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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
Commission File Number: 0-24194
HARBOR FEDERAL BANCORP, INC.
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(Exact name of small business issuer as specified
in its charter)
Maryland 52-1860591
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
705 York Road, Baltimore, Maryland 21204
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(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code:
(410) 321-7041
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Securities registered pursuant to
Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Check whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the past 12 months (or for such
shorter 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
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Transitional small business disclosure format (check one):
YES NO X
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Check if no disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is 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:
$15,598,087
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:
$22,825,597 (1,323,223 shares at the most recent price of
which management was aware as of June 2, 1997 ($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: 1,693,420 shares of common stock as of June 2, 1997.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's Annual Report to
Stockholders for the Fiscal Year Ended March 31, 1997 (the
"Annual Report"). (Part II)
2. Portions of the Proxy Statement for the registrant's
1997 Annual Meeting of Stockholders (the "Proxy Statement").
(Part III)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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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 and a note payable from the
Company's employee stock ownership plan ("ESOP"), and the
Company's principal business has been the business of Harbor
Federal.
The holding company structure permits the Company to expand
the financial services currently offered through Harbor
Federal, although there currently are no definitive plans or
arrangements for such expansion. As a holding company, the
Company has greater flexibility than Harbor Federal to
diversify its business activities through existing or newly
formed subsidiaries or through acquisition or merger with other
financial institutions, although the Company currently does not
have any plans, agreements, arrangements or understandings with
respect to any such acquisitions or mergers. 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 of Operations in the Annual
Report.
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
1
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promulgated by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). For additional information,
see "Regulation of the Bank."
PROPOSED LEGISLATIVE CHANGES
Legislation recently introduced in the Senate and the House
of Representatives could have a profound impact on the
operations of the Bank. Such legislation includes proposals to
eliminate regulatory distinctions between banks and savings
associations under federal law and would ease the merger of the
Savings Association Insurance Fund ("SAIF") and the Bank
Insurance Fund ("BIF"), the two deposit insurance funds. In
its current form, the legislation would require all
federally-chartered savings associations to convert to national
banks or to state depository institutions effective on a
to-be-specified date. The legislation will be subject to major
revisions and might not be adopted soon or ever.
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.
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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,
-------------------------------------------------
1997 1996 1995
--------------- --------------- -------------
Amount % Amount % Amount %
------ ----- ------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family
residential. . . . . . $119,924 80.84% $100,157 81.58% $87,332 81.15%
Multi-family
residential . . . . . 956 .64 980 .80 1,002 .93
Commercial . . . . . . 12,183 8.21 9,054 7.38 6,155 5.72
Construction (1) . . . 6,633 4.47 6,130 4.99 9,209 8.56
Land . . . . . . . . . 1,473 .99 1,928 1.57 1,964 1.83
Loans held for sale. . 3,866 2.61 1,199 .98 -- --
Consumer loans:
Savings accounts . . . 651 .44 667 .54 254 .24
Home equity loans. . . 400 .27 499 .41 -- --
Other. . . . . . . . . 112 .08 88 .07 2 --
Commercial business(2) . 1,396 .94 1,400 1.14 1,144 1.06
Accrued interest
receivable. . . . . . . 761 .51 662 .54 554 .51
-------- ------ -------- ------ -------- ------
148,355 100.00% 122,764 100.00% 107,616 100.00%
====== ====== ======
Less:
Loans in process . . . 2,307 4,767 4,312
Discounts, deferred
loan fees and other . 966 667 592
Allowance for loan
losses. . . . . . . . 380 438 465
-------- -------- --------
Total . . . . . . . $144,702 $116,892 $102,247
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<FN>
__________
(1) Consisted solely of one- to four-family residences
under construction at March 31, 1997, 1996 and
1995.
(2) Includes financing leases of $277,000 and $8,000
at March 31, 1997 and 1995, respectively.
</FN>
</TABLE>
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The following table sets forth information at March 31, 1997
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, loans having no
schedule of repayments and no stated maturity and overdrafts are
reported as due in one year or less.
<TABLE>
<CAPTION>
3 Months 6 Months
or Less 3-6 Months - 1 Year 1-3 Years 3-5 Years 5-10 Years
-------- ---------- -------- --------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential mortgage (1) . . . $ 6,516 $5,071 $ 8,319 $25,045 $38,214 $11,299
Construction and Land
Development. . . . . . . . . 1,218 -- 1,441 1,118 1,614 109
Commercial . . . . . . . . . . 1,882 355 3,241 1,483 580 1,224
Non-real estate (2) . . . . . . 300 115 393 610 709 32
Accrued interest receivable . . 761 -- -- -- -- --
------- ------ ------- ------- ------- -------
Total . . . . . . . . . . . $10,677 $5,541 $13,394 $28,256 $41,117 $12,664
======= ====== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
More Than
10-20 Years 20 Years Total
----------- --------- --------
(In thousands)
<S> <C> <C> <C>
Real estate:
Residential mortgage (1) . . . $10,482 $20,200 $125,146
Construction and Land
Development. . . . . . . . . -- 299 5,799
Commercial . . . . . . . . . . 948 2,470 12,183
Non-real estate (2) . . . . . . -- -- 2,159
Accrued interest receivable . . -- -- 761
------- ------- --------
Total . . . . . . . . . . . $11,430 $22,969 $146,048
======= ======= ========
</TABLE>
The following table sets forth the dollar amount of all loans
at March 31, 1997 due on or after March 31, 1998 which have
predetermined interest rates and have 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) . . $40,142 $65,098 $105,240
Construction and Land
Development. . . . . . . . 579 2,561 3,140
Commercial. . . . . . . 6,606 99 6,705
Non-real estate (2) . . . 685 666 1,351
------- ------- --------
Total. . . . . . . . . . $48,012 $68,424 $116,436
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<FN>
______________
(1) Includes both one- to four-family residential and
multi-family residential.
(2) Includes commercial loans, loans secured by
savings accounts, home improvement loans and
financing leases.
</FN>
</TABLE>
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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.
Originations, Purchases and Sales of Loans. The following
table sets forth certain information with respect to Harbor
Federal's loan originations and purchases (there were no sales)
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------
1997 1996 1995
----- ------ ------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
One- to four-family. . . . . . . $ 18,456 $ 7,235 $ 10,093
Land . . . . . . . . . . . 844 640 554
Commercial . . . . . . . . 2,606 4,971 595
Construction. . . . . . . . 16,714 6,081 16,825
Consumer . . . . . . . . . . -- 346 285
Commercial business. . . . . -- 886 202
-------- -------- --------
Total loans originated . . 38,620 20,159 28,554
Loan repayments. . . . . . . . (20,307) (20,126) (18,263)
-------- -------- --------
Net loan originations. . . $ 18,313 $ 33 $ 10,291
======== ======== ========
Loans purchased:
Real estate loans:
One- to four-family. . . . $ 9,102 $ 11,731 $ 6,643
Land . . . . . . . . . . . 214 -- --
Commercial . . . . . . . . 19 1,293 556
Consumer . . . . . . . . . . -- 894 --
Commercial business. . . . . -- 507 --
-------- -------- --------
Total loans purchased. . $ 9,335 $ 14,425 $ 7,199
======== ======== ========
</TABLE>
Management attributes the increased amounts of one- to
four-family real estate loan originations in fiscal 1997 and 1996
to increased demand for such loans during those years. Moreover,
Harbor Federal hired its first mortgage loan sales representative
in February 1996 which provided additional one- to four-family
loan production during this fiscal year. 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, 1997, $119.9 million,
or 80.8%, 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, 1997, $78.1 million, or
65.1%, of Harbor Federal's one- to four-family residential loans
had adjustable interest rates, and $41.8 million, or 34.9%, 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
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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.
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 all loans for
portfolio. At March 31, 1997, Harbor Federal was servicing $9.2
million of loans for others. The majority of this amount, $8.9
million, is serviced for Bankers Affiliate, Inc. (formerly "Cash,
Inc."), a consumer lending company in which Harbor Federal is a
1/3 owner.
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, 1997, one-to four-family
residential construction loans constituted $6.6 million, or 4.4%,
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.
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Harbor Federal also offers loans for the acquisition and
development of land. At March 31, 1997, land acquisition and
development loans constituted $1.5 million, or 1.0%, 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 24 months, respectively.
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, 1997, Harbor Federal had 51 of these loans, with a
median loan balance of $257,600.
The following paragraphs set forth information regarding
Harbor Federal's commercial and multi-family real estate loans
with outstanding balances exceeding $500,000 at March 31, 1997.
None of these loans was classified by management as substandard,
doubtful or loss or designated by management as special mention
at that date. For information regarding Harbor Federal's asset
classification policies, see "Asset Classification, Allowances
for Losses and Non-Performing Assets."
U.S. Post Office in Cicero, New York. In September
1994, Harbor Federal purchased a 40%. participation interest in
the amount of $555,600 in a loan secured by a full service postal
facility. At that time, an appraisal indicated a market value of
$1,464,000, for a loan-to-value ratio of 95%. The property has
been leased for use by the U.S. Postal Service, an agency whose
obligations are backed by the federal government, under a 20-year
lease. The loan is being amortized over twenty years for the
purpose of monthly payments of principal and interest, but the
full balance of the loan will be callable in September 1999. At
March 31, 1997, the outstanding balance was $540,000, and the
loan was fully performing in accordance with its terms.
Warehouse/Office in Baltimore, Maryland. In June 1990,
Harbor Federal made a $975,000 loan secured by warehouse/
office/parking lot. At that time, an appraisal indicated a
market value of $1,300,000, for a loan-to-value ratio of 75%.
The loan is being amortized over twenty years for the purpose of
monthly payments of principal and interest, and the full balance
of the loan will be due in June 2010. At March 31, 1997, the
outstanding balance was $823,000, and the loan was fully
performing in accordance with its terms.
Retail Space/Restaurant in Ocean City, Maryland. In
December 1995, Harbor Federal granted a $2,500,000 construction/
permanent loan secured by a restaurant and six retail outlets
with Boardwalk frontage. At that time an appraisal indicated a
market value of $3,600,000 for a loan to value ratio of 69%. The
loan is
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being amortized over a period of twenty years, and the full
balance is due in January 2016. At March 31, 1997 the
outstanding balance was $2,445,000, and the loan was fully
performing in accordance with its terms.
Professional Real Estate Offices in Central Maryland.
In January 1996, Harbor Federal originated four separate loans to
the same borrowers totaling $2,022,202 secured by four full
service real estate brokerage offices. The four commercial
office buildings are situated in Howard County, Maryland, Anne
Arundel County, Maryland and two in Harford County, Maryland. At
the time the appraisals indicated a market value of $2,795,000
for a total loan to value ratio of 75%. The loans are being
amortized over thirty years for the purpose of monthly payments
of principal and interest, and the full balance of the loans will
be due in February 2026. At March 31, 1997 the outstanding
aggregate balance was $2,007,000, and the loans were fully
performing in accordance with their terms.
Dental Offices and Two Commercial Building Lots in
Baltimore County, Maryland. Harbor Federal granted three
separate loans to the same borrower. One loan was made in June
1994. The property is improved with a Dental/Medical Center and
had an opening balance of $295,000 and matures May 2019. At
the time an appraisal indicated a value of $704,000 for a
loan-to-value ratio of 42%. Additionally, two commercial
building lot loans with the same borrower totaling $410,000 were
made in February 1995 and November 1996 and are due to mature no
later than September 1999. An appraisal on these two lots
estimated a loan-to-value ratio of 76%. At March 31, 1997 the
outstanding aggregate balance was $638,000, and the loans were
fully performing in accordance with their terms.
Three Commercial Buildings in Cockeysville, Maryland.
Harbor Federal made two separate loans to the same borrowers.
One was settled in February 1996 for $450,000 and matures January
2016 with possible annual interest rate changes. This property
is a large commercial strip specializing in antique sales. The
appraisal indicated a value of $1,141,500 for a loan-to-value
ratio of 39%. Furthermore a mortgage was issued to the same
borrowers for $850,000 in October 1996 with the security being a
full service restaurant with a liquor license and a separate
catering hall. The note comes due September 2016 with interest
rate changes possible on an annual basis. At the inception an
appraisal was completed indicating a value of $1,520,000 for a
loan-to-value ratio of 56%. At March 31, 1997 the outstanding
aggregate balance was $1,286,000, and the loans were fully
performing in accordance with their terms.
Fast Food Restaurant/Two Commercial Buildings in Towson,
Maryland. In July 1996, Harbor Federal granted two loans
totaling $780,000 on a major fast food outlet and two small
commercial office buildings. At the time the appraisals
indicated a market value of $1,314,000 for a loan-to-value ratio
of 59%. The loans are being amortized over twenty years for the
purpose of monthly payments of principal and interest, and the
full balance of the loans will be due in June 2003. All
associated properties have leases which are assignable to the
Bank. At March 31, 1997 the outstanding aggregate balance was
$772,000, and the loans were fully performing in accordance with
their terms.
In addition, at March 31, 1997 Harbor Federal had $4.6
million in 37 commercial and multi-family real estate loans with
outstanding balances not exceeding $500,000, none of which was
adversely classified or designated by management.
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
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<PAGE>
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. Under laws and regulations
enacted during the past several years, 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, 1997, Harbor
Federal's commercial business loans totaled $1.4 million and
primarily consisted of line of credit loans to developers and two
term loans to a leasing company. There are eight direct line of
credit loans with local developers of up to $1.7 million in the
aggregate, each secured by the personal guarantee of the
respective borrower. At March 31, 1997, the total outstanding
balance of these loans was $1.1 million, and all of these loans
were performing in accordance with their respective terms. In
addition, loans to a leasing company were made in October 1996
and February 1997. The aggregate original amount of these loans
was $500,000. At March 31, 1997, the aggregate outstanding
balance of these loans was $277,000 (with a remaining term of
approximately 62 months), and the loans 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 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
or commercial business lending. Harbor Federal's consumer loans
primarily consist of loans secured by deposit accounts at Harbor
Federal. Harbor Federal makes deposit account loans for up to
90% of the face amount of the deposit balance. The interest rate
on these loans generally is two percent above the rate paid on
the account, and interest is billed on a monthly basis. The
account must be pledged as collateral to secure the loan. For
information regarding the consumer lending activities of Harbor
Federal's partially owned subsidiary, Bankers Affiliate, Inc.,
see "Subsidiary Activities."
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
9<PAGE>
<PAGE>
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
Vice President of Lending 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 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.
10<PAGE>
<PAGE>
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.
At this time, the borrower is contacted by telephone. 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 r re-classification. The Board of
Directors reviews and approves all classifications. At March 31,
1997, Harbor Federal had no assets classified as loss, $180,000
of assets classified as doubtful, $345,000 of assets classified
as substandard and $934,000 of assets designated as special
mention. Harbor Federal's total adversely classified and
designated assets were $1,459,000, which represented 0.67% of
Harbor Federal's total assets and 5.96% of Harbor Federal's
tangible regulatory capital, at March 31, 1997. 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.
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
and forecasted 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 conditions differ substantially from the economic
conditions in 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,
11<PAGE>
<PAGE>
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 or net realizable 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 fair value. 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, 1997, 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.
