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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, 1998
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:
$16,890,071
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:
$31,156,720 (1,354,640 shares at the most recent price of which
management was aware as of June 1, 1998 ($23.00 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 1, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's Annual Report to
Stockholders for the Fiscal Year Ended March 31, 1998 (the
"Annual Report"). (Part II)
2. Portions of the Proxy Statement for the registrant's
1998 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
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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 introduced in Congress within the last year
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. Several congressional committees have
developed differing versions of the legislation, but no version
has been enacted.
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,
---------------------------------------------------
1998 1997 1996
--------------- --------------- --------------
Amount % Amount % Amount %
------ ----- ------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family
residential. . . . . . . . . . . . $118,815 77.23% $119,924 80.84% $100,157 81.58%
Multi-family residential . . . . . . 929 .60 956 .64 980 .80
Commercial . . . . . . . . . . . . . 16,392 10.66 12,183 8.21 9,054 7.38
Construction (1) . . . . . . . . . . 8,296 5.39 6,633 4.47 6,130 4.99
Land . . . . . . . . . . . . . . . . 2,934 1.91 1,473 .99 1,928 1.57
Loans held for sale. . . . . . . . . 2,756 1.79 3,866 2.61 1,199 .98
Consumer loans:
Savings accounts . . . . . . . . . . 621 .40 651 .44 667 .54
Home equity loans. . . . . . . . . . 456 .30 400 .27 499 .41
Other. . . . . . . . . . . . . . . . 224 .15 112 .08 88 .07
Commercial business (2). . . . . . . . 1,661 1.08 1,396 .94 1,400 1.14
Accrued interest receivable. . . . . . 759 .49 761 .51 662 .54
-------- ------ -------- ------ -------- ------
153,843 100.00% 148,355 100.00% 122,764 100.00%
====== ====== ======
Less:
Loans in process . . . . . . . . . . 4,438 2,307 4,767
Discounts, deferred loan fees
and other. . . . . . . . . . . . . 1,014 966 667
Allowance for loan losses. . . . . . 490 380 438
-------- -------- --------
Total . . . . . . . . . . . . . . $147,901 $144,702 $116,892
======== ======== ========
<FN>
__________
(1) Consisted solely of one- to four-family residences under construction at March 31, 1998,
1997 and 1996.
(2) Includes financing leases of $850,000, $277,000 and $8,000 at March 31, 1998, 1997
and 1996, respectively.
</FN>
</TABLE>
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The following table sets forth information at March 31, 1998
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) . . . $ 3,942 $3,642 $10,235 $24,979 $30,290 $ 9,836
Construction and Land
Development. . . . . . . . . 2,221 31 158 710 890 210
Commercial . . . . . . . . . . 2,758 35 3,261 1,036 3,415 1,915
Non-real estate (2) . . . . . . 259 228 587 325 992 115
Accrued interest receivable . . 759 -- -- -- -- --
------- ------ ------- ------- ------- -------
Total . . . . . . . . . . . $ 9,939 $3,936 $14,241 $27,050 $35,587 $12,076
======= ====== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
More Than
10-20 Years 20 Years Total
----------- --------- --------
(In thousands)
<S> <C> <C> <C>
Real estate:
Residential mortgage (1) . . . $15,947 $24,085 $122,956
Construction and Land
Development. . . . . . . . . 1,575 997 6,792
Commercial . . . . . . . . . . 1,490 2,482 16,392
Non-real estate (2) . . . . . . -- -- 2,506
Accrued interest receivable . . -- -- 759
------- ------- --------
Total . . . . . . . . . . . $19,012 $27,564 $149,405
======= ======= ========
</TABLE>
The following table sets forth the dollar amount of all loans
at March 31, 1998 due on or after March 31, 1999 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) . .$48,962 $56,175 $105,137
Construction and Land
Development. . . . . . . . 3,202 1,180 4,382
Commercial . . . . . . . 10,214 124 10,338
Non-real estate (2). . . . . 1,432 -- 1,432
------- ------- --------
Total. . . . . . . . .$63,810 $57,479 $121,289
======= ======= ========
<FN>
__________
(1) Includes both one- to four-family residential and multi-family residential.
(2) Includes commercial business loans, loans secured by savings accounts, home
improvement loans and financing leases.
</FN>
</TABLE>
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Scheduled contractual principal repayments of loans do not
necessarily reflect the actual life of such assets. The average
life of long-term loans is substantially less than their
contractual terms, due to prepayments. The average life of
mortgage loans tends to increase when current mortgage loan
market rates are substantially higher than rates on existing
mortgage loans and tends to decrease when current mortgage loan
market rates are substantially lower than rates on existing
mortgage loans.
Originations, Purchases and Sales of Loans. The following
table sets forth certain information with respect to Harbor
Federal's loan originations, purchases and sales during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------
1998 1997 1996
----- ------ ------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
One- to four-family. . . . . . .$ 12,806 $ 18,456 $ 7,235
Land . . . . . . . . . . . . . . 2,423 844 640
Commercial . . . . . . . . . . . 4,350 2,606 4,971
Construction . . . . . . . . . . 14,405 16,714 6,081
Consumer . . . . . . . . . . . . . -- -- 346
Commercial business. . . . . . . . -- -- 886
-------- -------- --------
Total loans originated . . . . . 33,984 38,620 20,159
Loan repayments. . . . . . . . . . . (28,253) (20,307) (20,126)
-------- -------- --------
Net loan originations. . . . . .$ 5,731 $ 18,313 $ 33
======== ======== ========
Loans purchased:
Real estate loans:
One- to four-family. . . . . . .$ 1,355 $ 9,102 $ 11,731
Land . . . . . . . . . . . . . . -- 214 --
Commercial . . . . . . . . . . . 750 19 1,293
Consumer . . . . . . . . . . . . . -- -- 894
Commercial business. . . . . . . . -- -- 507
-------- -------- --------
Total loans purchased. . . . . .$ 2,105 $ 9,335 $ 14,425
======== ======== ========
Loans sold:
Real estate loans:
One- to four-family. . . . . . .$ 4,803 $ -- $ --
======== ======== ========
</TABLE>
In June 1997, Harbor Federal formed a mortgage company,
Bank Street Mortgage Company to provide additional one- to four-
family loan production. Even with the establishment of the new
mortgage company, market demand was not as great in one- to
four-family and construction real estate loans in fiscal 1998 as
in the prior year. In fiscal 1998, management focused on
increasing land and commercial real estate loans due to higher
yields. 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, 1998, $122.0
million, or 79.3%, of Harbor Federal's total loans were secured
by one- to four-family residences, a substantial majority of
which were existing, owner-
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occupied, single-family residences in Harbor Federal's market
area. At March 31, 1998, $56.5 million, or 46.3%, of Harbor
Federal's one- to four-family residential loans had adjustable
interest rates, and $65.5 million, or 53.7%, had fixed-rates.
Harbor Federal's one- to four-family residential mortgage
loans generally are for terms of 5 to 30 years, amortized on a
monthly basis, with principal and interest due each month.
Residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms.
Borrowers may refinance or prepay loans at their option without
penalty. These loans customarily contain "due-on-sale" clauses
which permit Harbor Federal to accelerate repayment of a loan
upon transfer of ownership of the mortgaged property.
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, 1998, Harbor Federal was servicing
$13.7 million of loans for others. The majority of this amount,
$8.9 million, is serviced for Bankers Affiliate, 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, 1998, one- to four-
family residential construction loans constituted $8.3 million,
or 5.4%, 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
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on the outstanding loan balance. Construction loans
generally have a maximum loan-to-value ratio of 90%. Borrowers
must satisfy all credit requirements which would apply to Harbor
Federal's permanent mortgage loan financing for the subject
property. While Harbor Federal's construction-permanent
construction loans convert to permanent loans following
construction, Harbor Federal's interim construction loans
generally require repayment in full upon the completion of
construction.
Harbor Federal also offers loans for the acquisition and
development of land. At March 31, 1998, land acquisition and
development loans constituted $2.9 million, or 1.9%, of Harbor
Federal's total loans. These loans are made on a selective
basis to borrowers which management believes have the requisite
experience in land development and financial strength to ensure
repayment. These loans also are made in limited amounts,
usually not in excess of 65% of the appraised value of the
property. These loans generally provide for payments of only
interest during development, and the maximum loan amount and
term on these loans generally are $2,000,000 and 36 months,
respectively.
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, 1998, Harbor Federal had 88 of these
loans, with a median loan balance of $196,800.
The following paragraphs set forth information regarding
Harbor Federal's commercial and multi-family real estate loans
with outstanding balances exceeding $1.0 million at March 31,
1998. 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."
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 being amortized
over a period of twenty years, and the full balance is due
in January 2016. At March 31, 1998 the outstanding
balance was $2,392,000, and the loan was fully performing
in accordance with its terms.
Professional Real Estate Offices in Central
Maryland. In January 1996 and July 1997, Harbor Federal
originated several loans to the same borrowers totaling
$2,637,202 secured by several full service real estate
brokerage offices. The commercial office buildings are
situated in Howard County, Maryland, Anne Arundel County,
Maryland and Harford County, Maryland. At the time the
appraisals indicated a combined market value of $4,360,000
for a total loan to value ratio of 60%. 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
7<PAGE>
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February 2026. At March 31, 1998 the outstanding aggregate
balance was $2,602,000, 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, 1998 the outstanding aggregate
balance was $1,261,000, and the loans were fully
performing in accordance with their terms.
Luxury Apartments/Professional Offices in Towson,
Maryland. In December 1997, Harbor Federal made a
$1,920,000 loan secured by high-end residential apartments
and first floor professional offices with private parking.
At the time, an appraisal indicated a market value of
$2,400,000, for a loan to value ratio of 80%. The loan is
being amortized over thirty years for the purpose of
monthly payments of principal and interest, and the full
balance of the loan will be due in January 2002. At March
31, 1998 the outstanding balance was $1,918,000, and the
loan was fully performing in accordance with its terms.
Acquisition & Development/61-Single Family Building
Lots in Perry Hall, Maryland. In January 1998, Harbor
Federal finalized a combined acquisition & development
loan for $2,750,000 for the acquisition and eventual
development of 61-building lots. At the time, appraisals
indicated a finished value of $4,151,000 for a loan to
value ratio of 66%. The loan requires payments of
interest only on a monthly basis and principal reduction
via lot release fees when the completed building lots are
sold and transferred. The full loan balance is due in
February 2001. At March 31, 1998 the outstanding balance
was $1,013,000, and the loan was fully performing in
accordance with its terms.
In addition, at March 31, 1998 Harbor Federal had $8.1
million in 55 commercial and multi-family real estate loans with
outstanding balances not exceeding $1.0 million, 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 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
8<PAGE>
<PAGE>
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, 1998, Harbor Federal's commercial business loans
totaled $1.7 million and primarily consisted of line of credit
loans to developers and eight term loans to two leasing
companies. There are seven direct line of credit loans with
local developers of up to $1.9 million in the aggregate, each
secured by the personal guarantee of the respective borrower.
At March 31, 1998, the total outstanding balance of these loans
was $811,000, and all of these loans were performing in
accordance with their respective terms. In addition, loans to
two leasing companies were made in February 1997 and March 1998.
The aggregate original amount of these loans was $1.1 million.
At March 31, 1998, the aggregate outstanding balance of these
loans was $850,000 (with a remaining term of approximately 58
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 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 main office for
processing and approval. Loans made through brokers are
underwritten by Harbor Federal prior to settlement and are
funded by Harbor Federal. For information regarding mortgage
brokerage activities of Harbor Federal's wholly owned
subsidiary, Bank Street Mortgage Company, see "Subsidiary
Activities."
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.
9<PAGE>
<PAGE>
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.
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.
10<PAGE>
<PAGE>
Asset Classification, Allowances for Losses and Non-
Performing Assets. Federal regulations require savings
institutions to classify their assets on the basis of quality on
a regular basis. An asset is classified as substandard if it is
determined to be inadequately protected by the current net worth
and paying capacity of the obligor or of the collateral pledged,
if any. An asset is classified as doubtful if full collection
is highly questionable or improbable. An asset is classified as
loss if it is considered uncollectible, even if a partial
recovery could be expected in the future. The regulations also
provide for a special mention designation, described as assets
which do not currently expose a savings institution to a
sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving
management's close attention. Assets classified as substandard
or doubtful require a savings institution to establish general
allowances for loan losses. If an asset or portion thereof is
classified loss, a savings institution must either establish a
specific allowance for loss in the amount of the portion of the
asset classified loss, or charge off such amount. Federal
examiners may disagree with a savings institution's
classifications. If a savings institution does not agree with
an examiner's classification of an asset, it may appeal this
determination to the OTS Regional Director. Harbor Federal
regularly reviews its assets to determine whether any assets
require classification or re-classification. The Board of
Directors reviews and approves all classifications. At March
31, 1998, Harbor Federal had no assets classified as loss,
$161,000 of assets classified as doubtful, $666,000 of assets
classified as substandard and $533,000 of assets designated as
special mention. Harbor Federal's total adversely classified
and designated assets were $1,360,000, which represented 0.59%
of Harbor Federal's total assets and 6.12% of Harbor Federal's
core regulatory capital, at March 31, 1998. 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, 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,
1998, Harbor Federal held no properties acquired in settlement
of
11<PAGE>
<PAGE>
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.
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,
--------------------------
1998 1997 1996
----- ------ ------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of period . . . $380 $438 $465
---- ---- ----
Charge-offs:
Real estate - mortgage . . . . . . -- -- --
Commercial business. . . . . . . . -- 91 27
---- ---- ----
Total charge-offs. . . . . . . . -- 91 27
---- ---- ----
Provision for loan losses. . . . . . 110 33 --
---- ---- ----
Balance at end of period . . . . . . $490 $380 $438
==== ==== ====
Ratio of net charge-offs to
average loans outstanding
during the period. . . . . . . . . .00% 0.07% 0.03%
==== ==== ====
</TABLE>
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>
<CAPTION>
At March 31,
--------------------------------------------------------------------------
1998 1997 1996
------------------------ ----------------------- ----------------------
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. . . . . . . . $265 77.83% $155 81.48% $155 82.38%
Construction . . . . . . . 50 5.72 125 4.47 125 4.99
Commercial . . . . . . . . 175 10.33 100 8.21 100 7.38
Commercial business. . . . . -- 1.08 -- .94 58 1.14
---- ---- ----
Total allowance for loan
losses . . . . . . . . . . $490 $380 $438
==== ==== ====
</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,
--------------------------
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Loans accounted for on a
nonaccrual basis:
Real Estate:
Residential . . . . . . . . . . . $ 975 $ 289 $ 403
===== ===== =====
Percentage of nonperforming
loans to total loans. . . . . . . 0.66% 0.20% 0.34%
===== ===== =====
Other nonperforming assets (1). . . $ -- $ 465 $ 44
===== ===== =====
Percentage of nonperforming
assets to total assets. . . . . . 0.42% 0.34% 0.23%
===== ===== =====
<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, 1998, gross interest
income of $79,000 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 $67,000. At March 31, 1998,
management had identified approximately $385,000 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 9 loans, all of which
had balances below $300,000, and substantially all of which were
secured by one- to four-family residences. Management does not
expect Harbor Federal to experience any material loss on these
loans in the future.
MORTGAGE-BACKED SECURITIES
Harbor Federal maintains a significant portfolio of
mortgage-backed securities in the form of FHLMC, GNMA and FNMA
participation certificates. FNMA and FHLMC certificates are
each guaranteed by their respective agencies as to principal and
interest, and GNMA certificates are backed by the full faith and
credit of the U.S. Government. Mortgage-backed securities
generally entitle Harbor Federal to receive a pro rata portion
of the cash flows from an identified pool of mortgages.
Although mortgage-backed securities generally yield less than
the loans which are exchanged for such securities, they present
substantially lower credit risk, they are more liquid than
individual mortgage loans, and they may be used to collateralize
obligations of Harbor Federal.
The following table sets forth information regarding
Harbor Federal's mortgage-backed securities at the dates
indicated.
<TABLE>
<CAPTION>
At March 31,
--------------------------
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
FHLMC . . . . . . . . . . . . . . . $ 3,949 $ 5,753 $ 9,449
GNMA. . . . . . . . . . . . . . . . 15,310 6,048 1,698
FNMA. . . . . . . . . . . . . . . . 1,747 2,243 6,638
------- ------- -------
Total . . . . . . . . . . . . . $21,006 $14,044 $17,785
======= ======= =======
</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, 1998. Expected maturities will differ from
contractual maturities due to scheduled repayments and because
borrowers may have the right to call or prepay obligations with
or without prepayment penalties. The following table does not
take into consideration the effects of scheduled repayments or
the effects of possible prepayments.
<TABLE>
<CAPTION>
One to Five Years More Than Five Years Total 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. . . . . . . . . $ 478 5.14% $ 3,471 7.47% $ 3,949 $ 3,990 7.19%
GNMA . . . . . . . . . -- -- 15,310 7.50 15,310 15,380 7.50
FNMA . . . . . . . . . 998 6.05 749 5.35 1,747 1,801 5.75
------ ------- ------- -------
Total. . . . . . . $1,476 $19,530 $21,006 $21,171
====== ======= ======= =======
</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>
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, 1998 had an aggregate
carrying value of $36.2 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,
--------------------------
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Investment securities:
U.S. government and agency
obligations . . . . . . . . . . $50,821 $46,783 $48,082
Corporate bonds and notes. . . . -- -- --
Other. . . . . . . . . . . . . . 370 213 166
------- ------- -------
Total investment securities. . 51,191 46,996 48,248
------- ------- -------
Federal funds sold . . . . . . . . 313 3,939 3,442
Interest-earning deposits. . . . . 174 276 993
FHLB stock . . . . . . . . . . . . 1,434 1,366 1,270
------- ------- -------
Total. . . . . . . . . . . . . $53,112 $52,577 $53,953
======= ======= =======
</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, 1998.
<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 . . . . $6,499 5.12% $ 993 5.88% $17,500 6.71%
FHLMC stock. . . . . . . . . 370 1.01 -- -- -- --
------ ------ -------
Total investment
securities . . . . . . . 6,869 993 17,500
Federal funds sold . . . . . . 313 6.00 -- -- -- --
Interest-earning deposits. . . 174 5.98 -- -- -- --
FHLB stock . . . . . . . . . . 1,434 7.25 -- -- -- --
------ ------ -------
Total. . . . . . . . . . $8,790 $ 993 $17,500
====== ====== =======
</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 . . . . $25,829 7.18% $50,821 $50,774 6.73%
FHLMC stock. . . . . . . . . -- -- 370 370 1.01
------- ------- -------
Total investment
securities . . . . . . . 25,829 51,191 51,144
Federal funds sold . . . . . . -- -- 313 313 6.00
Interest-earning deposits. . . -- -- 174 174 5.98
FHLB stock . . . . . . . . . . -- -- 1,434 1,434 7.25
------- ------- -------
Total. . . . . . . . . . $25,829 $53,112 $53,065
======= ======= =======
</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, 1998 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>
1.00% None NOW accounts $ 300 $ 5,704 3.26%
3.05 None Passbook accounts 100 29,656 16.93
0.00 None Commercial checking 750 1,463 .84
3.05 None Christmas club 10 337 .19
Money Market
------------
3.25 None Money market passbook 2,500 7,761 4.43
3.33 None Money market checking 2,500 3,077 1.76
3.84 None Money market plus
passbook 10,000 12,249 6.99
3.25 None IRA money market
passbook 100 288 .16
Certificates of Deposit
-----------------------
3.20 3 month Fixed-Term, Fixed-Rate 1,000 69 .04
5.25 6 month Fixed-Term, Fixed-Rate 1,000 4,167 2.38
5.25 6 month Fixed-Term, Fixed-Rate 10,000 5,004 2.86
5.72 12 month Fixed-Term, Fixed-Rate 1,000 13,622 7.78
5.59 12 month Fixed-Term, Fixed-Rate 10,000 17,241 9.84
5.75 18 month Fixed-Term, Fixed-Rate 1,000 10,931 6.24
5.68 24 month Fixed-Term, Fixed-Rate 1,000 12,138 6.93
6.20 30 month Fixed-Term, Fixed-Rate 1,000 391 .22
6.13 36 month Fixed-Term, Fixed-Rate 1,000 14,105 8.05
6.14 42 month Fixed-Term, Fixed-Rate 1,000 764 .44
7.03 48 month Fixed-Term, Fixed-Rate 1,000 20,486 11.69
6.68 60 month Fixed-Term, Fixed-Rate 1,000 15,706 8.97
-------- ------
$175,159 100.00%
======== ======
</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
1998 Deposits (Decrease)
--------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Certificates . . . . . . . . . . $114,624 65.44% $ 3,398
Money market . . . . . . . . . . 23,375 13.35 (1,425)
Passbook . . . . . . . . . . . . 29,656 16.93 (1,598)
NOW. . . . . . . . . . . . . . . 5,704 3.26 278
Christmas Club . . . . . . . . . 337 .19 4
Commercial checking. . . . . . . 1,463 .83 397
-------- ------ -------
Total. . . . . . . . . . . . $175,159 100.00% $ 1,054
======== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Balance at Balance at
March 31, % Increase March 31, %
1997 Deposits (Decrease) 1996 Deposits
--------- -------- --------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Certificates . . . . . . $111,226 63.89% $11,137 $100,089 60.8%
Money market . . . . . . 24,800 14.24 469 24,331 14.8
Passbook . . . . . . . . 31,254 17.95 (1,834) 33,088 20.1
NOW. . . . . . . . . . . 5,426 3.12 (16) 5,442 3.3
Christmas Club . . . . . 333 .19 (49) 382 .2
Commercial checking. . . 1,066 .61 (264) 1,330 .8
-------- ------ ------- -------- -----
Total. . . . . . . . $174,105 100.00% $ 9,443 $164,662 100.0%
======== ====== ======= ======== =====
</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,
--------------------------------------------------------------------
1998 1997 1996
------------------- -------------------- ----------------------
Interest- Interest- Interst-
Bearing Bearing Bearing
Demand Time Demand Time Demand Time
Deposits Deposits Deposits Deposits Deposits Deposits
-------- -------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average Balance. . . . . . . $58,947 $113,850 $61,222 $103,309 $49,584 $72,991
Average Rate . . . . . . . . 3.13% 5.81% 3.19% 5.94% 3.21% 5.96%
</TABLE>
The following table sets forth the time deposits in Harbor
Federal classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
--------------------------
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
2 - 3.99% . . . . . . . . . . . $ 101 $ 118 $ 298
4 - 5.99% . . . . . . . . . . . 79,438 67,143 46,455
6 - 7.99% . . . . . . . . . . . 35,085 43,874 53,253
8 - 9.99% . . . . . . . . . . . -- 91 83
-------- -------- --------
$114,624 $111,226 $100,089
======== ======== ========
</TABLE>
The following table sets forth the amount and maturities
of time deposits in Harbor Federal at March 31, 1998.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
---- --------- ---------- ---------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
2 - 3.99% . . . . $ 69 $ 32 $ -- $ -- $ 101
4 - 5.99% . . . . 56,698 13,809 6,714 2,217 79,438
6 - 7.99% . . . . 17,556 9,846 5,529 2,154 35,085
------- ------- ------- ------ --------
$74,323 $23,687 $12,243 $4,371 $114,624
======= ======= ======= ====== ========
</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, 1998.
Certificates
Maturity Period of Deposit
--------------- --------------
(In thousands)
Three months or less . . . . . . . $ 1,847
Three through six months . . . . . 1,652
Six through nine months. . . . . . 2,678
Nine through twelve months . . . . 2,423
Over twelve months . . . . . . . . 4,643
-------
Total. . . . . . . . . . . . . . $13,242
=======
19<PAGE>
<PAGE>
The following table sets forth the deposit activities of
Harbor Federal for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Deposits . . . . . . . . . . . $187,564 $191,670 $159,535
Withdrawals. . . . . . . . . . 177,665 173,760 112,608
-------- -------- --------
Net increase (decrease)
before interest credited . 9,899 17,910 46,927
Interest credited. . . . . . . 8,845 8,467 5,943
-------- -------- --------
Net increase (decrease)
in deposits. . . . . . . . $ 1,054 $ 9,443 $ 52,870
======== ======== ========
</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, 1998, Harbor Federal had $10.0 million
in advances outstanding from the FHLB of Atlanta. This advance
was made in December 1997 at a fixed rate of 5.05% and is set to
mature in December 2007, subject to an early termination option.
