will be eligible to participate in Provident Bank's 401(k)
plan and pension plan with full credit for prior service with Harbor Federal for
purposes of eligibility and vesting, but not for purposes of benefit accruals.
Provident will make available to the continuing Harbor Federal employees health
and other employee welfare benefit plans on the same basis as it provides
coverage to Provident employees. Any pre-existing condition, eligibility waiting
period or other limitations usually applicable to new employees will not apply
to the Harbor Federal employees who are covered by a similar Harbor plan at the
time of the merger.
Harbor Federal will terminate its employee stock ownership plan upon
completion of the merger. The plan will repay its existing loan from Harbor and
will allocate any Provident common stock to the accounts of the plan
participants in proportion to their account balances, to the extent allowed
under applicable law and the governing documents of the plan. Harbor will
terminate its money purchase pension plan and distributions will be made to
participants as provided in the plan.
Indemnification of Harbor Officers and Directors. Provident has agreed to
indemnify and hold harmless each present and former director and officer of
Harbor for a period of six years from liability and expenses arising out of
matters existing or occurring at or before the consummation of the merger to the
fullest extent allowed under applicable law as in effect at the time of closing.
Provident has also agreed that it will maintain a policy of directors' and
officers' liability insurance coverage, or provide a policy providing comparable
coverage and amounts on terms no less favorable than Harbor's current policy,
for the benefit of Harbor's directors and officers who are currently covered by
insurance for three years following consummation of the merger, subject to a cap
on the amount of annual premiums.
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Certain Other Covenants. The merger agreement also contains other
agreements relating to our conduct before consummation of the merger, including
the following:
. Harbor will give Provident reasonable access during normal business
hours to its property, books, records and personnel and furnish all
information Provident may reasonably request.
. Provident will submit all necessary applications, notices, and other
filings with any governmental entity, the approval of which is
required to complete the merger and related transactions.
. Harbor will take any necessary action to exempt Provident and this
transaction from any antitakeover provisions contained in its articles
of incorporation or bylaws or federal or state law.
. We will use all reasonable efforts to take all actions necessary to
consummate the merger.
. We will consult with each other regarding any public statements about
the merger and any filings with any governmental entity or with any
national securities exchange or market.
. Harbor will take all actions necessary to convene a meeting of its
stockholders to vote on the merger agreement. Harbor's Boards of
Directors will recommend at its stockholder meeting that the
stockholders vote to approve the merger and will use its reasonable
best efforts to solicit stockholder approval, unless it determines
that its actions would not comply with its fiduciary obligations to
its stockholders.
. Prior to completion of the merger, Provident will notify the Nasdaq
National Market of the additional shares of Provident common stock
that Provident will issue in exchange for shares of Harbor.
. Harbor will use its best efforts to cause each person who is an
affiliate of it under Rule 145 of the Securities Act to deliver to
Provident a letter to the effect that such person will comply with
Rule 145.
. We each will notify the other of any contract defaults and any events
that would reasonably be likely to result in a material adverse effect
on us. We also will notify each other of any communication from a
third party regarding the need to obtain that party's consent to the
merger.
. We will coordinate our dividend payments so that Harbor stockholders
do not miss a dividend payment or get two dividend payments in one
quarter.
Representations and Warranties Made by Provident and Harbor in the Merger
Agreement
We have made certain customary representations and warranties to each other
in the merger agreement relating to our businesses. For information on these
representations and warranties, please refer to the merger agreement attached as
Appendix A. The representations and warranties must be true in all material
respects through the completion of the merger unless the change does not have a
material negative impact on our business, financial condition or results of
operations. See "--Conditions to Completing the Merger."
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Terminating the Merger Agreement
The merger agreement may be terminated at or prior to the completion of the
merger, either before or after approval of the merger agreement by Harbor
stockholders, as follows:
. with the mutual consent of Provident and Harbor;
. by either party, if the stockholders of Harbor fail to approve the
merger agreement;
. by either party, if a required regulatory approval is denied or any
governmental entity prohibits the merger;
. by either party, if the merger is not consummated by December 31,
2000, unless failure to complete the merger by that time is due to a
misrepresentation, breach of a warranty or failure to fulfill a
covenant by the party seeking to terminate the agreement;
. by either party, if the other party makes a misrepresentation,
breaches a warranty or fails to fulfill a covenant that is not cured
within a specified time and that would have a material adverse effect
on the party seeking to terminate; or
. by Provident, if the Board of Directors of Harbor does not recommend
approval of the merger in the proxy statement-prospectus or withdraws
or revises its recommendation.
In addition, Harbor may terminate the merger agreement if both of the
following conditions are satisfied:
. the average closing of Provident common stock as reported on the
Nasdaq Stock Market for the 20 consecutive trading days ending on the
date on which the last of the required regulatory approvals is
received is less than $12.25; and
. the average closing price of Provident common stock computed in the
manner described above represents a decline from Provident's closing
stock price of $13.81 on May 10, 2000 that exceeds by more than 15
percentage points the decline in the Standard & Poor's Regional Bank
Index.
Harbor will have five calendar days after the end of the measurement period
in which to exercise its right to terminate the merger agreement on this basis.
However, no termination will occur if Provident agrees to increase the exchange
ratio to an amount equal to the lesser of:
. the number obtained by dividing $15.39 by the average closing price of
Provident common stock described above, or
. the number obtained by dividing the product of the index ratio (as
defined below) and the exchange ratio by the Provident ratio (as
defined below).
The term "index ratio" means the final index value divided by the starting
index value, minus 0.15.
The term "Provident ratio" means the number obtained by dividing the
Provident average closing price, calculated as described above, by $13.81.
Provident will have five calendar days after receiving notice of
termination from Harbor to exercise its right to increase the exchange ratio.
Whether Harbor would exercise its right to terminate the merger
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agreement and whether Provident would exercise its right to increase the
exchange ratio will depend on the facts and circumstances as they exist at the
time.
Expenses and Termination Fees
Each of us will pay our own costs and expenses incurred in connection with
the merger, except that we will share equally the expense of filing, printing
and mailing this proxy statement-prospectus.
Harbor has agreed to pay Provident a termination fee of:
. $700,000, plus Provident's reasonable out-of-pocket expenses, if
within 12 months after May 3, 2000, after a bona fide proposal is made
to either Harbor or its stockholders by a third party to enter into an
acquisition transaction not permitted by the terms of the merger
agreement, any of the following occur:
- Harbor willfully breaches any covenant or obligation in the
merger agreement and such breach would entitle Provident to
terminate the merger agreement;
- Harbor's stockholders do not approve the merger agreement at the
Harbor special meeting or the Harbor special meeting is not held
or is canceled; or
- Harbor's Board of Directors withdraws or modifies its
recommendation to approve the merger agreement in a manner
adverse to Provident.
. $1,500,000, plus Provident's reasonable out-of-pocket expenses, if
within 18 months after May 3, 2000 Harbor or any of its subsidiaries,
without having first received Provident's consent, enters into an
agreement to engage in an acquisition transaction not otherwise
permitted by the terms of the merger agreement, or Harbor's Board of
Directors recommends that Harbor's stockholders approve an acquisition
transaction not otherwise permitted by the terms of the merger
agreement.
If the $1,500,000 fee becomes payable, the amount due will be reduced
dollar-for-dollar by any portion of the $700,000 fee that has actually been
paid. Harbor will not be obligated to pay Provident the termination fees
described above if, at or prior to the time that the fee becomes payable, the
merger agreement is validly terminated by either party for any reason, other
than a termination by Provident as a result of a material breach of the merger
agreement by Harbor or after Harbor's Board of Directors withdraws or adversely
modifies its recommendation that Harbor stockholders approve the merger
agreement.
Changing the Terms of the Merger Agreement
Before the completion of the merger, we may agree to waive, amend or modify
any provision of the merger agreement. However, after the vote by Harbor
stockholders, we can make no amendment or modification that would reduce the
amount or alter the kind of consideration to be received by Harbor's
stockholders under the terms of the merger or that would violate Maryland
corporate law or federal banking laws.
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Information About Provident
Information regarding the current directors and executive officers of
Provident, the principal holders of voting securities, executive compensation
and certain relationships and related transactions is incorporated by reference
or set forth in Provident's Annual Report on Form 10-K for the year ended
December 31, 1999, which is incorporated in this document by reference. Harbor
stockholders who want a copy of this document or any document incorporated by
reference into the report may contact Provident at its address or telephone
number indicated under "Where You Can Find More Information."
A Warning About Forward-looking Statements
This proxy statement-prospectus, including information included or
incorporated by reference in this document, contains certain forward-looking
statements with respect to the financial condition, results of operations,
plans, objectives, future performance and business of each of Provident and
Harbor, as well as certain information relating to the merger, including,
without limitation,
. statements relating to the cost savings and accretion to reported
earnings estimated to result from the merger;
. statements relating to revenues of the combined company after the
merger;
. statements relating to the expenses estimated to be incurred in
connection with the merger; and
. statements preceded by, followed by or that include the words
"believes," "expects," "anticipates," "estimates" or similar
expressions.
These forward-looking statements involve certain risks and uncertainties.
Actual results may differ materially from those contemplated by the forward-
looking statements due to, among others, the following factors:
. expected cost savings from the merger may not be fully realized or
realized within the expected time frame;
. revenues following the merger may be lower than expected;
. competitive pressures among financial services companies may increase
significantly;
. costs or difficulties related to the integration of the business of
Provident and Harbor may be greater than expected;
. changes in the interest rate environment may reduce interest margins;
. general economic conditions, either nationally or in Maryland, may be
less favorable than expected;
. legislative or regulatory changes may adversely affect the business in
which Provident or Harbor is engaged; and
. changes may occur in the securities markets.
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Provident does not intend to update or otherwise revise any forward-looking
statements to reflect circumstances existing since their preparation or to
reflect the occurrence of unanticipated events, even in the event that any or
all of the underlying assumptions are shown to be in error. Furthermore,
Provident does not intend to update or revise the forward-looking statements to
reflect changes in general economic or industry conditions.
See "Where You Can Find More Information."
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Description of Provident Common Stock
The following summarizes the material terms of Provident's capital stock
but does not purport to be complete. This discussion is qualified in its
entirety by reference to the applicable provisions of federal law governing bank
holding companies, Maryland law, Provident's articles of incorporation and
bylaws and the rights agreement, dated as of January 18, 1995 and amended as of
July 15, 1998, between Provident and Provident Bank, as rights agent relating to
rights to purchase shares of Provident Class A Preferred Stock. See "Where You
Can Find More Information" as to where to obtain a copy of these documents.
Common Stock
Provident is authorized to issue 100,000,000 shares of common stock having
a par value of $1.00 per share. As of June 30, 2000, there were 25,595,050
shares of Provident common stock issued and outstanding. Each share of
Provident's common stock has the same relative rights as, and is identical in
all respects with, each other share of common stock.
Dividends. Provident can pay dividends on its common stock if, after
giving effect to the distribution, it would be able to pay its indebtedness as
the indebtedness comes due in the usual course of business and its total assets
exceed the sum of its liabilities and the amount needed, if Provident were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of any holders of capital stock who have a preference in the
event of dissolution. The payment of dividends by Provident is subject to
limitations which are imposed by law and applicable regulation. The holders of
common stock of Provident are entitled to receive and share equally in any
dividends as may be declared by the Board of Directors of Provident out of funds
legally available for the payment of dividends. If Provident issues preferred
stock, the holders of the preferred stock may have a priority over the holders
of the common stock with respect to dividends.
Voting Rights. The holders of common stock of Provident possess exclusive
voting rights in Provident. They elect Provident's Board of Directors and act on
any other matters as are required to be presented to them under applicable law
or as are otherwise presented to them by the Board of Directors. Each holder of
common stock is entitled to one vote per share and does not have any right to
cumulate votes in the election of directors. If Provident issues preferred
stock, holders of preferred stock may also possess voting rights.
Liquidation. In the event of liquidation, dissolution or winding up of
Provident, the holders of its common stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of Provident available for distribution. If Provident issues preferred
stock, the holders of the preferred stock may have a priority over the holders
of the common stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the common stock of Provident are not
entitled to preemptive rights with respect to any shares that may be issued. The
common stock is not subject to redemption.
Preferred Share Purchase Rights. Each issued share of Provident common
stock includes a Class A Preferred Stock purchase right. See " --Provident
Rights Plan" below.
Preferred Stock
Provident is authorized to issue 5,000,000 shares of preferred stock having
a par value of $1.00 per share. As of June 30, 2000, there were no shares of
preferred stock outstanding. Provident may issue preferred stock with such
designations, powers, preferences and rights as Provident's Board of Directors
may
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from time to time determine. Provident's Board of Directors can, without
stockholder approval, issue preferred stock with voting, dividend, liquidation
and conversion rights that could dilute the voting strength of the holders of
the common stock and may assist management in impeding an unfriendly takeover or
attempted change in control. None of the shares of the authorized preferred
stock will be issued in connection with the merger and there are no plans to
issue preferred stock.
Provident Rights Plan
On January 18, 1995, Provident's Board of Directors declared a dividend
distribution of one Class A Preferred Stock purchase right for each outstanding
share of Provident common stock. The dividend was paid to stockholders of record
at the close of business on January 30, 1995. Each right entitles the registered
holder to purchase from Provident one one-hundredth of a share of Provident
Class A Preferred Stock at an exercise price of $80 per one-hundredth of a share
of Class A Preferred Stock, subject to adjustment. The description and terms of
the rights are set forth in the rights agreement. On July 15, 1998, Provident's
Board of Directors amended the rights agreement to increase the exercise price
to $120.
The rights generally will be exercisable only after the earlier of the date
which is (1) the tenth business day after the date on which any person or group
commences a tender or exchange offer which, if consummated, would result in such
person or group becoming the beneficial owner of 10% or more of the outstanding
shares of Provident common stock (an "acquiring person") (or a later date as
Provident's Board of Directors may determine prior to the tenth business day
after the commencement of the tender or exchange offer), or (2) the tenth
business day after the first date of public announcement by Provident that a
person or group has become an acquiring person (or such earlier or later date as
Provident's Board of Directors may determine prior to the tenth business day
after such announcement).
The rights agreement provides that, until the time the rights become
exercisable, the rights will be transferred with and only with the Provident
common stock. Provident common stock certificates issued prior to the time the
rights become exercisable will evidence one right for each share of Provident
common stock represented by the certificates and will contain a legend
incorporating by reference the terms of the rights agreement. Notwithstanding
the absence of this legend, certificates evidencing shares of Provident common
stock outstanding on or prior to January 30, 1995 will also evidence one right
for each share of Provident common stock represented by the certificates.
Promptly following the time the rights become exercisable, separate certificates
evidencing the rights will be mailed to holders of record of Provident common
stock at that time.
If not previously exercised, exchanged or redeemed, the rights will expire
on January 18, 2005. The rights will also expire upon the merger of Provident
into another corporation pursuant to an agreement entered into prior to the
tenth business day after the first public announcement that a person or group
has become an acquiring person.
The exercise price and the number of rights outstanding, or in certain
circumstances the securities purchasable upon exercise of the rights, are
subject to adjustment to prevent dilution in the event of a Provident common
stock dividend on, or a subdivision or a combination into a smaller number of
shares of, Provident common stock, or the issuance or distribution of any
securities or assets in respect of, in lieu of or in exchange for Provident
common stock.
If any person or group becomes an acquiring person, each right, other than
those held by an acquiring person, would entitle the holder of a right to
purchase from Provident a certain number shares. That number would be equal to
the shares of Provident common stock having an aggregate market price on the
date of the public announcement of an acquiring person's becoming such that gave
rise to the rights becoming exercisable, equal to twice the exercise price for
an amount in cash equal to the then-current exercise price.
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In addition, after a person or group acquires 10% or more, but less than
50%, of the outstanding shares of Provident common stock, each right, except
those held by an acquiring person, may be exchanged by Provident's Board of
Directors for one share of Provident common stock.
Whenever Provident becomes obligated to issue shares of Provident common
stock upon exercise of or in exchange for rights, Provident, at its option, may
substitute shares of Provident Class A Preferred Stock, at a ratio of one one-
hundredth of a share of Provident Class A Preferred Stock for each share of
Provident common stock that it is required to issue.
If Provident combines with another corporation at a time when the acquiring
person controls Provident's Board of Directors and (1) either the terms of the
transaction concerning the treatment of shares of capital stock relating to the
acquiring person are not identical to the terms relating to other holders of
Provident common stock, or (2) where the person with whom the transaction occurs
is the acquiring person, or where 50% or more of Provident's assets or earnings
power is sold in one or several transactions without the prior written consent
of Provident's Board of Directors, then each right would entitle the holders
thereof (except for the acquiring person) to receive the number of shares of the
acquiring company's common stock having a market price on the date of the merger
or other business transaction equal to two times the exercise price of the
rights.
At any time prior to the time an acquiring person becomes such, Provident's
Board of Directors may redeem all (but not less than all) of the then-
outstanding rights at a price of $.01 per right. Immediately upon the action of
Provident's Board of Directors electing to redeem the rights, the right to
exercise the rights will terminate and each right will thereafter represent only
the right to receive the redemption price.
The holders of rights will, solely by reason of their ownership of rights,
have no rights as stockholders of Provident, including, without limitation, the
right to vote or to receive dividends.
The rights have anti-takeover effects. The rights will cause substantial
dilution to a person or group that attempts to acquire Provident on terms not
approved by Provident's Board of Directors unless the offer is conditional on a
substantial number of rights being acquired. The rights should not interfere
with any merger or other business combination approved by Provident's Board of
Directors, as the rights may be redeemed by Provident at the required redemption
price prior to the time that a person or group has acquired beneficial ownership
of 10% or more of the shares of Provident common stock.
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Comparison of Rights of Stockholders
The rights of stockholders of Provident are currently governed by
Provident's articles of incorporation, bylaws and applicable provisions of the
Maryland General Corporation Law. The rights of stockholders of Harbor are
currently governed by Harbor's articles of incorporation, bylaws and the same
provisions of the Maryland General Corporation Law. If we complete the merger,
Harbor stockholders will become Provident stockholders and their rights will
likewise be governed by Provident's articles of incorporation and bylaws.
Because Provident and Harbor are both organized under the laws of the State
of Maryland, any differences in your rights as a stockholder of Harbor and
Provident will arise solely from differences in the articles of incorporation
and bylaws of Provident and Harbor rather than from differences of law. This
summary is not a complete discussion of the Provident and Harbor articles of
incorporation and bylaws, and it is qualified in its entirety by reference to
those documents. Copies of Provident's and Harbor's articles of incorporation
and bylaws are on file with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Authorized Stock
----------------------------------------------------------------------------------------------------------------
Provident Harbor
--------------------------------------------------- ----------------------------------------------------
<S> <C>
. The Provident articles of incorporation . The Harbor articles of incorporation authorize
authorize 105,000,000 shares of capital stock, 25,000,000 shares of capital stock, consisting
consisting of 100,000,000 shares of common of 20,000,000 common stock, $.01 par value,
stock, $1.00 par value, and 5,000,000 shares and 5,000,000 shares of serial preferred stock,
of serial preferred stock, $1.00 par value. $.01 par value.
. As of June 30, 2000, there were 25,595,050 . As of June 30, 2000, there were 1,664,515
shares of Provident common stock issued and shares of Harbor common stock issued and
outstanding. outstanding.
. Same.
. As of June 30, 2000, there were no shares of
preferred stock issued or outstanding.
</TABLE>
<TABLE>
<CAPTION>
Voting Rights
----------------------------------------------------------------------------------------------------------------
Provident Harbor
--------------------------------------------------- ----------------------------------------------------
<S> <C>
. The holders of the common stock exclusively . Same.
possess all voting power, subject to the
authority of the Board of Directors to offer
voting rights to the holders of preferred stock.
. Each share of common stock is entitled to one . Each share of common stock is entitled to one
vote. vote. Beneficial owners of 10% or more of
the outstanding stock are subject to voting
limitations.
. Holders of common stock may not cumulate . Same.
their votes for the election of directors.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Required Vote for Authorization of Certain Actions
----------------------------------------------------------------------------------------------------------------
Provident Harbor
--------------------------------------------------- ----------------------------------------------------
<S> <C>
. At least two-thirds of the outstanding shares . At least 80% of the outstanding shares of
of voting stock must approve certain voting stock must approve certain "business
"business combinations" involving an combinations" involving a "related person."
"interested stockholder." In addition, a In addition, a business combination with a
business combination with an interested related person must be approved by at least a
stockholder must be approved by at least two- majority of outstanding shares of voting stock
thirds of the outstanding shares of voting other than shares owned by the related person.
stock other than shares beneficially owned by However, if a majority of directors not
the interested stockholder. See "Selected affiliated with the related person approves the
Provisions in the Articles of Incorporation business combination, a vote of two-thirds of
And Bylaws of Provident--Business the outstanding shares is sufficient to approve
Combinations with Interested Stockholders." a business combination.
However, if a majority of directors not
affiliated with the interested stockholder
approves the business combination, or certain
price and procedure requirements are met, a
vote of two-thirds of the outstanding shares is
sufficient to approve a business combination.
</TABLE>
<TABLE>
<CAPTION>
Dividends
----------------------------------------------------------------------------------------------------------------
Provident Harbor
--------------------------------------------------- ----------------------------------------------------
<S> <C>
. Holders of common stock are entitled, when . Same.
declared by Provident's Board of Directors, to
receive dividends, subject to the rights of
holders of preferred stock.
</TABLE>
<TABLE>
<CAPTION>
Stockholders' Meetings
----------------------------------------------------------------------------------------------------------------
Provident Harbor
--------------------------------------------------- ----------------------------------------------------
<S> <C>
. Provident must deliver notice of the meeting . Harbor must deliver notice of the meeting and
and, in the case of a special meeting, a a description of its purpose no fewer than 10
description of its purpose no fewer than 10 days and no more than 90 days before the
days and no more than 90 days before the meeting to each stockholder of record entitled
meeting to each stockholder entitled to vote. to vote.
. A majority of the shares entitled to vote at the . One-third of the shares entitled to vote at the
meeting, present in person or by proxy, will meeting, present in person or by proxy, will
constitute a quorum. constitute a quorum.
. The Chairman, the President or a majority of . A majority of the Board of Directors or an
the Board of Directors may call a special authorized committee of the Board may call a
meeting. The Secretary will call a special special meeting. The Secretary will call a
meeting upon the written request of the special meeting upon the written request of
holders of a majority of the outstanding the holders of not less than 25% of the shares
shares. entitled to vote at the meeting.
</TABLE>
44
<PAGE>
<TABLE>
<S> <C>
. For purposes of determining stockholders . For purposes of determining stockholders
entitled to vote at a meeting, the Board of entitled to vote at a meeting, the Board of
Directors may fix a record date that is not less Directors may fix a record date that is not less
than 10 days or more than 60 days before the than 10 days or more than 90 days before the
meeting. meeting.
. The Board of Directors or any stockholder . Same.
may nominate directors for election or
propose new business.
. To nominate a director or propose new . To nominate a director or propose new
business, stockholders must give written business, stockholders must give written
notice to the Secretary of Provident not less notice to the Secretary of Harbor not less than
than 90 days prior to the meeting. However, 30 days nor more than 60 days prior to the
if Provident gives less than 100 days' notice meeting. However, if Harbor gives less than
or prior public disclosure of the date of the 40 days' notice of the meeting, written notice
meeting, written notice of the stockholder of the stockholder proposal or nomination
proposal or nomination must be delivered to must be delivered to the Secretary within 10
the Secretary within 10 days of the date notice days of the date notice of the meeting was
of the meeting was mailed to stockholders or mailed to stockholders. Each notice given by
such public disclosure was made. Each notice a stockholder with respect to a nomination to
given by a stockholder with respect to a the Board of Directors or proposal for new
nomination to the Board of Directors or business must include certain information
proposal for new business must include regarding the nominee or proposal and the
certain information regarding the nominee or stockholder making the nomination or
proposal and the stockholder making the proposal.
nomination or proposal.
</TABLE>
<TABLE>
<CAPTION>
Action by Stockholders Without a Meeting
----------------------------------------------------------------------------------------------------------------
Provident Harbor
--------------------------------------------------- ----------------------------------------------------
<S> <C>
. No action that requires the approval of the . Any action that may be taken at a meeting of
stockholders may be taken without a meeting stockholders may be taken without a meeting
by the written consent of stockholders. by the unanimous written consent of each
stockholder entitled to vote on the matter.
</TABLE>
<TABLE>
<CAPTION>
Board of Directors
----------------------------------------------------------------------------------------------------------------
Provident Harbor
--------------------------------------------------- ----------------------------------------------------
<S> <C>
. The bylaws provide that the number of . The articles of incorporation provides that the
directors shall be no fewer than three. The number of directors shall be no fewer than
Board of Directors has set the number of five nor more than 15. The bylaws set the
directors at 16. number of directors at six.
. The Board of Directors is divided into three . Same.
classes as equal in number as possible and
approximately one-third of the directors are
elected at each annual meeting.
</TABLE>
45
<PAGE>
<TABLE>
<S> <C>
. Vacancies on the Board of Directors will be . Vacancies on the Board of Directors may be
filled by the remaining directors, but if a filled by a majority vote of the stockholders
vacancy exists at the time of any annual or by the remaining directors.
meeting, that vacancy will be filled by
majority vote of the shares entitled to vote
at that meeting.
. Directors may be removed only for cause by . Directors may be removed only by the vote of
the vote of at least 80% of the outstanding at least 80% of the outstanding shares entitled
shares entitled to vote for directors. to vote for directors.
</TABLE>
<TABLE>
<CAPTION>
Stockholder Rights Plan
----------------------------------------------------------------------------------------------------------------
Provident Harbor
----------------------------------------- -----------------------------------------------------------
<S> <C>
. Provident has implemented a stockholder . Harbor has not implemented a stockholder
rights plan under which a Provident rights plan.
stockholder will have the right to purchase
Provident Class A Preferred Stock when a
person or group acquires 10% or more of
the outstanding shares of Provident
common stock. Each share of Provident
common stock issued in the merger will be
issued with an attached right. See
"Description of Provident Common
Stock--Provident Rights Plan."
</TABLE>
<TABLE>
<CAPTION>
Amendment of the Bylaws
----------------------------------------------------------------------------------------------------------------
Provident Harbor
------------------------------------------- -----------------------------------------------------------
<S> <C>
. The bylaws may be amended or repealed by . The bylaws may be amended or repealed by
the Board of Directors. the Board of Directors or by the vote of at
least 80% of the outstanding shares.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Amendment of the Articles of Incorporation
----------------------------------------------------------------------------------------------------------------
Provident Harbor
-------------------------------------------- -----------------------------------------------------------
<S> <C>
. The articles of incorporation may . The articles of incorporation may be
be amended or repealed upon amended or repealed upon approval of
approval of at least two-thirds of at least two-thirds of the shares
the shares entitled to vote on the entitled to vote on the matter.
matter. However, amendments to However, amendments to the articles
the articles of incorporation that of incorporation that would revise
would revise the provisions the provisions relating to meetings
relating to the number, terms and of stockholders and cumulative
classification, and removal voting, notice for stockholder
procedures for directors require nominations and proposals, directors,
approval by at least 80% of the removal of directors, acquisition of
outstanding shares and amendments Harbor's capital stock, approval of
that would revise the provisions business combinations with related
relating to transactions with persons, evaluation of business
interested stockholders also combinations, limitation of officers'
require approval by at least and directors' liability,
two-thirds of the shares other indemnification and amendment of the
than those owned by the articles of incorporation and bylaws
interested stockholder. require approval by at least 80% of
the outstanding shares, unless such
amendment is first approved by a
majority of directors not affiliated
with a related person, in which case
approval by at least two-thirds of
the outstanding shares is required.
</TABLE>
47
<PAGE>
Selected Provisions in the Articles of Incorporation
and Bylaws of Provident
Provident's articles of incorporation and bylaws contain certain provisions
that could make more difficult an acquisition of Provident by means of a tender
offer, proxy context or otherwise. Certain provisions will also render the
removal of the incumbent Board of Directors or management of Provident more
difficult. These provisions may have the effect of deterring a future takeover
attempt that is not approved by Provident's Board of Directors, but which
Provident stockholders may deem to be in their best interests or in which
stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to participate
in such a transaction may not have the opportunity to do so. The following
description of these provisions is only a summary and does not provide all of
the information contained in Provident's articles of incorporation and bylaws.
See "Where You Can Find More Information" as to where to obtain a copy of these
documents.
Business Combinations with Interested Stockholders
To approve certain "business combinations" with an "interested
stockholder," the articles of incorporation require the approval of (1) the
holders of at least two-thirds of Provident's outstanding shares of voting stock
entitled to vote and (2) the holders of at least two-thirds of Provident's
shares of voting stock other than those shares held by the interested
stockholder. This voting requirement will not apply in cases where the proposed
transaction has been approved by a majority of those members of Provident's
Board of Directors who are unaffiliated with the interested stockholder and who
were directors before the time when the interested stockholder became an
interested stockholder or if the proposed transaction meets certain conditions
that are designed to afford the stockholders a fair price in consideration for
their shares.
The term "interested stockholder" includes any individual, group acting in
concert, corporation, partnership, association or other entity (other than
Provident or its subsidiary) who or which is the beneficial owner, directly or
indirectly, of 10% or more of the outstanding shares of voting stock of
Provident.
A "business combination" includes:
. any merger or consolidation of Provident or any of its subsidiaries
with any interested stockholder or affiliate of an interested
stockholder or any corporation which is, or after such merger or
consolidation would be, an affiliate of an interested stockholder;
. any sale or other disposition to or with any interested stockholder of
assets of Provident or its subsidiaries that have an aggregate book
value of 10% or more of the total market value of Provident's common
stock or its net worth;
. the issuance or transfer to any interested stockholder or its
affiliate by Provident (or any subsidiary) of any securities of
Provident (or any subsidiary) in exchange for any cash, securities or
other property the value of which equals or exceeds 10% of the total
market value of the common stock of Provident;
. the adoption of any plan for the liquidation or dissolution of
Provident proposed by or on behalf of any interested stockholder or
its affiliate; and
. any reclassification of securities, recapitalization, merger or
consolidation of Provident with any of its subsidiaries which has the
effect of increasing the proportionate share of common stock or any
class of equity or convertible securities of Provident or subsidiary
owned directly or indirectly, by an interested stockholder or its
affiliate.
48
<PAGE>
Board of Directors
Classified Board. The Board of Directors of Provident is divided into three
classes, each of which contains approximately one-third of the number of
directors. The stockholders elect one class of directors each year for a term of
three years. The classified board makes it more difficult and time consuming for
a stockholder group to fully use its voting power to gain control of the Board
of Directors without the consent of the incumbent Board of Directors of
Provident.
Filling of Vacancies; Removal. The bylaws provide that any vacancy
occurring in Provident's Board of Directors, including a vacancy created by an
increase in the number of directors, may be filled by a vote of a majority of
the directors then in office. The bylaws provide that a director may be removed
from the Board of Directors prior to the expiration of his or her term only for
cause and only upon the vote of 80% of the outstanding shares of voting stock.
These provisions make it more difficult for stockholders to remove directors and
replace them with their own nominees.
Special Meetings of Stockholders
The bylaws permit stockholders to call a special meeting of stockholders
only upon the request of the holders of a majority of the outstanding shares.
At a special meeting, stockholders may consider only the business specified in
the notice of meeting given by Provident. These provisions make it more
difficult for stockholders to force stockholder consideration of a proposal
between annual meetings over the opposition of Provident's Board of Directors by
calling a special meeting of stockholders.
Advance Notice Provisions for Stockholder Nominations and Proposals
Provident's bylaws establish an advance notice procedure for stockholders
to nominate directors or bring other business before an annual meeting of
stockholders of Provident. A person may not be nominated for election as a
director unless that person is nominated by or at the direction of Provident's
Board of Directors or by a stockholder who has given appropriate notice to
Provident before the meeting. Similarly, a stockholder may not bring business
before an annual meeting unless the stockholder has given Provident appropriate
notice of its intention to bring that business before the meeting. Provident's
Secretary must receive notice of the nomination or proposal not less than 90
days prior to the annual meeting. However, if Provident gives less than 100
days' notice or prior public disclosure of the date of the meeting, written
notice of the stockholder proposal or nomination must be delivered to the
Secretary within 10 days of the date notice of the meeting was mailed to
stockholders or such public disclosure was made. A stockholder who desires to
raise new business must provide certain information to Provident concerning the
nature of the new business, the stockholder and the stockholder's interest in
the business matter. Similarly, a stockholder wishing to nominate any person
for election as a director must provide Provident with certain information
concerning the nominee and the proposing stockholder.
Advance notice of nominations or proposed business by stockholders gives
Provident's Board of Directors time to consider the qualifications of the
proposed nominees, the merits of the proposals and, to the extent deemed
necessary or desirable by the Board, to inform stockholders and make
recommendations about those matters.
Preferred Stock
The articles of incorporation authorizes Provident's Board of Directors to
establish one or more series of preferred stock and, for any series of preferred
stock, to determine the terms and rights of the series, including voting rights,
conversion rates, and liquidation preferences. Provident's Board of Directors
could issue a series of preferred stock that could, depending on its terms,
impede a merger, tender offer or other takeover attempt. Provident's Board of
Directors will make any determination to issue shares with those terms based on
its judgment as to the best interests of Provident and its stockholders.
49
<PAGE>
Regulation and Supervision of Provident
General
Provident is a bank holding company subject to supervision and regulation
by the Board of Governors of the Federal Reserve System under the Bank Holding
Company Act. As a bank holding company, Provident's activities and those of its
banking and nonbanking subsidiaries are limited to the business of banking and
activities closely related or incidental to banking, and Provident may not
directly or indirectly acquire the ownership or control of more than 5% of any
class of voting shares or substantially all of the assets of any company,
including a bank, without the prior approval of the Federal Reserve Board.
Recent legislation has authorized bank holding companies that meet specified
standards with respect to capitalization, management and Community Reinvestment
Act rating to elect to become a "financial holding company" and thereby engage
in a broader array of activities. Provident has not elected to exercise this
option at this time.
Provident Bank, as a Maryland state-chartered, FDIC-insured depository
institution, is subject to the supervision, regulation and examination of the
Maryland Commissioner of Financial Regulation and the FDIC. The FDIC has broad
enforcement authority over federally-insured depository institutions, including
the power to terminate deposit insurance, to appoint a conservator or receiver
if any of a number of conditions are met, and to impose substantial fines and
other civil penalties. The Maryland Commission of Financial Regulation also has
broad enforcement authority over Provident Bank. Almost every aspect of the
operations and financial condition of Provident Bank is subject to extensive
regulation and supervision and to various requirements and restrictions under
federal and state law, including requirements governing capital adequacy,
liquidity, earnings, dividends, reserves against deposits, management practices,
branching, loans, investments, and the provision of services. Various consumer
protection laws and regulations also affect the operations of Provident Bank.
The deposits of Provident Bank are insured up to applicable limits by the FDIC.
Supervision and regulation of bank holding companies and their subsidiaries
is intended primarily for the protection of depositors, the deposit insurance
funds of the FDIC and the banking system as a whole, not for the protection of
bank holding company stockholders or creditors.
The following description summarizes some of the laws to which Provident
and Provident Bank are subject. To the extent statutory or regulatory provisions
or proposals are described, the description is qualified in its entirety by
reference to the particular statutory or regulatory provisions or proposals.
Payment of Dividends
Provident is a legal entity separate and distinct from its subsidiaries.
The principal source of Provident's cash revenues is dividends from Provident
Bank, and there are various legal and regulatory limitations under federal and
state law on the extent to which banking subsidiaries can finance or otherwise
supply funds to their holding company.
Federal Reserve Board policy provides that, as a matter of prudent banking,
a bank holding company generally should not maintain a rate of cash dividends
unless its net income available to common stockholders has been sufficient to
fully fund the dividends, and the prospective rate of earnings retention appears
to be consistent with the holding company's capital needs, asset quality and
overall financial condition. In addition, among other things, dividends from a
Maryland state-chartered bank, such as Provident Bank, are limited by Maryland
law to an amount equal to the bank's undivided profits and, with prior approval,
its surplus in excess of 100% of its required capital stock.
50
<PAGE>
Under federal law, a depository institution is prohibited from paying a
dividend if the depository institution would thereafter be "undercapitalized" as
determined by the federal bank regulatory agencies. The relevant federal and
state regulatory agencies also have authority to prohibit a bank or bank holding
company from engaging in what, in the opinion of such regulatory body,
constitutes an unsafe or unsound practice in conducting its business. The
payment of dividends could, depending upon the financial condition of Provident
Bank, be deemed to constitute such an unsafe or unsound practice.
Transactions with Affiliates
Provident Bank is subject to restrictions under federal law that limit
certain transactions with Provident and its nonbanking subsidiaries, including
loans, other extensions of credit, investments or asset purchases. Such
transactions by a banking subsidiary with any one affiliate are limited in
amount to 10% of the bank's capital and surplus and, with all affiliates
together, to an aggregate of 20% of the bank's capital and surplus. Furthermore,
such loans and extensions of credit, as well as certain other transactions, are
required to be secured in specified amounts. These and certain other
transactions, including any payment of money to Provident, must be on terms and
conditions that are, or in good faith would be, offered to nonaffiliated
companies.
Holding Company Liability
Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to each of its banking subsidiaries and
commit resources to their support. Such support may be required at times when,
absent this Federal Reserve Board policy, a holding company may not be inclined
to provide it. As discussed below under "--Prompt Corrective Action," a bank
holding company in certain circumstances could be required to guarantee the
capital plan of an undercapitalized banking subsidiary.
In the event of a bank holding company's bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code, the trustee will be deemed to have assumed, and is
required to cure immediately, any deficit under any commitment by the debtor
holding company to any of the federal banking agencies to maintain the capital
of an insured depository institution, and any claim for breach of such
obligation will generally have priority over most other unsecured claims.
Prompt Corrective Action
The federal banking agencies must take prompt supervisory and regulatory
actions against undercapitalized depository institutions. Depository
institutions are assigned one of five capital categories: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized," and are subject to different regulation
corresponding to the capital category within which the institution falls. Under
certain circumstances, a well capitalized, adequately capitalized or
undercapitalized institution may be treated as if the institution were in the
next lower capital category. A depository institution is generally prohibited
from making capital distributions (including paying dividends) or paying
management fees to a holding company if the institution would thereafter be
undercapitalized.
The banking regulatory agencies are permitted or, in certain cases,
required to take certain actions with respect to institutions falling within one
of the three undercapitalized categories. Depending on the level of an
institution's capital, the agency's corrective powers include, among other
things:
. prohibiting the payment of principal and interest on subordinated
debt;
. prohibiting the holding company from making distributions without
prior regulatory approval;
51
<PAGE>
. placing limits on asset growth, restrictions on activities and
additional restrictions on transactions with affiliates;
. restricting the interest rate the institution may pay on deposits and
prohibiting the institution from accepting deposits from correspondent
banks; and
. in the most severe cases, appointing a conservator or receiver for the
institution.
A banking institution that is undercapitalized is required to submit a
capital restoration plan, and such a plan will not be accepted unless, among
other things, the banking institution's holding company guarantees the plan up
to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy. As of March 31, 2000, Provident Bank exceeded the required capital
ratios for classification as "well capitalized." See "--Capital Adequacy" below.
Capital Adequacy
<TABLE>
<CAPTION>
Risk-Based Ratios
--------------------------------
Tier I Total Leverage
Capital Capital Ratio
-------------- -------------- ---------
As of March 31, 2000
--------------------
<S> <C> <C> <C>
Provident......................... 9.69% 10.71% 7.44%
Provident Bank.................... 9.56 10.58 7.34
Minimum required ratio............ 4.00 8.00 4.00
"Well capitalized" minimum ratio.. 6.00 10.00 5.00
</TABLE>
The Federal Reserve Board has adopted risk-based capital guidelines for
bank holding companies. The minimum ratio of total capital to risk-weighted
assets (which are the credit risk equivalents of balance sheet assets and
certain off balance sheet items such as standby letters of credit) is 8%. At
least half of the total capital must be composed of common stockholders' equity
(including retained earnings), qualifying non-cumulative perpetual preferred
stock (and, for bank holding companies only, a limited amount of qualifying
cumulative perpetual preferred stock), and minority interests in the equity
accounts of consolidated subsidiaries, less goodwill, other disallowed
intangibles and disallowed deferred tax assets, among other items. The remainder
may consist of a limited amount of subordinated debt, other perpetual preferred
stock, hybrid capital instruments, mandatory convertible debt securities that
meet certain requirements, as well as a limited amount of reserves for loan
losses. The Federal Reserve Board has also adopted a minimum leverage ratio for
bank holding companies, requiring Tier I capital of at least 3% of average total
consolidated assets for companies with the highest examination rating and at
least 4% for all others.
The FDIC has also established risk-based and leverage capital guidelines
which state non-member banks are required to meet. These regulations are
generally similar to those established by the Federal Reserve Board for bank
holding companies. The capital ratios for Provident and Provident Bank are
provided in the chart above.
The federal bank regulatory agencies' risk-based and leverage ratios are
minimum supervisory ratios generally applicable to banking organizations that
meet certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when
52
<PAGE>
circumstances warrant. Federal Reserve Board guidelines also provide that
banking organizations experiencing internal growth or making acquisitions will
be expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets. In
addition, the regulations of the Federal Reserve Board provide that
concentration of credit risk, interest rate risk and certain risks arising from
nontraditional activities, as well as an institution's ability to manage these
risks, are important factors to be taken into account by regulatory agencies in
assessing an organization's overall capital adequacy. The agencies have also
adopted an adjustment to the risk-based capital calculations to cover market
risk in trading accounts of certain institutions.
The federal bank regulatory agencies recently adopted amendments to their
risk-based capital regulations to provide for the consideration of interest rate
risk in the agencies' determination of a banking institution's capital adequacy.
The amendments require such institutions to effectively measure and monitor
their interest rate risk and to maintain capital adequate for that risk.
As discussed below under "--Enforcement Powers of the Federal Banking
Agencies," failure to meet the minimum regulatory capital requirements could
subject a banking institution to a variety of enforcement remedies available to
federal regulatory authorities, including, in the most severe cases, the
termination of deposit insurance by the FDIC and the placement of the
institution into conservatorship or receivership.
Enforcement Powers of the Federal Banking Agencies
The federal bank regulatory agencies have broad enforcement powers,
including the power to terminate deposit insurance, impose substantial fines and
other civil and criminal penalties and appoint a conservator or receiver.
Failure to comply with applicable laws, regulations and supervisory agreements
could subject Provident and Provident Bank, as well as officers, directors and
other institution-affiliated parties of these organizations, to administrative
sanctions and potentially substantial civil money penalties. In addition to the
grounds discussed under "--Prompt Corrective Action" above, the FDIC may appoint
itself as conservator or receiver for a banking institution if any one or more
of a number of circumstances exist, including, without limitation, the fact that
the banking institution is undercapitalized and has no reasonable prospect of
becoming adequately capitalized, fails to become adequately capitalized when
required to do so, fails to submit a timely and acceptable capital restoration
plan, or materially fails to implement an accepted capital restoration plan.
Control Acquisitions
The Change in Bank Control Act prohibits a person or group of persons from
acquiring "control" of a bank holding company unless the Federal Reserve Board
has been notified and has not objected to the transaction. Under a rebuttable
presumption established by the Federal Reserve Board, the acquisition of 10% or
more of a class of voting stock of a bank holding company with a class of
securities registered under Section 12 of the Securities Exchange Act of 1934,
such as Provident, would, under the circumstances set forth in the presumption,
constitute acquisition of control of Provident.
In addition, any company is required to obtain the approval of the Federal
Reserve Board under the Bank Holding Company Act before acquiring 25% (5% in the
case of an acquiror that is a bank holding company) or more of the outstanding
common stock of Provident, or otherwise obtaining control or a "controlling
influence" over Provident.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
permits an adequately capitalized and adequately managed bank holding company,
with Federal Reserve Board approval, to acquire banking institutions located in
states other than the bank holding company's home state without regard to
whether the transaction is prohibited under state law. In addition, national
banks and state banks with different home states are permitted to merge across
state lines, with the approval of the appropriate federal
53
<PAGE>
banking agency, unless the home state of a participating banking institution has
passed legislation prior to that date that expressly prohibits interstate
mergers. De novo interstate branching is permitted if the laws of the host state
so authorizes.
Future Legislation
Various legislation is from time to time introduced in Congress, including
proposals to overhaul the bank regulatory system, expand the powers of banking
institutions and bank holding companies and limit the investments that a
depository institution may make with insured funds. Such legislation may change
banking statutes and the operating environment of Provident and its subsidiaries
in substantial and unpredictable ways. Provident cannot determine the ultimate
effect that potential legislation, if enacted, or implementing regulations,
would have upon the financial condition or results of operations of Provident or
its subsidiaries.
Legal Matters
The validity of the Provident common stock to be issued in connection with
the merger has been passed upon for Provident by Muldoon, Murphy & Faucette LLP,
Washington, D.C. In addition, certain federal income tax matters relating to
the merger will be passed upon for Provident by Muldoon, Murphy & Faucette LLP,
Washington, D.C., and for Harbor by Stradley Ronon Housley Kantarian &
Bronstein, LLP, Washington, D.C.
Experts
The financial statements of Provident as of December 31, 1999 and 1998 and
for the three years ended December 31, 1999 have been incorporated in this proxy
statement-prospectus by reference to Provident's 1999 annual report to
stockholders in reliance upon the report of PricewaterhouseCoopers LLP,
independent certified public accountants, with respect to those financial
statements, and upon the authority of that firm as experts in accounting and
auditing.
The financial statements of Harbor as of March 31, 2000 and 1999 and for
the three years ended March 31, 2000 have been incorporated in this proxy
statement-prospectus by reference to Harbor's annual report on Form 10-KSB for
the year ended March 31, 2000 in reliance upon the report of KPMG LLP,
independent certified public accountants, with respect to those financial
statements, and upon the authority of that firm as experts in accounting and
auditing.
Where You Can Find More Information
Provident has filed with the Securities and Exchange Commission a
registration statement under the Securities Act that registers the distribution
to Harbor stockholders of the shares of Provident common stock to be issued in
connection with the merger. The registration statement, including the exhibits,
contains additional relevant information about Provident and Provident common
stock. The rules and regulations of the SEC allow us to omit certain
information included in the registration statement from this proxy statement-
prospectus.
Provident and Harbor file annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information that Provident and Harbor file at the
SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. Please
call the SEC at 1-800-SEC-0330 for further information on the SEC's public
reference rooms. Provident's and Harbor's public filings are also available to
the public from commercial document retrieval
54
<PAGE>
services and at the Internet World Wide Website maintained by the SEC at
"http://www.sec.gov." You can also inspect reports, proxy statements and other
information about Provident and Harbor at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
The SEC allows us to "incorporate by reference" information into this proxy
statement-prospectus. This means that we can disclose important information to
you by referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this document,
except for any information superseded by information contained directly in this
document. This document incorporates by reference the other documents which are
listed below that we have previously filed with the SEC. These documents
contain important information about our companies and their financial condition.
Provident SEC Filings (File No. 0-23751)
. Annual Report on Form 10-K/A for the year ended December 31, 1999
. Quarterly Report on Form 10-Q for the quarter ended March 31, 2000
. Current Reports on Form 8-K filed on April 21, May 4 and May 10, 2000
Harbor SEC Filings (File No. 0-24194)
. Annual Report on Form 10-KSB for the year ended March 31, 2000
. Current Report on Form 8-K filed on May 5, 2000
Provident also incorporates by reference additional documents that it might
file with the SEC between the date of this document and the date of Harbor's
stockholder meeting. These include periodic reports, such as Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as
well as proxy statements.
Documents incorporated by reference are available from the appropriate
company without charge (except for exhibits to the documents unless the exhibits
are specifically incorporated in this document by reference). You may obtain
documents incorporated by reference in this document by requesting them in
writing or by telephone from the appropriate company at the following address:
Provident Bankshares Corporation Harbor Federal Bancorp, Inc.