<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,
--------------------------
1997 1996 1995
----- ------ ------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of period . . . $438 $465 $489
Charge-offs:
Real estate - mortgage . . . . . . -- -- 20
Commercial business. . . . . . . . 91 27 7
---- ---- ----
Total charge-offs . . . . . . . 91 27 27
---- ---- ----
Provision for loan losses. . . . . . 33 -- 3
---- ---- ----
Balance at end of period . . . . . . $380 $438 $465
==== ==== ====
Ratio of net charge-offs to
average loans outstanding
during the period. . . . . . . . . 0.07% 0.03% 0.03%
==== ==== ====
12<PAGE>
<PAGE>
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>
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------------------------------
1997 1996 1995
------------------------ ----------------------- ----------------------
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. . . . . . . . $ 155 81.48% $ 155 82.38% $ 165 82.08%
Construction . . . . . . . 125 4.47 125 4.99 125 8.56
Commercial . . . . . . . . 100 8.21 100 7.38 100 5.72
Commercial business. . . . . -- .94 58 1.14 75 1.06
----- ----- -----
Total allowance for
loan losses. . . . . . . . $ 380 $ 438 $ 465
===== ===== =====
</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 increase its loss allowance, thereby negatively 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.
The following table sets forth information with respect to
Harbor Federal's nonperforming 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,
--------------------------
1997 1996 1995
----- ------ ------
(In thousands)
<S> <C> <C> <C>
Loans accounted for on a
nonaccrual basis:
Real Estate:
Residential. . . . . . . . . . $ 289 $ 403 $ 264
===== ===== =====
Percentage of nonperforming
loans to total loans . . . . . . 0.20% 0.34% 0.26%
===== ===== =====
Other nonperforming assets (1) . . $ 465 $ 44 $ 91
===== ===== =====
Percentage of nonperforming assets
to total assets . . . . . . . . 0.34% 0.23% 0.37%
===== ===== =====
<FN>__________
(1) Other nonperforming assets represents property acquired by
Harbor Federal through foreclosure of repossession. The
property is carried at the lower of its fair market value or
the principal balance of the related loan, whichever is
lower.
</FN>
</TABLE>
13<PAGE>
<PAGE>
During the year ended March 31, 1997, gross interest income
of $11,000 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 $5,000. At March 31, 1997, management had identified
approximately $1,170,000 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 10 loans, all of which had balances below
$300,000, and substantially all of which were secured by one- to
four-family residences and were between 60 and 89 days
delinquent. 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,
--------------------------
1997 1996 1995
----- ------ ------
(In thousands)
<S> <C> <C> <C>
FHLMC . . . . . . . . . . . . . . . $ 5,753 $ 9,449 $ 6,354
GNMA. . . . . . . . . . . . . . . . 6,048 1,698 2,089
FNMA. . . . . . . . . . . . . . . . 2,243 6,638 3,226
------- ------- -------
Total. . . . . . . . . . . . . . $14,044 $17,785 $11,669
======= ======= =======
</TABLE>
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, 1997. 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.<PAGE>
<TABLE>
<CAPTION>
One to Five Years More Than Five Years Total Investment Portfolio
--------------------- -------------------- ----------------------------
Carrying Average Carrying Average Carrying Fair Average
Value Yield Value Yield Value Value Yield
-------- ------- -------- --------- -------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
FHLMC. . . . . . . . . $1,338 5.47% $ 4,415 7.51% $ 5,753 $ 5,750 7.03%
GNMA . . . . . . . . . -- -- 6,048 7.98 6,048 6,114 7.98
FNMA . . . . . . . . . 1,189 6.09 1,054 9.04 2,243 2,270 7.47
------ ------- ------- -------
Total. . . . . . . . $2,511 $11,533 $14,044 $14,134
====== ======= ======= =======
</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 in the
Annual Report.
14<PAGE>
<PAGE>
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, 1997 had an aggregate carrying value of $22.5 million. The
remaining investments in debt securities are carried at cost,
adjusted for amortization of premiums and accretion for discounts
on a method which approximates the interest method over the term
of the related security.
The following table sets forth information regarding Harbor
Federal's investment securities and other investments at the
dates indicated.
<TABLE>
<CAPTION>
At March 31,
--------------------------
1997 1996 1995
----- ------ ------
(In thousands)
<S> <C> <C> <C>
Investment securities:
U.S. government and agency
obligations . . . . . . . . . . $46,783 $48,082 $25,464
Corporate bonds and notes. . . . -- -- 998
Other. . . . . . . . . . . . . . 213 166 118
------- ------- -------
Total investment securities. . 46,996 48,248 26,580
Federal funds sold . . . . . . . . 3,939 3,442 2,155
Interest-earning deposits. . . . . 276 993 143
FHLB stock . . . . . . . . . . . . 1,366 1,270 1,270
------- ------- -------
Total. . . . . . . . . . . . . $52,577 $53,953 $30,148
======= ======= =======
</TABLE>
15<PAGE>
<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, 1997.
<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 . . . . $2,000 6.87% $9,461 5.65% $30,501 7.03%
FHLMC stock. . . . . . . . . 213 1.47 -- --
------ ------ -------
Total investment
securities . . . . . . . 2,213 9,461 30,501
Federal funds sold . . . . . . 3,939 6.25 -- --
Interest-earning deposits. . . 276 6.60 -- --
FHLB stock . . . . . . . . . . 1,366 7.25 -- --
------ ------ -------
Total. . . . . . . . . . $7,794 $9,461 $30,501
====== ====== =======
</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 . . . . $4,821 7.80% $46,783 $46,208 6.83%
FHLMC stock. . . . . . . . . -- 213 213 1.47
------ ------- -------
Total investment
securities . . . . . . . 4,821 46,996 46,421
Federal funds sold . . . . . . -- 3,939 3,939 6.25
Interest-earning deposits. . . -- 276 276 6.60
FHLB stock . . . . . . . . . . -- 1,366 1,366 7.25
------ ------- -------
Total. . . . . . . . . . $4,821 $52,577 $52,002
====== ======= =======
</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 in the
Annual Report.
16<PAGE>
<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, 1997 were
represented by the various programs described below.
<TABLE>
<CAPTION>
Weighted Average Minimum Minimum Percentage of
Interest Rate (1) Term Category Amount Balances Total Savings
- ---------------- ------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C>
0.96% None NOW accounts $ 300 $ 5,426 3.12%
3.05 None Passbook accounts 100 31,254 17.95
-- None Commercial checking 750 1,066 .61
3.05 None Christmas club 10 333 .19
Money Market
------------
3.30 None Money market passbook 2,500 8,329 4.78
3.39 None Money market checking 2,500 3,798 2.18
3.98 None Money market plus passbook 10,000 12,413 7.13
3.30 None IRA money market passbook 100 260 .15
Certificates of Deposit
-----------------------
3.20 3 month Fixed-Term, Fixed-Rate 1,000 93 .05
5.10 6 month Fixed-Term, Fixed-Rate 1,000 3,921 2.25
5.10 6 month Fixed-Term, Fixed-Rate 10,000 5,593 3.21
5.42 12 month Fixed-Term, Fixed-Rate 1,000 9,293 5.34
5.40 12 month Fixed-Term, Fixed-Rate 10,000 18,625 10.70
5.82 18 month Fixed-Term, Fixed-Rate 1,000 15,441 8.87
5.90 24 month Fixed-Term, Fixed-Rate 1,000 12,908 7.42
6.31 30 month Fixed-Term, Fixed-Rate 1,000 1,548 .89
6.06 36 month Fixed-Term, Fixed-Rate 1,000 8,665 4.98
5.76 42 month Fixed-Term, Fixed-Rate 1,000 1,171 .67
7.05 48 month Fixed-Term, Fixed-Rate 1,000 18,770 10.78
6.53 60 month Fixed-Term, Fixed-Rate 1,000 15,198 8.73
-------- ------
$174,105 100.00%
======== ======
</TABLE>
17<PAGE>
<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
1997 Deposits Decrease)
--------- -------- ---------
<S> <C> <C> <C>
Certificates . . . . . . . . . . $111,226 63.89% $11,137
Money market . . . . . . . . . . 24,800 14.24 469
Passbook . . . . . . . . . . . . 31,254 17.95 (1,834)
NOW. . . . . . . . . . . . . . . 5,426 3.12 (16)
Christmas Club . . . . . . . . . 333 .19 (49)
Commercial checking. . . . . . . 1,066 .61 (264)
-------- ------ -------
Total. . . . . . . . . . . . $174,105 100.00% $ 9,443
======== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Balance at Balance at
March 31, % Increase March 31, %
1997 Deposits (Decrease) 1995 Deposits
--------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Certificates . . . . . . $100,089 60.8% $36,511 $ 63,578 56.9%
Money market . . . . . . 24,331 14.8 4,661 19,670 17.6
Passbook . . . . . . . . 33,088 20.1 8,381 24,707 22.1
NOW. . . . . . . . . . . 5,442 3.3 2,574 2,868 2.6
Christmas Club . . . . . 382 .2 (20) 402 .3
Commercial checking. . . 1,330 .8 763 567 .5
-------- ----- ------- -------- -----
Total. . . . . . . . $164,662 100.0% $52,870 $111,792 100.0%
======== ===== ======= ======== =====
</TABLE>
18<PAGE>
<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,
--------------------------------------------------------------------
1997 1996 1995
------------------- -------------------- ----------------------
Interest- Interest- Interst-
Bearing Bearing Bearing
Demand Time Demand Time Demand Time
Deposit Deposits Deposits Deposits Deposits Deposits
-------- -------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average Balance. . . . . . . $61,222 $103,309 $49,584 $72,991 $57,841 $60,438
Average Rate . . . . . . . . 3.19% 5.94% 3.21% 5.96% 2.86% 4.96%
</TABLE>
The following table sets forth the time deposits in Harbor
Federal classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
--------------------------
1997 1996 1995
----- ------ ------
(In thousands)
<S> <C> <C> <C>
2 - 3.99% . . . . . . . . $ 118 $ 298 $ 2,534
4 - 5.99% . . . . . . . . 67,143 46,455 37,654
6 - 7.99% . . . . . . . . 43,874 53,253 20,855
8 - 9.99% . . . . . . . . 91 83 2,535
-------- -------- ---------
$111,226 $100,089 $ 63,578
======== ======== =========
</TABLE>
The following table sets forth the amount and maturities of
time deposits in Harbor Federal at March 31, 1997.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------
Rate Less Than After
One Year 1-2 Years 2-3 Years 3 Years Total
-------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
2 - 3.99% . . . . $ 93 $ 6 $ 19 $ -- $ 118
4 - 5.99% . . . . 47,158 17,122 901 1,962 67,143
6 - 7.99% . . . . 5,209 15,184 16,284 7,197 43,874
8 - 9.99% . . . . 91 -- -- -- 91
------- ------- ------- ------ --------
$52,551 $32,312 $17,204 $9,159 $111,226
======= ======= ======= ====== ========
</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, 1997.
Certificates
Maturity Period of Deposit
--------------- ------------
(In thousands)
Three months or less . . . . . . $ 1,642
Three through six months . . . . 660
Six through nine months. . . . . 1,780
Nine through twelve months . . . 1,371
Over twelve months . . . . . . . 7,087
-------
Total. . . . . . . . . . . . . $12,540
=======
19<PAGE>
<PAGE>
The following table sets forth the deposit activities of
Harbor Federal for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------
1997 1996 1995
----- ------ ------
(In thousands)
<S> <C> <C> <C>
Deposits . . . . . . . . . . . $191,670 $159,535 $163,718
Withdrawals. . . . . . . . . . 173,760 112,608 170,291
-------- -------- --------
Net increase (decrease)
before interest credited . 17,910 46,927 (6,573)
Interest credited. . . . . . . 8,467 5,943 4,834
-------- -------- --------
Net increase (decrease)
in deposits. . . . . . . . $ 9,443 $ 52,870 $ (1,739)
======== ======== ========
</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, 1997, Harbor Federal had no advances outstanding from the
FHLB of Atlanta.
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 reverse repurchase agreements of $16.5 million
and $4.5 million at March 31, 1997 and 1996, respectively. The
average rates of interest on these reverse repurchase agreements
were 5.68% and 5.70%, respectively.
For additional information, see the Management's Discussion
and Analysis of Financial Condition and Results of Operations and
Note 8 of Notes to Consolidated Financial Statements in the
Annual Report.
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. In addition, Harbor Federal
received OTS approval to lend an amount of up to one-half of its
regulatory capital to an affiliate, Bankers Affiliate, Inc.
("BAI") (formerly "Cash, Inc."). Harbor Federal's principal
subsidiaries are Harbor Service Corporation ("HSC"), a wholly
owned subsidiary that receives insurance commissions on credit
life and health & accident policies written for Harbor Federal's
borrowers, and BAI, a one-third owned subsidiary that makes
various types of consumer and home equity loans, generally in
amounts not in excess of $50,000, for customers of Harbor Federal
and two other local savings institutions. At March 31, 1997, the
net book values of Harbor Federal's investments in BAI and HSC
totaled $2,776,730, including advances of $2,750,000 to BAI.
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.
20<PAGE>
<PAGE>
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, 1997, 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,
.3% of its total assets 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, 1997 of $1,366,000. For additional
information, see Note 10 of the Notes to Consolidated Financial
Statements in the Annual Report.
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
21<PAGE>
<PAGE>
housing finance. At March 31, 1997, Harbor Federal had no
advances outstanding with the FHLB of Atlanta. See "Deposit
Activity and Other Sources of Funds -- Borrowings."
Liquidity Requirements. Harbor Federal is required to
maintain average daily balances of liquid assets (cash, deposits
maintained pursuant to Federal Reserve Board requirements, time
and savings deposits in certain institutions, obligations of the
United States and states and political subdivisions thereof,
shares in mutual funds with certain restricted investment
policies, highly rated corporate debt and mortgage loans and
mortgage-related securities with less that one year to maturity
or subject to pre-arranged sale within one year) equal to the
monthly average of not less than a specified percentage
(currently 5%) of its net withdrawable savings deposits plus
short-term borrowings. The Bank is also required to maintain
average daily balances of short-term liquid assets at a specified
percentage (currently 1%) of the total of its net withdrawable
savings accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet liquidity
requirements. The average daily liquidity ratio of the Bank for
the month of March 1997 was 9.50%.
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; (iii) the
institution shall not be eligible to obtain any advances from its
FHLB; and (iv) 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
immediately repay any outstanding FHLB advances (subject to
safety and soundness considerations).
To meet its QTL test, a savings institution's "Qualified
Thrift Investments" must represent 65% of "portfolio assets."
Under OTS implementing regulations, 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 consist of
(i) loans, equity positions or securities related to domestic,
residential real estate or manufactured housing and (ii) 50% of
the dollar amount of residential mortgage loans subject to sale
under certain conditions. 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. Qualified Thrift Investments do not include any
intangible asset.
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 will cease to be a Qualified Thrift
Lender if its percentage of Qualified Thrift Investments as
measured by monthly averages over the immediately preceding
12-month period falls below 65% for four or more 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, 1997, approximately 77.6% of Harbor Federal's
portfolio assets were invested in Qualified Thrift Investments,
which was in excess of the percentage required to qualify the
Bank under the QTL test.
Regulatory Capital Requirements. Under OTS capital
standards, savings institutions must maintain "tangible" capital
equal to at least 1.5% of adjusted total assets, "core" capital
equal to at least 3% of adjusted total assets and "total" capital
(a combination of core and "supplementary" capital) equal to at
least 8% of "risk-weighted" assets. In addition, the OTS has
adopted regulations which 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 is rated
Composite 1 under the OTS examination rating system). 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
22<PAGE>
<PAGE>
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 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. Tangible capital is given the same
definition as core capital but does not include qualifying
supervisory goodwill and is reduced by the amount of all the
savings institution's intangible assets except for certain
purchased mortgage servicing rights. 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, 1997, Harbor Federal had no material investments in or
extensions of credit to nonincludable subsidiaries.