In December 1998, or at any payment date thereafter, the FHLB
of Atlanta may convert the advance into a three (3) month LIBOR-
based floating rate advance (ARC).
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 $15.3 million
and $16.5 million at March 31, 1998 and 1997, respectively. The
average rates of interest on these reverse repurchase agreements
were 5.80% and 5.68%, respectively.
For additional information, see the Management's
Discussion and Analysis of Financial Condition and Results of
Operations and Notes 7 and 8 of Notes to Consolidated Financial
Statements 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 has
received OTS approval to lend an amount of up to one-half of its
regulatory capital to an affiliate, Bankers Affiliate, Inc.
("BAI"). 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; 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; and Bank Street Mortgage Company ("BSM"),
a wholly owned subsidiary formed by the Bank in June 1997
primarily to broker one- to four-family residential real estate
loans for Harbor Federal and various other correspondents. At
March 31, 1998, the net book values of Harbor Federal's
investment in BAI totaled $2,850,000, including advances of
20<PAGE>
<PAGE>
$2,825,000. The net book value of Harbor Federal's investments
in HSC and BSM are immaterial. Harbor Federal is also
authorized to make investments of any amount in operating
subsidiaries that engage solely in activities that federal
savings institutions may conduct directly.
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, 1998, management believed that most of
Harbor Federal's depositors and borrowers resided within ten
miles of one of Harbor Federal's offices. The majority of loans
originated by Harbor Federal are from the Central Maryland area,
which is located within the greater Baltimore metropolitan area
and the larger Washington-Baltimore area. The Baltimore
metropolitan area is the largest in Maryland and has had a
relatively stable and diversified labor force and economic base.
The heaviest employment concentrations in the greater Baltimore
metropolitan area in manufacturing industries are in primary
metals (steel and copper), transportation equipment, fabricated
materials, chemicals, machinery and electrical equipment. In
addition, the Port of Baltimore is the fourth largest foreign
tonnage port in the U.S. and the second largest container
tonnage port on the East and Gulf Coasts.
COMPETITION
Harbor Federal faces strong competition for deposits and
loans. Harbor Federal's principal competitors for deposits are
other banking institutions, such as commercial banks, credit
unions and other savings institutions, as well as mutual funds
and other investments. Harbor Federal principally competes for
deposits by offering a variety of deposit accounts, convenient
business hours and branch locations, customer service and a well
trained staff. Harbor Federal competes for loans with other
depository institutions, as well as specialty mortgage lenders
and brokers and consumer finance companies. Harbor Federal
principally competes for loans on the basis of interest rates
and the loan fees it charges, the types of loans it originates
and the convenience and service it provides to borrowers. In
addition, Harbor Federal believes it has developed strong
relationships with the businesses, realtors, builders and
general public in its market area. Due to Harbor Federal's
small size relative to the many and various other depository and
lending institutions in its market area, management believes
that Harbor Federal has an insubstantial overall share of the
deposit and loan market.
REGULATION OF THE BANK
As a federally chartered savings institution, Harbor
Federal is subject to extensive regulation by the OTS. The
lending activities and other investments of the Bank must comply
with various federal regulatory requirements, and the OTS
periodically examines the Bank for compliance with various
regulatory requirements. The FDIC also has the authority to
conduct special examinations. The Bank must file reports with
OTS describing its activities and financial condition and is
also subject to certain reserve requirements promulgated by the
Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors.
Federal Home Loan Bank System. Harbor Federal is a member
of the FHLB System, which consists of 12 district FHLBs subject
to supervision and regulation by the Federal Housing Finance
Board. The FHLBs provide a central credit facility primarily
for member institutions. As a member of the FHLB of Atlanta,
the Bank is required to acquire and hold shares of capital stock
in the FHLB of Atlanta in an amount at least equal to 1% of the
aggregate unpaid principal of its home mortgage loans, home
purchase contracts, and similar obligations at the beginning of
each year or 1/20 of its advances (borrowings) from the FHLB of
Atlanta, whichever is greater. The Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock at
March 31, 1998 of $1,433,500. For additional information, see
Note 10 of the Notes to Consolidated Financial Statements in the
Annual Report.
21<PAGE>
<PAGE>
The FHLB of Atlanta serves as a reserve or central bank
for its member institutions within its assigned district. It is
funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes advances
to members in accordance with policies and procedures
established by the OTS and the Board of Directors of the FHLB of
Atlanta. Long-term advances may only be made for the purpose of
providing funds for residential housing finance. At March 31,
1998, Harbor Federal had $10.0 million in 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 1998 was 7.3%.
Qualified Thrift Lender Test. A savings institution that
does not meet the Qualified Thrift Lender ("QTL") test must
either convert to a bank charter or comply with the following
restrictions on its operations: (i) the institution may not
engage in any new activity or make any new investment, directly
or indirectly, unless such activity or investment is permissible
for a national bank; (ii) the branching powers of the
institution shall be restricted to those of a national bank;
(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, 1998, substantially more than 65% of Harbor
Federal's portfolio assets were invested in Qualified Thrift
Investments as currently defined.
Regulatory Capital Requirements. Under OTS capital
standards, savings institutions must maintain "tangible" capital
equal to at least 1.5% of adjusted total assets, "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
22<PAGE>
<PAGE>
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 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. 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, 1998,
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, 1998, 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, 1998, Harbor Federal's adjusted total
assets for purposes of the core and tangible capital
requirements were $229.3 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, 1998, the Bank's risk-weighted assets were
approximately $102.9 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, 1998.
At March 31, 1998, 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, 1998.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
------ ----------
(Dollars in thousands)
<S> <C> <C>
Tangible Capital . . . . . . . . . $22,215 9.7%
Tangible Capital Requirement . . . 3,437 1.5
------- ----
Excess . . . . . . . . . . . $18,778 8.2%
======= ====
Core Capital. . . . . . . . . . . $22,215 9.7%
Core Capital Requirement. . . . . 6,874 3.0
------- ----
Excess. . . . . . . . . . . . $15,341 6.7%
======= ====
Total Capital. . . . . . . . . . . $22,705 22.1%
Risk-Based Capital Requirement. . . 8,231 8.0
------- ----
Excess. . . . . . . . . . . . $14,474 14.1%
======= ====
<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>
For additional information regarding regulations with
respect to capital, see the paragraphs below and Notes 10 of the
Notes to Consolidated Financial Statements in the Annual Report.
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")
24<PAGE>
<PAGE>
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
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 adopted a 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 least
favorable risk assessment classification will be assessed at the
rate of 0.27% of insured deposits. Until December 31, 1999,
however, SAIF-insured institutions, will be required to pay
assessments to the FDIC at the rate of 6.5 basis points
25<PAGE>
<PAGE>
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 $47.8 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, 1998, 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, 1998, the maximum amount that Harbor Federal
could have lent to any one borrower under the 15% limit was
approximately $3.4 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 $2.6 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
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(i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are
permissible for bank holding companies, or (ii) purchase or
invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institution.
Further, savings institutions are subject to the
restrictions contained in Section 22(h) of the Federal Reserve
Act and the Federal Reserve Board's Regulation O thereunder on
loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director,
executive officer and to a greater than 10% stockholder of an
institution and certain affiliated interests of such persons,
may not exceed, together with all other outstanding loans to
such person and affiliated interests, the institution's loans-
to-one-borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h)
also prohibits the making of loans above amounts prescribed by
the appropriate federal banking agency, to directors, executive
officers and greater than 10% stockholders of an institution,
and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the
institution with any "interested" director not participating in
the voting. Regulation O prescribes the loan amount (which
includes all other outstanding loans to such person) as to which
such prior board of director approval is required as being the
greater of $25,000 or 5% of capital and surplus (up to
$500,000). Further, Section 22(h) requires that loans to
directors, executive officers and principal stockholders be made
on terms substantially the same as offered in 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. Subsection 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
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also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive
officers of a significantly undercapitalized institution may not
receive bonuses or increases in compensation without prior
approval and the institution is prohibited from making payments
of principal or interest on its subordinated debt, 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
meets 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
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well as to evaluate and monitor earnings and ensure that
earnings are sufficient to maintain adequate capital and
reserves. Management does not believe that the asset and
earnings standards, 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
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holding company. In order for the shares acquired to constitute
a "qualified stock issuance," the shares must consist of
previously unissued stock or treasury shares, the shares must be
acquired for cash, the savings institution holding company's
other subsidiaries must have tangible capital of at least 6-1/2%
of total assets, there must not be more than one common director
or officer between the savings institution holding company and
the issuing savings institution, and transactions between the
savings institution and the savings institution holding company
and any of its affiliates must conform to Sections 23A and 23B
of the Federal Reserve Act. Except with the prior approval of
the Director of the OTS, no director or officer of an
institution holding company or person owning or controlling by
proxy or otherwise more than 25% of such company's stock, may
also acquire control of any savings institution, other than a
subsidiary savings institution, or of any other savings
institution holding company.
The Director of the OTS may only approve acquisitions
resulting in the formation of a multiple savings institution
holding company which controls savings institutions in more than
one state if: (i) the multiple savings institution holding
company involved controls an institution which operated a home
or branch office in the state of the institution to be acquired
as of March 5, 1987; (ii) the acquiror is authorized to acquire
control of the savings institution pursuant to the emergency
acquisition provisions of the FDIC Act; or (iii) the statutes of
the state in which the institution 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 Subsection
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 is no longer 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, 1998.
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, 1998, 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 federal taxable income. In addition, Maryland
imposes a franchise tax, at a rate of
32<PAGE>
<PAGE>
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, 1998, Harbor Federal had 43 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,
1998 regarding the executive officer of Harbor Federal who did
not serve on the Board of Directors.
Name Age Title
- ---- --- -----
Norbert J. Luken 60 Vice President and Chief
Financial Officer
NORBERT J. LUKEN has been with Harbor Federal since 1969,
and is currently Vice President and Chief Financial Officer. He
has served as Treasurer of Financial Managers Society, Maryland
Chapter, Committeeman and Treasurer of Boy Scout Troop 746, Shot
Tower District Chairman of the Baltimore Area Council, BSA, and
a member of the St. Joseph's Catholic Church Choir, and the
Archdiocesan Choir of Baltimore.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The following table sets forth information regarding
Harbor Federal's locations at March 31, 1998.
<TABLE>
<CAPTION>
Year Book Value Deposits at
Opened or Owned or at March 31, Approximate March 31, 1998
Acquired Leased 1998 Square Footage (In thousands)
--------- -------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Main Office:
Towson --
705 York Road 1993 Owned $1,194,500 8,300 $16,340
Branch Offices:
South Baltimore --
132 East Fort Avenue 1887 Owned 14,700 3,300 26,965
Riviera Beach --
8553 Ft. Smallwood Road 1972 Owned 47,200 2,200 27,622
Locust Point --
1350 East Fort Avenue 1981 Owned 71,100 1,400 11,624
Highlandtown --
3200 Eastern Avenue 1910 Owned 118,400 5,300 30,672
Parkville --
7917 Harford Road 1989 Owned 106,500 1,600 20,284
</TABLE>
33<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Year Book Value Deposits at
Opened or Owned or at March 31, Approximate March 31, 1998
Acquired Leased 1998 Square Footage (In thousands)
--------- -------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Pikesville --
507 Reisterstown Road 1996 Leased 6,800 1,500 18,732
Putty Hill --
8030 Belair Road 1996 Owned 225,900 2,400 11,521
Roland Park --
4806 Roland Avenue 1996 Leased 5,700 1,800 11,400
</TABLE>
The book value of Harbor Federal's investment in premises
and equipment totaled $1.8 million at March 31, 1998.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
From time to time, Harbor Federal is a party to various
legal proceedings incident to its business. At March 31, 1998,
there were no legal proceedings to which the Company, Harbor
Federal or its subsidiaries was a party, or to which any of
their property was subject, which were expected by management to
result in a material loss.
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 1998.
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. 1
3.2 Bylaws of Harbor Federal Bancorp, Inc. 1
4 Form of Common Stock Certificate 1
10.1 Employment and Guaranty Agreements between
Harbor Federal Bancorp, Inc. and Harbor
Federal Savings Bank and Robert A. Williams
and Lawrence W. Williams, as amended * 2
10.2 Severance Agreements between Harbor Federal
Bancorp, Inc. and Harbor Federal Savings
Bank and Norbert J. Luken, as amended * 2
10.3 Employment Agreement and Guaranty Agreement
between Thomas J. Riehl and Bank Street
Mortgage Company and Harbor Federal Bancorp,
Inc.*
10.4 Harbor Federal Savings Bank Non-Employee Director
Retirement Plan, as amended * 2
10.5 Harbor Federal Savings Bank Deferred
Compensation Plan, as amended * 1
10.6 Harbor Federal Savings Bank Supplemental
Executive Retirement Agreement with Robert
Williams (renamed Grantor Trust), as amended * 1
10.7 Harbor Federal Bancorp, Inc. Incentive
Compensation Plan, as amended * 1
35<PAGE>
<PAGE>
10.8 Harbor Federal Bancorp, Inc. 1995 Stock Option and
Incentive Plan and Trust, as amended *
10.9 Harbor Federal Bancorp, Inc. Management Recognition
Plan and Trust, as amended *
13 Portions of Annual Report to Stockholders *
21 Subsidiaries 3
23 Consent of KPMG Peat Marwick LLP *
27.1 Financial Data Schedule *
27.2 Restated Financial Data Schedule for fiscal 1997 *
___________
* Some or all filed as an exhibit to this report.
1 Some or all incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 33-75624).
2 Some or all incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the Quarterly Period
ended June 30, 1994.
3 Incorporated by reference to "Item 1. Business--
Subsidiary Activities" in this report.
(b) No report on Form 8-K was filed during the last
quarter of the fiscal year covered by this report.
36 <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 25, 1998 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
<PAGE>
HARBOR FEDERAL BANCORP, INC.
EMPLOYMENT AGREEMENT WITH ROBERT A. WILLIAMS
____________________
1998 AMENDMENT
____________________
WHEREAS, Harbor Federal Bancorp, Inc. (the "Company")
entered into an employment agreement (the "Agreement") with
Robert A. Williams (the "Employee") on August 11, 1994; and
WHEREAS, the Company and the Employee have determined that
it is in their respective best interests to amend the Agreement
to update its change-in-control provisions.
NOW, THEREFORE, the Agreement shall be amended as follows,
pursuant to Section 13 thereof:
1. The first paragraph of Section 11(a) of the
Agreement shall be amended in its entirety to provide as
follows, with italics herein highlighting new text:
(a) Notwithstanding any provision herein to the
contrary, the Employee shall be entitled to collect the
severance benefits set forth in this Section in the event
that (1) the Employee's employment under this Agreement is
terminated by the Company, without the Employee's prior
written consent and for a reason other than Just Cause,
in connection with or within twelve (12) months after any
change in control of the Bank or the Company, or (2) the
Employee voluntarily terminates employment for any reason
within the 30-day period beginning on the date of a change
in control. The Employee shall be paid an amount equal to
the difference between (i) the product of 2.99 times
his "base amount" as defined in Section 280G(b)(3) of the
Internal Revenue Code of 1986, as amended (the "Code") and
regulations promulgated thereunder, and (ii) the
sum of any other parachute payments (as defined under
Section 280G(b)(2) of the Code) that the Employee receives
on account of the change in control.
Any severance benefits that are payable under this
Agreement after the closing date of a change in control of
the Bank or the Company shall be paid in the manner
selected by the Employee in a duly executed election (the
"Election Form") in the form attached hereto as Exhibit
"A"; provided that such an election will be honored
and given effect only if it is properly made and delivered
to the Company more than 90 days before said closing date.
Present value determinations and interest accruals on
present value sums that are paid in installments over a
fixed period of years shall be calculated at a rate equal
to 120% of the applicable federal rate, compounded
semiannually, as determined under Section 1274(d) of the
Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
<PAGE>
<PAGE>
1998 Amendment to
Employment Agreement
Page 2
The Employee may specify on the Election Form the
manner of payment to his beneficiary, and may at any time
or from time to time change the identity or manner of
payment to his beneficiary.
2. Nothing contained herein shall be held to alter,
vary or affect any of the terms, provisions, or conditions of
the Agreement, other than as stated above.
WHEREFORE, the undersigned hereby execute this 1998
Amendment to the Agreement on March 30, 1998.
HARBOR FEDERAL BANCORP, INC.
Witnessed by:
By /s/ Joseph J. Lacy
------------------------
/s/ Barbara Therres Its Senior Board Member
- ----------------------
EMPLOYEE
Witnessed by:
/s/ Dana Miller /s/ Robert A. Williams
- ---------------------- ------------------------
Robert A. Williams
<PAGE>
<PAGE>
HARBOR FEDERAL SAVINGS BANK
EMPLOYMENT AGREEMENT WITH ROBERT A. WILLIAMS
____________________
1998 AMENDMENT
____________________
WHEREAS, Harbor Federal Savings Bank (the "Bank") entered
into an employment agreement (the "Agreement") with Robert A.
Williams (the "Employee") on August 11, 1994; and
WHEREAS, the Bank and the Employee have determined that it
is in their respective best interests to amend the Agreement to
update its change-in-control provisions.
NOW, THEREFORE, the Agreement shall be amended as follows,
pursuant to Section 13 thereof:
1. The first paragraph of Section 11(a) of the Agreement
shall be amended in its entirety to provide as follows with
italics herein highlighting new text:
(a) Notwithstanding any provision herein to the
contrary, the Employee shall be entitled to collect the
severance benefits set forth in this Section in the event
that (1) the Employee's employment under this Agreement is
terminated by the Bank, without the Employee's prior
written consent and for a reason other than Just Cause, in
connection with or within twelve (12) months after any
change in control of the Bank or Harbor Federal Bancorp,
Inc. (the "Company"), or (2) the Employee voluntarily
terminates employment for any reason within the 30-day
period beginning on the date of a change in control.
The Employee shall be paid an amount equal to the
difference between (i) the product of 2.99 times his "base
amount" as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and
regulations promulgated thereunder, and (ii) the sum of
any other parachute payments (as defined under Section
280G(b)(2) of the Code) that the Employee receives on
account of the change in control.
Any severance benefits that are payable under this
Agreement after the closing date of a change in control of
the Bank or the Company shall be paid in the manner
selected by the Employee in a duly executed election (the
"Election Form"), in the form attached hereto as Exhibit
"A"; provided that such an election will be honored and
given effect only if it is properly made and delivered to
the Bank more than 90 days before said closing date.
Present value determinations and interest accruals on
present value sums that are paid in installments over a
fixed period of years shall be calculated at a rate equal
to 120% of the applicable federal rate, compounded
semiannually, as determined under Section 1274(d) of the
Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
The Employee may specify on the Election Form the
manner of payment to his beneficiary, and may at any time
or from time to time change the identity or manner of
payment to his beneficiary.
<PAGE>
<PAGE>
1998 Amendment to Employment Agreement
Page 2
2. Schedule 11(d) of the Agreement shall be amended in
its entirety to provide as follows, with italics herein
highlighting new text:
(d) Funding of Grantor Trust. Not later than three
business days after a Change in Control, the Bank shall (a)
deposit, in the Harbor Federal Savings Bank Grantor Trust
(the "Trust"), an amount that the Bank reasonably projects
to be sufficient to fund the payment of all severance
benefits that are or may become payable, pursuant to this
Section, after the closing date of the change in control of
the Bank or the Company, and (b) provide the trustee of the
Trust with a written direction both to hold said amount and
any investment return thereon in a segregated account for
the benefit of the Employee, and to follow the procedures
set forth in the next paragraph as to the payment of such
amounts from the Trust. The provisions of this Section
shall be null and void only if the Executive provides a
written release of all claims under this Agreement.
During the 24-consecutive month period after a change
in control of the Bank or the Company, the Employee may
provide the trustee of the Trust with a written notice
directing the trustee to pay to Employee an amount
designated in the notice as being payable pursuant to this
Agreement. Within three business days after receiving said
notice, the trustee of the Trust shall pay such amount to
the Employee, and coincidentally shall provide the Bank or
its successor with notice of such payment. Upon the
earlier of the Trust's final payment of all amounts due
under the preceding paragraph or the date 24 months after
the change in control of the Bank or the Company, the
trustee of the Trust shall pay to the Bank the entire
balance remaining in the segregated account maintained for
the benefit of the Employee. The Employee shall thereafter
have no further interest in the Trust.
3. Nothing contained herein shall be held to alter, vary
or affect any of the terms, provisions, or conditions of the
Agreement, other than as stated above.
WHEREFORE, on this 30th day of March, 1998, the Bank
hereby executes this 1998 Amendment to the Agreement.
HARBOR FEDERAL SAVINGS BANK
By /s/ Joseph J. Lacy
------------------------
/s/ Barbara Therres Its Senior Board Member
- ----------------------
EMPLOYEE
Witnessed by:
/s/ Dana Miller /s/ Robert A. Williams
- ---------------------- ------------------------
Robert A. Williams
<PAGE>
HARBOR FEDERAL BANCORP, INC.
SEVERANCE AGREEMENT WITH NORBERT J. LUKEN
____________________
1998 AMENDMENT
____________________
WHEREAS, Harbor Federal Bancorp, Inc. (the "Company")
entered into a severance agreement (the "Agreement") with
Norbert J. Luken (the "Employee") on August 11, 1994; and
WHEREAS, the Company's Board of Directors and the Employee
have determined that it is in their respective best interests to
amend the Agreement to update its change-in-control provisions.
NOW, THEREFORE, effective March 30, 1998, the Agreement
shall be amended as follows, pursuant to Section 7 thereof:
1. The first paragraph of Section 1(a) of the Agreement
shall be amended in its entirety to provide as follows with
italics herein highlighting new text:
(a) Notwithstanding any provision herein to the
contrary, the Employee shall be entitled to collect the
severance benefits set forth in this Section in the event
that (1) the Employee's employment under this Agreement is
terminated by the Company, without the Employee's prior
written consent and for a reason other than Just Cause, in
connection with or within twenty-four (24) months after any
change in control of Harbor Federal Savings Bank (the
"Bank") or the Company, or (2) the Employee voluntarily
terminates employment for any reason within the 30-day
period beginning on the date of a change in control. The
Employee shall be paid an amount equal to the difference
between (i) the product of 2.99 times his "base amount" as
defined in Section 280G(b)(3) of the Internal Revenue Code
of 1986, as amended (the "Code") and regulations
promulgated thereunder, and (ii) the sum of any other
parachute payments (as defined under Section 280G(b)(2) of
the Code) that the Employee receives on account of the
change in control.
Any severance benefits that are payable under this
Agreement after the closing date of a change in control of
the Bank or the Company shall be paid in the manner
selected by the Employee in a duly executed irrevocable
written election (the "Election Form"), attached hereto as
Exhibit "A"; provided that such an election will be honored
and given effect only if it is properly made and delivered
to the Company more than 90 days before said closing date.
Present value determinations and interest accruals on
present value sums that are paid in installments over a
fixed period of years shall be calculated at a rate equal
to 120% of the applicable federal rate, compounded
semiannually, as determined under Section 1274(d) of the
Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
<PAGE>
<PAGE>
1998 Amendment to
Severance Agreement
Page 2
The Employee may specify on the Election Form the
manner of payment to his beneficiary, and may at any time
or from time to time change the identity or manner of
payment to his beneficiary.
2. Section 1 of the Agreement shall be further amended by
adding subsection (d) immediately at the end thereof to provide
as follows:
(d) If the Employee's employment with the Company
terminates for any reason (other than Just Cause) on or
after a change in control, the Employee shall be entitled
to purchase from Company or its successor, at the
Employee's own expense which shall not exceed applicable
COBRA rates, family medical insurance under any group
health plan that the acquiring company maintains for its
employees. This right shall be (i) in addition to, and not
in lieu of, any other rights that the Employee has under
this Agreement and (ii) shall continue for five years after
the change in control.
3. Nothing contained herein shall be held to alter, vary
or affect any of the terms, provisions, or conditions of the
Agreement, other than as stated above.
WHEREFORE, on this 30th day of March, 1998, the Company
hereby executes this 1998 Amendment to the Agreement.
HARBOR FEDERAL BANCORP, INC.