114 East Lexington Street 705 York Road
Baltimore, Maryland 21202 Baltimore, Maryland 21204
Attention: Robert L. Davis Attention: Dana L. Miller
Telephone No. (410) 281-7000 Telephone No. (410) 296-1010
If you would like to request documents, please do so by August 9, 2000 in
order to receive them before the special meeting of stockholders. If you
request any incorporated documents from us we will mail them to you by first-
class mail, or other equally prompt means, within one business day of our
receipt of your request.
Provident has supplied all information contained in this proxy statement-
prospectus relating to Provident, and Harbor has supplied all information
relating to Harbor.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the meeting. We have not
authorized anyone to provide you with information that is different from what is
contained or incorporated by reference in this document. This document is dated
July 5, 2000. You should not assume that the information contained in this
document is accurate as of any date other than that date, and neither the
mailing of this document to stockholders nor the issuance of Provident's
securities in the merger shall create any implication to the contrary.
55
<PAGE>
Stockholder Proposals
Harbor will hold an annual meeting for the year ending March 31, 2000 only
if the merger is not completed. Proposals that stockholders seek to have
included in the proxy statement for Harbor's next annual meeting, if one is
held, must have been received by Harbor no later than March 1, 2000. If the next
annual meeting is held on a date more than 30 calendar days from July 14, 2000,
a stockholder proposal must be received by a reasonable time before the proxy
solicitation for such annual meeting is made. Any such proposals will be subject
to the requirements of the proxy rules adopted by the Securities and Exchange
Commission.
Harbor's articles of incorporation provides that in order for a stockholder
to make nominations for the election of directors or proposals for business to
be brought before the annual meeting, a stockholder must deliver notice of such
nominations and/or proposals to the Secretary not less than 30 nor more than 60
days prior to the date of the annual meeting; provided that if less than 31
days' notice of the annual meeting is given to stockholders, such notice must be
delivered not later than the close of the tenth day following the day on which
notice of the annual meeting was mailed to stockholders.
56
<PAGE>
APPENDIX A
================================================================================
--------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF MAY 3, 2000
BY AND BETWEEN
PROVIDENT BANKSHARES CORPORATION
AND
HARBOR FEDERAL BANCORP, INC.
--------------------------------------------------------------------------------
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
Introductory Statement...................................................................................... A-1
ARTICLE I - The Merger...................................................................................... A-1
Section 1.1. Structure of the Merger.......................................................... A-1
Section 1.2. Effect on Outstanding Shares of Harbor Common Stock.............................. A-2
Section 1.3. Exchange Procedures.............................................................. A-2
Section 1.4. Effect on Outstanding Shares of Provident Common Stock........................... A-5
Section 1.5. Directors and Officers of Provident after Effective Time......................... A-5
Section 1.6. Articles of Incorporation and Bylaws of Provident after
Effective Time................................................................... A-5
Section 1.7. Harbor Stock Options............................................................. A-5
Section 1.8 Bank Merger...................................................................... A-6
Section 1.9. Alternative Structure............................................................ A-6
ARTICLE II - Representations and Warranties................................................................. A-6
Section 2.1. Representations and Warranties of Harbor......................................... A-6
Section 2.2. Representations and Warranties of Provident...................................... A-23
ARTICLE III - Conduct Pending the Merger.................................................................... A-32
Section 3.1. Conduct of Harbor's Business Prior to the Effective Time......................... A-32
Section 3.2. Forbearance by Harbor............................................................ A-32
Section 3.3. Conduct of Provident's Business Prior to the Effective Time...................... A-35
Section 3.4. Forbearance by Provident......................................................... A-35
ARTICLE IV - Covenants...................................................................................... A-36
Section 4.1. Acquisition Proposals............................................................ A-36
Section 4.2. Certain Policies and Actions of Harbor........................................... A-37
Section 4.3. Access and Information........................................................... A-38
Section 4.4. Applications; Consents........................................................... A-39
Section 4.5. Antitakeover Provisions.......................................................... A-40
Section 4.6. Additional Agreements............................................................ A-40
Section 4.7. Publicity........................................................................ A-40
Section 4.8. Stockholder Meeting.............................................................. A-40
Section 4.9. Registration of Provident Common Stock........................................... A-41
Section 4.10. Affiliate Letters................................................................ A-42
Section 4.11. Notification of Certain Matters.................................................. A-42
Section 4.12. Employees, Directors and Officers................................................ A-42
Section 4.13. Indemnification.................................................................. A-43
Section 4.14. Dividends........................................................................ A-45
Section 4.15. Section 16 Matters............................................................... A-45
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE V - Conditions to Consummation..................................................................... A-45
Section 5.1. Conditions to Each Party's Obligations.......................................... A-45
Section 5.2. Conditions to the Obligations of Provident...................................... A-47
Section 5.3. Conditions to the Obligations of Harbor......................................... A-47
ARTICLE VI - Termination................................................................................... A-48
Section 6.1. Termination..................................................................... A-48
Section 6.2. Termination Fee................................................................. A-51
Section 6.3. Effect of Termination........................................................... A-51
ARTICLE VII - Closing, Effective Date and Effective Time................................................... A-52
Section 7.1. Effective Date and Effective Time............................................... A-52
Section 7.2. Deliveries at the Closing....................................................... A-52
ARTICLE VIII - Certain Other Matters....................................................................... A-52
Section 8.1. Certain Definitions; Interpretation............................................. A-52
Section 8.2. Survival........................................................................ A-55
Section 8.3. Waiver; Amendment............................................................... A-55
Section 8.4. Counterparts.................................................................... A-55
Section 8.5. Governing Law................................................................... A-55
Section 8.6. Expenses........................................................................ A-55
Section 8.7. Notices......................................................................... A-55
Section 8.8. Entire Agreement; etc........................................................... A-56
Section 8.9. Successors and Assigns; Assignment.............................................. A-57
</TABLE>
EXHIBITS
Exhibit A Bank Merger Agreement
Exhibit B Form of Affiliate Letter
<PAGE>
Agreement and Plan of Merger
----------------------------
This is an Agreement and Plan of Merger, dated as of the 3rd day of
May, 2000 ("Agreement"), by and between Provident Bankshares Corporation, a
Maryland corporation ("Provident"), and Harbor Federal Bancorp, Inc., a Maryland
corporation ("Harbor").
Introductory Statement
----------------------
The Board of Directors of each of Provident and Harbor (i) has
determined that this Agreement and the business combination and related
transactions contemplated hereby are advisable and in the best interests of
Provident and Harbor, respectively, and in the best long-term interests of their
respective stockholders and (ii) has determined that this Agreement and the
transactions contemplated hereby are consistent with, and in furtherance of, its
respective business strategies.
The parties hereto intend that the Merger as defined herein shall
qualify as a reorganization under the provisions of Section 368(a) of the IRC
(as defined in Section 8.1) for federal income tax purposes, and that the Merger
shall be accounted for as a purchase transaction for accounting purposes.
Provident and Harbor desire to make certain representations,
warranties and agreements in connection with the business combination and
related transactions provided for herein and to prescribe various conditions to
such transactions.
As a condition and inducement to Provident's willingness to enter into
this Agreement, each member of the Board of Directors of Harbor has entered into
an agreement pursuant to which he (or she) will vote his (or her) shares of
Harbor Common Stock in favor of this Agreement and the transactions contemplated
hereby.
In consideration of their mutual promises and obligations hereunder,
the parties hereto adopt and make this Agreement and prescribe the terms and
conditions hereof and the manner and basis of carrying it into effect, which
shall be as follows:
ARTICLE I
The Merger
----------
Section 1.1. Structure of the Merger. On the Effective Date (as
-----------------------
defined in Section 7.1), Harbor will merge with and into Provident ("Merger")
pursuant to the provisions of, and with the effect provided for in, Maryland
General Corporation Law ("MGCL"). Upon consummation of the Merger, the separate
corporate existence of Harbor shall cease. Provident shall be the surviving
corporation (hereinafter sometimes referred to in such capacity as the
"Surviving Corporation") in the Merger and shall continue to be governed by the
MGCL and its name and separate corporate existence, with all of its rights,
privileges, immunities, powers and
A-1
<PAGE>
franchises, shall continue unaffected by the Merger. From and after the
Effective Time (as defined in Section 7.1), Provident shall possess all of the
properties and rights and be subject to all of the liabilities and obligations
of Harbor, all as more fully described in the MGCL.
Section 1.2. Effect on Outstanding Shares of Harbor Common Stock.
---------------------------------------------------
(a) By virtue of the Merger, automatically and without any action on
the part of the holder thereof, each share of Harbor Common Stock (as defined in
Section 8.1) issued and outstanding at the Effective Time, other than Excluded
Shares (as defined in Section 8.1), shall be converted into the right to receive
1.256 shares (the "Exchange Ratio") of Provident's common stock, par value $1.00
per share ("Provident Common Stock"); provided, however, that, notwithstanding
any other provision of this Agreement, no fraction of a share of Provident
Common Stock and no certificates or scrip therefor will be issued in the Merger;
instead, Provident shall pay to each holder of Harbor Common Stock who would
otherwise be entitled to a fraction of a share of Provident Common Stock an
amount in cash, rounded to the nearest cent, determined by multiplying such
fraction by the average of the daily closing sales prices of a share of
Provident Common Stock (and if there is no closing sales price on any such day,
then the mean between the closing bid and the closing asked prices on that day),
as reported on the Nasdaq Stock Market, for the 15 consecutive trading days
immediately preceding the Effective Date. The shares of Provident Common Stock
and any cash for fractional shares are collectively referred to in this
Agreement as the "Merger Consideration."
(b) If, between the date of this Agreement and the Effective Time
(and as permitted by Section 3.2), the outstanding shares of Provident Common
Stock or the outstanding shares of Harbor Common Stock shall have been changed
into a different number of shares or into a different class by reason of any
stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares, the Exchange Ratio shall be adjusted
correspondingly to provide the holders of Harbor Common Stock the same economic
effect as contemplated by this Agreement prior to such event.
(c) As of the Effective Time, each Excluded Share shall be canceled
and retired and shall cease to exist, and no exchange or payment shall be made
with respect thereto. All shares of Provident Common Stock that are held by
Harbor, if any, other than shares held in a fiduciary capacity or in
satisfaction of a debt previously contracted, shall be canceled and shall
constitute authorized but unissued shares.
Section 1.3. Exchange Procedures.
-------------------
(a) Appropriate transmittal materials ("Letter of Transmittal") in a
form satisfactory to Provident and Harbor shall be mailed as soon as practicable
(but in no event later than five business days) after the Effective Time to each
holder of record of Harbor Common Stock as of the Effective Time. A Letter of
Transmittal will be deemed properly completed only
A-2
<PAGE>
if accompanied by certificates representing all shares of Harbor Common Stock to
be converted thereby.
(b) At and after the Effective Time, each certificate previously
representing shares of Harbor Common Stock ("Certificate") (except as
specifically set forth in Section 1.2) shall represent only the right to receive
the Merger Consideration.
(c) Prior to the Effective Time, Provident shall deposit, or shall
cause to be deposited, with the transfer agent and registrar for the Provident
Common Stock (the "Exchange Agent"), for the benefit of the holders of shares of
Harbor Common Stock, for exchange in accordance with this Section 1.3, an
estimated amount of cash sufficient to pay the aggregate amount of cash in lieu
of fractional shares to be paid pursuant to Section 1.2, and Provident shall
reserve for issuance with its transfer agent and registrar a sufficient number
of shares of Provident Common Stock to provide for payment of the Merger
Consideration.
(d) The Letter of Transmittal shall (i) specify that delivery shall
be effected, and risk of loss and title to the Certificates shall pass, only
upon delivery of the Certificates to the Exchange Agent, (ii) be in a form and
contain any other provisions as Provident may reasonably determine and (iii)
include instructions for use in effecting the surrender of the Certificates in
exchange for the Merger Consideration. Upon the proper surrender of the
Certificates to the Exchange Agent, together with a properly completed and duly
executed Letter of Transmittal, the holder of such Certificates shall be
entitled to receive in exchange therefor a certificate representing that number
of whole shares of Provident Common Stock that such holder has the right to
receive pursuant to Section 1.2, if any, and a check in the amount equal to the
cash in lieu of fractional shares, if any, that such holder has the right to
receive pursuant to Section 1.2 plus any dividends or other distributions to
which such holder is entitled pursuant to this Section 1.3. Certificates so
surrendered shall forthwith be canceled. As soon as practicable following
receipt of the properly completed Letter of Transmittal and any necessary
accompanying documentation, the Exchange Agent shall distribute Provident Common
Stock and cash as provided herein. The Exchange Agent shall not be entitled to
vote or exercise any rights of ownership with respect to the shares of Provident
Common Stock held by it from time to time hereunder, except that it shall
receive and hold all dividends or other distributions paid or distributed with
respect to such shares for the account of the persons entitled thereto. If there
is a transfer of ownership of any shares of Harbor Common Stock not registered
in the transfer records of Harbor, the Merger Consideration shall be issued to
the transferee thereof if the Certificates representing such Harbor Common Stock
are presented to the Exchange Agent, accompanied by all documents required, in
the reasonable judgment of Provident and the Exchange Agent, to evidence and
effect such transfer and to evidence that any applicable stock transfer taxes
have been paid.
(e) No dividends or other distributions declared or made after the
Effective Time with respect to Provident Common Stock shall be remitted to any
person entitled to receive shares of Provident Common Stock hereunder until such
person surrenders his or her Certificates in accordance with this Section 1.3.
Upon the surrender of such person's Certificates, such person shall be entitled
to receive any dividends or other distributions, without interest thereon,
A-3
<PAGE>
which theretofore had become payable with respect to shares of Provident Common
Stock represented by such person's Certificates.
(f) The stock transfer books of Harbor shall be closed immediately
upon the Effective Time and from and after the Effective Time there shall be no
transfers on the stock transfer records of Harbor of any shares of Harbor Common
Stock. If, after the Effective Time, Certificates are presented to Provident,
they shall be canceled and exchanged for the Merger Consideration deliverable in
respect thereof pursuant to this Agreement in accordance with the procedures set
forth in this Section 1.3.
(g) Any portion of the aggregate amount of cash to be paid pursuant
to Section 1.2, any dividends or other distributions to be paid pursuant to this
Section 1.3 or any proceeds from any investments thereof that remains unclaimed
by the stockholders of Harbor for twelve months after the Effective Time shall
be repaid by the Exchange Agent to Provident upon the written request of
Provident. After such request is made, any stockholders of Harbor who have not
theretofore complied with this Section 1.3 shall look only to Provident for the
Merger Consideration deliverable in respect of each share of Harbor Common Stock
such stockholder holds, as determined pursuant to Section 1.2 of this Agreement,
without any interest thereon. If outstanding Certificates are not surrendered
prior to the date on which such payments would otherwise escheat to or become
the property of any governmental unit or agency, the unclaimed items shall, to
the extent permitted by any abandoned property, escheat or other applicable
laws, become the property of Provident (and, to the extent not in its
possession, shall be paid over to it), free and clear of all claims or interest
of any person previously entitled to such claims. Notwithstanding the foregoing,
neither the Exchange Agent nor any party to this Agreement (or any affiliate
thereof) shall be liable to any former holder of Harbor Common Stock for any
amount delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
(h) Provident and the Exchange Agent shall be entitled to rely upon
Harbor's stock transfer books to establish the identity of those persons
entitled to receive the Merger Consideration, which books shall be conclusive
with respect thereto. In the event of a dispute with respect to ownership of
stock represented by any Certificate, Provident and the Exchange Agent shall be
entitled to deposit any Merger Consideration represented thereby in escrow with
an independent third party and thereafter be relieved with respect to any claims
thereto.
(i) If any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by the Exchange
Agent, the posting by such person of a bond in such amount as the Exchange Agent
may direct as indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent will issue in exchange for such
lost, stolen or destroyed Certificate the Merger Consideration deliverable in
respect thereof pursuant to Section 1.2.
A-4
<PAGE>
Section 1.4. Effect on Outstanding Shares of Provident Common Stock.
------------------------------------------------------
At and after the Effective Time, each share of Provident Common Stock issued and
outstanding immediately prior to the Effective Time shall remain an issued and
outstanding share of common stock of the Surviving Corporation and shall not be
affected by the Merger.
Section 1.5. Directors and Officers of Provident after Effective
---------------------------------------------------
Time. From and after the Effective Time, the directors and officers of the
----
Surviving Corporation shall consist of the directors and officers of Provident
serving immediately prior to the Effective Time until their respective
successors are duly elected or appointed and qualified.
Section 1.6. Articles of Incorporation and Bylaws of Provident after
-------------------------------------------------------
Effective Time. The articles of incorporation and bylaws of Provident in effect
--------------
immediately prior to the Effective Time shall be the articles of incorporation
and bylaws of the Surviving Corporation until thereafter amended in accordance
with applicable law.
Section 1.7. Harbor Stock Options.
--------------------
(a) Each option to purchase shares of Harbor Common Stock issued by
Harbor and outstanding at the Effective Time (a "Harbor Option") pursuant to the
Harbor 1995 Stock Option and Incentive Plan (the "Harbor Option Plan") shall be
converted into an option to purchase shares of Provident Common Stock as
follows:
(i) The aggregate number of shares of Provident Common Stock
issuable upon the exercise of the converted Harbor Option after the Effective
Time shall be equal to the product of the Exchange Ratio multiplied by the
number of shares of Harbor Common Stock issuable upon exercise of the Harbor
Option immediately prior to the Effective Time, such product to be rounded to
the nearest whole share of Provident Common Stock; and
(ii) the exercise price per share of each converted Harbor Option
shall be equal to the quotient of the exercise price of such Harbor Option
immediately prior to the Effective Time divided by the Exchange Ratio, such
quotient to be rounded to the nearest whole cent;
provided, however, that, in the case of any Harbor Option that is intended to
qualify as an incentive stock option under Section 422 of the IRC, the number of
shares of Provident Common Stock issuable upon exercise of and the exercise
price per share for such converted Harbor Option determined in the manner
provided above shall be further adjusted in such manner as Provident may
determine to be necessary to conform to the requirements of Section 424(b) of
the IRC. Options to purchase shares of Provident Common Stock that arise from
the operation of this Section 1.7 shall be referred to as the "Converted
Options." All Converted Options shall be exercisable for the same period and
shall otherwise have the same terms and conditions applicable to the Harbor
Options that they replace. Prior to the Effective Time, Provident shall take,
or cause to be taken, all necessary action to effect the intent of the
provisions set forth in this Section 1.7.
A-5
<PAGE>
(b) Concurrently with the reservation of shares of Provident Common
Stock to provide for the payment of the Merger Consideration, Provident shall
take all corporate action necessary to reserve for future issuance a sufficient
additional number of shares of Provident Common Stock to provide for the
satisfaction of its obligations with respect to the Converted Options. Within 15
business days after the Effective Time, Provident shall file a registration
statement on Form S-8 (or any successor or other appropriate form) and make any
state filings or obtain state exemptions with respect to the Provident Common
Stock issuable upon exercise of the Converted Options.
Section 1.8. Bank Merger. Concurrently with or as soon as
-----------
practicable after the execution and delivery of this Agreement, Provident Bank
of Maryland ("Provident Bank"), a wholly owned subsidiary of Provident, and
Harbor Federal Savings Bank ("Harbor Federal"), a wholly owned subsidiary of
Harbor, shall enter into the Plan of Bank Merger, in the form attached hereto as
Exhibit A, pursuant to which Harbor Federal will merge with and into Provident
---------
Bank (the "Bank Merger"). The parties intend that the Bank Merger will become
effective on the Effective Date. The Plan of Bank Merger shall provide that the
directors of Provident Bank as the surviving entity of the Bank Merger shall be
all of the directors of Provident Bank serving immediately prior to the Bank
Merger until their respective successors are duly elected or appointed and
qualified.
Section 1.9. Alternative Structure. Notwithstanding anything to the
---------------------
contrary contained in this Agreement, prior to the Effective Time, Provident may
specify that the structure of the transactions contemplated by this Agreement be
revised and the parties shall enter into such alternative transactions as
Provident may determine to effect the purposes of this Agreement; provided,
however, that such revised structure shall not (i) alter or change the amount or
kind of the Merger Consideration, (ii) change the intended federal income tax
consequences of the transactions contemplated by this Agreement, or (iii)
materially impede or delay the receipt of any regulatory approval referred to
in, or the consummation of the transactions contemplated by, this Agreement.
This Agreement and any related documents shall be appropriately amended in order
to reflect any such revised structure.
ARTICLE II
Representations and Warranties
------------------------------
Section 2.1. Representations and Warranties of Harbor.
----------------------------------------
Except as set forth in the Disclosure Letter delivered by Harbor to
Provident prior to the execution of this Agreement, Harbor represents and
warrants to Provident that:
A-6
<PAGE>
(a) Organization.
------------
(i) Harbor is a corporation duly organized, validly existing
and in good standing under the laws of the State of Maryland and is registered
as a savings and loan holding company.
(ii) Harbor Federal is a federally chartered savings bank duly
organized and validly existing under the laws of the United States of America.
The deposits of Harbor Federal are insured by the Savings Association Insurance
Fund of the FDIC (as defined in Section 8.1) to the extent provided in the FDIA
(as defined in Section 8.1).
(iii) Harbor and Harbor Federal each has all requisite corporate
power and authority to own, lease and operate its properties and to conduct the
business currently being conducted by it. Harbor and Harbor Federal are each
duly qualified or licensed as a foreign corporation to transact business and are
in good standing in each jurisdiction in which the character of the properties
owned or leased by it or the nature of the business conducted by it makes such
qualification or licensing necessary, except where the failure to be so
qualified or licensed and in good standing would not have a Material Adverse
Effect (as defined in Section 8.1) on Harbor.
(b) Subsidiaries.
------------
(i) Harbor's Disclosure Letter sets forth (A) the name,
percentage ownership and number of shares of stock owned or controlled by Harbor
of each Subsidiary (as defined in Section 8.1); and (B) the jurisdiction of
incorporation, capitalization and ownership of each Subsidiary. All such
Subsidiaries and ownership interests are in compliance with all applicable laws,
rules and regulations relating to investments in equity ownership interests by
savings and loan holding companies or federally chartered savings associations.
(ii) Harbor owns of record and beneficially all the capital
stock of each of its Subsidiaries free and clear of any claims, liens,
encumbrances or restrictions and there are no agreements or understandings with
respect to the voting or disposition of any such shares. The outstanding shares
of capital stock of each Subsidiary have been validly authorized and are validly
issued, fully paid and nonassessable. Each of Harbor's Subsidiaries is a
corporation duly organized and validly existing under the laws of its
jurisdiction of incorporation, has all requisite corporate power and authority
to own, lease and operate its properties and to conduct the business currently
being conducted by it and is duly qualified or licensed as a foreign corporation
to transact business and is in good standing in each jurisdiction in which the
character of the properties owned or leased by it or the nature of the business
conducted by it makes such qualification or licensing necessary, except where
the failure to be so qualified or licensed and in good standing would not have a
Material Adverse Effect on Harbor.
(iii) None of Harbor's Subsidiaries holds shares of its capital
stock in its treasury, and there are not, and on the Closing Date there will not
be, outstanding (A) any
A-7
<PAGE>
options, warrants or other rights with respect to the capital stock of any
Subsidiary, (B) any securities convertible into or exchangeable for shares of
such capital stock or any other debt or equity security of any Subsidiary or (C)
any other commitments of any kind for the issuance of additional shares of
capital stock or other debt or equity security of any Subsidiary or options,
warrants or other rights with respect to such securities.
(iv) No Subsidiary of Harbor other than Harbor Federal is an
"insured depository institution" as defined in the FDIA and the applicable
regulations thereunder.
(c) Capital Structure.
-----------------
(i) The authorized capital stock of Harbor consists of:
(A) 20,000,000 shares of Harbor Common Stock; and
(B) 5,000,000 shares of preferred stock, par value $.01
per share.
(ii) As of the date of this Agreement:
(A) 1,664,515 shares of Harbor Common Stock are issued
and outstanding, all of which are validly issued, fully paid and nonassessable;
(B) no shares of Harbor preferred stock are issued and
outstanding or held in Harbor's treasury;
(C) 100,153 shares of Harbor Common Stock are reserved
for issuance pursuant to outstanding Harbor Options under the Harbor Option
Plan; and
(D) no shares of Harbor Common Stock are held by Harbor
in its treasury or by its Subsidiaries.
(iii) Set forth in Harbor's Disclosure Letter is a complete and
accurate list of all outstanding Harbor Options, including the names of the
optionees, dates of grant, exercise prices, dates of vesting, dates of
termination, shares subject to each grant and whether limited rights were
granted in connection with such options.
(iv) No bonds, debentures, notes or other indebtedness having
the right to vote on any matters on which stockholders of Harbor may vote are
issued or outstanding.
(v) Except as set forth in this Section 2.1(c) or in Harbor's
Disclosure Letter, as of the date of this Agreement, (A) no shares of capital
stock or other voting securities of Harbor are issued, reserved for issuance or
outstanding and (B) neither Harbor nor any of its Subsidiaries has or is bound
by any outstanding subscriptions, options, warrants, calls, rights,
A-8
<PAGE>
convertible securities, commitments or agreements of any character obligating
Harbor or any of its Subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, any additional shares of capital stock of Harbor or
obligating Harbor or any of its Subsidiaries to grant, extend or enter into any
such option, warrant, call, right, convertible security, commitment or
agreement. As of the date hereof, there are no outstanding contractual
obligations of Harbor or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any shares of capital stock of Harbor or any of its
Subsidiaries.
(d) Authority.
---------
(i) Harbor has all requisite corporate power and authority to
enter into this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
by this Agreement have been duly authorized by all necessary corporate actions
on the part of Harbor's Board of Directors, and no other corporate proceedings
on the part of Harbor are necessary to authorize this Agreement or to consummate
the transactions contemplated by this Agreement other than the approval and
adoption of this Agreement by the affirmative vote of the holders of two-thirds
of the outstanding shares of Harbor Common Stock. This Agreement has been duly
and validly executed and delivered by Harbor and constitutes a valid and binding
obligation of Harbor, enforceable against Harbor in accordance with its terms,
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally and, as to enforceability, to general
principles of equity, whether applied in a court of law or a court of equity.
(ii) Harbor Federal has all requisite corporate power and
authority to enter into the Plan of Bank Merger and to consummate the
transactions contemplated thereby. The execution and delivery of the Plan of
Bank Merger and the consummation of the transactions contemplated thereby have
been duly authorized by the Board of Directors of Harbor Federal and approved by
Harbor as the sole stockholder of Harbor Federal. The Plan of Bank Merger, upon
execution and delivery by Harbor Federal, will be duly and validly executed and
delivered by Harbor Federal and will constitute a valid and binding obligation
of Harbor Federal, enforceable against Harbor Federal in accordance with its
terms, subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally and, as to enforceability, to general
principles of equity, whether applied in a court of law or a court of equity.
(e) Fairness Opinion. Harbor has received the opinion of Trident
----------------
Securities to the effect that, as of the date hereof, the Merger Consideration
to be received by Harbor's stockholders is fair, from a financial point of view,
to such stockholders.
(f) No Violations; Consents.
-----------------------
(i) The execution, delivery and performance of this Agreement
by Harbor do not, and the consummation of the transactions contemplated by this
Agreement will not, (A) assuming that the consents and approvals referred to in
Section 2.1(f)(ii) are obtained
A-9
<PAGE>
and the applicable waiting periods have expired and the approval of Harbor's
stockholders is obtained, violate any law, rule or regulation or any judgment,
decree, order, governmental permit or license to which Harbor or any of its
Subsidiaries (or any of their respective properties) is subject, (B) violate the
articles of incorporation or bylaws of Harbor or the similar organizational
documents of any of its Subsidiaries or (C) constitute a breach or violation of,
or a default under (or an event which, with due notice or lapse of time or both,
would constitute a default under), or result in the termination of, accelerate
the performance required by, or result in the creation of any lien, pledge,
security interest, charge or other encumbrance upon any of the properties or
assets of Harbor or any of its Subsidiaries under, any of the terms, conditions
or provisions of any note, bond, indenture, deed of trust, loan agreement or
other agreement, instrument or obligation to which Harbor or any of its
Subsidiaries is a party, or to which any of their respective properties or
assets may be subject, except, in the case of (C), for any such breaches,
violations or defaults that would not, individually or in the aggregate, have a
Material Adverse Effect on Harbor.
(ii) Except for (A) the filing of an application with the FDIC
under the Bank Merger Act (as defined in Section 8.1) and approval of such
application, (B) the filing of applications or notices, as applicable, with the
Federal Reserve Board and the OTS (as defined in Section 8.1) and approval of
such applications and/or lack of objection to any notice, (C) the filing of
applications or notices, as applicable, with the Commissioner of Financial
Regulation of the State of Maryland (the "Commissioner") and approval of such
applications or notices, (D) the filing of articles of merger with the Maryland
Department of Assessments and Taxation (the "Department") pursuant to the MGCL,
(E) the registration under the Securities Act (as defined in Section 8.1) of the
shares of Provident Common Stock to be issued in exchange for shares of Harbor
Common Stock, (F) the registration or qualification of the shares of Provident
Common Stock to be issued in exchange for shares of Harbor Common Stock under
state securities or "blue sky" laws, (G) the listing of the shares of Provident
Common Stock to be issued in exchange for shares of Harbor Common Stock on the
Nasdaq Stock Market, and (H) such filings, authorizations or approvals as may be
set forth in Harbor's Disclosure Letter, no consents or approvals of or filings
or registrations with any Governmental Entity (as defined in Section 8.1) or
with any third party are necessary in connection with the execution and delivery
by Harbor of this Agreement or the consummation by Harbor of the Merger and the
other transactions contemplated by this Agreement, including the Bank Merger.
As of the date hereof, Harbor knows of no reason pertaining to Harbor why any of
the approvals referred to in this Section 2.1(f) should not be obtained without
the imposition of any material condition or restriction described in Section
5.1(b).
(g) Reports and Financial Statements.
--------------------------------
(i) Harbor and each of its Subsidiaries have each timely filed
all material reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file since
December 31, 1997 with (A) the FDIC, (B) the OTS, (C) the NASD (as defined in
Section 8.1), and (D) the SEC (as defined in Section 8.1) (collectively,
"Harbor's Reports") and have paid all fees and assessments due and
A-10
<PAGE>
payable in connection therewith. As of their respective dates (or, if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing), none of Harbor's Reports contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading. All of Harbor's Reports filed with
the SEC complied in all material respects with the applicable requirements of
the Exchange Act (as defined in Section 8.1) and the rules and regulations of
the SEC promulgated thereunder.
(ii) Each of the financial statements of Harbor included in
Harbor's Reports filed with the SEC complied as to form, as of their respective
dates of filing with the SEC, in all material respects with applicable
accounting requirements and with the applicable published rules and regulations
of the SEC with respect thereto. The financial statements included in Harbor's
Reports were prepared from the books and records of Harbor and its Subsidiaries,
fairly present the consolidated financial position of Harbor and its
Subsidiaries in each case at and as of the dates indicated and the consolidated
results of operations, retained earnings and cash flows of Harbor and its
Subsidiaries for the periods indicated, and, except as otherwise set forth in
the notes thereto, were prepared in accordance with GAAP (as defined in Section
8.1) consistently applied throughout the periods covered thereby; provided,
however, that the unaudited financial statements for interim periods are subject
to normal year-end adjustments (which will not be material individually or in
the aggregate) and lack a statement of cash flows and footnotes.
(h) Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
Harbor's Reports filed with the SEC prior to the date of this Agreement, since
December 31, 1999 (i) Harbor and its Subsidiaries have not incurred any material
liability, except in the ordinary course of their business consistent with past
practice, (ii) Harbor and its Subsidiaries have conducted their respective
businesses only in the ordinary and usual course of such businesses consistent
with their past practices, (iii) there has not been any event or occurrence that
has had a Material Adverse Effect on Harbor, (iv) there has been no increase in
the salary, compensation, pension or other benefits payable or to become payable
by Harbor or any of its Subsidiaries to any of their respective directors,
officers or employees, other than in conformity with the policies and practices
of such entity in the usual and ordinary course of its business, (v) neither
Harbor nor any of its Subsidiaries has paid or made any accrual or arrangement
for payment of bonuses or special compensation of any kind or any severance or
termination pay to any of their directors, officers or employees, and (vi) there
has been no change in any accounting principles, practices or methods of Harbor
or any of its Subsidiaries other than as required by GAAP.
(i) Absence of Claims. No litigation, controversy, claim, action,
-----------------
suit or other legal, administrative or arbitration proceeding before any court,
governmental agency or arbitrator, other than in connection with routine
foreclosure and collection claims against borrowers, is pending against Harbor
or Harbor Federal and, to the knowledge of Harbor, no such litigation,
controversy, claim, action, suit or proceeding has been threatened. To the
knowledge of Harbor, there are no investigations, reviews or inquiries by any
court or governmental agency pending or threatened against Harbor or Harbor
Federal. There are no
A-11
<PAGE>
judgments, decrees, injunctions, orders or rulings of any Governmental Entity or
arbitrator outstanding against Harbor or Harbor Federal.
(j) Absence of Regulatory Actions. Since December 31, 1997, neither
-----------------------------
Harbor nor any of its Subsidiaries has been a party to any cease and desist
order, written agreement or memorandum of understanding with, or any commitment
letter or similar undertaking to, or has been subject to any action, proceeding,
order or directive by, or has been a recipient of any extraordinary supervisory
letter from any Government Regulator (as defined in Section 8.1), or has adopted
any board resolutions at the request of any Government Regulator, or has been
advised by any Government Regulator that it is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such action, proceeding, order, directive, written agreement, memorandum of
understanding, extraordinary supervisory letter, commitment letter, board
resolutions or similar undertaking.
(k) Taxes. All federal, state, local and foreign tax returns required
-----
to be filed prior to the date of this Agreement, by or on behalf of Harbor or
any of its Subsidiaries have been timely filed or requests for extensions have
been timely filed and any such extension shall have been granted and not have
expired, and all such filed returns are complete and accurate in all material
respects. All taxes shown on such returns, all taxes required to be shown on
returns for which extensions have been granted and all other taxes required to
be paid by Harbor or any of its Subsidiaries have been paid in full or adequate
provision has been made for any such taxes on Harbor's balance sheet (in
accordance with GAAP). As of the date of this Agreement, there is no audit
examination, deficiency assessment, tax investigation or refund litigation with
respect to any taxes of Harbor or any of its Subsidiaries, and no claim has been
made by any authority in a jurisdiction where Harbor or any of its Subsidiaries
do not file tax returns that Harbor or any such Subsidiary is subject to
taxation in that jurisdiction. All taxes, interest, additions and penalties due
with respect to completed and settled examinations or concluded litigation
relating to Harbor or any of its Subsidiaries have been paid in full or adequate
provision has been made for any such taxes on Harbor's balance sheet (in
accordance with GAAP). Harbor and its Subsidiaries have not executed an
extension or waiver of any statute of limitations on the assessment or
collection of any material tax due that is currently in effect. Harbor and each
of its Subsidiaries has withheld and paid all taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third party, and Harbor
and each of its Subsidiaries has timely complied with all applicable information
reporting requirements under Part III, Subchapter A of Chapter 61 of the IRC and
similar applicable state and local information reporting requirements.
(l) Agreements.
----------
(i) Harbor and its Subsidiaries are not bound by any material
contract (as defined in Item 601(b)(10) of Regulation S-K promulgated by the
SEC), to be performed after the date hereof that has not been filed with or
incorporated by reference in Harbor's Reports.
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<PAGE>
(ii) Harbor's Disclosure Letter lists any contract,
arrangement, commitment or understanding (whether written or oral) to which
Harbor or any of its Subsidiaries is a party or is bound:
(A) with any executive officer or other key employee of
Harbor or any of its Subsidiaries the benefits of which are contingent, or the
terms of which are materially altered, upon the occurrence of a transaction
involving Harbor or any of its Subsidiaries of the nature contemplated by this
Agreement;
(B) with respect to the employment of any directors,
officers employees or consultants;
(C) (including any stock option plan, phantom stock or
stock appreciation rights plan, restricted stock plan or stock purchase plan)
any of the benefits of which will be increased, or the vesting or payment of the
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement, or the value of any of the benefits
of which will be calculated on the basis of any of the transactions contemplated
by this Agreement;
(D) containing covenants that limit the ability of Harbor
or any of its Subsidiaries to compete in any line of business or with any
person, or that involve any restriction on the geographic area in which, or
method by which, Harbor (including any successor thereof) or any of its
Subsidiaries may carry on its business (other than as may be required by law or
any regulatory agency);
(E) pursuant to which Harbor or any of its Subsidiaries
may become obligated to invest in or contribute capital to any entity;
(F) not fully disclosed in Harbor's Reports that relates
to borrowings of money (or guarantees thereof) by Harbor or any of its
Subsidiaries, other than in the ordinary course of business; or
(G) which is a lease or license with respect to any
property, real or personal, whether as landlord, tenant, licensor or licensee,
involving a liability or obligation as obligor in excess of $25,000 on an annual
basis.
To the knowledge of Harbor, each of the agreements and other documents
referenced in Harbor's Disclosure Letter is a valid, binding and enforceable
obligation of the parties sought to be bound thereby, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors' rights and remedies
generally and, as to enforceability, to general principles of equity, whether
applied in a court of law or a court of equity. Harbor has previously delivered
to Provident true and complete copies of each agreement and other documents
referenced in Harbor's Disclosure Letter.
A-13
<PAGE>
(iii) Neither Harbor nor any of its Subsidiaries is in default
under (and no event has occurred which, with due notice or lapse of time or
both, would constitute a default under) or is in violation of any provision of
any note, bond, indenture, mortgage, deed of trust, loan agreement, lease or
other agreement to which it is a party or by which it is bound or to which any
of its respective properties or assets is subject and, to the knowledge of
Harbor, no other party to any such agreement (excluding any loan or extension of
credit made by Harbor or any of its Subsidiaries) is in default in any respect
thereunder, except for such defaults or violations that would not, individually
or in the aggregate, have a Material Adverse Effect on Harbor.
(iv) Harbor and each of its Subsidiaries owns or possesses
valid and binding licenses and other rights to use without payment all patents,
copyrights, trade secrets, trade names, service marks and trademarks used in its
businesses, and neither Harbor nor any of its Subsidiaries has received any
notice of conflict with respect thereto that asserts the right of others. Each
of Harbor and its Subsidiaries has performed all the obligations required to be
performed by it and are not in default under any contact, agreement, arrangement
or commitment relating to any of the foregoing.
(m) Labor Matters. Harbor and its Subsidiaries are in material
-------------
compliance with all applicable laws respecting employment, retention of
independent contractors and employment practices, terms and conditions of
employment and wages and hours. Neither Harbor nor any of its Subsidiaries is
or has ever been a party to, or is or has ever been bound by, any collective
bargaining agreement, contract or other agreement or understanding with a labor
union or labor organization with respect to its employees, nor is Harbor or any
of its Subsidiaries the subject of any proceeding asserting that it has
committed an unfair labor practice or seeking to compel it or any such
Subsidiary to bargain with any labor organization as to wages and conditions of
employment nor has any such proceeding been threatened, nor is there any strike,
other labor dispute or organizational effort involving Harbor or any of its
Subsidiaries pending or threatened.
(n) Employee Benefit Plans.
----------------------
(i) Harbor's Disclosure Letter contains a complete and
accurate list of all pension, retirement, stock option, stock purchase, stock
ownership, savings, stock appreciation right, profit sharing, deferred
compensation, consulting, bonus, group insurance, severance and other benefit
plans, contracts, agreements and arrangements, including, but not limited to,
"employee benefit plans," as defined in Section 3(3) of ERISA (as defined in
Section 8.1), incentive and welfare policies, contracts, plans and arrangements
and all trust agreements related thereto with respect to any present or former
directors, officers or other employees of Harbor or any of its Subsidiaries
(hereinafter referred to collectively as the "Harbor Employee Plans"). Harbor
has previously delivered or made available to Provident true and complete copies
of each agreement, plan and other documents referenced in Harbor's Disclosure
Letter. There has been no announcement or commitment by Harbor or any of its
Subsidiaries to create an additional Harbor Employee Plan, or to amend any
Harbor Employee
A-14
<PAGE>
Plan, except for amendments required by applicable law which do not materially
increase the cost of such Harbor Employee Plan. With respect to each Harbor
Employee Plan, Harbor has previously made available to Provident a true and
correct copy of (A) the annual report on the applicable form of the Form 5500
series filed with the IRS (as defined in Section 8.1) for the most recent three
plan years, if required to be filed, (B) such Harbor Employee Plan, including
amendments thereto, (C) each trust agreement, insurance contract or other
funding arrangement relating to such Harbor Employee Plan, including amendments
thereto, (D) the most recent summary plan description and summary of material
modifications thereto for such Harbor Employee Plan, to the extent available, if
the Harbor Employee Plan is subject to Title I of ERISA, (E) the most recent
actuarial report or valuation if such Harbor Employee Plan is a Harbor Pension
Plan (as defined below) and any subsequent changes to the actuarial assumptions
contained therein and (F) the most recent determination letter issued by the IRS
if such Harbor Employee Plan is a Harbor Qualified Plan (as defined below).
(ii) There is no pending or, to the knowledge of Harbor,
threatened litigation, administrative action or proceeding relating to any
Harbor Employee Plan. All of the Harbor Employee Plans comply in all material
respects with all applicable requirements of ERISA, the IRC and other applicable
laws. There has occurred no "prohibited transaction" (as defined in Section 406
of ERISA or Section 4975 of the IRC) with respect to the Harbor Employee Plans
which is likely to result in the imposition of any penalties or taxes upon
Harbor or any of its Subsidiaries under Section 502(i) of ERISA or Section 4975
of the IRC.
(iii) No liability to the Pension Benefit Guarantee Corporation
has been or is expected by Harbor or any of its Subsidiaries to be incurred with
respect to any Harbor Employee Plan which is subject to Title IV of ERISA
("Harbor Pension Plan"), or with respect to any "single-employer plan" (as
defined in Section 4001(a) of ERISA) currently or formerly maintained by Harbor
or any ERISA Affiliate (as defined in Section 8.1). No Harbor Pension Plan had
an "accumulated funding deficiency" (as defined in Section 302 of ERISA),
whether or not waived, as of the last day of the end of the most recent plan
year ending prior to the date hereof; the fair market value of the assets of
each Harbor Pension Plan exceeds the present value of the "benefit liabilities"
(as defined in Section 4001(a)(16) of ERISA) under such Harbor Pension Plan as
of the end of the most recent plan year with respect to the respective Harbor
Pension Plan ending prior to the date hereof, calculated on the basis of the
actuarial assumptions used in the most recent actuarial valuation for such
Harbor Pension Plan as of the date hereof; and no notice of a "reportable event"
(as defined in Section 4043 of ERISA) for which the 30-day reporting requirement
has not been waived has been required to be filed for any Harbor Pension Plan
within the 12-month period ending on the date hereof. Neither Harbor nor any of
its Subsidiaries has provided, or is required to provide, security to any Harbor
Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant to
Section 401(a)(29) of the IRC. Neither Harbor, its Subsidiaries, nor any ERISA
Affiliate has contributed to any "multiemployer plan," as defined in Section
3(37) of ERISA, on or after September 26, 1980.
(iv) Except as disclosed in Harbor's Disclosure Letter, each
Harbor Employee Plan that is an "employee pension benefit plan" (as defined in
Section 3(2) of ERISA)
A-15
<PAGE>
and which is intended to be qualified under Section 401(a) of the IRC (a "Harbor
Qualified Plan") has received a favorable determination letter from the IRS (as
defined in Section 8.1), and Harbor and its Subsidiaries are not aware of any
circumstances likely to result in revocation of any such favorable determination
letter. Each Harbor Qualified Plan that is an "employee stock ownership plan"
(as defined in Section 4975(e)(7) of the IRC) has satisfied all of the
applicable requirements of Sections 409 and 4975(e)(7) of the IRC and the
regulations thereunder in all material respects and any assets of any such
Harbor Qualified Plan that, as of the end of the plan year, are not allocated to
participants' individual accounts are pledged as security for, and may be
applied to satisfy, any securities acquisition indebtedness.
(v) Harbor and its Subsidiaries do not have any obligations
for post-retirement or post-employment benefits under any Harbor Employee Plan
that cannot be amended or terminated upon 60 days' notice or less without
incurring any liability thereunder, except for coverage required by Part 6 of
Title I of ERISA or Section 4980B of the IRC, or similar state laws, the cost of
which is borne by the insured individuals. With respect to Harbor or any of its
Subsidiaries, for the Harbor Employee Plans listed in Harbor's Disclosure
Letter, the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby will not result in any payment or series of
payments by Harbor or any of its Subsidiaries to any person which is an "excess
parachute payment" (as defined in Section 280G of the IRC) or is a nondeductible
payment under Section 162(m) of the IRC, increase or secure (by way of a trust
or other vehicle) any benefits payable under any Harbor Employee Plan or
accelerate the time of payment or vesting of any such benefit.
(o) Title to Assets. Harbor's Disclosure Letter contains a complete
---------------
and accurate list of all real property owned or leased by Harbor or Harbor's
Subsidiaries, including all properties of Harbor or its Subsidiaries classified
as "Real Estate Owned" or words of similar impact. Harbor and each of its
Subsidiaries has good and insurable title to its properties and assets
(including any intellectual property asset such as any trademark, service mark,
trade name or copyright) and property acquired in a judicial foreclosure
proceeding or by way of a deed in lieu of foreclosure or similar transfer
whether real or personal, tangible or intangible, in each case free and clear of
any liens, security interests, encumbrances, mortgages, pledges, restrictions,
charges or rights or interests of others, except (i) liens for taxes not yet due
and payable, (ii) pledges to secure deposits and other liens incurred in the
ordinary course of business, and (iii) such easements, restrictions and
encumbrances, if any, as are not material in character, amount or extent, and do
not materially detract from the value, or materially interfere with the present
use of the properties subject thereto or affected thereby. Each lease pursuant
to which Harbor or any of its Subsidiaries is lessee or lessor is valid and in
full force and effect and neither Harbor nor any of its Subsidiaries, nor, to
Harbor's knowledge, any other party to any such lease is in default or in
violation of any material provisions of any such lease. All material tangible
properties of Harbor and each of its Subsidiaries are in a good state of
maintenance and repair (normal wear and tear excepted), conform with all
applicable ordinances, regulations and zoning laws and are considered by Harbor
to be adequate for the current business of Harbor and its Subsidiaries. To the
knowledge of Harbor, none of the buildings, structures or other
A-16
<PAGE>
improvements located on its real property encroaches upon or over any adjoining
parcel or real estate or any easement or right-of-way.
(p) Compliance with Laws. Harbor and each of its Subsidiaries has all
--------------------
permits, licenses, certificates of authority, orders and approvals of, and has
made all filings, applications and registrations with, all Governmental Entities
that are required in order to permit it to carry on its business as it is
presently conducted; all such permits, licenses, certificates of authority,
orders and approvals are in full force and effect, and no suspension or
cancellation of any of them is threatened. Harbor's Disclosure Letter contains
a complete and accurate list of all permits, licenses, certificates of
authority, orders and approvals of all Governmental Entities that are required
in order to permit it to carry on its business as it is presently conducted.
Neither Harbor nor any of its Subsidiaries is in violation of, and Harbor and
its Subsidiaries have not been given notice or been charged with any violation
of, any law, ordinance, regulation, order, writ, rule, decree or condition to
approval of any Governmental Entity which, individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect on Harbor.
(q) Fees. Other than financial advisory services performed for Harbor
----
by Trident Securities pursuant to an agreement dated November 1, 1999, a true
and complete copy of which has been previously delivered to Provident, neither
Harbor nor any of its Subsidiaries, nor any of their respective officers,
directors, employees or agents, has employed any broker or finder or incurred
any liability for any financial advisory fees, brokerage fees, commissions or
finder's fees, and no broker or finder has acted directly or indirectly for
Harbor or any of its Subsidiaries in connection with this Agreement or the
transactions contemplated hereby.
(r) Environmental Matters.