OTS regulations further provide that core and tangible
capital need not be reduced by the amount of core deposit
intangibles resulting from branch purchase transactions
consummated (or under firm contract) prior to March 4, 1994, to
the extent permitted by OTS, provided that such core deposit
intangibles are valued in accordance with generally accepted
accounting principles, supported by credible assumptions, and
have their amortization adjusted at least annually to reflect
decay rates (past and present) in the acquired customer base. As
of March 31, 1997, Harbor Federal had no such transactions.
Adjusted total assets are a savings institution's total
assets as determined under generally accepted accounting
principles, adjusted for certain goodwill amounts, and increased
by a pro rated portion of the assets of subsidiaries in which the
institution holds a minority interest and which are not engaged
in activities for which the capital rules require the institution
to net its debt and equity investments against capital, as well
as a pro rated portion of the assets of other subsidiaries for
which netting is not fully required under phase-in rules.
Adjusted total assets are reduced by the amount of assets that
have been deducted from capital, the portion of the institution's
investments in subsidiaries that must be netted against capital
under the capital rules and, for purposes of the core capital
requirement, qualifying supervisory goodwill. At March 31, 1997,
Harbor Federal's adjusted total assets for purposes of the core
and tangible capital requirements were $217.9 million.
In determining compliance with the risk-based capital
requirement, a savings institution is allowed to use both core
capital and supplementary 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 and a
portion of the institution's general loss allowances.
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, 1997, the Bank's risk-weighted assets were
approximately $91.5 million.
23<PAGE>
<PAGE>
The OTS has adopted but delayed effectiveness of an amendment
to its risk-based capital requirements that would require savings
institutions with more than a "normal" level of interest rate
risk to maintain additional total capital. An institution's
interest rate risk will be 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 will calculate 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 will be 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 will require any exempt
institution that it determines may have a high level of interest
rate risk exposure to file such schedule on a quarterly basis.
Management does not believe that Harbor Federal would have been
deemed to have had more than normal interest rate risk under the
rule as of March 31, 1997.
At March 31, 1997, 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, 1997.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
------ ----------
(Dollars in thousands)
<S> <C> <C>
Tangible Capital. . . . . . . . . $24,479 11.2%
Tangible Capital Requirement. . . 3,268 1.5
------- ----
Excess. . . . . . . . . . . . . $21,211 9.7%
======= ====
Core Capital. . . . . . . . . . . $24,479 11.2%
Core Capital Requirement. . . . . 6,536 3.0
------- ----
Excess. . . . . . . . . . . . . $17,943 8.2%
======= ====
Total Capital . . . . . . . . . . $24,859 27.2%
Risk-Based Capital Requirement. . 7,320 8.0
------- ----
Excess. . . . . . . . . . . . . $17,539 19.2%
<FN> ======= ====
____________
(1) Based on adjusted total assets for purposes of the
tangible capital and core capital requirements,
and risk-weighted assets for purpose of the
risk-based capital requirement.
</FN>
</TABLE>
24<PAGE>
<PAGE>
The capital standards for savings institutions must be no
less stringent than the capital standards applicable to national
banks. Effective December 31, 1990, regulations of the Office of
the Comptroller of the Currency ("OCC") established a new minimum
core capital ratio of 3% for the most highly rated national
banks, with an additional 100 to 200 basis point "cushion" amount
of additional capital required on a case-by-case basis,
considering the quality of risk management systems and the
overall risk in individual banks. The OTS has proposed an
amendment to its capital regulations establishing a minimum core
capital ratio of 3% for institutions rated Composite 1 under the
OTS examination rating system. For all other institutions, the
minimum core capital ratio will be 3% plus at least an additional
100 to 200 points. In determining the amount of additional core
capital, the OTS will assess both the quality of risk management
systems and the level of overall risk in each individual
institution through the supervisory process on a case-by-case
basis.
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 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.
For the past several semi-annual periods, savings
institutions with SAIF-assessable deposits, like Harbor Federal,
have been required to pay higher deposit insurance premiums than
institutions with deposits insured by the BIF. In order to
recapitalize the SAIF and address the premium disparity, the
recently-enacted Deposit Insurance Funds Act of 1996 authorized
the FDIC to impose a one-time special assessment on institutions
with SAIF-assessable deposits based on the amount determined by
the FDIC to be necessary to increase the reserve levels of the
SAIF to the designated reserve ratio of 1.25% of insured
deposits. Institutions were assessed at the rate of 65.7 basis
points based on the amount of their SAIF-assessable deposits as
of March 31, 1995. As a result of the special assessment, the
Bank incurred a pre-tax expense of $806,000 during the quarter
ended September 30, 1996.
The FDIC has proposed a new assessment schedule for SAIF
deposit insurance pursuant to which the assessment rate for
well-capitalized institutions with the highest supervisory
ratings would be reduced to zero and institutions in the lowest
risk assessment classification will be assessed at the rate of
0.27% of insured deposits. Until
25<PAGE>
<PAGE>
December 31, 1999, however, SAIF-insured institutions, will be
required to pay assessments to the FDIC at the rate of 6.5 basis
points 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.
During this period, BIF members will be assessed for these
obligations at the rate of 1.3 basis points. After December 31,
1999, both BIF and SAIF members will be assessed at the same rate
for FICO payments.
SAIF members generally are prohibited from converting to the
BIF, also administered by the FDIC, or merging with or
transferring assets to a BIF member before the date on which the
SAIF first meets or exceeds the designated reserve ratio of 1.25%
of insured deposits. The FDIC, however, may approve such a
transaction in the case of a SAIF member in default or if the
transaction involves an insubstantial portion of the deposits of
each participant. In addition, mergers, transfers of assets and
assumptions of liabilities may be approved by the appropriate
bank regulator so long as deposit insurance premiums continue to
be paid to the SAIF for deposits attributable to the SAIF members
plus an adjustment for the annual rate of growth of deposits in
the surviving bank without regard to subsequent acquisitions.
Each depository institution participating in a SAIF-to-BIF
conversion transaction is required to pay an exit fee to the SAIF
equal to 0.90% of the deposits transferred and an entrance fee to
BIF based on the current reserve ratio of the BIF. A savings
institution may adopt a commercial bank or savings bank charter
if the resulting bank remains a SAIF member.
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.
Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any
related surplus) and minority interests in consolidated
subsidiaries, minus all intangible assets other than mortgage
servicing rights and qualifying supervisory goodwill eligible for
inclusion in core capital under OTS regulations and minus
identified losses and investments in certain securities
subsidiaries. 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 savings institution must maintain
average daily reserves equal to 3% on the first $49.3 million of
net transaction accounts, plus 10% on the remainder. This
percentage is 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. As of March
31, 1997, Harbor Federal met its reserve requirements.
Dividend Restrictions. OTS regulations impose additional
limitations on the payment of dividends and other capital
distributions (including stock repurchases and cash mergers) by
Harbor Federal. Under these regulations, an institution that,
immediately prior to, and on a pro forma basis after giving
effect to, a proposed capital distribution, has total capital (as
defined by OTS regulation) that is equal to or greater than the
amount of its fully phased-in capital requirements (a "Tier 1
Bank") is generally permitted, after notice, to make capital
distributions during a calendar year in the amount equal to the
greater of: (a) 75% of its net income for the previous four
quarters; or (b) 100% of its net income to date during the
calendar year plus an amount that would reduce by one-half the
amount by which its ratio of total capital to assets exceeded its
fully phased-in risk-based capital ratio requirement at the
beginning of the calendar year. An institution with total
capital in excess of current minimum capital ratio requirements
but not in excess of the fully phased-in requirements (a "Tier 2
Bank") is permitted, after notice, to make capital distributions
without OTS approval of up to 75% of its net income for the
previous four quarters, less dividends already paid for such
period. An institution that fails to meet current minimum
capital requirements (a "Tier 3 Bank") is prohibited from making
any
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capital distributions without the prior approval of the OTS. A
Tier 1 Bank that has been notified by the OTS that its is in need
of more than normal supervision will be treated as either a Tier
2 or Tier 3 Bank. Despite the above authority, the OTS may
prohibit any institution from making a capital distribution that
would otherwise be permitted by the regulation, if the OTS were
to determine that the distribution constituted an unsafe or
unsound practice.
Under the OTS prompt corrective action regulations, the Bank
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 leverage
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 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 fully phased-in 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, 1997, the maximum amount that Harbor Federal
could have lent to any one borrower under the 15% limit was
approximately $3.6 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
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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 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 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 that would cause the institution to become undercapitalized.
An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution")
generally is: (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
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prior approval and the institution is prohibited from making
payments of principal or interest on its subordinated debt, with
certain exceptions. 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 is subject to conservatorship or receivership within
90 days unless periodic determinations are made that forbearance
from such action would better protect the deposit insurance fund.
Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically
undercapitalized institution must be placed in receivership if it
remains critically undercapitalized on average during the
calendar quarter beginning 270 days after the date it became
critically undercapitalized.
Under the OTS regulation, implementing the prompt corrective
action provisions of FDICIA, the OTS measures 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). An institution that is not
subject to an order or written directive to meet or maintain a
specific capital level is deemed "well capitalized" if it also
has: (i) a total risk-based capital ratio of 10% or greater; (ii)
a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) a
leverage ratio of 5.0% or greater. An "adequately capitalized"
savings institution is an institution that does not meet the
definition of well capitalized and has: (i) a total risk-based
capital ratio of 8.0% or greater; (ii) a Tier 1 capital
risk-based ratio of 4.0% or greater; and (iii) a leverage ratio
of 4.0% or greater (or 3.0% or greater if the savings institution
has a Composite 1 rating). An "undercapitalized institution" is
an institution that has (i) a total risk-based capital ratio less
than 8.0%; or (ii) a Tier 1 risk-based capital ratio of less than
4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if the
institution has a Composite 1 rating). A "significantly
undercapitalized" institution is defined as an institution that
has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or
(iii) a leverage ratio of less than 3.0%. A "critically
undercapitalized" savings institution is defined as an
institution that has a ratio of core capital to total assets of
less than 2.0%. 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 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 Composite 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
meet substantially all the standards adopted in the interagency
guidelines and, therefore, does not believe that the
implementation of these regulatory standards will materially
affect its operations.
Additionally, each federal banking agency is required to
establish standards relating to the adequacy of asset and
earnings quality. In 1995, these agencies, including the OTS,
issued proposed guidelines relating to asset and earnings
quality. Under the proposed guidelines, a savings institution
should 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
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and reserves. Management does not believe that the asset and
earnings standards, in the form proposed by the OTS, would 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 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."
Legislative initiatives have been introduced in the U.S. Congress
which could result in the imposition of restrictions on the
activities of unitary savings institution holding companies in
the future.
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
under-capitalized 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
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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
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 "domestic building and loan association" under 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. Legislative initiatives have been introduced in the
U.S. Congress which could result in the imposition of
restrictions on the branching activities of federal savings
institutions in the future.
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.
Federal Securities Law. The Common Stock is registered with
the SEC under the Securities Exchange Act of 1934, as amended
("Securities Exchange Act"), and under OTS regulations generally
may not be deregistered for at least three years after the
Conversion. The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements
of the Securities Exchange Act.
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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. However,
institutions such as Harbor Federal which meet certain
definitional tests and other conditions prescribed by the Code
may benefit 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 are separated into "qualifying real property loans," which
generally are loans secured by interests in certain real
property, and nonqualifying loans, which are all other loans.
The bad debt reserve deduction with respect to nonqualifying
loans must be 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
may be 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").
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 will no longer be allowed to use the percentage of
taxable income method for tax loan loss provisions, but would be
allowed to use the experience method of accounting for bad debts.
There will be no future effect on net income of Harbor Federal
from the recapture because the taxes on these bad debts reserves
have been accrued as a deferred tax liability.
The legislation provides for a suspension of this recapture
if the institution meets 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 the requirement is met, the recapture is suspended
until a taxable year beginning December 31, 1997, or until the
residential loan requirement is not met in a subsequent year.
Harbor Federal met this requirement for the taxable year ended
March 31, 1997.
Harbor Federal historically elected to use the percentage of
taxable income method. Under the percentage of taxable income
method, the bad debt reserve deduction for qualifying real
property loans is computed as a percentage, which Congress has
reduced from as much as 60% in prior years to 8% of taxable
income, with certain adjustments, effective for taxable years
beginning after 1986. The allowable deduction under the
percentage of taxable income method (the "percentage bad debt
deduction") for taxable years beginning before 1987 was scaled
downward in the event that less than 82% of the total dollar
amount of the assets of an association were within certain
designated categories. When the percentage method bad debt
deduction was lowered to 8%, the 82% qualifying assets
requirement was lowered to 60%. For all taxable years, there is
no deduction in the event that less than 60% of the total dollar
amount of the assets of an association falls within such
categories. Moreover, in such case, the Bank could be required
to recapture, generally over a period of up to four years, their
existing bad debt reserve. As of March 31, 1997, more
than the required amount of the Bank's total assets fell within
such category.
Earnings appropriated to an institution's bad debt reserve
and claimed as a tax deduction are not available for the payment
of cash dividends or for distribution to shareholders (including
distributions made on dissolution or liquidation), unless such
amount is included in taxable income, along with the amount
deemed necessary to pay the resulting federal income tax.
State Income Taxation. The State of Maryland imposes an
income tax of approximately 7% on income measured substantially
the same as federally taxable income. In addition, Maryland
imposes a franchise tax, at a rate
32<PAGE>
<PAGE>
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 in the Annual Report.
EMPLOYEES
As of March 31, 1997, Harbor Federal had 45 full-time and six
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,
1997 regarding the executive officer of Harbor Federal who did
not serve on the Board of Directors.
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
Norbert J. Luken 59 Vice President and Chief Financial Officer
</TABLE>
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.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The following table sets forth information regarding Harbor
Federal's locations at March 31, 1997.
<TABLE>
<CAPTION>
Year Book Value Deposits at
Opened or Owned or at March 31, Approximate March 31, 1997
Acquired Leased 1997 Square Footage (In thousands)
--------- -------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Main Office:
Towson --
705 York Road 1993 Owned $1,241,200 8,300 $14,530
Branch Offices:
South Baltimore --
132 East Fort Avenue 1887 Owned 25,800 3,300 26,925
Riviera Beach --
8553 Ft. Smallwood Road 1972 Owned 56,100 2,200 26,747
Locust Point --
1350 East Fort Avenue 1981 Owned 76,500 1,400 10,945
Highlandtown --
3200 Eastern Avenue 1910 Owned 145,900 5,300 29,900
Parkville --
7917 Harford Road 1989 Owned 115,300 1,600 20,065
</TABLE>
33<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Year Book Value Deposits at
Opened or Owned or at March 31, Approximate March 31, 1997
Acquired Leased 1997 Square Footage (In thousands)
--------- -------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Pikesville --
507 Reisterstown Road 1996 Leased 9,500 1,500 21,253
Putty Hill --
8030 Belair Road 1996 Owned 220,900 2,400 12,166
Roland Park --
4806 Roland Avenue 1996 Leased 7,900 1,800 11,574
Automated Teller Machine:
Ocean City --
Boardwalk at N.
Division St. 1996 Leased 26,000 200 --
</TABLE>
The book value of Harbor Federal's investment in premises and
equipment totaled $1.9 million at March 31, 1997.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
From time to time, Harbor Federal is a party to various legal
proceedings incident to its business. At March 31, 1997, there
were no legal proceedings to which the Company, Harbor Federal or
its subsidiary was a party, or to which any of their property was
subject, which were expected by management to result in a
material loss.