Witnessed by:
/s/ Calvin W. Anthony By /s/ Robert A. Williams
- --------------------- -------------------------
Its Chairman of the Board
EMPLOYEE
Witnessed by:
/s/ Calvin W. Anthony By /s/ Norbert J. Luken
- --------------------- -------------------------
<PAGE>
<PAGE>
HARBOR FEDERAL SAVINGS BANK
SEVERANCE AGREEMENT WITH NORBERT J. LUKEN
____________________
1998 AMENDMENT
____________________
WHEREAS, Harbor Federal Savings Bank (the "Bank") entered
into a severance agreement (the "Agreement") with Norbert J.
Luken (the "Employee") on August 11, 1994; and
WHEREAS, the Bank and the Employee have determined that it
is in their respective best interests to amend the Agreement to
update its change-in-control provisions.
NOW, THEREFORE, the Agreement shall be amended as follows,
pursuant to Section 7 thereof:
1. The first paragraph of Section 1(a) of the Agreement
shall be amended in its entirety to provide as follows with
italics herein highlighting new text:
(a) Notwithstanding any provision herein to the
contrary, the Employee shall be entitled to collect the
severance benefits set forth in this Section in the event
that (1) the Employee's employment under this Agreement is
terminated by the Bank, without the Employee's prior
written consent and for a reason other than Just Cause, in
connection with or within twenty-four (24) months after any
change in control of the Bank or Harbor Federal Bancorp,
Inc. (the "Company"), or (2) the Employee voluntarily
terminates employment for any reason within the 30-day
period beginning on the date of a change in control. The
Employee shall be paid an amount equal to the difference
between (i) the product of 2.99 times his "base amount" as
defined in Section 280G(b)(3) of the Internal Revenue Code
of 1986, as amended (the "Code") and regulations
promulgated thereunder, and (ii) the sum of any other
parachute payments (as defined under Section 280G(b)(2) of
the Code) that the Employee receives on account of the
change in control.
Any severance benefits that are payable under this
Agreement after the closing date of a change in control of
the Bank or the Company shall be paid in the manner
selected by the Employee in a duly executed irrevocable
written election (the "Election Form"), attached hereto as
Exhibit "A"; provided that such an election will be honored
and given effect only if it is properly made and delivered
to the Bank more than 90 days before said closing date.
Present value determinations and interest accruals on
present value sums that are paid in installments over a
fixed period of years shall be calculated at a rate equal
to 120% of the applicable federal rate, compounded
semiannually, as determined under Section 1274(d) of the
Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
<PAGE>
<PAGE>
1998 Amendment to Severance Agreement
Page 2
The Employee may specify on the Election Form the
manner of payment to his beneficiary, and may at any time
or from time to time change the identity or manner of
payment to his beneficiary.
2. Section 1(d) of the Agreement shall be amended in its
entirety to provide as follows, with italics herein highlighting
new text:
(d) Funding of Grantor Trust. Not later than three
business days after a change in control, the Bank shall (a)
deposit, in the Harbor Federal Savings Bank Grantor Trust
(the "Trust"), an amount that the Bank reasonably projects
to be sufficient to fund the payment of all severance
benefits that are or may become payable, pursuant to this
Section, after the closing date of the change in control of
the Bank or the Company, and (b) provide the trustee of the
Trust with a written direction both to hold said amount and
any investment return thereon in a segregated account for
the benefit of the Employee, and to follow the procedures
set forth in the next paragraph as to the payment of such
amounts from the Trust. The provisions of this Section
shall be null and void only if the Executive provides a
written release of all claims under this Agreement.
During the 24-consecutive month period after a change
in control of the Bank or the Company, the Employee may
provide the trustee of the Trust with a written notice
directing the trustee to pay to Employee an amount
designated in the notice as being payable pursuant to this
Agreement. Within three business days after receiving said
notice, the trustee of the Trust shall pay such amount to
the Employee,and coincidentally shall provide the Bank or
its successor with notice of such payment. Upon the
earlier of the Trust's final payment of all amounts due
under the preceding paragraph or the date 24 months after
the change in control of the Bank or the Company, the
trustee of the Trust shall pay to the Bank the entire
balance remaining in the segregated account maintained for
the benefit of the Employee. The Employee shall thereafter
have no further interest in the Trust.
3. Section 1 of the Agreement shall be further amended by
adding subsection (e) immediately at the end thereof to provide
as follows:
(e) If the Employee's employment terminates with the
Bank for any reason other than Just Cause, the Employee
shall be entitled to purchase from the acquiring company,
at the Employee's own expense which shall not exceed
applicable COBRA rates, family medical insurance under any
group health plan that the acquiring company maintains for
its employees. This right shall be (i) in addition to,
and not in lieu of, any other rights that the Employee has
under this Agreement and (ii) shall continue for five years
after the change in control.
4. Nothing contained herein shall be held to alter, vary
or affect any of the terms, provisions, or conditions of the
Agreement, other than as stated above.
<PAGE>
<PAGE>
1998 Amendment to Severance Agreement
Page 3
WHEREFORE, on this 30th day of March, 1998, the Bank hereby
executes this 1998 Amendment to the Agreement.
HARBOR FEDERAL SAVINGS BANK
Witnessed by:
/s/ Kelly Hoyle By /s/ Robert A. Williams
- --------------------- -------------------------
Its Chairman of the Board
EMPLOYEE
Witnessed by:
/s/ Kelly Hoyle By /s/ Norbert J. Luken
- --------------------- -------------------------
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into this 27th day of April,
1998 (the "Effective Date"), by and between Bank Street
Mortgage, Inc. ("BSMI") and Thomas G. Riehl (the "Employee").
WHEREAS, the Employee has heretofore been employed by BSMI
as Vice President and is experienced in all phases of the
business of BSMI; and
WHEREAS, the parties desire by this writing to set forth
the continuing employment relationship of BSMI and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed as the Vice
President of BSMI. The Employee shall render such
administrative and management services for BSMI as are
currently rendered and as are customarily performed by persons
situated in a similar executive capacity. The Employee shall
also promote, by entertainment or otherwise, as and to the
extent permitted by law, the business of BSMI. The Employee's
other duties shall be such as the Board of Directors of BSMI
(the "Board") may from time to time reasonably direct, including
normal duties as an officer of BSMI.
2. Base Compensation. BSMI agrees to pay the Employee
during the term of this Agreement a salary at the rate of
$60,000 per annum, payable in cash not less frequently than
monthly. The Board shall review, not less often than annually,
the rate of the Employee's salary, and in its sole discretion
may decide to increase his salary.
3. Discretionary Bonuses. The Employee shall
participate in an equitable manner with all other senior
management employees of BSMI in discretionary bonuses that the
Board may award from time to time to BSMI's senior management
employees. No other compensation provided for in this Agreement
shall be deemed a substitute for the Employee's right to
participate in such discretionary bonuses.
4. (a) Participation in Retirement, Medical and
Other Plans. The Employee shall participate in any plan that
BSMI maintains for the benefit of its employees if the plan
relates to (i) pension, profit-sharing, or other retirement
benefits, (ii) medical insurance or the reimbursement of medical
or dependent care expenses, or (iii) other group benefits,
including disability and life insurance plans.
(b) Employee Benefits; Expenses. The Employee
shall participate in any fringe benefits which are or may become
available to BSMI's senior management employees, including for
example: any stock option or incentive compensation plans, club
memberships, and any other benefits which are commensurate with
the responsibilities and functions to be performed by the
Employee under this Agreement. The Employee shall be reimbursed
for all reasonable out-of-pocket
-1-<PAGE>
<PAGE>
business expenses which he shall incur in connection with his
services under this Agreement upon substantiation of such
expenses in accordance with the policies of BSMI.
5. Term. BSMI hereby employs the Employee, and the
Employee hereby accepts such employment under this Agreement,
for the period commencing on the Effective Date and ending 36
months thereafter (or such earlier date as is determined in
accordance with Section 9). Additionally, on each annual
anniversary date from the Effective Date, the Employee's term of
employment shall be extended for an additional one-year period
beyond the then effective expiration date provided the Board
determines in a duly adopted resolution that the performance of
the Employee has met the Board's requirements and standards, and
that this Agreement shall be extended.
6. Loyalty; Noncompetition.
(a) During the period of his employment hereunder
and except for illnesses, reasonable vacation periods, and
reasonable leaves of absence, the Employee shall devote all his
full business time, attention, skill, and efforts to the
faithful performance of his duties hereunder; provided, however,
from time to time, Employee may serve on the boards of directors
of, and hold any other offices or positions in, companies or
organizations, which will not present any conflict of interest
with BSMI or any of its affiliates, or unfavorably affect the
performance of Employee's duties pursuant to this Agreement, or
will not violate any applicable statute or regulation. "Full
business time" is hereby defined as that amount of time usually
devoted to like companies by similarly situated executive
officers. During the term of his employment under this
Agreement, the Employee shall not engage in any business or
activity contrary to the business affairs or interests of BSMI,
or be gainfully employed in any other position or job other than
as provided above.
(b) Nothing contained in this Paragraph 6 shall
be deemed to prevent or limit the Employee's right to invest in
the capital stock or other securities of any business dissimilar
from that of BSMI, or, solely as a passive or minority investor,
in any business.
7. Standards. The Employee shall perform his duties
under this Agreement in accordance with such reasonable
standards as the Board may establish from time to time. BSMI
will provide Employee with the working facilities and staff
customary for similar executives and necessary for him to
perform his duties.
8. Vacation and Sick Leave. At such reasonable times
as the Board shall in its discretion permit, the Employee shall
be entitled, without loss of pay, to absent himself voluntarily
from the performance of his employment under this Agreement, all
such voluntary absences to count as vacation time; provided
that:
(a) The Employee shall be entitled to an annual
vacation in accordance with the policies that the Board
periodically establishes for senior management employees of
BSMI.
-2-<PAGE>
<PAGE>
(b) The Employee shall not receive any additional
compensation from BSMI on account of his failure to take a
vacation, and the Employee shall not accumulate unused vacation
from one fiscal year to the next, except in either case to the
extent authorized by the Board.
(c) In addition to the aforesaid paid vacations,
the Employee shall be entitled without loss of pay, to absent
himself voluntarily from the performance of his employment with
BSMI for such additional periods of time and for such valid and
legitimate reasons as the Board may in its discretion determine.
Further, the Board may grant to the Employee a leave or leaves
of absence, with or without pay, at such time or times and upon
such terms and conditions as such Board in its discretion may
determine.
(d) In addition, the Employee shall be entitled
to an annual sick leave benefit as established by the Board.
9. Termination and Termination Pay. Subject to
Section 11 hereof, the Employee's employment hereunder may be
terminated under the following circumstances:
(a) Death. The Employee's employment under this
Agreement shall terminate upon his death during the term of this
Agreement, in which event the Employee's estate shall be
entitled to receive the compensation due the Employee through
the last day of the calendar month in which his death occurred.
(b) Disability. BSMI may terminate the
Employee's employment after having established the Employee's
Disability. For purposes of this Agreement, "Disability" means
a physical or mental infirmity which impairs the Employee's
ability to substantially perform his duties under this Agreement
and which results in the Employee becoming eligible for long-
term disability benefits under BSMI's long-term disability plan
(or, if BSMI has no such plan in effect, which impairs the
Employee's ability to substantially perform his duties under
this Agreement for a period of one hundred eighty (180)
consecutive days). The Employee shall be entitled to the
compensation and benefits provided for under this Agreement for
(i) any period during the term of this Agreement and prior to
the establishment of the Employee's Disability during which the
Employee is unable to work due to the physical or mental
infirmity, or (ii) any period of Disability which is prior to
the Executive's termination of employment pursuant to this
Section 9(b).
(c) Just Cause. The Board may, by written notice
to the Employee, immediately terminate his employment at any
time, for Just Cause. The Employee shall have no right to
receive compensation or other benefits for any period after
termination for Just Cause. Termination for "Just Cause" shall
mean termination because of, in the good faith determination of
the Board, the Employee's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order,
or material breach of any provision of this Agreement.
Notwithstanding the foregoing, (i) the Employee shall not be
deemed to have been terminated for Just Cause unless there shall
have been delivered to the Employee a copy of a resolution duly
adopted by the affirmative vote of not less than
-3-<PAGE>
<PAGE>
a majority of the entire membership of the Board at a meeting of
the Board called and held for the purpose (after reasonable
notice to the Employee and an opportunity for the Employee to be
heard before the Board), finding that in the good faith opinion
of the Board the Employee was guilty of conduct set forth above
in the second sentence of this Subsection (c) and specifying the
particulars thereof in detail.
(d) Without Just Cause. Subject to Section 11
hereof, the Board may, by written notice to the Employee,
immediately terminate his employment at any time for a reason
other than Just Cause, in which event the Employee shall be
entitled to receive the following compensation and benefits: (i)
the salary provided pursuant to Section 2 hereof, up to the date
of termination of the term (including any renewal term) of this
Agreement (the "Expiration Date"), plus said salary for an
additional 12-month period, and (ii) the cost to the Employee of
obtaining all health, life, disability and other benefits which
the Employee would have been eligible to participate in through
the Expiration Date based upon the benefit levels substantially
equal to those that BSMI provided for the Employee at the date
of termination of employment. Said sum shall be paid, at the
option of the Employee, either (I) in periodic payments over the
remaining term of this Agreement, as if the Employee's
employment had not been terminated, or (II) in one lump sum
within ten (10) days of such termination.
Notwithstanding the foregoing, but only to the extent
required under federal banking law, the amount payable under
clause (i) hereof shall be reduced to the extent that on the
date of the Employee's termination of employment, the present
value of the benefits payable under clauses (i) and (ii) hereof
exceeds three times his average annual compensation based on his
most recent five taxable years. In this context, "compensation"
shall have the meaning set forth in Regulatory Bulletin 27a of
the Office of Thrift Supervision.
(e) Termination or Suspension Under Federal Law.
(1) If the Employee is removed and/or permanently prohibited
from participating in the conduct of BSMI's affairs by an order
issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit
Insurance Act ("FDIA") (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of BSMI under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the
parties shall not be affected.
(2) If Harbor Federal Savings Bank (the "Bank") is
in default (as defined in Section 3(x)(1) of FDIA), all
obligations under this Agreement shall terminate as of the date
of default; however, this Paragraph shall not affect the vested
rights of the parties.
(3) All obligations under this Agreement shall
terminate, except to the extent that continuation of this
Agreement is necessary for the continued operation of the Bank:
(i) by the Director of the Office of Thrift Supervision
("Director of OTS"), or his or her designee, at the time that
the Federal Deposit Insurance Corporation ("FDIC") or the
Resolution Trust Corporation enters into an agreement to provide
assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of FDIA; or (ii) by the Director of
the OTS, or his or her designee, at the time that the Director
of the OTS, or his or her designee approves a supervisory merger
to resolve problems
-4-<PAGE>
<PAGE>
related to operation of the Bank or when the Bank is determined
by the Director of the OTS to be in an unsafe or unsound
condition. Such action shall not affect any vested rights of
the parties.
(4) If a notice served under Section 8(e)(3) or
(g)(1) of the FDIA (12 U.S.C. 1818(e)(3) or (g)(1)) suspends
and/or temporarily prohibits the Employee from participating in
the conduct of BSMI's affairs, BSMI's obligations under this
Agreement shall be suspended as of the date of such service,
unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, BSMI may in its discretion (i) pay the
Employee all or part of the compensation withheld while its
contract obligations were suspended, and (ii) reinstate (in
whole or in part) any of its obligations which were suspended.
(f) Voluntary Termination by Employee. Subject
to Section 11 hereof, the Employee may voluntarily terminate
employment with BSMI during the term of this Agreement, upon at
least 60 days' prior written notice to the Board of Directors,
in which case the Employee shall receive only his compensation,
vested rights and employee benefits up to the date of his
termination.
10. No Mitigation. The Employee shall not be required
to mitigate the amount of any payment provided for in this
Agreement by seeking other employment or otherwise and no such
payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Employee in any
subsequent employment.
11. Change in Control.
(a) Notwithstanding any provision herein to the
contrary, the Employee shall be entitled to collect the
severance benefits set forth in this Section in the event that
(1) the Employee's employment under this Agreement is terminated
by BSMI, without the Employee's prior written consent and for a
reason other than Just Cause, in connection with or within
twelve (12) months after any change in control of the Bank or
Harbor Federal Bancorp, Inc. (the "Company"), or (2) the
Employee voluntarily terminates employment for any reason within
the 30-day period beginning on the date of a change in control.
The Employee shall be paid an amount equal to the difference
between (i) the product of 2.99 times his "base amount" as
defined in Section 280G(b)(3) of the Internal Revenue Code of
1986, as amended (the "Code") and regulations promulgated
thereunder, and (ii) the sum of any other parachute payments (as
defined under Section 280G(b)(2) of the Code) that the Employee
receives on account of the change in control.
Any severance benefits that are payable under this
Agreement after the closing date of a change in control of the
Bank or the Company shall be paid in the manner selected by the
Employee in a duly executed election (the "Election Form"), in
the form attached hereto as Exhibit "A"; provided that such an
election will be honored and given effect only if it is properly
made and delivered to BSMI more than 90 days before said closing
date. Present value determinations and interest accruals on
present value sums that are paid in installments over a fixed
period of years shall be calculated at a rate equal to 120% of
the applicable federal rate, compounded semiannually, as
determined under Section 1274(d) of the Code, and the
regulations thereunder. The Employee may
-5-<PAGE>
<PAGE>
specify on the Election Form the manner of payment to his
beneficiary, and may at any time or from time to time change
the identity or manner of payment to his beneficiary.
The term "change in control" shall mean (1) the
ownership, holding or power to vote more than 25% of the Bank's
or Company's voting stock, (2) the control of the election of a
majority of the Bank's or Company's directors, (3) the exercise
of a controlling influence over the management or policies of
the Bank or the Company by any person or by persons acting as a
"group" (within the meaning of Section 13(d) of the Securities
Exchange Act of 1934) (except in the case of (1), (2) and (3)
hereof, ownership or control of the Bank by the Company itself
shall not constitute a "Change in Control"), or (4) during any
period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of
the Company or the Bank (the "Company Board") (the "Continuing
Directors") cease for any reason to constitute at least two-
thirds thereof, provided that any individual whose election or
nomination for election as a member of the Company Board was
approved by a vote of at least two-thirds of the Continuing
Directors then in office shall be considered a Continuing
Director. The term "person" means an individual other than the
Employee, or a corporation, partnership, trust, association,
joint venture, pool, syndicate, sole proprietorship,
unincorporated organization or any other form of entity not
specifically listed herein.
(b) Notwithstanding any other provision of this
Agreement to the contrary, the Employee may voluntarily
terminate his employment under this Agreement within twelve (12)
months following a change in control of the Bank or the Company,
and the Employee shall thereupon be entitled to receive the
payment described in Section 11(a) of this Agreement, upon the
occurrence of any of the following events, or within ninety (90)
days thereafter, which have not been consented to in advance by
the Employee in writing: (i) the requirement that the Employee
move his personal residence, or perform his principal executive
functions, more than thirty-five (35) miles from his primary
office as of the date of the change in control; (ii) a material
reduction in the Employee's base compensation as in effect on
the date of the change in control or as the same may be
increased from time to time; (iii) the failure by BSMI to
continue to provide the Employee with compensation and benefits
provided for under this Agreement, as the same may be increased
from time to time, or with benefits substantially similar to
those provided to him under any of the employee benefit plans in
which the Employee now or hereafter becomes a participant, or
the taking of any action by BSMI which would directly or
indirectly reduce any of such benefits or deprive the Employee
of any material fringe benefit enjoyed by him at the time of the
change in control; (iv) the assignment to the Employee of duties
and responsibilities materially different from those normally
associated with his position as referenced at Section 1; (v) a
failure to elect or reelect the Employee to the Board of
Directors of BSMI, if the Employee is serving on the Board on
the date of the change in control; or (vi) a material diminution
or reduction in the Employee's responsibilities or authority
(including reporting responsibilities) in connection with his
employment with BSMI.
(c) Any payments made to the Employee pursuant to
this Agreement, or otherwise are subject to and conditioned upon
their compliance with 12 U.S.C. Section 1828(k) and any
regulations promulgated thereunder.
-6-<PAGE>
<PAGE>
(d) Funding of Grantor Trust. Not later than
three business days after a change in control, BSMI shall (a)
deposit, in the Harbor Federal Savings Bank Grantor Trust (the
"Trust"), an amount that BSMI reasonably projects to be
sufficient to fund the payment of all severance benefits that
are or may become payable, pursuant to this Section, after the
closing date of the change in control of the Bank or the
Company, and (b) provide the trustee of the Trust with a written
direction both to hold said amount and any investment return
thereon in a segregated account for the benefit of the Employee,
and to follow the procedures set forth in the next paragraph as
to the payment of such amounts from the Trust. The provisions
of this Section 11(d) shall be null and void only if the
Executive provides a written release of all claims under this
Agreement.
During the 24-consecutive month period after a change in
control of the Bank or the Company, the Employee may provide the
trustee of the Trust with a written notice directing the trustee
to pay to Employee an amount designated in the notice as being
payable pursuant to this Agreement. Within three business days
after receiving said notice, the trustee of the Trust shall pay
such amount to the Employee, and coincidentally shall provide
BSMI or its successor with notice of such payment. Upon the
earlier of the Trust's final payment of all amounts due under
the preceding paragraph or the date 24 months after the change
in control of the Bank or the Company, the trustee of the Trust
shall pay to BSMI the entire balance remaining in the segregated
account maintained for the benefit of the Employee. The
Employee shall thereafter have no further interest in the Trust.
(e) In the event that any dispute arises between
the Employee and BSMI as to the terms or interpretation of this
Agreement, including this Section 11, whether instituted by
formal legal proceedings or otherwise, including any action that
the Employee takes to enforce the terms of this Section 11 or to
defend against any action taken by BSMI, the Employee shall be
reimbursed for all costs and expenses, including reasonable
attorneys' fees, arising from such dispute, proceedings or
actions, provided that the Employee shall obtain a final
judgement by a court of competent jurisdiction in favor of the
Employee. Such reimbursement shall be paid within ten (10) days
of Employee's furnishing to BSMI written evidence, which may be
in the form, among other things, of a cancelled check or
receipt, of any costs or expenses incurred by the Employee.
12. Successors and Assigns.
(a) This Agreement shall inure to the benefit of
and be binding upon any corporate or other successor of BSMI
which shall acquire, directly or indirectly, by merger, con-
solidation, purchase or otherwise, all or substantially all of
the assets or stock of BSMI.
(b) Since BSMI is contracting for the unique and
personal skills of the Employee, the Employee shall be precluded
from assigning or delegating his rights or duties hereunder
without first obtaining the written consent of BSMI.
13. Amendments. No amendments or additions to this
Agreement shall be binding unless made in writing and signed by
all of the parties, except as herein otherwise specifically
provided.
-7-<PAGE>
<PAGE>
14. Applicable Law. Except to the extent preempted by
Federal law, the laws of the State of Maryland shall govern this
Agreement in all respects, whether as to its validity, construc-
tion, capacity, performance or otherwise.
15. Severability. The provisions of this Agreement
shall be deemed severable and the invalidity or unenforceability
of any provision shall not affect the validity or enforceability
of the other provisions hereof.
16. Entire Agreement. This Agreement, together with
any understanding or modifications thereof as agreed to in
writing by the parties, shall constitute the entire agreement
between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the day and year first hereinabove written.
BANK STREET MORTGAGE, INC.
Witnessed by:
/s/ Joyce Lancaster By /s/ Robert A. Williams
- -------------------- -----------------------
Secretary Its President
EMPLOYEE
Witnessed by:
/s/ Lawrence W. Williams /s/ Thomas G. Riehl
- ------------------------ -----------------------
Thomas G. Riehl
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.
__________________________
Guaranty Agreement
__________________________
THIS AGREEMENT is entered into this 27th day of
April, 1998 (the "Effective Date"), by and between Harbor
Federal Bancorp, Inc. (the "Company") and Thomas G. Riehl (the
"Employee").