---------------------
(i) With respect to Harbor and Harbor Federal:
(A) Each of Harbor and Harbor Federal, the Participation
Facilities (as defined below), and, to the knowledge of Harbor, the Loan
Properties (as defined below) are, and have been, in substantial compliance
with, and are not liable under, all Environmental Laws (as defined below);
(B) There is no suit, claim, action, demand, executive or
administrative order, directive, investigation or proceeding pending or, to the
knowledge of Harbor, threatened, before any court, governmental agency or board
or other forum against Harbor or Harbor Federal or any Participation Facility
(1) for alleged noncompliance (including by any predecessor) with, or liability
under, any Environmental Law or (2) relating to the presence of or release into
the environment of any Hazardous Material (as defined below), whether or not
occurring at or on a site owned, leased or operated by Harbor or Harbor Federal
or any Participation Facility;
(C) To the knowledge of Harbor, there is no suit, claim,
action, demand, executive or administrative order, directive, investigation or
proceeding pending or
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<PAGE>
threatened before any court, governmental agency or board or other forum
relating to or against any Loan Property (or Harbor or Harbor Federal in respect
of such Loan Property) (1) relating to alleged noncompliance (including by any
predecessor) with, or liability under, any Environmental Law or (2) relating to
the presence of or release into the environment of any Hazardous Material,
whether or not occurring at a Loan Property;
(D) To the knowledge of Harbor, the properties currently
owned or operated by Harbor or Harbor Federal (including, without limitation,
soil, groundwater or surface water on or under the properties, and buildings
thereon) are not contaminated with and do not otherwise contain any Hazardous
Material other than as permitted under applicable Environmental Law;
(E) Neither Harbor nor Harbor Federal has received any
notice, demand letter, executive or administrative order, directive or request
for information from any Governmental Entity or any third party indicating that
it may be in violation of, or liable under, any Environmental Law;
(F) To the knowledge of Harbor, there are no underground
storage tanks on, in or under any properties owned or operated by Harbor or
Harbor Federal or any Participation Facility and no underground storage tanks
have been closed or removed from any properties owned or operated by Harbor or
Harbor Federal or any Participation Facility; and
(G) To the knowledge of Harbor, during the period of (1)
Harbor's or Harbor Federal's ownership or operation of any of their respective
current properties or (2) Harbor's or Harbor Federal's participation in the
management of any Participation Facility, there has been no contamination by or
release of Hazardous Materials in, on, under or affecting such properties. To
the knowledge of Harbor, prior to the period of (1) Harbor's or Harbor Federal's
ownership or operation of any of their respective current properties or (2)
Harbor's or Harbor Federal's participation in the management of any
Participation Facility, there was no contamination by or release of Hazardous
Material in, on, under or affecting such properties.
(ii) The following definitions apply for purposes of Sections
2.1(r) and 2.2(n):
"Loan Property" means any property in which the applicable party
(or a subsidiary of it) holds a security interest and, where required by the
context, includes the owner or operator of such property, but only with respect
to such property.
"Participation Facility" means any facility in which the
applicable party (or a subsidiary of it) participates in the management
(including all property held as trustee or in any other fiduciary capacity) and,
where required by the context, includes the owner or operator of such property,
but only with respect to such property.
A-18
<PAGE>
"Environmental Law" means (i) any federal, state or local law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, legal doctrine, order, directive, executive or administrative
order, judgment, decree, injunction, legal requirement or agreement with any
Governmental Entity relating to (A) the protection, preservation or restoration
of the environment (which includes, without limitation, air, water vapor,
surface water, groundwater, drinking water supply, structures, soil, surface
land, subsurface land, plant and animal life or any other natural resource), or
to human health or safety as it relates to Hazardous Materials, or (B) the
exposure to, or the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or disposal
of, Hazardous Materials, in each case as amended and as now in effect. The term
Environmental Law includes all federal, state and local laws, rules, regulations
or requirements relating to the protection of the environment or health and
safety, including, without limitation, (x) the Federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Superfund
Amendments and Reauthorization Act of 1986, the Federal Water Pollution Control
Act of 1972, the Federal Clean Air Act, the Federal Clean Water Act, the Federal
Resource Conservation and Recovery Act of 1976 (including, but not limited to,
the Hazardous and Solid Waste Amendments thereto and Subtitle I relating to
underground storage tanks), the Federal Solid Waste Disposal and the Federal
Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide
Act, the Federal Occupational Safety and Health Act of 1970 as it relates to
Hazardous Materials, the Federal Hazardous Substances Transportation Act, the
Emergency Planning and Community Right-To-Know Act, the Safe Drinking Water Act,
the Endangered Species Act, the National Environmental Policy Act, the Rivers
and Harbors Appropriation Act or any so-called "Superfund" or "Superlien" law,
each as amended and as now in effect, and (y) any common law or equitable
doctrine (including, without limitation, injunctive relief and tort doctrines
such as negligence, nuisance, trespass and strict liability) that may impose
liability or obligations for injuries or damages due to, or threatened as a
result of, the presence of or exposure to any Hazardous Material.
"Hazardous Material" means any substance (whether solid, liquid
or gas) which is or could be detrimental to human health or safety or to the
environment, currently or hereafter listed, defined, designated or classified as
hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any
Environmental Law, whether by type or by quantity, including any substance
containing any such substance as a component. Hazardous Material includes,
without limitation, any toxic waste, pollutant, contaminant, hazardous
substance, toxic substance, hazardous waste, special waste, industrial
substance, oil or petroleum, or any derivative or by-product thereof, radon,
radioactive material, asbestos, asbestos-containing material, urea formaldehyde
foam insulation, lead and polychlorinated biphenyl.
A-19
<PAGE>
(s) Loan Portfolio; Allowance; Asset Quality.
----------------------------------------
(i) With respect to each Loan (as defined in Section 8.1)
owned by Harbor or its Subsidiaries in whole or in part:
(A) to the knowledge of Harbor, the note and the related
security documents are each legal, valid and binding obligations of the maker or
obligor thereof, enforceable against such maker or obligor in accordance with
their terms, subject to bankruptcy, insolvency, fraudulent conveyance and other
laws of general applicability relating to or affecting creditors' rights and to
general equity principles;
(B) neither Harbor nor any of its Subsidiaries, nor any
prior holder of a Loan, has modified the note or any of the related security
documents in any material respect or satisfied, canceled or subordinated the
note or any of the related security documents except as otherwise disclosed by
documents in the applicable Loan file;
(C) Harbor or a Subsidiary of Harbor is the sole holder
of legal and beneficial title to each Loan (or Harbor's or its Subsidiary's
applicable participation interest, as applicable), except as otherwise
referenced on the books and records of Harbor or a Subsidiary of Harbor;
(D) the note and the related security documents, copies
of which are included in the Loan files, are true and correct copies of the
documents they purport to be and have not been suspended, amended, modified,
canceled or otherwise changed except as otherwise disclosed by documents in the
applicable Loan file;
(E) to the knowledge of Harbor, there is no pending or
threatened condemnation proceeding or similar proceeding affecting the property
that serves as security for a Loan, except as otherwise referenced on the books
and records of Harbor;
(F) to the knowledge of Harbor, there is no litigation or
proceeding pending or threatened relating to the property that serves as
security for a Loan that would have a Material Adverse Effect upon the related
Loan; and
(G) with respect to a Loan held in the form of a
participation, the participation documentation is legal, valid, binding and
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent conveyance and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles.
(ii) The allowance for possible loan losses reflected in
Harbor's audited balance sheet at March 31, 1999 was, and the allowance for
possible losses shown on the balance sheets in Harbor's Reports for periods
ending after March 31, 1999, in the opinion of management, was or will be
adequate, as of the dates thereof, under GAAP.
A-20
<PAGE>
(iii) Harbor's Disclosure Letter sets forth a true and complete
listing, as of March 31, 2000, of:
(A) all Loans that have been classified (whether
regulatory or internal) as "Special Mention," "Substandard," "Doubtful," "Loss"
or words of similar import listed by category, including the amounts thereof;
and
(B) Loans (1) that are contractually past due 90 days or
more in the payment of principal and/or interest, (2) that are on a non-accrual
status, (3) where the interest rate terms have been reduced and/or the maturity
dates have been extended subsequent to the agreement under which the Loan was
originally created due to concerns regarding the borrower's ability to pay in
accordance with such initial terms, or (4) where a specific reserve allocation
exists in connection therewith, listed by category, including the amounts
thereof.
(iv) To the knowledge of Harbor, neither Harbor nor any of its
Subsidiaries is a party to any Loan that is in violation of any law, regulation
or rule of any Governmental Entity. Any asset of Harbor or any of its
Subsidiaries that is classified as "Real Estate Owned" or words of similar
import that is included in any non-performing assets of Harbor or any of its
Subsidiaries is listed in Harbor's Disclosure Letter and is carried net of
reserves at the lower of cost or fair value, less estimated selling costs, based
on current independent appraisals or evaluations or current management
appraisals or evaluations; provided, however, that "current" shall mean within
the past 12 months.
(t) Deposits. None of the deposits of Harbor or any of its
--------
Subsidiaries is a "brokered" deposit.
(u) Anti-takeover Provisions Inapplicable. Harbor and its
-------------------------------------
Subsidiaries have taken all actions required to exempt Provident, the Agreement,
the Plan of Bank Merger, the Merger and the Bank Merger from any provisions of
an antitakeover nature contained in their organizational documents, and the
provisions of any federal or state "anti-takeover," "fair price," "moratorium,"
"control share acquisition" or similar laws or regulations.
(v) Material Interests of Certain Persons. No officer or director of
-------------------------------------
Harbor, or any "associate" (as such term is defined in Rule 12b-2 under the
Exchange Act) of any such officer or director, has any material interest in any
material contract or property (real or personal), tangible or intangible, used
in or pertaining to the business of Harbor or Harbor Federal.
(w) Insurance. In the opinion of management, Harbor and its
---------
Subsidiaries are presently insured for amounts deemed reasonable by management
against such risks as companies engaged in a similar business would, in
accordance with good business practice, customarily be insured. All of the
insurance policies and bonds maintained by Harbor and its Subsidiaries are in
full force and effect, Harbor and its Subsidiaries are not in default thereunder
and all material claims thereunder have been filed in due and timely fashion.
A-21
<PAGE>
(x) Investment Securities; Derivatives.
----------------------------------
(i) Except for restrictions that exist for securities to be
classified as "held to maturity," none of the investment securities held by
Harbor or any of its Subsidiaries is subject to any restriction (contractual or
statutory) that would materially impair the ability of the entity holding such
investment freely to dispose of such investment at any time.
(ii) Neither Harbor nor any of its Subsidiaries is a party to
or has agreed to enter into an exchange-traded or over-the-counter equity,
interest rate, foreign exchange or other swap, forward, future, option, cap,
floor or collar or any other contract that is a derivative contract (including
various combinations thereof) or owns securities that (A) are referred to
generically as "structured notes," "high risk mortgage derivatives," "capped
floating rate notes" or "capped floating rate mortgage derivatives" or (B) are
likely to have changes in value as a result of interest or exchange rate changes
that significantly exceed normal changes in value attributable to interest or
exchange rate changes.
(y) Indemnification. Except as provided in the articles of
---------------
incorporation or bylaws of Harbor and the similar organizational documents of
its Subsidiaries, neither Harbor nor any Subsidiary is a party to any agreement
that provides for the indemnification of any of its present or former directors,
officers or employees, or other persons who serve or served as a director,
officer or employee of another corporation, partnership or other enterprise at
the request of Harbor and, to the knowledge of Harbor, there are no claims for
which any such person would be entitled to indemnification under the articles of
incorporation or bylaws of Harbor or the similar organizational documents of any
of its Subsidiaries, under any applicable law or regulation or under any
indemnification agreement.
(z) Books and Records. The books and records of Harbor and its
-----------------
Subsidiaries on a consolidated basis have been, and are being, maintained in
accordance with applicable legal and accounting requirements and reflect in all
material respects the substance of events and transactions that should be
included therein.
(aa) Corporate Documents. Harbor has previously furnished or made
-------------------
available to Provident a complete and correct copy of the articles of
incorporation, bylaws and similar organizational documents of Harbor and each of
Harbor's Subsidiaries, as in effect as of the date of this Agreement. Neither
Harbor nor any of Harbor's Subsidiaries is in violation of its articles of
incorporation, bylaws or similar organizational documents. The minute books of
Harbor and each of Harbor's Subsidiaries constitute a complete and correct
record of all actions taken by their respective boards of directors (and each
committee thereof) and their stockholders.
(bb) Registration Statement. The information regarding Harbor and its
----------------------
Subsidiaries to be supplied by Harbor for inclusion in the Registration
Statement (as defined in Section 4.9) will not, at the time the Registration
Statement becomes effective, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein
A-22
<PAGE>
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
(cc) Community Reinvestment Act Compliance. Harbor Federal is in
-------------------------------------
material compliance with the applicable provisions of the CRA (as defined in
Section 8.1) and the regulations promulgated thereunder, and Harbor Federal
currently has a CRA rating of satisfactory or better. To the knowledge of
Harbor, there is no fact or circumstance or set of facts or circumstances that
would cause Harbor Federal to fail to comply with such provisions or cause the
CRA rating of Harbor Federal to fall below satisfactory.
(dd) Undisclosed Liabilities. As of the date hereof, Harbor and its
-----------------------
Subsidiaries have not incurred any debt, liability or obligation of any nature
whatsoever (whether accrued, contingent, absolute or otherwise and whether due
or to become due) except for (i) liabilities reflected on or reserved against in
the consolidated financial statements of Harbor as of March 31, 1999, (ii)
liabilities incurred since March 31, 1999 in the ordinary course of business
consistent with past practice that, either alone or when combined with all
similar liabilities, have not had, and would not reasonably be expected to have,
a Material Adverse Effect on Harbor and, (iii) liabilities incurred for legal,
accounting, financial advising fees and out-of-pocket expenses in connection
with the transactions contemplated by this Agreement.
(ee) Year 2000 Matters. Harbor and its Subsidiaries have not
-----------------
experienced any data processing or other computer malfunctions related to
processing date information on and after January 1, 2000 and none of the third
party service providers or customers of Harbor or its Subsidiaries have reported
year 2000 data processing problems to Harbor that, individually or in the
aggregate, would have a Material Adverse Effect on Harbor.
(ff) Tax Treatment of the Merger. Harbor has no knowledge of any fact
---------------------------
or circumstance relating to it that would prevent the transactions contemplated
by this Agreement from qualifying as a reorganization under the IRC.
(gg) Liquidation Account. Neither the Merger nor the Bank Merger will
-------------------
result in any payout or distribution payable out of the liquidation account of
Harbor Federal established in connection with Harbor Federal's conversion from
mutual to stock form.
Section 2.2. Representations and Warranties of Provident. Except as
-------------------------------------------
set forth in the Disclosure Letter delivered by Provident to Harbor prior to the
execution of this Agreement, Provident represents and warrants to Harbor that:
(a) Organization.
------------
(i) Provident is a corporation duly organized, validly
existing and in good standing under the laws of the State of Maryland and is
registered as a bank holding company.
A-23
<PAGE>
(ii) Provident Bank is a state-chartered commercial bank duly
organized and validly existing under the laws of the State of Maryland. The
deposits of Provident Bank are insured by the Bank Insurance Fund of FDIC to the
extent provided in the FDIA.
(iii) Each of Provident and Provident Bank has all requisite
corporate power and authority to own, lease and operate its properties and to
conduct the business currently being conducted by it. Provident and Provident
Bank are each duly qualified or licensed as a foreign corporation to transact
business and are in good standing in each jurisdiction in which the character of
the properties owned or leased by it or the nature of the business conducted by
it makes such qualification or licensing necessary, except where the failure to
be so qualified or licensed and in good standing would not have a Material
Adverse Effect on Provident.
(b) Subsidiaries.
------------
(i) Exhibit 21 to Provident's Annual Report on Form 10-K for
the year ended December 31, 1999 lists all the Subsidiaries of Provident. All
such Subsidiaries and ownership interests are in compliance with all applicable
laws, rules and regulations relating to investments in equity ownership
interests by bank holding companies or Maryland-chartered banks.
(ii) Provident owns of record and beneficially all the capital
stock of each of its Subsidiaries free and clear of any claims, liens,
encumbrances or restrictions and there are no agreements or understandings with
respect to the voting or disposition of any such shares. The outstanding shares
of capital stock of each Subsidiary have been validly authorized and are validly
issued, fully paid and nonassessable. Each of Provident's Subsidiaries is a
corporation duly organized and validly existing under the laws of its
jurisdiction of incorporation, has all requisite corporate power and authority
to own, lease and operate its properties and to conduct the business currently
being conducted by it and is duly qualified or licensed as a foreign corporation
to transact business and is in good standing in each jurisdiction in which the
character of the properties owned or leased by it or the nature of the business
conducted by it makes such qualification or licensing necessary, except where
the failure to be so qualified or licensed and in good standing would not have a
Material Adverse Effect on Provident.
(iii) No Subsidiary of Provident other than Provident Bank is an
"insured depository institution" as defined in the FDIA and the applicable
regulations thereunder.
(c) Capital Structure.
-----------------
(i) The authorized capital stock of Provident consists of:
(A) 100,000,000 shares of Provident Common Stock; and
(B) 5,000,000 of preferred stock, par value $1.00 per
share.
A-24
<PAGE>
(ii) As of the date of this Agreement:
(A) 25,063,952 shares of Provident Common Stock are
issued and outstanding, all of which are validly issued, fully paid and
nonassessable;
(B) no shares of Provident preferred stock are issued and
outstanding;
(C) no shares of Provident preferred stock are held in
Provident's treasury;
(D) 250,639 shares of Class A Preferred Stock are
reserved for issuance upon exercise of the rights distributed to holders of
Provident Common Stock pursuant to the Stockholder Protection Rights Agreement
dated as of January 18, 1995, as amended as of July 15, 1998, between Provident
and Provident Bank, as rights agent;
(E) 2,115,763 shares of Provident Common Stock are
reserved for issuance pursuant to outstanding grants or awards under Provident's
stock option plans;
(F) 1,348,050 shares of Provident Common Stock are
reserved for issuance pursuant to Provident's Dividend Reinvestment Plan; and
(G) 1,187,432 shares of Provident Common Stock are held
by Provident in its treasury or by its Subsidiaries.
(iii) No bonds, debentures, notes or other indebtedness having
the right to vote on any matters on which stockholders of Provident may vote are
issued or outstanding.
(iv) Except as set forth in this Section 2.2(c), as of the date
of this Agreement, (A) no shares of capital stock or other voting securities of
Provident are issued, reserved for issuance or outstanding and (B) neither
Provident nor any of its Subsidiaries has or is bound by any outstanding
subscriptions, options, warrants, calls, rights, convertible securities,
commitments or agreements of any character obligating Provident or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, any additional shares of capital stock of Provident or obligating
Provident or any of its Subsidiaries to grant, extend or enter into any such
option, warrant, call, right, convertible security, commitment or agreement. As
of the date hereof, there are no outstanding contractual obligations of
Provident or any of its Subsidiaries to repurchase, redeem or otherwise acquire
any shares of capital stock of Provident or any of its Subsidiaries.
(v) Prior to the filing of the Registration Statement, the
shares of Provident Common Stock to be issued in exchange for shares of Harbor
Common Stock upon consummation of the Merger in accordance with this Agreement,
and upon exercise of options pursuant to Section 1.7 of this Agreement, will
have been duly authorized and such shares, when
A-25
<PAGE>
issued in accordance with the terms of this Agreement, will be validly issued,
fully paid and nonassessable and subject to no preemptive rights.
(d) Authority.
---------
(i) Provident has all requisite corporate power and authority
to enter into this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
by this Agreement have been duly authorized by all necessary corporate actions
on the part of Provident's Board of Directors, and no other corporate
proceedings on the part of Provident are necessary to authorize this Agreement
or to consummate the transactions contemplated by this Agreement. This Agreement
has been duly and validly executed and delivered by Provident and constitutes a
valid and binding obligation of Provident, enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally and, as to enforceability, to general
principles of equity, whether applied in a court of law or a court of equity.
(ii) Provident Bank has all requisite corporate power and
authority to enter into the Plan of Bank Merger and to consummate the
transactions contemplated thereby. The execution and delivery of the Plan of
Bank Merger and the consummation of the transactions contemplated thereby have
been duly authorized by the Board of Directors of Provident Bank and approved by
Provident as the sole stockholder of Provident Bank. The Plan of Bank Merger,
upon execution and delivery by Provident Bank, will be duly and validly executed
and delivered by Provident Bank and will constitute a valid and binding
obligation of Provident Bank, enforceable in accordance with its terms, subject
to applicable bankruptcy, insolvency and similar laws affecting creditors'
rights and remedies generally and, as to enforceability, to general principles
of equity, whether applied in a court of law or a court of equity.
(e) No Violations; Consents.
-----------------------
(i) The execution, delivery and performance of this Agreement
by Provident do not, and the consummation of the transactions contemplated by
this Agreement will not, (A) assuming that the consents and approvals referred
to in Section 2.2(e)(ii) are obtained, violate any law, rule or regulation or
any judgment, decree, order, governmental permit or license to which Provident
or any of its Subsidiaries (or any of their respective properties) is subject,
(B) violate the articles of incorporation or bylaws of Provident or the similar
organizational documents of any of its Subsidiaries or (C) constitute a breach
or violation of, or a default under (or an event which, with due notice or lapse
of time or both, would constitute a default under), or result in the termination
of, accelerate the performance required by, or result in the creation of any
lien, pledge, security interest, charge or other encumbrance upon any of the
properties or assets of Provident or any of its Subsidiaries under, any of the
terms, conditions or provisions of any note, bond, indenture, deed of trust,
loan agreement or other agreement, instrument or obligation to which Provident
or any of its Subsidiaries is a party, or to which any of their respective
properties or assets may be subject, except, in the case of (C), for any such
breaches,
A-26
<PAGE>
violations or defaults that would not, individually or in the aggregate, have a
Material Adverse Effect on Provident.
(ii) Except for (A) the filing of an application with the FDIC
under the Bank Merger Act and the approval or waiver of such application, (B)
the filing of applications or notices, as applicable, with the Federal Reserve
Board and the OTS and approval of such application and/or lack of objection to
any notice, (C) the filing of applications or notices, as applicable, with the
Commissioner and approval of such applications or notices, (D) the filing of
articles of merger with the Department pursuant to the MGCL, (E) the
registration under the Securities Act of the shares of Provident Common Stock to
be issued in exchange for shares of Harbor Common Stock, (F) the registration or
qualification of the shares of Provident Common Stock to be issued in exchange
for shares of Harbor Common Stock under state securities or "blue sky" laws, (G)
the listing of shares of Provident Common Stock to be issued in exchange for
shares Harbor Common Stock on the Nasdaq Stock Market, and (H) such filings,
authorizations or approvals as may be set forth in Provident's Disclosure
Letter, no consents or approvals of or filings or registrations with any
Governmental Entity or with any third party are necessary in connection with the
execution and delivery by Provident of this Agreement or the consummation by
Provident of the Merger and the other transactions contemplated by this
Agreement, including the Bank Merger. As of the date hereof, Provident knows of
no reason pertaining to Provident why any of the approvals referred to in this
Section 2.2(e) should not be obtained without the imposition of any material
condition or restriction described in Section 5.1(b).
(f) Reports and Financial Statements.
--------------------------------
(i) Provident and each of its Subsidiaries have each timely
filed all material reports, registrations and statements, together with any
amendments required to be made with respect thereto, that they were required to
file since December 31, 1997 with (A) the FDIC, (B) the Federal Reserve Board,
(C) the NASD, (D) the State of Maryland Department of Labor, Licensing and
Registration or (E) the SEC (collectively, "Provident's Reports") and have paid
all fees and assessments due and payable in connection therewith. As of their
respective dates, none of Provident's Reports contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading. All of Provident's
Reports filed with the SEC complied in all material respects with the applicable
requirements of the Exchange Act and the rules and regulations of the SEC
promulgated thereunder.
(ii) Each of the financial statements of Provident included in
Provident's Reports filed with the SEC complied as to form, as of their
respective dates of filing with the SEC, in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto. The financial statements included in
Provident's Reports were prepared from the books and records of Provident and
its Subsidiaries, fairly present the consolidated financial position of
Provident and its Subsidiaries in each case at and as of the dates indicated and
the consolidated results of operations, retained earnings and cash flows of
Provident and its Subsidiaries for the periods indicated, and, except as
A-27
<PAGE>
otherwise set forth in the notes thereto, were prepared in accordance with GAAP
consistently applied throughout the periods covered thereby; provided, however,
that the unaudited financial statements for interim periods are subject to
normal year-end adjustments (which will not be material individually or in the
aggregate) and lack a statement of cash flows and footnotes.
(g) Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
Provident's Reports filed with the SEC prior to the date of this Agreement,
since December 31, 1999, (i) Provident and its Subsidiaries have not incurred
any liability, except in the ordinary course of their business consistent with
past practice, (ii) Provident and its Subsidiaries have conducted their
respective businesses only in the ordinary and usual course of such businesses
consistent with their past practices, (iii) there has not been any event or
occurrence that has had a Material Adverse Effect on Provident, and (iv) there
has been no change in any accounting principles, practices or methods of
Provident or any of its Subsidiaries other than as required by GAAP.
(h) Absence of Claims. There are no suits, actions or proceedings
-----------------
pending or, to the knowledge of Provident, threatened against or affecting
Provident or any of its Subsidiaries or any property or asset of Provident or
any of its Subsidiaries which, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect on Provident, nor are
there any judgments, decrees, injunctions, rules or orders of any Governmental
Entity or arbitrator outstanding against Provident which, individually or in the
aggregate, would reasonably be expected to have a Material Adverse Effect on
Provident.
(i) Absence of Regulatory Actions. Since December 31, 1997, neither
-----------------------------
Provident nor any of its Subsidiaries has been a party to any cease and desist
order, written agreement or memorandum of understanding with, or any commitment
letter or similar undertaking to, or has been subject to any action, proceeding,
order or directive by, or has been a recipient of any extraordinary supervisory
letter from Government Regulator, or has adopted any board resolutions at the
request of any Government Regulator, or has been advised by any Government
Regulator that it is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such action, proceeding, order,
directive, written agreement, memorandum of understanding, extraordinary
supervisory letter, commitment letter, board resolutions or similar undertaking.
(j) Taxes. All federal, state, local and foreign tax returns required
-----
to be filed by or on behalf of Provident or any of its Subsidiaries have been
timely filed or requests for extensions have been timely filed and any such
extension shall have been granted and not have expired, and all such filed
returns are complete and accurate in all material respects. All taxes shown on
such returns, all taxes required to be shown on returns for which extensions
have been granted and all other taxes required to be paid by Provident or any of
its Subsidiaries have been paid in full or adequate provision has been made for
any such taxes on Provident's balance sheet (in accordance with GAAP). As of
the date of this Agreement, there is no audit examination, deficiency
assessment, tax investigation or refund litigation with respect to any taxes of
Provident or any of its Subsidiaries, and no claim has been made by any
authority in a jurisdiction where Provident or any of its Subsidiaries do not
file tax returns that Provident or
A-28
<PAGE>
any such Subsidiary is subject to taxation in that jurisdiction. All taxes,
interest, additions and penalties due with respect to completed and settled
examinations or concluded litigation relating to Provident or any of its
Subsidiaries have been paid in full or adequate provision has been made for any
such taxes on Provident's balance sheet (in accordance with GAAP). Provident and
its Subsidiaries have not executed an extension or waiver of any statute of
limitations on the assessment or collection of any material tax due that is
currently in effect. Provident and each of its Subsidiaries has withheld and
paid all taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder or other third party, and Provident and each of its Subsidiaries has
timely complied with all applicable information reporting requirements under
Part III, Subchapter A of Chapter 61 of the IRC and similar applicable state and
local information reporting requirements.
(k) Agreements.
----------
(i) Provident and its Subsidiaries are not bound by any
material contract (as defined in Item 601(b)(10) of Regulation S-K promulgated
by the SEC), to be performed after the date hereof that has not been filed with
or incorporated by reference in Provident's Reports.
(ii) neither Provident nor any of its Subsidiaries is in
default under (and no event has occurred which, with due notice or lapse of time
or both, would constitute a default under) or is in violation of any provision
of any note, bond, indenture, mortgage, deed of trust, loan agreement, lease or
other agreement to which it is a party or by which it is bound or to which any
of its respective properties or assets is subject and, to the knowledge of
Provident, no other party to any such agreement (excluding any loan or extension
of credit made by Provident or any of its Subsidiaries) is in default in any
respect thereunder, except for such defaults or violations that would not,
individually or in the aggregate, have a Material Adverse Effect on Provident.
(l) Labor Matters. Provident and its Subsidiaries are in material
-------------
compliance with all applicable laws respecting employment, retention of
independent contractors and employment practices, terms and conditions of
employment and wages and hours. Neither Provident nor any of its Subsidiaries
is or has ever been a party to, or is or has ever been bound by, any collective
bargaining agreement, contract or other agreement or understanding with a labor
union or labor organization with respect to its employees, nor is Provident or
any of its Subsidiaries the subject of any proceeding asserting that it has
committed an unfair labor practice or seeking to compel it or any such
Subsidiary to bargain with any labor organization as to wages and conditions of
employment nor has any such proceeding been threatened, nor is there any strike,
other labor dispute or organizational effort involving Provident or any of its
Subsidiaries pending or threatened.
(m) Compliance with Laws. Provident and each of its Subsidiaries has
--------------------
all permits, licenses, certificates of authority, orders and approvals of, and
has made all filings, applications and registrations with, all Governmental
Entities that are required in order to permit
A-29
<PAGE>
it to carry on its business as it is presently conducted; all such permits,
licenses, certificates of authority, orders and approvals are in full force and
effect, and no suspension or cancellation of any of them is threatened. Neither
Provident nor any of its Subsidiaries is in violation of, and Provident and its
Subsidiaries have not been given notice or been charged with any violation of,
any law, ordinance, regulation, order, writ, rule, decree or condition to
approval of any Governmental Entity which, individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect on Provident.
(n) Environmental Matters. With respect to Provident and Provident
---------------------
Bank:
(i) Each of Provident and Provident Bank, the Participation
Facilities and, to the knowledge of Provident, the Loan Properties are, and have
been, in substantial compliance with, and are not liable under, all
Environmental Laws.
(ii) There is no suit, claim, action, demand, executive or
administrative order, directive, investigation or proceeding pending or, to the
knowledge of Provident, threatened, before any court, governmental agency or
board or other forum against Provident or Provident Bank or any Participation
Facility (1) for alleged noncompliance (including by any predecessor) with, or
liability under, any Environmental Law or (2) relating to the presence of or
release into the environment of any Hazardous Material, whether or not occurring
at or on a site owned, leased or operated by Provident or Provident Bank or any
Participation Facility;
(iii) To the knowledge of Provident, there is no suit, claim,
action, demand, executive or administrative order, directive, investigation or
proceeding pending or threatened before any court, governmental agency or board
or other forum relating to or against any Loan Property (or Provident or
Provident Bank in respect of such Loan Property) (a) relating to alleged
noncompliance (including by any predecessor) with, or liability under, any
Environmental Law or (b) relating to the presence of or release into the
environment of any Hazardous Material, whether or not occurring at a Loan
Property.
(iv) To the knowledge of Provident, the properties currently
owned or operated by Provident or Provident Bank (including, without limitation,
soil, groundwater or surface water on or under the properties, and buildings
thereon) are not contaminated with and do not otherwise contain any Hazardous
Material other than as permitted under applicable Environmental Law; and
(v) Neither Provident nor Provident Bank has received any
notice, demand letter, executive or administrative order, directive or request
for information from any Governmental Entity or any third party indicating that
it may be in violation of, or liable under, any Environmental Law;
(vi) To the knowledge of Provident, there are no underground
storage tanks on, in or under any properties owned or operated by Provident or
Provident Bank or any
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<PAGE>
Participation Facility and no underground storage tanks have been closed or
removed from any properties owned or operated by Provident or Provident Bank, or
any Participation Facility; and
(vii) To the knowledge of Provident, during the period of (a)
Provident or Provident Bank's ownership or operation of any of their respective
current properties or (b) Provident or a Provident Bank's participation in the
management of any Participation Facility, there has been no contamination by or
release of Hazardous Materials in, on, under or affecting such properties. To
the knowledge of Provident, prior to the period of (a) Provident or Provident
Bank's ownership or operation of any of their respective current properties or
(b) Provident or Provident Bank's participation in the management of any
Participation Facility, there was no contamination by or release of Hazardous
Material, in on, under or affecting such properties.
(o) Allowance. The allowance for loan losses reflected in Provident's
---------
audited balance sheet at December 31, 1999 was, and the allowance for possible
losses shown on the balance sheets in Provident's Reports for periods ending
after December 31, 1999, in the opinion of management, was or will be adequate,
as of the dates thereof, under GAAP.
(p) Books and Records. The books and records of Provident and its
-----------------
Subsidiaries on a consolidated basis have been, and are being, maintained in
accordance with applicable legal and accounting requirements and reflect in all
material respects the substance of events and transactions that should be
included therein.
(q) Corporate Documents. Provident has previously furnished or made
-------------------
available to Harbor a complete and correct copy of the articles of
incorporation, bylaws and similar organizational documents of Provident and each
of Provident's Subsidiaries, as in effect as of the date of this Agreement.
Neither Provident nor any of Provident's Subsidiaries is in violation of its
articles of incorporation, bylaws or similar organizational documents. The
minute books of Provident and each of Provident's Subsidiaries constitute a
complete and correct record of all actions taken by their respective boards of
directors (and each committee thereof) and their stockholders.
(r) Registration Statement. The information regarding Provident and
----------------------
its Subsidiaries to be supplied by Provident for inclusion in the Registration
Statement will not, at the time the Registration Statement becomes effective,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
(s) Community Reinvestment Act Compliance. Provident Bank is in
-------------------------------------
material compliance with the applicable provisions of the CRA and the
regulations promulgated thereunder, and Provident Bank currently has a CRA
rating of satisfactory or better. To the knowledge of Provident, there is no
fact or circumstance or set of facts or circumstances that would cause Provident
Bank to fail to comply with such provisions or cause the CRA rating of Provident
Bank to fall below satisfactory.
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<PAGE>
(t) Undisclosed Liabilities. As of the date hereof, Provident and
-----------------------
its Subsidiaries have not incurred any debt, liability or obligation of any
nature whatsoever (whether accrued, contingent, absolute or otherwise and
whether due or to become due) except for (i) liabilities reflected on or
reserved against in the consolidated financial statements of Provident as of
December 31, 1999, and (ii) liabilities incurred since December 31, 1999, either
alone or when combined with all similar liabilities, that have not had and would
not reasonably be expected to have, a Material Adverse Effect on Provident.
(u) Year 2000 Matters. Provident and its Subsidiaries have not
-----------------
experienced any data processing or other computer malfunctions related to
processing date information on and after January 1, 2000 and none of the third
party service providers or customers of Provident or its Subsidiaries have
reported year 2000 data processing problems to Provident that, individually or
in the aggregate, would have a Material Adverse Effect on Provident.
(v) Tax Treatment of the Merger. Provident has no knowledge of any
---------------------------
fact or circumstance relating to it that would prevent the transactions
contemplated by this Agreement from qualifying as a reorganization under the
IRC.
ARTICLE III
Conduct Pending the Merger
--------------------------
Section 3.1. Conduct of Harbor's Business Prior to the Effective Time.
--------------------------------------------------------
Except as expressly provided in this Agreement, during the period from the date
of this Agreement to the Effective Time, Harbor shall, and shall cause each of
its Subsidiaries to, use commercially reasonable efforts to (i) conduct its
business in the regular, ordinary and usual course consistent with past
practice, (ii) maintain and preserve intact its business organization,
properties, leases, employees and advantageous business relationships and retain
the services of its officers and key employees, (iii) take no action that would
adversely affect or delay the ability of Harbor or Provident to perform their
respective covenants and agreements on a timely basis under this Agreement, (iv)
take no action that would adversely affect or delay the ability of Harbor,
Harbor Federal, Provident or Provident Bank to obtain any necessary approvals,
consents or waivers of any governmental authority required for the transactions
contemplated hereby or which would reasonably be expected to result in any such
approvals, consents or waivers containing any material condition or restriction,
and (v) take no action that results in, or is reasonably likely to have, a
Material Adverse Effect on Harbor or Harbor Federal.
Section 3.2. Forbearance by Harbor. Without limiting the covenants set
---------------------
forth in Section 3.1 hereof, except as expressly contemplated or permitted by
this Agreement or as set forth in Harbor's Disclosure Letter and except to the
extent required by law or regulation or any Governmental Entity, during the
period from the date of this Agreement to the Effective Time, Harbor shall not,
nor shall Harbor permit any of its Subsidiaries to, without the prior written
consent of Provident, which consent shall not be unreasonably withheld:
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<PAGE>
(a) other than in the ordinary course of business, incur any
indebtedness for borrowed money, assume, guarantee, endorse or otherwise as an
accommodation become responsible for the obligations of any other individual,
corporation or other entity, or make any loan or advance (it being understood
and agreed that incurrence of indebtedness in the ordinary course of business
shall include, without limitation, the creation of deposit liabilities,
borrowings from the Federal Home Loan Bank, sales of certificates of deposit and
entering into repurchase agreements);
(b) (i) adjust, split, combine or reclassify any capital stock;
(ii) make, declare or pay any dividend, or make any other
distribution on its capital stock (except for regular quarterly cash dividends
at a rate not in excess of $0.13 per share of Harbor Common Stock and dividends
paid by any of the Subsidiaries for the purpose of enabling Harbor to pay such
dividends);
(iii) grant any stock appreciation rights or any limited rights
under the Harbor Option Plan or grant any individual, corporation or other
entity any right to acquire any shares of its capital stock; or
(iv) issue any additional shares of capital stock or any
securities or obligations convertible or exercisable for any shares of its
capital stock except pursuant to the exercise of stock options outstanding as of
the date hereof;
(c) sell, transfer, mortgage, encumber or otherwise dispose of any of
its material properties or assets to any individual, corporation or other entity
other than a Subsidiary, or cancel, release or assign any indebtedness to any
such person or any claims held by any such person, except in the ordinary course
of business or pursuant to contracts or agreements in force at the date of this
Agreement;
(d) except pursuant to contracts or agreements in force at the date
of or permitted by this Agreement, make any equity investment, either by
purchase of stock or securities, contributions to capital, property transfers,
or purchase of any property or assets of any other individual, corporation or
other entity;
(e) enter into, renew, amend or terminate any contract or agreement,
or make any change in any of its leases or contracts, other than with respect to
those involving aggregate payments of less than, or the provision of goods or
services with a market value of less than, $20,000 per annum and other than
contracts or agreements covered by Section 3.2(f);
(f) make, renegotiate, renew, increase, extend, modify or purchase
any loan, lease (credit equivalent), advance, credit enhancement or other
extension of credit, or make any commitment in respect of any of the foregoing,
except (i) in conformity with existing lending practices in amounts not to
exceed an aggregate of $300,000 with respect to any individual
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<PAGE>
borrower, or (ii) loans or advances as to which Harbor has a binding obligation
to make such loan or advances as of the date hereof;
(g) except for loans or extensions of credit made on terms generally
available to the public, make or increase any loan or other extension of credit,
or commit to make or increase any such loan or extension of credit, to any
director or executive officer of Harbor or Harbor Federal, or any entity
controlled, directly or indirectly, by any of the foregoing, other than renewals
of existing loans or commitments to loan;
(h) (i) increase in any manner the compensation or fringe benefits
of any of its employees or directors other than in the ordinary course of
business consistent with past practice and pursuant to policies currently in
effect, or pay any bonus, pension, retirement allowance or contribution not
required by any existing plan or agreement to any such employees or directors;
(ii) become a party to, amend or commit itself to any pension,
retirement, profit-sharing or welfare benefit plan or agreement or employment
agreement with or for the benefit of any employee or director;
(iii) voluntarily accelerate the vesting of, or the lapsing of
restrictions with respect to, any stock options or other stock-based
compensation; or
(iv) elect to any senior executive office any person who is not
a member of the senior executive officer team of Harbor as of the date of this
Agreement or elect to the Board of Directors of Harbor any person who is not a
member of the Board of Directors of Harbor as of the date of this Agreement, or
hire any employee with annual compensation in excess of $50,000;
(i) settle any claim, action or proceeding involving payment by it of
money damages in excess of $25,000 or impose any material restriction on its
operations or the operations of any of its Subsidiaries;
(j) amend its articles of incorporation or its bylaws;
(k) restructure or materially change its investment securities
portfolio or its gap position, through purchases, sales or otherwise, or the
manner in which the portfolio is classified or reported;
(l) make any investment in any debt security, including mortgage-
backed and mortgage-related securities, other than U.S. government and U.S.
government agency securities with final maturities not greater than five years;
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<PAGE>
(m) make any capital expenditures other than pursuant to binding
commitments existing on the date hereof and other than expenditures necessary to
maintain existing assets in good repair or to make payment of necessary taxes;
(n) establish or commit to the establishment of any new branch or
other office facilities or file any application to relocate or terminate the
operation of any banking office;
(o) take any action that is intended or expected to result in any of
its representations and warranties set forth in this Agreement being or becoming
untrue in any material respect at any time prior to the Effective Time, or in
any of the conditions to the Merger set forth in Article V not being satisfied
or in a violation of any provision of this Agreement;
(p) engage in any transaction that is not in the usual and ordinary
course of business and consistent with past practices;
(q) implement or adopt any change in its accounting principles,
practices or methods, other than as may be required by GAAP or regulatory
guidelines;
(r) knowingly take any action that would prevent or impede the Merger
from qualifying as a reorganization within the meaning of Section 368 of the
IRC; or
(s) agree to take, make any commitment to take, or adopt any
resolutions of its board of directors in support of, any of the actions
prohibited by this Section 3.2.
Any request by Harbor or response thereto by Provident shall be made
in accordance with the notice provisions of Section 8.7 and shall note that it
is a request pursuant to this Section 3.2.
Section 3.3. Conduct of Provident's Business Prior to the Effective
------------------------------------------------------
Time. Except as expressly provided in this Agreement, during the period from the
----
date of this Agreement to the Effective Time, Provident shall, and shall cause
each of its Subsidiaries to, use commercially reasonable efforts to (i) conduct
its business in the regular, ordinary and usual course consistent with past
practice, (ii) maintain and preserve intact its business organization,
properties, leases, employees and advantageous business relationships and retain
the services of its officers and key employees, (iii) take no action that would
adversely affect or delay the ability of Provident or Harbor to perform their
respective covenants and agreements on a timely basis under this Agreement, (iv)
take no action that would adversely affect or delay the ability of Provident,
Provident Bank, Harbor or Harbor Federal to obtain any necessary approvals,
consents or waivers of any governmental authority required for the transactions
contemplated hereby, and (v) take not action that results in, or is reasonably
likely to have, a Material Adverse Effect on Provident or Provident Bank.
Section 3.4. Forbearance by Provident. Without limiting the
------------------------
covenants set forth in Section 3.3 hereof, except as expressly contemplated or
permitted by this Agreement, and
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<PAGE>
except to the extent required by law or regulation or any Governmental Entity,
during the period from the date of this Agreement to the Effective Time,
Provident shall not, nor shall Provident permit any of its Subsidiaries to,
without the prior written consent of Harbor:
(a) take any action that is intended to or expected to result in any
of its representations and warranties set forth in this Agreement being or
becoming untrue in any material respect at any time prior to the Effective Time,
or in any of the conditions to the Merger set forth in Article V not being
satisfied or in a violation of any provision of this Agreement;
(b) knowingly take any action that would prevent or impede the Merger
from qualifying as a reorganization withing the meaning of Section 368 of the
IRC; or
(c) agree to take, make any commitment to take, or adopt any
resolutions of its Board of Directors in support of, any of the actions
prohibited by this Section 3.4.
ARTICLE IV
Covenants
---------
Section 4.1. Acquisition Proposals. From and after the date hereof
---------------------
until the termination of this Agreement, Harbor agrees that neither it nor any
of its Subsidiaries nor any of the officers and directors of it or its
Subsidiaries shall, and that it shall use its reasonable best efforts to cause
its and its Subsidiaries' employees, representatives, agents or affiliates
(including, without limitation, any investment banker, attorney or accountant
retained by it or any of its Subsidiaries) not to, directly or indirectly,
initiate, solicit or knowingly encourage (including by way of furnishing non-
public information or assistance), or facilitate knowingly, any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to lead
to, any Acquisition Proposal (as defined in Section 8.1), or enter into or
maintain or continue discussions or negotiate with any person or entity in
furtherance of such inquiries or to obtain an Acquisition Proposal or agree to
or endorse any Acquisition Proposal, or authorize or permit any of its officers,
directors or employees or any of its Subsidiaries or any investment banker,
financial advisor, attorney, accountant or other representative retained by any
of its Subsidiaries to take any such action, and that it shall notify Provident
orally (within 24 hours) and in writing (as promptly as practicable, but in no
event later than 2 calendar days) of such inquiries and proposals (including,
without limitation, the terms and conditions of any such Acquisition Proposal
and the identity of the person making such Acquisition Proposal) which it or any
of its Subsidiaries or any such officer, director, employee, investment banker,
financial advisor, attorney, accountant or other representative may receive
relating to any of such matters (and shall keep Provident informed of the status
and details of any such Acquisition Proposal) and, if such inquiry or proposal
is in writing, it shall deliver to Provident a copy of such inquiry or proposal
promptly; provided, however, that nothing contained in this Section 4.1 shall
prohibit the Board of Directors of Harbor from:
(a) furnishing information to, or entering into discussions or
negotiations with any person or entity that makes an unsolicited written, bona
fide proposal to acquire Harbor
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<PAGE>
pursuant to a merger, consolidation, share exchange, business combination,
tender or exchange offer or other similar transaction, if, and only to the
extent that:
(i) the Board of Directors, after consultation with its
independent financial advisor, determines that such proposal may be superior to
the Merger from a financial point-of-view to Harbor's stockholders;
(ii) the Board of Directors, after consultation with
independent legal counsel, determines in good faith that such action is
necessary for the Board of Directors to comply with its fiduciary duties to
stockholders under applicable law (such proposal that satisfies (i) and (ii)
being referred to herein as a "Superior Proposal"); and
(iii) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity, it:
(A) provides prompt notice to Provident to the effect
that it is furnishing information to, or entering into discussions or
negotiations with, another party; and
(B) receives from such person or entity an executed
confidentiality agreement in reasonably customary form;
(b) complying with Rule 14e-2 promulgated under the Exchange Act with
regard to a tender or exchange offer; or
(c) failing to make or withdrawing or modifying its recommendation
and entering into a Superior Proposal if there exists a Superior Proposal and
the Board of Directors determines in good faith that such action is necessary
for the Board of Directors to comply with its fiduciary duties to stockholders
under applicable law.
Section 4.2. Certain Policies and Actions of Harbor. At the request
--------------------------------------
of Provident, Harbor shall cause Harbor Federal to modify and change its loan,
litigation and real estate valuation policies and practices (including loan
classifications and levels of reserves) and investment and asset/liability
management policies and practices so as to be consistent with those of Provident
Bank; provided, however, that Harbor shall not be required to take such action
prior to the date on which all regulatory and stockholder approvals required to
consummate the transactions contemplated hereby are received, and until after
receipt of written confirmation from Provident that it is not aware of any fact
or circumstance that would prevent completion of the Merger, and provided,
further, that such policies and procedures are not prohibited by GAAP or any
applicable laws and regulations. Harbor's representations, warranties and
covenants contained in this Agreement shall not be deemed to be untrue or
breached in any respect for any purpose as a consequence of any modifications or
changes undertaken solely on account of this Section 4.2.
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<PAGE>
Section 4.3. Access and Information.
----------------------
(a) Upon reasonable notice, Harbor shall (and shall cause Harbor
Federal to) afford Provident and its representatives (including, without
limitation, directors, officers and employees of Provident and its affiliates
and counsel, accountants and other professionals retained by Provident) such
reasonable access during normal business hours throughout the period prior to
the Effective Time to the books, records (including, without limitation, tax
returns and work papers of independent auditors), contracts, properties,
personnel and to such other information relating to Harbor and Harbor Federal as
Provident may reasonably request; provided, however, that no investigation
pursuant to this Section 4.3 shall affect or be deemed to modify any
representation or warranty made by Harbor in this Agreement. Notwithstanding
the foregoing, neither Harbor nor any of its Subsidiaries shall be required to
provide access to or disclose information where such access or disclosure would
jeopardize any attorney-client privilege. In furtherance, and not in limitation
of the foregoing, Harbor shall make available to Provident all information
necessary and appropriate for the preparation and filing of all real property
and real estate transfer tax returns and reports required by reason of the
Merger or the Bank Merger.