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 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------
The information required by this item is incorporated by
reference to "Item 1. Business -- Regulation -- Dividend
Limitations" herein and "Market Information," "Market Price of
Common Stock and Dividend Information" and Note 11 of the Notes
to Consolidated Financial Statements in the portions of the
Annual Report filed as Exhibit 13 to this report.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
- --------------------------------------------------------
The information required by this item is incorporated by
reference to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the portions of the
Annual Report filed as Exhibit 13 to this report.
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
The financial statements required by this item are
incorporated by reference to the consolidated financial
statements, notes to consolidated financial statements and
independent auditors' report in the portions of the Annual
Report filed as Exhibit 13 to this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ---------------------------------------------------------
Not applicable.
34<PAGE>
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT
- ---------------------------------------------------------------
The information required by this item is incorporated by
reference to "Election of Directors" in the Proxy Statement and
"Item 1. Description of Business -- Executive Officers" herein.
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
The information required by this item is incorporated by
reference to "Executive Compensation" in the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
- -------------------------------------------------------------
The information required by this item is incorporated by
reference to "Voting Securities and Principal Holders
Thereof" and "Election of Directors" in the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated by
reference "Transactions with Management" in the Proxy Statement.
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. *
3.2 Bylaws of Harbor Federal Bancorp, Inc. *
4 Form of Common Stock Certificate *
10.1 Employment Agreements between Harbor Federal
Bancorp, Inc. and Harbor Federal
Savings Bank and Robert A. Williams **
10.2 Severance Agreements between Harbor Federal
Bancorp, Inc. and Harbor Federal Savings Bank
and Lawrence W. Williams and Norbert J. Luken **
10.3 Harbor Federal Savings Bank Non-Employee Director
Retirement Plan **
10.4 Harbor Federal Savings Bank Deferred Compensation
Plan *
10.5 Harbor Federal Savings Bank Supplemental
Executive Retirement Agreement *
10.6 Harbor Federal Bancorp, Inc. Employee Stock
Ownership Plan, as amended *
10.7 Harbor Federal Bancorp, Inc. Incentive
Compensation Plan, as amended *
13 Portions of 1997 Annual Report to Stockholders
35<PAGE>
<PAGE>
21 Subsidiaries *
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
___________
* Incorporated by reference to the Company's Registration
Sttatement on Form S-1 (File No. 33-75624).
** Incorporated by reference to the Company's Quarterly Report
on Form 10-QSB for the Quarterly Period ended June 30, 1994.
(b) No report on Form 8-K was filed during the last quarter
of the fiscal year covered by this report.
36<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, as of the date set forth
below.
HARBOR FEDERAL BANCORP, INC.
Date: June 27, 1997 By: /s/ Robert A. Williams
------------------------
Robert A. Williams
President
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant in the capacities indicated
as of the date set forth above.
By: /s/ Robert A. Williams
-----------------------
Robert A. Williams
President
(Director and Principal Executive Officer)
By: /s/ Norbert J. Luken
----------------------
Norbert J. Luken
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Louis V. Koerber
-------------------------
Louis V. Koerber
Director
By: /s/ Joseph J. Lacy
-------------------------
Joseph J. Lacy
Director
By: /s/ John H. Riehl, III
-------------------------
John H. Riehl, III
Director
By: /s/ J. Kemp Roche
-------------------------
J. Kemp Roche
Director
By: /s/ Gideon N. Stieff, Jr.
-------------------------
Gideon N. Stieff, Jr.
Director
By: /s/ Lawrence W. Williams
-------------------------
Lawrence W. Williams
Director
Exhibit 13
Portions of 1997 Annual Report to Stockholders<PAGE>
<PAGE>
MARKET INFORMATION
The Company's common stock began trading under the symbol "HRBF"
on the NASDAQ National Market System on August 11, 1994. At
March 31, 1997, there were 1,754,420 shares of the common stock
outstanding and approximately 437 holders of record of the common
stock. During fiscal year ended March 31, 1997 four dividends
have been paid on the common stock at $0.10 per share. On April
10, 1997 a dividend of $0.10 per share was also paid.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The earnings of Harbor Federal depend primarily on its level
of net interest income, which is the difference between interest
earned on Harbor Federal'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. Net interest income is a function of Harbor
Federal'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. Harbor Federal's earnings are also affected by its
level of noninterest income, including primarily service fees and
charges, and non-interest expense, including primarily
compensation and employee benefits, occupancy and equipment
expenses and SAIF deposit insurance premiums. Earnings of Harbor
Federal also are affected significantly by general economic and
competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities,
which events are beyond the control of Harbor Federal.
On February 16, 1996, Harbor Federal acquired three
Baltimore area branches from Sequoia National Bank. These
branches contained deposits of $44.1 million for which Harbor
Federal paid a premium of $3.2 million. Harbor Federal received
$13.9 million in various types of loans and $27.0 million in
cash. After adjusting this premium for real and tangible assets
acquired in the transaction, the premium balance of $3.0 million
is being amortized over an eight year period.
FINANCIAL CONDITION
Harbor Federal's total assets increased by $22.7 million or
11.5% from $196.8 million at March 31, 1996 to $219.5 million at
March 31, 1997, primarily due to an increase in loans of $27.8
million, partially offset by decreases in mortgage-backed
securities of $3.8 million and investment securities of $1.2
million.
Net loans receivable increased $27.8 million or 23.8% from
$116.9 million at March 31, 1996 to $144.7 million at March 31,
1997. This increase was due primarily to a higher level of loan
originations, which was funded in part by an increase in deposits
of $9.8 million, in part by an increase in borrowed funds of
$12.0 million, and in part by proceeds of sales and repayments of
mortgage-backed and investment securities.
Harbor Federal's deposits increased by $9.8 million or 6.1%
from $161.6 million at March 31, 1996 to $171.4 million at March
31, 1997. This increase was primarily due to competitive rates
offered on certificates of deposit, which increased $11.1 million
or 11.1% from $100.1 million at March 31, 1996 to $111.2 million
at March 31, 1997.
<PAGE>
<PAGE>
RESULTS OF OPERATIONS
Harbor Federal had net income totaling $901,000, $1.0
million and $1.6 million for fiscal years 1997, 1996, and 1995,
respectively.
Interest Income. Total interest income increased by $3.6
million, or 30.4%, from $11.8 million for the year ended March
31, 1996 to $15.4 million for the year ended March 31, 1997. The
increase in interest income was principally attributable to a
$49.3 million, or 31.5% increase in the balance of average
interest-earning assets to $205.8 million for the year ended
March 31, 1997 from $156.5 million for the year ended March 31,
1996, partially offset by a decrease in the average yield on
Harbor Federal's average interest-earning assets to 7.47% for the
year ended March 31, 1997 from 7.53% for the year ended March 31,
1996. The increase in interest-earning assets during the year
ended March 31, 1997 compared to the year ended March 31, 1996
reflects management's use of the funds received from deposits
including the deposits acquired in February 1996, and borrowings.
The increase in average interest-earning assets was largely the
result of a $29.8 million increase in average loans and a $22.5
million increase in average investment securities, partially
offset by a $1.3 million decrease in average mortgage-backed
securities and a $1.7 million decrease in average short-term
investment securities and other interest-earning assets. The
decrease in average yield was caused primarily by a decrease in
fixed and adjustable rates on one-to four-family residential
mortgage loans.
Interest income on first mortgage and other loans increased
by $2.2 million, or 26.2%, to $10.4 million for the year ended
March 31, 1997 from $8.2 million for the year ended March 31,
1996. This increase was attributable to the increase in the
average investment in first mortgage and other loans to $133.7
million for the year ended March 31, 1997 from $103.9 million for
the year ended March 31, 1996, partially offset by a decrease in
the average yield on first mortgage and other loans to 7.8% for
the year ended March 31, 1997 from 8.0% for the year ended March
31, 1996. The lower yield on mortgage loans reflects primarily
decreasing interest rates on adjustable rate mortgage loans.
Interest income on mortgage-backed securities decreased by
$86,000, or 6.6% to $1.2 million for the year ended March 31,
1997 from $1.3 million for the year ended March 31, 1996. The
decrease resulted primarily from a $1.3 million, or 7.3%,
decrease in average mortgage-backed securities to $16.8 million
for the year ended March 31, 1997 from $18.1 million for the year
ended March 31, 1996. Interest income on investment securities
increased $1.5 million, or 80.8%, to $3.4 million for the year
ended March 31, 1997 from $1.9 million for the year ended March
31, 1996. The increase resulted from an increase in average
investment securities to $48.9 million for the year ended March
31, 1997 from $26.4 million for the year ended March 31, 1996.
The increase in the average balance of investment securities
resulted primarily from the reinvestment of a portion of the
proceeds of the deposits acquired in February 1996. Interest
income from short-term investments and other interest-earning
assets decreased $31,000, or 9.5%, to $294,000 for the year ended
March 31, 1997 from $325,000 for the year ended March 31, 1996 as
a result of a decrease in average short-term investments and
other interest-earning assets of $1.6 million, or 20.4%, to $6.5
million for the year ended March 31, 1997 from $8.1 million for
the year ended March 31, 1996, partially offset by an increase in
average yield on short-term investments and other interest-
earning assets to 4.6% for the year ended March 31, 1997 from
4.0% for the year ended March 31, 1996.
Total interest income increased by $1.5 million, or 14.56%,
from $10.3 million for the year ended March 31, 1995 to $11.8
million for the year ended March 31, 1996. The increase in
interest income was principally attributable to a $18.0 million,
<PAGE>
<PAGE>
or 13.0% increase in the balance of average interest-earning
assets to $156.5 million for the year ended March 31, 1996 from
$138.5 million for the year ended March 31, 1995, and an increase
in the average yield on average interest-earning assets to 7.53%
for the year ended March 31, 1996 from 7.44% for the year ended
March 31, 1995. The increase in interest-earning assets during
the year ended March 31, 1996 compared to the year ended March
31, 1995 reflects management's use of the funds received with the
deposits acquired in February 1996. The increase in average
interest-earning assets was largely the result of a $9.7 million
increase in average loans, a $1.7 million increase in average
investment securities, a $5.3 million increase in average
mortgage-backed securities and a $1.2 million increase in average
short-term investment securities and other interest-earning
assets. The increase in the average yield was caused primarily
by an increase in fixed and adjustable rates on one-to four-
family residential mortgage loans and higher yielding investment
securities.
The interest income on first mortgage and other loans
increased by $970,000, or 13.3%, to $8.3 million for the year
ended March 31, 1996 from $7.3 million for the year ended March
31, 1995. This increase was attributable to the increase in
average investments in first mortgage and other loans to $103.9
million for the year ended March 31, 1996 from $94.2 million for
the year ended March 31, 1995 and an increase in the average
yield on first mortgage and other loans to 8.0% for the year
ended March 31, 1996 from 7.7% for the year ended March 31, 1995.
The higher yield on mortgage loans reflects primarily increasing
interest rates on adjustable rate mortgage loans and the
acquisition of $13.9 million in various loan types from Sequoia
National Bank with a slightly higher average rate than Harbor
Federal's portfolio. Interest income on mortgage-backed
securities increased by $313,000, or 31.8% to $1.3 million for
the year ended March 31, 1996 from $1.0 million for the year
ended March 31, 1995. The increase resulted from a $5.3 million,
or 41.4%, increase in average mortgage-backed securities to $18.1
million for the year ended March 31, 1996 from $12.8 million for
the year ended March 31, 1995, partially offset by a decrease in
the average yield to 7.2% for the year ended March 31, 1996 from
7.7% for the year ended March 31, 1995. The lower average yield
on mortgage-backed securities generally resulted from a more
rapid prepayment of mortgage-backed securities in a declining
rate environment. Interest income on investment securities
increased $147,000, or 8.4%, to $1.9 million for the year ended
March 31, 1996 from $1.8 million for the year ended March 31,
1995. The increase resulted from an increase in average
investment securities to $26.4 million for the year ended March
31, 1996 from $24.7 million for the year ended March 31, 1995 and
an increase in the average yield to 7.2% for the year ended March
31, 1996 from 7.1% for the year ended March 31, 1995. The
increase in the average balance of investment securities resulted
from the investment of the proceeds from the acquired deposits.
Interest income from short-term investments and other interest-
earning assets increased $45,000, or 16.1%, to $325,000 for the
year ended March 31, 1996 from $280,000 for the year ended March
31, 1995 as a result of an increase in average short-term
investments and other interest-earning assets of $1.2 million, or
17.4%, to $8.1 million for the year ended March 31, 1996 from
$6.9 million for the year ended March 31, 1995 and a decrease in
the average yield on short-term investments and other interest-
earning assets to 4.0% for the year ended March 31, 1996 from
4.1% for the year ended March 31, 1995.
Interest Expense. Total interest expense increased by $3.2
million, or 50.8%, to $9.4 million for the year ended March 31,
1997 from $6.2 million for the year ended March 31, 1996. The
increase was attributable to an increase in the average cost of
deposits to 5.2% for the year ended March 31, 1997 from 4.9% for
the year ended March 31, 1996, a $41.9 million, or 34.2%,
increase in average deposits to $164.5 million for the year ended
<PAGE>
<PAGE>
March 31, 1997 from $122.6 million for the year ended March 31,
1996, and a $10.7 million increase in average borrowed funds to
$15.2 million for the year ended March 31, 1997 from $4.5 million
for the year ended March 31, 1996. The borrowed funds were
needed to fund loan originations.
Total interest expense increased by $1.5 million, or 31.9%,
to $6.2 million for the year ended March 31, 1996 from $4.7
million for the year ended March 31, 1995. The increase was
attributable to an increase in the average cost of deposits to
4.9% for the year ended March 31, 1996 from 4.1% for the year
ended March 31, 1995 and a $9.3 million, or 8.2%, increase in
average deposits to $122.6 million for the year ended March 31,
1996 from $113.3 million for the year ended March 31, 1995 and a
$4.0 million increase in average borrowed funds to $4.5 million
for the year ended March 31, 1996 from $500,000 for the year
ended March 31, 1995. The borrowed funds were needed to fund the
purchase of mortgage-backed securities.
Net Interest Income. Net interest income increased by
$428,000, or 7.7% to $6.0 million for the year ended March 31,
1997 from $5.6 million for the same period in 1996. The
principal reason for the increase in net interest income was the
increase in average outstanding loans, partially offset by a
reduction in the interest rate spread to 2.3% for the year ended
March 31, 1997 from 2.6% for the year ended March 31, 1996.
Net interest income decreased by $53,000, or 0.9% to $5.57
million for the year ended March 31, 1996 from $5.62 million for
the same period in 1995. The principal reason for the decrease
in net interest income was a decrease in Harbor Federal's
interest rate spread to 2.6% for the year ended March 31, 1996
from 3.3% for the year ended March 31, 1995.
Provisions for Losses. Harbor Federal 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 and prospective economic conditions, status
of nonperforming loans and regulatory reviews conducted in the
regulatory examination process. There was a $33,000 provision
for losses on loans for the year ended March 31, 1997 as compared
to no provision during the year ended March 31, 1996 and a
provision of $3,000 during the year ended March 31, 1995.
Management believes that the current level of loan loss
allowances is adequate to provide for losses, although there can
be no assurance that such 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 increased $87,000 or
61.3% to $229,000 for the year ended March 31, 1997 from $142,000
for the year ended March 31, 1996. The increase was due
primarily to fees of $45,000 earned from an ATM machine installed
in Ocean City, Maryland in May 1996.