WHEREAS, the Employee has heretofore been employed by Bank
Street Mortgage, Inc. ("BSMI") as its Vice President, and has
entered into an agreement (the "Employment Agreement") dated
April 27, 1998, with BSMI; and
WHEREAS, the Board of Directors (the "Board") of the
Company has determined that it is in the best interests of the
Company to enter into this Agreement with the Employee in order
to assure continuity of management of BSMI and to reinforce and
encourage the long-term retention of the Employee; and
WHEREAS, the parties desire by this writing to set forth
the Company's commitment to guarantee BSMI's obligations under
its Employment Agreement with the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Consideration from Company: Joint and Several
Liability. The Company hereby agrees that to the extent
permitted by law, it shall be jointly and severally liable with
BSMI for the payment of all amounts due under the Employment
Agreement, provided that the paragraphs of the Employment
Agreement that appear under the heading "Termination or
Suspension under Federal Law" shall be inapplicable to this
Agreement. The Board may in its discretion at any time during
the term of this Agreement agree to pay the Employee with a base
salary for the remaining term of this Agreement. If the Board
agrees to pay such salary, the Board shall thereafter review,
not less often than annually, the rate of the Employee's salary,
and in its sole discretion may decide to increase his salary.
2. Indemnification. The Company agrees that its
Bylaws shall continue to provide for indemnification of
directors, officers, employees and agents of the Company,
including the Employee, during the full term of this Agreement,
and to at all times provide adequate insurance for such
purposes.
<PAGE>
<PAGE>
3. Successors and Assigns.
(a) Company. This Agreement shall inure to the
benefit of and be binding upon any corporate or other successor
of the Company which shall acquire, directly or indirectly, by
merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Company.
(b) Attachment. Except as required by law, no
right to receive payments under this Agreement shall be subject
to anticipation, commutation, alienation, sale, assignment,
encumbrance, charge, pledge, or hypothecation or to exclusion,
attachment, levy or similar process or assignment by operation
of law, and any attempt, voluntary or involuntary, to effect any
such action shall be null, void and of no effect.
4. Amendments. No amendments or additions to this
Agreement shall be binding unless made in writing and signed by
all of the parties, except as herein otherwise specifically
provided.
5. Applicable Law. Except to the extent preempted by
Federal law, the laws of the State of Maryland shall govern this
Agreement in all respects, whether as to its validity, construc-
tion, capacity, performance or otherwise.
6. Severability. The provisions of this Agreement
shall be deemed severable and the invalidity or unenforceability
of any provision shall not affect the validity or enforceability
of the other provisions hereof.
7. Entire Agreement. This Agreement, together with
any understanding or modifications thereof as agreed to in
writing by the parties, shall constitute the entire agreement
between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this
Agreement on the day and year first hereinabove written.
HARBOR FEDERAL BANCORP, INC.
Witnessed by:
/s/ Joyce Lancaster By /s/ Robert A. Williams
- -------------------- -----------------------
Secretary Its President
EMPLOYEE
Witnessed by:
/s/ Lawrence W. Williams /s/ Thomas G. Riehl
- ------------------------ -----------------------
Thomas G. Riehl
-2-
<PAGE>
HARBOR FEDERAL SAVINGS BANK
RETIREMENT PLAN FOR NON-EMPLOYEE DIRECTORS
_______________________________
1998 AMENDMENT
_______________________________
WHEREAS, Harbor Federal Savings Bank (the "Bank") maintains
the Harbor Federal Savings Bank Retirement Plan for Non-Employee
Directors (the "Plan"); and
WHEREAS, the Bank's Board of Directors has determined that
it is in the best interests of the Bank and the participants in
the Plan to amend the Plan in the manner set forth herein.
NOW, THEREFORE, the Plan shall be amended as follows,
pursuant to Article XI thereof:
1. Effective March 30, 1998, Article IX of the Plan
shall be amended in its entirety to provide as follows:
Payment of Benefits Upon a Change in Control
--------------------------------------------
The provisions of this Article shall supersede
any provisions of this Plan to the contrary. In the
event of a Change in Control: (i) the Benefit
Percentage of a Participant who is then serving on the
Board shall become 100% if, and only if, the
Participant involuntarily leaves the Board after such
Change in Control, (ii) the Participant's Vested
Percentage shall become 100%, and (iii) any Benefits
that are or become payable after the closing date of
the Change in Control shall be paid in the manner
selected by the Participant in a duly executed
election (the "Election Form") in the form attached
hereto as Exhibit "A"; provided that such an election
will be honored and given effect only if it is
properly made and delivered to the Bank more than
90 days before said closing date. The Participant may
specify on the Election Form the manner of payment to
his beneficiary, and may at any time or from time to
time change the identity or manner of payment to his
beneficiary. Present value determinations, as well as
interest accruals on present value sums that are paid
in installments over a fixed period of years, shall be
calculated at a rate equal to 120% of the applicable
federal rate, compounded semiannually, as determined
under Section 1274(d) of the Internal Revenue Code of
1986, as amended, and the regulations thereunder.
2. Nothing contained herein shall be held to alter, vary,
or affect any of the terms, provisions, or conditions of the
Plan other than stated above.
<PAGE>
<PAGE>
1998 Amendment to Retirement Plan
for Non-Employee Directors
Page 2
WHEREFORE, the undersigned hereby execute this 1998
Amendment to the Plan on March 30, 1998.
HARBOR FEDERAL SAVINGS BANK
Witnessed by:
/s/ Dana Miller By /s/ Robert A. Williams
- -------------------- -------------------------
Its Chairman of the Board
<PAGE>
<PAGE>
THE HARBOR FEDERAL SAVINGS BANK
RETIREMENT PLAN FOR NON-EMPLOYEE DIRECTORS
____________________________________
1998 AMENDMENT TO TRUST AGREEMENT
____________________________________
WHEREAS, Harbor Federal Savings Bank (the "Bank") maintains
the Harbor Federal Savings Bank Retirement Plan for Non-Employee
Directors (the "Plan"), and has entered into a trust agreement
under the Plan ("Trust Agreement") with Norbert J. Luken (the
"Trustee"); and
WHEREAS, the Bank's Board of Directors and the Trustee have
determined that it is in their respective best interests to
amend the Trust Agreement in the manner set forth herein.
NOW, THEREFORE, effective March 30, 1998, the Trust
Agreement shall be amended as follows, pursuant to Section
12(a) thereof:
1. The Retirement Plan for Non-Employee Directors Trust
Agreement shall be amended by replacing "Harbor Federal Savings
and Loan Association" with "Harbor Federal Savings Bank" and by
replacing "Association" with "Bank" wherever they appear in the
document.
2. Section 2 of the Trust Agreement shall be amended by
adding subsection (d) immediately at the end thereof to provide
as follows:
(d) Upon a Change in Control within the meaning of
the Plan, the Bank shall, as soon as possible but in no
event longer than ten business days after the Change in
Control, make an irrevocable contribution to this Trust in
an amount that is projected to provide the Trust with
sufficient funds to pay each Beneficiary the benefits to
which he or she is entitled pursuant to the Plan as in
effect on the date of the Change in Control.
3. Section 10 of the Trust Agreement shall be amended by
adding the following paragraph immediately at the end thereof:
Notwithstanding the foregoing, if the Trustee resigns
or is removed following a Change in Control, the Trustee
that has resigned or is being removed shall appoint as its
successor a third party financial institution that has
trust powers, is independent of and unrelated to the entity
that has acquired or otherwise obtained control of the
Bank, and is agreed to in writing by 80% of the Trust
Beneficiaries.
4. Nothing contained herein shall be held to alter, vary,
or affect any of the terms, provisions, or conditions of the
Trust Agreement other than stated above.
<PAGE>
<PAGE>
1998 Amendment to Retirement Plan
Trust Agreement
Page 2
WHEREFORE, the undersigned hereby execute this 1998
Amendment on March 30, 1998.
HARBOR FEDERAL SAVINGS BANK
Witnessed by:
/s/ Dana Miller By /s/ Robert A. Williams
- -------------------- -------------------------
Its Chairman of the Board
TRUSTEE
Witnessed by:
/s/ Carol Erpenstein /s/ Norbert J. Luken
- -------------------- -------------------------
<PAGE>
HARBOR FEDERAL SAVINGS BANK
DEFERRED COMPENSATION PLAN
_______________________________
1998 AMENDMENT
_______________________________
WHEREAS, Harbor Federal Savings Bank (the "Bank") maintains
the Harbor Federal Savings Bank Deferred Compensation Plan (the
"Plan"), and Article VII of the Plan permits the Bank's Board of
Directors (the "Board") to amend the Plan without the consent of
participants where they are not adversely affected by the
amendment; and
WHEREAS, the Board has determined that the Plan should be
amended in the manner provided herein; and
WHEREAS, the Board has determined that this amendment does
not adversely affect Plan participants and therefore may be
adopted with their consent.
NOW, THEREFORE, pursuant to Article VII of the Plan, the
Plan is hereby amended as follows effective March 30, 1998:
1. The Deferred Compensation Plan shall be amended by
replacing "Harbor Federal Savings Bank Association" with
"Harbor Federal Savings Bank" and by replacing "Association"
with "Bank" wherever these terms appear in the document.
2. Article IV of the Plan shall be amended by revising
its first sentence in its entirety:
except that, following a "change in control" within the
meaning of Section 7.01(c) of the Association's Management
Recognition Plan "A," the Participant's account will be
paid to the Participant (or his estate) in accordance with
the terms of Exhibit "A" unless the Participant has filed
a valid Special Distribution Election in the form attached
hereto as Exhibit "B." Special Distribution Elections
must be received by the Bank at least 90 days before the
closing date of a change in control in order to be
effective.
3. Article V of the Plan is amended by adding the
following paragraph at the end thereof:
If a Participant elects in accordance with Harbor Federal
Bancorp's 1995 Stock Option and Incentive Plan (the "Option
Plan") to have his Account credited with a Phantom Stock
Option, the Phantom Stock Option shall be subject to the
exercise and distribution provisions of the Option Plan
and any provisions of the Plan that are not consistent
therewith.
<PAGE>
<PAGE>
4. Article VI of the Plan shall be amended by adding the
following sentence immediately at the end thereof:
A Special Distribution Election made by a Participant
pursuant to Article IV may be changed by the Participant at
any time and from time to time prior to the date (the
"Deadline") 90 days before a change in control (within the
meaning of Article IV), and shall become irrevocable on
such Deadline, except that the Participant may at any time
change a designation of a beneficiary and term of payments
for death benefits.
5. Exhibit "B" of the Plan shall be implemented in the
form attached hereto.
6. Nothing contained herein shall be held to alter,
vary, or affect any of the terms, provisions, or conditions of
the Plan other than stated above.
WHEREFORE, the undersigned hereby executes this 1998
Amendment on March 30, 1998.
HARBOR FEDERAL SAVINGS BANK
Witnessed by:
/s/ Carol Erpenstein By /s/ Robert A. Williams
- -------------------- -------------------------
Its Chairman of the Board
<PAGE>
<PAGE>
THE HARBOR FEDERAL SAVINGS BANK
DEFERRED COMPENSATION PLAN
___________________________________
1998 AMENDMENT TO TRUST AGREEMENT
___________________________________
WHEREAS, Harbor Federal Savings Bank (the "Bank") maintains
the Harbor Federal Savings Bank Deferred Compensation Plan (the
"Plan"), and has entered into a trust agreement under the Plan
("Trust Agreement") with Gideon N. Stieff, Jr. (the "Trustee");
and
WHEREAS, the Bank's Board of Directors and the Trustee have
determined that it is in their respective best interests to
amend the Trust Agreement in the manner set forth herein.
NOW, THEREFORE, effective March 30, 1998, the Trust
Agreement shall be amended as follows, pursuant to Section
12(a) thereof:
1. The Deferred Compensation Plan Trust Agreement shall
be amended by replacing "Harbor Federal Savings Bank
Association" with "Harbor Federal Savings Bank" and by replacing
"Association" with "Bank" wherever these terms appear in the
document.
2. Section 2 of the Trust Agreement shall be amended by
adding subsection (d) immediately at the end thereof to provide
as follows:
(d) Upon a change in control within the meaning of
the Plan, the Bank shall, as soon as possible but in no
event more than ten business days after the change in
control, make an irrevocable contribution to this Trust in
an amount that is projected to provide the Trust with
sufficient funds to pay each Beneficiary the benefits to
which he or she is entitled pursuant to the Plan as in
effect on the date of the change in control.
3. Section 10 of the Trust Agreement shall be amended by
adding the following paragraph immediately at the end thereof:
Notwithstanding the foregoing, if the Trustee resigns
or is removed following a Change in Control, the Trustee
that has resigned or is being removed shall appoint as its
successor a third party financial institution that has
trust powers, is independent of and unrelated to the
entity that has acquired or otherwise obtained control of
the Bank, and is agreed to in writing by 80% of the Trust
Beneficiaries.
4. Nothing contained herein shall be held to alter, vary,
or affect any of the terms, provisions, or conditions of the
Trust Agreement other than stated above.
<PAGE>
<PAGE>
1998 Amendment to
Deferred Compensation Plan Trust Agreement
Page 2
WHEREFORE, the undersigned hereby execute this 1998
Amendment on March 30, 1998.
HARBOR FEDERAL SAVINGS BANK
Witnessed by:
/s/ Dana Miller By /s/ Robert A. Williams
- -------------------- -------------------------
Its Chairman of the Board
TRUSTEE
Witnessed by:
/s/ Barbara Therres /s/ Gideon N. Stieff, Jr.
- -------------------- -------------------------
<PAGE>
HARBOR FEDERAL SAVINGS BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
FOR ROBERT A. WILLIAMS
_______________________________
1998 AMENDMENT
_______________________________
WHEREAS, Harbor Federal Savings Bank (the "Bank") has
entered into a Executive Retirement Agreement (the "SERA") with
Robert A. Williams (the "Executive"), and the Bank's Board of
Directors and the Executive have agreed that due and adequate
consideration exists to amend the SERA in the manner set
forth herein.
NOW, THEREFORE, effective March 30, 1998, the SERA shall be
amended as follows, pursuant to Article XI thereof:
1. The Supplemental Executive Retirement Agreement shall
be amended by replacing "Harbor Federal Savings and Loan
Association" with "Harbor Federal Savings Bank" and by replacing
"Association" with "Bank" wherever they appear in the document.
2. Article IX of the Plan shall be amended by replacing
its second sentence with the following sentences:
Notwithstanding any provisions of this Agreement to
the contrary, any benefits that are or become payable after
the closing date of a Change in Control shall be paid in
the manner selected by the Executive in a duly executed
election (the "Election Form") in the form attached hereto
as Exhibit "A"; provided that such an election will be
honored and given effect only if it is properly made and
delivered to the Bank more than 90 days before said closing
date. The Executive may specify on the Election Form the
manner of payment to his beneficiary, and may at any time
or from time to time change the identity or manner of
payment to his beneficiary. Present value determinations,
as well as interest accruals on present value sums that are
paid at a Participant's election in installments over a
fixed period of years, shall be calculated at a rate equal
to 120% of the applicable federal rate, compounded
semiannually, as determined under Section 1274(d) of the
Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
3. Nothing contained herein shall be held to alter, vary,
or affect any of the terms, provisions, or conditions of the
Plan other than stated above.
<PAGE>
<PAGE>
1998 Amendment to SERA
Page 2
WHEREFORE, the undersigned hereby execute this 1998
Amendment to the SERA on March 30, 1998.
HARBOR FEDERAL SAVINGS BANK
Witnessed by:
/s/ Barbara Therres By /s/ Joseph J. Lacy
- ---------------------- --------------------
Senior Board Member
EXECUTIVE
Witnessed by:
/s/ Dana Miller /s/ Robert A. Williams
- ---------------------- ------------------------
Robert A. Williams
<PAGE>
<PAGE>
THE HARBOR FEDERAL SAVINGS BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
WITH ROBERT A. WILLIAMS
__________________________________
1998 AMENDMENT TO TRUST AGREEMENT
__________________________________
WHEREAS, Harbor Federal Savings Bank (the "Bank") entered
into a trust agreement (the "Trust Agreement") with Joseph J.
Lacy (the "Trustee"), and the Company and the Trustee have
determined that it is in their respective best interests to
amend the Trust Agreement.
NOW, THEREFORE, effective March 30, 1998, the Trust
Agreement shall be amended as follows, pursuant to Section 12
thereof:
1. The Trust Agreement shall be amended by replacing its
title "TRUST AGREEMENT UNDER THE HARBOR FEDERAL SAVINGS AND
LOAN ASSOCIATION SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT"
with "HARBOR FEDERAL SAVINGS BANK GRANTOR TRUST."
2. The Trust Agreement shall be further amended by
replacing "Harbor Federal Savings and Loan Association" with
"Harbor Federal Savings Bank" and "Association" with "Bank" and
wherever these terms appear in the document.
3. The Trust Agreement shall be further amended by
replacing the first two "WHEREAS" clauses with the following
paragraph:
WHEREAS, the Bank has entered into (i) an agreement
with Robert A. Williams (the "Executive") pursuant to which
the Executive (or, in the event of his death, his surviving
spouse) will receive supplemental retirement benefits, (ii)
an employment agreement with the Executive dated August 11,
1994, and (iii) severance agreements with Officers
Williams, Luken, Anthony, Epps, and Lancaster
(collectively, the "Officers") -- the agreements under (i),
(ii), and (iii) being collectively referred to as "the
Agreements";
4. The Trust Agreement shall be further amended by
replacing the reference to "the Agreement and the Severance
Agreements" with "the Agreements" wherever they appear in the
document.
5. Section 2 of the Trust Agreement shall be amended by
adding the following subsection (d) immediately at the end
thereof:
<PAGE>
<PAGE>
1998 Amendment to
SERA Trust Agreement
Page 2
(d) Upon a change in control within the meaning of
Section 11(a) of the Employment Agreement with Mr. R.
Williams, the Bank shall, as soon as possible but in no
event more than ten business days after the change in
control, make an irrevocable contribution to this Trust in
an amount that is projected to provide the Trust with
sufficient funds to pay each Beneficiary the benefits to
which he or she is entitled pursuant to the Agreements as
in effect on the date of the change in control. Executive
officers of the Bank shall be entitled to direct the
Trustee to pay such benefits without pre-approval of the
acquiring company.
6. Section 10 of the Trust Agreement shall be amended by
adding the following paragraph immediately at the end thereof:
Notwithstanding the foregoing, if the Trustee resigns
or is removed following a change in control, the Trustee
that has resigned or is being removed shall appoint as its
successor a third party financial institution that has
trust powers, is independent of and unrelated to the entity
that has acquired or otherwise obtained control of the
Bank, and is agreed to in writing by 80% of the Trust
Beneficiaries.
7. Nothing contained herein shall be held to alter, vary
or affect any of the terms, provisions, or conditions of the
Trust Agreement, other than as stated above.
WHEREFORE, on this 30th day of March, 1998, the undersigned
hereby execute this 1998 Amendment to the Trust Agreement.
HARBOR FEDERAL SAVINGS BANK
Witnessed by:
/s/ Dana Miller By /s/ Robert A. Williams
- ----------------------- -----------------------
Its Chairman of the Board
TRUSTEE
Witnessed by:
/s/ Barbara Therres /s/ Joseph J. Lacy
- ----------------------- -----------------------
<PAGE>
HARBOR FEDERAL BANCORP, INC.
INCENTIVE COMPENSATION PLAN
____________________
1998 AMENDMENT
____________________
WHEREAS, Harbor Federal Bancorp, Inc. (the "Company")
maintains the Harbor Federal Bancorp, Inc. Incentive
Compensation Pan (the "Plan"), and the Company's Board of
Directors has determined that the Plan should be amended
in the manner set forth herein.
NOW, THEREFORE, pursuant to Section 6.01 of the Plan, the
Plan is hereby amended as follows, effective March 30, 1998.
1. Section 6.01 of the Plan shall be amended by adding
the following sentence immediately at the end thereof:
In the event of a Change in Control, each Employee
who is a Participant on the date of the Change in Control
shall be entitled to receive Benefits for the Plan Year
in which the Change in Control closes in an amount not
less than the product of (i) a fraction with a numerator
equal to the number of days during which the Plan was in
effect during the Plan Year, and a denominator equal to
365, and (ii) the highest Benefits paid to the
Participant during the preceding three Plan Years.
2. Nothing contained herein shall be held to alter, vary
or affect any of the terms, provisions, or conditions of the
Plan, other than as stated above.
WHEREFORE, on this 30th day of March, 1998, the Company
hereby executes this 1998 Amendment to the Plan.
HARBOR FEDERAL BANCORP, INC.
Witnessed by:
/s/ Janet L. Hatfield By /s/ Robert A. Williams
- ---------------------- ---------------------------
Its Chairman of the Board
<PAGE>
HARBOR FEDERAL BANCORP, INC.
1995 STOCK OPTION AND INCENTIVE PLAN, AS AMENDED 1/
1. PURPOSE OF THE PLAN.
The purpose of this Harbor Federal Bancorp, Inc. 1995
Stock Option and Incentive Plan (the "Plan") is to advance the
interests of the Company through providing select Employees and
Directors of the Bank, the Company, and their Affiliates with
the opportunity to acquire Shares. By encouraging such stock
ownership, the Company seeks to attract, retain and motivate the
best available personnel for positions of substantial respon-
sibility and to provide additional incentive to Directors and
key Employees of the Company or any Affiliate to promote the
success of the business.
2. DEFINITIONS.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or
"subsidiary corporation" of the Company, as such terms are
defined in Section 424(e) and (f), respectively, of the Code.
(b) "Agreement" shall mean a written agreement entered
into in accordance with Paragraph 5(c).
(c) "Awards" shall mean, collectively, Options and SARs,
unless the context clearly indicates a different meaning.
(d) "Bank" shall mean Harbor Federal Savings Bank.
(e) "Board" shall mean the Board of Directors of the
Company.
(f) "Change in Control" shall mean any one of the
following events: (1) the acquisition of ownership, holding or
power to vote more than 25% of the Bank's or the Company's
voting stock, (2) the acquisition of the ability to control the
election of a majority of the Bank's or the Company's directors,
(3) the acquisition of a controlling influence over the
management or policies of the Bank or the Company by any person
or by persons acting as a "group" (within the meaning of Section
13(d) of the Securities Exchange Act of 1934) (except in the
case of (1), (2) and (3) hereof, ownership or control of the
Bank by the Company itself shall not constitute a "Change in
Control"), or (4) during any period of two consecutive years,
individuals who at the beginning of such period constitute the
Board of Directors of the Company or the Bank (the "Existing
Board") (the "Continuing Directors") cease for any reason to
constitute at least two-thirds thereof, provided that any in-
dividual whose election or nomination for election as a member
of
_____________
1/ through 1998 Amendment<PAGE>
<PAGE>
the Existing Board was approved by a vote of at least two-
thirds of the Continuing Directors then in office shall be
considered a Continuing Director. For purposes of this
subparagraph only, the term "person" refers to an individual or
a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed
herein. The decision of the Committee as to whether a change in
control has occurred shall be conclusive and binding.
(g) "Code" shall mean the Internal Revenue Code of 1986,
as amended.
(h) "Committee" shall mean the Stock Option Committee
appointed by the Board in accordance with Paragraph 5(a) hereof.
(i) "Common Stock" shall mean the common stock, par
value $.01 per share, of the Company.
(j) "Company" shall mean Harbor Federal Bancorp, Inc.
(k) "Continuous Service" shall mean the absence of any
interruption or termination of service as an Employee or
Director of the Company or an Affiliate. Continuous Service
shall not be considered interrupted in the case of sick leave,
military leave or any other leave of absence approved by the
Company or in the case of transfers between payroll locations of
the Company or between the Company, an Affiliate, or a
successor.
(l) "Director" shall mean any member of the Board, and
any member of the board of directors of any Affiliate that the
Board has by resolution designated as being eligible for
participation in this Plan.
(m) "Effective Date" shall mean the date specified in
Paragraph 15 hereof.
(n) "Employee" shall mean any person employed by the
Company, the Bank, or an Affiliate.
(o) "Exercise Price" shall mean the price per Optioned
Share at which an Option or SAR may be exercised.
(p) "ISO" means an option to purchase Common Stock which
meets the requirements set forth in the Plan, and which is
intended to be and is identified as an "incentive stock option"
within the meaning of Section 422 of the Code.
(q) "Market Value" shall mean the fair market value of
the Common Stock, as determined under Paragraph 7(b) hereof.
(r) "Non-Employee Director" shall have the meaning
provided in Rule 16bb-3.
<PAGE>
<PAGE>
(s) "Non-ISO" means an option to purchase Common Stock
which meets the requirements set forth in the Plan but which is
not intended to be and is not identified as an ISO.
(t) "Option" means an ISO and/or a Non-ISO.
(u) "Optioned Shares" shall mean Shares subject to an
Option granted pursuant to this Plan.