(b) Harbor shall provide Provident with true, correct and complete
copies of all financial and other information relating to the business or
operations of Harbor or Harbor Federal that is provided to directors of Harbor
and Harbor Federal in connection with meetings of their Boards of Directors or
committees thereof.
(c) As soon as reasonably available, but in no event more than 45
days after the end of each fiscal quarter (and 90 days in the case of the fourth
fiscal quarter), Harbor shall deliver to Provident its Quarterly and Annual
Reports, as filed with the SEC under the Exchange Act. Harbor shall deliver to
Provident any Current Reports on Form 8-K promptly after filing such reports
with the SEC and shall provide Provident with a copy of any press release
promptly after such release is made available to the public.
(d) Provident will not, and will cause its representatives not to,
use any information obtained pursuant to this Section 4.3 for any purpose
unrelated to the consummation of the transactions contemplated by this
Agreement. Subject to the requirements of applicable law, Provident will keep
confidential, and will cause its representatives to keep confidential, all
information and documents obtained pursuant to this Section 4.3 unless such
information (i) was already known to Provident or an affiliate of Provident,
other than pursuant to a confidentiality agreement or other confidential
relationship, (ii) becomes available to Provident or an affiliate of Provident
from other sources not known by such party to be bound by a confidentiality
agreement or other obligation of secrecy, (iii) is disclosed with the prior
written approval of Harbor or (iv) is or becomes readily ascertainable from
published information or trade sources.
(e) During the period of time beginning on the day application
materials to obtain the requisite regulatory approvals for the Merger are
initially filed and continuing to the Effective Time, including weekends and
holidays, Harbor shall cause Harbor Federal to provide
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<PAGE>
Provident and Provident Bank and their authorized agents and representatives
full access to Harbor Federal offices after normal business hours for the
purpose of installing necessary wiring and equipment to be utilized by Provident
Bank after the Effective Time; provided, that:
(i) reasonable advance notice of each entry shall be given to
Harbor Federal and Harbor Federal approves of each entry, which approval shall
not be unreasonably withheld;
(ii) Harbor shall consent to the scope of work to be performed,
which consent shall not be unreasonably withheld;
(iii) Harbor Federal shall have the right to have its employees
or contractors present to inspect the work being done;
(iv) to the extent practicable, such work shall be done in a
matter that will not interfere with Harbor Federal's business conducted at any
affected branch offices;
(v) all such work shall be done in compliance with all
applicable laws and government regulations, and Provident Bank shall be
responsible for the procurement, at Provident Bank's expense, of all required
governmental or administrative permits and approvals;
(vi) Provident Bank shall maintain appropriate insurance
satisfactory to Harbor Federal in connection with any work done by Provident
Bank's agents and representatives pursuant to this Section 4.3;
(vii) Provident Bank shall reimburse Harbor Federal for any
material out-of-pocket costs or expenses reasonably incurred by Harbor Federal
in connection with this undertaking, including, without limitation, employee
overtime expense; and
(viii) in the event this Agreement is terminated in accordance
with Article VI hereof, Provident Bank, within a reasonable time period and at
its sole cost and expense, will restore such offices to their condition prior to
the commencement of any such installation.
Section 4.4. Applications; Consents.
----------------------
(a) As soon as practicable after the date hereof, Provident shall use
its reasonable best efforts to prepare and file all necessary applications,
notices and filings to obtain all permits, consents, approvals and
authorizations of all third parties and Governmental Entities that are necessary
or advisable to consummate the transactions contemplated by this Agreement.
Harbor shall furnish Provident with all information concerning Harbor's and its
Subsidiaries' directors, officers and stockholders and such other matters as may
be reasonably necessary or advisable in connection with any application, notice
or filing made by or on behalf of Provident to any Governmental Entity in
connection with the transactions contemplated by this Agreement
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<PAGE>
and the Plan of Bank Merger. Provident shall permit Harbor and its counsel a
reasonable opportunity to review and comment upon such applications prior to
filing same.
(b) As soon as practicable after the date hereof, each of the parties
hereto shall, and they shall cause their respective subsidiaries to, use its
best efforts to obtain any consent, authorization or approval of any third party
that is required to be obtained in connection with the Merger and the Bank
Merger.
Section 4.5. Antitakeover Provisions. Harbor and its Subsidiaries
-----------------------
shall take all steps required by any relevant federal or state law or regulation
or under any relevant agreement or other document to exempt or continue to
exempt Provident, Provident Bank, the Agreement, the Plan of Bank Merger and the
Merger from any provisions of an antitakeover nature in Harbor's or its
Subsidiaries' articles of incorporation and bylaws, or similar organizational
documents, and the provisions of any federal or state antitakeover laws.
Section 4.6. Additional Agreements. Subject to the terms and
---------------------
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take promptly, or cause to be taken promptly, all actions
and to do promptly, or cause to be done promptly, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement as expeditiously as
possible, including using efforts to obtain all necessary actions or non-
actions, extensions, waivers, consents and approvals from all applicable
Governmental Entities, effecting all necessary registrations, applications and
filings (including, without limitation, filings under any applicable state
securities laws) and obtaining any required contractual consents and regulatory
approvals.
Section 4.7. Publicity. The initial press release announcing this
---------
Agreement shall be a joint press release and thereafter Harbor and Provident
shall consult with each other prior to issuing any press releases or otherwise
making public statements with respect to the Merger and any other transaction
contemplated hereby and in making any filings with any Governmental Entity or
with any national securities exchange or market with respect thereto; provided,
however, that nothing in this Section 4.7 shall be deemed to prohibit any party
from making any disclosure which its counsel deems necessary in order to satisfy
such party's disclosure obligations imposed by law.
Section 4.8. Stockholder Meeting. Harbor shall take all action
-------------------
necessary, in accordance with applicable law and its articles of incorporation
and bylaws, to convene a meeting of its stockholders (the "Stockholder Meeting")
as promptly as practicable for the purpose of considering and voting on approval
and adoption of the transactions provided for in this Agreement. Except to the
extent legally required for the discharge by the Board of Directors of its
fiduciary duties, Harbor's Board of Directors shall (i) recommend at its
Stockholder Meeting that the Harbor stockholders vote in favor of and approve
the transactions provided for in this Agreement and (ii) use its reasonable best
efforts to solicit such approvals. Harbor shall coordinate and cooperate with
Provident with respect to the timing of the Stockholder Meeting.
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<PAGE>
Section 4.9. Registration of Provident Common Stock.
--------------------------------------
(a) As promptly as reasonably practicable following the date hereof,
Provident and Harbor shall cooperate in preparing a proxy statement-prospectus
relating to the matters to be submitted to the Harbor stockholders at the Harbor
Stockholder Meeting (such proxy statement-prospectus, and any amendments or
supplements thereto, the "Proxy Statement-Prospectus") and Provident shall
prepare and file with the SEC a registration statement on Form S-4 with respect
to the issuance of Provident Common Stock in the Merger (such Form S-4, and any
amendments or supplements thereto, the "Registration Statement"). The Proxy
Statement-Prospectus will be included as a prospectus in and will constitute a
part of the Registration Statement as Provident's prospectus. Each of Provident
and Harbor shall use reasonable best efforts to have the Proxy Statement-
Prospectus cleared by the SEC and the Registration Statement declared effective
by the SEC and to keep the Registration Statement effective as long as is
necessary to consummate the Merger and the transactions contemplated thereby.
Provident and Harbor shall, as promptly as practicable after receipt thereof,
provide the other party copies of any written comments and advise the other
party of any oral comments, with respect to the Proxy Statement-Prospectus or
Registration Statement received from the SEC. The parties shall cooperate and
provide the other with a reasonable opportunity to review and comment on any
amendment or supplement to the Proxy Statement-Prospectus and the Registration
Statement prior to filing such with the SEC, and will provide each other with a
copy of all such filings made with the SEC. Harbor will use reasonable best
efforts to cause the Proxy Statement-Prospectus to be mailed to Harbor's
stockholders as promptly as practicable after the Registration Statement is
declared effective under the Securities Act. Provident will advise Harbor,
promptly after it receives notice thereof, of the time when the Registration
Statement has become effective, the issuance of any stop order, the suspension
of the qualification of the Provident Common Stock issuable in connection with
the Merger for offering or sale in any jurisdiction, or any request by the SEC
for amendment of the Proxy Statement-Prospectus or the Registration Statement.
If at any time prior to the Effective Time any information relating to Provident
or Harbor, or any of their respective affiliates, officers or directors, should
be discovered by Provident or Harbor which should be set forth in an amendment
or supplement to any of the Registration Statement or the Proxy Statement-
Prospectus so that any of such documents would not include any misstatement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, the party which discovers such information shall promptly notify
the other party hereto and, to the extent required by law, rules or regulations,
an appropriate amendment or supplement describing such information shall be
promptly filed with the SEC and disseminated to Harbor's stockholders.
(b) Provident shall also take any action required to be taken under
any applicable state securities laws in connection with the Merger and each of
Harbor and Provident shall furnish all information concerning it and the holders
of Harbor Common Stock as may be reasonably requested in connection with any
such action.
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<PAGE>
(c) Prior to the Effective Time, Provident shall notify the Nasdaq
National Market of the additional shares of Provident Common Stock to be issued
by Provident in exchange for the shares of Harbor Common Stock.
Section 4.10. Affiliate Letters. Harbor shall use its best efforts
-----------------
to cause each director, executive officer and other person who is an "affiliate"
of Harbor under Rule 145 of the Securities Act to deliver to Provident as soon
as practicable and prior to the mailing of the Proxy Statement-Prospectus
executed letter agreements, each substantially in the form attached hereto as
Exhibit B, providing that such person will comply with Rule 145.
---------
Section 4.11. Notification of Certain Matters. Each party shall
-------------------------------
give prompt notice to the other of: (i) any event or notice of, or other
communication relating to, a default or event that, with notice or lapse of time
or both, would become a default, received by it or any of its Subsidiaries
subsequent to the date of this Agreement and prior to the Effective Time, under
any contract material to the financial condition, properties, businesses or
results of operations of each party and its Subsidiaries taken as a whole to
which each party or any Subsidiary is a party or is subject; and (ii) any event,
condition, change or occurrence which individually or in the aggregate has, or
which, so far as reasonably can be foreseen at the time of its occurrence, is
reasonably likely to result in a Material Adverse Effect. Each of Harbor and
Provident shall give prompt notice to the other party of any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with any of the transactions contemplated by
this Agreement.
Section 4.12. Employees, Directors and Officers.
---------------------------------
(a) All persons who are employees of Harbor Federal immediately prior
to the Effective Time and whose employment is not specifically terminated at or
prior to the Effective Time (a "Continuing Employee") shall, at the Effective
Time, become employees of Provident Bank; provided, however, that in no event
shall any of Harbor Federal's employees be officers of Provident Bank, or have
or exercise any power or duty conferred upon such an officer, unless and until
duly elected or appointed to such position in accordance with the bylaws of
Provident Bank. All of the Continuing Employees shall be employed at the will
of Provident Bank and no contractual right to employment shall inure to such
employees because of this Agreement.
(b) As soon as administratively practicable following the Effective
Time, each Continuing Employee shall be eligible to participate in the Provident
Bank 401(k) Plan and Provident Pension Plan with full credit for prior service
with Harbor and Harbor Federal for purposes of eligibility and vesting, but not
for purposes of benefit accruals. As of the Effective Time, Provident shall
make available employer-provided health and other employee welfare benefit plans
to each Continuing Employee on the same basis as it provides such coverage to
Provident employees except that any pre-existing condition, eligibility waiting
period or other limitations or exclusions otherwise applicable under such plans
to new employees shall not apply to a Continuing Employee or their covered
dependents who were covered under a similar Harbor plan on the Effective Date of
the Merger.
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(c) The foregoing subparagraph (b) notwithstanding, Provident agrees
to honor in accordance with their terms all benefits vested as of the Effective
Time under the Harbor Employee Plans and all vested benefits or other vested
amounts earned or accrued through such time under contracts, arrangement
commitments or understandings described in Harbor's Disclosure Letter, including
benefits which vest or are otherwise accrued as a result of the consummation of
the transactions contemplated by this Agreement.
(d) The Harbor Employee Stock Ownership Plan ("Harbor ESOP") shall be
terminated as of, or prior to, the Effective Time. As of the Effective Time,
all shares held by the Harbor ESOP shall be converted into the right to receive
the Merger Consideration. As soon as administratively practicable following the
Effective Time, all outstanding indebtedness of the Harbor ESOP shall be repaid
in full and the balance remaining with respect to unallocated shares previously
held by the Harbor ESOP shall be allocated and distributed to Harbor ESOP
participants as provided in the Harbor ESOP, subject to receipt of a favorable
determination letter from the IRS and unless otherwise required by applicable
law. The Harbor Money Purchase Defined Contribution Pension Plan ("Harbor
Pension Plan") shall be terminated as of, or prior to, the Effective Time and,
subject to receipt of a favorable determination letter from the IRS,
distributions shall be made to participants as provided in the plan.
(e) At the Effective Time, the employees of Harbor shall be eligible
for the payment of bonuses for 2000 pursuant to Harbor's existing bonus program;
provided, however, that the aggregate bonus payments to be made to Harbor's
employees pursuant to this provision shall in no event be greater than the
amount Harbor has accrued for such bonus payments as of the Effective Time, and
Harbor shall accrue no more than $19,000 per month for such bonus payments for
each month beginning January, 2000 through the Effective Time.
Section 4.13. Indemnification.
---------------
(a) From and after the Effective Time through the sixth anniversary
of the Effective Date, Provident agrees to indemnify and hold harmless each
present and former director and officer of Harbor and its Subsidiaries and each
officer or employee of Harbor and its Subsidiaries that is serving or has served
as a director or trustee of another entity expressly at Harbor's request or
direction (each, an "Indemnified Party"), against any costs or expenses
(including reasonable attorneys' fees), judgments, fines, amounts paid in
settlement, losses, claims, damages or liabilities (collectively, "Costs")
incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of matters existing or occurring at or prior to the Effective Time
(including the transactions contemplated by this Agreement), whether asserted or
claimed prior to, at or after the Effective Time, and to advance any such Costs
to each Indemnified Party as they are from time to time incurred, in each case
to the fullest extent such Indemnified Party would have been indemnified as a
director, officer or employee of Harbor and its Subsidiaries and as then
permitted under applicable law.
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<PAGE>
(b) Any Indemnified Party wishing to claim indemnification under
Section 4.13(a), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify Provident thereof, but the failure to so
notify shall not relieve Provident of any liability it may have hereunder to
such Indemnified Party if such failure does not materially and substantially
prejudice Provident. In the event of any such claim, action, suit, proceeding
or investigation, (i) Provident shall have the right to assume the defense
thereof with counsel reasonably acceptable to the Indemnified Party and
Provident shall not be liable to such Indemnified Party for any legal expenses
of other counsel subsequently incurred by such Indemnified Party in connection
with the defense thereof, except that if Provident does not elect to assume such
defense within a reasonable time or counsel for the Indemnified Party at any
time advises that there are issues which raise conflicts of interest between
Provident and the Indemnified Party (and counsel for Provident does not
disagree), the Indemnified Party may retain counsel satisfactory to such
Indemnified Party, and Provident shall remain responsible for the reasonable
fees and expenses of such counsel as set forth above, to be paid promptly as
statements therefor are received; provided, however, that Provident shall be
obligated pursuant to this paragraph (b) to pay for only one firm of counsel for
all Indemnified Parties in any one jurisdiction with respect to any given claim,
action, suit, proceeding or investigation unless the use of one counsel for such
Indemnified Parties would present such counsel with a conflict of interest; (ii)
the Indemnified Party will reasonably cooperate in the defense of any such
matter; and (iii) Provident shall not be liable for any settlement effected by
an Indemnified Party without its prior written consent, which consent may not be
withheld unless such settlement is unreasonable in light of such claims,
actions, suits, proceedings or investigations against, or defenses available to,
such Indemnified Party.
(c) Provident shall pay all reasonable Costs, including attorneys'
fees, that may be incurred by any Indemnified Party in successfully enforcing
the indemnity and other obligations provided for in this Section 4.13 to the
fullest extent permitted under applicable law. The rights of each Indemnified
Party hereunder shall be in addition to any other rights such Indemnified Party
may have under applicable law.
(d) Provident shall maintain Harbor's existing directors' and
officers' liability insurance policy (or provide a policy providing comparable
coverage and amounts on terms no less favorable to the persons currently covered
by Harbor's existing policy, including Provident's existing policy if it meets
the foregoing standard) covering persons who are currently covered by such
insurance for a period of three years after the Effective Time; provided,
however, that in no event shall Provident be obligated to expend, in order to
maintain or provide insurance coverage pursuant to this Section 4.13(d), an
amount per annum in excess of 125% of the amount of the annual premiums paid by
Harbor as of the date hereof for such insurance ("Maximum Insurance Amount");
provided further, that if the amount of the annual premiums necessary to
maintain or procure such insurance coverage exceeds the Maximum Insurance
Amount, Provident shall obtain the most advantageous coverage obtainable for an
annual premium equal to the Maximum Insurance Amount.
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<PAGE>
(e) In the event Provident or any of its successors or assigns (i)
consolidates with or merges into any other person or entity and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers or conveys all or substantially all of its properties and
assets to any person or entity, then, and in each such case, to the extent
necessary, proper provision shall be made so that the successors and assigns of
Provident assume the obligations set forth in this Section 4.13.
(f) The provisions of this Section 4.13 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or her
representatives.
Section 4.14. Dividends. After the date of this Agreement, each
---------
of Harbor and Provident shall coordinate with the other the declaration of any
dividends in respect of Harbor Common Stock and Provident Common Stock and the
record dates and payment dates relating thereto, it being the intention of the
parties hereto that holders of Harbor Common Stock shall not receive two
dividends, or fail to receive one dividend, for any quarter with respect to
their shares of Harbor Common Stock and any shares of Provident Common Stock any
such holder receives in exchange therefor in the Merger.
Section 4.15. Section 16 Matters. Prior to the Effective Time,
------------------
Harbor and Provident shall take all such steps as may be required to cause any
dispositions of Harbor Common Stock (including derivative securities with
respect to Harbor Common Stock) or acquisitions of Provident Common Stock
resulting from the transactions contemplated by this Agreement by each
individual who is subject to the reporting requirements of Section 16(a) of the
Exchange Act with respect to Harbor to be exempt under Rule 16b-3 promulgated
under the Exchange Act. Harbor agrees to promptly furnish Provident with all
requisite information necessary for Provident to take the actions contemplated
by this Section 4.15.
ARTICLE V
Conditions to Consummation
--------------------------
Section 5.1. Conditions to Each Party's Obligations. The respective
--------------------------------------
obligations of each party to effect the Merger shall be subject to the
satisfaction of the following conditions:
(a) Stockholder Approval. This Agreement shall have been approved by
--------------------
the requisite vote of Harbor's stockholders in accordance with applicable laws
and regulations.
(b) Regulatory Approvals. All approvals, consents or waivers of any
--------------------
Governmental Entity required to permit consummation of the transactions
contemplated by this Agreement shall have been obtained and shall remain in full
force and effect, and all statutory waiting periods shall have expired;
provided, however, that none of such approvals, consents or waivers shall
contain any condition or requirement that would so materially and adversely
impact the economic or business benefits to Provident of the transactions
contemplated hereby that, had such condition or requirement been known,
Provident would not, in its reasonable judgment, have entered into this
Agreement.
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<PAGE>
(c) No Injunctions or Restraints; Illegality. No party hereto shall
----------------------------------------
be subject to any order, decree or injunction of a court or agency of competent
jurisdiction that enjoins or prohibits the consummation of the Merger or the
Bank Merger and no Governmental Entity shall have instituted any proceeding for
the purpose of enjoining or prohibiting the consummation of the Merger or the
Bank Merger or any transactions contemplated by this Agreement. No statute,
rule or regulation shall have been enacted, entered, promulgated or enforced by
any Governmental Entity which prohibits, restricts or makes illegal consummation
of the Merger.
(d) Registration Statement; Blue Sky Laws. The Registration
-------------------------------------
Statement shall have been declared effective by the SEC and no proceedings shall
be pending or threatened by the SEC to suspend the effectiveness of the
Registration Statement, and Provident shall have received all required approvals
by state securities or "blue sky" authorities with respect to the transactions
contemplated by this Agreement.
(e) Third Party Consents. Provident and Harbor shall have obtained
--------------------
the consent or approval of each person (other than the governmental approvals or
consents referred to in Section 5.1(b)) whose consent or approval shall be
required to consummate the transactions contemplated by this Agreement, except
those for which failure to obtain such consents and approvals would not,
individually or in the aggregate, have a Material Adverse Effect on Provident
(after giving effect to the consummation of the transactions contemplated
hereby) or upon the consummation of the transactions contemplated hereby.
(f) Tax Opinion. Provident and Harbor shall have received opinions
-----------
of Muldoon, Murphy & Faucette LLP and Stradley Ronon Housley Kantarian &
Bronstein, LLP, respectively, dated as of the Effective Date, in form and
substance customary in transactions of the type contemplated hereby, and
reasonably satisfactory to Harbor and Provident, as the case may be,
substantially to the effect that on the basis of the facts, representations and
assumptions set forth in such opinions which are consistent with the state of
facts existing at the Effective Time, the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the IRC and that accordingly:
(i) No gain or loss will be recognized by Provident or Harbor
as a result of the Merger;
(ii) Except to the extent of any cash received in lieu of a
fractional share interest in Provident Common Stock, no gain or loss will be
recognized by the stockholders of Harbor who exchange their Harbor Common Stock
for Provident Common Stock pursuant to the Merger;
(iii) The tax basis of Provident Common Stock received by
stockholders who exchange their Harbor Common Stock for Provident Common Stock
in the Merger will be the same as the tax basis of Harbor Common Stock
surrendered pursuant to the Merger, reduced by any amount allocable to a
fractional share interest for which cash is received and increased by any gain
recognized on the exchange; and
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<PAGE>
(iv) The holding period of Provident Common Stock received by
each stockholder in the Merger will include the holding period of Harbor Common
Stock exchanged therefor, provided that such stockholder held such Harbor Common
Stock as a capital asset on the Effective Date.
Such opinions may be based on, in addition to the review of such
matters of fact and law as counsel considers appropriate, representations
contained in certificates of officers of Provident, Harbor and others.
Section 5.2. Conditions to the Obligations of Provident. The
------------------------------------------
obligations of Provident to effect the Merger shall be further subject to the
satisfaction of the following additional conditions, any one or more of which
may be waived by Provident:
(a) Representations and Warranties; Performance of Obligations. Each
----------------------------------------------------------
of the obligations of Harbor required to be performed by it at or prior to the
Closing pursuant to the terms of this Agreement shall have been duly performed
and complied with in all material respects and the representations and
warranties of Harbor contained in this Agreement shall be true and correct as of
the date of this Agreement and as of the Effective Time as though made at and as
of the Effective Time (except as to any representation or warranty that
specifically relates to an earlier date), and Provident shall have received a
certificate to the foregoing effect signed by the chief executive officer and
the chief financial or principal accounting officer of Harbor; provided,
however, that for purposes of this paragraph, such representations and
warranties shall be deemed to be true and correct unless the failure or failures
of such representations and warranties to be so true and correct, either
individually or in the aggregate, and without giving effect to any qualification
as to materiality set forth in such representations and warranties, will have a
Material Adverse Effect on Harbor.
(b) Good Standing and Other Certificates. Provident shall have
------------------------------------
received certificates (such certificates to be dated as of a day as close as
practicable to the Closing Date) from appropriate authorities as to the
corporate existence of Harbor and its Subsidiaries and such other documents and
certificates to evidence fulfillment of the conditions set forth in Sections 5.1
and 5.2 as Provident may reasonably require.
(c) Corporate Authorization. All action required to be taken by, or
-----------------------
on the part of, Harbor and Harbor Federal to authorize the execution, delivery
and performance of this Agreement and the consummation by Harbor and Harbor
Federal of the transactions contemplated thereby shall have been duly and
validly taken by the Board of Directors and stockholders of Harbor or Harbor
Federal, as the case may be, and Provident shall have received certified copies
of the resolutions evidencing such authorization.
Section 5.3. Conditions to the Obligations of Harbor. The
---------------------------------------
obligations of Harbor to effect the Merger shall be further subject to the
satisfaction of the following additional conditions, any one or more of which
may be waived by Harbor:
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<PAGE>
(a) Representations and Warranties; Performance of Obligations. Each
----------------------------------------------------------
of the obligations of Provident required to be performed by it at or prior to
the Closing pursuant to the terms of this Agreement shall have been duly
performed and complied with in all material respects and the representations and
warranties of Provident contained in this Agreement shall be true and correct as
of the date of this Agreement and as of the Effective Time as though made at and
as of the Effective Time (except as to any representation or warranty which
specifically relates to an earlier date), and Harbor shall have received a
certificate to the foregoing effect signed by the chief executive officer and
the chief financial or principal accounting officer of Provident; provided,
however, that for purposes of this paragraph, such representations and
warranties shall be deemed to be true and correct unless the failure or failures
of such representations and warranties to be so true and correct, either
individually or in the aggregate, and without giving effect to any qualification
as to materiality set forth in such representations and warranties, will have a
Material Adverse Effect on Provident.
(b) Good Standing and Other Certificates. Harbor shall have received
------------------------------------
certificates (such certificates to be dated as of a day as close as practicable
to the Closing Date) from appropriate authorities as to the corporate existence
of Provident and its Subsidiaries and such other documents and certificates to
evidence fulfillment of the conditions set forth in Sections 5.1 and 5.3 as
Harbor may reasonably require.
(c) Corporate Authorization. All action required to be taken by, or
-----------------------
on the part of, Provident and Provident Bank to authorize the execution,
delivery and performance of this Agreement and the consummation by Provident and
Provident Bank of the transactions contemplated thereby shall have been duly and
validly taken by the Board of Directors and stockholders of Provident or
Provident Bank, as the case may be, and Harbor shall have received certified
copies of the resolutions evidencing such authorization.
(d) Exchange Agent Certificate. The Exchange Agent shall have
--------------------------
delivered to Harbor a certificate dated as of the Effective Date to the effect
that the Exchange Agent has received from Provident due authorization to issue
certificates for the required number of shares of Provident Common Stock to be
issued in connection with the Merger and cash to cover fractional shares.
ARTICLE VI
Termination
-----------
Section 6.1. Termination. This Agreement may be terminated, and
-----------
the Merger abandoned, at any time prior to the Effective Time, either before or
after any requisite stockholder approval:
(a) by the mutual consent of Provident and Harbor in a written
instrument, if the Board of Directors of each so determines by vote of a
majority of the members of its entire Board; or
A-48
<PAGE>
(b) by either the Board of Directors of Provident or Harbor, in the
event of the failure of the stockholders of Harbor to approve the Agreement at
its Stockholder Meeting called to consider such approval; provided, however,
that Harbor shall only be entitled to terminate the Agreement pursuant to this
clause if it has complied in all material respects with its obligations under
Section 4.8; or
(c) by either the Board of Directors of Provident or Harbor, if
either (i) any approval, consent or waiver of a Governmental Entity required to
permit consummation of the transactions contemplated by this Agreement shall
have been denied or (ii) any Governmental Entity of competent jurisdiction shall
have issued a final, unappealable order enjoining or otherwise prohibiting
consummation of the transactions contemplated by this Agreement; or
(d) by either the Board of Directors of Provident or Harbor, in the
event that the Merger is not consummated by December 31, 2000, unless the
failure to so consummate by such time is due to the breach of any
representation, warranty or covenant contained in this Agreement by the party
seeking to terminate; or
(e) by either the Board of Directors of Provident or Harbor (provided
that the party seeking termination is not then in material breach of any
representation, warranty, covenant or other agreement contained herein), in the
event of (i) a failure to perform or comply by the other party with any covenant
or agreement of such other party contained in this Agreement, which failure or
non-compliance is material in the context of the transactions contemplated by
this Agreement, or (ii) any inaccuracies, omissions or breach in the
representations, warranties, covenants or agreements of the other party
contained in this Agreement the circumstances as to which either individually or
in the aggregate have, or reasonably could be expected to have, a Material
Adverse Effect on such other party; in either case which has not been or cannot
be cured within 30 calendar days after written notice thereof is given by the
party seeking to terminate to such other party; or
(f) by the Board of Directors of Provident, if the Board of Directors
of Harbor does not publicly recommend in the Proxy Statement-Prospectus that
Harbor's stockholders approve and adopt this Agreement or if, after recommending
in the Proxy Statement-Prospectus that Harbor's stockholders approve and adopt
this Agreement, the Harbor Board of Directors withdraws, qualifies or revises
such recommendation in any respect materially adverse to Provident; or
(g) By the Board of Directors of Harbor, if it determines by a vote
of a majority of the members of the Board of Directors, at any time during the
five-day period commencing two days after the Determination Date, if both of the
following conditions are satisfied:
(i) The Average Closing Price shall be less than $12.25;
(ii) (A) the quotient obtained by dividing the Average Closing
Price by the Starting Price (such number being referred to herein as the
"Provident Ratio") shall be less
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<PAGE>
than (B) the quotient obtained by dividing the Index Value on the Determination
Date by the Index Value on the Starting Date and subtracting 0.15 from such
quotient (such number being referred to herein as the "Index Ratio");
subject, however, to the following three sentences. If Harbor elects to
exercise its termination right pursuant to this Section 6.1(g), it shall give
prompt written notice to Provident; provided, that such notice of election to
terminate may be withdrawn at any time within the aforementioned five-day
period. During the five-day period commencing with its receipt of such notice,
Provident shall have the option to elect to increase the Exchange Ratio to equal
the lesser of (i) the quotient obtained by dividing (A) the product of $12.25
and the Exchange Ratio (as then in effect) by (B) the Average Closing Price, and
(ii) the quotient obtained by dividing (A) the product of the Index Ratio and
the Exchange Ratio (as then in effect) by (B) the Provident Ratio. If Provident
makes an election contemplated by the preceding sentence, within such five-day
period, it shall give prompt written notice to Harbor of such election and the
revised Exchange Ratio, whereupon no termination shall have occurred pursuant to
this Section 6.1(g) and this Agreement shall remain in effect in accordance with
its terms (except as the Exchange Ratio shall have been so modified), and any
references in this Agreement to the Exchange Ratio shall thereafter be deemed to
refer to the Exchange Ratio as adjusted pursuant to this Section 6.1(g).
For purposed of this Section 6.1(g), the following terms shall have the
meanings indicated:
"Average Closing Price" shall mean the average of the daily last sales
prices of Provident Common Stock as reported on the Nasdaq Stock Market (as
reported in The Wall Street Journal) for the 20 consecutive trading days in
which such shares are trading ending at the close of trading on the
Determination Date.
"Determination Date" shall be the date on which the last approval,
consent or waiver of any Governmental Entity required to permit
consummation of the transactions contemplated by this Agreement is
received, without regard to any requisite waiting period in respect
thereof.
"Index" shall mean the Standard & Poor's Regional Bank Index.
"Index Value" on a given date shall mean the value of the Index.
"Starting Date" shall mean the fourth full trading day after the
announcement by press release of the Merger.
"Starting Price" shall mean the closing price per share of Provident
Common Stock as reported on the Nasdaq Stock Market on the Starting Date.
If Provident declares or effects a stock dividend, reclassification,
recapitalization, split-up, combination or exchange of shares of similar
transaction between the date of this Agreement
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<PAGE>
and the Determination Date, the prices for Provident Common Stock shall be
appropriately adjusted for the purposes of applying this Section 6.1(g).
Section 6.2. Termination Fee. In recognition of the efforts,
---------------
expenses and other opportunities foregone by Provident while structuring the
Merger, the parties hereto agree that:
(a) Harbor shall pay to Provident a termination fee of Seven Hundred
Thousand Dollars ($700,000) plus Provident's documented, reasonable out-of-
pocket expenses (including fees and expenses of legal, financial and accounting
advisors) in cash on demand if, within 12 months after the date of this
Agreement, after a bona fide proposal is made after the date of this Agreement
by a third party to Harbor or its stockholders to engage in an Acquisition
Transaction (as defined in Section 8.1), any of the following occur:
(i) Harbor shall have willfully breached any covenant or
obligation contained in this Agreement and such breach would entitle Provident
to terminate the Agreement;
(ii) the stockholders of Harbor shall not have approved the
Agreement at the Stockholder Meeting, such meeting shall not have been held or
shall have been canceled prior to termination of the Agreement; or
(iii) Harbor's Board of Directors shall have withdrawn or
modified in a manner adverse to Provident the recommendation of Harbor's Board
of Directors with respect to the Agreement; and
(b) Harbor shall pay to Provident a termination fee of One Million
Five Hundred Thousand Dollars ($1,500,000) plus Provident's documented,
reasonable out-of-pocket expenses (including fees and expenses of legal,
financial and accounting advisors) in cash on demand if, during a period of 18
months after the date hereof, Harbor or any of its Subsidiaries, without having
received Provident's prior written consent, shall have entered into an agreement
to engage in an Acquisition Transaction (as defined in Section 8.1) with any
person other than Provident or any of its Subsidiaries or the Board of Directors
of Harbor shall have recommended that the stockholders of Harbor approve or
accept an Acquisition Transaction with any person other than Provident or any of
its Subsidiaries. Any fee payable to Provident pursuant to this Section 6.2(b)
shall be reduced dollar for dollar to the extent that any fee is actually paid
pursuant to Section 6.2(a). Notwithstanding the foregoing, Harbor shall not be
obligated to pay to Provident the termination fee described in Section 6.2(a) or
Section 6.2(b) in the event that at or prior to such time as such fee becomes
payable (i) Provident and Harbor validly terminate this Agreement pursuant to
Section 6.1(a), (ii) Provident or Harbor validly terminates this Agreement
pursuant to Sections 6.1(c) or 6.1(d), or (iii) Harbor validly terminates this
Agreement pursuant to Section 6.1(b) or 6.1(e).
Section 6.3. Effect of Termination. In the event of termination of
---------------------
this Agreement by either Provident or Harbor as provided in Section 6.1, this
Agreement shall forthwith become void and, subject to Section 6.2, have no
effect, and there shall be no liability
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<PAGE>
on the part of any party hereto or their respective officers and directors,
except (i) Section 4.3(d), and Sections 8.6 and 8.7, shall survive any
termination of this Agreement, and (ii) that notwithstanding anything to the
contrary contained in this Agreement, no party shall be relieved or released
from any liabilities or damages arising out of its willful breach of any
provision of this Agreement.
ARTICLE VII
Closing, Effective Date and Effective Time
------------------------------------------
Section 7.1. Effective Date and Effective Time. The closing of the
---------------------------------
transactions contemplated hereby ("Closing") shall take place at the offices of
Muldoon, Murphy & Faucette LLP, 5101 Wisconsin Avenue, N.W., Washington, D.C.
20016, unless another place is agreed to by Provident and Harbor, on a date
specified by the parties ("Closing Date") that is no later than 14 days
following the date on which the expiration of the last applicable waiting period
in connection with notices to and approvals of Governmental Entities shall occur
and all conditions to the consummation of this Agreement are satisfied or waived
(excluding conditions that, by their nature, cannot be satisfied until the
Closing Date) unless extended by mutual agreement of the parties. Prior to the
Closing Date, Provident and Harbor shall execute articles of merger in
accordance with all appropriate legal requirements, which shall be filed as
required by law on the Closing Date, and the Merger provided for therein shall
become effective upon such filing or on such date as may be specified in such
articles of merger. The date of such filing or such later effective date as
specified in the articles of merger is herein referred to as the "Effective
Date." The "Effective Time" of the Merger shall be as set forth in the articles
of merger.
Section 7.2. Deliveries at the Closing. Subject to the provisions
-------------------------
of Articles V and VI, on the Closing Date there shall be delivered to Provident
and Harbor the documents and instruments required to be delivered under Article
V.
ARTICLE VIII
Certain Other Matters
---------------------
Section 8.1. Certain Definitions; Interpretation. For purposes of
-----------------------------------
this Agreement:
"Acquisition Proposal" means any proposal or offer with respect to any
of the following (other than the transactions contemplated hereunder) involving
Harbor or any of its Subsidiaries: (i) any merger, consolidation, share
exchange, business combination, or other similar transaction; (ii) any sale,
lease, exchange, mortgage, pledge, transfer or other disposition of 25% or more
of its consolidated assets in a single transaction or series of transactions;
(iii) any tender offer or exchange offer for 25% or more of the outstanding
shares of its capital stock or the filing of a registration statement under the
Securities Act in connection therewith; or (iv) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing;
A-52
<PAGE>
"Acquisition Transaction" means any of the following (other than the
transactions contemplated hereunder) involving Harbor or any of its
Subsidiaries: (i) any merger, consolidation, share exchange, business
combination, or other similar transaction; (ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 25% or more of its
consolidated assets in a single transaction or series of transactions; or (iii)
any tender offer or exchange offer for 25% or more of the outstanding shares of
its capital stock or the filing of a registration statement under the Securities
Act in connection therewith;
"Bank Merger Act" means the Bank Merger Act, as amended;
"BHC Act" means the Bank Holding Company Act of 1956, as amended;
"CRA" means the Community Reinvestment Act;
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended;
"ERISA Affiliate" means any entity that is considered one employer
with Provident or Harbor, as the case may be, under Section 4001(b)(1) of ERISA
or Section 414 of the IRC;
"Exchange Act" means the Securities Exchange Act of 1934, as amended;
"Excluded Shares" shall consist of shares held directly or indirectly
by Provident (other than shares held in a fiduciary capacity or in satisfaction
of a debt previously contracted);
"FDIA" means the Federal Deposit Insurance Act, as amended;
"FDIC" means the Federal Deposit Insurance Corporation;
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System;
"GAAP" means generally accepted accounting principles;
"Government Regulator" means any federal or state governmental
authority charged with the supervision or regulation of depository institutions
or depository institution holding companies or engaged in the insurance of bank
deposits;
"Governmental Entity" means any court, administrative agency or
commission or other governmental authority or instrumentality;
"Harbor Common Stock" means the common stock, par value $.01 per
share, of Harbor;
A-53
<PAGE>
"HOLA" means the Home Owners' Loan Act, as amended;
"IRC" means the Internal Revenue Code of 1986, as amended;
"IRS" means the Internal Revenue Service;
"knowledge" means, with respect to a party hereto, actual knowledge of
the members of the Board of Directors of that party or any officer of that party
with the title ranking not less than senior vice president;
"Loan" means a loan, lease, advance, credit enhancement, guarantee or
other extension of credit;
"Material Adverse Effect" means an effect which is material and
adverse to the business, financial condition or results of operations of Harbor
or Provident, as the context may dictate, and its Subsidiaries taken as a whole;
provided, however, that any such effect resulting from any (i) changes in laws,
rules or regulations or generally accepted accounting principles or regulatory
accounting requirements or interpretations thereof that apply to both Provident
and Provident Bank and Harbor and Harbor Federal, as the case may be, or to
similarly situated financial and/or depository institutions or (ii) changes in
economic conditions affecting financial institutions generally, including but
not limited to, changes in the general level of market interest rates shall not
be considered in determining if a Material Adverse Effect has occurred;
"NASD" means the National Association of Securities Dealers, Inc.;
"OTS" means the Office of Thrift Supervision;
"person" means an individual, corporation, limited liability company,
partnership, association, trust, unincorporated organization or other entity;
"SEC" means the Securities and Exchange Commission;
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder;
"Subsidiary" means a corporation, partnership, joint venture or other
entity in which Harbor or Provident, as the case may be, has, directly or
indirectly, an equity interest representing 5% or more of any class of the
capital stock thereof or other equity interests therein; and
"taxes" means all income, franchise, gross receipts, real and personal
property, real property transfer and gains, wage and employment taxes.
A-54
<PAGE>
When a reference is made in this Agreement to Sections, Exhibits or
Schedules, such reference shall be to a Section of, Exhibit or Schedule to, this
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for ease of reference only and shall not affect
the meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation." Any singular term in this Agreement
shall be deemed to include the plural, and any plural term the singular. Any
reference to gender in this Agreement shall be deemed to include any other
gender.
Section 8.2. Survival. Only those agreements and covenants of the
--------
parties that are by their terms applicable in whole or in part after the
Effective Time, including Sections 4.12 and 4.13 of this Agreement, shall
survive the Effective Time. All other representations, warranties, agreements
and covenants shall be deemed to be conditions of the Agreement and shall not
survive the Effective Time.
Section 8.3. Waiver; Amendment. Prior to the Effective Time, any
-----------------
provision of this Agreement may be: (i) waived in writing by the party
benefitted by the provision or (ii) amended or modified at any time (including
the structure of the transaction) by an agreement in writing between the parties
hereto except that, after the vote by the stockholders of Harbor, no amendment
or modification may be made that would reduce the amount or alter or change the
kind of consideration to be received by holders of Harbor Common Stock or
contravene any provision of the MGCL or the federal banking laws, rules and
regulations.
Section 8.4. Counterparts. This Agreement may be executed in
------------
counterparts each of which shall be deemed to constitute an original, but all of
which together shall constitute one and the same instrument.
Section 8.5. Governing Law. This Agreement shall be governed by,
-------------
and interpreted in accordance with, the laws of the State of Maryland, without
regard to conflicts of laws principles.
Section 8.6. Expenses. Each party hereto will bear all expenses
--------
incurred by it in connection with this Agreement and the transactions
contemplated hereby, except that expenses incurred in connection with the
filing, printing and mailing of the Proxy Statement-Prospectus and Registration
Statement shall be shared equally by Provident and Harbor.
Section 8.7. Notices. All notices, requests, acknowledgments and
-------
other communications hereunder to a party shall be in writing and shall be
deemed to have been duly given when delivered by hand, overnight courier or
facsimile transmission (confirmed in writing) to such party at its address or
facsimile number set forth below or such other address or facsimile transmission
as such party may specify by notice (in accordance with this provision) to the
other party hereto.
A-55
<PAGE>
If to Provident, to:
Provident Bankshares Corporation
114 East Lexington Street
Baltimore, Maryland 21202
Facsimile: (410) 277-2887
Attention: Robert L. Davis
General Counsel and Corporate Secretary
With copies to:
Paul M. Aguggia, Esq.
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Ave., NW
Washington, DC 20016
Facsimile: (202) 966-9409
If to Harbor, to:
Harbor Federal Bancorp, Inc.
705 York Road
Baltimore, Maryland 21204
Facsimile: (410) 296-0852
Attention: Robert A. Williams
President
With copies to:
Gary R. Bronstein, Esq.
Stradley Ronon Housley Kantarian & Bronstein, LLP
1220 19/th/ Street, N.W., Suite 700
Washington, D.C. 20036
Facsimile: (202) 822-0140
Section 8.8. Entire Agreement; etc. This Agreement, together with
----------------------
the Disclosure Letters, represents the entire understanding of the parties
hereto with reference to the transactions contemplated hereby and supersedes any
and all other oral or written agreements heretofore made. All terms and
provisions of this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
Except for Section 4.12 and 4.13, which confer rights on the parties described
therein, nothing in this Agreement is intended to confer upon any other person
any rights or remedies of any nature whatsoever under or by reason of this
Agreement.
A-56
<PAGE>
Section 8.9. Successors and Assigns; Assignment. This Agreement
----------------------------------
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that this Agreement may
not be assigned by either party hereto without the written consent of the other
party.
A-57
<PAGE>
In Witness Whereof, the parties hereto have caused this Agreement to
be executed by their duly authorized officers as of the 3rd day of May, 2000.
Provident Bankshares Corporation
By: /s/ Peter M. Martin
-------------------
Peter M. Martin
President and Chief Executive Officer
Chairman of the Board,
Harbor Federal Bancorp, Inc.
By: /s/ Robert A. Williams
----------------------
Robert A. Williams
President
A-58
<PAGE>
APPENDIX B
[LETTERHEAD OF TRIDENT SECURITIES]
July 5, 2000
Board of Directors
Harbor Federal Bancorp, Inc.
705 York Road
Baltimore, Maryland 21204
Gentlemen:
You have requested our opinion with respect to the fairness, from a
financial point of view, as of the date hereof, to the holders of the voting and
non-voting common stock, without par value ("Harbor Common"), of Harbor Federal
Bancorp, Inc. ("Harbor"), of the Exchange Ratio, as set forth in Section 1.2. of
the Agreement and Plan of Merger dated as of May 3, 2000 (the "Agreement"),
between Harbor and Provident Bankshares Inc. ("Provident").
The Agreement provides for the merger (the "Merger") of Harbor with and
into Provident, pursuant to which, among other things, at the Effective Time (as
defined in the Agreement), each outstanding share of Harbor Common, other than
any shares held in the treasury of Harbor, will be exchanged for the right to
receive 1.256 shares of the common stock, without par value, of Provident
("Provident Common"), as set forth in Section 1.2 of the Agreement. The terms
and conditions of the Merger are more fully set forth in the Agreement.
Trident Securities, a division of McDonald Investments Inc., as part of its
investment banking business, is customarily engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes.
We have acted as Harbor's financial advisor in connection with, and have
participated in certain negotiations leading to, the Agreement. In connection
with rendering our opinion set forth herein, we have among other things:
(i) Reviewed Harbor's Annual Reports to Shareholders and Annual Reports on
Form 10-K for each of the years ended March 31, 1999, March 31, 1998 and
March 31, 1997, including the audited financial statements contained
therein, and Harbor's Quarterly Report on Form 10-Q for the first, second
and third quarters of 2000;
<PAGE>
Board of Directors
July 5, 2000
Page 2
(ii) Reviewed Provident's Annual Reports to Shareholders and Annual Reports on
Form 10-K for each of the years ended December 31, 1999, December 31,
1998 and December 31, 1997, including the audited financial statements
contained therein.
(iii) Reviewed certain other public and non-public information, primarily
financial in nature, relating to the respective businesses, earnings,
assets and prospects of Harbor and Provident provided to us or publicly
available;
(iv) Participated in meetings and telephone conferences with members of senior
management of Harbor and Provident concerning the financial condition,
business, assets, financial forecasts and prospects of the respective
companies, as well as other matters we believed relevant to our inquiry;
(v) Reviewed certain stock market information for Harbor Common and Provident
Common, and compared it with similar information for certain companies,
the securities of which are publicly traded;
(vi) Compared the results of operations and financial condition of Harbor and
Provident with that of certain companies, which we deemed to be relevant
for purposes of this opinion;
(vii) Reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions, which we deemed to be relevant for
purposes of this opinion;
(viii) Reviewed the Agreement dated May 3, 2000 and certain related documents;
and
(ix) Performed such other reviews and analyses as we have deemed appropriate.
In our review and analysis and in arriving at our opinion, we have
assumed and relied upon the accuracy and completeness of all of the financial
and other information reviewed by us and have relied upon the accuracy and
completeness of the representations, warranties and covenants of Harbor and
Provident contained in the Agreement. We have not been engaged to undertake, and
have not assumed any responsibility for, nor have we conducted, an independent
investigation or verification of such matters. We have not been engaged to and
we have not conducted a physical inspection of any of the assets, properties or
facilities of either Harbor or Provident, nor have we made or obtained or been
furnished with any independent valuation or appraisal of any of such assets,
properties or facilities or any of the liabilities of either Harbor or
Provident. With respect to financial forecasts used in our analysis, we have
prepared such forecasts in consultation with management of Harbor and Provident,
as the case may be, on a basis reflecting the best currently available estimates
and judgments of the management of Harbor and Provident. We have assumed the
merger will be treated as Purchase Accounting for financial reporting purposes.
We have not been engaged to and we have not assumed any responsibility for, nor
have we conducted any independent investigation or verification of such
<PAGE>
Board of Directors
July 5, 2000
Page 3
matters, and we express no view as to such financial forecasts or the
assumptions on which they are based. We have also assumed that all of the
conditions to the consummation of the Merger, as set forth in the Agreement,
including the tax-free treatment of the Merger to the holders of Harbor Common,
would be satisfied and that the Merger would be consummated on a timely basis in
the manner contemplated by the Agreement.