Noninterest income decreased $56,000 or 28.3% to $142,000
for the year ended March 31, 1996 from $198,000 for the year
ended March 31, 1995. Changes in noninterest income resulted
from changes in the volume of loans serviced, the amount of
service fees charged on deposit accounts, late fees charged on
delinquent loans and other miscellaneous fees.
Noninterest Expense. Noninterest expense increased by
$656,000 to $4.7 million for the year ended March 31, 1997 from
$4.1 million for the year ended March 31, 1996. The increase in
noninterest expense was due to a one-time assessment of $806,000
for deposit insurance due to the federally mandated recapitaliza-
tion of Savings Association Insurance Fund as of September 30,
1996.
<PAGE>
<PAGE>
There was also an increase in occupancy expense of $115,000
to $439,000 for the year ended March 31, 1997 from $324,000 for
the year ended March 31, 1996. This was primarily due to rentals
of two branches purchased from Sequoia National Bank in February
1996 and rental of space for the ATM machine in Ocean City,
Maryland. These increases were partially offset by reductions in
legal and accounting fees of $101,000 to $73,000 from $174,000,
advertising of $74,000 to $162,000 from $236,000 and compensation
and benefits expense of $85,000 to $2.4 million from $2.5
million.
Noninterest expense increased by $882,000 to $4.1 million
for the year ended March 31, 1996 from $3.2 million for the year
ended March 31, 1995. The increase in noninterest expense
resulted from various factors, most of which related to the
Company converting to a stock company in August 1994 and the
acquisition of three branches from Sequoia National Bank in
February 1996. Other noninterest expenses that increased for the
year ended March 31, 1996 over the same period in 1995 were as
follows: advertising $90,000 to $236,000 from $146,000, legal
and accounting $72,000 to $174,000 from $102,000, electronic data
processing $27,000 to $132,000 from $105,000.
At the Company's Annual Meeting of Stockholders on September
28, 1994, stockholders approved the implementation of a stock
option plan and three separate recognition plans relating to
directors, executive officers and key management personnel of the
Company. Increases in compensation expense related to these
plans totaled $585,000 for the year ended March 31, 1996.
Income Taxes. The changes in the amounts of Harbor
Federal's income tax provision reflect the changes in income
before income taxes. Income tax provisions for the years ended
March 31, 1997, 1996 and 1995 are generally reflective of the
amounts of Harbor Federal'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.
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following tables set forth certain information relating
to Harbor Federal'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 net loan 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.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- --------------------------- ---------------------------
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 . . . . . . . . $133,674 $10,426 7.80% $103,861 $ 8,259 7.95% $ 94,166 $ 7,289 7.74%
Investment securities. . . 48,895 3,437 7.03 26,426 1,901 7.19 24,681 1,754 7.11
Mortgage-backed securities . 16,810 1,211 7.21 18,136 1,297 7.15 12,792 985 7.70
Short-term investments and
other interest-earning
assets (2). . . . . . . 6,456 295 4.56 8,115 326 4.01 6,874 280 4.07
-------- ------- -------- ------- -------- -------
Total interest-earning
assets . . . . . . 205,835 15,369 7.47 156,538 11,783 7.53 138,513 10,308 7.44
------- ------- -------
Non-interest-earning assets . 4,347 4,387 4,518
-------- -------- --------
Total assets . . . . . $210,182 $160,925 $143,031
======== ======== ========
Interest-bearing liabilities:
Deposits . . . . . . $164,531 8,468 5.15 $122,575 5,944 4.85 $113,253 4,656 4.11
Borrowed funds. . . . . 15,210 904 5.94 4,554 269 5.90 537 29 5.45
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities . . . . 179,741 9,372 5.21 127,129 6,213 4.89 113,790 4,685 4.13
------- ------- -------
Non-interest bearing
liabilities. . . . . . 2,489 2,115 2,026
-------- -------- --------
Total liabilities. . . 182,230 129,244 115,816
Stockholders' equity . . . 27,952 31,681 27,215
-------- -------- --------
Total liabilities and
stockholders' equity. . $210,182 $160,925 $143,031
======== ======== ========
Net interest income. . . . $ 5,997 $ 5,570 $ 5,623
======= ======= =======
Interest rate spread (3) . . 2.26% 2.64% 3.31%
==== ==== ====
Net yield on interest-earning
assets (4) . . . . . 2.91% 3.56% 4.06%
==== ==== ====
Ratio of average interest-
earning assets to average
interest-bearing
liabilities . . . . . 114.52% 123.13% 121.73%
====== ====== ======
<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, certificates of deposit, short-term investments,
secured demand loans to Bankers Affiliate, Inc. (affiliate) 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
<PAGE>
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding
changes in interest income and interest expense of Harbor Federal
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,
-------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------- ----------------------------
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 . . . . . . . . . $2,370 $(158) $ (45) $ 2,167 $ 750 $ 198 $ 22 $ 970
Investment securities . . . . 1,617 (44) (37) 1,536 124 20 3 147
Mortgage-backed securities . . (95) 10 (1) (86) 411 (70) (28) 313
Short-term investments and
other interest-earning
assets (1) . . . . . . (67) 45 (9) (31) 50 (4) (1) 45
------ ------ ----- ------- ------ ----- ---- ------
Total interest-earning
assets. . . . . . . . 3,825 (147) (92) 3,586 1,335 144 (4) 1,475
Interest expense:
Deposits . . . . . . . . 2,034 364 126 2,524 383 838 68 1,289
Borrowed funds. . . . . . . 628 2 5 635 219 2 18 239
------ ------ ----- ------- ------ ----- ---- ------
Total interest-bearing
liabilities . . . . . . 2,662 366 131 3,159 602 840 86 1,528
------ ------ ----- ------- ------ ----- ---- ------
Change in net interest income. . . $1,163 $ (513) $(223) $ 427 $ 733 $(696) $(90) $ (53)
====== ====== ===== ======= ====== ===== ==== ======
<FN>
________________________
(1) Includes interest on interest-bearing deposits,
certificates of deposit, short term investments, secured
demand loan to Bankers Affiliate, Inc. (affiliate) and
dividends on Federal Home Loan Bank stock.
</FN>
</TABLE>
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 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, Harbor Federal 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.
<PAGE>
<PAGE>
Harbor Federal'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, 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 Harbor Federal 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, Harbor Federal 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 Harbor Federal continue to offer fixed
rate mortgage loans. In addition to emphasizing adjustable rate
loans and high levels of liquidity, Harbor Federal 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 change 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% of the estimated market
value of its assets will require the institution to deduct from
its capital 50% of the excess change. Based on the most recent
information provided to Harbor Federal by the OTS, which is as of
December 31, 1996, Harbor Federal was not subject to an IRR
component.
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 5.0%.
Harbor Federal's liquidity ratio averaged 9.5% during the month
of March 1997. Liquidity ratios averaged 10.6% for the year
ended March 31, 1997. Harbor Federal adjusts its liquidity
levels in order to meet funding needs of deposit outflows,
payment of real estate taxes on mortgage loans, 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, maturities of investment 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
<PAGE>
<PAGE>
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, 1997, $2.0 million, or 4.2%,
of Harbor Federal's investment portfolio was scheduled to mature
in one year or less, $9.5 million, or 20.0%, was scheduled to
mature in one to five years, and $35.3 million was scheduled to
mature in over five years. At March 31, 1997, certificates of
deposit which were scheduled to mature in one year or less
totaled $52.6 million. Assets qualifying for liquidity
outstanding at March 31, 1997 amounted to $17.8 million.
Harbor Federal had $4.7 million in outstanding loan
commitments at March 31, 1997. 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 Harbor Federal's
operations. Unlike most industrial companies, nearly all the
assets and liabilities of Harbor Federal are monetary. As a
result, interest rates have a greater impact on Harbor Federal'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.
NEW ACCOUNTING STANDARDS
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. In June 1996 the FASB issued
SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". SFAS No.
125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31,
1996 and is to be applied prospectively. This Statement will
require, among other things, that the Company record at fair
value, assets and liabilities resulting from a transfer of
financial assets. In December 1996, SFAS No. 127 was issued
which deferred the effective date of certain provisions of SFAS
No. 125 related to repurchase agreements, securities lending and
similar transactions until January 1, 1998. The Company adopted
the provisions of SFAS No. 125 as of January 1, 1997, and the
adoption did not have a material effect on the Company's reported
financial condition or results of operations.
Earnings per Share. In February 1997, the FASB issued SFAS
No. 128, "Earnings per Share", which is effective for the
financial statements issued for periods ending after December 15,
1997. SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and replaces the
presentation of primary EPS with a presentation of basic EPS. It
requires dual presentation of basic and diluted EPS on the face
of the consolidated statement of income and the reconciliation of
the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation.
Earlier application is not permitted but disclosure of pro forma
EPS amounts computed using the standards established by SFAS No.
128 is permitted in the notes to financial statements for periods
ending prior to the effective date. See Note 1 to the Notes to
the Consolidated Financial Statements for additional information.
<PAGE>
<PAGE>
MARKET PRICE OF COMMON STOCK AND DIVIDEND INFORMATION
- -----------------------------------------------------
The Company's common stock is traded on the over-the-counter
market under the symbol "HRBF" and trading information is
reported by the National Association of Securities Dealers
Automated Quotation (NASDAQ) National Market System. As of March
31, 1997, there were 437 stockholders of record and 1,754,420
shares of common stock entitled to vote and receive dividends of
which 1,640,736 shares were considered outstanding for financial
reporting purposes due to nonvesting of certain ESOP shares. See
Note 12 of Notes to Consolidated Financial Statement. The number
of stockholders of record does not reflect the number of persons
or entities who hold their stock in nominee or "street" name.
Four quarterly dividends of $.10 per share have been paid
during the year ended March 31, 1997 and five quarterly dividends
of $.05 per share have been paid during the year ended March 31,
1996. On February 24, 1997, a dividend of $.10 per share was
declared payable April 10, 1997 to holders of record at the close
of business on April 1, 1997. 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 1997, 1996 and 1995
were as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Market Price Range
Fiscal 1997:
High $13.75 14.50 16.00 18.25
Low 12.50 12.38 14.25 15.38
Fiscal 1996:
High $13.75 15.38 15.50 15.00
Low 12.00 13.25 14.38 12.75
Fiscal 1995:
High $ N/A 13.00 12.00 12.63
Low N/A 11.69 9.75 10.25
</TABLE>
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' 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, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended
March 31, 1997. These 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 generally accepted
auditing standards. 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, 1997 and 1996, and the results of their operations and
their cash flows for each of the years in the three-year period
ended March 31, 1997 in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
May 16, 1997
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
March 31, 1997 and 1996
- ------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash:
On hand and due from banks $1,482,872 1,814,498
Interest-bearing deposits 275,962 992,754
Federal funds sold 3,939,419 3,441,969
Investment securities, fair value of $46,968,577
and $48,286,914, respectively (notes 2 and 8) 47,543,418 48,738,919
Mortgage-backed securities, fair value of
$14,251,452 and $18,122,990, respectively
(notes 3 and 8) 14,161,239 17,937,421
Loans receivable, net (note 4) 144,701,746 116,891,985
Investment in Federal Home Loan Bank
stock, at cost (note 10) 1,366,000 1,269,600
Investments in real estate, net 465,136 43,848
Investment in and advances to affiliated
corporation (note 5) 2,775,000 2,825,000
Property and equipment, net (note 6) 1,938,699 1,978,542
Prepaid expenses and other assets 812,693 621,663
Federal and state income taxes receivable -- 205,564
- ------------------------------------------------------------------------------
$219,462,184 196,761,763
- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings accounts (note 7) $171,466,629 161,643,312
Borrowed funds (note 8) 16,500,000 4,500,000
Advance payments by borrowers for taxes,
insurance and ground rents 1,902,414 1,929,535
Accrued expenses and other liabilities 1,296,861 799,822
Federal and state income taxes payable 71,501 --
- ------------------------------------------------------------------------------
Total liabilities 191,237,405 168,872,669
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
1,754,420 shares 17,544 17,544
Additional paid-in capital 13,611,599 13,316,038
Unearned ESOP shares (1,136,840) (1,363,250)
Retained income, substantially restricted 16,068,969 16,041,999
Unrealized holding gain (loss) on securities
available for sale, net (336,493) (123,237)
- ------------------------------------------------------------------------------
Total stockholders' equity 28,224,779 27,889,094
Commitments and contingencies (notes 10, 11,
12 and 14)
- ------------------------------------------------------------------------------
$219,462,184 196,761,763
- ------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended March 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $10,426,017 8,258,649 7,288,928
Mortgage-backed securities 1,211,214 1,297,242 984,484
Investment securities 3,437,112 1,901,219 1,754,209
Interest-earning deposits and other
short-term investments 294,470 325,511 280,063
- ------------------------------------------------------------------------------
Total interest income 15,368,813 11,782,621 10,307,684
- ------------------------------------------------------------------------------
Interest expense:
Savings accounts:
Certificates 6,375,035 4,351,237 2,999,199
NOW and money market deposit
accounts 1,054,961 800,607 814,759
Passbook and statement savings 1,037,527 792,324 841,491
- ------------------------------------------------------------------------------
8,467,523 5,944,168 4,655,449
Borrowed funds 903,821 268,528 29,306
- ------------------------------------------------------------------------------
Total interest expense 9,371,344 6,212,696 4,684,755
- ------------------------------------------------------------------------------
Net interest income 5,997,469 5,569,925 5,622,929
Provision for losses on loans (note 4) 32,605 -- 2,703
- ------------------------------------------------------------------------------
Net interest income after provision
for losses on loans 5,964,864 5,569,925 5,620,226
- ------------------------------------------------------------------------------
Noninterest income:
Loan fees and service charges 65,687 65,916 88,047
Other 163,587 76,203 109,885
- ------------------------------------------------------------------------------
Total noninterest income 229,274 142,119 197,932
- ------------------------------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income, Continued
<TABLE>
<CAPTION>
Years ended March 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest expense:
Compensation and benefits (note 12) $2,412,898 2,498,000 1,912,901
Occupancy and equipment 438,675 323,800 310,288
SAIF deposit insurance premiums
(note 10) 1,029,651 297,295 273,679
Advertising 162,434 235,969 146,136
Gain on foreclosed collateral -- -- (51,958)
Other 681,800 714,586 596,998
- ------------------------------------------------------------------------------
Total noninterest expense 4,725,458 4,069,650 3,188,044
Income before income taxes 1,468,680 1,642,394 2,630,114
Income taxes (note 9) 567,200 638,182 1,015,900
- ------------------------------------------------------------------------------
Net income $ 901,480 1,004,212 1,614,214
Net income per share of common
stock (note 1):
Primary:
Post-conversion $ 0.54 0.54 0.52
Proforma -- -- 0.93
- ------------------------------------------------------------------------------
Fully diluted:
Post-conversion $ 0.54 0.54 0.48
Proforma -- -- 0.85
- ------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Years ended March 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------------
Common Additional Unearned
stock paid-in capital ESOP Shares
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1994 $ -- $ -- $ --
Proceeds from stock offering 21,801 21,779,059 --
Conversion costs -- (1,050,000) --
Borrowings for Employee Stock
Ownership Plan (ESOP) -- -- (1,744,070)
Compensation under stock-based
benefit plans -- 98,784 174,410
Adjustment to unrealized holding
gain (loss) on securities available
for sale, net (note 1) -- -- --
Dividends ($.05 per share) -- -- --
Net income - 1995 -- -- --
- ------------------------------------------------------------------------------------
Balance at March 31, 1995 21,801 20,827,843 (1,569,660)
Compensation under stock-based benefit
plans -- 451,677 206,410
Purchase of 425,666 shares of common stock (4,257) (5,973,431) --
Purchase of 87,203 shares of common stock
for MRP Trust -- (1,242,522) --
Purchase of 58,707 shares of common stock
for Stock Option Trust -- (875,242) --
Exercise of 12,020 stock options by