(v) "Participant" shall mean any person who receives an
Award pursuant to the Plan.
(w) "Plan" shall mean this Harbor Federal Bancorp, Inc.
1995 Stock Option and Incentive Plan.
(x) "Rule 16b-3" shall mean Rule 16b-3 of the General
Rules and Regulations under the Securities Exchange Act of 1934,
as amended.
(y) "Share" shall mean one share of Common Stock.
(z) "SAR" (or "Stock Appreciation Right") means a right
to receive the appreciation in value, or a portion of the
appreciation in value, of a specified number of shares of Common
Stock.
3. TERM OF THE PLAN AND AWARDS.
(a) Term of the Plan. The Plan shall continue in effect
for a term of ten years from the Effective Date, unless sooner
terminated pursuant to Paragraph 17 hereof. No Award shall be
granted under the Plan after ten years from the Effective Date.
(b) Term of Awards. The term of each Award granted
under the Plan shall be established by the Committee, but shall
not exceed 10 years; provided, however, that in the case of an
Employee who owns Shares representing more than 10% of the
outstanding Common Stock at the time an ISO is granted, the term
of such ISO shall not exceed five years.
4. SHARES SUBJECT TO THE PLAN.
(a) General Rule. Except as otherwise required by the
provisions of Paragraph 12 hereof, the aggregate number of
Shares deliverable pursuant to Awards shall not exceed 218,009
Shares, which equals 10% of the Shares issued in the Bank's
conversion from mutual-to-stock form. Such Shares may either be
authorized but unissued Shares or Shares held in treasury. If
Awards should expire, become unexercisable or be forfeited for
any reason without having been exercised or become vested in
full, the Optioned Shares shall, unless the Plan shall have been
terminated, be available for the grant of additional Awards
under the Plan.
<PAGE>
<PAGE>
(b) Special Rule for SARs. The number of Shares with
respect to which an SAR is granted, but not the number of Shares
which the Company delivers or could deliver to an Employee or
individual upon exercise of an SAR, shall be charged against the
aggregate number of Shares remaining available under the Plan;
provided, however, that in the case of an SAR granted in
conjunction with an Option, under circumstances in which the
exercise of the SAR results in termination of the Option and
vice versa, only the number of Shares subject to the Option
shall be charged against the aggregate number of Shares
remaining available under the Plan. The Shares involved in an
Option as to which option rights have terminated by reason of
the exercise of a related SAR, as provided in Paragraph 10
hereof, shall not be available for the grant of further Options
under the Plan.
5. ADMINISTRATION OF THE PLAN.
(a) Composition of the Committee. The Plan shall be
administered by the Committee, which shall consist of not less
than two (2) members of the Board who are Non-Employee
Directors. Members of the Committee shall serve at the pleasure
of the Board. In the absence at any time of a duly appointed
Committee, the Plan shall be administered by those members of
the Board who are Non-Employee Directors.
(b) Powers of the Committee. Except as limited by the
express provisions of the Plan or by resolutions adopted by the
Board, the Committee shall have sole and complete authority and
discretion (i) to select Participants and grant Awards, (ii) to
determine the form and content of Awards to be issued in the
form of Agreements under the Plan, (iii) to interpret the Plan,
(iv) to prescribe, amend and rescind rules and regulations
relating to the Plan, and (v) to make other determinations
necessary or advisable for the administration of the Plan. The
Committee shall have and may exercise such other power and
authority as may be delegated to it by the Board from time to
time. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at
any meeting at which a quorum is present, or acts approved in
writing by a majority of the Committee without a meeting, shall
be deemed the action of the Committee.
(c) Agreement. Each Award shall be evidenced by a
written agreement containing such provisions as may be approved
by the Committee. Each such Agreement shall constitute a
binding contract between the Company and the Participant, and
every Participant, upon acceptance of such Agreement, shall be
bound by the terms and restrictions of the Plan and of such
Agreement. The terms of each such Agreement shall be in
accordance with the Plan, but each Agreement may include such
additional provisions and restrictions determined by the
Committee, in its discretion, provided that such additional
provisions and restrictions are not inconsistent with the terms
of the Plan. In particular, the Committee shall set forth in
each Agreement (i) the Exercise Price of an Option or SAR,
<PAGE>
<PAGE>
(ii)the number of Shares subject to, and the expiration date of,
the Award, (iii) the manner, time and rate (cumulative or
otherwise) of exercise or vesting of such Award, and (iv) the
restrictions, if any, to be placed upon such Award, or upon
Shares which may be issued upon exercise of such Award.
The Chairman of the Committee and such other officers as
shall be designated by the Committee are hereby authorized to
execute Agreements on behalf of the Company and to cause them to
be delivered to the recipients of Awards.
(d) Effect of the Committee's Decisions. All decisions,
determinations and interpretations of the Committee shall be
final and conclusive on all persons affected thereby.
(e) Indemnification. In addition to such other rights
of indemnification as they may have, the members of the
Committee shall be indemnified by the Company in connection with
any claim, action, suit or proceeding relating to any action
taken or failure to act under or in connection with the Plan or
any Award, granted hereunder to the full extent provided for
under the Company's governing instruments with respect to the
indemnification of Directors.
6. GRANT OF OPTIONS.
(a) General Rule. Only Employees shall be eligible to
receive discretionary grants of Options pursuant to the Plan.
Non-Employee Directors shall be ineligible to receive
discretionary grants of Options (or other Awards), but shall
receive formula grants pursuant to Paragraph 9 hereof.
(b) Automatic Grants to Employees. On the Effective
Date, each of the following individuals shall receive an ISO to
purchase the number of Shares listed below, at an Exercise Price
per Share equal to the Market Value of a Share on the Effective
Date; provided that such grant shall not be made to an
individual whose Continuous Service terminates on or before the
Effective Date:
Percentage of Shares
Optionee Reserved under Paragraph 4(a)
-------- -----------------------------
Robert A. Williams 25.00
Norbert J. Luken 13.33
Lawrence W. Williams 13.33
Glenda L. Neubert 13.33
With respect to each of the above-named Optionees, the
Option granted to the Optionee hereunder (i) shall become vested
and exercisable, on a cumulative basis, with respect to 20% of
the Optioned Shares upon each of the first five annual
anniversary dates of the Effective Date, provided that vesting
shall not occur on a particular date if the Optionee's
Continuous Service has
<PAGE>
<PAGE>
terminated on or before such date, (ii) shall have a term of ten
years from the Effective Date, and (iii) shall be subject to the
general rule set forth in Paragraph 8(c) with respect to the
effect of an Optionee's termination of Continuous Service on the
Optionees's right to exercise his Options.
(c) Special Rules for ISOs. The aggregate Market Value,
as of the date the Option is granted, of the Shares with respect
to which ISOs are exercisable for the first time by an Employee
during any calendar year (under all incentive stock option
plans, as defined in Section 422 of the Code, of the Company or
any present or future Parent or Subsidiary of the Company) shall
not exceed $100,000. Notwithstanding the foregoing the
Committee may grant Options in excess of the foregoing
limitations, in which case such Options granted in excess of
such limitation shall be Options which are Non-ISOs.
7. EXERCISE PRICE FOR OPTIONS.
(a) Limits on Committee Discretion. The Exercise Price
as to any particular Option granted under the Plan shall not be
less than the Market Value of the Optioned Shares on the date of
grant. In the case of an Employee who owns Shares representing
more than 10% of the Company's outstanding Shares of Common
Stock at the time an ISO is granted, the Exercise Price shall
not be less than 110% of the Market Value of the Optioned Shares
at the time the ISO is granted.
(b) Standards for Determining Exercise Price. If the
Common Stock is listed on a national securities exchange
(including the NASDAQ National Market System) on the date in
question, then the Market Value per Share shall be not less than
the average of the highest and lowest selling price on such
exchange on such date, or if there were no sales on such date,
then the Exercise Price shall be not less than the mean between
the bid and asked price on such date. If the Common Stock is
traded otherwise than on a national securities exchange on the
date in question, then the Market Value per Share shall be not
less than the mean between the bid and asked price on such date,
or, if there is no bid and asked price on such date, then on the
next prior business day on which there was a bid and asked
price. If no such bid and asked price is available, then the
Market Value per Share shall be its fair market value as
determined by the Committee, in its sole and absolute
discretion.
8. EXERCISE OF OPTIONS.
(a) Generally. Any Option granted hereunder shall be
exercisable at such times and under such conditions as shall be
permissible under the terms of the Plan and of the Agreement
granted to a Participant. An Option may not be exercised for a
fractional Share.
<PAGE>
<PAGE>
(b) Procedure for Exercise. A Participant may exercise
Options, subject to provisions relative to its termination and
limitations on its exercise, only by (1) written notice of
intent to exercise the Option with respect to a specified number
of Shares, and (2) payment to the Company (contemporaneously
with delivery of such notice) in cash, in Common Stock, or a
combination of cash and Common Stock, of the amount of the
Exercise Price for the number of Shares with respect to which
the Option is then being exercised. Each such notice (and
payment where required) shall be delivered, or mailed by prepaid
registered or certified mail, addressed to the Treasurer of the
Company at the Company's executive offices. Common Stock
utilized in full or partial payment of the Exercise Price for
Options shall be valued at its Market Value at the date of
exercise.
(c) Period of Exercisability. Except to the extent
otherwise provided in the terms of an Agreement, an Option may
be exercised by a Participant only while he is an Employee and
has maintained Continuous Service from the date of the grant of
the Option, or within three months after termination of such
Continuous Service (but not later than the date on which the
Option would otherwise expire), except if the Employee's
Continuous Service terminates by reason of --
(1) "Just Cause" which for purposes hereof shall have the
meaning set forth in any unexpired employment or severance
agreement between the Participant and the Bank and/or the
Company (and, in the absence of any such agreement, shall
mean termination because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any
law, rule or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order), then
the Participant's rights to exercise such Option shall
expire on the date of such termination;
(2) death, then to the extent that the Participant would
have been entitled to exercise the Option immediately
prior to his death, such Option of the deceased
Participant may be exercised within two years from the
date of his death (but not later than the date on which
the Option would otherwise expire) by the personal
representatives of his estate or person or persons to whom
his rights under such Option shall have passed by will or
by laws of descent and distribution;
(3) Permanent and Total Disability (as such term is
defined in Section 22(e)(3) of the Code), then to the
extent that the Participant would have been entitled to
exercise the Option immediately prior to his Permanent and
Total Disability, such Option may be exercised within one
year from the date of such Permanent and Total Disability,
but not later than the date on which the Option would
otherwise expire.
<PAGE>
<PAGE>
Notwithstanding the provisions of any Option which
provides for its exercise in installments as designated by the
Committee, such Option shall become immediately exercisable upon
the Participant's death or Permanent and Total Disability.
Notwithstanding any other provision of this Plan to the
contrary, common stock of the Company that is purchased upon
exercise of an Option or SAR may not be sold within the six-
month period following the grant date of that Option or SAR.
(d) Effect of the Committee's Decisions. The Committee's
determination whether a Participant's Continuous Service has
ceased, and the effective date thereof shall be final and
conclusive on all persons affected thereby.
9. GRANTS OF OPTIONS TO NON-EMPLOYEE DIRECTORS
(a) Automatic Grants. Notwithstanding any other
provisions of this Plan, each Director who is not an Employee
but is a Director on the Effective Date shall receive, on said
date, Non-ISOs to purchase 4% of the Shares reserved under
Paragraph 4(a) of the Plan. Such Non-ISOs shall have an
Exercise Price per Share equal to the Market Value of a Share on
the date of grant.
Each Director who joins the Board after the Effective Date
and is not then an Employee shall receive, on the date of
joining the Board, NON-ISOs to purchase 2% of the Shares
reserved under Paragraph 4(a) of the Plan, at an Exercise Price
per Share equal to its Market Value on the date of grant.
(b) Terms of Exercise. Options received under the
provisions of this Paragraph may be exercised from time to time
by (a) written notice of intent to exercise the Option with
respect to all or a specified number of the Optioned Shares, and
(b) payment to the Company (contemporaneously with the delivery
of such notice), in cash, in Common Stock, or a combination of
cash and Common Stock, of the amount of the Exercise Price for
the number of the Optioned Shares with respect to which the
Option is then being exercised. Each such notice and payment
shall be delivered, or mailed by prepaid registered or certified
mail, addressed to the Treasurer of the Company at the Company's
executive offices. A Director who exercises Options pursuant to
this paragraph may satisfy all applicable federal, state and
local income and employment tax withholding obligations, in
whole or in part, by irrevocably electing to have the Company
withhold shares of Common Stock, or to deliver to the Company
shares of Common Stock that he already owns, having a value
equal to the amount required to be withheld; provided that to
the extent not inconsistent herewith, such election otherwise
complies with those requirements of Paragraphs 8 and 20 hereof.
Options granted under this Paragraph shall have a term of
ten years, and may be exercised at any time and from time to
time prior
<PAGE>
<PAGE>
to their expiration. In the event of such Director's death
during the term of his directorship, Options granted under
this Paragraph may be exercised within two years from the date
of his death by the personal representatives of his estate or
person or persons to whom his rights under such Option shall
have passed by will or by laws of descent and distribution, but
in no event later than the date on which such Options would
otherwise expire. Options granted under this Paragraph shall
expire one year after the date on which a Director terminates
Continuous Service on the Board, but in no event later than the
date on which such Options would otherwise expire. Unless
otherwise inapplicable or inconsistent with the provisions of
this paragraph, the Options to be granted to Directors hereunder
shall be subject to all other provisions of this Plan.
(c) Deferral of Stock Options. A Participant may elect
to transfer to the Company unexercised Non-ISOs that he or she
has received pursuant to the Plan, in consideration of the
Bank's credit of a Phantom Stock Option to the Participant's
account ("Account") under the Bank's Deferred Compensation
Plan. Such an election must (i) be made on the Stock Option
Surrender Form attached hereto, and (ii) be accepted by the
Committee. At any time and from time to time, a Participant who
transfers stock options to the Company and whose Account is
credited with a Phantom Stock Option may direct the Committee to
exercise all or any part of the Phantom Stock Option. The
Company shall collect the exercise price associated with the
Phantom Stock Options through reduction of the Participant's
Account (which shall not be permitted to have a negative
balance), and shall credit the Participant's Account with the
shares purchased upon exercise, as well as any future cash or
stock dividends on such shares. The shares acquired upon
exercise of the Phantom Stock Options may, in the Company's
discretion, be held in the trust established under the Bank's
Deferred Compensation Plan until distributed to the Participant.
The portion of the Participant's Account that consists of shares
of Common Stock will be distributed, in kind, in accordance with
the Participant's distribution election form made with respect
to the Participant's Account.
10. SARS (STOCK APPRECIATION RIGHTS)
(a) Granting of SARs. In its sole discretion, the
Committee may from time to time grant SARs to Employees either
in conjunction with, or independently of, any Options granted
under the Plan. An SAR granted in conjunction with an Option
may be an alternative right wherein the exercise of the Option
terminates the SAR to the extent of the number of shares
purchased upon exercise of the Option and, correspondingly, the
exercise of the SAR terminates the Option to the extent of the
number of Shares with respect to which the SAR is exercised.
Alternatively, an SAR granted in conjunction with an Option may
be an additional right wherein both the SAR and the Option may
be exercised. An SAR may not be granted in conjunction with an
ISO under circumstances in which the exercise
<PAGE>
<PAGE>
of the SAR affects the right to exercise the ISO or vice versa,
unless the SAR, by its terms, meets all of the following
requirements:
(1) The SAR will expire no later than the ISO;
(2) The SAR may be for no more than the difference
between the Exercise Price of the ISO and the Market Value
of the Shares subject to the ISO at the time the SAR is
exercised;
(3) The SAR is transferable only when the ISO is
transferable, and under the same conditions;
(4) The SAR may be exercised only when the ISO may be
exercised; and
(5) The SAR may be exercised only when the Market Value
of the Shares subject to the ISO exceeds the Exercise
Price of the ISO.
(b) Exercise Price. The Exercise Price as to any
particular SAR shall not be less than the Market Value of the
Optioned Shares on the date of grant.
(c) Timing of Exercise. Any election by a Participant
to exercise SARs shall be made during the period beginning on
the 3rd business day following the release for publication of
quarterly or annual financial information and ending on the 12th
business day following such date. This condition shall be
deemed to be satisfied when the specified financial data is
first made publicly available. In no event, however, may an SAR
be exercised within the six-month period following the date of
its grant.
The provisions of Paragraph 8(c) regarding the period of
exercisability of Options is incorporated by reference herein,
and shall determine the period of exercisability of SARs.
(d) Exercise of SARs. An SAR granted hereunder shall be
exercisable at such times and under such conditions as shall be
permissible under the terms of the Plan and of the Agreement
granted to a Participant, provided that an SAR may not be
exercised for a fractional Share. Upon exercise of an SAR, the
Participant shall be entitled to receive, without payment to the
Company except for applicable withholding taxes, an amount equal
to the excess of (or, in the discretion of the Committee if
provided in the Agreement, a portion of) the excess of the then
aggregate Market Value of the number of Optioned Shares with
respect to which the Participant exercises the SAR, over the
aggregate Exercise Price of such number of Optioned Shares.
This amount shall be payable by the Company, in the discretion
of the Committee, in cash or in Shares valued at the then Market
Value thereof, or any combination thereof.
<PAGE>
<PAGE>
(e) Procedure for Exercising SARs. To the extent not
inconsistent herewith, the provisions of Paragraph 8(b) as to
the procedure for exercising Options are incorporated by
reference, and shall determine the procedure for exercising
SARs.
11. CHANGE IN CONTROL
(a) General Rule. Notwithstanding the provisions of any
Award which provides for its exercise or vesting in
installments, for a period of 60 days beginning on the date of a
Change in Control, all Options and SARs shall be immediately
exercisable and fully vested. With respect to Options, at the
time of a Change in Control, the Participant shall, at the
discretion of the Committee, be entitled to receive cash in an
amount equal to the excess of the Market Value of the Common
Stock subject to such Option over the Exercise Price of such
Shares, in exchange for the cancellation of such Options by the
Participant.
(b) Exception to General Rule. Notwithstanding
subparagraph (a) of this Paragraph, in no event may an SAR be
exercised, or an Option be canceled in exchange for cash, within
the six-month period following the date of its grant.
12. EFFECT OF CHANGES IN COMMON STOCK SUBJECT TO THE
PLAN.
(a) Recapitalizations; Stock Splits, Etc. The number
and kind of shares reserved for issuance under the Plan, and the
number and kind of shares subject to outstanding Awards (and the
Exercise Price thereof in the case of Options and SARs), shall
be proportionately adjusted for any increase, decrease, change
or exchange of Shares for a different number or kind of shares
or other securities of the Company which results from a merger,
consolidation, recapitalization, reorganization, reclassifi-
cation, stock dividend, split-up, combination of shares, or
similar event in which the number or kind of shares is changed
without the receipt or payment of consideration by the Company.
(b) Transactions in which the Company is Not the
Surviving Entity. Subject to Paragraph 11 hereof, in the event
of (i) the liquidation or dissolution of the Company, (ii) a
merger or consolidation in which the Company is not the
surviving entity, or (iii) the sale or disposition of all or
substantially all of the Company's assets (any of the foregoing
to be referred to herein as a "Transaction"), all outstanding
Awards shall be surrendered. With respect to each Award so
surrendered, the Committee shall in its sole and absolute
discretion determine whether the holder of the surrendered Award
shall receive --
(1) for each Share then subject to an outstanding Award
the number and kind of shares into which each outstanding
Share (other than Shares held by dissenting stockholders)
is changed or exchanged, together with an appropriate
adjustment to the Exercise Price in the case of Options
and SARs; or <PAGE>
<PAGE>
(2) a cash payment (from the Company or the successor
corporation), in an amount equal to the Market Value of
the Shares subject to the Award on the date of the
Transaction, less the Exercise Price of the Award in the
case of Options and SARs.
(c) Special Rule for ISOs. Any adjustment made pursuant
to subparagraphs (a) or (b)(1) hereof shall be made in such a
manner as not to constitute a modification, within the meaning
of Section 424(h) of the Code, of outstanding ISOs.
(d) Conditions and Restrictions on New, Additional, or
Different Shares or Securities. If, by reason of any adjustment
made pursuant to this Paragraph, a Participant becomes entitled
to new, additional, or different shares of stock or securities,
such new, additional, or different shares of stock or securities
shall thereupon be subject to all of the conditions and
restrictions which were applicable to the Shares pursuant to the
Award before the adjustment was made.
(e) Other Issuances. Except as expressly provided in
this Paragraph, the issuance by the Company or an Affiliate of
shares of stock of any class, or of securities convertible into
Shares or stock of another class, for cash or property or for
labor or services either upon direct sale or upon the exercise
of rights or warrants to subscribe therefor, shall not affect,
and no adjustment shall be made with respect to, the number,
class, or Exercise Price of Shares then subject to Awards or
reserved for issuance under the Plan.
13. NON-TRANSFERABILITY OF AWARDS.
Awards may not be sold, pledged, assigned, hypothecated,
transferred or disposed of in any manner other than by will or
by the laws of descent and distribution. Notwithstanding the
foregoing, or any other provision of this Plan, a Participant
who holds Awards may transfer such Awards (but not ISOs) to his
or her spouse, lineal ascendants, lineal descendants, or to a
duly established trust for the benefit of one or more of these
individuals. Awards so transferred may thereafter be
transferred only to the Participant who originally received the
grant or to an individual or trust to whom the Participant could
have initially transferred the Awards pursuant to this Paragraph
Awards which are transferred pursuant to this Paragraph shall be
exercisable by the transferee according to the same terms and
conditions as applied to the Participant.
14. TIME OF GRANTING AWARDS.
The date of grant of an Award shall, for all purposes, be
the later of the date on which the Committee makes the deter-
mination of granting such Award, and the Effective Date. Notice
of the determination shall be given to each Participant to whom
an Award
<PAGE>
<PAGE>
is so granted within a reasonable time after the date
of such grant.
15. EFFECTIVE DATE.
The Plan shall become effective immediately upon its
approval by all regulatory agencies required by applicable law
and a favorable vote of stockholders owning at least a majority
of the Shares present or represented, and entitled to vote, at a
meeting duly held in accordance with applicable laws, provided
that the Plan shall not be submitted for such approval before
the first annual meeting of the Company's stockholders. No
Awards may be made prior to approval of the Plan by the
stockholders of the Company.
16. MODIFICATION OF AWARDS.
At any time, and from time to time, the Board may autho-
rize the Committee to direct execution of an instrument
providing for the modification of any outstanding Award,
provided no such modification shall confer on the holder of said
Award any right or benefit which could not be conferred on him
by the grant of a new Award at such time, or impair the Award
without the consent of the holder of the Award.
17. AMENDMENT AND TERMINATION OF THE PLAN.
The Board may from time to time amend the terms of the
Plan and, with respect to any Shares at the time not subject to
Awards, suspend or terminate the Plan.
No amendment, suspension or termination of the Plan shall,
without the consent of any affected holders of an Award, alter
or impair any rights or obligations under any Award theretofore
granted.
18. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Compliance with Securities Laws. Shares of Common
Stock shall not be issued with respect to any Award unless the
issuance and delivery of such Shares shall comply with all
relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, any applicable state securities law, and
the requirements of any stock exchange upon which the Shares may
then be listed. The Plan is intended to comply with Rule 16b-3,
and any provision of the Plan which the Committee determines in
its sole and absolute discretion to be inconsistent with said
Rule shall, to the extent of such inconsistency, be inoperative
and null and void, and shall not affect the validity of the
remaining provisions of the Plan.
<PAGE>
<PAGE>
(b) Special Circumstances. The inability of the Company
to obtain approval from any regulatory body or authority deemed
by the Company's counsel to be necessary to the lawful issuance
and sale of any Shares hereunder shall relieve the Company of
any liability in respect of the non-issuance or sale of such
Shares. As a condition to the exercise of an Option or SAR, the
Company may require the person exercising the Option or SAR to
make such representations and warranties as may be necessary to
assure the availability of an exemption from the registration
requirements of federal or state securities law.
(c) Committee Discretion. The Committee shall have the
discretionary authority to impose in Agreements such
restrictions on Shares as it may deem appropriate or desirable,
including but not limited to the authority to impose a right of
first refusal, or to establish repurchase rights, or both of
these restrictions.