We will receive a fee for our services as financial advisor to Harbor, a
substantial portion of which is contingent upon closing of the Merger. We will
also receive a fee for our services in rendering this opinion. In the past, we
have also provided certain other investment banking services for Harbor and have
received compensation for such services.
In the ordinary course of business, we may actively trade securities of
Harbor and Provident for our own account and for the accounts of customers and
accordingly, we may at any time hold a long or short position in such
securities.
This opinion is based on economic and market conditions and other
circumstances existing on, and information made available as of, the date
hereof. In addition, our opinion is, in any event, limited to the fairness, as
of the date hereof, from a financial point of view, of the Exchange Ratio, to
the holders of Harbor Common, and does not address the underlying business
decision by Harbor's Board of Directors to effect the Merger, does not compare
or discuss the relative merits of any competing proposal or any other terms of
the Merger, and does not constitute a recommendation to any Harbor shareholder
as to how such shareholder should vote with respect to the Merger. This opinion
does not represent an opinion as to what the value of Harbor Common or Provident
Common may be at the Effective Time of the Merger or as to the prospects of
Harbor's business or Provident's business.
This opinion is directed to the Board of Directors of Harbor and may not
be reproduced, summarized, described or referred to or given to any other person
without our prior written consent. Notwithstanding the foregoing, this opinion
may be included in the proxy statement to be mailed to the holders of Harbor
Common in connection with the Merger, provided that this opinion will be
reproduced in such proxy statement in full, and any description of or reference
to us or our actions, or any summary of the opinion in such proxy statement,
will be in a form reasonably acceptable to us and our counsel.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair to the holders of Harbor Common from a
financial point of view.
Very truly yours,
/s/ Trident Securities
Trident Securities, a division of
McDONALD INVESTMENTS INC.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number: 0-24194
HARBOR FEDERAL BANCORP, INC.
--------------------------------------------------------------------------------
(Name of Small Business Issuer as Specified in Its Charter)
Maryland 52-1860591
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
705 York Road, Baltimore, Maryland 21204
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (410) 321-7041
--------------
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period 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 if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $18,801,009.
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock was sold, or
the average bid and asked prices of such stock, as of a specified date within
the past 60 days: $21,482,546 (1,245,365 shares at the most recent price of
which management was aware as of June 1, 2000 ($17.25 per share)).
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 1,664,515 shares of common
stock as of June 1, 2000.
Transitional small business disclosure format (check one): YES NO X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
--------------------------------
GENERAL
Harbor Federal Bancorp, Inc. Harbor Federal Bancorp, Inc. (the "Company")
was incorporated under the laws of the State of Maryland in January 1994 at the
direction of the Board of Directors of the predecessor of Harbor Federal Savings
Bank ("Harbor Federal" or the "Bank") for the purpose of serving as the holding
company of Harbor Federal upon its conversion from mutual to stock form (the
"Conversion"), which was effective August 11, 1994. Before the Conversion, the
Company did not engage in any material operations. Since the Conversion, the
Company has had no significant assets other than the outstanding capital stock
of Harbor Federal, a portion of the net proceeds of the Conversion, investment
securities and a note receivable from the Company's employee stock ownership
plan ("ESOP"), and the Company's principal business has been the business of
Harbor Federal.
The Company is classified as a unitary savings institution holding company
and is subject to regulation by the Office of Thrift Supervision ("OTS"). As
long as the Company remains a unitary savings institution holding company, the
Company currently may diversify its activities in such a manner as to include
any activities allowed by law or regulation to a unitary savings institution
holding company. For additional information, see "Regulation of the Company."
The Company's executive offices are located at 705 York Road, Baltimore,
Maryland 21204, and its main telephone number is (410) 321-7041.
Harbor Federal Savings Bank. Harbor Federal was originally organized in 1887
as "Riverside Permanent Building and Loan Association," a Maryland-chartered
mutual savings institution. In 1941, it converted to a federally chartered
mutual savings and loan association, obtained federal deposit insurance, became
a member of the Federal Home Loan Bank ("FHLB") System and changed its name to
"Riverside Federal Savings and Loan Association." In 1981, Riverside Federal
combined with Highland Federal Savings and Loan Association and changed its name
to "Harbor Federal Savings and Loan Association." Effective August 11, 1994,
Harbor Federal converted from a federally chartered mutual savings and loan
association to a federally chartered stock savings bank and adopted its current
name. Effective February 16, 1996, Harbor Federal acquired from Sequoia National
Bank, Bethesda, Maryland, three branch offices in the Baltimore area with
deposits totaling approximately $44.1 million. Harbor Federal currently operates
through nine banking offices in the City of Baltimore and the Counties of
Baltimore and Anne Arundel in Maryland.
Harbor Federal is primarily engaged in the business of attracting deposits
from the general public and originating loans secured by first mortgages on one-
to four-family residences in Harbor Federal's market area. Harbor Federal also
makes commercial and multi-family real estate loans, construction loans,
commercial business loans and other loans. For additional information, see the
Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results included elsewhere herein.
As a federally chartered savings institution, Harbor Federal is subject to
extensive regulation by the OTS. The lending activities and other investments of
Harbor Federal must comply with various federal regulatory requirements, and the
OTS periodically examines Harbor Federal for compliance with various regulatory
requirements. The Federal Deposit Insurance Corporation ("FDIC") also has the
authority to conduct special examinations. Harbor Federal must file reports with
OTS describing its activities and financial condition and is also subject to
certain reserve requirements promulgated by the Board of Governors of the
Federal Reserve System ("Federal Reserve Board"). For additional information,
see "Regulation of the Bank."
1
<PAGE>
PENDING MERGER
On May 3, 2000, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Provident Bankshares Corporation ("Provident")
pursuant to which the Company will merge with and into Provident (the "Merger").
As a result of the Merger, each outstanding share of Harbor common stock, par
value $0.01 per share ("Harbor Common Stock"), will be converted into the right
to receive 1.256 shares (the "Exchange Ratio") of common stock of Provident, par
value $1.00 per share ("Provident Common Stock"). The Merger is conditioned
upon, among other things, approval by holders of two-thirds of the outstanding
shares of Harbor Common Stock and the receipt of certain regulatory and
governmental approvals. It is currently anticipated that the Merger will close
in the third quarter of 2000.
FINANCIAL MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed legislation which could have
a far-reaching impact on the financial services industry. The Gramm-Leach-Bliley
("G-L-B") Act authorizes affiliations between banking, securities and insurance
firms and authorizes bank holding companies and national banks to engage in a
variety of new financial activities. Among the new activities that will be
permitted to bank holding companies are securities and insurance brokerage,
securities underwriting, insurance underwriting and merchant banking. The Board
of Governors of the Federal Reserve System (the "Federal Reserve Board"), in
consultation with the Secretary of the Treasury, may approve additional
financial activities. The G-L-B Act, however, prohibits future acquisitions of
existing unitary savings and loan holding companies, like the Company, by firms
which are engaged in commercial activities and limits the permissible activities
of unitary holding companies formed after May 4, 1999.
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the
G-L-B Act. The G-L-B Act directs the federal banking agencies, the National
Credit Union Administration, the Secretary of the Treasury, the Securities and
Exchange Commission and the Federal Trade Commission, after consultation with
the National Association of Insurance Commissioners, to promulgate implementing
regulations within six months of enactment.
The G-L-B Act contains significant revisions to the FHLB System. The G-L-B
Act imposes new capital requirements on the FHLB and authorizes them to issue
two classes of stock with differing dividend rates and redemption requirements.
The G-L-B Act deletes the current requirement that the FHLBs annually contribute
$300 million to pay interest on certain government obligations in favor of a 20%
of net earnings formula. The G-L-B Act expands the permissible uses of Federal
Home Loan Bank advances by community financial institutions (under $500 million
in assets) to include funding loans to small businesses, small farms and small
agri-businesses. The G-L-B Act makes membership in the Federal Home Loan Bank
voluntary for federal savings associations.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and
authorizes a federal savings association that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.
2
<PAGE>
LENDING ACTIVITIES
General. Harbor Federal's principal lending activity consists of the
origination of loans secured by first mortgages on existing one- to four-family
residences in Harbor Federal's market area. Harbor Federal also makes commercial
and multi- family real estate loans, construction loans, land loans and other
loans.
Historically, Harbor Federal's residential lending activities consisted
primarily of originating fixed rate mortgage loans with maturities of up to 30
years for retention in the loan portfolio. Since the early 1980s, Harbor Federal
has sought to build a more rate-sensitive loan portfolio by also originating
adjustable rate mortgages. In recent years, management has sought to manage
Harbor Federal's interest rate risk by emphasizing the origination of adjustable
rate mortgage loans and fixed rate mortgage loans with terms of 15 years or
less, as well as by investing in significant amounts of short and medium term
mortgage-backed securities and other investments. In recent periods of both
falling and rising market interest rates, borrowers have tended to prefer longer
term, fixed rate mortgage loans rather than shorter term or adjustable rate
mortgage loans. Prevailing market conditions, regulatory considerations and the
need for a balanced portfolio have necessitated that Harbor Federal continue to
offer fixed rate mortgages. Since Harbor Federal is a portfolio lender (i.e.,
its loans are originated for retention in portfolio rather than for sale in the
secondary market), Harbor Federal's fixed rate loan originations are a function
of the level of interest rate risk that Harbor Federal is willing to accept
given its capital, profitability and other factors.
Loan Portfolio Composition. The following table sets forth selected data
relating to the composition of Harbor Federal's loan portfolio by type of loan
at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
---------------------------------------------------------------------
2000 1999 1998
------------------ ------------------ ------------------
Amount % Amount % Amount %
------ ----- ------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential..................... $128,184 70.78% $114,994 71.20% $118,815 77.23%
Multi-family residential............................ 1,048 .58 900 .56 929 .60
Commercial.......................................... 20,003 11.05 19,784 12.25 16,392 10.66
Construction (1).................................... 19,471 10.75 14,848 9.19 8,296 5.39
Land................................................ 3,032 1.68 3,293 2.04 2,934 1.91
Loans held for sale................................. 2,143 1.18 2,659 1.65 2,756 1.79
Consumer loans:
Savings accounts.................................... 328 .18 290 .18 621 .40
Home equity loans................................... 792 .44 533 .33 456 .30
Other............................................... 1,252 .69 511 .31 224 .15
Commercial business (2)............................... 3,958 2.19 2,907 1.80 1,661 1.08
Accrued interest receivable........................... 876 .48 793 .49 759 .49
--------- ------ -------- ------ -------- ------
181,087 100.00% 161,512 100.00% 153,843 100.00%
====== ====== ======
Less:
Loans in process.................................... 4,951 6,225 4,438
Discounts, deferred loan fees and other............. 986 911 1,014
Allowance for loan losses........................... 474 457 490
-------- -------- --------
Total............................................ $174,676 $153,919 $147,901
======== ======== ========
</TABLE>
---------
(1) Consisted solely of one- to four-family residences under construction at
March 31, 2000, 1999 and 1998, respectively.
(2) Includes financing leases of $1.8 million, $1.4 million and $850,000 at
March 31, 2000, 1999 and 1998, respectively.
3
<PAGE>
The following table sets forth information at March 31, 2000 regarding the
dollar amount of loans maturing in Harbor Federal's portfolio, including
scheduled repayments of principal, based on contractual terms to maturity.
Demand loans and overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
Due within 1 Due 1 through Due after 5
year after 5 years after years after
March 31, March 31, March 31,
2000 2000 2000
------------ ------------- -----------
(In thousands)
<S> <C> <C> <C>
Real Estate:
Residential mortgage (1)........ $12,841 $26,545 $ 92,781
Construction and land........... 6,192 1,337 14,974
Commercial...................... 2,625 6,303 11,075
Non-real estate (2)............... 1,179 1,899 2,460
Accrued interest receivable....... 876 -- --
------- ------- --------
Total......................... $23,713 $36,084 $121,290
======= ======= ========
</TABLE>
--------
(1) Includes both one- to four-family residential and multi-family
residential.
(2) Includes commercial business loans, loans secured by savings accounts, home
improvement loans and financing leases.
The following table sets forth the dollar amount of all loans at March 31,
2000 due one year or more after March 31, 2000 which have predetermined interest
rates and floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rate Adjustable Rates Total
---------- ---------------- -----
(In thousands)
<S> <C> <C> <C>
Real Estate:
Residential mortgage (1)....... $ 88,847 $30,479 $119,326
Construction and land.......... 11,281 5,030 16,311
Commercial..................... 17,052 326 17,378
Non-real estate (2).............. 4,359 -- 4,359
-------- ------- --------
Total........................ $121,539 $35,835 $157,374
======== ======= ========
</TABLE>
--------
(1) Includes both one- to four-family residential and multi-family
residential.
(2) Includes commercial business loans, loans secured by savings accounts, home
improvement loans and financing leases.
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms, due to prepayments. The average
life of mortgage loans tends to increase when current mortgage loan market rates
are substantially higher than rates on existing mortgage loans and tends to
decrease when current mortgage loan market rates are substantially lower than
rates on existing mortgage loans.
4
<PAGE>
Originations, Purchases and Sales of Loans. The following table sets forth
certain information with respect to Harbor Federal's loan originations,
purchases and sales during the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------
2000 1999 1998
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
One- to four-family.................... $ 18,514 $ 17,396 $ 12,806
Land................................... 1,065 1,250 2,423
Commercial............................. 2,136 2,536 4,350
Construction........................... 20,859 19,256 14,405
Commercial business...................... -- 368 --
-------- -------- --------
Total loans originated................. 42,574 40,806 33,984
Loan repayments.......................... (25,598) (35,523) (28,253)
-------- -------- --------
Net loan originations.................. $ 16,976 $ 5,283 $ 5,731
======== ======== ========
Loans purchased:
Real estate loans:
One- to four-family.................... $ 644 $ 160 $ 1,355
Land................................... 225 -- --
Commercial............................. 3,112 781 750
-------- -------- --------
Total loans purchased................ $ 3,981 $ 941 $ 2,105
======== ======== ========
Loans sold:
Real estate loans:
One- to four-family.................... $ -- $ 1,017 $ 4,803
======== ======== ========
</TABLE>
In June 1997, Harbor Federal formed a mortgage company, Bank Street
Mortgage Company to provide additional one- to four- family loan production. Due
to the decline in demand for one- to four-family and construction real estate
loans, the Bank decided to close the mortgage company in September 1999. For
additional information regarding Harbor Federal's commercial real estate
lending, see "Commercial and Multi-Family Real Estate Lending" below.
One- to Four-Family Residential Lending. Historically, Harbor Federal's
principal lending activity has been the origination of loans secured by first
mortgages on existing one- to four-family residences in Harbor Federal's market
area. Harbor Federal also originates significant amounts of loans for the
construction of such residences. The purchase price or appraised value of most
of such residences historically has been between $50,000 and $300,000, with
Harbor Federal's loan amounts averaging less than $150,000. At March 31, 2000,
$131.1 million, or 72.4%, of Harbor Federal's total loans were secured by one-to
four-family residences, a substantial majority of which were existing, owner-
occupied, single-family residences in Harbor Federal's market area. At March 31,
2000, $46.9 million, or 35.7%, of Harbor Federal's one- to four-family
residential loans had adjustable interest rates, and $84.2 million, or 64.3%,
had fixed rates.
Harbor Federal's one- to four-family residential mortgage loans generally
are for terms of 5 to 30 years, amortized on a monthly basis, with principal and
interest due each month. Residential real estate loans often remain outstanding
for significantly shorter periods than their contractual terms. Borrowers may
refinance or prepay loans at their option without penalty. These loans
customarily contain "due-on-sale" clauses which permit Harbor Federal to
accelerate repayment of a loan upon transfer of ownership of the mortgaged
property.
5
<PAGE>
Harbor Federal's lending policies generally limit the maximum loan-to-value
ratio on one- to four-family residential mortgage loans secured by owner-
occupied properties to 95% of the lesser of the appraised value or purchase
price, with private mortgage insurance required on loans with loan-to-value
ratios in excess of 80%. The maximum loan-to-value ratio on mortgage loans
secured by non-owner-occupied properties is limited to 90%.
Harbor Federal's fixed rate, one- to four-family residential mortgage loans
are underwritten in accordance with applicable guidelines and requirements for
sale in the secondary market. Harbor Federal currently originates and holds most
loans for portfolio.
Harbor Federal offers adjustable rate, one- to four-family residential
mortgage loans. These loans generally are indexed to the weekly average rate on
U.S. Treasury securities adjusted to a constant maturity (usually, one year).
The rates at which interest accrues on these loans are adjustable periodically
(usually, annually), generally with limitations on adjustments of 2% per
adjustment period and 6% over the life of the loan. Some of Harbor Federal's
adjustable rate mortgage loans have an initial term of five to seven years
before the first interest rate adjustment, with annual rate adjustments
thereafter.
The retention of adjustable rate loans in Harbor Federal's portfolio helps
reduce Harbor Federal's exposure to increases in prevailing market interest
rates. However, there are unquantifiable credit risks resulting from potential
increases in costs to borrowers in the event of upward repricing of adjustable
rate loans. It is possible that during periods of rising interest rates, the
risk of default on adjustable rate loans may increase due to increases in
interest costs to borrowers. Further, adjustable rate loans which provide for
initial rates of interest below the fully indexed rates may be subject to
increased risk of delinquency or default as the higher, fully indexed rate of
interest subsequently replaces the lower, initial rate. Further, although
adjustable rate loans allow Harbor Federal to increase the sensitivity of its
interest-earning assets to changes in interest rates, the extent of this
interest sensitivity is limited by the initial fixed rate period before the
first adjustment and the periodic and lifetime interest rate adjustment
limitations and the ability of borrowers to convert the loans to fixed rates.
Accordingly, there can be no assurance that yields on Harbor Federal's
adjustable rate loans will fully adjust to compensate for increases in Harbor
Federal's cost of funds. Finally, adjustable rate loans increase Harbor
Federal's exposure to decreases in prevailing market interest rates, although
decreases in Harbor Federal's cost of funds tend to offset this effect.
Construction and Land Lending. Harbor Federal offers single-family
residential construction loans to qualified borrowers for construction of one-to
four-family residences in Harbor Federal's market area. At March 31, 2000, one-
to four- family residential construction loans constituted $19.5 million, or
10.8%, of Harbor Federal's total loans. Typically, Harbor Federal limits its
construction lending to single-settlement, construction-permanent loans to
individuals building their primary residences and, to a lesser extent, interim
construction loans to selected local developers to build single-family dwellings
where a permanent purchase commitment has been obtained. These loans generally
have adjustable interest rates and are underwritten in accordance with the same
standards as Harbor Federal's mortgages on existing properties, except the loans
generally provide for disbursement in stages during a construction period of up
to 12 months, during which period the borrower is required to make monthly
payments of accrued interest on the outstanding loan balance. Construction loans
generally have a maximum loan-to-value ratio of 90%. Borrowers must satisfy all
credit requirements which would apply to Harbor Federal's permanent mortgage
loan financing for the subject property. While Harbor Federal's construction-
permanent construction loans convert to permanent loans following construction,
Harbor Federal's interim construction loans generally require repayment in full
upon the completion of construction.
Harbor Federal also offers loans for the acquisition and development of
land. At March 31, 2000, land acquisition and development loans constituted $3.0
million, or 1.7%, of Harbor Federal's total loans. These loans are made on a
selective basis to borrowers which management believes have the requisite
experience in land development and financial strength to ensure repayment. These
loans also are made in limited amounts, usually not in excess of 65% of the
appraised value of the property. These loans generally provide for payments of
only interest during development, and the maximum loan amount and term on these
loans generally are $2,000,000 and 36 months, respectively.
6
<PAGE>
Construction and land financing are considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction or land loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of development or
construction and the estimated cost (including interest) thereof. During the
development and construction phases, a number of factors could result in delays
and cost overruns. If the estimate of development or construction costs proves
to be inaccurate, Harbor Federal may be required to advance funds beyond the
amount originally committed to permit completion of the project. If the estimate
of value proves to be inaccurate, Harbor Federal may be confronted, at or prior
to the maturity of the loan, with a project having a value which is insufficient
to assure full repayment. The ability of a developer to sell developed lots or a
builder to sell completed dwelling units will depend on, among other things,
demand, pricing, availability of comparable properties and economic conditions.
Harbor Federal has sought to limit this risk by restricting construction and
land lending to qualified borrowers in Harbor Federal's market area and by
restricting the aggregate amounts of outstanding construction and land loans.
Commercial and Multi-Family Real Estate Lending. Harbor Federal originates
limited amounts of commercial and multi- family real estate loans in order to
benefit from the higher origination fees and interest rates, as well as shorter
terms to maturity, than could be obtained from single-family mortgage loans.
Harbor Federal's commercial and multi-family real estate loans are secured by
apartments, offices, warehouses, shopping centers and other income-producing
multi-family and commercial properties. At March 31, 2000, Harbor Federal had 85
of these loans, with a median loan balance of $254,000.
Harbor Federal's commercial and multi-family real estate loans generally
are limited to loans not exceeding $1,000,000 on properties in Harbor Federal's
market area, with amortization periods and maturities of up to 30 years. These
loans generally have annually adjustable interest rates, with limitations on
adjustments of 2% per year, and maximum loan-to-value ratios of 80%.
Commercial and multi-family real estate lending entails significant
additional risks compared with one- to four-family residential lending. For
example, commercial and multi-family real estate loans typically involve large
loan balances to single borrowers or groups of related borrowers, the payment
experience on such loans typically is dependent on the successful operation of
the real estate project, and these risks can be significantly impacted by supply
and demand conditions in the market for multi-family residential units and
commercial office, retail and warehouse space.
The aggregate amount of loans which federally chartered savings
institutions may make on the security of liens on commercial real estate
currently may not exceed 400% of the institution's capital; however, the limits
on commercial real estate lending do not require divestiture of any loan or
investment that was lawful when made.
Commercial Business Lending. Harbor Federal is permitted to make secured
and unsecured loans for commercial, corporate, business and agricultural
purposes, including issuing letters of credit and engaging in inventory
financing and commercial leasing activities. The aggregate outstanding amount of
such loans generally may not exceed 10% of Harbor Federal's assets. Harbor
Federal offers commercial business loans on a selected basis and in limited
amounts. At March 31, 2000, Harbor Federal's commercial business loans totaled
$4.0 million and primarily consisted of line of credit loans to developers and
nine term loans to seven leasing companies. There are twelve direct line of
credit loans with local developers of up to $2.7 million in the aggregate, each
secured by personal guarantee of the respective borrower. At March 31, 2000, the
total outstanding balance of these loans was $2.2 million, and all of these
loans were performing in accordance with their respective terms. In addition,
loans to the leasing companies with an aggregate original balance of $2.3
million have an aggregate outstanding balance at March 31, 2000 of $1.8 million
and were fully performing in accordance with their terms.
Commercial business loans, including finance leases, generally involve more
risk than first mortgage loans. Repossessed collateral for a defaulted loan may
not provide an adequate source of repayment of the outstanding credit obligation
as a result of damage, loss or depreciation, and the remaining deficiency often
does not warrant further
7
<PAGE>
substantial collection efforts against the obligor. In addition, collections are
dependent on the obligor's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Further, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered. These financings may also give rise to claims and
defenses by an obligor against Harbor Federal, and an obligor may be able to
assert against Harbor Federal claims and defenses which it has against the
seller of the underlying collateral. In underwriting commercial business loans,
Harbor Federal considers the obligor's credit history, an analysis of the
obligor's income, expenses and ability to repay the obligation and the value of
the collateral. Harbor Federal's risks associated with commercial business loans
have been minimized by the immaterial amount of such loans made by Harbor
Federal.
Consumer Lending. Federally chartered thrift institutions are authorized to
make secured and unsecured consumer loans up to 35% of the institution's assets.
In addition, a federal thrift institution has lending authority above the 35%
category for certain consumer loans, such as home equity loans, property
improvement loans, mobile home loans and loans secured by savings accounts.
Harbor Federal currently does not emphasize consumer lending.
Loan Solicitation and Processing. Harbor Federal's loan originations are
derived from a number of sources, including referrals by realtors, builders,
depositors, borrowers and mortgage brokers, as well as walk-in customers. Harbor
Federal's solicitation programs consist of regular calls by Harbor Federal's
branch managers and loan officers to local realtors and builders and
advertisements in local newspapers and radio and television broadcasts. Real
estate loans are originated by Harbor Federal's salaried staff loan officers as
well as Harbor Federal's branch managers who also receive only salaries. Loan
applications are accepted at each of Harbor Federal's offices and then submitted
to the main office for processing and approval. Loans made through brokers are
underwritten by Harbor Federal prior to settlement and are funded by Harbor
Federal.
Upon receipt of a loan application from a prospective borrower, a credit
report and verifications are ordered to verify specific information relating to
the loan applicant's employment, income and credit standing. It is Harbor
Federal's policy to obtain an appraisal of the real estate intended to secure a
proposed mortgage loan from an independent fee appraiser approved by Harbor
Federal. It is Harbor Federal's policy to obtain personal guarantees from the
principals on all loans. Except when Harbor Federal becomes aware of a
particular risk of environmental contamination, Harbor Federal generally does
not obtain a formal environmental report on the real estate at the time a loan
is made.
It is Harbor Federal's policy to record a lien on the real estate securing
the loan and to obtain a title insurance policy which insures that the property
is free of prior encumbrances. Borrowers must also obtain hazard insurance
policies prior to closing and, when the property is in a designated flood plain,
paid flood insurance policies. Most borrowers are also required to advance funds
on a monthly basis together with each payment of principal and interest to a
mortgage escrow account from which Harbor Federal makes disbursements for items
such as real estate taxes.
The Board of Directors has the overall responsibility and authority for
general supervision of Harbor Federal's loan policies. The Board has established
written lending policies for Harbor Federal. One- to four-family real estate
loans are generally underwritten in accordance with FHLMC guidelines. The Board
approves all commercial business and acquisition, development and construction
loans and all loans over $500,000, the President is authorized to approve loans
up to $500,000, the Executive Vice President is authorized to approve loans up
to $350,000, and Harbor Federal's branch managers are authorized to approve
share loans up to 90% of a borrower's deposit balance.
Loan applicants are promptly notified of the decision of Harbor Federal. It
has been management's experience that substantially all approved loans are
funded.
Interest Rates and Loan Fees. Interest rates charged by Harbor Federal on
mortgage loans are primarily determined by competitive loan rates offered in its
market area and Harbor Federal's minimum yield requirements. Mortgage loan rates
reflect factors such as prevailing market interest rate levels, the supply of
money available to the
8
<PAGE>
savings industry and the demand for such loans. These factors are in turn
affected by general economic conditions, the monetary policies of the federal
government, including the Federal Reserve Board, the general supply of money in
the economy, tax policies and governmental budget matters.
Harbor Federal receives fees in connection with loan commitments and
originations, loan modifications, late payments and changes of property
ownership and for miscellaneous services related to its loans. Income from these
activities varies from period to period with the volume and type of loans
originated, sold and purchased, which in turn is dependent on prevailing market
interest rates and their effect on the demand for loans in Harbor Federal's
market area. Loan origination fees are calculated as a percentage of the loan
principal. Harbor Federal typically receives fees of between zero and two points
(one point being equivalent to 1% of the principal amount of the loan) in
connection with the origination of fixed rate and adjustable rate residential
mortgage loans. The excess, if any, of loan origination fees over direct loan
origination expenses is deferred and accreted into income over the contractual
life of the loan using the interest method. If a loan is prepaid, refinanced or
sold, all remaining deferred fees with respect to such loan are taken into
income at such time.
In addition to the foregoing fees, Harbor Federal receives fees for
servicing loans for others. Servicing activities include the collection and
processing of mortgage payments, accounting for loan funds and paying real
estate taxes, hazard insurance and other loan-related expenses out of escrowed
funds. Loan servicing fees usually are charged as a percentage (usually, between
1/4% and 3/8%) of the balance of the loans being serviced.
Collection Policies. When a borrower fails to make a payment on a loan,
Harbor Federal generally takes immediate steps to have the delinquency cured and
the loan restored to current status. Once the payment grace period has expired
(in most instances 15 days after the due date), a late notice is promptly mailed
to the borrower, and a late charge is imposed, if applicable. If payment is not
promptly received, the borrower is contacted, and efforts are made to formulate
an affirmative plan to cure the delinquency. If a loan becomes 30 days in
default, a letter is mailed to the borrower requesting payment by a specified
date. If a mortgage becomes 60 days past due, a certified letter is sent to the
borrower demanding payment by a certain date and indicating that a foreclosure
suit will be filed if the deadline is not met. If payment is not made,
management may pursue foreclosure or other appropriate action. Before
foreclosure, it is Harbor Federal's policy to conduct an informal inspection of
the subject property and, when warranted, to obtain an appropriate environmental
report.
Asset Classification, Allowances for Losses and Non-Performing Assets.
Federal regulations require savings institutions to classify their assets on the
basis of quality on a regular basis. An asset is classified as substandard if it
is determined to be inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. An asset is
classified as doubtful if full collection is highly questionable or improbable.
An asset is classified as loss if it is considered uncollectible, even if a
partial recovery could be expected in the future. The regulations also provide
for a special mention designation, described as assets which do not currently
expose a savings institution to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention. Assets classified as substandard or
doubtful require a savings institution to establish general allowances for loan
losses. If an asset or portion thereof is classified loss, a savings institution
must either establish a specific allowance for loss in the amount of the portion
of the asset classified loss, or charge off such amount. Federal examiners may
disagree with a savings institution's classifications. If a savings institution
does not agree with an examiner's classification of an asset, it may appeal this
determination to the OTS Regional Director. Harbor Federal regularly reviews its
assets to determine whether any assets require classification or re-
classification. The Board of Directors reviews and approves all classifications.
At March 31, 2000, Harbor Federal had no assets classified as loss, $415,000 of
assets classified as doubtful, $122,000 of assets classified as substandard and
$409,000 of assets designated as special mention. Harbor Federal's total
adversely classified and designated assets were $946,000, which represented
0.37% of Harbor Federal's total assets and 5.3% of Harbor Federal's core
regulatory capital, at March 31, 2000. At that date, substantially all of Harbor
Federal's adversely classified or designated assets were one- to four-family
residences in Harbor Federal's market area, and none of such assets was in
excess of $300,000.
9
<PAGE>
In extending credit, Harbor Federal recognizes that losses will occur and
that the risk of loss will vary with, among other things, the type of credit
being extended, the creditworthiness of the obligor over the term of the
obligation, general economic conditions and, in the case of a secured
obligation, the quality of the security. It is management's policy to maintain
adequate allowances for losses based on, among other things, regular reviews of
delinquencies and credit portfolio quality, character and size, Harbor Federal's
and the industry's historical and projected loss experience and current economic
conditions. Harbor Federal increases its allowance for loan losses by charging
provisions for losses against income. Federal examiners may disagree with a
savings institution's allowance for loan losses.
Management actively monitors Harbor Federal's asset quality and charges off
loans and properties acquired in settlement of loans against the allowances for
losses on such loans and such properties when appropriate and provides specific
loss allowances when necessary. Although management believes it uses the best
information available to make determinations with respect to the allowances for
losses, future adjustments may be necessary if economic or other conditions
differ substantially from the assumptions used in making the initial
determinations.
Harbor Federal's methodology for establishing the allowance for losses
takes into consideration probable losses that have been identified in connection
with specific assets as well as losses that have not been identified but can be
expected to occur. Management conducts regular reviews of Harbor Federal's
assets and evaluates the need to establish allowances on the basis of this
review. Allowances are established by the Board of Directors on a monthly basis
based on an assessment of risk in Harbor Federal's assets taking into
consideration the composition and quality of the portfolio, delinquency trends,
current charge-off and loss experience, the state of the real estate market,
regulatory reviews conducted in the regulatory examination process and economic
conditions generally. Allowances are provided for individual assets, or portions
of assets, when ultimate collection is considered improbable by management based
on the current payment status of the assets and the fair value of the security.
At the date of foreclosure or other repossession, Harbor Federal transfers the
property to real estate acquired in settlement of loans at the lower of cost or
estimated fair value less costs to sell. Fair value is defined as the amount in
cash or cash-equivalent value of other consideration that a property would yield
in a current sale between a willing buyer and a willing seller. Fair value is
measured by market transactions. If a market does not exist, fair value of the
property is estimated based on selling prices of similar properties in active
markets or, if there are no active markets for similar properties, by
discounting a forecast of expected cash flows at a rate commensurate with the
risk involved. Fair value generally is determined through independent appraisal
at the time of foreclosure. At March 31, 2000, Harbor Federal held no properties
acquired in settlement of loans for which market prices were unavailable. Any
amount of cost in excess of fair value is charged-off against the allowance for
loan losses. Harbor Federal records an allowance for estimated selling costs of
the property immediately after foreclosure. Subsequent to acquisition, the
property is periodically evaluated by management and an allowance is established
if the estimated fair value of the property, less estimated costs to sell,
declines. If, upon ultimate disposition of the property, net sales proceeds
exceed the net carrying value of the property, a gain on sale of real estate is
recorded.
The OTS has adopted a policy statement regarding maintenance of an adequate
allowance for loan and lease losses and an effective loan review system. This
policy includes an arithmetic formula for checking the reasonableness of an
institution's allowance for loan loss estimate compared to the average loss
experience of the industry as a whole. Examiners will review an institution's
allowance for loan losses and compare it against the sum of (i) 50% of the
portfolio that is classified doubtful; (ii) 15% of the portfolio that is
classified as substandard; and (iii) for the portions of the portfolio that have
not been classified (including those loans designated as special mention),
estimated credit losses over the upcoming twelve months given the facts and
circumstances as of the evaluation date. This amount is considered neither a
"floor" nor a "safe harbor" of the level of allowance for loan losses an
institution should maintain, but examiners will view a shortfall relative to the
amount as an indication that they should review management's policy on
allocating these allowances to determine whether it is reasonable based on all
relevant factors.
10
<PAGE>
The following table sets forth an analysis of Harbor Federal's allowance
for loan losses (there were no recoveries) for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
2000 1999 1998
----- ------ ------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of period............. $ 457 $ 490 $ 380
----- ----- -----
Charge-offs:
Real estate - mortgage................... 48 108 --
Commercial business...................... -- -- --
----- ----- -----
Total charge-offs...................... 48 108 --
----- ----- -----
Provision for loan losses.................. 65 75 110
----- ----- -----
Balance at end of period................... $ 474 $ 457 $ 490
===== ===== =====
Ratio of net charge-offs to average loans
outstanding during the period............ 0.03% 0.07% 0.00%
===== ===== =====
</TABLE>
The following table allocates the allowance for loan losses by asset
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------------------------------------
2000 1999 1998
----------------------- ----------------------- ----------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ -------------- ------ --------------- ------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Residential............................ $257 72.52% $290 71.76% $ 265 77.83%
Construction........................... 50 10.75 -- 9.51 50 5.72
Commercial............................. 150 11.05 150 11.93 175 10.33
Commercial business...................... 17 2.19 17 .88 -- 1.08
---- ---- -----
Total allowance for loan losses.......... $474 $457 $ 490
==== ==== =====
</TABLE>
While management believes Harbor Federal has established its existing loss
allowances in accordance with generally accepted accounting principles, there
can be no assurance that regulators, in reviewing Harbor Federal's assets, will
not make Harbor Federal adjust its loss allowance, thereby affecting Harbor
Federal's reported financial condition and results of operations.
Harbor Federal ceases accruing interest on a loan when, in the opinion of
management, full collection of principal or interest is in doubt, or payment of
principal or interest has become 90 days or more past due. Interest accrued
prior to a loan becoming 90 days past due is retained in income. Such interest
is considered as part of the total investment in determining the need for an
allowance for losses. Any interest received in excess of the amount previously
accrued on such a loan is recorded in income in the period of recovery.
11
<PAGE>
The following table sets forth information with respect to Harbor Federal's
non-performing assets at the dates indicated. At these dates, Harbor Federal did
not have any restructured loans within the meaning of Statement of Financial
Accounting Standards No. 15.
<TABLE>
<CAPTION>
At March 31,
--------------------------
2000 1999 1998
------ ------ -------
(In thousands)
<S> <C> <C> <C>
Loans accounted for on a non-accrual
basis:
Real Estate:
Residential..................... $ 559 $ 986 $ 975
===== ===== =====
Percentage of non-performing loans
to total loans.................. 0.32% 0.64% 0.66%
===== ===== =====
Other non-performing assets (1)... $ 74 $ 447 $ --
===== ===== =====
Percentage of non-performing
assets to total assets.......... 0.22% 0.41% 0.42%
===== ===== =====
</TABLE>
------------
(1) Other non-performing assets represents property acquired by Harbor Federal
through foreclosure of repossession. The property is carried at the lower
of its fair market value less costs to sell or the principal balance of the
related loan.
During the year ended March 31, 2000, gross interest income of $41,000
would have been recorded on loans accounted for on a non-accrual basis if the
loans had been current throughout the year. Interest on such loans included in
income during the year amounted to $29,000. At March 31, 2000, management had
identified approximately $387,000 of loans which were not reflected in the
preceding table but as to which known information about possible credit problems
of borrowers caused management to have doubts as to the ability of the borrowers
to comply with present loan repayment terms, and all of such loans were
classified as substandard, doubtful or loss or designated as special mention.
This group comprised six loans, all of which had balances below $150,000, and
substantially all of which were secured by one- to four-family residences.
Management does not expect Harbor Federal to experience any material loss on
these loans in the future.
MORTGAGE-BACKED SECURITIES
Harbor Federal maintains a significant portfolio of mortgage-backed
securities in the form of FHLMC, GNMA and FNMA participation certificates. FNMA
and FHLMC certificates are each guaranteed by their respective agencies as to
principal and interest, and GNMA certificates are backed by the full faith and
credit of the U.S. Government. Mortgage-backed securities generally entitle
Harbor Federal to receive a pro rata portion of the cash flows from an
identified pool of mortgages. Although mortgage-backed securities generally
yield less than the loans which are exchanged for such securities, they present
substantially lower credit risk, they are more liquid than individual mortgage
loans, and they may be used to collateralize obligations of Harbor Federal.
The following table sets forth information regarding Harbor Federal's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
--------------------------
2000 1999 1998
------ ------ -------
(In thousands)
<S> <C> <C> <C>
FHLMC........................ $ 1,537 $ 2,215 $ 3,949
GNMA......................... 8,213 10,757 15,310
FNMA......................... 807 1,097 1,747
------- ------- -------
Total.................... $10,557 $14,069 $21,006
======= ======= =======
</TABLE>
12
<PAGE>
The following table sets forth information regarding the scheduled
maturities, amortized cost, market value and weighted average yields for Harbor
Federal's mortgage-backed securities at March 31, 2000. Expected maturities will
differ from contractual maturities due to scheduled repayments and because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties. The following table does not take into consideration the
effects of scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
One to Five Years More Than Five Years Total Portfolio
--------------------- -------------------- ---------------------------
Carrying Average Carrying Average Carrying Fair Average
Value Yield Value Yield Value Value Yield
-------- ------- -------- --------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
FHLMC............... $ 3 10.00% $ 1,534 7.37% $ 1,537 $ 1,544 7.38%
GNMA................ -- -- 8,213 7.51 8,213 8,235 7.51
FNMA................ 330 6.16 477 9.18 807 820 7.94
----- ------- ------- -------
Total........... $ 333 $10,244 $10,557 $10,599
===== ======= ======= =======
</TABLE>
For additional information, see the Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 3 of the Notes to
Consolidated Financial Statements included elsewhere herein.
INVESTMENT ACTIVITIES
Harbor Federal is permitted under federal law to make certain investments,
including investments in securities issued by various federal agencies and state
and municipal governments, deposits at the FHLB of Atlanta, certificates of
deposits in federally insured institutions, certain bankers' acceptances and
federal funds. Harbor Federal may also invest, subject to certain limitations,
in commercial paper having one of the two highest investment ratings of a
nationally recognized credit rating agency, and certain other types of corporate
debt securities and mutual funds. Federal regulations require Harbor Federal to
maintain an investment in FHLB of Atlanta stock and a minimum amount of liquid
assets which may be invested in cash and specified securities. From time to
time, the OTS adjusts the percentage of liquid assets which savings associations
are required to maintain. For additional information, see "Regulation of the
Bank."
Harbor Federal invests in investment securities in order to diversify its
assets, manage cash flow, obtain yield and maintain the minimum levels of liquid
assets required by regulatory authorities. Such investments generally include
federal funds, securities purchased for short terms under repurchase agreements,
federal government and agency obligations, investment grade corporate bonds and
notes and qualified deposits in other financial institutions. Investment
decisions generally are made by the Chief Executive Officer and ratified by the
Board of Directors.
Since February 1996, Harbor Federal has placed all purchased U.S.
government or agency obligations in the "available for sale" category to remain
more flexible for investment purposes. These securities and the investment in
FHLMC preferred stock at March 31, 2000 had an aggregate carrying value of $57.6
million.
13
<PAGE>
The following table sets forth information regarding Harbor Federal's
investment securities and other investments at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
---------------------------
2000 1999 1998
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Investment securities:
U.S. government and agency
obligations...................... $48,901 $50,372 $50,821
Trust preferred securities........ 8,403 8,640 --
FHLMC preferred stock............. 345 447 370
------- ------- -------
Total investment securities..... 57,649 59,459 51,191
Federal funds sold.................. 699 2,545 313
Interest-earning deposits........... 84 114 174
FHLB stock.......................... 2,200 1,434 1,434
------- ------- -------
Total........................... $60,632 $63,552 $53,112
======= ======= =======
</TABLE>
14
<PAGE>
The following table sets forth information regarding the scheduled
maturities, market value and weighted average yields for Harbor Federal's
investment securities and certain other investments at March 31, 2000.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years
------------------- -------------------- ---------------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
--------- -------- --------- -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and
agency obligations.......... $ -- --% $ -- --% $2,842 6.68%
Trust preferred securities... 488 6.77 -- -- -- --
FHLMC preferred stock........ 345 1.54 -- -- -- --
------ ------ ------
Total investment securities. 833 -- 2,842
Federal funds sold............. 699 6.25 -- -- -- --
Interest-earning deposits...... 84 6.29 -- -- -- --
FHLB stock..................... 2,200 7.75 -- -- -- --
------ ------ ------
Total...................... $3,816 $ -- $2,842
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
More than Ten Years Total Investment Portfolio
------------------- -----------------------------
Carrying Average Carrying Market Average
Value Yield Value Value Yield
--------- ------- --------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and
agency obligations.......... $46,059 6.79% $48,901 $48,901 6.78%
Trust preferred securities... 7,915 8.84 8,403 8,403 8.74
FHLMC preferred stock........ -- -- 345 345 1.54
------- ------- -------
Total investment securities. 53,974 57,649 57,649
Federal funds sold............. -- -- 699 699 6.25
Interest-earning deposits...... -- -- 84 84 6.29
FHLB stock..................... -- -- 2,200 2,200 7.75
------- ------- -------
Total...................... $53,974 $60,632 $60,632
======= ======= =======
</TABLE>
For additional information, see the Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 2 of the Notes to
Consolidated Financial Statements included elsewhere herein. At March 31, 2000,
all investment securities include provisions which allow the issuers to call
them under certain terms and conditions at par value.
15
<PAGE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of Harbor Federal's funds for
lending and other investment purposes. In addition to deposits, Harbor Federal
derives funds from loan principal repayments, interest payments and maturing
investments. Loan repayments and interest payments are a relatively stable
source of funds, while deposit inflows and outflows are significantly influenced
by prevailing market interest rates and money market conditions. Borrowings may
be used to supplement Harbor Federal's available funds. Harbor Federal is
authorized to borrow from the FHLB of Atlanta as well as to obtain funds through
reverse repurchase agreements.
Deposits. Harbor Federal attracts deposits principally from within its
market area by offering a variety of deposit instruments, including passbook and
statement accounts and certificates of deposit which range in term from three to
60 months. Deposit terms vary, principally on the basis of the minimum balance
required, the length of time the funds must remain on deposit and the interest
rate. Harbor Federal also offers Individual Retirement Accounts ("IRAs").
Harbor Federal's policies are designed primarily to attract deposits from
local residents through Harbor Federal's branch network rather than from outside
Harbor Federal's market area. Harbor Federal does not accept deposits from
brokers due to their rate sensitivity. Harbor Federal's interest rates,
maturities, service fees and withdrawal penalties on deposits are established by
management on a periodic basis. Management determines deposit interest rates and
maturities based on Harbor Federal's funds acquisition and liquidity
requirements, the rates paid by Harbor Federal's competitors, Harbor Federal's
growth goals and applicable regulatory restrictions and requirements.
Deposits in Harbor Federal as of March 31, 2000 were represented by the
various programs described below.
<TABLE>
<CAPTION>
Weighted Average Minimum Minimum Balance Percentage of
Interest Rate (1) Term Category Amount (In thousands) Total Savings
----------------- ------- -------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C>
1.00% None NOW accounts $ 300 $ 7,342 4.06%
3.05 None Passbook accounts 100 30,441 16.83
-- None Commercial checking 750 2,324 1.28
3.04 None Christmas club 10 313 .17
Money Market
------------
3.25 None Money market passbook 2,500 8,155 4.51
3.29 None Money market checking 2,500 2,822 1.56
3.80 None Money market plus
passbook 10,000 11,077 6.12
3.25 None IRA money market
passbook 100 426 .24
Certificates of Deposit
-----------------------
3.20 3 month Fixed-Term, Fixed rate 1,000 47 .03
5.32 6 month Fixed-Term, Fixed rate 1,000 5,542 3.06
5.32 6 month Fixed-Term, Fixed rate 10,000 3,250 1.80
5.30 9 month Fixed-Term, Fixed rate 1,000 3,428 1.90
5.67 12 month Fixed-Term, Fixed rate 1,000 22,956 12.69
5.55 12 month Fixed-Term, Fixed rate 10,000 11,835 6.54
5.42 18 month Fixed-Term, Fixed rate 1,000 6,516 3.60
5.66 24 month Fixed-Term, Fixed rate 1,000 20,211 11.17
6.26 30 month Fixed-Term, Fixed rate 1,000 100 .06
6.06 36 month Fixed-Term, Fixed rate 1,000 17,824 9.85
5.67 48 month Fixed-Term, Fixed rate 1,000 11,145 6.16
6.26 60 month Fixed-Term, Fixed rate 1,000 15,143 8.37
-------- ------
$180,897 100.00%
======== ======
</TABLE>
16
<PAGE>
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by Harbor Federal between the dates
indicated.
<TABLE>
<CAPTION>
Balance at
March 31, % Increase
2000 Deposits (Decrease)
---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Certificates.................... $117,997 65.23% $(4,359)
Money market.................... 22,480 12.43 (642)
Passbook........................ 30,441 16.83 1,176
NOW............................. 7,342 4.06 685
Christmas Club.................. 313 .17 (17)
Commercial checking............. 2,324 1.28 693
-------- ------ -------
Total. ..................... $180,897 100.00% $(2,464)
======== ====== =======
<CAPTION>
Balance at Balance at
March 31, % Increase March 31, %
1999 Deposits (Decrease) 1998 Deposits
--------- -------- ---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Certificates............ $122,356 66.73% $ 7,732 $114,624 65.44%
Money market............ 23,122 12.61 (253) 23,375 13.35
Passbook................ 29,265 15.96 (391) 29,656 16.93
NOW..................... 6,657 3.63 953 5,704 3.26
Christmas Club.......... 330 .18 (7) 337 .19
Commercial checking..... 1,631 .89 168 1,463 .83
-------- ------ ------- -------- ------
Total............... $183,361 100.00% $ 8,202 $175,159 100.00%
======== ====== ======= ======== ======
</TABLE>
17
<PAGE>
The following table sets forth the average balances and interest rates
based on month-end balances for certificates of deposit and non-certificate
accounts as of the dates indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------------------
2000 1999 1998
------------------- -------------------- ----------------------
Interest- Interest- Interst-
Bearing Bearing Bearing
Demand Time Demand Time Demand Time
Deposits Deposits Deposits Deposits Deposits Deposits
-------- -------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average Balance. . . . . . . $59,670 $121,964 $58,092 $118,439 $58,947 $113,850
Average Rate . . . . . . . . 2.96% 5.54% 3.02% 5.82% 3.13% 5.81%
</TABLE>
The following table sets forth the time deposits in Harbor Federal
classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
--------------------------
2000 1999 1998
------- ------- -------
(In thousands)
<S> <C> <C> <C>
2 - 3.99% . . . . . . . . . . .$ 47 $ 189 $ 101
4 - 5.99% . . . . . . . . . . . 98,501 98,092 79,438
6 - 7.99% . . . . . . . . . . . 19,449 24,075 35,085
-------- -------- --------
$117,997 $122,356 $114,624
======== ======== ========
</TABLE>
The following table sets forth the amount and maturities of time deposits
in Harbor Federal at March 31, 2000.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
---- --------- ---------- ---------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
2 - 3.99% . . . . .$ 47 $ -- $ -- $ -- $ 47
4 - 5.99% . . . . . 69,622 10,101 12,061 6,365 98,149
6 - 7.99% . . . . . 11,363 3,863 2,992 1,582 19,801
------- ------- ------- ------ --------
$81,033 $13,964 $15,053 $7,947 $117,997
======= ======= ======= ====== ========
</TABLE>
The following table indicates the amount of the certificates of deposit of
$100,000 or more in Harbor Federal by time remaining until maturity at March 31,
2000.