Stock Option Trust -- 127,713 --
Adjustment to unrealized holding gain
(loss) on securities available for
sale, net (note 1) -- -- --
Dividends ($.20 per share) -- -- --
Net income - 1996 -- -- --
- ------------------------------------------------------------------------------------
Balance at March 31, 1996 17,544 13,316,038 (1,363,250)
Compensation under stock-based benefit
plans -- 236,240 226,410
Purchase of 698 shares of common stock
for Stock Option Trust -- (8,987) --
Exercise of 6,429 stock options by
Stock Option Trust -- 63,308 --
Adjustment to unrealized holding gain
(loss) on securities available for
sale, net (note 1) -- -- --
Dividends ($.40 per share) -- -- --
Net income - 1997 -- -- --
- ------------------------------------------------------------------------------------
Balance at March 31, 1997 $17,544 $13,611,599 $(1,136,840)
- ------------------------------------------------------------------------------------
/TABLE
<PAGE>
<TABLE>
<CAPTION>
Years ended March 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------------
Retained Unrealized Holding
income gain (loss) on Total
substantially securities available stockholders'
restricted for sale equity
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1994 $13,936,410 $ -- $13,936,410
Proceeds from stock offering -- -- 21,800,860
Conversion costs -- -- (1,050,000)
Borrowings for Employee Stock
Ownership Plan (ESOP) -- -- (1,744,070)
Compensation under stock-based
benefit plans -- -- 273,194
Adjustment to unrealized holding
gain (loss) on securities available
for sale, net (note 1) -- 68,523 68,523
Dividends ($.05 per share) (109,004) -- (109,004)
Net income - 1995 1,614,214 -- 1,614,214
- ------------------------------------------------------------------------------------
Balance at March 31, 1995 15,441,620 68,523 34,790,127
Compensation under stock-based benefit
plans -- -- 658,087
Purchase of 425,66 shares of common stock -- -- (5,977,688)
Purchase of 87,203 shares of common stock
for MRP Trust -- -- (1,242,522)
Purchase of 58,707 shares of common stock
for Stock Option Trust -- -- (875,242)
Exercise of 12,020 stock options by
Stock Option Trust -- -- 127,713
Adjustment to unrealized holding gain
(loss) on securities available for
sale, net (note 1) -- (191,760) (191,760)
Dividends ($.20 per share) (403,833) -- (403,833)
Net income - 1996 1,004,212 -- 1,004,212
- ------------------------------------------------------------------------------------
Balance at March 31, 1996 16,041,999 (123,237) 27,889,094
Compensation under stock-based benefit
plans -- -- 462,650
Purchase of 698 shares of common stock
for Stock Option Trust -- -- (8,987)
Exercise of 6,429 stock options by
Stock Option Trust -- -- 68,308
Adjustment to unrealized holding gain
(loss) on securities available for
sale, net (note 1) -- (213,256) (213,256)
Dividends ($.40 per share) (874,510) -- (874,510)
Net income - 1997 901,480 -- 901,480
- ------------------------------------------------------------------------------------
Balance at March 31, 1997 16,068,969 (336,493) 28,224,779
- ------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended March 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 901,480 1,004,212 1,614,214
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 150,976 151,322 149,489
Amortization of premium on savings
deposits 381,384 25,314 --
Provision for losses on loans 32,605 -- 2,703
Deferred income tax provision (104,374) 14,275 30,819
Noncash compensation under stock-
based benefit plans 462,650 658,087 273,194
Loans originated for sale (2,666,457) (1,199,431) --
Amortization of loan fees, premiums
and discounts, net (85,708) (48,941) 168,319
Loss on sale of mortgage-backed
securities available for sale 7,787 -- --
Decrease (increase) in prepaid
expenses and other assets 47,091 (2,535) 588,541
Increase in accrued expenses and
other liabilities 210,826 325,977 282,064
Increase (decrease) in federal and
state income taxes 277,065 (279,093) (162,266)
Increase in accrued interest receivable (120,068) (238,981) (73,477)
Increase (decrease) in accrued interest
payable 113,471 (8,441) 14,773
- ------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (391,272) 401,765 2,888,373
- ------------------------------------------------------------------------------------
Cash flows from investing activities:
Premium paid on savings deposits -- (3,044,642) --
Purchases of investment securities
available for sale (4,997,965) (21,981,389) --
Maturities of investment securities
available for sale 4,000,000 -- --
Principal repayments of mortgage-backed
securities available for sale 1,193,668 2,462,614 --
Purchases of mortgage-backed securities
available for sale (4,996,875) (10,484,123) --
Sales of mortgage-backed securities
available for sale 3,538,099 -- --
Maturities of investment securities 2,000,000 11,000,000 988,400
Purchases of investment securities -- (10,986,501) (8,966,726)
Purchases of mortgage-backed securities -- -- (1,020,262)
Principal repayments of mortgage-backed
securities 3,890,273 1,818,389 2,768,183
Loan principal disbursements, net of
repayments (16,110,791) 1,166,296 (10,290,711)
Loan purchases (9,334,785) (14,424,603) (7,199,236)
Increase in investment in Federal Home
Loan Bank stock (96,400) -- --
Proceeds from sales of investments in
real estate 43,848 -- 91,230
Purchases of property and equipment (111,133) (275,361) (129,926)
Decrease (increase) in investment in and
advances to affiliated corporation, net 50,000 (50,000) (100,000)
- ------------------------------------------------------------------------------------
Net cash used in investing activities (20,932,061) (44,799,320) (23,859,048)
- ------------------------------------------------------------------------------------
(Continued)
</TABLE>
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
Years ended March 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in savings accounts $ 9,441,933 52,870,177 (1,739,040)
Net increase in borrowed funds 12,000,000 2,500,000 2,000,000
Increase (decrease) in advance payments by
borrowers for taxes, insurance and
ground rents (27,121) (164,902) 499,165
Proceeds from stock offering -- -- 19,006,790
Stock repurchases -- (5,977,688) --
Purchase of stock for MRP Trust -- (1,242,522) --
Purchase of stock for Stock Option Trust (8,987) (875,242) --
Exercise of stock options by Stock Option Trust 68,308 127,713 --
Dividends paid (701,768) (403,833) (109,004)
- ------------------------------------------------------------------------------------
Net cash provided by financing activities 20,772,365 46,833,703 19,657,911
- ------------------------------------------------------------------------------------
Net increase (decrease) in cash equivalents (550,968) 2,436,151 (1,312,764)
Cash and cash equivalents at beginning of year 6,249,221 3,813,070 5,125,834
- ------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $5,698,253 6,249,221 3,813,070
- ------------------------------------------------------------------------------------
Supplemental information:
Interest paid on savings accounts and
borrowed funds $8,899,748 6,217,000 4,656,000
Income taxes paid 628,000 900,000 1,252,000
- ------------------------------------------------------------------------------------
Schedule of noncash investing and
financing transactions:
Transfers of loans receivable to investments
in real estate $ 465,136 43,848 --
Unrealized holding gains (loss) on securities
available for sale, net of income tax (213,256) (191,760) 68,523
- ------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1997, 1996 and 1995
- ----------------------------------------------------------------
(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.
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 regulatory
authorities.
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 as of the date of the statement of
financial condition and revenues and expenses for the
period. 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 investments in real estate 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
investments in real estate. 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.
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
(1) CONTINUED
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.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, requires classification of investments into
three categories. 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 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 excluded from income and
reported as a separate component of stockholders' equity
(net of tax effects). Fair value is determined based on bid
prices published in financial newspapers 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 MORTGAGE-BACKED
SECURITIES
Discounts and premiums on loans and mortgage-backed
securities are deferred and amortized to income using the
level-yield method over the contractual term of the loan or
security.
UNEARNED 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 of mortgage loans at March 31,
1997 and 1996. Loans held for sale 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.
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
(1) CONTINUED
INVESTMENTS IN REAL ESTATE
Real estate acquired through foreclosure is initially
recorded at the lower of cost or fair value and subsequently
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 betterments are capitalized,
and costs of repairs and maintenance are expensed when
incurred. The related cost and accumulated depreciation or
amortization are eliminated from the accounts when an asset
is sold or retired and the resultant gain or loss is
credited or charged to income.
LOAN FEES
Loan origination and commitment fees 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.
Direct loan origination costs are deferred and recognized as
a reduction of the loan yield over the contractual lives of
the related loans using the level-yield method. Deferred
fees and costs are combined where applicable and the net
amount is amortized.
PROVISION FOR LOSSES ON LOANS
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 and prospective
economic conditions and the status of nonperforming loans.
Loans or portions thereof are charged off when considered,
in the opinion of management, uncollectible.
Interest on potential problem 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 loan losses. Any interest received in excess
of the amount previously accrued on such loans is recorded
in income in the period of recovery.
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
(1) CONTINUED
SFAS No. 114, Accounting by Creditors for Impairment of a
Loan (SFAS No. 114) addresses the accounting by creditors
for impairment of certain loans. It is generally applicable
to all loans, except large groups of smaller balance
homogenous loans, including residential mortgage loans and
consumer installment loans that are collectively evaluated
for impairment. It also applies to loans that are
restructured in a troubled debt restructuring involving a
modification of terms, with limited exceptions.
A loan is considered impaired when, based on current
information and events, it is probable that a creditor will
be unable to collect all amounts due according to the
contractual terms of the loan agreement. SFAS No. 114
requires that impaired loans be 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.
In October 1994, the Financial Accounting Standards Board
(FASB) issued SFAS No. 118 Accounting by Creditors for
Impairment of a Loan - Income Recognition Disclosures (SFAS
No. 118). SFAS No. 118 amends SFAS No. 114 to allow a
creditor to use existing methods for recognizing interest
income on impaired loans. It also requires disclosure about
the recorded investment in certain impaired loans and how
the creditor recognizes interest income related to those
loans.
The Company adopted the provisions of SFAS No. 114 and No.
118 as of April 1, 1995. The impact of adoption was not
material.
PREMIUM ON SAVINGS ACCOUNTS
Effective February 16, 1996, the Bank purchased certain
assets and liabilities, principally loans and deposits,
relating to three branch offices pursuant to a Purchase and
Assumption Agreement. The acquisition was accounted for
using the purchase method and the excess of the purchase
cost over the fair values of the acquired assets of
$3,044,642 was recorded as a premium on savings accounts
which is being amortized using the straight-line method over
an estimated life of eight years.
(Continued)
<PAGE>
<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, 1997 and
1996. As specified in legislation enacted in August 1996,
this bad debt reserve would 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.
In October 1995, the FASB issued SFAS No. 123, Accounting
for Stock-Based Compensation (SFAS No. 123). SFAS No. 123
permits companies to adopt a new fair value-based method to
account for stock-based employee compensation plans or to
continue using the intrinsic value method. Information
required by SFAS No. 123 concerning the Company's stock-
based compensation plans is provided in note 12.
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.
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
(1) CONTINUED
NET INCOME PER SHARE OF COMMON STOCK
Primary net income per share for 1997 and 1996 has been
computed based on 1,664,823 and 1,865,250 weighted average
shares of common stock and common stock equivalents
outstanding, respectively. Weighted average shares used in
computing fully diluted net income per share for 1997 and
1996 were 1,671,094 and 1,865,250, respectively. Unearned
ESOP shares are not included in outstanding shares.
Net income per share for the portion of the year ended
March 31, 1995 for which the Company was a stock
corporation, (i.e., August 11, 1994 through March 31, 1995),
is computed using estimated net income for such period. Pro
forma net income per share for the year ended March 31, 1995
is computed assuming net proceeds of the sale of common
stock issued in the conversion were received and invested
beginning April 1, 1994 at a net effective yield of 4.5%
(the approximate weighted average yield on all interest-
earning assets, net of tax).
In February 1997, the FASB issued SFAS No. 128, Earnings per
Share, which is effective for financial statements issued
for periods ending after December 15, 1997. SFAS No. 128
establishes standards for computing and presenting earnings
per share ("EPS") and replaces the presentation of primary
EPS with a presentation of basic EPS. It requires dual
presentation of basic and diluted EPS on the face of the
consolidated statement of income and reconciliation of the
numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS
computation. Earlier application is not permitted but
disclosure of pro forma EPS amounts computed using the
standards established by SFAS No. 128 is permitted in the
notes to financial statements for periods ending prior to
the effective date. Pro forma EPS of the Company determined
in accordance with SFAS No. 128 are as follows for the years
ended March 31:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------
<S> <C> <C>
Basic $0.55 0.54
Diluted 0.54 0.53
-----------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
(2) Investment Securities
Investment securities are summarized as follows at March 31:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair Carrying
cost gains losses value amount
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Government and
agency obligations $24,476,611 $ 6,140 $ (580,981) $23,901,770 $24,476,611
- --------------------------------------------------------------------------------------------------
Available for sale:
U.S. Government and
agency obligations 22,977,853 -- (671,253) 22,306,600 22,306,600
Preferred stock -
Federal Home Loan
Mortgage Corporation 6,339 206,211 -- 212,550 212,550
- ----------------------------------------------------------------------------------------------------
22,984,192 206,211 (671,253) 22,519,150 22,519,150
Accrued interest receivable 547,657 -- -- 547,657 547,657
- ----------------------------------------------------------------------------------------------------
$48,008,460 $212,351 (1,252,234) 46,968,577 47,543,418
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair Carrying
cost gains losses value amount
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Government and
agency obligations $26,460,790 $ 65,542 $ (517,547) $26,008,785 $26,460,790
- ---------------------------------------------------------------------------------------------------
Available for sale:
U.S. Government and
agency obligations 21,987,661 -- (366,594) 21,621,067 21,621,067
Preferred stock -
Federal Home Loan
Mortgage Corporation 6,339 159,899 -- 166,238 166,238
- ----------------------------------------------------------------------------------------------------
21,994,000 159,899 (366,594) 21,787,305 21,787,305
Accrued interest receivable 490,824 -- -- 490,824 490,824
- ----------------------------------------------------------------------------------------------------
$48,945,614 $225,441 (884,141) 48,286,914 48,738,919
- ----------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
(2) Continued
Investment securities mature as follows at March 31:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
Amortized Fair Amortized Fair
cost value cost value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
Due in one year or less $ 2,000,140 $ 2,001,880 $ 1,997,493 $ 1,987,670
Due after one through five years 8,494,899 8,403,015 9,487,608 9,377,990
Due after five through ten years 12,981,572 12,497,655 13,975,689 13,628,275
Due after ten years 1,000,000 999,220 1,000,000 1,014,850
- -------------------------------------------------------------------------------------------
24,476,611 23,901,770 26,460,790 26,008,785
- -------------------------------------------------------------------------------------------
Available for sale:
Due after one through five years 1,000,000 966,410 2,000,000 1,956,160
Due after five through ten years 17,984,611 17,519,280 16,993,680 16,783,027
Due after ten years 3,993,242 3,820,910 2,993,981 2,881,880
- -------------------------------------------------------------------------------------------
22,977,853 22,306,600 21,987,661 21,621,067
Accrued interest receivable 547,657 547,657 490,824 490,824
- -------------------------------------------------------------------------------------------
$48,002,121 46,756,027 48,939,275 48,120,676
- ----------------------------------------------------------------------------------------
</TABLE>
There were no sales of investment securities during the years
ended March 31, 1997, 1996 and 1995.