19. RESERVATION OF SHARES.
The Company, during the term of the Plan, will reserve and
keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
20. WITHHOLDING TAX.
The Company's obligation to deliver Shares upon exercise
of Options and/or SARs shall be subject to the Participant's
satisfaction of all applicable federal, state and local income
and employment tax withholding obligations. The Committee, in
its discretion, may permit the Participant to satisfy the
obligation, in whole or in part, by irrevocably electing to have
the Company withhold Shares, or to deliver to the Company Shares
that he already owns, having a value equal to the amount
required to be withheld. The value of Shares to be withheld, or
delivered to the Company, shall be based on the Market Value of
the Shares on the date the amount of tax to be withheld is to be
determined. As an alternative, the Company may retain, or sell
without notice, a number of such Shares sufficient to cover the
amount required to be withheld.
21. NO EMPLOYMENT OR OTHER RIGHTS.
In no event shall an Employee's or Director's eligibility
to participate or participation in the Plan create or be deemed
to create any legal or equitable right of the Employee,
Director, or any other party to continue service with the
Company, the Association, or any Affiliate of such corporations.
Except to the extent provided in Paragraphs 6(b) and 9(a), no
Employee or Director shall have a right to be granted an Award
or, having received an Award, the right to again be granted an
Award. However, an Employee or Director who has been granted an
Award may, if otherwise eligible, be granted an additional Award
or Awards.
<PAGE>
<PAGE>
22. GOVERNING LAW.
The Plan shall be governed by and construed in accordance
with the laws of the State of Maryland, except to the extent
that federal law shall be deemed to apply.
<PAGE>
<PAGE>
TRUST AGREEMENT
UNDER THE HARBOR FEDERAL BANCORP, INC.
STOCK OPTION AND INCENTIVE PLAN
This Agreement made this 28th day of August, 1995, by
and between Harbor Federal Bancorp, Inc. (the "Company") and
Joseph J. Lacy, John N. Riehl, III, and Gideon N. Stieff, Jr.
(acting by majority, the "Trustee").
WHEREAS, the Company maintains the Harbor Federal Bancorp,
Inc. Stock Option and Incentive Plan (the "Plan"); and
WHEREAS, the Company has incurred or expects to incur
liability under the terms of the Plan with respect to the
individuals participating in the Plan ("Participants"); and
WHEREAS, the Company wishes to establish a trust (the
"Trust") and to contribute to the Trust assets that shall be
held therein, subject to the claims of the Company's general
creditors in the event of Insolvency, as defined in Section 3(a)
hereof, until paid to Participants and their beneficiaries in
such manner and at such times as specified in the Plan;
WHEREAS, it is the intention of the parties that this
Trust shall constitute an unfunded arrangement and shall not
affect the status of the Plan as an unfunded plan maintained for
the purpose of providing compensation for a select group of
management or other employees for purposes of Title I of the
Employee Retirement Income Security Act of 1974;
WHEREAS, it is the intention of the Company to make
contributions to the Trust to provide itself with a source of
funds to assist it in the meeting of its liabilities under the
Plan;
NOW, THEREFORE, the parties do hereby establish this Trust
and agree that the Trust shall be comprised, held and disposed
of as follows:
Section 1. Establishment of Trust
----------------------------------
(a) The Company hereby deposits, or will from time to
time deposit, with the Trustee in trust an amount expected to be
sufficient to permit the Trust to purchase up to 218,009 shares
of common stock ("Common Stock") of Harbor Federal Bancorp, Inc.
Said amount shall become the initial principal of the Trust to
be held, administered and disposed of by the Trustee as provided
in this Trust Agreement.
(b) The Trust shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of
which the Company is the grantor, within the meaning of subpart
E, part I, subchapter J, chapter 1,
<PAGE>
<PAGE>
subtitle A of the Internal Revenue Code of 1986, as amended (the
"Code"), and shall be construed accordingly.
(d) The principal of the Trust, and any earnings
thereon, shall be held separate and apart from other funds of
the Company and shall be used exclusively for the uses and
purposes of Participants and general creditors as herein set
forth. Participants and their beneficiaries shall have no
preferred claim on, or any beneficial ownership interest in, any
assets of the Trust. Any rights created under the Plan and this
Trust Agreement shall be mere unsecured contractual rights of
Participants and their beneficiaries against the Company. Any
assets held by the Trust will be subject to the claims of the
Company's general creditors under federal and state law in the
event of Insolvency, as defined in Section 3(a) herein.
(e) The Company, in its sole discretion, may at any
time, or from time to time, make additional deposits of cash or
other property in trust with the Trustee to augment the
principal to be held, administered and disposed of by Trustee as
provided in this Trust Agreement. Neither the Trustee nor any
Participant or beneficiary shall have any right to compel such
additional deposits.
Section 2. Payments to Plan Participants and Their
---------------------------------------------------
Beneficiaries.
- -------------
(a) The Company shall deliver to the Trustee a schedule
(the "Payment Schedule") that indicates the amounts payable in
respect of each Participant (and his or her beneficiaries), that
provides a formula or other instructions acceptable to the
Trustee for determining the amounts so payable, the form in
which such amount is to be paid (as provided for or available
under the Plan, and including transfers of Common Stock from the
Trust to Participants), and the time of commencement for payment
of such amounts. Except as otherwise provided herein, the
Trustee shall make payments to Participants and their
beneficiaries in accordance with such Payment Schedule. The
Trustee shall make provision for the reporting and withholding
of any federal, state or local taxes that may be required to be
withheld with respect to the payment of benefits pursuant to the
terms of the Plan and shall pay amounts withheld to the
appropriate taxing authorities or determine that such amounts
have been reported, withheld and paid by the Company.
(b) The entitlement of a Participant or his or her
beneficiaries to benefits under the Plan shall be determined by
the Company or such party as it shall designate under the Plan,
and any claim for such benefits shall be considered and reviewed
under the procedures set out in the Plan.
(c) The Company may make payment of benefits directly to
Participants or their beneficiaries as they become due under the
terms of the Plan. The Company shall notify the Trustee of its
decision to make payment of benefits directly prior to the time
amounts are payable to Participants or their beneficiaries. In
addition, if the principal of the Trust, and any earnings
thereon, are not sufficient to make payments of benefits in
accordance with the terms of the Plan, the Company shall make
the balance of each such payment as it falls due. The Trustee
shall notify the Company where principal and earnings are not
sufficient.
2<PAGE>
<PAGE>
Section 3. Trustee Responsibility Regarding Payments to
--------------------------------------------------------
Trust Beneficiary When Company Is Insolvent.
- -------------------------------------------
(a) The Trustee shall cease payment of benefits to
Participants and their beneficiaries if the Company is
Insolvent. The Company shall be considered "Insolvent" for
purposes of this Trust Agreement if (i) the Company is unable to
pay its debts as they become due, or (ii) the Company becomes
subject to a pending proceeding as a debtor under the United
States Bankruptcy Code.
(b) At all times during the continuance of this Trust,
as provided in Section 1(d) hereof, the principal and income of
the Trust shall be subject to claims of general creditors of the
Company under federal and state law as set forth below.
(c) The Board of Directors and the Chief Executive
Officer of the Company shall have the duty to inform the Trustee
in writing of the Company's Insolvency. If a person claiming to
be a creditor of the Company alleges in writing to the Trustee
that the Company has become Insolvent, the Trustee shall
determine whether the Company is Insolvent and, pending such
determination, the Trustee shall discontinue payment of benefits
to Participants or their beneficiaries.
(1) Unless the Trustee has actual knowledge of the
Company's Insolvency, or has received notice from the Company or
a person claiming to be a creditor alleging that the Company is
Insolvent, the Trustee shall have no duty to inquire whether the
Company is Insolvent. The Trustee may in all events rely on
such evidence concerning the Company's solvency as may be
furnished to the Trustee and that provides the Trustee with a
reasonable basis for making a determination concerning the
Company's solvency.
(2) If at any time the Trustee has determined that
the Company is Insolvent, the Trustee shall discontinue payments
to Plan participants or their beneficiaries, shall liquidate the
Trust's investment in Common Stock, and shall hold the assets of
the Trust for the benefit of the Company's general creditors.
Nothing in this Trust Agreement shall in any way diminish any
rights of Participants or their beneficiaries as general
creditors of the Company with respect to benefits due under the
Plan or otherwise.
(3) The Trustee shall resume the payment of
benefits to Participants or their beneficiaries in accordance
with Section 2 of this Trust Agreement only after the Trustee
has determined that the Company is not Insolvent (or is no
longer Insolvent).
(d) Provided that there are sufficient assets, if the
Trustee discontinues the payment of benefits from the Trust
pursuant to Section 3(b) hereof and subsequently resumes such
payments, the first payment following such discontinuance shall
include the aggregate amount of all payments due to Participants
or their beneficiaries under the terms of the Plan for the
period of such discontinuance, less the aggregate amount of any
payments made to Participants or their beneficiaries by the
Company in lieu of the payments provided for hereunder during
any such period of discontinuance.
3<PAGE>
<PAGE>
Section 4. Payments to the Company.
-----------------------------------
Except as provided in Section 3 hereof, the Company shall
have no right or power to direct the Trustee to return to the
Company or to divert to others any of the Trust assets before
all payment of benefits have been made to Plan Participants and
their beneficiaries pursuant to the terms of the Plan.
Section 5. Investment Authority.
--------------------------------
(a) The Trustee shall have sole discretion as to the
investment of Trust assets, except that to the extent reasonably
practicable, the Trustee shall invest all assets of the Trust in
Common Stock; provided that the Trust shall not purchase, in the
aggregate, more than 218,009 shares of Common Stock.
(b) All rights associated with assets of the Trust shall
be exercised by the Trustee or the person designated by the
Trustee, and shall in no event be exercisable by or rest with
Participants, except that voting rights with respect to Common
Stock will be exercised in accordance with the terms and
conditions for the exercise of voting rights of unallocated
shares under the Company's Employee stock Ownership Plan, as in
effect on the date hereof.
(c) Subject to applicable federal and state securities
laws, if for any reason the Trustee will be selling shares of
Common Stock, the Trustee shall sell such shares by (i) giving
each Participant 20 business days within which to purchase, at
fair market value, all or part of any shares of Common Stock
that the Trustee holds for the benefit of the Participant, and
(ii) to the extent purchases by Participants are insufficient to
eliminate the Trust's excess holdings of Common Stock, to offer
to sell, and to sell, all or any part of the excess shares held
by the Trust to the following purchasers, listed here by order
of priority: first, the Company; second, any benefit plan
maintained by the Company or the Bank; third, directors of the
Bank; forth, officers of the Bank; fifth, members of the general
public (through sales on the open market).
Section 6. - Disposition of Income.
----------------------------------
During the term of this Trust, all income received by the
Trust, net of expenses and taxes, shall be accumulated and
reinvested.
Section 7. Accounting by Trustee.
---------------------------------
The Trustee shall keep accurate and detailed records of
all investments, receipts, disbursements, and all other
transactions required to be made, including such specific
records as shall be agreed upon in writing between the Company
and the Trustee. Within 60 days following the close of each
calendar year and within 20 days after the removal or
resignation of the Trustee, the Trustee shall deliver to the
Company a written account of its administration of the Trust
during such year or during the period from the close of the last
preceding year to the date of such removal or resignation,
setting forth all investments, receipts, disbursements and other
transactions effected by it, including a description of all
securities and investments purchased and sold with the cost or
net proceeds of such purchased and sold with the cost or net
proceeds of such purchases or sales (accrued interest paid or
receivable being shown
4<PAGE>
<PAGE>
separately), and showing all cash, securities and other property
held in the Trust at the end of such year or as of the date of
such removal or resignation, as the case may be.
Section 8. Responsibility of Trustee.
-------------------------------------
(a) The Trustee shall act with the care, skill, prudence
and diligence under the circumstances then prevailing that a
prudent person acting in like capacity and familiar with such
matters would use in the conduct of an enterprise of a like
character and with like aims, provided, however, that Trustee
shall incur no liability to any person for any action taken
pursuant to a direction, request or approval given by the
Company which is contemplated by, and in conformity, the terms
of the Plan or this Trust and is given in writing by the
Company. In the event of a dispute between the Company and a
party, the Trustee may apply to a court of competent
jurisdiction to resolve the dispute.
(b) If the Trustee undertakes or defends any litigation
arising in connection with this Trust, the Company agrees to
indemnify the Trustee against Trustee's costs, expenses and
liabilities (including, without limitation, attorneys' fees and
expenses) relating thereto and to be primarily liable for such
payments, except in those cases where the Trustee shall have
been found by a court of competent jurisdiction to have acted
with gross negligence or willful misconduct. If the Company
does not pay such costs, expenses and liabilities in a
reasonably timely manner, the Trustee may obtain payment from
the Trust.
(c) The Trustee may consult with legal counsel with
respect to any of its duties or obligations hereunder.
(d) The Trustee may hire agents, accountants, actuaries,
investment advisors, financial consultants or other
professionals to assist it in performing any of its duties or
obligations hereunder.
(e) The Trustee shall have, without exclusion, all
powers conferred on trustees by applicable law, unless expressly
provided otherwise herein, provided, however, that if an
insurance policy is held as an asset of the Trust, the Trustee
shall have no power to name a beneficiary of the policy other
than the Trust, to assign the policy (as distinct from
conversion of the policy to a different form) other than to a
successor the Trustee, or to loan to any person the proceeds of
any borrowing against such policy.
(f) Notwithstanding any powers granted to the Trustee
pursuant to this Trust Agreement or to applicable law, the
Trustee shall not have any power that could give this Trust the
objective of carrying on a business and dividing the gains
therefrom, within the meaning of section 301.7701-2 of the
Procedure and Administrative Regulations promulgated pursuant to
the Code.
<PAGE>
Section 9. Compensation and Expenses of Trustee.
------------------------------------------------
The Company shall pay all administrative expenses and the
Trustee's fees and expenses relating to the Plan and this Trust.
If not so paid, the fees and expenses shall be paid from the
Trust.
5<PAGE>
<PAGE>
Section 10. Resignation and Removal of Trustee.
-----------------------------------------------
The Trustee may resign at any time by written notice to
the Company, which resignation shall be effective 30 days after
the Company receives such notice (unless the Company and the
Trustee agree otherwise). The Trustee may be removed by the
Company on 30 days notice or upon shorter notice accepted by the
Trustee.
If the Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the
effective date or resignation or removal under this section. If
no such appointment has been made, the Trustee may apply to a
court of competent jurisdiction for appointment of a successor
or for instructions. All expenses of the Trustee in connection
with the proceeding shall be allowed as administrative expenses
of the Trust. Upon resignation or removal of the Trustee and
appointment of a successor trustee, all assets shall
subsequently be transferred to the successor trustee. The
transfer shall be completed within 60 days after receipt of
notice of resignation, removal or transfer, unless the Company
extends the time limit.
Section 11. Appointment of Successor.
-------------------------------------
If the Trustee resigns or is removed in accordance with
Section 10 hereof, the Company may appoint any other party as a
successor to replace the Trustee upon resignation or removal.
The appointment shall be effective when accepted in writing by
the new trustee, who shall have all of the rights and powers of
the former trustee, including ownership rights in the Trust
assets. The former trustee shall execute any instrument
necessary or reasonably requested by the Company or the
successor trustee to evidence the transfer.
A successor trustee need not examine the records and acts
of any prior trustee and may retain or dispose of existing Trust
assets, subject to Sections 7 and 8 hereof. The successor
trustee shall not be responsible for, and the Company shall
indemnify and defend the successor trustee from, any claim or
liability resulting from any action or inaction of any prior
trustee or from any other past event, or any condition existing
at the time it becomes successor trustee.
Section 12. Amendment or Termination.
-------------------------------------
(a) This Trust Agreement may be amended by a written
instrument executed by the Trustee and the Company, provided
that no such amendment shall make the Trust revocable.
(b) The Trust shall not terminate until the date on
which no Participant or his or her beneficiaries is entitled to
benefits pursuant to the terms hereof. Upon termination of the
Trust, the Trustee shall return any assets remaining in the
Trust to the Company.
(c) Upon written approval of all Participants (or their
beneficiaries if they are then entitled to payment of benefits),
the Company may terminate this Trust prior to the time all
benefit payments under the Plan have been made. All assets in
the Trust at termination shall be returned to the Company.
<PAGE>
<PAGE>
Section 13. Miscellaneous.
--------------------------
(a) Any provision of this Trust Agreement prohibited by
law shall be ineffective to the extent of any such prohibition,
without invalidating the remaining provisions hereof.
(b) Benefits payable to Participants and their
beneficiaries under this Trust Agreement may not be anticipated,
assigned (either at law or in equity), alienated, pledged,
encumbered or subjected to attachment, garnishment, levy,
execution or other legal or equitable process, except pursuant
to the terms of the Plan.
(c) This Trust Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland,
to the extent not preempted by federal law.
(d) The Trustee agrees to be bound by the terms of the
Plan, as in effect from time to time.
(e) The Trustee shall act by vote or written consent of a
majority of its then duly-appointed members.
Section 14. Effective Date.
---------------------------
The effective date of this Trust shall be the date of
execution designated below.
IN WITNESS WHEREOF, the Company, by its duly authorized
officer, has caused this Agreement to be executed, and its
corporate seal affixed, and the undersigned Trustees have
executed this Agreement, this 28th day of January, 1995.
ATTEST: HARBOR FEDERAL BANCORP, INC.
/s/ Dawn Smith By /s/ Robert A. Williams
- ------------------------- ----------------------------
Its President
ATTEST:
/s/ Dawn Smith /s/ Joseph L. Lacy, Trustee
- ------------------------- ------------------------------
Joseph J. Lacy, Trustee
/s/ Dawn Smith /s/ John N. Riehl, Trustee
- ------------------------- ------------------------------
John N. Riehl, III, Trustee
/s/ Dawn Smith /s/ Gideon N. Stieff, Jr.
- ------------------------- ------------------------------
Gideon N. Stieff, Jr., Trustee
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.
1995 STOCK OPTION AND INCENTIVE PLAN
____________________________________
1998 Amendment to Trust Agreement
____________________________________
WHEREAS, Harbor Federal Bancorp, Inc. (the "Company")
maintains the Harbor Federal Bancorp, Inc. 1995 Stock Option and
Incentive Plan (the "Option Plan"); and
WHEREAS, the Company has previously entered into a trust
agreement under the Option Plan ("Trust Agreement") with Messrs.
Joseph J. Lacy, John N. Riehl III, and Gideon N. Stieff, Jr.
(acting by majority, the "Trustee"); and
WHEREAS, the Company's Board of Directors and the Trustee
have determined that it is in their respective best interests to
amend the Trust Agreement in the manner set forth herein.
NOW, THEREFORE, effective March 30, 1998, the Trust
Agreement shall be amended as follows, pursuant to Section 12
thereof:
1. Section 2 of the Trust Agreement shall be amended
by adding subsection (d) immediately at the end thereof to
provide as follows:
(d) Upon a Change in Control within the meaning of
the Plan, the Company shall, as soon as possible but in no
event longer than ten business days after the Change in
Control, make an irrevocable contribution to this Trust in
an amount that is projected to provide the Trust with
sufficient funds to pay each Beneficiary the benefits to
which he or she is entitled pursuant to the Plan as in
effect on the date of the Change in Control.
2. Section 10 of the Trust Agreement shall be amended
by adding the following paragraph immediately at the end
thereof:
Notwithstanding the foregoing, if the Trustee
resigns or is removed following a Change in Control, the
Trustee that has resigned or is being removed shall
appoint as its successor a third party financial
institution that has trust powers, is independent of and
unrelated to the entity that has acquired or otherwise
obtained control of the Company, and is agreed to in
writing by 80% of the Trust Beneficiaries.
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<PAGE>
1998 Amendment to
1995 Stock Option and Incentive Plan
Trust Agreement
Page 2
3. Nothing contained herein shall be held to alter,
vary, or affect any of the terms, provisions, or conditions of
the Trust Agreement other than stated above.
WHEREFORE, the undersigned hereby execute this 1998
Amendment to the Trust Agreement on March 30, 1998.
HARBOR FEDERAL BANCORP, INC.
Witnessed by:
/s/ Dana Miller By /s/ Robert A. Williams
- ----------------------- ---------------------------
Its Chairman of the Board
TRUSTEES
Witnessed by:
/s/ Barbara Therres /s/ Joseph J. Lacy
- --------------------- ---------------------------
Joseph J. Lacy
/s/ Barbara Therres /s/ John N. Riehl, III
- --------------------- ---------------------------
John N. Riehl III
/s/ Barbara Therres /s/ Gideon N. Stieff, Jr.
- --------------------- --------------------------
Gideon N. Stieff, Jr.
<PAGE>
HARBOR FEDERAL BANCORP, INC.
MANAGEMENT RECOGNITION PLAN, AS AMENDED
ARTICLE I
ESTABLISHMENT OF THE PLAN
1.01 The Company hereby establishes this Plan upon the
terms and conditions hereinafter stated.
1.02 Through acceptance of their appointment to the
Committee, each member of the Committee hereby accepts his or
her appointment hereunder upon the terms and conditions
hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to reward and retain
personnel of experience and ability in key positions of
responsibility by providing Employees and Directors of the
Company, the Bank and their Subsidiaries with a proprietary
interest in the Company, and as compensation for their past
contributions to the Bank, and as an incentive to make such
contributions in the future.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Plan with
an initial capital letter, shall have the meanings set forth
below unless the context clearly indicates otherwise. Wherever
appropriate, the masculine pronoun shall include the feminine
pronoun and the singular shall include the plural.
3.01 "Bank" means Harbor Federal Savings Bank.
3.02 "Beneficiary" means the person or persons designated
by a Participant to receive any benefits payable under the Plan
in the event of such Participant's death. Such person or
persons shall be designated in writing on forms provided for
this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence
of a written designation, the Beneficiary shall be the
Participant's surviving spouse, if any or if none, his estate.
3.03 "Board" means the Board of Directors of the Company.
3.04 "Committee" means the Management Recognition Plan
Committee appointed by the Board pursuant to Article IV hereof.
3.05 "Common Stock" means shares of the common stock, $.01
par value per share, of the Company.
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3.06 "Company" means Harbor Federal Bancorp, Inc.
3.07 "Date of Conversion" means the date of the conversion
of the Bank from mutual to stock form.
3.08 "Director" means a member of the Board.
3.09 "Effective Date" means the date on which the Plan
first becomes effective, as determined under Section 8.07
hereof.
3.10 "Employee" means any person who is employed by the
Company, the Bank, or a Subsidiary of the Company or of the
Bank.
3.11 "Non-Employee Director" shall have the meaning
provided in Rule 16b-3 under the Securities Exchange Act of
1934, as amended.
3.12 "Participant" means an Employee or Director who
receives a Plan Share Award under the Plan.
3.13 "Plan" means the Harbor Federal Savings Bank
Management Recognition Plan.
3.14 "Plan Shares" means shares of Common Stock held in
the Trust which are awarded or issuable to a Participant
pursuant to the Plan.
3.15 "Plan Share Award" means a right granted under this
Plan to receive Plan Shares.
3.16 "Plan Share Reserve" means the shares of Common
Stock held by the Trustee pursuant to Section 5.03.
3.17 "Subsidiary" or "Subsidiaries" means any "subsidiary
corporation" of the Company or of the Bank, as the term
"subsidiary" is defined in Section 424(f) of the Internal
Revenue Code of 1986, as amended.
3.18 "Trust" and "Trust Agreement" mean that agreement
entered into pursuant to the terms hereof between the Company
and the Trustee, and "Trust" means the trust created thereunder.
3.19 "Trustee" means that person(s) or entity appointed
by the Board pursuant to the Trust Agreement to hold legal title
to the Plan assets for the purposes set forth herein.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 ROLE AND POWERS OF THE COMMITTEE. The Plan shall be
administered and interpreted by the Committee, which shall
consist of not less than two members of the Board who are
Non-Employee Directors. In the absence at any time of a duly
appointed Committee, the Plan shall be administered by those
members
2<PAGE>
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of the Board who are Non-Employee Directors, and by the Board if
there are less than two Non-Employee Directors.