Certificates
Maturity Period of Deposit
--------------- -------------
(In thousands)
Three months or less . . . . . . . .$ 1,934
Three through six months . . . . . . 2,212
Six through nine months. . . . . . . 1,912
Nine through twelve months . . . . . 1,905
Over twelve months . . . . . . . . . 5,531
-------
Total. . . . . . . . . . . . . . .$13,494
=======
18
<PAGE>
The following table sets forth the deposit activities of Harbor Federal for
the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
2000 1999 1998
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Deposits . . . . . . . . . . . . .$225,644 $235,623 $187,564
Withdrawals. . . . . . . . . . . . 219,597 218,603 177,665
-------- -------- --------
Net increase
before interest credited . . 6,047 17,020 9,899
Interest credited. . . . . . . . . 8,511 8,818 8,845
-------- -------- --------
Net increase (decrease) in
deposits. . . . . . . . . .$ (2,464) $ 8,202 $ 1,054
======== ======== ========
</TABLE>
Borrowings. Savings deposits historically have been the primary source of
funds for Harbor Federal's lending, investment and general operating activities.
Harbor Federal is authorized, however, to use advances from the FHLB of Atlanta
to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Atlanta functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member of the FHLB system, Harbor Federal is required to own stock in the
FHLB of Atlanta and is authorized to apply for advances. Advances are made
pursuant to several different programs, each of which has its own interest rate
and range of maturities. Advances from the FHLB of Atlanta are secured by Harbor
Federal's stock in the FHLB and a portion of Harbor Federal's mortgage loan
portfolio. At March 31, 2000, Harbor Federal had $34.5 million in advances
outstanding from the FHLB of Atlanta. These advances were made between September
1999 and March 2000 at fixed rates averaging 5.75% and are set to mature from
September 2004 to March 2010, subject to early termination options.
In addition, the Company is authorized to obtain funds through reverse
repurchase agreements. Such agreements are treated as financings, and the
obligation to repurchase securities sold is reflected as a liability in the
consolidated statements of financial condition. The Company had outstanding
financings under repurchase agreements of $10.2 million and $17.6 million at
March 31, 2000 and 1999, respectively. The average rates of interest on these
repurchase agreements were 5.98% and 5.08%, respectively.
For additional information, see the Management's Discussion and Analysis of
Financial Condition and Results of Operations and Notes 7 and 8 of Notes to
Consolidated Financial Statements included elsewhere herein.
SUBSIDIARY ACTIVITIES
Federally chartered savings institutions are permitted to invest up to 2%
of their assets in subsidiary service corporations, plus an additional 1% in
subsidiaries engaged in specified community purposes. Harbor Federal's only
subsidiary is Harbor Service Corporation ("HSC"), a wholly owned subsidiary that
receives insurance commissions on sale of annuities. The net book value of
Harbor Federal's investment in HSC is immaterial. Harbor Federal is also
authorized to make investments of any amount in operating subsidiaries that
engage solely in activities that federal savings institutions may conduct
directly.
In September 1999, Harbor Federal closed Bank Street Mortgage Company, a
wholly owned subsidiary formed by the Bank in June 1997, as it did not generate
the income anticipated. While the entity has not been dissolved, it does not
currently conduct any business.
19
<PAGE>
In April 1999, Harbor Federal sold its interest in BAI to another thrift
institution for the par value of the capital stock. At that time, the advances
were repaid by BAI.
MARKET AREA
Harbor Federal currently conducts its business through nine banking offices
in the City of Baltimore and the Counties of Baltimore and Anne Arundel in
Maryland. While Harbor Federal's primary market areas tend to be concentrated in
the areas immediately surrounding each of Harbor Federal's offices, Harbor
Federal accepts deposits and loan applications from throughout the greater
Baltimore metropolitan area and central Maryland. At March 31, 2000, management
believed that most of Harbor Federal's depositors and borrowers resided within
ten miles of one of Harbor Federal's offices. The majority of loans originated
by Harbor Federal are from the Central Maryland area, which is located within
the greater Baltimore metropolitan area and the larger Washington-Baltimore
area. The Baltimore metropolitan area is the largest in Maryland and has had a
relatively stable and diversified labor force and economic base. The heaviest
employment concentrations in the greater Baltimore metropolitan area in
manufacturing industries are in primary metals (steel and copper),
transportation equipment, fabricated materials, chemicals, machinery and
electrical equipment. In addition, the Port of Baltimore is the fourth largest
foreign tonnage port in the U.S. and the second largest container tonnage port
on the East and Gulf Coasts.
COMPETITION
Harbor Federal faces strong competition for deposits and loans. Harbor
Federal's principal competitors for deposits are other banking institutions,
such as commercial banks, credit unions and other savings institutions, as well
as mutual funds and other investments. Harbor Federal principally competes for
deposits by offering a variety of deposit accounts, convenient business hours
and branch locations, customer service and a well trained staff. Harbor Federal
competes for loans with other depository institutions, as well as specialty
mortgage lenders and brokers and consumer finance companies. Harbor Federal
principally competes for loans on the basis of interest rates and the loan fees
it charges, the types of loans it originates and the convenience and service it
provides to borrowers. In addition, Harbor Federal believes it has developed
strong relationships with the businesses, realtors, builders and general public
in its market area. Due to Harbor Federal's small size relative to the many and
various other depository and lending institutions in its market area, management
believes that Harbor Federal has an insubstantial overall share of the deposit
and loan market.
REGULATION OF THE BANK
As a federally chartered savings institution, Harbor Federal is subject to
extensive regulation by the OTS. The lending activities and other investments of
the Bank must comply with various federal regulatory requirements, and the OTS
periodically examines the Bank for compliance with various regulatory
requirements. The FDIC also has the authority to conduct special examinations.
The Bank must file reports with OTS describing its activities and financial
condition and is also subject to certain reserve requirements promulgated by the
Federal Reserve Board. This supervision and regulation is intended primarily for
the protection of depositors.
Federal Home Loan Bank System. Harbor Federal is a member of the FHLB
System, which consists of 12 district FHLBs subject to supervision and
regulation by the Federal Housing Finance Board. The FHLBs provide a central
credit facility primarily for member institutions. As a member of the FHLB of
Atlanta, the Bank is required to acquire and hold shares of capital stock in the
FHLB of Atlanta in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year or 1/20 of its advances (borrowings)
from the FHLB of Atlanta, whichever is greater. The Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock at March 31, 2000
of $2,200,000. For additional information, see Note 10 of the Notes to
Consolidated Financial Statements included herein.
20
<PAGE>
The FHLB of Atlanta serves as a reserve or central bank for its member
institutions within its assigned district. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the OTS and the Board of Directors of the FHLB of Atlanta. Long term advances
may only be made for the purpose of providing funds for residential housing
finance. At March 31, 2000, Harbor Federal had $34.5 million in advances
outstanding with the FHLB of Atlanta. See "Deposit Activity and Other Sources of
Funds -- Borrowings."
Liquidity Requirements. Harbor Federal generally is required to maintain
average daily balances of liquid assets (generally, cash, certain time deposits,
bankers' acceptances, highly rated corporate debt and commercial paper,
securities of certain mutual funds, and specified United States government,
state or federal agency obligations) equal to 4% of its net withdrawable
accounts plus short-term borrowings. Harbor Federal also is required to maintain
sufficient liquidity to ensure its safe and sound operation. Monetary penalties
may be imposed for failure to meet liquidity requirements. The average daily
balance of liquid assets ratio of Harbor Federal for March 2000 was 24.3%.
Qualified Thrift Lender Test. A savings institution that does not meet the
Qualified Thrift Lender ("QTL") test must either convert to a bank charter or
comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution shall be restricted to those
of a national bank; and (iii) payment of dividends by the institution shall be
subject to the rules regarding payment of dividends by a national bank. Upon the
expiration of three years from the date the institution ceases to be a QTL, it
must cease any activity and not retain any investment not permissible for a
national bank and savings association.
To meet its QTL test, a savings institution must either satisfy the
definition of domestic building and loan institution under the Internal Revenue
Code or its "Qualified Thrift Investments" must represent 65% of "portfolio
assets." Portfolio assets are defined as total assets less intangibles, property
used by an institution in its business and liquidity investments in an amount
not exceeding 20% of assets. Qualified Thrift Investments include investments in
residential mortgages, home equity loans, loans made for educational purposes,
small business loans, credit card loans and mortgage-backed securities. In
addition, subject to a 20% of portfolio assets limit, institutions are able to
treat as Qualified Thrift Investments 200% of their investments in loans to
finance "starter homes" and loans for construction, development or improvement
of housing and community service facilities or for financing small businesses in
"credit-needy" areas. A savings institution shall be deemed a Qualified Thrift
Lender as long as its percentage of Qualified Thrift Investments continues to
equal or exceed 65% in at least nine out of each 12 months. An institution that
fails to maintain QTL status will be permitted to requalify once, and if it
fails the QTL test a second time, it will become immediately subject to all
penalties as if all time limits on such penalties had expired.
At March 31, 2000, 72% of Harbor Federal's portfolio assets were invested
in Qualified Thrift Investments as currently defined.
Regulatory Capital Requirements. Under OTS capital standards, savings
institutions must maintain "tangible" capital equal to at least 1.5% of adjusted
total assets, Tier 1 or "core" capital equal to at least 4% of adjusted total
assets (or 3% if the institution has a composite 1 CAMELS rating under the OTS
examination rating system) and "total" capital (a combination of core and
"supplementary" capital) equal to at least 8% of "risk-weighted" assets. In
addition, OTS regulations impose certain restrictions on institutions that have
a total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1
capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital
to adjusted total assets of less than 4.0% (or 3.0% if the institution has a
composite 1 CAMELS rating). For purposes of these regulations, Tier 1 capital
has the same definition as core capital. See "Prompt Corrective Regulatory
Action." Core capital is defined as common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in the equity accounts of fully consolidated subsidiaries,
certain nonwithdrawable accounts and pledged deposits and "qualifying
supervisory goodwill." Core capital is generally reduced by the amount of an
institution's intangible assets for which no market exists. Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights, purchased credit card relationships and qualifying supervisory
goodwill held by an eligible institution. Tangible capital is given the same
definition as core capital, but does not include an exception for qualifying
supervisory
21
<PAGE>
goodwill and is reduced by the amount of all the savings institution's
intangible assets with only a limited exception for purchased mortgage servicing
rights and purchased credit card relationships. The OTS capital rule requires
that core and tangible capital be further reduced by an amount equal to a
savings institution's debt and equity investments in subsidiaries engaged in
activities not permissible to national banks ("nonincludable subsidiaries"),
other than subsidiaries engaged in activities undertaken as agent for customers
or in mortgage banking activities and subsidiary depository institutions or
their holding companies. As of March 31, 2000, Harbor Federal had no material
investments in or extensions of credit to nonincludable subsidiaries.
Adjusted total assets are a savings institution's total assets as
determined under generally accepted accounting principles, increased for certain
goodwill amounts and by a prorated portion of the assets of unconsolidated
includable subsidiaries in which the institution holds a minority interest.
Adjusted total assets are reduced by the amount of assets that have been
deducted from capital, the investments in any unconsolidated includable
subsidiaries in which the institution has a minority interest and, for purposes
of the core capital requirement, qualifying supervisory goodwill. At March 31,
2000, Harbor Federal's adjusted total assets for purposes of the core and
tangible capital requirements were $246.8 million.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include core capital and supplementary capital
in its total capital, provided the amount of supplementary capital used does not
exceed the institution's core capital. Supplementary capital is defined to
include certain preferred stock issues, nonwithdrawable accounts and pledged
deposits that do not qualify as core capital, certain approved subordinated
debt, certain other capital instruments, a portion of the institution's general
loss allowances, and up to 45% of unrealized gains of equity securities.
The risk-based capital requirement is measured against risk-weighted assets
which equal the sum of each asset and the credit-equivalent amount of each off-
balance sheet item after being multiplied by an assigned risk weight. Under the
OTS risk-weighting system, assets are assigned a risk weight between zero and
100%, based on their general risk characteristics. As of March 31, 2000, the
Bank's risk-weighted assets were approximately $123.1 million.
The risk-based capital requirements also require savings institutions with
more than a "normal" level of interest rate risk to maintain additional total
capital. An institution's interest rate risk is measured in terms of the
sensitivity of its "net portfolio value" to changes in interest rates. Net
portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. An institution will
be considered to have a "normal" level of interest rate risk exposure if the
decline in its net portfolio value after an immediate 200 basis point increase
or decrease in market interest rates (whichever results in the greater decline)
is less than two percent of the current estimated economic value of its assets.
An institution with a greater than normal interest rate risk will be required to
deduct from total capital, for purposes of calculating its risk- based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.
The OTS calculates the sensitivity of an institution's net portfolio value
based on data submitted by the institution in a schedule to its quarterly Thrift
Financial Report and using the interest rate risk measurement model adopted by
the OTS. The amount of the interest rate risk component, if any, to be deducted
from an institution's total capital is based on the institution's Thrift
Financial Report filed two quarters earlier. Institutions with less than $300
million in assets and a risk-based capital ratio above 12% generally are exempt
from filing the interest rate risk schedule with their Thrift Financial Reports.
However, the OTS requires any exempt institution that it determines may have a
high level of interest rate risk exposure to file such schedule on a quarterly
basis and may be subject to an additional capital requirement based upon its
level of interest rate risk as compared to its peers. Harbor Federal is exempt
from filing the interest rate risk schedule with its Thrift Financial Reports
and the OTS has not required it to file such a
22
<PAGE>
schedule. The interest rate risk rule did not have a material effect on Harbor
Federal's risk-based capital at March 31, 2000.
At March 31, 2000, Harbor Federal substantially exceeded all regulatory
minimum capital requirements. The table below presents certain information
relating to the Bank's regulatory capital compliance at March 31, 2000.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
----------------------
(Dollars in thousands)
<S> <C> <C>
Tier 1/core capital. . . . . . . . .$17,765 7.20%
Core capital requirement . . . . . . 9,871 4.00
------- -----
Excess . . . . . . . . . . . . . . .$ 7,894 3.20%
======= =====
Total capital (i.e., core and
supplementary capital) . . . . . .$18,391 14.94%
Risk-based capital requirement . . . 9,846 8.00
------- -----
Excess . . . . . . . . . . . . .$ 8,545 6.94%
</TABLE> ======= =====
[FN]
---------
(1) Based upon adjusted total assets for purposes of the tangible and Tier
1/core capital requirements, and risk-weighted assets for purposes of the
risk-based capital requirement.
</FN>
For additional information regarding regulations with respect to capital,
see the paragraphs below and Note 10 of the Notes to Consolidated Financial
Statements included elsewhere herein.
In addition to requiring generally applicable capital standards for
institutions, the Director of the OTS is authorized to establish the minimum
level of capital for an institution at such amount or at such ratio of capital-
to-assets as the Director determines to be necessary or appropriate for such
institution in light of the particular circumstances of the institution. The
Director of the OTS may treat the failure of any institution to maintain capital
at or above such level as an unsafe or unsound practice and may issue a
directive requiring any institution which fails to maintain capital at or above
the minimum level required by the Director to submit and adhere to a plan for
increasing capital. Such an order may be enforced in the same manner as an order
issued by the FDIC.
Deposit Insurance. Harbor Federal is required to pay assessments based on a
percent of its insured deposits to the FDIC for insurance of its deposits by the
SAIF. Under the Federal Deposit Insurance Act, the FDIC is required to set semi-
annual assessments for SAIF-insured institutions at a level necessary to
maintain the designated reserve ratio of the SAIF at 1.25% of estimated insured
deposits or at a higher percentage of estimated insured deposits that the FDIC
determines to be justified for that year by circumstances indicating a
significant risk of substantial future losses to the SAIF.
The FDIC has established a risk-based assessment system for insured
depository institutions. Under the system, the assessment rate for an insured
depository institution depends on the assessment risk classification assigned to
the institution by the FDIC which will be determined by the institution's
capital level and supervisory evaluations. Based on the data reported to
regulators for the date closest to the last day of the seventh month preceding
the semi-annual assessment period, institutions are assigned to one of three
capital groups -- well capitalized, adequately capitalized or undercapitalized--
using the same percentage criteria as under the prompt corrective action
regulations. See "Prompt Corrective Regulatory Action." Within each capital
group, institutions are assigned to one of three subgroups on the basis of
supervisory evaluations by the institution's primary supervisory authority and
such other information as the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
fund. Subgroup A consists of financially sound institutions with only a few
minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution
23
<PAGE>
and increased risk of loss to the deposit insurance fund. Subgroup C consists of
institutions that pose a substantial probability of loss to the deposit
insurance fund unless effective corrective action is taken.
Under the FDIC's assessment schedule for SAIF deposit insurance, the
assessment rate for well-capitalized institutions with the highest supervisory
ratings is zero and institutions with the highest risk assessment classification
are assessed at the rate of 0.27% of insured deposits. In addition, insured
institutions are required to pay assessments to the FDIC to help fund interest
payments on certain bonds issued by the Financing Corporation ("FICO") an agency
of the federal government established to finance takeovers of insolvent thrifts.
Prior to December 31, 1999, SAIF-insured institutions were required to pay FICO
assessments at five times the rate at which Bank Insurance Fund ("BIF") members
were assessed. After December 31, 1999, both BIF and SAIF members will be
assessed at the same rate for FICO payments.
The FDIC has adopted a regulation which provides that any insured depository
institution with a ratio of Tier 1 capital to total assets of less than 2% will
be deemed to be operating in an unsafe or unsound condition, which would
constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, would not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Insured depository institutions with Tier 1 capital equal to or
greater than 2% of total assets may also be deemed to be operating in an unsafe
or unsound condition notwithstanding such capital level. The regulation further
provides that in considering applications that must be submitted to it by
savings institutions, the FDIC will take into account whether the institution is
meeting the Tier 1 capital requirement for state non-member banks of 4% of total
assets for all but the most highly rated state non-member banks.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% on
the first $44.3 million of transaction accounts, plus 10% on the remainder.
These reserve requirements are subject to adjustment by the Federal Reserve
Board. Because required reserves must be maintained in the form of vault cash or
in a non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's
interest-earning assets.
Dividend Restrictions. Savings institutions must submit notice to the OTS
prior to making a capital distribution (including cash dividends, stock
repurchases and amounts paid to stockholders of another institution in a cash
merger) if (a) they would not be well capitalized after the distribution, (b)
the distribution would result in the retirement of any of the institution's
common or preferred stock or debt counted as its regulatory capital, or (c) the
institution is a subsidiary of a holding company. A savings institution must
make application to the OTS to pay a capital distribution if (x) the institution
would not be adequately capitalized following the distribution, (y) the
institution's total distributions for the calendar year exceed the institution's
net income for the calendar year to date plus its net income (less
distributions) for the preceding two years, or (z) the distribution would
otherwise violate applicable law or regulation or an agreement with or condition
imposed by the OTS.
Under the OTS prompt corrective action regulations, Harbor Federal would be
prohibited from making any capital distributions if, after making the
distribution, it would have: (i) a total risk-based capital ratio of less than
8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a Tier
1 core capital ratio of less than 4.0%. See "Prompt Corrective Regulatory
Action."
In addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to the Company without payment
of taxes at the then current tax rate on the amount of earnings removed from the
reserves for such distributions. See "Taxation." The Company intends to make
full use of this favorable tax treatment afforded to the Bank and the Company
and does not contemplate use of any post-Conversion earnings of the Bank in a
manner which would limit either company's bad debt deduction or create federal
tax liabilities. Also, Harbor Federal would not be permitted to
24
<PAGE>
pay dividends on its capital stock if its regulatory capital would thereby be
reduced below the remaining balance of the liquidation account established for
the benefit of certain depositors of the Bank at the time of the Conversion.
Limits on Loans to One Borrower. Savings institutions generally are subject
to the lending limits applicable to national banks. With certain limited
exceptions, an institution's loans and extensions of credit outstanding to a
person at one time shall not exceed 15% of the unimpaired capital and surplus of
the institution. An institution may lend an additional amount, equal to 10% of
unimpaired capital and surplus, if such loan is fully secured by readily
marketable collateral. Savings institutions are additionally authorized to make
loans to one borrower, for any purpose, in an amount not to exceed $500,000 or,
by order of the Director of the OTS, in an amount not to exceed the lesser of
$30,000,000 or 30% of unimpaired capital and surplus to develop residential
housing, provided: (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the institution is in compliance with
its regulatory capital requirements; (iii) the loans comply with applicable
loan-to- value requirements, and; (iv) the aggregate amount of loans made under
this authority does not exceed 150% of unimpaired capital and surplus. A savings
institution is also authorized to make loans to one borrower to finance the sale
of real property acquired in satisfaction of debts in an amount up to 50% of
unimpaired capital and surplus. The lending limits generally do not apply to
purchase money mortgage notes taken from the purchaser of real property acquired
by the institution in satisfaction of debts previously contracted if no new
funds are advanced to the borrower and the institution is not placed in a more
detrimental position as a result of the sale. Certain types of loans are
excepted from the lending limits, including loans secured by savings deposits.
At March 31, 2000, the maximum amount that Harbor Federal could have lent to
any one borrower under the 15% limit was approximately $2.7 million. At such
date, the largest aggregate amount of loans that the Bank had outstanding to any
one borrower or group of affiliated borrowers was $2.5 million.
Transactions with Related Parties. Transactions between savings institutions
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of an institution is any company or entity which controls, is
controlled by or is under common control with the savings institution. In a
holding company context, the parent holding company of an institution (such as
the Company) and any companies which are controlled by such parent holding
company are affiliates of the savings institution. Generally, Sections 23A and
23B (i) limit the extent to which the savings institution or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such institution's capital stock and surplus, and contain an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, no savings institution may (i) loan or otherwise extend
credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, or (ii) purchase or
invest in any stocks, bonds, debentures, notes or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the savings
institution.
Further, savings institutions are subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's
Regulation O thereunder on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, executive officer and to
a greater than 10% stockholder of an institution and certain affiliated
interests of such persons, may not exceed, together with all other outstanding
loans to such person and affiliated interests, the institution's loans-
to-one-borrower limit (generally equal to 15% of the institution's unimpaired
capital and surplus). Section 22(h) also prohibits the making of loans above
amounts prescribed by the appropriate federal banking agency, to directors,
executive officers and greater than 10% stockholders of an institution, and
their respective affiliates, unless such loan is approved in advance by a
majority of the board of directors of the institution with any "interested"
director not participating in the voting. Regulation O prescribes the loan
amount (which includes all other outstanding loans to such person) as to which
such prior board of director approval is required as being the greater of
$25,000 or 5% of capital and surplus (up to $500,000). Further, Section 22(h)
requires that loans to directors, executive officers and principal stockholders
be made on terms substantially the same as offered in
25
<PAGE>
comparable transactions to other persons. Section 22(h) also generally prohibits
a depository institution from paying the overdrafts of any of its executive
officers or directors.
Savings institutions are also subject to the requirements and restrictions
of Section 22(g) of the Federal Reserve Act and Regulation O on loans to
executive officers and the restrictions of 12 U.S.C. Section 1972 on certain
tying arrangements and extensions of credit by correspondent banks. Section
22(g) of the Federal Reserve Act requires approval by the board of directors of
a depository institution for extension of credit to executive officers of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 1972 (i)
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions, and (ii)
prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements, including a
leverage limit, a risk-based capital requirement, and any other measure deemed
appropriate by the federal banking regulators for measuring the capital adequacy
of an insured depository institution. All institutions, regardless of their
capital levels, are restricted from making any capital distribution or paying
any management fees if the institution would thereafter fail to satisfy the
minimum levels for any of its capital requirements. An institution that fails to
meet the minimum level for any relevant capital measure (an "undercapitalized
institution") may be: (i) subject to increased monitoring by the appropriate
federal banking regulator; (ii) required to submit an acceptable capital
restoration plan within 45 days; (iii) subject to asset growth limits; and (iv)
required to obtain prior regulatory approval for acquisitions, branching and new
lines of businesses. The capital restoration plan must include a guarantee by
the institution's holding company that the institution will comply with the plan
until it has been adequately capitalized on average for four consecutive
quarters, under which the holding company would be liable up to the lesser of 5%
of the institution's total assets or the amount necessary to bring the
institution into capital compliance as of the date it failed to comply with its
capital restoration plan. A "significantly undercapitalized" institution, as
well as any undercapitalized institution that does not submit an acceptable
capital restoration plan, may be subject to regulatory demands for
recapitalization, broader application of restrictions on transactions with
affiliates, limitations on interest rates paid on deposits, asset growth and
other activities, possible replacement of directors and officers, and
restrictions on capital distributions by any bank holding company controlling
the institution. Any company controlling the institution may also be required to
divest the institution or the institution could be required to divest
subsidiaries. The senior executive officers of a significantly undercapitalized
institution may not receive bonuses or increases in compensation without prior
approval and the institution is prohibited from making payments of principal or
interest on its subordinated debt. In their discretion, the federal banking
regulators may also impose the foregoing sanctions on an undercapitalized
institution if the regulators determine that such actions are necessary to carry
out the purposes of the prompt corrective provisions. If an institution's ratio
of tangible capital to total assets falls below the "critical capital level"
established by the appropriate federal banking regulator, the institution will
be subject to conservatorship or receivership within specified time periods.
Under the implementing regulations, the federal banking regulators,
including the OTS, generally measure an institution's capital adequacy on the
basis of its total risk- based capital ratio (the ratio of its total capital to
risk- weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). The following table shows the capital ratios
required for the various prompt corrective action categories.
26
<PAGE>
<TABLE>
<CAPTION>
ADEQUATELY SIGNIFICANTLY
WELL CAPITALIZED CAPITALIZED UNDERCAPITALIZED UNDERCAPITALIZED
---------------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total risk-based capital
ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0%
Tier 1 risk-based
capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0%
Leverage ratio 5.0% or more 4.0% or more* Less than 4.0%* Less than 3.0%
<FN>
________
* 3.0% if institution has a composite 1 CAMELS rating.
</FN>
</TABLE>
A "critically undercapitalized" savings institution is defined as an institution
that has a ratio of "tangible equity" to total assets of less than 2.0%.
Tangible equity is defined as core capital plus cumulative perpetual preferred
stock (and related surplus) less all intangibles other than qualifying
supervisory goodwill and certain purchased mortgage servicing rights. The OTS
may reclassify a well capitalized savings institution as adequately capitalized
and may require an adequately capitalized or undercapitalized institution to
comply with the supervisory actions applicable to institutions in the next lower
capital category (but may not reclassify a significantly undercapitalized
institution as critically undercapitalized) if the OTS determines, after notice
and an opportunity for a hearing, that the savings institution is in an unsafe
or unsound condition or that the institution has received and not corrected a
less-than-satisfactory rating for any CAMELS rating category.
Standards for Safety and Soundness. FDICIA requires each federal bank
regulatory agency to prescribe, by regulation, safety and soundness standards
for institutions under its authority. In 1995, these agencies, including the
OTS, released interagency guidelines establishing such standards and adopted
rules with respect to safety and soundness compliance plans. The OTS guidelines
require savings institutions to maintain internal controls and information
systems and internal audit systems that are appropriate for the size, nature and
scope of the institution's business. The guidelines also establish certain basic
standards for loan documentation, credit underwriting, interest rate risk
exposure and asset growth. The guidelines further provide that savings
institutions should maintain safeguards to prevent the payment of compensation,
fees and benefits that are excessive or that could lead to material financial
loss and should take into account factors such as comparable compensation
practices at comparable institutions. If the OTS determines that a savings
institution is not in compliance with the safety and soundness guidelines, it
may require the institution to submit an acceptable plan to achieve compliance
with the guidelines. A savings institution must submit an acceptable compliance
plan to the OTS within 30 days of receipt of a request for such a plan. Failure
to submit or implement a compliance plan may subject the institution to
regulatory sanctions. Management believes that Harbor Federal meets
substantially all the standards adopted in the interagency guidelines.
Additionally, each federal banking agency has established standards
relating to the adequacy of asset and earnings quality. In 1995, these agencies,
including the OTS, issued guidelines relating to asset and earnings quality.
Under the guidelines, a savings institution must maintain systems, commensurate
with its size and the nature and scope of its operations, to identify problem
assets and prevent deterioration in those assets as well as to evaluate and
monitor earnings and ensure that earnings are sufficient to maintain adequate
capital and reserves. Management does not believe that the asset and earnings
standards have a material effect on Harbor Federal.
REGULATION OF THE COMPANY
The Company is a savings institution holding company and, as such, subject
to OTS registration, regulation, examination, supervision and reporting
requirements. As a subsidiary of a savings institution holding company, Harbor
Federal is subject to certain restrictions in its dealings with the Company and
affiliates thereof. The Company also is required to file certain reports with,
and otherwise comply with the rules and regulations of, the Securities and
Exchange Commission ("SEC") under the federal securities laws.
Activities Restrictions. The Board of Directors of the Company presently
intends to operate the Company as a unitary savings institution holding company.
There are generally no restrictions on the activities of a unitary savings
27
<PAGE>
institution holding company. However, if the Director of the OTS determines that
there is reasonable cause to believe that the continuation by an institution
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director of the OTS may impose such restrictions as deemed necessary to address
such risk including limiting: (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the above
rules as to permissible business activities of unitary savings institution
holding companies, if the savings institution subsidiary of such a holding
company fails to meet the QTL test, then such unitary holding company shall also
presently become subject to the activities restrictions applicable to multiple
holding companies and, unless the savings institution requalifies as a QTL
within one year thereafter, register as, and become subject to, the restrictions
applicable to a bank holding company. See "Regulation of the Bank -- Qualified
Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with Harbor Federal, the
Company would thereupon become a multiple savings institution holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings institution
holding company or subsidiary thereof which is not an institution shall commence
or continue for a limited period of time after becoming a multiple savings
institution holding company or subsidiary thereof, any business activity, upon
prior notice to, and no objection by, the OTS, other than: (i) furnishing or
performing management services for a subsidiary savings institution; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution;
(iv) holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those activities
authorized by regulation as of March 5, 1987 to be engaged in by multiple
holding companies; or (vii) unless the Director of the OTS by regulation
prohibits or limits such activities for savings institution holding companies,
those activities authorized by the Federal Reserve Board as permissible for bank
holding companies. A multiple savings institution holding company must obtain
the approval of the OTS prior to engaging in the activities described in (vii)
above.
Restrictions on Acquisitions. Savings institution holding companies may not
acquire, without prior approval of the Director of the OTS, (i) control of any
other savings institution or savings institution holding company or
substantially all the assets thereof, or (ii) more than 5% of the voting shares
of an institution or holding company thereof which is not a subsidiary. Under
certain circumstances, a registered savings institution holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15% of
the voting shares of an undercapitalized savings institution pursuant to a
"qualified stock issuance" without that savings institution being deemed
controlled by the holding company. In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings institution holding company's other subsidiaries must have tangible
capital of at least 6-1/2% of total assets, there must not be more than one
common director or officer between the savings institution holding company and
the issuing savings institution, and transactions between the savings
institution and the savings institution holding company and any of its
affiliates must conform to Sections 23A and 23B of the Federal Reserve Act.
Except with the prior approval of the Director of the OTS, no director or
officer of an institution holding company or person owning or controlling by
proxy or otherwise more than 25% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary savings institution,
or of any other savings institution holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings institution holding company which controls
savings institutions in more than one state if: (i) the multiple savings
institution holding company involved controls an institution which operated a
home or branch office in the state of the institution to be acquired as of March
5, 1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the FDIC Act; or
(iii) the statutes of the state in which the institution
28
<PAGE>
to be acquired is located specifically permit institutions to be acquired by
state-chartered institutions or savings institution holding companies located in
the state where the acquiring entity is located (or by a holding company that
controls such state-chartered savings institutions).
OTS regulations permit federal savings institutions to branch in any state
or states of the United States and its territories. Except in supervisory cases
or when interstate branching is otherwise permitted by state law or other
statutory provision, a federal institution may not establish an out-of- state
branch unless (i) the federal institution qualifies as a QTL or as a "domestic
building and loan association" under Section 7701(a)(19) of the Internal Revenue
Code and the total assets attributable to all branches of the institution in the
state would qualify such branches taken as a whole for treatment as a domestic
building and loan association and (ii) such branch would not result in (a)
formation of a prohibited multi-state multiple savings holding company, or (b) a
violation of certain statutory restrictions on branching by savings institution
subsidiaries of banking holding companies. Federal associations generally may
not establish new branches unless the institution meets or exceeds minimum
regulatory capital requirements. The OTS will also consider the institution's
record of compliance with the Community Reinvestment Act of 1977 in connection
with any branch application.
Under the Bank Holding Company Act of 1956, as amended, bank holding
companies are specifically authorized to acquire control of any savings
institution. Pursuant to rules promulgated by the Federal Reserve Board, owning,
controlling or operating an institution is a permissible activity for bank
holding companies, if the savings institution engages only in deposit-taking
activities and lending and other activities that are permissible for bank
holding companies. A bank holding company that controls an institution may merge
or consolidate the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings institution plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the Bank Holding Company Act.
TAXATION
The Company and its subsidiaries file a consolidated federal income tax
return on a fiscal year basis. Consolidated returns have the effect of
eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur.
Federal Income Taxation. Thrift institutions are subject to the provisions
of the Internal Revenue Code of 1986 (the "Code") in the same general manner as
other corporations. Prior to 1996, institutions such as Harbor Federal which met
certain definitional tests and other conditions prescribed by the Code benefited
from certain favorable provisions regarding their deductions from taxable income
for annual additions to their bad debt reserve. For purposes of the bad debt
reserve deduction, loans were separated into "qualifying real property loans,"
which generally are loans secured by interests in certain real property, and
non-qualifying loans, which are all other loans. The bad debt reserve deduction
with respect to non-qualifying loans was based on actual loss experience. For
tax years beginning before January 1, 1996, the amount of the bad debt reserve
deduction with respect to qualifying real property loans was based upon actual
loss experience (the "experience method") or a percentage of taxable income
determined without regard to such deduction (the "percentage of taxable income
method").
Generally, the legislation that is effective for tax years beginning after
December 31, 1995 requires institutions to recapture into taxable income over a
six taxable year period the portion of the tax loan loss reserve that exceeds
the pre-1988 tax loan loss reserve. Harbor Federal is no longer allowed to use
the percentage of taxable income method for tax loan loss provisions, but is
allowed to use the experience method of accounting for bad debts. There has been
no effect on net income of Harbor Federal from the recapture because the taxes
on these bad debts reserves were accrued as a deferred tax liability.
29
<PAGE>
The legislation provided for a suspension of this recapture if the
institution met the "residential loan requirement." This requirement is met if
the principal amount of residential loans that the institution originates during
its first taxable year after December 31, 1995, exceeds the average of the
principal amounts of residential loans made by the institution during the six
most recent taxable years beginning before January 1, 1996. If a thrift met the
"residential loan requirement" for the taxable year beginning in 1996 or 1997,
the reserve recognition was suspended for such year. Harbor Federal began
recapturing its excess reserve for the tax year ended March 31, 1999.
State Income Taxation. The State of Maryland imposes a tax of approximately
7% on income measured substantially the same as federal taxable income. In
addition, Maryland imposes a franchise tax, at a rate of 0.013% of the total
withdrawal value of the deposits that a savings and loan association holds in
Maryland at December 31 each year.
Harbor Federal's federal and state income tax returns have been audited
through December 31, 1993. For additional information, see Note 9 of the Notes
to Consolidated Financial Statements included elsewhere herein.
EMPLOYEES
As of March 31, 2000, Harbor Federal had 43 full-time and seven part-time
employees, none of whom was represented by a collective bargaining agreement.
EXECUTIVE OFFICERS
The following table sets forth information as of March 31, 2000 regarding
the executive officer of Harbor Federal who did not serve on the Board of
Directors.
Name Age Title
---- --- -----
Norbert J. Luken 62 Vice President and Chief
Financial Officer
NORBERT J. LUKEN has been with Harbor Federal since 1969, and is currently
Vice President and Chief Financial Officer. He has served as Treasurer of
Financial Managers Society, Maryland Chapter, Committeeman and Treasurer of Boy
Scout Troop 746, Shot Tower District Chairman of the Baltimore Area Council,
BSA, and a member of the St. Joseph's Catholic Church Choir and the Archdiocesan
Choir of Baltimore.
30
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
--------------------------------
The following table sets forth information regarding Harbor Federal's
locations at March 31, 2000.
<TABLE>
<CAPTION>
Year Book Value Deposits at
Opened or Owned or at March 31, Approximate March 31, 2000
Acquired Leased 2000 Square Footage (In thousands)
--------- -------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Main Office:
Towson --
705 York Road 1993 Owned $1,106,700 8,300 $16,992
Branch Offices:
South Baltimore --
132 East Fort Avenue 1887 Owned 17,500 3,300 25,439
Riviera Beach --
8553 Ft. Smallwood Road 1972 Owned 40,400 2,200 29,043
Locust Point --
1350 East Fort Avenue 1981 Owned 65,100 1,400 12,583
Highlandtown --
3200 Eastern Avenue 1910 Owned 101,500 5,300 29,997
Parkville --
7917 Harford Road 1989 Owned 111,700 1,600 20,732
Pikesville --
507 Reisterstown Road 1996 Leased 3,500 1,500 19,510
Putty Hill --
8030 Belair Road 1996 Owned 222,200 2,400 13,635
Roland Park --
4806 Roland Avenue 1996 Leased 2,900 1,800 12,966
</TABLE>
The book value of Harbor Federal's investment in premises and equipment
totaled $1.7 million at March 31, 2000.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
From time to time, Harbor Federal is a party to various legal proceedings
incident to its business. At March 31, 2000, there were no legal proceedings to
which the Company, Harbor Federal or its subsidiaries was a party, or to which
any of their property was subject, which were expected by management to result
in a material loss.
Subsequent to March 31, 2000 a lawsuit captioned Joyce Lancaster v. Harbor
-------------------------
Federal Savings Bank, Harbor Federal Bancorp, Inc. and Robert A. Williams and
-----------------------------------------------------------------------------
Lawrence W. Williams was filed on May 23, 2000 in the Circuit Court for
--------------------
Baltimore City, Maryland. The lawsuit which was filed by a former employee of
the Bank alleges defamation of character, breach of contract and respondeat
superior and seeks $2.0 million in money damagages for each count. The Company
and the Bank do not believe that there is any merit in the allegations and have
referred this matter to counsel for response.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
----------------------------------------------------------------
The Company's common stock is traded on the over-the-counter market under
the symbol "HRBF" and trading information is reported by the Nasdaq Stock
Market. As of March 31, 2000, there were 382 stockholders of record and
31
<PAGE>
1,664,515 shares of common stock entitled to vote and receive dividends. The
number of stockholders of record does not reflect the number of persons or
entities who hold their stock in nominee or "street" name.
The dividends paid and the high and low closing sale prices for the
Company's common stock as reported on the Nasdaq Stock Market during each
quarter of fiscal years 2000 and 1999 were as follows (these quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and might
not represent actual transactions):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal 2000
Market Price Range:
High $16.88 17.13 15.06 15.25
Low 15.25 13.38 12.63 11.25
Dividend Paid (1) .13 .13 .13 .13
Fiscal 1999
Market Price Range:
High $23.41 21.75 21.75 20.50
Low 19.20 16.94 18.00 15.75
Dividend Paid .118 .13 .13 .13
</TABLE>
[FN]
_________________
(1) On March 6, 2000, a dividend of $.13 per share was declared payable April
14, 2000 to holders of record at the close of business on April 3, 2000.
</FN>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------------------------------------------------------------------
GENERAL
The earnings of the Company depend primarily on its level of net interest
income, which is the difference between interest earned on the Company's
interest-earning assets, consisting primarily of mortgage loans, mortgage-backed
securities, interest-bearing deposits at other institutions, investment
securities and other investments, and the interest paid on interest-bearing
liabilities which have consisted primarily of savings deposits and other
borrowed funds. Net interest income is a function of the Company's interest rate
spread, which is the difference between the average yield on interest-earning
assets and the average rate paid on interest-bearing liabilities, as well as the
average balances of interest-earning assets and interest-bearing liabilities.
The Company's earnings are also affected by its level of noninterest income,
including primarily service fees and charges, and noninterest expense, including
primarily compensation and employee benefits and occupancy and equipment
expenses. Earnings of the Company also are affected significantly by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities, which are
beyond the control of the Company.
In addition to historical information, this annual report may contain
forward-looking statements. Forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those reflected in the forward-looking statements. Important factors that
might cause such a difference include, but are not limited to, those discussed
herein. Readers are cautioned not to place undue reliance on forward-looking
statements, which reflect management's analysis only as of the date they are
made. The Company undertakes no obligation to publicly revise or update
forward-looking statements to reflect events or circumstances that arise
thereafter. Readers should carefully review the disclosures set forth in other
documents the Company files from time to time with the SEC,
32
<PAGE>
including the Annual, Quarterly and Current Reports on Forms 10-KSB, 10-QSB and
8-K filed in the past and to be filed in the future.
FINANCIAL CONDITION
The Company's total assets increased by $13.8 million or 5.8% to $253.1
million at March 31, 2000 from $239.3 million at March 31, 1999, primarily due
to increases in loans receivable of $20.7 million, partially offset by a
reduction in investment securities of $2.3 million and by a reduction in
mortgage-backed securities of $3.6 million. Return on average assets was .82%
and return on average equity was 7.90% for the year ended March 31, 2000.
Net loans receivable increased $20.7 million or 13.5% to $173.8 million at
March 31, 2000 from $153.9 million at March 31, 1999. This increase was due
primarily to a normal level of loan originations over repayments.
The Company's savings accounts decreased $2.1 million or 1.1% to $179.4
million at March 31, 2000 from $181.5 million at March 31, 1999, and its
borrowings increased by $17.1 million or 62.2% to $44.7 million at March 31,
2000 from $27.6 million at March 31, 1999. The increase in borrowings was due
primarily to increased Federal Home Loan Bank advances used to fund most of the
increase in net loans receivable.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED MARCH 31,
2000, 1999 AND 1998
The Company had net income totaling $2.0 million and $1.8 million and $1.7
million for fiscal years 2000, 1999 and 1998, respectively.
Interest Income. Total interest income increased by $1.3 million or 7.9% to
$18.4 million for the year ended March 31, 2000 from $17.0 million for the year
ended March 31, 1999. The increase in interest income was principally
attributable to a $16.2 million or 7.1% increase in the balance of average
interest-earning assets to $243.8 million for the year ended March 31, 2000 from
$227.6 million for the year ended March 31, 1999 and an increase in the average
yield on the Company's average interest-earning assets to 7.54% for the year
ended March 31, 2000 from 7.48% for the year ended March 31, 1999. The increase
in interest-earning assets during the year ended March 31, 2000 compared to the
year ended March 31, 1999 reflects management's use of funds received from
borrowings. The increase in average interest-earning assets was largely the
result of a $12.3 million increase in average loans receivable and a $10.6
million increase in average investment securities, partially offset by a $5.6
million decrease in average mortgage- backed securities. The increase in average
yield was caused primarily by increase in rates available on long-term
investments.
Interest income on first mortgages and other loans increased by $814,000 or
6.8% to $12.7 million for the year ended March 31, 2000 from $11.9 million for
the year ended March 31, 1999. This increase was attributable to an increase in
the average investment in first mortgages and other loans to $164.6 million for
the year ended March 31, 2000 from $152.3 million for the year ended March 31,
1999, partially offset by a reduction in the average yield on first mortgage and
other loans to 7.72% for the year ended March 31, 2000 from 7.81% for the year
ended March 31, 1999. The lower average yield on mortgage loans reflects
primarily a reduction in interest rates on adjustable rate mortgage loans.
Interest income on investment securities increased $1.2 million or 32.4% to $4.8
million for the year ended March 31, 2000 from $3.6 million for the year ended
March 31, 1999. This increase was attributable to an increase in the average
investment securities to $60.8 million for the year ended March 31, 2000 from
$50.2 million for the year ended March 31, 1999 and an increase in the average
yield on investment securities to 7.83% for the year ended March 31, 2000 from
7.15% for the year ended March 31, 1999 due to higher interest rates on
long-term investments. Interest income on mortgage-backed securities decreased
by $446,000 or 36.3% to $781,000 for the year ended March 31, 2000 from $1.2
million for the year ended March 31, 1999. This decrease was attributable to a
decrease in average mortgage-backed securities to $11.9 million for the year
ended March 31, 2000 from $17.6 million for the year ended March 31, 1999 and a
reduction in the average yield on mortgage-backed securities to 6.55% for the
year ended March 31, 2000 from 6.99% for the year ended March 31, 1999. The
lower average yield on mortgage-backed securities reflects primarily the pay
down of principal on higher rate mortgage pools.
33
<PAGE>
Total interest income increased by $622,000 or 3.8% to $17.0 million for the
year ended March 31, 1999 from $16.4 million for the year ended March 31, 1998.
The increase in interest income was principally attributable to a $10.4 million
or 4.8% increase in the balance of average interest-earning assets to $227.6
million for the year ended March 31, 1999 from $217.2 million for the year ended
March 31, 1998, partially offset by a reduction in the average yield on the
Company's average interest-earning assets to 7.48% for the year ended March 31,
1999 from 7.55% for the year ended March 31, 1998. The increase in
interest-earning assets during the year ended March 31, 1999 compared to the
year ended March 31, 1998 reflects management's use of funds received from
deposits and borrowings. The increase in average interest-earning assets was
largely the result of a $4.4 million increase in average loans receivable, $3.4
million increase in average investment securities and $1.8 million increase in
average mortgage-backed securities. The decrease in average yield was caused
primarily by decreases in adjustable rates on one-to four-family residential
mortgage loans and rates available on short-term investments.
Interest income on first mortgages and other loans increased by $245,000 or
2.1% to $11.9 million for the year ended March 31, 1999 from $11.6 million for
the year ended March 31, 1998. This increase was attributable to an increase in
the average investment in first mortgages and other loans to $152.3 million for
the year ended March 31, 1999 from $148.0 million for the year ended March 31,
1998, partially offset by a reduction in the average yield on first mortgage and
other loans to 7.81% for the year ended March 31, 1999 from 7.87% for the year
ended March 31, 1998. The lower average yield on mortgage loans reflects
primarily a reduction in interest rates on adjustable rate mortgage loans.
Interest income on investment securities increased $274,000 or 8.2% to $3.6
million for the year ended March 31, 1999 from $3.3 million for the year ended
March 31, 1998. This increase was attributable to an increase in the average
investment securities to $50.2 million for the year ended March 31, 1999 from
$46.9 million for the year ended March 31, 1998 and an increase in the average
yield on investment securities to 7.15% for the year ended March 31, 1999 from
7.08% for the year ended March 31, 1998. Interest income on mortgage-backed
securities increased by $106,000 or 9.4% to $1.2 million for the year ended
March 31, 1999 from $1.1 million for the year ended March 31, 1998. This
increase was attributable to an increase in average mortgage-backed securities
to $17.6 million for the year ended March 31, 1999 from $15.8 million for the
year ended March 31, 1998, partially offset by a reduction in the average yield
on mortgage-backed securities to 6.99% for the year ended March 31, 1999 from
7.11% for the year ended March 31, 1998. The lower average yield on
mortgage-backed securities reflects primarily the pay down of principal on
higher rate mortgage pools.