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------
(3) Mortgage-Backed Securities
Mortgage-backed securities and accrued interest receivable
thereon are summarized as follows at March 31:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair Carrying
cost gains losses value amount
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Government National
Mortgage Association
(GNMA) $ 1,319,880 $ 66,667 $ -- $ 1,386,547 $ 1,319,880
Federal National Mortgage
Association (FNMA) 2,243,013 58,086 (31,432) 2,269,667 2,243,013
Federal Home Loan Mortgage
Corporation (FHLMC) 2,392,199 45,693 (48,801) 2,389,091 2,392,199
- ---------------------------------------------------------------------------------------------------
5,955,092 170,446 (80,233) 6,045,305 5,955,092
Available for sale:
GNMA 4,814,984 -- (87,215) 4,727,769 4,727,769
FHLMC 3,347,231 13,966 -- 3,361,181 3,361,181
- ----------------------------------------------------------------------------------------------------
8,162,215 13,966 (87,215) 8,088,950 8,088,950
Accrued interest receivable 117,197 -- -- 117,197 117,197
- ----------------------------------------------------------------------------------------------------
$14,234,504 184,412 (167,448) 14,251,452 14,161,239
- ----------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
(3) Continued
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair Carrying
cost gains losses value amount
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Held to maturity:
GNMA $ 1,697,869 100,379 -- 1,798,248 1,697,869
FNMA 2,924,271 72,458 (45,050) 2,951,679 2,924,271
FHLMC 5,212,609 88,576 (30,794) 5,270,391 5,212,609
- ---------------------------------------------------------------------------------------------------
9,834,749 261,413 (75,844) 10,020,318 9,834,749
Available for sale:
FNMA 3,712,263 1,176 -- 3,713,439 3,713,439
FHLMC 4,233,641 4,134 -- 4,236,775 4,236,775
- ----------------------------------------------------------------------------------------------------
7,944,904 5,310 -- 7,950,214 7,950,214
Accrued interest receivable 152,458 -- -- 152,458 152,458
- ----------------------------------------------------------------------------------------------------
$17,932,111 266,723 (75,844) 18,122,990 17,937,421
- ----------------------------------------------------------------------------------------------------
</TABLE>
Contractual maturities of mortgage-backed securities are as
follows at March 31:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
Amortized Fair Amortized Fair
cost value cost value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
Due in one year or less $ 695,097 692,776 1,717,215 1,723,558
Due after one through five years 1,832,768 1,753,954 2,884,826 2,836,102
Due after five through ten years 58,590 60,201 856,299 837,711
Due after ten years 3,368,637 3,538,374 4,376,409 4,622,947
- -------------------------------------------------------------------------------------------
5,955,092 6,045,305 9,834,749 10,020,318
- -------------------------------------------------------------------------------------------
Available for sale:
Due after ten years 8,162,215 8,088,950 7,944,904 7,950,214
Accrued interest receivable 117,197 117,197 152,458 152,458
- -------------------------------------------------------------------------------------------
$14,234,504 14,251,452 17,932,111 18,122,990
- ----------------------------------------------------------------------------------------
</TABLE>
Contractual maturities do not consider anticipated prepayments
of mortgage-backed securities.
During the year ended March 31, 1997, mortgage-backed
securities with an amortized cost of $3,538,099 were sold at a
loss of $7,787. There were no sales of mortgage-backed
securities during the years ended March 31, 1996 and 1995.
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(4) Loans Receivable
Loans receivable and accrued interest receivable thereon are
summarized as follows at March 31:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
First Mortgage loans on real estate:
One-to four-family residential $119,924,528 100,156,599
Multifamily residential 955,952 980,180
Commercial 12,182,568 9,054,078
Construction 6,632,972 6,129,635
Land 1,473,445 1,927,527
Loans held for sale 3,865,888 1,199,431
- ------------------------------------------------------------------------------
Total first mortgage loans 145,035,353 119,447,450
Loans secured by savings accounts 650,540 667,260
Home equity loans 400,088 499,224
Home improvement loans 112,163 87,833
Financing leases 277,112 --
Commercial loans 1,118,630 1,400,427
Accrued interest receivable 760,571 662,248
- ------------------------------------------------------------------------------
148,354,457 122,764,442
- ------------------------------------------------------------------------------
Less:
Undisbursed portion of loans in process 2,306,965 4,767,046
Unearned discount on loans purchased 46,130 57,941
Unearned loan fees 919,616 608,970
Allowance for losses 380,000 438,500
- ------------------------------------------------------------------------------
3,652,711 5,872,457
- ------------------------------------------------------------------------------
Loans receivable, net $144,701,746 116,891,985
- ------------------------------------------------------------------------------
</TABLE>
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.
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(4) (Continued)
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 $289,000 and
$403,000 at March 31, 1997 and 1996, respectively. For the
years ended March 31, 1997, 1996, and 1995, 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 $11,000, $14,000
and $22,000, respectively. The actual interest income recorded
on these loans for the years ended March 31, 1997, 1996 and
1995 was approximately $5,000, $11,000 and $8,000,
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 $1,170,000 at March 31, 1997, 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.
Changes in the allowance for losses were as follows for the
years ended March 31:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $438,500 $465,000 $489,016
Provision for losses on loans 32,605 -- 2,703
Charge-offs (91,105) (26,500) (26,719)
- -----------------------------------------------------------------
Ending balance $380,000 438,500 465,000
- -----------------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(4) (Continued)
The following table allocates the allowance for losses on loans
by loan category at March 31 of the years 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>
1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
Residential mortgage $155,000 155,000 165,000
Commercial mortgage 100,000 100,000 100,000
Construction 125,000 125,000 125,000
Commercial and financing leases -- 58,500 75,000
- ---------------------------------------------------------------
$380,000 438,500 465,000
- ---------------------------------------------------------------
</TABLE>
At March 31, 1997, 1996 and 1995, the Bank was servicing loans
for the benefit of others of approximately $9,215,000,
$9,550,000 and $11,088,000, respectively.
The Bank has made loans to certain of its directors and a
company in which an executive officer holds a 50% interest.
These loans were 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 balance outstanding at March 31, 1997
on such loans was approximately $432,000.
(5) Investment in and Advances to Affiliated Corporation
Bankers Affiliate, Inc. (formerly, Cash, Inc.) was organized in
April 1983 as a service corporation. It is owned by the Bank
and two other thrift institutions and makes consumer loans to
their customers. Advances are due on demand and bear interest
at a rate determined by the Bank and the two other thrift
institutions. The interest rate at March 31, 1997 was 7.0%.
The Bank accounts for its investment using the equity method.
As of March 31, 1997, all profits to date have been reinvested.
Each of the three investors share profits and losses equally at
33-1/3%.
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(5) (Continued)
The investment in and advances to Bankers Affiliate, Inc. are
as follows at March 31:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Capital stock, at cost $ 25,000 $ 25,000
Advances 2,750,000 2,800,000
- ------------------------------------------------------------------------------
$2,775,000 $2,825,000
- ------------------------------------------------------------------------------
</TABLE>
Summarized financial information as of June 30, 1996 and 1995
and for the years ended June 30, 1996, 1995 and 1994 for
Bankers Affiliate, Inc. is as follows:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 233,189 $ 157,999
Finance receivables, net 8,124,742 8,308,052
Other assets 24,461 8,166
Real estate owned 117,729 199,722
- ------------------------------------------------------------------------------
$8,500,121 $8,673,939
- ------------------------------------------------------------------------------
Loans payable to Harbor Federal $2,800,000 $2,800,000
Other loans payable 5,600,000 5,773,000
Other liabilities 34,162 37,679
- ------------------------------------------------------------------------------
8,434,162 8,610,679
Stockholders' equity 65,959 63,260
- ------------------------------------------------------------------------------
$8,500,121 $8,673,939
- ------------------------------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
(5) (Continued)
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
Income:
Interest $897,767 $852,817 $782,023
Other income 33,866 28,920 33,908
- -----------------------------------------------------------------
931,633 881,737 815,931
- -----------------------------------------------------------------
Expenses:
Interest 686,482 594,761 599,157
Salaries 120,997 119,428 109,402
Provision for losses 40,392 73,694 35,302
Other expenses 78,013 78,890 73,205
- -----------------------------------------------------------------
925,884 866,773 817,066
- -----------------------------------------------------------------
Income (loss) before income taxes 5,749 14,964 (1,135)
Income taxes 3,050 15,688 29,765
- -----------------------------------------------------------------
Income (loss) before cumulative
effect of accounting change 2,699 (724) (30,900)
- -----------------------------------------------------------------
Cumulative effect of change in
accounting for income taxes -- -- 20,086
- -----------------------------------------------------------------
Net income (loss) $ 2,699 $ (724) $(10,814)
- -----------------------------------------------------------------
</TABLE>
(6) Property and Equipment
Property and equipment are summarized as follows at March 31:
<TABLE>
<CAPTION>
1997 1996 Useful life
- -----------------------------------------------------------------
<S> <C> <C> <C>
Land $ 733,189 $ 733,189 --
Buildings and improvements 1,356,498 1,356,498 15-30 years
Leasehold improvements 33,000 33,000 5-10 years
Furniture, fixtures and
equipment 829,189 718,056 5-10 years
Automobiles 24,128 24,128 3 years
- -----------------------------------------------------------------
Total, at cost 2,976,004 2,864,871
Less accumulated depreciation
and amortization 1,037,305 886,329
- -----------------------------------------------------
Property and equipment, net $1,938,699 1,978,542
- -----------------------------------------------------
</TABLE>
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(6) (Continued)
At March 31, 1997, the Bank was obligated under noncancellable
long-term operating leases for two of its branch offices and
space for an automated teller machine. These leases expire at
various dates to 1999 and provide for approximate aggregate
rentals of $93,000 in 1998 and $15,000 in 1999.
Rent expense was $103,618, $6,248 and $24,350 for the years
ended March 31, 1997, 1996, and 1995, respectively.
(7) SAVINGS ACCOUNTS
Savings accounts are summarized as follows at March 31:
<TABLE>
<CAPTION>
Weighted average rate 1997 1996
--------------------- ------------------- ------------------
1997 1996 Amount % Amount %
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Certificates 5.99% 6.03% $111,226,244 63.9% $100,088,706 60.8%
Money market 3.65% 3.64% 24,799,745 14.2% 24,331,222 14.8%
Passbook 3.05% 3.16% 31,254,100 18.0% 33,088,140 20.1%
NOW 0.96% 2.57% 5,425,414 3.1% 5,442,070 3.3%
Christmas Club 3.05% 3.05% 333,075 0.2% 382,424 0.2%
Commercial checking -- -- 1,065,995 0.6% 1,330,078 0.8%
- --------------------------------------------------------------------------------------------
174,104,573 100.0% 164,662,640 100.0%
===== =====
Unamortized premium (2,637,944) (3,019,328)
------------ ------------
$171,466,629 $161,643,312
============ ============
Certificate accounts maturing:
Under 12 months $ 52,551,230 47.2% 58,601,861 58.6%
12 months to 24 months 32,311,982 29.1% 8,784,095 8.8%
24 months to 36 months 17,203,594 15.5% 17,223,018 17.2%
36 months to 48 months 6,710,506 6.0% 9,057,298 9.0%
48 months to 60 months 2,448,932 2.2% 6,422,434 6.4%
------------ ----- ----------- -----
$111,226,244 100.0% 100,088,706 100.0%
============ ===== =========== =====
</TABLE>
At March 31, 1997 and 1996, customer deposits in savings
accounts of $100,000 or more were approximately $12,540,000 and
$15,716,000, respectively.
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(8) BORROWED FUNDS
Borrowed funds are summarized as follows at March 31:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Securities sold under agreements to
repurchase with interest rates and
maturities as follows:
5.7% due June 1997 $ 4,500,000 4,500,000
5.7% due October 1997 10,000,000 --
5.6% due November 1997 2,000,000 --
- ------------------------------------------------------------------------------
$16,500,000 4,500,000
- ------------------------------------------------------------------------------
</TABLE>
The Bank enters into sales of mortgage-backed securities with
agreements to repurchase. Such agreements are treated as
financings, and the obligations to repurchase securities sold
are reflected as a liability 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. The mortgage-backed
securities remain in the asset accounts.
Information with respect to reverse repurchase agreements is as
follows for the years ended March 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Amount outstanding at year-end $16,500,000 4,500,000 2,000,000
Maximum outstanding at any month-end 21,415,000 7,500,000 2,000,000
Average outstanding 15,210,000 4,700,000 1,746,000
Fair value of securities sold under
reverse repurchase agreements
at year-end:
Mortgage-backed securities 9,354,892 4,886,383 2,073,335
Investment securities 8,734,950 -- --
Amortized cost of securities sold
under reverse repurchase
agreements at year-end
Mortgage-backed securities 9,478,744 4,995,156 2,157,186
Investment securities 9,000,000 -- --
- ----------------------------------------------------------------------------
</TABLE>
FEDERAL HOME LOAN BANK ADVANCES
Under a blanket floating lien security agreement with the
Federal Home Loan Bank of Atlanta, the Bank is required to
maintain as collateral for its advances qualifying first
mortgage loans in an amount equal to 110% of the advances.
There were no advances in 1997 and 1996, and no first mortgage
loans were pledged as collateral at March 31, 1997.
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(9) Income Taxes
The income tax provision is composed of the following for the
years ended March 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 549,850 $ 510,822 $ 801,598
State 121,724 113,085 183,483
- ----------------------------------------------------------------------------
671,574 623,907 985,081
- ----------------------------------------------------------------------------
Deferred:
Federal (85,457) 11,688 24,900
State (18,917) 2,587 5,919
- ----------------------------------------------------------------------------
(104,374) 14,275 30,819
- ----------------------------------------------------------------------------
$ 567,200 638,182 1,015,900
- ----------------------------------------------------------------------------
</TABLE>
The net deferred tax asset at March 31, 1997 and 1996 consists
of total deferred tax assets of $887,301 and $642,260,
respectively, and total deferred tax liabilities of $448,267
and $441,175, 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>
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Interest and fees on loans $ 51,457 $ 67,211
Allowance for losses on loans 146,949 173,404
Accrual basis of accounting and deferred
compensation 408,271 323,497
Unamortized premium on savings deposits 68,901 --
Federal Home Loan Bank stock dividends (207,351) (207,351)
Prepaid pension cost (29,771) (22,660)
Tax bad debt reserve in excess of base year (211,145) (211,164)
Unrealized loss on investment available for sale 211,723 78,148
- ------------------------------------------------------------------------------
$ 439,034 $ 201,085
- ------------------------------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
<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>
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate $499,351 558,414 894,239
State income taxes, net of
Federal income tax benefit 67,853 76,344 121,511
Other, net (4) 3,424 150
- ----------------------------------------------------------------------------
Income tax provision 567,200 638,182 1,015,900
- ----------------------------------------------------------------------------
Effective tax rate 38.6% 38.9% 38.6%
- ----------------------------------------------------------------------------
</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, .3% of its total assets 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.
During 1997, the Bank paid a special assessment of
approximately $806,000 as a result of the federally-mandated
recapitalization of the SAIF. The assessment was required of
substantially all SAIF-insured depository institutions and was
charged to noninterest expense.