The Committee shall have all of the powers allocated to it
in this and other Sections of the Plan. Except as limited by
the express provisions of the Plan or by resolutions adopted by
the Board, the Committee shall have sole and complete authority
and discretion (1) to make Plan Share Awards to such Employees
as the Committee may select, (2) to determine the form and
content of Plan Share Awards to be issued under the Plan, (3) to
interpret the Plan, (4) to prescribe, amend and rescind rules
and regulations relating to the Plan, and (5) to make other
determinations necessary or advisable for the administration of
the Plan. The Committee shall have and may exercise such other
power and authority as may be delegated to it by the Board
from time to time. Subject to Section 4.02, the interpretation
and construction by the Committee of any provisions of the Plan
or of any Plan Share Award granted hereunder shall be final and
binding. The Committee shall act by vote or written consent of
a majority of its members, and shall report its actions and
decisions with respect to the Plan to the Board at appropriate
times, but in no event less than one time per calendar year.
The Committee may recommend to the Board one or more persons or
entity to act as Trustee(s) in accordance with the provisions of
this Plan and the Trust.
4.02 ROLE OF THE BOARD. The members of the Committee
shall be appointed or approved by, and will serve at the
pleasure of, the Board. The Board may in its discretion from
time to time remove members from, or add members to, the
Committee. The Board shall have all of the powers allocated to
it in this and other Sections of the Plan, may take any action
under or with respect to the Plan which the Committee is
authorized to take, and may reverse or override any action taken
or decision made by the Committee under or with respect to the
Plan, provided, however, that the Board may not revoke any
Plan Share Award already made or impair a participant's
vested rights under a Plan Share Award, except as provided in
Section 7.01(b) herein. Members of the Board who are eligible
for or who have been granted Plan Share Awards (other than
pursuant to Section 6.04) may not vote on any matters affecting
the administration of the Plan or the grant of Plan Shares or
Plan Share Awards (although such members may be counted in
determining the existence of a quorum at any meeting of
the Board during which actions with regard thereto are
taken).
4.03 LIMITATION ON LIABILITY. No member of the Board or
the Committee or the Trustee(s) shall be liable for any
determination made in good faith with respect to the Plan or any
Plan Shares or Plan Share Awards granted under it. If a member
of the Board or the Committee or any Trustee is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of anything done or
not done by him in such capacity under or with respect to the
Plan, the Company shall indemnify such member against expenses
(including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding if he or she
acted in good faith and in a manner he or she reasonably
believed to be in the best interests of the Company and its
Subsidiaries and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful.
3<PAGE>
<PAGE>
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. The Board shall
determine the amounts (or the method of computing the amounts)
to be contributed by the Company to the Trust. Such amounts
shall be paid to the Trustee at the time of contribution. No
contributions to the Trust by Employees shall be permitted.
5.02 INVESTMENT OF TRUST ASSETS. The Trustee shall invest
Trust assets only in accordance with the Trust Agreement;
provided that the Trust shall not purchase more than four (4%)
percent of the number of shares of Common Stock issued on the
Date of Conversion.
5.03 EFFECT OF ALLOCATIONS, RETURNS AND FORFEITURES UPON
PLAN SHARE RESERVES. Upon the allocation of Plan Share Awards
under Section 6.02, the Plan Share Reserve shall be reduced by
the number of Shares subject to the Awards so allocated or
returned. Any Shares subject or attributable to an Award which
may not be earned because of a forfeiture by the Participant
pursuant to Section 7.01 shall be added to the Plan Share
Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 ELIGIBILITY. Only Employees shall be eligible to
receive Plan Share Awards. However, non-Employee Directors
shall receive Plan Share Awards pursuant to Section 6.04, and
the Employees designated in Section 6.05 shall receive the Plan
Share Awards specified therein.
6.02 ALLOCATIONS. The Committee will determine which of
the Employees referenced in Section 6.01 above will be granted
Plan Share Awards, and the number of Shares covered by each Plan
Share Award provided that in no event shall any Awards be made
which will violate the Charter, Bylaws or Plan of Conversion of
the Bank or its Subsidiaries or any applicable federal or state
law or regulation. In the event Plan Shares are forfeited for
any reason or additional shares of Common Stock are purchased by
the Trustee, the Committee may, from time to time, determine
which of the Employees referenced in Section 6.01 above will be
granted additional Plan Share Awards to be awarded from the
forfeited or acquired Plan Shares. In selecting those Employees
to whom Plan Share Awards will be granted and the number of
shares covered by such Awards, the Committee shall consider the
position, duties and responsibilities of the eligible Employees,
the value of their services to the Company and its Subsidiaries,
and any other factors the Committee may deem relevant.
6.03 FORM OF ALLOCATION. As promptly as practicable after
a determination is made pursuant to Section 6.02 that a Plan
Share Award is to be made, the Committee shall notify the
Participant in writing of the grant of the Award, the number of
Plan Shares covered by the Award, and the terms upon which the
Plan Shares subject to the Award may be earned. The date on
which the Committee so notifies the Participant shall be
considered the date of grant of the Plan Share
4<PAGE>
<PAGE>
Awards. The Committee shall maintain records as to all grants
of Plan Share Awards under the Plan.
6.04 AUTOMATIC GRANTS TO NON-EMPLOYEE DIRECTORS.
Notwithstanding any other provisions of this Plan, each Director
who is not an Employee but is a Director on the Effective Date
shall receive, on said date, a Plan Share Award for a number of
Shares equal to four percent (4%) of the number of Plan Shares
purchased on the Effective Date. Each Director who joins the
Board after the Effective Date shall receive, on said date, a
Plan Share Award as to two percent (2%) of the number of Plan
Shares purchased on the Effective Date (or such lesser number as
are available hereunder for Plan Share Awards). Plan Share
Awards received under the provisions of this Section shall
become vested and nonforfeitable according to the general rules
set forth in subsections (a), (b), and (c) of Section 7.01, and
the Committee shall have no discretion to alter or accelerate
said vesting requirements. Unless otherwise inapplicable or
inconsistent with the provisions of this Section, the Plan Share
Awards to be granted to hereunder shall be subject to all other
provisions of this Plan; provided that the Committee shall
approve a Director's request made pursuant to Section 7.03 (b).
6.05 AUTOMATIC GRANTS TO EMPLOYEES. On the Effective
Date, each of the following individuals shall receive a Plan
Share Award as to the number of Plan Shares listed below,
provided that such award shall not be made to an individual who
is not an Employee on the Effective Date:
Percentage of Plan Shares
Optionee Purchased on the Effective Date
-------- -------------------------------
Robert A. Williams 25.00%
Norbert J. Luken 13.33%
Lawrence W. Williams 13.33%
Glenda L. Neubert 13.33%
Plan Share Awards received under the provisions of this
Section shall become vested and nonforfeitable according to the
general rules set forth in subsections (a), (b), and (c) of
Section 7.01, and the Committee shall have no discretion to
alter said vesting requirements. Unless otherwise inapplicable
or inconsistent with the provisions of this Section, the
Plan Share Awards to be granted to hereunder shall be subject to
all other provisions of this Plan; provided that the Committee
shall approve a Employee's request made pursuant to Section 7.03
(b).
6.06 ALLOCATIONS NOT REQUIRED. Notwithstanding anything
to the contrary in Sections 6.01 and 6.02, but subject to
Sections 6.04 and 6.05, no Employee or Director shall have any
right or entitlement to receive a Plan Share Award hereunder,
such Awards being at the total discretion of the Committee, nor
shall any Employees or Directors as a group have such a right.
The Committee may, with the approval of the Board (or, if so
directed by the Board) return all Common Stock in the Plan Share
Reserve to the Company at any time, and cease issuing Plan Share
Awards.
5<PAGE>
<PAGE>
ARTICLE VII
EARNINGS AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 EARNING PLAN SHARES; FORFEITURES.
(a) GENERAL RULES. Twenty percent (20%) of the Plan
Shares subject to a Plan Share Award shall be earned and become
non-forfeitable by a Participant upon his completion of each of
five Years of Service. For purposes of this paragraph, with
respect to each Plan Share Award, "Year of Service" means a full
twelve-month period, measured from the date of a Plan Share
Award and each annual anniversary of that date, during which the
Participant has continuously been an Employee or Director of the
Company or a Subsidiary.
(b) EXCEPTION FOR TERMINATIONS DUE TO DEATH OR DISABILITY.
Notwithstanding the general rule contained in Section 7.01(a)
above, all Plan Shares subject to a Plan Share Award held by a
Participant whose service with the Company or a Subsidiary
terminates due to death or disability (as determined by the
Committee), shall be deemed earned as of the Participant's last
day of service with the Company or Subsidiary and shall be
distributed as soon as practicable thereafter.
(c) EXCEPTION FOR A CHANGE IN CONTROL. Notwithstanding
the general rule contained in Section 7.01(a) above, all Plan
Shares subject to a Plan Share Award held by a Participant shall
be deemed to be immediately 100% earned and non-forfeitable in
the event of a "change in control" of the Company or of the Bank
and shall be distributed as soon as practicable thereafter. For
purposes of this paragraph, "change in control" shall mean any
one of the following events: (1) the ownership, holding or power
to vote more than 25% of the Bank's or Company's voting stock,
(2) the control of the election of a majority of the Bank's or
Company's directors, (3) the exercise of a controlling influence
over the management or policies of the Bank or the Company by
any person or by persons acting as a group within the meaning of
Section 13(d) of the Securities Exchange Act of 1934 (except in
the case of (1), (2) and (3) hereof, ownership or control of the
Bank or its directors by the Company itself shall not constitute
a "change in control"), or (4) during any period of two
consecutive years, individuals who at the beginning of such
period constitute the Board of Directors of the Company or the
Bank (the "Continuing Directors") cease for any reason to
constitute at least two-thirds thereof, provided that any
individual whose election or nomination for election as a member
of such Boards was approved by a vote of at least two-thirds of
the Continuing Directors then in office shall be considered
a Continuing Director. For purposes of this subparagraph only,
the term "person" refers to an individual or a corporation,
partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein. The decision of
the Committee as to whether a change in control has occurred
shall be conclusive and binding.
7.02 ACCRUAL OF DIVIDENDS. Whenever Plan Shares are paid
to a Participant or Beneficiary under Section 7.03, such
Participant or Beneficiary shall also be entitled to receive,
with respect to each Plan Share paid an amount equal to any cash
dividends and a number of shares of Common Stock equal to any
stock dividends, declared and paid with respect to a share of
Common Stock between the date the relevant Plan Share Award was
initially granted to such Participant and the date the Plan
Shares are being distributed. There shall also be distributed
6<PAGE>
<PAGE>
an appropriate amount of net earnings, if any, of the Trust with
respect to any cash dividends so paid out.
7.03 DISTRIBUTION OF PLAN SHARES.
(a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Except as
provided in Subsections (b), (d) and (e) below, the Trustee
shall distribute Plan Shares and accumulated cash from dividends
and interest to the Participant or his Beneficiary, as the case
may be, as soon as practicable after they have been earned. No
fractional shares shall be distributed.
(b) FORM OF DISTRIBUTION. At any time on or after the
date on which a Participant receives a Plan Share Award, the
Participant may file a written request with the Committee to
have such Plan Share Award paid as soon as practicable in the
form of a transfer to the Participant of Common Stock subject to
the forfeiture provisions applicable under the Participant's
Plan Share Award. In such event, the Committee may, in its sole
and absolute discretion, transfer to the Participant Common
Stock certificates in the name of the Participant, whereupon the
Participant shall become a stockholder of the Company with
respect to such Common Stock and shall have all the rights of a
stockholder, including but not limited to the right to receive
all dividends paid on such Shares and the right to vote such
Shares. Said Common Stock shall be subject to the forfeiture
provisions applicable under the Participant's Plan Share Award,
and the certificates for such Common Stock shall bear the
following legend reflecting that the shares represented thereby
are subject to restrictions against transfer and to forfeiture
in accordance with the Plan and the Participant's Plan Share
Award:
"The transferability of this certificate and
the shares of stock represented thereby are
subject to the terms and conditions (including
forfeiture) contained in the Harbor Federal
Bancorp, Inc. Management Recognition Plan, and a
Plan Share Award made thereunder by the Harbor
Federal Bancorp, Inc. Management Recognition Plan
Committee. Copies of such Plan and Plan Share
Award are on file in the offices of the Secretary
of Harbor Federal Bancorp, Inc., 705 York Road,
Baltimore, Maryland 21204-2562.
As the Participant earns the Restricted Stock subject to
the Plan Share Award, the Participant (or, in the event of the
Participant's death, the legal representative of his estate, or
if the personal representative of the Participant's estate shall
have assigned the estate's interest in the Restricted Stock,
to the person or persons to whom his rights under such Common
Stock shall have passed by assignment pursuant to his will or to
the laws of descent and distribution) may surrender the Common
Stock certificates bearing the foregoing legend, whereupon the
Company shall cause such certificates to be reissued without the
legend. If a Participant who has received Restricted Stock
hereunder forfeits any or all of such Restricted Stock, the
Participant shall, within 30 days after terminating employment,
pay the Company an amount equal to the dividends attributable to
the forfeited Restricted Stock. To the extent not inconsistent
herewith, Restricted Stock distributed hereunder will be subject
to the terms and conditions applicable to the Plan Share Award
underlying the Restricted Stock.
7<PAGE>
<PAGE>
(c) FORM OF DISTRIBUTION. The Trustee shall distribute
all Plan Shares, together with any shares representing stock
dividends, in the form of Common Stock. One share of Common
Stock shall be given for each Plan Share earned. Payments
representing cash dividends (and earnings thereon) shall be made
in cash.
(d) WITHHOLDING. The Trustee shall withhold from any cash
payment made under this Plan sufficient amounts to cover any
applicable withholding and employment taxes, and if the amount
of such cash payment is not sufficient, the Trustee shall
require the Participant or Beneficiary to pay to the Trustee the
amount required to be withheld as a condition of delivering the
Plan Shares. The Trustee shall pay over to the Company or
Subsidiary which employs or employed such Participant any such
amount withheld from or paid by the Participant or Beneficiary.
(e) TIMING: EXCEPTION FOR 10% SHAREHOLDERS.
Notwithstanding Subsections (a) and (b) above, no Plan Shares
may be distributed prior to the date which is five (5) years
from the Date of Conversion to the extent the Participant or
Beneficiary, as the case may be, would after receipt of such
Shares own in excess of ten percent (10%) of the issued and
outstanding shares of Common Stock unless such action is
approved in advance by a majority vote of disinterested
directors of the Board. To the extent this limitation would
delay the date on which a Participant receives Plan Shares, the
Participant may elect to receive from the Trust, in lieu
of such Plan Shares, the cash equivalent thereof. Any Plan
Shares remaining undistributed solely by reason of the operation
of this Subsection (d) shall be distributed to the Participant
or his Beneficiary on the date which is five years from the Date
of Conversion.
(f) REGULATORY EXCEPTIONS. No Plan Shares shall be
distributed (except in accordance with Section 7.03(b)), unless
and until all of the requirements of all applicable law and
regulation shall have been fully complied with, including the
receipt of approval of the Plan by the stockholders of the
Company by such vote, if any, as may be required by applicable
law and regulations.
7.04 VOTING OF PLAN SHARES. All shares of Common Stock
held by the Trust (whether or not subject to a Plan Share Award)
shall be voted by the Trustee in the same proportion as the
trustee of the Company's Employee Stock Ownership Plan votes
Common Stock held in the trust associated therewith.
7.05. DEFERRAL ELECTIONS BY PARTICIPANTS. The Participant
may at any time irrevocably elect, on the form attached hereto
as Exhibit "A" (the "Election Form"), to defer the receipt of
all or a percentage of the Plan Shares that would otherwise be
transferred to the Participant upon a future vesting of such
award (the "Deferred Shares"). The MRP Committee shall
establish and maintain an individual account in the name of each
Participant who files an Election Form for the purpose of
tracking deferred earnings attributable to cash dividends paid
on Deferred Shares (the "Cash Account"). On the last day of
each fiscal year of the Company, the Committee shall credit to
the Participant's Cash Account earnings on the balance of the
Cash Account at a rate equal to the yield on Common Stock, as
determined from time to time by the MRP Committee in its sole
discretion.
The Deferred Shares, together with any cash or stock
dividends attributable thereto (the "Deferred Earnings"), will
be distributed to the Participant in
8<PAGE>
<PAGE>
accordance with the deferral schedule (the "Deferral Schedule")
selected by the Participant in his or her Election Form. The
Trustees shall hold each Participant's Deferred Shares and
Deferred Earnings in the Trust until distribution is required
pursuant to the election set forth in the Participant's Election
Form.
The Trustee shall distribute a Participant's Deferred
Shares and Deferred Earnings in accordance with the
Participant's Election Form, unless the Participant terminates
service for a reason other than the Participant's (i) death,
(ii) disability, or (iii) normal retirement after age 70.
Within 90 days after receiving notice of a Participant's death,
the Trustee shall distribute any balance of the Participant's
Deferred Shares and Deferred Earnings to the Participant's
designated beneficiary, if living, or if such designated
beneficiary is deceased or the Participant failed to designate a
beneficiary, to the Participant's estate. Notwithstanding the
preceding, at any time prior to his or her death, a Participant
may elect to have the balance of his or her Deferred Shares
and Deferred Earnings distributed to his or her beneficiary or
estate over a period of time designated by the Participant. If,
on the other hand, a Participant's terminates service for a
reason other than the Participant's death, disability, or normal
retirement, the Participant's Deferred Shares and Deferred
Earnings shall be distributed to the Participant in a lump sum
occurring as soon as reasonably practicable.
Notwithstanding any other provision of the Plan or a
Participant's Election Form, in the event the Participant
suffers an unforeseeable emergency hardship within the
contemplation of this paragraph, the Participant may apply to
the Committee for a distribution of all or a portion of his
Deferred Shares and Deferred Earnings prior to the basis for any
such distribution. The hardship must result from a sudden
and unexpected illness or accident of the Participant or a
dependent of the Participant, casualty loss of property, or
other similar conditions beyond the control of the Participant.
Examples of purposes which are not considered hardships include
post-secondary school expenses or the desire to purchase a
residence. In no event will a distribution be made to the
extent the hardship could be relieved through reimbursement or
compensation by insurance or otherwise, or by liquidation of the
Participant's nonessential assets to the extent such liquidation
would not itself cause a severe financial hardship. The amount
of any distribution hereunder shall be limited to the amount
necessary to relieve the Participant's financial hardship. The
determination of whether a Participant has a qualifying hardship
and the amount which qualifies for distribution, if any, shall
be made by the Committee in its sole discretion. The Committee
may require evidence of the purpose and amount of the need, and
may establish such application or other procedures as it
deems appropriate.
No Participant may assign his or her claim to Deferred
Shares and Deferred Earnings during his or her lifetime, except
in accordance with Section 8.03 of the MRP. Any deferral
election made hereunder shall be irrevocable. A Participant's
right to Deferred Shares and Deferred Earnings shall at all
times constitute an unsecured promise of the Company to pay
benefits as they come due. The right of the Participant or his
or her beneficiary to receive benefits hereunder shall be
solely an unsecured claim against the general assets of the
Company. Neither the Participant nor his or her beneficiary
shall have any claim against or rights in any specific assets or
other fund of the Company, and any assets in the Trust shall be
deemed general assets of the Company.
9<PAGE>
<PAGE>
All distributions made by the Company and/or the Trustees
pursuant to elections made hereunder shall be subject to
applicable federal, state, and local tax withholding and to such
other deductions as shall at the time of such payment be
required under any income tax or other law, whether of the
United States or any other jurisdiction, and, in the case of
payments to a beneficiary, the delivery to the Committee and/or
Trustees of all necessary waivers, qualifications and other
documentation.
ARTICLE VIII
MISCELLANEOUS
8.01 ADJUSTMENTS FOR CAPITAL CHANGES.
(a) RECAPITALIZATIONS; STOCK SPLITS, ETC. The number and
kind of shares which may be purchased under the Plan, and the
number and kind of shares subject to outstanding Plan Share
Awards, shall be proportionately adjusted for any increase,
decrease, change or exchange of shares of Common Stock for a
different number or kind of shares or other securities of the
Company which results from a merger, consolidation,
recapitalization, reorganization, reclassification, stock
dividend, split-up, combination of shares, or similar event in
which the number or kind of shares is changed without the
receipt or payment of consideration by the Company.
(b) TRANSACTIONS IN WHICH THE COMPANY IS NOT THE
SURVIVING ENTITY. Subject to Section 7.01(c) hereof, in the
event of (i) the liquidation or dissolution of the Company, (ii)
a merger or consolidation in which the Company is not the
surviving entity, or (iii) the sale or disposition of all or
substantially all of the Company's assets (any of the foregoing
to be referred to herein as a "Transaction"), all outstanding
Plan Share Awards shall be surrendered. With respect to each
Plan Share Award so surrendered, the Committee shall in its
sole and absolute discretion determine whether the holder of the
surrendered Plan Share Award shall receive --
(1) for each share of Common Stock then subject
to an outstanding Plan Share Award, the number and
kind of shares into which each outstanding share
of Common Stock (other than shares held by
dissenting stockholders) is changed or exchanged;
or
(2) a cash payment from the Bank or the successor
corporation, in an amount equal to the fair market
value (as determined by the Committee in its sole
and absolute discretion) of the Common Stock
subject to the Plan Share Award on the date of the
Transaction.
(c) CONDITIONS AND RESTRICTIONS ON NEW, ADDITIONAL, OR
DIFFERENT SHARES OR SECURITIES. If, by reason of any adjustment
made pursuant to this Section, a Participant becomes entitled to
new, additional, or different shares of stock or securities,
such new, additional, or different shares of stock or securities
shall thereupon be subject to all of the conditions and
restrictions which were applicable to the shares pursuant to the
Plan Share Award before the adjustment was made. In addition,
the Committee shall have the discretionary authority to impose
on the Shares subject to Plan Share Awards such restrictions as
the
10<PAGE>
<PAGE>
Committee may deem appropriate or desirable, including but not
limited to a right of first refusal, or repurchase option, or
both of these restrictions.
(d) OTHER ISSUANCES. Except as expressly provided in this
Section, the issuance by the Company or a Subsidiary of shares
of stock of any class, or of securities convertible into shares
of Common Stock or stock of another class, for cash or property
or for labor or services either upon direct sale or upon the
exercise of rights or warrants to subscribe therefor, shall not
affect, and no adjustment shall be made with respect to, the
number or class of shares of Common Stock then subject to Plan
Share Awards or reserved for issuance under the Plan.
8.02 AMENDMENT AND TERMINATION OF PLAN. The Board may, by
resolution, at any time amend or terminate the Plan. The power
to amend or terminate the Plan shall include the power to direct
the Trustee to return to the Bank all or any part of the assets
of the Trust, including shares of Common Stock held in the Plan
Share Reserve. However, the termination of the Trust shall
not affect a Participant's right to earn Plan Share Awards and
to the distribution of Common Stock relating thereto, including
earnings thereon, in accordance with the terms of this Plan and
the grant by the Committee or the Board.
8.03 NONTRANSFERABILITY. Plan Share Awards may not be
sold, pledged, assigned, hypothecated, transferred or disposed
of in any manner other than by will or by the laws of descent
and distribution. Notwithstanding the foregoing, or any other
provision of this Plan, a Participant who holds Plan Share
Awards may transfer such Awards to his or her spouse, lineal
ascendants, lineal descendants, or to a duly established
trust for the benefit of one or more of these individuals. Plan
Share Awards so transferred may thereafter be transferred only
to the Participant who originally received the grant or to an
individual or trust to whom the Participant could have initially
transferred the Awards pursuant to this Section 8.03. Plan
Share Awards which are transferred pursuant to this Section 8.03
shall be exercisable by the transferee according to the same
terms and conditions as applied to the Participant.
8.04 NO EMPLOYMENT OR OTHER RIGHTS. Neither the Plan nor
any grant of a Plan Share Award or Plan Shares hereunder nor any
action taken by the Trustee, the Committee or the Board in
connection with the Plan shall create any right, either express
or implied, on the part of any Employee or Director to continue
in the service of the Company, the Bank, or a Subsidiary
thereof.
8.05 VOTING AND DIVIDEND RIGHTS. No Participant shall
have any voting or dividend rights or other rights of a
stockholder in respect of any Plan Shares covered by a Plan
Share Award, except as expressly provided in Section 7.02 above,
prior to the time said Plan Shares are actually distributed to
him.
8.06 GOVERNING LAW. The Plan and Trust shall be governed
and construed under the laws of the State of Maryland to the
extent not preempted by Federal law.