Interest Expense. Total interest expense increased $729,000 or 7.1% to $11.0
million for the year ended March 31, 2000 from $10.3 million for the year ended
March 31, 1999. The increase resulted from a $5.1 million, or 2.9%, increase in
average deposits to $181.6 million for the year ended March 31, 2000 from $176.5
million for the year ended March 31, 1999, and a $16.0 million, or 68.9%
increase in average borrowed funds to $39.2 million for the year ended March 31,
2000 from $23.2 million for the year ended March 31, 1999. These increases were
partially offset by a reduction in the average cost of funds to 4.98% for the
year ended March 31, 2000 from 5.14% for the year ended March 31, 1999 due
primarily to lower rates on certificates of deposit.
Total interest expense increased $430,000 or 4.4% to $10.3 million for the
year ended March 31, 1999 from $9.8 million for the year ended March 31, 1998.
The increase resulted from a $3.7 million, or 2.2%, increase in average deposits
to $176.5 million for the year ended March 31, 1999 from $172.8 million for the
year ended March 31, 1998, and $5.7 million, or 32.9% increase in average
borrowed funds to $23.2 million for the year ended March 31, 1999 from $17.5
million for the year ended March 31, 1998. These increases were partially offset
by a reduction in the average cost of funds to 5.14% for the year ended March
31, 1999 from 5.17% for the year ended March 31, 1998.
Net Interest Income. Net interest income increased by $618,000 or 9.1%, to
$7.4 million for the year ended March 31, 2000 from $6.8 million for the year
ended March 31, 1999. The principal reason for the increase in the net interest
income was the increase in average outstanding loans and investments and an
increase in the interest rate spread to 2.56% for the year ended March 31, 2000
from 2.34% for the year ended March 31, 1999.
Net interest income increased by $192,000 or 2.9%, to $6.8 million for the
year ended March 31, 1999 from $6.6 million for the year ended March 31, 1998.
The principal reason for the increase in the net interest income was
34
<PAGE>
the increase in average outstanding loans, investments and mortgage-backed
securities, partially offset by a reduction in the interest rate spread to 2.34%
for the year ended March 31, 1999 from 2.38% for the year ended March 31, 1998.
Provisions for Losses on Loans. The Company maintains an allowance for
losses on loans based on management's review and classification of the loan
portfolio and analyses of borrowers' ability to pay, past collection experience,
risk characteristics of individual loans or groups of similar loans and
underlying collateral, current economic conditions, the status of nonperforming
loans, reviews conducted in the regulatory examination process and other
relevant factors. There was a $65,000 provision for losses on loans for the year
ended March 31, 2000 as compared to a $75,000 provision for the year ended March
31, 1999 and a $110,000 provision for the year ended March 31, 1998. Management
believes that the current level of the loan loss allowance is adequate to
provide for losses, although there can be no assurance that losses will not
exceed estimated amounts. See Notes 1 and 4 of the Notes to Consolidated
Financial Statements for additional information on the allowance for losses on
loans.
Noninterest Income. Noninterest income decreased $208,000 or 32.5%, to
$431,000 for the year ended March 31, 2000 from $638,000 for the year ended
March 31, 1999. The decrease was due primarily to a decrease in loan origination
fees of $242,000 earned by Bank Street Mortgage Company, partially offset by an
increase of $64,000 in insurance commissions earned by Harbor Service
Corporation. Bank Street Mortgage Company was closed in October 1999.
Noninterest income increased $149,000 or 30.5%, to $638,000 for the year
ended March 31, 1999 from $489,000 for the year ended March 31, 1998. The
increase was due primarily to an increase in loan origination fees of $224,000
earned by Bank Street Mortgage Company, partially offset by a reduction in gain
on loans sold of $96,000.
Noninterest Expense. Noninterest expense increased by $87,000, or 2.1% to
$4.3 million for the year ended March 31, 2000 from $4.2 million for the year
ended March 31, 1999. The increase in noninterest expense was due primarily to
an increase in computer data expense of $83,000, or 49.8%, to $248,000 for the
year ended March 31, 2000 from $165,000 for the year ended March 31, 1999. The
primary reasons for the increase in computer data expense were Year 2000
preparations and start-up costs for internet banking. The increase in
noninterest expense is net of a $120,000 decrease in compensation and benefits
expense. This decrease was due primarily to lower compensation costs under
stock-based benefit plans and the closing of Bank Street Mortgage Company.
Noninterest expense increased by $123,000, or 3.0% to $4.2 million for the
year ended March 31, 1999 from $4.1 million for the year ended March 31, 1998.
The increase in noninterest expense was due primarily to an increase in
compensation and benefits expense of $180,000, or 6.8%, to $2.8 million for the
year ended March 31, 1999 from $2.6 million for the year ended March 31, 1998,
partially offset by a reduction in occupancy and equipment expense of $61,000,
or 13.5%, to $390,000 for the year ended March 31, 1999 from $451,000 for the
year ended March 31, 1998. The primary reason for the compensation and benefits
expense increase was an increase in compensation to employees of Bank Street
Mortgage Company of $126,000 or 96.5%, to $257,000 for the year ended March 31,
1999 from $131,000 for the year ended March 31, 1998. The primary reason for the
reduction in occupancy and equipment expense was a reduction in the depreciation
expense of $39,000, or 28.6% , to $97,000 for the year ended March 31, 1999 from
$136,000 for the year ended March 31, 1998, and a reduction in rent of $32,000,
or 36.3%, to $57,000 for the year ended March 31, 1999 from $89,000 for the year
ended March 31, 1998. These reductions were due to the aging of the fixed assets
and the closing of an ATM location in November 1997, respectively. The ATM was
reinstated in an existing branch location in June 1998 with no additional cost
to facilities.
Income Taxes. The changes in the Company's income tax provision reflect the
changes in income before income taxes. Income tax provisions for the years ended
March 31, 2000, 1999 and 1998 are generally reflective of the amounts of the
Company's pre-tax income and the effective income tax rate then in effect. See
Notes 1 and 9 of the Notes to Consolidated Financial Statements for additional
information on income taxes.
35
<PAGE>
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following tables set forth certain information relating to the Company's
average interest-earning assets and interest-bearing liabilities and the average
yield on assets and the average cost of liabilities for the periods indicated.
Such yields and costs are derived by dividing income or expense by the average
daily balance of assets or liabilities, respectively, for the periods indicated.
During the periods indicated, nonaccrual loans are included in the loans
category.
The table also presents information for the periods indicated with respect
to the difference between the weighted average yield earned on interest-earning
assets and the weighted average rate paid on interest-bearing liabilities, or
"interest rate spread," which savings institutions have traditionally used as an
indicator of profitability. Another indicator of an institution's net interest
income is its "net yield on interest-earning assets," which is its net interest
income divided by the average balance of interest-earning assets. Net interest
income is affected by the interest rate spread and by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.
36
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- --------------------------- --------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost(1) Balance Interest Cost(1) Balance Interest Cost(1)
------- -------- ------- ------- -------- ------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans .......................... $164,587 $12,704 7.72% $152,331 $11,890 7.81% $147,967 $11,645 7.87%
Investment securities........... 65,484 4,760 7.28 53,395 3,595 6.59 49,774 3,321 6.56
Mortgage-backed securities...... 11,929 781 6.55 17,563 1,227 6.99 15,768 1,121 7.11
Short-term investments and
other interest-earning
assets (2) .................... 1,748 125 7.15 4,325 311 7.19 3,664 314 8.57
-------- ------- -------- ------- -------- -------
Total interest-earning
assets.................... 243,748 18,370 7.54 227,614 17,023 7.48 217,173 16,401 7.55
Non-interest-earning assets....... 5,278 ------- 4,289 ------- 4,598 -------
-------- -------- --------
Total assets.............. $249,026 $231,903 $221,771
======== ======== ========
Interest-bearing liabilities:
Deposits ..................... $181,634 8,898 4.90 $176,531 9,029 5.12 $172,797 8,845 5.12
Borrowed funds................ 39,199 2,101 5.36 23,210 1,240 5.34 17,463 994 5.69
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities........... 220,833 10,999 4.98 199,741 10,269 5.14 190,260 9,839 5.17
------- ------- -------
Non-interest bearing
liabilities..................... 2,696 3,110 3,040
-------- -------- --------
Total liabilities......... 223,529 202,851 193,300
Stockholders' equity.............. 25,497 29,052 28,471
-------- -------- --------
Total liabilities and
stockholders'
equity.................. $249,026 $231,903 $221,771
======== ======== ========
Net interest income............... $ 7,371 $ 6,754 $ 6,562
======= ======= =======
Interest rate spread (3).......... 2.56% 2.34% 2.38%
====== ====== ======
Net yield on interest-earning
assets (4)...................... 3.02% 2.97% 3.02%
====== ====== ======
Ratio of average interest-earning
assets to average interest-
bearing liabilities............. 110.38% 113.95% 114.15%
====== ====== ======
<FN>
---------------------------
(1) Represents interest income or expense as a percentage of average interest-earning assets or average interest-bearing
liabilities.
(2) Includes interest-bearing deposits, short-term investments, secured demand loans to Bankers Affiliate, Inc. and Federal Home
Loan Bank stock.
(3) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities.
(4) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.
</FN>
</TABLE>
37
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning asset and interest-bearing liability information
is provided on changes attributable to: (i) changes in volume (changes in volume
multiplied by old rate), (ii) changes in rates (change in rate multiplied by old
volume) and (iii) changes in rate-volume (changes in rate multiplied by changes
in volume).
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
------------------------------- ----------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------- ----------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------- ---- -------- ----- ------ ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans . . . . . . . . . $ 957 $(137) $ (6) $ 814 $ 343 $(89) $ (10) $ 245
Investment securities . . . . 797 368 -- 1,165 238 15 22 274
Mortgage-backed securities . . (394) (77) 25 (446) 128 (19) (3) 106
Short-term investments and
other interest-earning
assets (1) . . . . . . (185) (2) 1 (186) 57 (51) (9) (3)
------ ----- ---- ------ ------ ---- ----- -------
Total interest income . 1,175 152 20 1,347 765 (143) -- 622
Interest expense:
Deposits . . . . . . . . 261 (388) (5) (132) 191 -- (7) 184
Borrowed funds . . . . . . 854 5 3 862 327 (61) (20) 246
------ ----- ---- ------ ------ ---- ----- -------
Total interest expense. . . 1,115 (383) (2) 730 518 (61) (27) 430
------ ----- ---- ------ ------ ---- ----- -------
Change in net interest income . . . $ 60 $ 536 $ 21 $ 617 $ 247 $(82) $ 27 $ 192
====== ===== ==== ====== ====== ==== ===== =======
</TABLE>
[FN]
------------------------
(1) Includes interest on interest-bearing deposits, short-term investments,
secured demand loan to Bankers Affiliate, Inc. and dividends on Federal Home
Loan Bank stock.
</FN>
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity Gap. The matching of assets and liabilities may
be analyzed by examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring an institution's interest rate
sensitivity "gap". An asset or liability is interest rate sensitive within a
specific time period if it will mature or reprice within that time period. The
interest rate sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. Management
believes that, due to its substantial amount of relatively long term assets and
short term liabilities, the Company generally has a negative gap. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income while a positive gap would tend to positively affect net
interest income. Similarly, during a period of falling interest rates, a
negative gap would tend to positively affect net interest income while a
positive gap would tend to adversely affect net interest income. As a result,
management expects that during periods of rising rates the Bank's net interest
income could be adversely affected.
The Company's policy in recent years has been to reduce its exposure to
interest rate risk generally by emphasizing fixed rate one-to four-family
mortgage loans with terms of 15 years or less and adjustable rate one-to four-
family mortgage loans and investing in mortgage-backed securities, short and
medium term U.S. government and agency securities, and short term investments
such as federal funds, interest-earning deposits in other institutions, and
securities purchased under agreements to resell. The advantage of the adjustable
rate loans is somewhat diminished by the fact that the Company in recent years
has offered these loans with an initial period of five to seven years before the
first interest adjustment. By maintaining a significant percentage of its assets
in cash and other liquid investments, the
38
<PAGE>
Company is able to reinvest a higher percentage of its assets more quickly in
response to changes in market interest rates, thereby reducing its exposure to
interest rate volatility. However, prevailing market conditions, regulatory
considerations and the need for a balanced portfolio have necessitated that the
Company continue to offer fixed rate mortgage loans. In addition to emphasizing
adjustable rate loans and high levels of liquidity, the Company offers
competitive rates on deposit accounts and prices certificates of deposits to
provide customers with incentives to choose certificates of deposit with longer
terms. Due to the current interest rate environment, however, certificates of
deposit with longer terms are not attractive to customers.
Net Portfolio Value. The OTS has incorporated an interest rate risk ("IRR")
component into the risk-based regulatory capital rules. The IRR component is a
dollar amount that would be deducted from total capital for the purpose of
calculating an institution's risk-based capital requirement and would be
measured in terms of the sensitivity of its net portfolio value ("NPV") to
changes in interest rates. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts.
An institution's IRR is measured as the reduction in its NPV as a result of a
hypothetical 200 basis point change in market interest rates. A resulting change
in NPV of more than 2% may require the institution to deduct from its capital
50% of the excess change times the estimated market value of its assets. Based
on the most recent information provided to Harbor Federal by the OTS, which is
as of December 31, 1999, a 200 basis point change in market interest rates would
not be expected to reduce the Bank's NPV by more than 2%.
LIQUIDITY AND CAPITAL RESOURCES
Harbor Federal is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio currently is 4.0%.
Harbor Federal's liquidity ratio averaged 24.3% during the month of March 2000.
Liquidity ratios averaged 19.2% for the year ended March 31, 2000. Harbor
Federal adjusts its liquidity levels in order to meet funding needs of deposit
outflows, payment of real estate taxes from mortgage escrow accounts, repayment
of borrowings and loan commitments. Harbor Federal also adjusts liquidity as
appropriate to meet its asset and liability management objectives.
Harbor Federal's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, and other investments, and
earnings and funds provided from operations. While scheduled principal
repayments on loans and mortgage-backed securities are a relatively predictable
source of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions, and competition. Harbor Federal
manages the pricing of its deposits to maintain a desired deposit balance. In
addition, Harbor Federal invests in short-term interest-earning assets, which
provide liquidity to meet lending requirements. At March 31, 2000, certificates
of deposit which were scheduled to mature in one year or less totaled $81.0
million. Assets qualifying for liquidity outstanding at March 31, 2000 amounted
to $20.1 million.
Harbor Federal had $1.7 million in outstanding loan commitments at March
31, 2000. Harbor Federal expects to fund its loan originations through principal
and interest payments on loans and mortgage-backed securities, proceeds from
investment and other securities as maturities occur and, to the extent
necessary, borrowed funds. Management expects that funds provided from these
sources will be adequate to meet Harbor Federal's needs.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and the related notes thereto have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
monetary. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
39
<PAGE>
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities", as amended (SFAS
No. 133). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts. (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. It is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Initial application of this Statement
should be as of the beginning of an entity's fiscal quarter. On the effective
date, hedging relationships must be designated anew and documented pursuant to
the provisions of SFAS No. 133. SFAS No. 133 does not apply retroactively. While
the Company has not completed its analysis of SFAS No. 133 and has not made a
decision regarding timing of adoption, management does not believe that adoption
will have a material effect on the financial condition or results of operations
of the Company.
40
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
-----------------------------
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Table of Contents
March 31, 2000, 1999 and 1998
----------------------------------------------------------------
PAGE
Independent Auditors' Report.................................42
Consolidated Financial Statements:
Statements of Financial Condition.........................43
Statements of Income and Comprehensive Income.............45
Statements of Stockholders' Equity........................47
Statements of Cash Flows..................................48
Notes to Consolidated Financial Statements...................50
----------------------------------------------------------------
41
<PAGE>
[LOGO OF KPMG]
111 South Calvert Street
Baltimore, MD 21202
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Harbor Federal Bancorp, Inc.
Baltimore, Maryland:
We have audited the accompanying consolidated statements of financial condition
of Harbor Federal Bancorp, Inc. and subsidiary as of March 31, 2000 and 1999,
and the related consolidated statements of income and comprehensive income,
stockholders' equity and cash flows for each of the years in the three-year
period ended March 31, 2000. The consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Harbor Federal
Bancorp, Inc. and subsidiary as of March 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
May 8, 2000
42
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
March 31, 2000 and 1999
==============================================================================
2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash:
On hand and due from banks $ 1,250,115 1,501,358
Interest-bearing deposits 83,504 114,259
Federal funds sold 698,578 2,545,437
Investment securities available-for-sale
(note 2) 66,621,761 71,305,678
Investment securities held-to-maturity,
fair value of $1,626,075 and $2,330,876,
respectively (note 3) 1,584,840 2,222,330
Loans receivable (note 4):
First mortgage loans on real estate:
One-to-four family residential 128,184,304 114,992,363
Multifamily residential 1,047,951 899,962
Commercial 20,003,673 19,784,395
Construction 19,471,104 14,847,822
Land 3,031,704 3,292,436
Loans held for sale 2,143,067 2,659,319
Loans secured by automobiles 855,071 2,419
Loans secured by savings accounts 327,959 290,767
Home equity loans 792,391 533,206
Home improvement loans 396,335 511,088
Financing leases 1,773,214 1,427,157
Commercial loans 2,184,548 1,479,439
------------------------------------------------------------------------------
Total loans 180,211,321 160,720,373
Less:
Undisbursed portion of loans in process 4,950,749 6,225,479
Unearned discount on loans purchased 73,906 60,006
Unearned loan fees 912,299 851,009
Allowance for losses 474,100 457,000
------------------------------------------------------------------------------
Loans receivable, net 173,800,267 153,126,879
Investment in Federal Home Loan Bank stock,
at cost (note 10) 2,200,000 1,433,500
Real estate owned 74,138 446,899
Investment in and advances to affiliated
corporation (note 5) -- 2,525,000
Property and equipment, net (note 6) 1,680,128 1,760,516
Accrued interest receivable 1,571,426 1,427,032
Prepaid expenses and other assets 3,547,270 888,747
------------------------------------------------------------------------------
$253,112,027 239,297,635
==============================================================================
</TABLE>
(Continued)
43
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition, Continued
<TABLE>
<CAPTION>
March 31, 2000 and 1999
==============================================================================
2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings accounts (note 7) $179,403,009 181,485,848
Borrowed funds (note 8) 44,700,000 27,555,000
Advance payments by borrowers for taxes,
insurance and ground rents 1,948,647 1,841,672
Accrued expenses and other liabilities 1,563,492 1,612,963
------------------------------------------------------------------------------
Total liabilities 227,615,148 212,495,483
Stockholders' equity (notes 1, 10, 11 and 12):
Preferred stock $0.01 par value; authorized
5,000,000 shares; none issued -- --
Common stock $0.01 par value; authorized
20,000,000 shares; issued and outstanding
1,664,515 and 1,676,515 shares, respectively 16,645 16,765
Additional paid-in capital 13,515,785 13,071,570
Unearned ESOP shares (407,118) (662,056)
Retained income, substantially restricted 15,591,890 14,422,503
Accumulated other comprehensive income (3,220,323) (46,630)
------------------------------------------------------------------------------
Total stockholders' equity 25,496,879 26,802,152
Commitments and contingencies (notes 10, 11,
12 and 14)
------------------------------------------------------------------------------
$253,112,027 239,297,635
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
Years ended March 31, 2000, 1999 and 1998
==============================================================================
2000 1999 1998
------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $12,703,906 11,890,112 11,644,544
Investment securities 4,759,821 3,594,695 3,321,342
Mortgage-backed securities 781,100 1,227,043 1,121,238
Interest-bearing deposits and other
short-term investments 125,221 311,540 313,561
------------------------------------------------------------------------------
Total interest income 18,370,048 17,023,390 16,400,685
------------------------------------------------------------------------------
Interest expense:
Savings accounts:
Certificates 6,992,455 7,137,897 6,858,210
NOW and money market deposit
accounts 916,796 924,405 985,810
Passbook and statement savings 988,867 967,676 1,001,263
------------------------------------------------------------------------------
8,898,118 9,029,978 8,845,283
Borrowed funds:
Federal Home Loan Bank advances 1,224,439 512,014 147,292
Securities sold under agreements
to repurchase 876,209 727,862 846,842
------------------------------------------------------------------------------
2,100,648 1,239,876 994,134
------------------------------------------------------------------------------
Total interest expense 10,998,766 10,269,854 9,839,417
------------------------------------------------------------------------------
Net interest income 7,371,282 6,753,536 6,561,268
Provision for losses on loans (note 4) 65,000 75,000 110,000
------------------------------------------------------------------------------
Net interest income after provision
for losses on loans 7,306,282 6,678,536 6,451,268
------------------------------------------------------------------------------
Noninterest income:
Loan fees and service charges 202,292 459,700 225,431
Other 228,669 178,787 263,955
------------------------------------------------------------------------------
Total noninterest income 430,961 638,487 489,386
------------------------------------------------------------------------------
</TABLE>
(Continued)
45
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income,
Continued
<TABLE>
<CAPTION>
Years ended March 31, 2000, 1999 and 1998
==============================================================================
2000 1999 1998
------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest expense:
Compensation and benefits
(notes 12 and 13) $2,712,021 2,832,077 2,652,242
Occupancy and equipment 371,299 390,130 450,958
SAIF deposit insurance premiums
(note 10) 74,096 89,547 90,278
Advertising 164,892 142,926 129,040
Other 1,020,239 800,624 809,366
------------------------------------------------------------------------------
Total noninterest expense 4,342,547 4,255,304 4,131,884
Income before income taxes 3,394,696 3,061,719 2,808,770
Income taxes (note 9) 1,357,550 1,277,050 1,139,963
------------------------------------------------------------------------------
Net income 2,037,146 1,784,669 1,668,807
------------------------------------------------------------------------------
Other comprehensive income, net of
tax unrealized holding gain
(loss) on securities available-
for-sale (3,173,693) (256,934) 546,797
------------------------------------------------------------------------------
Comprehensive income $(1,136,547) 1,527,735 2,215,604
==============================================================================
Net income per share of common stock (note 1):
Basic $ 1.25 1.03 0.96
Diluted 1.23 0.99 0.93
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Years ended March 31, 2000, 1999 and 1998
====================================================================================
Common Additional Unearned
stock paid-in capital ESOP shares
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1997 $ 17,544 13,611,599 (1,136,840)
Compensation under stock-based benefit
plans -- 317,391 224,010
Purchase of 61,000 shares of common stock (610) (965,687) --
Exercise of stock options by
Stock Option Trust -- 105,930 --
Other comprehensive income -- -- --
Dividends ($.43 per share) -- -- --
Net income - 1998 -- -- --
------------------------------------------------------------------------------------
Balance at March 31, 1998 16,934 13,069,233 (912,830)
Stock dividend - 10% 1,693 3,385,827 --
Compensation under stock-based benefit
plans -- 471,539 250,774
Purchase of 186,280 shares of common stock (1,862) (3,469,134) --
Purchase of 35,841 shares of common stock
for Stock Option Trust -- (652,544) --
Exercise of stock options by
Stock Option Trust -- 266,649 --
Other comprehensive income -- -- --
Dividends ($.51 per share) -- -- --
Net income - 1999 -- -- --
------------------------------------------------------------------------------------
Balance at March 31, 1999 16,765 13,071,570 (662,056)
Compensation under stock-based benefit
plans -- 336,555 254,938
Purchase of 12,000 shares of common stock (120) (173,068) --
Purchase of 11,318 shares of common stock
for Stock Option Trust -- (164,808) --
Exercise of stock options by
Stock Option Trust -- 445,536 --
Other comprehensive income -- -- --
Dividends ($.52 per share) -- -- --
Net income - 2000 -- -- --
------------------------------------------------------------------------------------
Balance at March 31, 2000 $ 16,645 13,515,785 (407,118)
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
Years ended March 31, 2000, 1999 and 1998
====================================================================================
Retained Accumulated
income, other Total
substantially comprehensive stockholders'
restricted income equity
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1997 16,068,969 (336,493) 28,224,779
Compensation under stock-based benefit
plans -- -- 541,401
Purchase of 61,000 shares of common stock -- -- (966,297)
Exercise of stock options by
Stock Option Trust -- -- 105,930
Other comprehensive income -- 546,797 546,797
Dividends ($.43 per share) (798,607) -- (798,607)
Net income - 1998 1,668,807 -- 1,668,807
------------------------------------------------------------------------------------
Balance at March 31, 1998 16,939,169 210,304 29,322,810
Stock dividend - 10% (3,387,520) -- --
Compensation under stock-based
benefit plans -- -- 722,313
Purchase of 186,280 shares of common
stock -- -- (3,470,996)
Purchase of 35,841 shares of common stock
for Stock Option Trust -- -- (652,544)
Exercise of stock options by
Stock Option Trust -- -- 266,649
Other comprehensive income -- (256,934) (256,934)
Dividends ($.51 per share) (913,815) -- (913,815)
Net income - 1999 1,784,669 -- 1,784,669
------------------------------------------------------------------------------------
Balance at March 31, 1999 14,422,503 (46,630) 26,802,152
Compensation under stock-based
benefit plans -- -- 591,493
Purchase of 12,000 shares of common
stock -- -- (173,188)
Purchase of 11,318 shares of common stock
for Stock Option Trust -- -- (164,808)
Exercise of stock options by
Stock Option Trust -- -- 445,536
Other comprehensive income -- (3,173,693) (3,173,693)
Dividends ($.52 per share) (867,759) -- (867,759)
Net income - 2000 2,037,146 -- 2,037,146
------------------------------------------------------------------------------------
Balance at March 31, 2000 15,591,890 (3,220,323) 25,496,879
====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
47
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended March 31, 2000, 1999 and 1998
====================================================================================
2000 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $2,037,146 1,784,669 1,668,807
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 90,285 97,012 135,661
Amortization of premium on savings
deposits 381,384 381,384 381,384
Provision for losses on loans 65,000 75,000 110,000
Deferred income tax provision (67,932) (107,015) (87,876)
Noncash compensation under stock-
based benefit plans 591,493 722,313 541,401
Loans originated for sale, net of
repayments 516,252 (920,390) (3,682,878)
Proceeds from sales of loans originated
for sale -- 1,016,685 4,803,060
Amortization of loan fees, premiums
and discounts, net (70,067) (198,331) (172,819)
Gain on sale of loans -- -- (96,428)
Loss on sales of real estate owned 47,899 3,219 --
Decrease (increase) in prepaid
expenses and other assets (593,718) 102,627 (277,520)
Increase (decrease) in accrued expenses
and other liabilities (47,911) 50,667 215,834
Decrease (increase)in accrued
interest receivable (144,394) 270,285 (116,104)
------------------------------------------------------------------------------------
Net cash provided by operating activities 2,805,437 3,278,125 3,422,522
------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investment securities
available-for-sale (4,184,845) (56,675,792) (40,122,750)
Proceeds from maturities and principal
repayments of investment securities
available-for-sale 3,565,819 37,971,956 18,463,947
Proceeds from maturities and principal
repayments of investment securities
held-to-maturity 637,490 16,855,587 11,383,401
Loan principal disbursements, net of
repayments (17,492,164) (5,562,643) (2,048,299)
Loan purchases (3,980,692) (941,300) (2,105,334)
Investment in Federal Home Loan
Bank stock (766,500) -- (67,500)
Proceeds from sales of real estate owned 745,522 79,605 465,136
Purchases of property and equipment (9,897) (36,619) (17,871)
Decrease (increase) in investment in and
advances to affiliated corporation, net 2,525,000 325,000 (75,000)
------------------------------------------------------------------------------------
Net cash used in investing activities (18,960,267) (7,984,206) (14,124,270)
------------------------------------------------------------------------------------
(Continued)
</TABLE>
48
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
Years ended March 31, 2000, 1999 and 1998
====================================================================================
2000 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in savings
accounts $(2,464,223) 8,201,620 1,054,831
Net increase in borrowed funds 17,145,000 2,288,750 8,766,250
Increase (decrease) in advance payments
by borrowers for taxes, insurance and
ground rents 106,975) (94,132) 33,390
Purchases of common stock (173,188) (3,470,996) (966,297)
Purchases of common stock for Stock
Option Trust (164,808) (652,544) --
Exercise of stock options by Stock Option
Trust 445,536 266,649 105,930
Dividends paid (869,319) (911,617) (751,204)
------------------------------------------------------------------------------------
Net cash provided by financing activities 14,025,973 5,627,730 8,242,900
------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (2,128,857) 921,649 (2,458,848)
Cash and cash equivalents at beginning of
year 4,161,054 3,239,405 5,698,253
------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,032,197 4,161,054 3,239,405
====================================================================================
Supplemental information:
Interest paid on savings accounts and
borrowed funds $10,558,000 9,975,000 9,451,000
Income taxes paid 1,353,000 1,457,000 1,147,000
====================================================================================
Schedule of noncash investing and
financing transactions:
Transfers of loans receivable to
investments in real estate owned $ 420,660 529,723 --
Unrealized holding gain (loss) on
securities available for sale,
net of tax (3,173,693) (256,938) 546,797
====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
-----------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Harbor
Federal Bancorp, Inc. (the Company) and its wholly owned subsidiary Harbor
Federal Savings Bank (the Bank). All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain amounts for
prior years have been reclassified to conform to the presentation for 2000.
BUSINESS
The Bank provides a full range of banking services to individual and
corporate customers through its subsidiaries and branch banks in Maryland.
The Bank is subject to competition from other financial institutions. The
Bank is subject to the regulations of certain federal agencies and
undergoes periodic examinations by those agencies.
BASIS OF PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the dates of the statements of financial
condition and the reported amounts of revenues and expenses for the
periods. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan
losses and the valuation of real estate owned. In connection with the
determination of the allowance and the valuation of real estate, management
prepares fair value analyses and obtains independent appraisals for
significant properties, where appropriate.
Management believes that the allowances for losses on loans and real estate
owned are adequate. While management uses available information to
recognize losses on loans and real estate owned, future additions to the
allowances may be necessary based on changes in economic conditions,
particularly in Baltimore and the State of Maryland. In addition, various
regulatory agencies, as an integral part of their examination processes,
periodically review the Bank's allowances for losses on loans and real
estate owned. Such agencies may require the Bank to recognize additions to
the allowances based on their judgments about information available to them
at the time of their examinations.
CASH AND CASH EQUIVALENTS
Cash equivalents includes Federal funds sold and are carried at cost which
approximates fair value. Generally, Federal funds are purchased and sold
for one-day periods.
(Continued)
50
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(1) CONTINUED
INVESTMENT SECURITIES
Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to- maturity and recorded at
amortized cost. Debt securities not classified as held-to-maturity and
equity securities with readily determinable fair values are classified as
trading securities if bought and held principally for the purpose of
selling them in the near term. Trading securities are reported at fair
value, with unrealized gains and losses included in income. Investments not
classified as held-to- maturity or trading are considered
available-for-sale and are reported at fair value, with unrealized holding
gains and losses, net of the related tax effect, reported as other
comprehensive income until realized. Fair value is determined based on
published bid prices or bid quotations received from securities dealers.
Realized gains and losses on sales are determined using the specific
identification method.
DISCOUNTS AND PREMIUMS ON LOANS AND INVESTMENT SECURITIES
Discounts and premiums on loans and investment securities are deferred and
amortized to income using the level-yield method over the contractual term
of the loan or security.
INTEREST ON FINANCING LEASES
Leases included in loans receivable are accounted for as direct financing
leases. The excess of rentals to be received over the cost of the
investment in the lease is deferred and amortized to income using the
level-yield method over the lease term.
LOANS HELD FOR SALE
Loans held for sale consisted primarily of mortgage loans at March 31, 2000
and 1999. These loans are carried at the lower of cost or market as
determined by outstanding commitments from investors or current investor
yield requirements calculated on an aggregate basis.
REAL ESTATE OWNED
Real estate acquired through foreclosure is recorded at the lower of cost
or fair value less estimated costs to sell. Costs relating to holding real
estate are charged against income, while costs relating to improving real
estate are capitalized until a salable condition is reached.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation and amortization are accumulated using the
straight-line and accelerated methods over the estimated useful lives of
the related assets. Additions and improvements are capitalized, and costs
of repairs and maintenance are expensed as incurred. The related cost and
accumulated depreciation or amortization are eliminated from the accounts
when an asset is sold or retired and the resulting gain or loss is credited
or charged to income.
(Continued)
51
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(1) CONTINUED
LOAN FEES
Origination and commitment fees and direct origination costs of loans are
deferred and amortized to income over the contractual lives of the related
loans using the level-yield method. Under certain circumstances, commitment
fees are recognized as income over the commitment period or upon expiration
of the commitment.
LOANS RECEIVABLE
Loans are stated at the amount of unpaid principal reduced by discounts,
unearned loan fees and the allowance for losses. Interest on loans is not
accrued when, in the opinion of management, full collection of principal or
interest is in doubt, or payment of principal or interest has become 90
days past due. Interest accrued prior to a loan becoming 90 days past due
is retained in income. Such interest is considered in management's
determination of the allowance for losses. Any interest received in excess
of the amount previously accrued on such loans is recorded in income in the
period of recovery.
The provision for losses on loans is determined based on management's
review of the loan portfolio and analyses of borrowers' ability to pay,
past collection experience, risk characteristics of individual loans or
groups of similar loans and underlying collateral, current economic
conditions and the status of nonperforming loans. Loans or portions thereof
are charged off when considered uncollectible by management.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Loans that
experience insignificant payment delays (90 days or less) or shortfalls
generally are not considered impaired. Impairment of a loan is measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, or at the loan's observable market price or
the fair value of the collateral if the loan is collateral dependent. If
the measure of the impaired loan is less than the recorded investment in
the loan, an impairment is recognized through a valuation allowance and a
corresponding provision for credit losses.
Large groups of smaller balance homogenous loans, including residential
mortgage loans and consumer installment loans, are collectively evaluated
for impairment. Accordingly, the Bank does not separately identify
individual consumer and residential loans for impairment disclosures.
PREMIUM ON SAVINGS ACCOUNTS
In 1996, the Bank purchased certain assets and liabilities, principally
loans and deposits, relating to three branch offices. The acquisition was
accounted for using the purchase method and the excess of the purchase cost
over the fair values of the net assets acquired of $3,044,642 was recorded
as a premium on savings accounts which is being amortized to interest
expense using the straight-line method over an estimated life of eight
years.
(Continued)
52
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(1) CONTINUED
INCOME TAXES
Deferred income taxes are accounted for using the asset and liability
method. Under this method, deferred income taxes are recognized, with
certain exceptions, for temporary differences between the financial
reporting basis and income tax basis of assets and liabilities based on
enacted tax rates expected to be in effect when such amounts are realized
or settled. Deferred tax assets are recognized only to the extent that it
is more likely than not that such amounts will be realized based on
consideration of available evidence, including tax planning strategies and
other factors. The effects of changes in tax laws or rates on deferred tax
assets and liabilities are recognized in the period that includes the
enactment date.
Qualified thrift lenders, such as the Bank, are not required to provide a
deferred tax liability for bad debt reserves for tax purposes that arose in
fiscal years beginning before December 31, 1987. Such bad debt reserve for
the Bank amounted to approximately $4,600,000 with an income tax effect of
approximately $1,750,000 at March 31, 2000 and 1999. This bad debt reserve
could become taxable in the future if certain conditions are not met by the
Bank.
STOCK-BASED BENEFIT PLANS
The Company uses the intrinsic value method to account for stock-based
employee compensation plans. Under this method, compensation cost is
recognized for awards of shares of common stock to employees only if the
quoted market price of the stock at the grant date (or other measurement
date, if later) is greater than the amount the employee must pay to acquire
the stock. Compensation cost is recorded on a pro- rata basis as the
employees perform the services required to acquire the stock.
The Company has established an Employee Stock Ownership Plan (ESOP) for its
employees. The Company recognizes the costs associated with the ESOP in
accordance with provisions of AICPA Statement of Position 93-6, Employers'
Accounting for Employee Stock Ownership Plans. Accordingly, compensation
expense is recorded based on the market value of shares
committed-to-be-released to the ESOP for allocation to participants for
services rendered.
PER SHARE DATA AND NET INCOME PER SHARE OF COMMON STOCK
On July 15, 1998, the Board of Directors declared a 10% stock dividend,
which was paid on August 10, 1998. An amount equal to the fair value of the
common shares issued was transferred from retained income to common stock
and additional paid-in capital, as appropriate. Except for the number of
shares authorized, all references to per share information and numbers of
shares in the consolidated financial statements have been adjusted to
reflect the stock dividend on a retroactive basis.
(Continued)
53
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(1) CONTINUED
Basic earnings per share (EPS) is calculated by dividing net income by the
weighted average number of common shares outstanding for the applicable
period. Diluted EPS is calculated after adjusting the numerator and the
denominator of the basic EPS calculation for the effect of all dilutive
potential common shares outstanding during the period. The dilutive effects
of options and unvested restricted stock awards are computed using the
"treasury stock" method. Unearned ESOP shares are not included in
outstanding shares. Information related to the calculation of net income
per share of common stock is summarized as follows for the years ended
March 31:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------- ----------------- --------------------
Basic Diluted Basic Diluted Basic Diluted
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $2,037,146 2,037,146 1,784,669 1,784,669 1,668,807 1,668,807
Dividends on unvested
common stock awards -- -- (7,991) (5,460) (14,098) (11,441)
------------------------------------------------------------------------------------------------
Adjusted net income
used in EPS
calculations $2,037,146 2,037,146 1,776,678 1,779,209 1,654,709 1,657,366
================================================================================================
Weighted average
shares outstanding 1,625,776 1,625,776 1,731,587 1,731,587 1,731,745 1,731,745
Effect of dilutive securities:
Options -- 32,852 -- 61,269 -- 54,680
Unvested common
stock awards -- -- -- 4,983 -- 6,161
------------------------------------------------------------------------------------------------
Adjusted weighted-average
shares used in EPS
computation 1,625,776 1,658,628 1,731,587 1,797,839 1,731,745 1,792,586
================================================================================================
</TABLE>
COMPREHENSIVE INCOME
Comprehensive income includes all changes in stockholders' equity during a
period, except those relating to investments by and distributions to
stockholders. The Company's comprehensive income consists of net earnings
and unrealized gains and losses on securities available-for- sale and is
presented in the statements of income and comprehensive income. Accumulated
other comprehensive income is displayed as a separate component of
stockholders' equity.
(Continued)
54
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(2) INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Investment securities available-for-sale are summarized as follows at March
31:
<TABLE>
<CAPTION>
2000
---------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
agency obligations $52,993,085 -- (4,091,904) 48,901,181
Trust preferred securities 9,757,363 -- (1,354,148) 8,403,215
Preferred stock - Federal
Home Loan Mortgage
Corporation (FHLMC) 6,339 338,324 -- 344,663
Mortgage-backed securities:
Government National Mortgage
Association (GNMA) 7,742,336 -- (102,210) 7,640,126
FHLMC 1,369,173 -- (36,597) 1,332,576
---------------------------------------------------------------------------------------
$71,868,296 338,324 (5,584,859) 66,621,761
=======================================================================================
<CAPTION>
1999
----------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
agency obligations $50,992,523 16,249 (636,718) 50,372,054
Trust preferred securities 8,610,862 90,722 (61,896) 8,639,688
Preferred stock - FHLMC 6,339 440,699 -- 447,038
Mortgage-backed securities:
GNMA 9,949,731 94,160 -- 10,043,891
FHLMC 1,822,194 -- (19,187) 1,803,007
---------------------------------------------------------------------------------------
$71,381,649 641,830 (717,801) 71,305,678
=======================================================================================
</TABLE>
(Continued)
55
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(2) CONTINUED
The amortized cost and estimated fair values of nonequity investment
securities available-for-sale at March 31, 2000 and 1999, by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities as borrowers may have the right to call or prepay obligations
with or without penalties.
<TABLE>
<CAPTION>
2000 1999
------------------------ --------------------------
Amortized Fair Amortized Fair
cost value cost value
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due after five through ten years $ 2,999,007 2,842,320 3,998,882 4,007,160
Due after ten years 59,751,441 54,462,076 55,604,503 55,004,582
Mortgage-backed securities 9,111,509 8,972,702 11,771,925 11,846,898
----------------------------------------------------------------------------------------------
$71,861,957 66,277,098 71,375,310 70,858,640
==============================================================================================
</TABLE>
There were no sales of investment securities available-for- sale during the
years ended March 31, 2000, 1999 and 1998. Accrued interest receivable on
investment securities available-for-sale was approximately $594,000 and
$523,000 at March 31, 2000 and 1999, respectively.
(3) INVESTMENT SECURITIES HELD-TO-MATURITY
Investment securities held-to-maturity are summarized as follows at March
31:
<TABLE>
<CAPTION>
2000
---------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA $ 573,279 21,993 -- 595,272
FNMA 807,498 20,402 (8,171) 819,729
FHLMC 204,063 7,011 -- 211,074
--------------------------------------------------------------------------------------
$1,584,840 49,406 (8,171) 1,626,075
======================================================================================
<CAPTION>
1999
---------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA $ 713,537 46,780 -- 760,317
FNMA 1,097,280 39,424 (90) 1,136,614
FHLMC 411,513 22,432 -- 433,945
--------------------------------------------------------------------------------------
$2,222,330 108,636 (90) 2,330,876
======================================================================================
</TABLE>
(Continued)
56
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(3) CONTINUED
There were no sales of investment securities held-to- maturity during the
years ended March 31, 2000, 1999 and 1998. Accrued interest receivable on
investment securities held-to-maturity was approximately $65,000 and
$84,000 at March 31, 2000 and 1999, respectively.
(4) LOANS RECEIVABLE
Substantially all of the loans receivable are mortgage loans secured by
residential and commercial real estate properties located in the state of
Maryland. Loans are extended only after evaluation by management of
customers' creditworthiness and other relevant factors on a case-by-case
basis. The Bank generally does not lend more than 90% of the appraised
value of a property and requires private mortgage insurance on residential
mortgages with loan-to-value ratios in excess of 80%. In addition, the Bank
generally obtains personal guarantees of repayment from borrowers and/or
others for construction, commercial and multifamily residential loans and
disburses the proceeds of construction and similar loans only as work
progresses on the related projects.
Residential lending is generally considered to involve less risk than other
forms of lending, although payment experience on these loans is dependent
to some extent on economic and market conditions in the Bank's lending
area. Commercial and construction loan repayments are generally dependent
on the operations of the related properties or the financial condition of
the borrowers or guarantors. Accordingly, repayment of such loans can be
more susceptible to adverse conditions in the real estate market and the
regional economy.
Nonperforming loans amounted to approximately $559,000 and $986,000 at
March 31, 2000 and 1999, respectively. For the years ended March 31, 2000,
1999 and 1998, the amount of interest income that would have been recorded
on loans in nonaccrual status at year end had such loans performed in
accordance with their terms, was approximately $41,000, $86,000 and 79,000,
respectively. The actual interest income recorded on these loans for the
years ended March 31, 2000, 1999 and 1998 was approximately $29,000,
$60,000, and $67,000, respectively.
The Bank, through its normal asset review process, has identified certain
loans which management believes involve a degree of risk warranting
additional attention. Such loans, totaling approximately $387,000 and
$483,000 at March 31, 2000 and 1999, respectively, are not included above
in nonperforming loans, but have exhibited potential or actual weaknesses
which, if not corrected, would cause management to have doubts as to the
ability of the borrowers to comply with the present loan repayment terms
and which could result in classification of such loans as nonperforming in
the future.
(Continued)
57
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(4) CONTINUED
Changes in the allowance for losses were as follows for the years ended
March 31:
<TABLE>
<CAPTION>
2000 1999 1998
-----------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 457,000 490,000 380,000
Provision for losses on loans 65,000 75,000 110,000
Charge-offs (47,900) (108,000) --
-----------------------------------------------------------------
Ending balance $ 474,100 457,000 490,000
=================================================================
</TABLE>
At March 31, 2000, 1999 and 1998, the Bank was servicing loans owned by
others of approximately $2,985,000, $11,156,000 and $13,718,000,
respectively.
The Bank participates in a loan made to one of its directors by another
financial institution. This loan was made on substantially the same terms,
including interest rate and collateral requirements, as those prevailing at
the time for comparable transactions with unrelated customers. The Bank's
outstanding balance on this loan was approximately $494,000 and $500,000 at
March 31, 2000 and 1999, respectively.
Accrued interest receivable on loans receivable was $876,000 and $792,000
at March 31, 2000 and 1999, respectively.
(5) INVESTMENT IN AND ADVANCES TO AFFILIATED CORPORATION
The investment in and advances to Bankers Affiliate, Inc.
are as follows at March 31:
<TABLE>
<CAPTION>
2000 1999
-----------------------------------------------------------------
<S> <C> <C>
Capital stock, at cost $ -- 25,000
Advances -- 2,500,000
-----------------------------------------------------------------
$ -- 2,525,000
=================================================================
</TABLE>
Bankers Affiliate, Inc. was organized in April 1983 to make consumer loans
and, until April 1999, was owned by the Bank and two other financial
institutions. Advances were due on demand and bore interest at a rate
determined by the Bank and the two other institutions. In April 1999, the
Bank sold its interest in Bankers Affiliate, Inc. to one of the other
institutions for the par value of the capital stock. At that time, the
advances were repaid by Bankers Affiliate, Inc.
(Continued)
58
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
----------------------------------------------------------------
(6) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at March 31:
<TABLE>
<CAPTION>
2000 1999 Useful life
------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 733,189 733,189 --
Buildings and improvements 1,227,405 1,227,405 15-30 years
Leasehold improvements 33,000 33,000 5-10 years
Furniture, fixtures and equipment 892,481 882,584 5-10 years
Automobiles 24,128 24,128 3 years
-------------------------------------------------------------- ============
Total, at cost 2,910,203 2,900,306
Less accumulated depreciation
and amortization 1,230,075 1,139,790
--------------------------------------------------------------
Property and equipment, net $1,680,128 1,760,516
==============================================================
</TABLE>
At March 31, 2000, the Bank was obligated under noncancellable long-term
operating leases for two of its branch offices. These leases expire at
dates to 2002 and provide for approximate aggregate rentals of $52,000 in
2001 and $9,000 in 2002. Rent expense was $57,072, $56,979 and $89,495 for
the years ended March 31, 2000, 1999 and 1998, respectively.
(Continued)
59
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
----------------------------------------------------------------
(7) SAVINGS ACCOUNTS
Savings accounts are summarized as follows at March 31:
<TABLE>
<CAPTION>
Weighted average rate 2000 1999
--------------------- ------------------- --------------------
2000 1999 Amount % Amount %
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Certificates 5.59% 5.31% $117,996,786 65.2% 122,356,375 66.7%
Money market 3.44% 3.38% 22,479,778 12.4% 23,121,853 12.6%
Passbook 3.05% 3.05% 30,440,696 16.8% 29,265,439 16.0%
NOW 0.71% 1.01% 7,342,685 4.1% 6,656,017 3.6%
Commercial checking -- -- 2,323,913 1.3% 1,631,153 0.9%
Christmas Club 3.04% 3.05% 312,943 0.2% 330,187 0.2%
----------------------------------------------------------------------------------------------
180,896,801 100.0% 183,361,024 100.0%
==============================================================================================
Acquisition premium, net of
accumulated amortization
of $1,550,850 and $1,169,466,
respectively (1,493,792) (1,875,176)
----------------------------------------------------------------------------------------------
$179,403,009 181,485,848
==============================================================================================
Certificate accounts maturing:
Under 12 months $ 81,033,219 68.7% 71,414,952 58.4%
12 months to 24 months 13,964,038 11.8% 30,944,369 25.3%
24 months to 36 months 15,052,729 12.8% 8,858,634 7.2%
36 months to 48 months 4,473,701 3.8% 9,102,547 7.4%
48 months to 60 months 3,473,099 2.9% 2,035,873 1.7%
----------------------------------------------------------------------------------------------
$117,996,786 100.0% 122,356,375 100.0%
==============================================================================================
</TABLE>
At March 31, 2000 and 1999, certificates of $100,000 or more were
approximately $13,494,000 and $11,653,000, respectively.