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, iabilities,
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.
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(10) Continued
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 December 31, 1996, 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. To be categorized as
well capitalized the Bank must maintain minimum tangible, core
and risk-based capital ratios as set forth in the table below.
There are no conditions or events since that notification
that management believes have changed the Bank's category.
Regulatory capital amounts and ratios for the Bank are as
follows (in thousands):
<TABLE>
<CAPTION>
To Be Well
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, 1997:
Tangible capital (a) $24,479 11.24% $3,268 1.50% $10,893 >5%
Core capital (a) 24,479 11.24% 6,536 3.00% 13,072 >6%
Risk-based capital (b) 24,859 27.17% 7,320 8.00% 9,150 >10%
As of March 31, 1996:
Tangible capital (a) 23,398 11.80% 2,975 1.50% 9,914 >5%
Core capital (a) 23,398 11.80% 5,949 3.00% 11,897 >6%
Risk-based capital (b) 23,846 29.38% 6,494 8.00% 8,117 >10%
<FN>
(a) Percentage of capital to ending assets.
(b) Percentage of risk-based capital to ending risk-weighted assets.
</FN>
</TABLE>
The OTS adopted a final rule in August, 1993 incorporating an
interest rate risk (IRR) component into the risk-based capital
rules. The new rule was effective January 1, 1994; however,
the IRR capital deduction discussed below has been waived until
the OTS publishes guidelines under which institutions may
appeal such a deduction. The IRR component is a dollar amount
that will be deducted from total capital for the purpose of
calculating an institution's risk-based capital requirement and
is 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 change to its
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(10) Continued
NPV as a result of a hypothetical 200 basis point change in
market interest rates. A resulting change in NPV of more than
2% of the estimated market value of its assets will require the
institution to deduct from its capital 50% of that excess
change. The rule provides that the OTS will calculate the
IRR component quarterly for each institution. Institutions,
such as the Bank, with total assets of less than $300,000,000
and a risk-based capital ratio of greater than 12% are exempt
from calculating an IRR component. At its discretion, the OTS
may require an institution to be subject to an IRR component.
(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. A subscription offering of the
shares of common stock was made initially to employee benefit
plans of the Company, depositors, borrowers, directors,
officers and employees and certain other eligible parties. In
connection with the conversion, the Company publicly issued
2,180,086 shares of its common stock, par value $.01 per share
for gross proceeds of $21,800,860 and net proceeds of
$19,006,790, of which $10,360,430 was contributed to the Bank
in exchange for all of its outstanding common stock.
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 shall be entitled to receive a distribution from the
liquidation account after payment to 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.
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 that
exceeds all fully phased-in 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 fully phased-in
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(11) Continued
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.
An institution that meets its regulatory capital requirements,
but not its fully phased-in capital requirements before or
after its capital distribution (Tier 2 Institution) may, after
prior notice but without the approval of the OTS, make capital
distributions of: up to 75% of its net income over the most
recent four-quarter period if it satisfies the risk-based
capital requirement that was applicable to it on January 1,
1993, computed based on its current portfolio; up to 50% of its
net income over the most recent four-quarter period if it
satisfies the risk-based capital standard that was applicable
to it on January 1, 1991, computed based on its current
portfolio; and up to 25% of its net income over the most recent
four-quarter period if it satisfies its current risk-based
capital requirement. In computing the institution's
permissible percentage of capital distributions, previous
distributions made during the prior four-quarter period must be
included.
An institution that does not meet its current regulatory
capital requirements before or after payment of a proposed
capital distribution (Tier 3 Institution) may not make any
capital distributions without the prior approval of the OTS.
In addition, the OTS would prohibit a proposed capital
distribution by any institution which would otherwise be
permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
In addition, the Federal Deposit Insurance Corporation
Improvement Act of 1991 provides that, as a general rule, a
financial institution may not make a capital distribution if it
would be undercapitalized after making the capital
distribution. Also, an institution meeting the Tier 1
capital criteria which has been notified that it needs more
than normal supervision will be treated as a Tier 2 or Tier 3
Institution unless the OTS deems otherwise.
In addition to the foregoing, 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.
On February 24, 1997 the Company's Board of Directors declared
a $.10 per share dividend payable April 10, 1997, to holders of
record on April 1, 1997.
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(12) STOCK-BASED BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
On August 11, 1994 the ESOP acquired 174,407 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. The ESOP's sources
of repayment of the note are dividends on the common stock, if
any, either held in trust or allocated to the participants'
accounts, and an annual contribution from the Bank to the ESOP
and earnings thereon. For the years ended March 31, 1997,
1996 and 1995 the Bank made contributions to the ESOP of
approximately $312,000, $275,000 and $183,000, respectively.
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.
For the years ended March 31, 1997, 1996 and 1995, compensation
expense related to the ESOP was $284,000, $259,000 and
$229,000, respectively. Dividends on ESOP shares used for debt
service by the ESOP for the years ended March 31, 1997 and 1996
were $52,000 and $32,000, respectively. No dividends on ESOP
shares were used for debt service by the ESOP for the year
ended March 31, 1995.
The ESOP shares were as follows at March 31:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Allocated shares 60,723 38,082
Unearned shares 113,684 136,325
- ------------------------------------------------------------------------------
174,407 174,407
- ------------------------------------------------------------------------------
Fair value of unearned shares at March 31 $1,847,365 1,823,347
- ------------------------------------------------------------------------------
</TABLE>
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 87,203 shares of stock which
are held in a separate trust that manages the MRP. The Company
funded the MRP in 1996 by purchasing 87,203 shares of its
common stock in the open market. Shares awarded to
participants in the MRP vest at a rate of 20% per
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(12) CONTINUED
year on each anniversary of the effective date of the MRP. If
a participant terminates employment for reasons other than
death or disability, he or she forfeits all rights to unvested
shares. For the years ended March 31, 1997, 1996 and 1995,
compensation expense related to the MRP was $150,650, $383,520
and $90,006, respectively.
DIRECTORS RETIREMENT PLAN
On August 11, 1994, the Bank established a Directors Retirement
Plan for certain directors. Participants include the President
of the Bank and other directors who were members of the Board
of Directors at the date of conversion to a capital stock form
of organization and were not employees at that date.
Participants become one-third vested per full year of service
from the date of conversion. The President's benefits are
equal to 60% of his average salary for the final three years of
service. 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. Participants receive on each of the
ten anniversary dates following retirement, an amount equal to
the vesting percentage times the benefit percentage times the
annual fee received for service on the Board of Directors
during the calendar year preceding retirement. For the years
ended March 31, 1997, 1996 and 1995, compensation expense
related to the Directors Retirement Plan was $214,668, $214,668
and $136,534, respectively.
STOCK OPTION PLAN
Effective January 13, 1995, Company established 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.
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(12) CONTINUED
Information with respect to options is as follows for the years
ended March 31:
<TABLE>
<CAPTION>
1997 1996
(shares) (shares)
- ------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at beginning of year - $10.625 per share 203,409 218,009
Granted -- --
Exercised (6,429) (12,020)
Forfeited (24,475) (2,580)
- ------------------------------------------------------------------------------
Outstanding at end of year - $10.625 per share 172,505 203,409
- ------------------------------------------------------------------------------
Exercisable at end of year 87,701 64,682
- ------------------------------------------------------------------------------
</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 698
shares for $8,987 and 58,707 shares for $875,242 in 1997 and
1996, respectively, and is authorized to purchase up to
49,600 shares in the open market at March 31, 1997.
(13) PENSION PLAN
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, 1997, 1996 and 1995, pension expense was $84,370,
$99,581 and $119,056, respectively.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial
Instruments requires disclosure of estimated fair values for
certain on- and off-balance sheet financial instruments. Fair
value estimates and the methods and assumptions used to
determine them are set forth below for financial instruments
outstanding as of March 31, 1997 and 1996.
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(14) CONTINUED
The carrying value and estimated fair value of financial
instruments is summarized as follows at March 31:
<TABLE>
<CAPTION>
1997 1996
--------------------- ------------------------
Carrying Fair Carrying Fair
amount value amount value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and interest-bearing
deposits $ 1,758,834 $ 1,759,000 $ 2,807,252 $ 2,807,000
Federal funds sold 3,939,419 3,939,000 3,441,969 3,442,000
Investment securities 47,543,418 46,969,000 48,738,919 48,287,000
Mortgage-backed securities 14,161,239 14,251,000 17,937,421 18,123,000
Loans receivable 144,701,746 144,975,000 116,891,985 116,458,000
Liabilities:
Savings accounts 171,466,629 175,433,000 161,643,312 166,844,000
Borrowed funds 16,500,000 16,500,000 4,500,000 4,500,000
Advances payments by
borrowers for taxes,
insurance and ground
rents 1,902,414 1,902,000 1,929,535 1,930,000
- ------------------------------------------------------------------------------------
</TABLE>
CASH AND INTEREST-BEARING DEPOSITS
The carrying amount for cash on hand and due from banks
approximates fair value due to the short maturity of these
instruments.
FEDERAL FUNDS SOLD
The carrying amount for Federal funds sold approximates fair
value due to the overnight maturity of these instruments.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The fair value of investment securities and mortgage-backed
securities is based on bid prices received from an external
pricing service or bid quotations received from securities
dealers.
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(14) CONTINUED
LOANS
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 second mortgage loans is calculated by
discounting scheduled cash flows through the estimated maturity
date using estimated market discount rates that reflect the
credit and interest rate risk inherent in the portfolio. 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.
ACCRUED INTEREST RECEIVABLE
The carrying amount of accrued interest receivable approximates
its 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 are considered
to be at fair value.
ACCRUED INTEREST PAYABLE
The carrying amount of accrued interest payable approximates
its fair value.
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(14) CONTINUED
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.
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. 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
approximately as follows at March 31:
<TABLE>
<CAPTION>
1997
---------------------------
Fixed rate Floating Rate
- -----------------------------------------------------------------------------
<S> <C> <C>
Residential mortgage loans to be funded $2,447,600 774,900
Commercial mortgage loans to be funded 1,495,000 --
Undisbursed lines of credit -- 1,266,400
- ------------------------------------------------------------------------------
$3,942,600 2,041,300
- ------------------------------------------------------------------------------
</TABLE>
All residential mortgage loan commitments usually expire within
thirty days. The interest rate range on fixed rate mortgage
loan commitments was from 6.875% to 9.50% at March 31, 1997.
These mortgage loan commitments and undisbursed lines of credit
are expected to be settled at face amount or expire unused.
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.
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(14) CONTINUED
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.
(15) 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>
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 5,178,382 6,009,797
Investment in the Bank 10,542,516 9,461,336
- ------------------------------------------------------------------------------
$15,720,898 15,471,133
- ------------------------------------------------------------------------------
Loan payable - Bank $ 1,136,840 1,363,250
Federal and state income taxes (receivable)
payable (226,254) 1,728
Other liabilities 185,450 30,234
- ------------------------------------------------------------------------------
1,096,036 1,395,212
Stockholders' equity 14,624,862 14,075,921
- ------------------------------------------------------------------------------
$15,720,898 15,471,133
- ------------------------------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(15) CONTINUED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Interest income $112,763 $258,840 $173,024
- ----------------------------------------------------------------------------
Expenses:
Interest expense 110,349 233,434 --
Professional fees 19,200 75,000 54,256
Other expenses 30,565 42,247 16,801
- ----------------------------------------------------------------------------
160,114 350,681 71,057
- ----------------------------------------------------------------------------
Income (loss) before equity in
net income of subsidiary and
income taxes (47,351) (91,841) 101,967
Equity in net income of subsidiary 930,531 1,060,703 1,551,647
- ----------------------------------------------------------------------------
Income before income taxes 883,180 968,862 1,653,614
Income taxes (benefit) (18,300) (35,350) 39,400
- ----------------------------------------------------------------------------
Net income $ 901,480 1,004,212 1,614,214
- ----------------------------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------
(15) CONTINUED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 901,480 $1,004,212 1,614,214
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in net income of subsidiary (930,531) (1,060,703) (1,551,647)
Noncash compensation under stock-
based benefit plans 462,650 658,087 273,194
Other, net (396,157) (261,656) 69,400
- ----------------------------------------------------------------------------
Net cash provided by operating activities 37,442 339,940 405,161
- ----------------------------------------------------------------------------
Investing activities:
Purchase of stock of Bank -- -- (10,465,465)
Dividend distribution from Bank -- 4,000,000 --
- ----------------------------------------------------------------------------
Net cash provided by (used in)
investing activities -- 4,000,000 (10,465,465)
- ----------------------------------------------------------------------------
Financing activities:
Net proceeds of stock conversion -- -- 19,006,790
Purchase of common stock (8,987) (7,220,210) (1,034,545)
Exercise of stock options by Stock
Option Trust 68,308 127,713 --
Borrowings -- -- 1,744,070
Repayment of borrowings (226,410) (206,410) (174,410)
Dividends paid (701,768) (403,833) (109,004)
- ----------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (868,857) (7,702,740) 19,432,901
- ----------------------------------------------------------------------------
Increase (decrease) in cash and
equivalents (831,415) (3,362,800) 9,372,597
Cash and equivalents at beginning of
year 6,009,797 9,372,597 --
- ----------------------------------------------------------------------------
Cash and equivalents at end of year $5,178,382 6,009,797 9,372,597
- ----------------------------------------------------------------------------
</TABLE>
Exhibit 23
Consent of KPMG Peat Marwick LLP<PAGE>
<PAGE>
Accountants' Consent
The Board of Directors
Harbor Federal Bancorp, Inc.
We consent to incorporation by reference in the Registration
Statement on Form S-8 of Harbor Federal Bancorp, Inc. of our
report dated May 16, 1997, relating to the consolidated
statements of financial condition of Harbor Federal Bancorp,
Inc. and subsidiaries as of March 31, 1997 and 1996, and the
related consolidated statements of income, stockholders'
equity, and cash flows for each of the years in the three-year
period ended March 31, 1997 which report is incorporated by
reference in the March 31, 1997 annual report on Form 10-KSB of
Harbor Federal Bancorp, Inc.
/s/ KPMG Peat Marwick LLP
Baltimore, Maryland
June 27, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-1-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,482,872
<INT-BEARING-DEPOSITS> 275,962
<FED-FUNDS-SOLD> 3,939,419
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,835,141
<INVESTMENTS-CARRYING> 30,869,516
<INVESTMENTS-MARKET> 30,407,833
<LOANS> 144,701,746
<ALLOWANCE> 380,000
<TOTAL-ASSETS> 219,462,184
<DEPOSITS> 171,466,629
<SHORT-TERM> 16,500,000
<LIABILITIES-OTHER> 3,270,776
<LONG-TERM> 0
0
0
<COMMON> 17,544
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 219,462,184
<INTEREST-LOAN> 10,426,017
<INTEREST-INVEST> 4,648,326
<INTEREST-OTHER> 294,470
<INTEREST-TOTAL> 15,368,813
<INTEREST-DEPOSIT> 8,467,523
<INTEREST-EXPENSE> 9,371,344
<INTEREST-INCOME-NET> 5,997,469
<LOAN-LOSSES> 32,605
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,725,458
<INCOME-PRETAX> 1,468,680
<INCOME-PRE-EXTRAORDINARY> 901,480
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 901,480
<EPS-PRIMARY> .54
<EPS-DILUTED> .54
<YIELD-ACTUAL> 7.47
<LOANS-NON> 288,786
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 438,500
<CHARGE-OFFS> 91,105
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 380,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 380,000
</TABLE>