(Continued)
60
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
----------------------------------------------------------------
(8) BORROWED FUNDS
Borrowed funds with interest rates and maturities are summarized as follows
at March 31:
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Securities sold under agreements to repurchase:
4.9% matured June 1999 $ -- 4,675,000
5.0% matured May 1999 -- 6,000,000
5.7% matured May 1999 -- 3,880,000
4.8% matured October 1999 -- 3,000,000
5.93% due April 2000 5,500,000 --
6.00% due May 2000 3,000,000 --
6.08% due May 2000 1,700,000 --
Federal Home Loan Bank advances,
5.05%, due December 2007 -- 10,000,000
5.71% due September 2004 7,000,000 --
5.48% due December 2009 10,000,000 --
5.92% due March 2010 17,500,000 --
---------------------------------------------------------------------------
$44,700,000 27,555,000
===========================================================================
</TABLE>
The Bank enters into sales of mortgage-backed securities and investment
securities with agreements to repurchase. Such agreements are treated as
financings, and the obligations to repurchase securities sold are reported
as liabilities in the consolidated statements of financial condition. The
securities underlying the agreements are book-entry securities. The
securities are delivered by appropriate entry into the counterparties'
accounts maintained at the Federal Reserve Bank of New York.
Information with respect to repurchase agreements is as follows for the
years ended March 31:
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount outstanding at year-end $10,200,000 17,555,000 15,266,250
Maximum outstanding at any month-end 23,310,000 17,555,000 16,500,000
Average outstanding 15,878,333 13,119,000 14,210,000
Fair value of securities sold under
repurchase agreements at year-end:
Mortgage-backed securities 7,587,722 10,043,892 2,017,108
Investment securities 11,136,300 8,902,100 13,950,500
Amortized cost of securities sold under
repurchase agreements at year-end:
Mortgage-backed securities 7,742,336 9,949,732 1,980,396
Investment securities 11,995,856 8,995,502 14,000,000
==================================================================================
</TABLE>
(Continued)
61
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
----------------------------------------------------------------
(8) CONTINUED
Under a blanket floating lien security agreement with the Federal Home Loan
Bank of Atlanta (FHLB), the Bank is required to maintain as collateral for
its advances qualifying first mortgage loans in an amount equal to 100% of
the advances. First mortgage loans of $34,500,000 were pledged as
collateral at March 31, 2000. At the discretion of the FHLB, the interest
rate on advances can be converted to a variable rate on a quarterly basis,
at which time the Bank may repay the advances.
(9) INCOME TAXES
The income tax provision is composed of the following for the years ended
March 31:
<TABLE>
<CAPTION>
2000 1999 1998
----------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,167,111 1,133,199 1,005,289
State 258,371 250,866 222,550
----------------------------------------------------------------
1,425,482 1,384,065 1,227,839
Deferred:
Federal (55,621) (87,618) (71,948)
State (12,311) (19,397) (15,928)
----------------------------------------------------------------
(67,932) (107,015) (87,876)
----------------------------------------------------------------
$1,357,550 1,277,050 1,139,963
================================================================
</TABLE>
The net deferred tax asset at March 31, 2000 and 1999 consists of total
deferred tax assets of $2,911,192 and $854,550, respectively, and total
deferred tax liabilities of $394,844 and $403,007, respectively. The tax
effects of temporary differences between the financial reporting and income
tax basis of assets and liabilities relate to the following at March 31:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------
<S> <C> <C>
Interest and fees on loans $ 33,856 41,071
Allowance for losses on loans 183,097 176,493
Accrual basis of accounting and deferred compensation 392,422 400,941
Unamortized premium on savings deposits 275,605 206,704
Federal Home Loan Bank stock dividends (207,351) (207,351)
Prepaid pension cost (46,249) (19,100)
Tax bad debt reserve in excess of base year (141,244) (176,556)
Unrealized (gain) loss on investments available-
for-sale 2,026,212 29,341
----------------------------------------------------------------------------
$2,516,348 451,543
============================================================================
</TABLE>
(Continued)
62
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
----------------------------------------------------------------
(9) CONTINUED
A reconciliation between the income tax provision computed by multiplying
income before income taxes by the statutory Federal income tax rate of 34%
and the actual provision for income taxes is as follows for the years ended
March 31:
<TABLE>
<CAPTION>
2000 1999 1998
----------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate $1,154,197 1,040,984 954,982
State income taxes, net of
Federal income tax benefit 162,400 152,770 136,371
Nondeductible compensation
costs 42,318 94,612 59,239
Other, net (1,365) (11,316) (10,629)
----------------------------------------------------------------
Income tax provision $1,357,550 1,277,050 1,139,963
================================================================
</TABLE>
(10) REGULATORY MATTERS
The Federal Deposit Insurance Corporation, through the Savings Association
Insurance Fund (SAIF), insures deposits of accountholders up to $100,000.
The Bank pays an annual premium to provide for this insurance. The Bank is
also a member of the Federal Home Loan Bank System and is required to
maintain an investment in the stock of the Federal Home Loan Bank of
Atlanta equal to at least 1% of the unpaid principal balances of its
residential mortgage loans or 5% of its outstanding advances from the Bank,
whichever is greater. Purchases and sales of stock are made directly with
the Federal Home Loan Bank of Atlanta at par value.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum capital amounts and ratios (as defined
in the regulations and as set forth in the table below). As of March 31,
2000, the most recent notification from the Office of Thrift Supervision
(OTS) categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events
since that notification that management believes have changed the Bank's
category.
(Continued)
63
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
----------------------------------------------------------------
(10) CONTINUED
Regulatory capital amounts and ratios for the Bank are as follows (in
thousands):
<TABLE>
<CAPTION>
To be well
Minimum capitalized under
for capital prompt corrective
Actual adequacy purposes action provisions
--------------------- ------------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 2000:
Tier I core capital (a) $17,765 7.20% $9,871 4% $12,239 >5%
Tier I risk-based capital (b) 17,765 14.43% 4,923 4% 7,384 >6%
Total risk-based capital (b) 18,391 14.94% 9,846 8% 12,307 >10%
As of March 31, 1999:
Tier I core capital (a) 23,945 10.24% 9,356 4% 11,964 >5%
Tier I risk-based capital (b) 23,945 21.00% 4,561 4% 6,841 >6%
Total risk-based capital (b) 24,600 21.57% 9,122 8% 11,402 >10%
(a) Percentage of capital to ending assets.
(b) Percentage of risk-based capital to ending risk-weighted assets.
=================================================================================================
</TABLE>
(11) STOCKHOLDERS' EQUITY AND RELATED MATTERS
In 1994, the Board of Directors approved a plan of reorganization from a
mutual savings association to a capital stock savings bank and the
concurrent formation of a holding company. The conversion was accomplished
through amendment of the Bank's charter and the sale (on August 11, 1994)
of the Company's common stock in an amount equal to the consolidated pro
forma market value of the Company and the Bank after giving effect to the
conversion.
Federal regulations require that, upon conversion from mutual to stock form
of ownership, a "liquidation account" be established by restricting a
portion of net worth for the benefit of eligible savings account holders
who maintain their savings accounts with the Bank after conversion. In the
event of complete liquidation (and only in such event), each savings
account holder who continues to maintain a savings account would be
entitled to receive a distribution from the liquidation account after
payment of all creditors, but before any liquidation distribution with
respect to capital stock. This account will be proportionately reduced for
any subsequent reduction in the eligible holders' savings accounts. At
conversion, the liquidation account totaled approximately $14,500,000.
(Continued)
64
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
----------------------------------------------------------------
(11) CONTINUED
OTS regulations impose limitations on all capital distributions by savings
institutions. Capital distributions include cash dividends, payments to
repurchase or otherwise acquire the institution's capital stock, payments
to shareholders of another institution in a cash-out merger and other
distributions charged against capital. The regulations establish three
tiers of institutions. An institution, such as the Bank, that exceeds all
capital requirements before and after a proposed capital distribution (Tier
1 Institution) may, after prior notice but without the approval of the OTS,
make capital distributions during a calendar year up to 100% of its net
income to date during the calendar year plus the amount that would reduce
by one-half its "surplus capital ratio" (the excess capital over its
capital requirements) at the beginning of the calendar year or 75% of its
net income over the most recent four-quarter period. Any additional capital
distributions require prior OTS approval.
Bad debt reserves, deducted from income for federal income tax purposes and
included in retained income of the Bank, are not available for the payment
of cash dividends or other distributions to stockholders, without payment
of taxes at the then-current tax rate by the Bank on the amount removed
from the reserves for such distributions.
During the years ended March 31, 1999 and 1998, the Board of Directors
authorized the repurchase of up to 5% and 10% of the then outstanding
shares, respectively. During the years ended March 31, 2000, 1999 and 1998,
the Bank purchased 12,000, 186,280 and 61,000 shares, respectively,
pursuant to these authorizations. The average cost of the shares purchased
was $14.43, $18.63 and $15.84 per share, respectively.
(12) STOCK-BASED BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
On August 11, 1994, the ESOP acquired 191,848 shares of the Company's
common stock in exchange for a note in conjunction with the conversion to a
capital stock form of organization. The ESOP holds the common stock in a
trust for allocation among participating employees. Shares are allocated to
participants annually based on principal payments made on the note. The
ESOP's sources of repayment of the note are dividends on the common stock,
if any, and an annual contribution to the ESOP and earnings thereon. All
employees who attain the age of 21 and complete six months of service are
eligible to participate in the ESOP. Participants are 100% vested in their
accounts after seven years of service or, if earlier, upon death,
disability or attainment of normal retirement age. Participants received
credit for service with the Bank prior to the establishment of the ESOP.
(Continued)
65
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
----------------------------------------------------------------
(12) CONTINUED
For the years ended March 31, 2000, 1999 and 1998, compensation expense
related to the ESOP was approximately $364,000, $494,000, and $378,000,
respectively. Dividends on ESOP shares used for debt service by the ESOP
for the years ended March 31, 2000, 1999 and 1998 were approximately
$81,000, $77,000, and $50,000, respectively.
The ESOP shares were as follows at March 31:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------
<S> <C> <C>
Allocated shares 147,065 119,022
Unearned shares 44,783 72,826
----------------------------------------------------------------
191,848 191,848
----------------------------------------------------------------
Fair value of unearned shares
at March 31 $582,179 1,210,749
================================================================
</TABLE>
STOCK OPTION PLAN
The Company has a stock option plan which provides for the granting of
options to acquire common stock to directors and key employees. Option
prices are equal to or greater than the estimated fair market value of the
common stock at the date of grant. Employee options vest at 20% per year
from the date of grant. Director options may be exercised at any time after
the date of grant. Options expire ten years after the date of grant or one
year after the date of an employee's termination.
Information with respect to options is as follows for the years ended March
31:
<TABLE>
<CAPTION>
2000 1999 1998
(shares) (shares) (shares)
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year - $9.66 per share 149,467 177,291 189,756
Exercised (48,786) (27,502) (10,967)
Forfeited (528) (322) (1,498)
----------------------------------------------------------------------------------
Outstanding at end of year - $9.66 per share 100,153 149,467 177,291
----------------------------------------------------------------------------------
Exercisable at end of year 100,153 118,721 115,807
==================================================================================
</TABLE>
In connection with the stock option plan, the Company established a Stock
Option Trust to purchase shares in the open market or unissued shares of
stock. The Company purchased for the trust 11,318 shares for $164,808 and
35,841 shares for $652,544 in 2000 and 1999, respectively. No shares were
purchased for the trust in 1998. The Company is authorized to purchase up
to 6,124 shares for the Stock Option Trust in the open market at March 31,
2000.
(Continued)
66
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
----------------------------------------------------------------
(12) CONTINUED
MANAGEMENT RECOGNITION PLAN
Effective January 13, 1995, the Company established a Management
Recognition Plan (MRP) to retain personnel of experience and ability in key
positions of responsibility. Members of the Board of Directors and certain
executive officers were awarded a total of 95,923 shares of stock which are
held in a separate trust that manages the MRP. Shares awarded to
participants in the MRP vested at a rate of 20% per year on each
anniversary of the effective date of the MRP. For the years ended March 31,
2000, 1999 and 1998, compensation expense related to the MRP was $24,456,
$61,581 and $113,790, respectively.
(13) RETIREMENT PLANS
Substantially all employees are included in a defined contribution pension
plan. Benefits under the plan are funded partly by contributions to trust
funds and partly by payments of premiums on life insurance policies. For
the years ended March 31, 2000, 1999 and 1998, pension expense was $89,370,
$122,673 and $112,459, respectively.
The Bank has a retirement agreement with the President of the Bank and a
retirement plan for directors who were members of the Board of Directors at
the date of conversion to a capital stock form of organization and not
employees at that date. The President's benefits are equal to 60% of his
average salary for the final three years of service in excess of his
pension. Nonemployee directors' benefits are equal to annual directors'
fees times a benefit percentage. Such benefit percentages are 33-1/3%,
66-2/3% and 100% for 6 to 14 years, 15 to 24 years, and 25 years or more of
service on the Board of Directors, respectively. Benefits are payable on
each of the ten anniversary dates following retirement. For the years ended
March 31, 2000, 1999 and 1998, compensation expense related to these plans
was $4,461, $11,556 and $97,034, respectively.
(Continued)
67
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
----------------------------------------------------------------
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of financial instruments are
summarized as follows at March 31:
<TABLE>
<CAPTION>
2000 1999
--------------------- --------------------------
Carrying Fair Carrying Fair
amount value amount value
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash $ 1,333,619 1,334,000 1,615,617 1,616,000
Federal funds sold 698,578 699,000 2,545,437 2,545,000
Investment securities
available-for-sale 66,621,761 66,622,000 71,305,678 71,306,000
Investment securities
held-to-maturity 1,584,840 1,626,000 2,222,330 2,331,000
Loans receivable 173,800,267 166,628,000 153,126,879 151,759,000
Investment in Federal Home
Loan Bank stock 2,200,000 2,200,000 1,433,500 1,434,000
Accrued interest receivable 1,571,426 1,571,000 1,427,032 1,427,000
Liabilities:
Savings accounts 179,403,009 181,123,000 181,485,848 182,501,000
Borrowed funds 44,700,000 44,700,000 27,555,000 27,555,000
Advances payments by borrowers
for taxes, insurance and
ground rents 1,948,647 1,949,000 1,841,672 1,842,000
====================================================================================
</TABLE>
Fair value estimates and the methods and assumptions used to determine them
are set forth below for financial instruments outstanding as of March 31,
2000 and 1999.
CASH AND FEDERAL FUNDS SOLD
The carrying amounts approximate fair value due to the short maturity of
these instruments.
INVESTMENT SECURITIES
The fair values of investment securities are based on bid prices received
from an external pricing service or bid quotations received from securities
dealers.
(Continued)
68
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
----------------------------------------------------------------
(14) CONTINUED
LOANS RECEIVABLE
The fair value of residential loans is calculated by discounting
anticipated cash flows determined based on weighted-average contractual
maturity, weighted-average coupon and certain prepayment assumptions.
Prepayment speed estimates are derived from published historical prepayment
experience in the mortgage pass-through market and recent issuance activity
in the primary and secondary mortgage markets. The discount rate used is
calculated by adding to the Treasury yield for the corresponding
weighted-average maturity associated with each prepayment assumption a
market spread as observed for mortgage-backed securities with similar
characteristics. The fair values of multifamily and nonresidential loans
are calculated by discounting the contractual cash flows at the Bank's
current nonresidential loan origination rate. Construction, land and
commercial loans, loans secured by savings accounts and mortgage lines of
credit are considered to be at fair value due to their adjustable rate
nature. The fair value of consumer loans is calculated by discounting the
contractual cash flows at the Bank's current consumer loan origination
rate. The fair value of nonperforming loans is determined by reducing the
carrying value of the loans by the Bank's historical loss percentage for
each specific loan category.
INVESTMENTS IN FEDERAL HOME LOAN BANK STOCK
The carrying amounts approximate fair value based on the redemption
provisions of the Federal Home Loan Bank.
ACCRUED INTEREST RECEIVABLE
The carrying amounts approximate fair value.
SAVINGS ACCOUNTS
The fair value of deposits with no stated maturity, such as noninterest
bearing deposits, interest bearing NOW accounts, money market and statement
savings accounts, is equal to the carrying amounts. The fair value of
certificates of deposit is based on the discounted value of contractual
cash flows. The discount rates are based on the rates currently offered by
the Bank for deposits of similar maturities.
BORROWED FUNDS
Securities sold under agreements to repurchase and FHLB advances are
considered to be at fair value.
ADVANCE PAYMENTS BY BORROWERS FOR TAXES, INSURANCE AND GROUND RENTS
The carrying amount of advance payments by borrowers for taxes, insurance
and ground rents approximates its fair value.
(Continued)
69
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
----------------------------------------------------------------
(14) CONTINUED
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business, including mortgage loan commitments and
lines of credit on commercial business loans and home equity loans. These
instruments involve, to various degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated statements
of financial condition.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument is represented by the contract
amount of the financial instrument. The Bank uses the same credit policies
in making commitments for off-balance-sheet financial instruments as it
does for on-balance-sheet financial instruments. The contract amounts of
financial instruments with off-balance-sheet risk were as follows at March
31:
<TABLE>
<CAPTION>
2000
---------------------------
Fixed rate Floating Rate
-----------------------------------------------------------------------------
<S> <C> <C>
Residential mortgage loans to be funded $ 521,600 994,050
Commercial mortgage loans to be funded 199,900 --
Undisbursed lines of credit -- 792,391
------------------------------------------------------------------------------
$ 721,500 1,786,441
==============================================================================
</TABLE>
Residential mortgage loan commitments usually expire within thirty days.
The interest rate range on fixed rate mortgage loan commitments was from
7.75% to 8.5% at March 31, 2000. These mortgage loan commitments and
undisbursed lines of credit are expected to be settled at face amount or
expire unused. It is impractical to assign any fair value to these
commitments.
The disclosure of fair value amounts does not include the fair values of
any intangibles, including core deposit intangibles. Core deposit
intangibles represent the value attributable to total deposits based on an
expected duration of customer relationships.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about financial instruments.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the entire holdings of a particular
financial instrument. Fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
(Continued)
70
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
---------------------------------------------------------------
(15) SUBSEQUENT EVENT
On May 3, 2000, the Company signed an agreement to be acquired by Provident
Bankshares Corporation (Provident). The agreement provides for Provident to
exchange 1.256 shares of its common stock for each outstanding share of the
Company's common stock. The transaction is subject to certain terms and
conditions and regulatory approvals and is expected to be consummated in
the third quarter of 2000.
(16) CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Summarized financial information for the Company is as follows as of and
for the years ended March 31:
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 1,631,322 134,860
Investment securities available-for-sale 8,403,215 8,639,687
Investment in the Bank 15,299,090 23,981,868
Prepaid expenses and other assets 815,458 198,110
-------------------------------------------------------------------------
$ 26,149,085 32,954,525
=========================================================================
Loan payable - Bank $ 407,118 5,884,215
Other liabilities 245,088 268,158
-------------------------------------------------------------------------
652,206 6,152,373
Stockholders' equity 25,496,879 26,802,152
-------------------------------------------------------------------------
$ 26,149,085 32,954,525
=========================================================================
<CAPTION>
STATEMENTS OF INCOME
2000 1999 1998
------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Interest income $ 840,587 382,457 194,673
------------------------------------------------------------------------------
Expenses:
Interest expense 160,228 114,602 89,742
Professional fees 83,050 40,200 32,837
Other expenses 38,353 37,822 36,891
------------------------------------------------------------------------------
281,631 192,624 159,470
------------------------------------------------------------------------------
Income before income taxes and equity in
net income of subsidiary 558,956 189,833 35,203
Income taxes 215,900 73,300 13,600
------------------------------------------------------------------------------
Income before equity in net income
of subsidiary 343,056 116,533 21,603
Equity in net income of subsidiary 1,694,090 1,668,136 1,647,204
------------------------------------------------------------------------------
Net income $2,037,146 1,784,669 1,668,807
==============================================================================
</TABLE>
(Continued)
71
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
--------------------------------------------------------------
(16) Continued
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
2000 1999 1998
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 2,037,146 1,784,669 1,668,807
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in net income of subsidiary (1,694,090) (1,668,136) (1,647,204)
Noncash compensation under stock-
based benefit plans 591,493 722,313 541,401
Other, net (52,623) (164,282) 94,462
----------------------------------------------------------------------------------
Net cash provided by operating activities 881,926 674,564 657,466
----------------------------------------------------------------------------------
Investing activities:
Dividend distribution from Bank 8,000,000 -- 4,000,000
Purchases of investment securities
available-for-sale (1,146,588) (8,742,848) --
----------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 6,853,412) (8,742,848) 4,000,000
----------------------------------------------------------------------------------
Financing activities:
Purchases of common stock (173,188) (3,470,996) (966,297)
Purchase of common stock for
Stock Option Trust (164,808) (652,544) --
Exercise of stock options by Stock
Option Trust 445,536 266,649 105,930
Increase in (repayment of) borrowings (5,477,097) 4,971,385 (224,010)
Dividends paid (869,319) (911,617) (751,204)
----------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (6,238,876) 202,877 (1,835,851)
----------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 1,496,462 (7,865,407) 2,821,885
Cash and cash equivalents at beginning of year 134,860 8,000,267 5,178,382
----------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,631,322 134,860 8,000,267
==================================================================================
</TABLE>
72
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
------------------------------------------------------------------------
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
------------------------------------------------------------------------
The following table sets forth the name of each member of the Board of
Directors of the Company. Also set forth is certain other information with
respect to each person's age, the year he first became a director of Harbor
Federal and the expiration of his term as a director. Each director of the
Company is also a member of the Board of Directors of the Bank.
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED AS CURRENT
DIRECTOR OF TERM
NAME AGE THE BANK TO EXPIRE
---- --- ----------- ---------
<S> <C> <C>
Joseph J. Lacy 67 1963 2000
John H. Riehl, III 70 1990 2000
Lawrence W. Williams 46 1996 2000
Robert A. Williams 70 1955 2001
J. Kemp Roche 67 1965 2002
Gideon N. Stieff, Jr. 70 1969 2002
</TABLE>
Set forth below is information concerning the Company's directors. Unless
otherwise stated, all directors have held the positions indicated for at least
the past five years.
JOSEPH J. LACY served until 1998 as President of Lacy Foundries, Inc., a
manufacturer of iron, brass and aluminum castings in Baltimore, Maryland. He has
been a member of the Board of Directors of Mercy Medical Center, Jenkins Nursing
Home and associated Catholic charities.
JOHN H. RIEHL, III is General Partner of Riehl Estate Management Co. in
Baltimore, Maryland. He is a former trustee of Saint Mary's Spiritual Center and
a member of the Parish Council - Shrine of the Sacred Heart Church.
LAWRENCE W. WILLIAMS is Executive Vice President and Community Reinvestment
Officer for Harbor Federal. Mr. Williams serves as a Board Member for Bel Air
Edison Housing Services and is a certified instructor for the Institute of
Financial Education. He also hosts "The Bankers Hour", a weekly radio show which
airs on WCBM, Baltimore.
ROBERT A. WILLIAMS has been affiliated with Harbor Federal since 1955 when
he was appointed to the Board of Directors. In March of 1964 he was elected
President of Harbor Federal. Mr. Williams is a past director of the Greater
Baltimore Real Estate Board and for many years was a Director of Neighborhood
Housing Services of Baltimore. He has also served as Chairman of the Maryland
League of Financial Institutions and on the Boards of the Foundation for Savings
Institutions, the South-East Conference of the U.S. League for Financial
Institutions and the Federal Home Loan Bank of Atlanta.
J. KEMP ROCHE had been employed as a sales representative for 29 years at
St. Joe Paper Co. of Jacksonville, Florida. He is currently retired.
73
<PAGE>
GIDEON N. STIEFF, JR. served until 1990 as Executive Vice President of Kirk-
Stieff Co., a manufacturer of silver products, in Baltimore, Maryland. He has
served on the Board of Directors of the Baltimore Opera Company and as Chairman
of the Board of the Mount Clare Plantation Foundation, and he is a member of the
Kiwanis Club of Baltimore City.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to regulations promulgated under the Exchange Act, the Company's
officers and directors and all persons who beneficially own more than ten
percent of the Common Stock ("Reporting Persons") are required to file reports
detailing their ownership and changes of ownership in the Common Stock and to
furnish the Company with copies of all such ownership reports that are filed.
Based solely on the Company's review of the copies of such ownership reports
which is has received in the past fiscal year or with respect to the past fiscal
year, or written representations from the Reporting Person that no annual report
of changes in beneficial ownership were required, the Company believes that
during fiscal year 2000 all Reporting Persons have complied with these reporting
requirements.
ITEM 10. EXECUTIVE COMPENSATION
--------------------------------
Summary Compensation Table. The following table sets forth information
regarding cash and noncash compensation for each of the three fiscal years ended
March 31, 2000 awarded to or earned by the chief executive officer and the one
other executive officer whose salary and bonus exceeded $100,000 for services
rendered in all capacities to the Company and Harbor Federal and its
subsidiaries during those years.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND FISCAL ------------------------
PRINCIPAL POSITIONS YEAR SALARY BONUS OTHER(1)
------------------- ----- ------ ----- --------
<S> <C> <C> <C> <C>
Robert A. Williams 2000 $123,958 $47,708 $45,352
Chief Executive Officer, 1999 122,372 47,845 45,352
President and Director 1998 118,360 49,755 44,452
Norbert J. Luken 2000 $ 97,864 $34,644 $30,000
Chief Financial 1999 97,094 35,006 30,000
Officer, Treasurer 1998 94,024 37,041 30,000
</TABLE>
[FN]
__________________
(1) Reflects combined compensation under the Company's ESOP and
money purchase plan of $30,000 per year for Mr. Williams and
Mr. Luken; for Mr. Williams, also reflects annual deferred
compensation funded by the payment of premium on life
insurance policy of $4,552 and annual director's fees of
$10,800.
</FN>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Value.
The following table sets forth information regarding option exercises during the
fiscal year ended March 31, 2000 and the number and potential value at March 31,
2000 of options held by the named executive officers.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Options/SARs at Fiscal Year-End at Fiscal Year-End($)(1)
Shares Acquired Value ------------------------------- -------------------------
on exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
--------------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Williams 1,000 $ 14,156 51,702 -- $172,731 $ --
Norbert J. Luken 16,676 204,953 -- -- -- --
</TABLE>
[FN]
__________________
(1) Based on the difference between the closing sale price of the Common Stock
on March 31, 2000 as reported on the Nasdaq Stock Market ($13.00 per share)
and the exercise price ($9.6591 per share).
</FN>
74
<PAGE>
DIRECTOR COMPENSATION
Fees. Directors received fees of $900 per meeting.
During fiscal 2000, directors' fees totaled $64,800.
Director Retirement Plan. Harbor Federal maintains a retirement plan for
non-employee directors (the "Director Retirement Plan") for its directors (i)
who were members of Harbor Federal's Board of Directors at the date of
completion of the conversion of Harbor Federal from mutual to stock form (the
"Conversion"), and (ii) who were not then employees. A participant in the
Director Retirement Plan will receive, on each of the ten annual anniversary
dates of his or her retirement, an amount equal to the product of his or her
"benefit percentage" and the amount of the annual fee he or she received for
service on the Board during the calendar year preceding his or her retirement. A
participant's "benefit percentage" is based on his or her overall years of
service on the Board of Directors of Harbor Federal (and Highland Federal
Savings and Loan Association, which merged into Harbor Federal in 1981), and
increases in increments of 33-1/3% from 0% for less than six years of service,
to 33-1/3% for six years or more of service, to 66-2/3% for 15 years or more of
service, to 100% for 25 or more years of service; provided that a participant's
"benefit percentage" accelerates to 100% if the participant completes five years
of service and retires from service on the Board on or after age 70. If a
participant dies, his or her surviving spouse will receive an amount equal to
50% of the benefits that would have been paid to the participant under the
Director Retirement Plan if the participant had survived to collect the full
benefits payable for retirement or disability (provided that disability payments
had commenced prior to the participant's death). Harbor Federal will pay such
benefits from its general assets, and has established a trust in order to hold
assets with which to pay benefits. Trust assets are subject to the claims of
Harbor Federal's general creditors.
Deferred Compensation Plan. Harbor Federal has established a Deferred
Compensation Plan (the "Deferred Compensation Plan") for the exclusive benefit
of members of Harbor Federal's Board of Directors and executive officers of
Harbor Federal. Pursuant to the terms of the Deferred Compensation Plan,
directors may elect to defer the receipt of all or part of their future fees,
and eligible officers may elect to defer receipt of up to 25% of their future
compensation. Deferred amounts will be credited to a bookkeeping account in the
participant's name, which will also be credited quarterly with the investment
return which would have resulted if such deferred amounts had been invested,
based upon the participant's choice, in either Common Stock or Harbor Federal's
highest annual rate of interest on certificates of deposit, regardless of their
term. Participants may cease future deferrals any time. Each participant may
elect the time and manner of distribution for amounts deferred and any related
accumulated earnings.
Employment Agreements. The Company and Harbor Federal have entered into an
employment agreement with Robert A. Williams, President and Chief Executive
Officer of Harbor Federal and of the Company. In such capacities, Mr. Williams
is responsible for overseeing all operations of Harbor Federal and the Company,
and for implementing the policies adopted by the Board of Directors.
The employment agreement provides for a term of three years, with an annual
base salary equal to Mr. Williams' existing base salary rate in effect on the
date of Conversion. On each anniversary date from the date of commencement of
the employment agreement, the term of employment is extended for an additional
one-year period beyond the then effective expiration date, upon a determination
by the Board of Directors that the performance of Mr. Williams has met the
required performance standards and that such employment agreement should be
extended. The employment agreement provides Mr. Williams with a salary review by
the Board of Directors not less often than annually, as well as with inclusion
in any discretionary bonus plans, retirement and medical plans, customary fringe
benefits and vacation and sick leave. In addition, if the Company terminates Mr.
Williams' employment with the Company for any reason other than termination for
"just cause", then notwithstanding termination of Mr. Williams' employment and
the employment agreement, Mr. Williams and his dependents shall continue to
participate in the Company's group health insurance plan for the life of Mr.
Williams. The employment agreement will terminate upon Mr. Williams' death or
disability, and is terminable by Harbor Federal for "just cause" as defined in
the employment agreement. In the event of termination for just cause, no
severance benefits are available. If the Company or Harbor Federal terminates
Mr. Williams without just cause, he will be entitled to a continuation of his
salary and benefits from the date of termination through the remaining term of
the employment agreement plus an additional 12-month period. If the employment
agreement is terminated due to Mr. Williams' "disability" (as defined in the
employment agreement), he will be entitled to a continuation of his salary and
benefits for up to 180 days following such termination. Severance
75
<PAGE>
benefits payable to Mr. Williams or to his estate will be paid in a lump sum or
in installments, as he (or his estate) elects. Mr. Williams is able to
voluntarily terminate his employment agreement by providing 60 days' written
notice to the Boards of Directors of Harbor Federal and the Company, in which
case he is entitled to receive only his compensation, vested rights and benefits
up to the date of termination.
The employment agreement contains provisions stating that in the event of
Mr. Williams' involuntary termination of employment in connection with, or
within 24 months after, any change in control of Harbor Federal or the Company,
other than for "just cause," or Mr. Williams voluntarily terminates his
employment within 30 days of such change in control. Mr. Williams will be paid
within 10 days of such termination an amount equal to the difference between (i)
2.99 times his "base amount," as defined in Section 280G(b)(3) of the Internal
Revenue Code, and (ii) the sum of any other parachute payments, as defined under
Section 280G(b)(2) of the Internal Revenue Code, that he receives on account of
the change in control. "Control" generally refers to the acquisition, by any
person or entity, of the ownership or power to vote more than 25% of Harbor
Federal's or Company's voting stock, the control of the election of a majority
of Harbor Federal's or the Company's directors, or the exercise of a controlling
influence over the management or policies of Harbor Federal or the Company. In
addition, under the employment agreement, a change in control occurs when,
during any consecutive two-year period, directors of the Company or Harbor
Federal at the beginning of such period cease to constitute two-thirds of the
Board of Directors of the Company or Harbor Federal, unless the election of
replacement directors was approved by a two-thirds vote of the initial directors
then in office. The employment agreement with Harbor Federal provides that
within 5 business days of a change in control, Harbor Federal shall fund, or
cause to be funded, a trust in the amount of 2.99 times Mr. Williams base
amount, that will be used to pay Mr. Williams amounts owned to him upon
termination other than for just cause within one year of the change in control.
The amount to be paid to Mr. Williams from this trust upon his termination is
determined according to the procedures outlined in the employment agreement with
Harbor Federal, and any money not paid to Mr. Williams is returned to Harbor
Federal. The employment agreement also provides for a similar lump sum payment
to be made in the event of Mr. Williams' voluntary termination of employment
within one year following a change in control, upon the occurrence, or within 90
days thereafter, of certain specified events following the change in control,
which have not been consented to in writing by Mr. Williams, including (i) the
requirement that he perform his principal executive functions more than 35 miles
from Harbor Federal's current primary office, (ii) a reduction in his base
compensation as then in effect, (iii) the failure of the Company or Harbor
Federal to maintain existing or substantially similar employee benefit plans,
including material vacation, fringe benefits, stock option and retirement plans,
(iv) the assignment to Mr. Williams of duties and responsibilities which are
other than those normally associated with his position with Harbor Federal, (v)
a material reduction in his authority and responsibility, and (vi) the failure
to re-elect Mr. Williams to the Company's or Harbor Federal's Board of
Directors. The aggregate payments that would be made to Mr. Williams assuming
his termination of employment under the foregoing circumstances at March 31,
2000 would have been approximately $732,000. These provisions may have an anti-
takeover effect by making it more expensive for a potential acquiror to obtain
control of the Company. If Mr. Williams were to prevail over the Company and
Harbor Federal in a legal dispute as to the employment agreement, he would be
reimbursed for his legal and other expenses.
Supplemental Executive Retirement Agreement. Harbor Federal has entered into
a supplemental executive retirement agreement (the "SERA") with Mr. Williams.
Pursuant to the terms of the SERA, upon Mr. Williams's termination of employment
with the Company or Harbor Federal for reasons other than death, disability or
removal for just cause, he will be entitled to receive annual payments from
Harbor Federal in an amount equal to 60% of his "Average Annual Compensation"
less his "Annual Offset Amount." "Average Annual Compensation" means the average
of Mr. Williams annual compensation for the three calendar years preceding his
termination of employment, and "Annual Offset Amount" means the benefits Mr.
Williams would receive in the form of an annuity under Harbor Federal's Money
Purchase Plan upon his termination of employment. Such annual payments shall be
made for 10 years, unless Mr. Williams elects an alternative time and manner of
payment. Harbor Federal has established an irrevocable grantor trust to hold
assets to provide itself with a source of funds to assist Harbor Federal in
meeting its liabilities under the SERA.
In the event Mr. Williams terminates employment due to disability as
determined under his employment agreement, Mr. Williams would receive annual
payments for 10 years in the amount equal to 60% of his Average Annual
Compensation less his Annual Offset Amount, beginning on the first day of the
second month after his
76
<PAGE>
termination of employment. Termination for "just cause" (as determined under Mr.
Williams' employment agreement) would result in his forfeiture of all retirement
benefits under the SERA. In the event Harbor Federal terminates Mr. Williams's
employment for other than "just cause" or in the event of termination of
employment in connection with a change in control (as defined in Mr. Williams's
employment agreement) which triggers the payment of compensation to Mr. Williams
under the terms of his employment agreement, then the present value of the
benefits payable to Mr. Williams would be paid in one lump sum within 10 days of
termination of employment or within 10 days following a change in control, if
earlier.
Severance Agreement. The Company and Harbor Federal have entered into a
severance agreement with Norbert J. Luken. The severance agreement will
terminate on the earlier of (a) three years after the date of completion of the
Conversion, and (b) the date on which Mr. Luken terminates employment with the
Corporation and Harbor Federal, provided that the rights under the severance
agreement will continue following termination of employment if the severance
agreement was in effect at the date of the change in control. On each annual
anniversary date from the date of commencement of the severance agreement, the
term of the severance agreements may be extended for an additional one year
period beyond the then effective expiration date, upon determination by the
Board of Directors that the performance of Mr. Luken has met the required
performance standards and that such severance agreement should be extended.
The severance agreement contains provisions stating that in the event of
involuntary termination of employment in connection with, or within 24 months
after, any change in control of Harbor Federal or the Company, other than for
"just cause," Mr. Luken will be paid within 10 days of such termination an
amount equal to the difference between (i) 2.99 times his "base amount," as
defined in Section 280G(b)(3) of the Internal Revenue Code and (ii) the sum of
any other parachute payments, as defined under Section 280G(b)(2) of the
Internal Revenue Code, that the he receives on account of the change in control.
"Control" generally refers to the acquisition, by any person or entity, of the
ownership or power to vote more than 25% of Harbor Federal's or Company's voting
stock, the control of the election of a majority of Harbor Federal's or the
Company's directors or the exercise of a controlling influence over the
management or policies of Harbor Federal or the Company. In addition, under the
severance agreement, a change in control occurs when, during any consecutive
two-year period, directors of the Company or Harbor Federal at the beginning of
such period cease to constitute two-thirds of the Board of Directors of the
Company or Harbor Federal, unless the election of replacement directors was
approved by a two-thirds vote of the initial directors then in office. The
severance agreement with Harbor Federal provides that within 5 business days of
a change in control, Harbor Federal shall fund, or cause to be funded, a trust
in the amount of 2.99 times the base amount, that will be used to pay amounts
owed to him upon termination other than for just cause within one year of the
change in control. The amount to be paid to Mr. Luken from this trust upon his
termination is determined according to the procedures outlined in the severance
agreement with Harbor Federal, and any money not paid to him is returned to
Harbor Federal. The severance agreement also provides for a similar lump sum
payment to be made in the event of Mr. Luken's voluntary termination of
employment within one year following a change in control, upon the occurrence,
or within 90 days thereafter, of certain specified events following the change
in control, which have not been consented to in writing by him, including (i)
requiring him to perform his principal executive functions more than 35 miles
from Harbor Federal's current primary office, (ii) reducing his base
compensation as then in effect, (iii) failing to maintain existing employee
benefit plans, including material vacation, fringe benefits, stock option and
retirement plans, (iv) assigning material duties and responsibilities to him
which are other than those normally associated with his position with Harbor
Federal, and (v) materially diminishing his authority and responsibility. The
aggregate payment that would be made to Mr. Luken assuming his termination of
employment under the foregoing circumstances at March 31, 2000 would have been
approximately $494,000. These provisions may have an anti-takeover effect by
making it more expensive for a potential acquiror to obtain control of the
Company. In the event that Mr. Luken prevails over the Company and Harbor
Federal in a legal dispute as to the severance agreement, he will be reimbursed
for his legal and other expenses.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
Persons and groups owning in excess of 5% of the Company's Common Stock are
required to file certain reports regarding such ownership pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The following
table sets forth, at the Record Date, certain information as to the Common Stock
believed by management
77
<PAGE>
to be beneficially owned by persons owning in excess of 5% of the Company's
Common Stock, by each individual director and named executive officers and by
all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Amount and Percent of
Nature of Shares of
Name and Address Beneficial Common Stock
of Beneficial Owner Ownership Outstanding
------------------- ---------- ------------
<S> <C> <C>
Harbor Federal Bancorp, Inc. 174,208 (1) 10.47% (1)
Employee Stock Ownership Plan ("ESOP")
705 York Road
Baltimore, Maryland 21204
Joseph J. Lacy 29,940 1.80
John H. Riehl, III 34,699 2.09
Lawrence W. Williams 65,535 (2) 3.86
Robert A. Williams 114,452 (3) 6.67
J. Kemp Roche 4,719 .28
Gideon N. Stieff, Jr. 22,779 1.37
Norbert J. Luken, Jr. 67,867 (4) 4.08
All directors and 339,991 (5) 19.45%
executive officers
as a group (7 persons)
</TABLE>
[FN]
_____________
(1) These shares are held in a suspense account for future allocation among
participating employees as the loan used to purchase the shares is repaid.
The ESOP trustees, currently Directors Lacy, Riehl and Stieff, vote all
allocated shares in accordance with instructions of the participants.
Unallocated shares and shares for which no instructions have been received
are voted by the ESOP trustees in the same ratio as participants direct the
voting of allocated shares or, in the absence of such direction, in the ESOP
trustees' best judgment. The ESOP trustees vote all allocated shares in
accordance with the instructions of the participating employees. As of March
31, 2000, the ESOP owned an aggregate of 174,208 shares, of which 129,425
shares had been allocated to the accounts of participants.
(2) Includes 31,976 shares that may be purchased pursuant to the exercise of
stock options and 12,600 shares allocated to Mr. L. Williams' account
under the ESOP.
(3) Includes 51,702 shares that may be purchased pursuant to the exercise
options and 17,610 shares allocated to Mr. Williams' account under the ESOP.
(4) Includes 16,649 shares allocated to Mr. Luken's account under the ESOP.
(5) Includes 83,678 shares which all directors and executive officers as a
group had a right to purchase pursuant to the exercise of stock options.
</FN>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
Harbor Federal offers loans to its directors, officers and employees. These
loans currently are made in the ordinary course of business with the same
collateral, interest rates and underwriting criteria as those of comparable
transactions prevailing at the time and do not involve more than the normal risk
of collectibility or present other unfavorable features. Under current law,
Harbor Federal's loans to directors and executive officers are required to be
made on substantially the same terms, including interest rates, as those
prevailing for comparable transactions and must not involve more than the normal
risk of repayment or present other unfavorable features. Furthermore, loans to
such persons above the greater of $25,000 or 5% of Harbor Federal's capital and
surplus must be approved in advance by a disinterested majority of the Board of
Directors.
78
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
------------------------------------------
(a) The following exhibits either are filed as part of this report or are
incorporated herein by reference:
NO. DESCRIPTION
-- -----------
3.1 Articles of Incorporation of Harbor Federal
Bancorp, Inc. (1)
3.2 Bylaws of Harbor Federal Bancorp, Inc. (1)
4 Form of Common Stock Certificate (1)
10.1 Employment and Guaranty Agreements between
Harbor Federal Bancorp, Inc. and Harbor
Federal Savings Bank and Robert A. Williams
and Lawrence W. Williams, as amended (2)
10.2 Severance Agreements between Harbor Federal
Bancorp, Inc. and Harbor Federal Savings
Bank and Norbert J. Luken, as amended (2)
10.3 Employment Agreement and Guaranty Agreement
between Thomas J. Riehl and Bank Street
Mortgage Company and Harbor Federal Bancorp,
Inc.(3)
10.4 Harbor Federal Savings Bank Non-Employee
Director Retirement Plan, as amended (2)
10.5 Harbor Federal Savings Bank Deferred
Compensation Plan, as amended (4)
10.6 Harbor Federal Savings Bank Supplemental
Executive Retirement Agreement with Robert
Williams (renamed Grantor Trust), as amended (4)
10.7 Harbor Federal Bancorp, Inc. Incentive
Compensation Plan, as amended (4)
10.8 Harbor Federal Bancorp, Inc. 1995 Stock
Option and Incentive Plan and Trust, as
amended (3)
10.9 Harbor Federal Bancorp, Inc. Management
Recognition Plan and Trust, as amended (3)
10.10 Harbor Federal Bancorp, Inc. 1999 Stock
Incentive Plan (5)
21 Subsidiaries *
23 Consent of KPMG LLP *
27 Financial Data Schedule *
----------
* Filed as an exhibit to this report.
(1) Some or all incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 33-75624).
(2) Incorporated by reference to the Company's Quarterly Report
on Form 10-QSB for the Quarterly Period ended June 30, 1994 and the
Company's Annual Report on Form 10-KSB for the year ended March 31, 1998.
(3) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended March 31, 1998.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-75624) and the Company's Annual Report on Form 10-KSB for
the year ended March 31, 1998.
(5) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended March 31, 1999.
(b) No report on Form 8-K was filed during the last quarter of the fiscal
year covered by this report.
79
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HARBOR FEDERAL BANCORP, INC.
Date: Date: June 15, 2000 By:/s/ Robert A. Williams
-------------------------------
Robert A. Williams
President
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Robert A. Williams Date: June 15, 2000
----------------------------------
Robert A. Williams
President
(Director and Principal Executive Officer)
By: /s/ Norbert J. Luken Date: June 15, 2000
----------------------------------
Norbert J. Luken
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Joseph J. Lacy Date: June 15, 2000
----------------------------------
Joseph J. Lacy
Director
By: /s/ John H. Riehl, III Date: June 15, 2000
----------------------------------
John H. Riehl, III
Director
By: /s/ J. Kemp Roche Date: June 15, 2000
----------------------------------
J. Kemp Roche
Director
By: /s/ Gideon N. Stieff, Jr. Date: June 15, 2000
----------------------------------
Gideon N. Stieff, Jr.
Director
By: /s/ Lawrence W. Williams Date: June 15, 2000
----------------------------------
Lawrence W. Williams
Director
<PAGE>
[X] PLEASE MARK VOTES HARBOR FEDERAL BANCORP, INC.
AS IN THIS EXAMPLE
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
HARBOR FEDERAL BANCORP, INC. FOR THE SPECIAL MEETING OF
STOCKHOLDERS TO BE HELD ON AUGUST 16, 2000.
The undersigned stockholder of Harbor Federal Bancorp, Inc. (the "Company")
hereby appoints Robert A. Williams and Lawrence W. Williams as proxies, each of
them with full power of substitution, to attend and act as proxy for the
undersigned and to cast all votes which the undersigned stockholder is entitled
to cast at the special meeting of stockholders of the Company to be held at 3:00
p.m. on August 16, 2000, at the Days Inn, Loch Raven Boulevard and Route 695,
Towson, Maryland, and any and all adjournments and postponements thereof (the
"Special Meeting"), with all powers which the undersigned would possess if
personally present (i) as designated below with respect to the matters set forth
below and described in the accompanying Proxy Statement-Prospectus and (ii) in
their discretion with respect to any other business that may properly come
before the Special Meeting. The undersigned stockholder hereby revokes any proxy
or proxies heretofore given. The Board of Directors recommends a vote "FOR"
approval and adoption of the Merger Agreement.
1. Approval and adoption of the Agreement and Plan of Merger, dated as of May
3, 2000, by and between Provident Bankshares, Inc. and the Company pursuant
to which the Company will merge with and into Provident and each share of
common stock of the Company, par value at $.01 per share, will be converted
into the right to receive 1.256 shares of common stock, par value $1.00 per
share, of Provident, and cash in lieu of fractional shares, all on and
subject to the terms and conditions contained therein.
For Against Abstain
[_] [_] [_]
This proxy will be voted in the manner directed by the undersigned
stockholder. If no direction is made, this proxy will be voted (1) "FOR"
approval and adoption of the Merger Agreement (as defined herein) and (2) in the
discretion of the proxies as to all other matters that may properly come before
the Special Meeting.
This proxy card will also be used to provide voting instructions to the
trustee for any shares of common stock of the Company allocated to participants
under the Harbor Federal Bancorp, Inc. Employee Stock Ownership Plan.
------------------------
Please be sure to sign and date Date
this proxy in the box below.
----------------------------------------------------------------
Stockholder sign above Co-holder (if any) sign above
--------------------------------------------------------------------------------
Detach above card, sign, date and mail in postage paid envelope provided.
HARBOR FEDERAL BANCORP, INC.
--------------------------------------------------------------------------------
Please date and sign here exactly as name appears at left. When signing as
attorney, administrator, trustee or guardian, give full title as such; and when
stock has been issued in the name of two or more persons, all should sign.
PLEASE ACT PROMPTLY. SIGN, DATE & MAIL YOUR PROXY CARD TODAY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
IF YOU RECEIVE MORE THAN ONE PROXY CARD, PLEASE DATE, SIGN AND RETURN ALL CARDS
IN THE ACCOMPANYING ENVELOPE.
--------------------------------------------------------------------------------