8.07 EFFECTIVE DATE. The Plan shall become effective
immediately upon its approval by all regulatory authorities
required by applicable law and a favorable vote of stockholders
owning at least a majority of the shares present or represented,
and entitled to vote, at a meeting duly held in accordance
with applicable laws, provided that the Plan shall not be
submitted for such approval
11<PAGE>
<PAGE>
before the first annual meeting of the Company's stockholders.
In no event shall Plan Share Awards be made prior to the
Effective Date.
8.08 TERM OF PLAN. This Plan shall remain in effect until
the earlier of (1) termination by the Board, or (2) the
distribution of all assets of the Trust. Termination of the
Plan shall not affect any Plan Share Awards previously granted,
and such Awards shall remain valid and in effect until they have
been earned and paid, or by their terms expire or are
forfeited.
8.09 TAX STATUS OF TRUST. It is intended that the Trust
associated with the Plan be treated as a grantor Trust of the
Bank under the provisions of Section 671 etseq. of the Internal
Revenue Code, as the same may be amended from time to time.
12<PAGE>
<PAGE>
TRUST AGREEMENT
UNDER THE HARBOR FEDERAL BANCORP, INC.
MANAGEMENT RECOGNITION PLAN
This Agreement made this 25th day of January, 1994, by and
between Harbor Federal Bancorp, Inc. (the "Company") and Joseph
J. Lacy, John N. Riehl, III, and Gideon N. Stieff, Jr. (acting
by majority, the "Trustee").
WHEREAS, the Company maintains the Harbor Federal Bancorp,
Inc. Management Recognition Plan (the "Plan"); and
WHEREAS, the Company has incurred or expects to incur
liability under the terms of the Plan with respect to the
individuals participating in the Plan ("Participants"); and
WHEREAS, the Company wishes to establish a trust (the
"Trust") and to contribute to the Trust assets that shall be
held therein, subject to the claims of the Company's general
creditors in the event of Insolvency, as defined in Section 3(a)
hereof, until paid to Participants and their beneficiaries in
such manner and at such times as specified in the Plan;
WHEREAS, it is the intention of the parties that this Trust
shall constitute an unfunded arrangement and shall not affect
the status of the Plan as an unfunded plan maintained for the
purpose of providing deferred compensation for a select group of
management or highly compensated employees for purposes of Title
I of the Employee Retirement Income Security Act of 1974;
WHEREAS, it is the intention of the Company to make
contributions to the Trust to provide itself with a source of
funds to assist it in the meeting of its liabilities under the
Plan;
NOW, THEREFORE, the parties do hereby establish this Trust
and agree that the Trust shall be comprised, held and disposed
of as follows:
Section 1. Establishment of Trust
----------------------------------
(a) The Company hereby deposits, or will shortly hereafter
deposit, with the Trustee in trust an amount expected to be
sufficient to permit the Trust to purchase four percent (4%) of
the shares of common stock ("Common Stock") of Harbor Federal
Bancorp, Inc. that are issued in connection with the Company's
conversion of Harbor Federal Savings Bank from mutual-to-stock
form. Said amount shall become the initial principal of the
Trust to be held, administered and disposed of by the Trustee as
provided in this Trust Agreement.
(b) The Trust shall become irrevocable upon approval of
the Plan by the stockholders of Harbor Federal Bancorp, Inc.
<PAGE>
<PAGE>
(c) The Trust is intended to be a grantor trust, of which
the Company is the grantor, within the meaning of subpart E,
part I, subchapter J, chapter 1, subtitle A of the Internal
Revenue Code of 1986, as amended (the "Code"), and shall be
construed accordingly.
(d) The principal of the Trust, and any earnings thereon,
shall be held separate and apart from other funds of the Company
and shall be used exclusively for the uses and purposes of
Participants and general creditors as herein set forth.
Participants and their beneficiaries shall have no preferred
claim on, or any beneficial ownership interest in, any assets of
the Trust. Any rights created under the Plan and this Trust
Agreement shall be mere unsecured contractual rights of
Participants and their beneficiaries against the Company. Any
assets held by the Trust will be subject to the claims of the
Company's general creditors under federal and state law in the
event of Insolvency, as defined in Section 3(a) herein.
(e) The Company, in its sole discretion, may at any time,
or from time to time, make additional deposits of cash or other
property in trust with the Trustee to augment the principal to
be held, administered and disposed of by Trustee as provided in
this Trust Agreement. Neither the Trustee nor any Participant
or beneficiary shall have any right to compel such additional
deposits.
Section 2. Payments to Plan Participants and Their
---------------------------------------------------
Beneficiaries.
- --------------
(a) The Company shall deliver to the Trustee a schedule
(the "Payment Schedule") that indicates the amounts payable in
respect of each Participant (and his or her beneficiaries), that
provides a formula or other instructions acceptable to the
Trustee for determining the amounts so payable, the form in
which such amount is to be paid (as provided for or available
under the Plan), and the time of commencement for payment of
such amounts. Except as otherwise provided herein, the Trustee
shall make payments to Participants and their beneficiaries in
accordance with such Payment Schedule. The Trustee shall make
provision for the reporting and withholding of any federal,
state or local taxes that may be required to be withheld with
respect to the payment of benefits pursuant to the terms of the
Plan and shall pay amounts withheld to the appropriate taxing
authorities or determine that such amounts have been reported,
withheld and paid by the Company.
(b) The entitlement of a Participant or his or her
beneficiaries to benefits under the Plan shall be determined by
the Company or such party as it shall designate under the Plan,
and any claim for such benefits shall be considered and reviewed
under the procedures set out in the Plan.
(c) The Company may make payment of benefits directly to
Participants or their beneficiaries as they become due under the
terms of the Plan. The Company shall notify the Trustee of its
decision to make payment of benefits directly prior to the time
amounts are payable to Participants or their beneficiaries. In
addition, if the principal of the Trust, and any earnings
thereon, are not sufficient to make payments of benefits in
accordance with the terms of the Plan, the Company shall make
the balance of each such payment as it falls due. The Trustee
shall notify the Company where principal and earnings are not
sufficient.
2<PAGE>
<PAGE>
Section 3. Trustee Responsibility Regarding Payments to
--------------------------------------------------------
Trust Beneficiary When Company Is Insolvent.
- --------------------------------------------
(a) The Trustee shall cease payment of benefits to
Participants and their beneficiaries if the Company is
Insolvent. The Company shall be considered "Insolvent" for
purposes of this Trust Agreement if (i) the Company is unable to
pay its debts as they become due, or (ii) the Company becomes
subject to a pending proceeding as a debtor under the United
States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as
provided in Section 1(d) hereof, the principal and income of the
Trust shall be subject to claims of general creditors of the
Company under federal and state law as set forth below.
(c) The Board of Directors and the Chief Executive Officer
of the Company shall have the duty to inform the Trustee in
writing of the Company's Insolvency. If a person claiming to be
a creditor of the Company alleges in writing to the Trustee that
the Company has become Insolvent, the Trustee shall determine
whether the Company is Insolvent and, pending such
determination, the Trustee shall discontinue payment of benefits
to Participants or their beneficiaries.
(1) Unless the Trustee has actual knowledge of the
Company's Insolvency, or has received notice from the Company or
a person claiming to be a creditor alleging that the Company is
Insolvent, the Trustee shall have no duty to inquire whether the
Company is Insolvent. The Trustee may in all events rely on
such evidence concerning the Company's solvency as may be
furnished to the Trustee and that provides the Trustee with a
reasonable basis for making a determination concerning the
Company's solvency.
(2) If at any time the Trustee has determined that
the Company is Insolvent, the Trustee shall discontinue payments
to Plan participants or their beneficiaries, shall liquidate the
Trust's investment in Common Stock, and shall hold the assets of
the Trust for the benefit of the Company's general creditors.
Nothing in this Trust Agreement shall in any way diminish any
rights of Participants or their beneficiaries as general
creditors of the Company with respect to benefits due under the
Plan or otherwise.
(3) The Trustee shall resume the payment of benefits
to Participants or their beneficiaries in accordance with
Section 2 of this Trust Agreement only after the Trustee has
determined that the Company is not Insolvent (or is no longer
Insolvent).
(d) Provided that there are sufficient assets, if the
Trustee discontinues the payment of benefits from the Trust
pursuant to Section 3(b) hereof and subsequently resumes such
payments, the first payment following such discontinuance shall
include the aggregate amount of all payments due to Participants
or their beneficiaries under the terms of the Plan for the
period of such discontinuance, less the aggregate amount of any
payments made to Participants or their beneficiaries by the
Company in lieu of the payments provided for hereunder during
any such period of discontinuance.
3<PAGE>
<PAGE>
Section 4. Payments to the Company.
-----------------------------------
Except as provided in Section 3 hereof, after the Trust has
become irrevocable, the Company shall have no right or power to
direct the Trustee to return to the Company or to divert to
others any of the Trust assets before all payment of benefits
have been made to Plan Participants and their beneficiaries
pursuant to the terms of the Plan.
Section 5. Investment Authority.
---------------------------------
(a) The Trustee shall have sole discretion as to the
investment of Trust assets, except that to the extent reasonably
practicable, the Trustee shall invest all assets of the Trust in
Common Stock. Any funds held by the Trust prior to the date of
the conversion of the Company from mutual-to-stock form shall be
invested by the Trustee in such interest-bearing account or
accounts at the Company as the Trustee shall determine to be
appropriate. Upon the date of the Company's conversion from
mutual-to-stock form, the Trustee shall, pursuant to the
exercise during the conversion period of subscription rights in
the Company's Common Stock offering conducted as part of the
Company's conversion, invest all of the Trust's assets, after
providing for any required withholding as needed for tax
purposes, exclusively in Common Stock, provided, however that
the Trust shall not purchase a number of shares of Common Stock
equal to more than four percent (4%) of the shares of Common
Stock issued in the Company's mutual-to-stock conversion.
(b) All rights associated with assets of the Trust shall
be exercised by the Trustee or the person designated by the
Trustee, and shall in no event be exercisable by or rest with
Participants, except that voting rights with respect to Common
Stock will be exercised in accordance with the terms of the
Plan.
Section 6. - Disposition of Income.
-----------------------------------
During the term of this Trust, all income received by the
Trust, net of expenses and taxes, shall be accumulated and
reinvested.
Section 7. Accounting by Trustee.
----------------------------------
The Trustee shall keep accurate and detailed records of all
investments, receipts, disbursements, and all other transactions
required to be made, including such specific records as shall be
agreed upon in writing between the Company and the Trustee.
Within 60 days following the close of each calendar year and
within 20 days after the removal or resignation of the Trustee,
the Trustee shall deliver to the Company a written account of
its administration of the Trust during such year or during the
period from the close of the last preceding year to the date of
such removal or resignation, setting forth all investments,
receipts, disbursements and other transactions effected by it,
including a description of all securities and investments
purchased and sold with the cost or net proceeds of such
purchased and sold with the cost or net proceeds of such
purchases or sales (accrued interest paid or receivable being
shown separately), and showing all cash, securities and other
property held in the Trust at the end of such year or as of the
date of such removal or resignation, as the case may be.
4<PAGE>
<PAGE>
Section 8. Responsibility of Trustee.
--------------------------------------
(a) The Trustee shall act with the care, skill, prudence
and diligence under the circumstances then prevailing that a
prudent person acting in like capacity and familiar with such
matters would use in the conduct of an enterprise of a like
character and with like aims, provided, however, that Trustee
shall incur no liability to any person for any action taken
pursuant to a direction, request or approval given by the
Company which is contemplated by, and in conformity, the terms
of the Plan or this Trust and is given in writing by the
Company. In the event of a dispute between the Company and a
party, the Trustee may apply to a court of competent
jurisdiction to resolve the dispute.
(b) If the Trustee undertakes or defends any litigation
arising in connection with this Trust, the Company agrees to
indemnify the Trustee against Trustee's costs, expenses and
liabilities (including, without limitation, attorneys' fees and
expenses) relating thereto and to be primarily liable for such
payments, except in those cases where the Trustee shall have
been found by a court of competent jurisdiction to have acted
with gross negligence or willful misconduct. If the Company
does not pay such costs, expenses and liabilities in a
reasonably timely manner, the Trustee may obtain payment from
the Trust.
(c) The Trustee may consult with legal counsel with
respect to any of its duties or obligations hereunder.
(d) The Trustee may hire agents, accountants, actuaries,
investment advisors, financial consultants or other
professionals to assist it in performing any of its duties or
obligations hereunder.
(e) The Trustee shall have, without exclusion, all powers
conferred on trustees by applicable law, unless expressly
provided otherwise herein, provided, however, that if an
insurance policy is held as an asset of the Trust, the Trustee
shall have no power to name a beneficiary of the policy other
than the Trust, to assign the policy (as distinct from
conversion of the policy to a different form) other than to a
successor the Trustee, or to loan to any person the proceeds of
any borrowing against such policy.
(f) Notwithstanding any powers granted to the Trustee
pursuant to this Trust Agreement or to applicable law, the
Trustee shall not have any power that could give this Trust the
objective of carrying on a business and dividing the gains
therefrom, within the meaning of section 301.7701-2 of the
Procedure and Administrative Regulations promulgated pursuant to
the Code.
Section 9. Compensation and Expenses of Trustee.
-------------------------------------------------
The Company shall pay all administrative expenses and the
Trustee's fees and expenses relating to the Plan and this Trust.
If not so paid, the fees and expenses shall be paid from the
Trust.
Section 10. Resignation and Removal of Trustee.
------------------------------------------------
The Trustee may resign at any time by written notice to the
Company, which resignation shall be effective 30 days after the
Company receives such notice
5<PAGE>
<PAGE>
(unless the Company and the Trustee agree otherwise). The
Trustee may be removed by the Company on 30 days notice or upon
shorter notice accepted by the Trustee.
If the Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the
effective date or resignation or removal under this section. If
no such appointment has been made, the Trustee may apply to a
court of competent jurisdiction for appointment of a successor
or for instructions. All expenses of the Trustee in connection
with the proceeding shall be allowed as administrative expenses
of the Trust. Upon resignation or removal of the Trustee and
appointment of a successor trustee, all assets shall
subsequently be transferred to the successor trustee. The
transfer shall be completed within 60 days after receipt of
notice of resignation, removal or transfer, unless the Company
extends the time limit.
Section 11. Appointment of Successor.
--------------------------------------
If the Trustee resigns or is removed in accordance with
Section 10 hereof, the Company may appoint any other party as a
successor to replace the Trustee upon resignation or removal.
The appointment shall be effective when accepted in writing by
the new trustee, who shall have all of the rights and powers of
the former trustee, including ownership rights in the Trust
assets. The former trustee shall execute any instrument
necessary or reasonably requested by the Company or the
successor trustee to evidence the transfer.
A successor trustee need not examine the records and acts
of any prior trustee and may retain or dispose of existing Trust
assets, subject to Sections 7 and 8 hereof. The successor
trustee shall not be responsible for, and the Company shall
indemnify and defend the successor trustee from, any claim or
liability resulting from any action or inaction of any prior
trustee or from any other past event, or any condition existing
at the time it becomes successor trustee.
Section 12. Amendment or Termination.
--------------------------------------
(a) This Trust Agreement may be amended by a written
instrument executed by the Trustee and the Company, provided
that no such amendment shall make the Trust revocable.
(b) The Trust shall not terminate until the date on which
the Participant and his beneficiaries are no longer entitled to
benefits pursuant to the terms hereof. Upon termination of the
Trust, the Trustee shall return any assets remaining in the
Trust to the Company.
(c) Upon written approval of the Participant (or his
beneficiaries if they are then entitled to payment of benefits),
the Company may terminate this Trust prior to the time all
benefit payments under the Plan have been made. All assets in
the Trust at termination shall be returned to the Company.
6<PAGE>
<PAGE>
Section 13. Miscellaneous.
--------------------------
(a) Any provision of this Trust Agreement prohibited by
law shall be ineffective to the extent of any such prohibition,
without invalidating the remaining provisions hereof.
(b) Benefits payable to Participants and their
beneficiaries under this Trust Agreement may not be anticipated,
assigned (either at law or in equity), alienated, pledged,
encumbered or subjected to attachment, garnishment, levy,
execution or other legal or equitable process, except pursuant
to the terms of the Plan.
(c) This Trust Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland,
to the extent not preempted by federal law.
(d) The Trustee agrees to be bound by the terms of the
Plan, as in effect from time to time.
(e) The Trustee shall act by vote or written consent of a
majority of its then duly-appointed members.
IN WITNESS WHEREOF, the Company, by its duly authorized
officer, has caused this Agreement to be executed, and its
corporate seal affixed, and the undersigned Trustees have
executed this Agreement, this 25th day of January, 1994.
ATTEST: HARBOR FEDERAL BANCORP, INC.
/s/ Deborah A. Epps By: /s/ Robert A. Williams
- ------------------------- ----------------------
Its President
ATTEST:
/s/ Deborah A. Epps /s/ Joseph J. Lacy
- ------------------------- ---------------------------
Joseph J. Lacy, Trustee
/s/ Deborah A. Epps /s/ John N. Riehl, III
- ------------------------- ---------------------------
John N. Riehl, III, Trustee
/s/ Deborah A. Epps /s/ Gideon N. Stieff, Jr.
- ------------------------- ---------------------------
Gideon N. Stieff, Jr., Trustee
7
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.
MANAGEMENT RECOGNITION PLAN
___________________________________
1998 AMENDMENT TO TRUST AGREEMENT
___________________________________
WHEREAS, Harbor Federal Bancorp, Inc. (the "Company")
maintains the Harbor Federal Bancorp, Inc. Management
Recognition Plan (the "Plan"); and
WHEREAS, the Company has previously entered into a trust
agreement under the Plan ("Trust Agreement") with Messrs. Joseph
J. Lacy, John N. Riehl III, and Gideon N. Stieff, Jr. (acting by
majority, the "Trustee"); and
WHEREAS, the Company's Board of Directors and the Trustee
have determined that it is in their respective best interests
to amend the Trust Agreement in the manner set forth herein.
NOW, THEREFORE, effective March 30, 1998, the Trust
Agreement shall be amended as follows, pursuant to Section
12 thereof:
1. Section 2 of the Trust Agreement shall be amended by
adding subsection (d) immediately at the end thereof to
provide as follows:
(d) Upon a Change in Control within the meaning of
the Plan, the Company shall, as soon as possible but in no
event longer than ten business days after the Change in
Control, make an irrevocable contribution to this Trust in
an amount that is projected to provide the Trust with
sufficient funds to pay each Beneficiary the benefits to
which he or she is entitled pursuant to the Plan as in
effect on the date of the Change in Control.
2. Section 10 of the Trust Agreement shall be amended by
adding the following paragraph immediately at the end thereof:
Notwithstanding the foregoing, if the Trustee resigns
or is removed following a Change in Control, the
Trustee that has resigned or is being removed shall appoint
as its successor a third party financial institution that
has trust powers, is independent of and unrelated to the
entity that has acquired or otherwise obtained control of
the Company, and is agreed to in writing by 80% of the
Trust Beneficiaries.
<PAGE>
<PAGE>
3. Nothing contained herein shall be held to alter, vary,
or affect any of the terms, provisions, or conditions of the
Trust Agreement other than stated above.
WHEREFORE, the undersigned hereby execute this 1998
Amendment to the Trust Agreement on March 30, 1998.
HARBOR FEDERAL BANCORP, INC.
Witnessed by:
/s/ Dana Miller By: /s/ Robert A. Williams
- ------------------------- --------------------------
Its Chairman of the Board
ATTEST:
/s/ Barbara Therres /s/ Joseph J. Lacy
- ------------------------- ---------------------------
Joseph J. Lacy
/s/ Barbara Therres /s/ John N. Riehl III
- ------------------------- ---------------------------
John N. Riehl III
/s/ Barbara Therres /s/ Gideon N. Stieff, Jr.
- ------------------------- ---------------------------
Gideon N. Stieff, Jr.
<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, 1998, there were 1,693,420 shares of the common stock
outstanding and approximately 426 holders of record of the
common stock. During fiscal year ended March 31, 1998, two
dividends have been paid on the common stock at $0.10 per share
and two dividends at $0.12 per share. On April 10, 1998 a
dividend of $0.13 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.
In addition to historical information, this annual
report may contain forward-looking statements. Forward-looking
statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those
reflected in the forward-looking statements. Important factors
that might cause such a difference include, but are not limited
to, those discussed herein. Readers are cautioned not to place
undue reliance on forward-looking statements, which reflect
management's analysis only as of the date they are made. The
Company undertakes no obligation to publicly revise or update
forward-looking statements to reflect events or circumstances
that arise thereafter. Readers should carefully review the
disclosures set forth in other documents the Company files from
time to time with the Securities and Exchange Commission,
including the Annual, Quarterly and Current Reports of Forms 10-
KSB, 10-QSB and 8-K filed in the past and to be filed in the
future.
<PAGE>
<PAGE>
FINANCIAL CONDITION
Harbor Federal's total assets increased by $11.7
million or 5.3% from $219.5 million at March 31, 1997 to $231.1
million at March 31, 1998, primarily due to increases in
mortgage-backed securities of $7.0 million and investment
securities of $4.3 million.
Net loans receivable increased $3.2 million or 2.2%
from $144.7 million at March 31, 1997 to $147.9 million at March
31, 1998. This increase was due primarily to a normal level of
loan originations over repayments which was funded primarily by
an increase in borrowed funds.
Harbor Federal's borrowings increased by $8.8
million or 53.1% from $16.5 million at March 31, 1997 to $25.3
million at March 31, 1998. The borrowed funds were used to fund
loan originations.
RESULTS OF OPERATIONS
Harbor Federal had net income totaling $1.7 million,
$901,000 and $1.0 million for fiscal years 1998, 1997 and 1996,
respectively.
Interest Income. Total interest income increased by
$1.0 million, or 6.7% from $15.4 million for the year ended
March 31, 1997 to $16.4 million for the year ended March 31,
1998. The increase in interest income was principally
attributable to a $11.3 million, or 5.5% increase in the balance
of average interest-earning assets to $217.2 million for the
year ended March 31, 1998 from $205.8 million for the year ended
March 31, 1997, and an increase in the average on Harbor
Federal's average interest-earning assets to 7.55% for the year
ended March 31, 1998 from 7.47% for the year ended March 31,
1997. The increase in interest-earning assets during the year
ended March 31, 1998 compared to the year ended March 31, 1997
reflects management's use of funds received from deposits and
borrowings. The increase in average interest-earning assets was
largely the result of a $14.3 million increase in average loans
receivable, partially offset by a $2.0 million decrease in
average investment securities and a $1.0 million decrease in
average mortgage-backed securities. The increase in average
yield was caused primarily by an increase in adjustable rates on
one-to-four family residential mortgage loans.
Interest income on first mortgage and other loans
increased by $1.2 million, or 11.7%, to $11.6 million for the
year ended March 31, 1998 from $10.4 million for the year ended
March 31, 1997. This increase was attributable to the increase
in average investment in first mortgage and other loans to
$148.0 million for the year ended March 31, 1998 from $133.7
million for the year ended March 31, 1997 and an increase in the
average yield on first mortgage and other loans to 7.9% for the
year ended March 31, 1998 from 7.8% for the year ended March 31,
1997. The higher average yield on mortgage loans reflects
primarily increasing interest rates on adjustable rate mortgage
loans. Interest income on mortgage-backed securities decreased
by $90,000, or 7.4% to $1.1 million for the year ended March 31,
1998 from $1.2 million for the year ended March 31, 1997. The
decrease resulted primarily from a $1.0 million, or 6.2%,
decrease in average mortgage-backed securities to $15.8 million
for the year ended March 31, 1998 from $16.8 million for the
year ended March 31, 1997 and a decrease in average yield on
mortgage-backed securities to 7.1% for the year ended March 31,
1998 from 7.2% for the year ended March 31, 1997. Interest
income on investment securities also decreased $116,000, or
3.4%, to $3.3 million for the year ended March 31, 1998 from
$3.4 million for the year ended March 31, 1997. The decrease
resulted primarily from a $2.0 million, or 4.1%, decrease in
average investment securities to $46.9 million for the year
<PAGE>
ended March 31, 1998 from $48.9 million for the year March 31,
1997, partially offset by an increase in average yield on
investment securities to 7.1% for the year ended March 31, 1998
from 7.0% for the year ended March 31, 1997. Interest income
from short-term investments and other interest-earning assets
increased $19,000, or 6.5% to $314,000 for the year ended March
31, 1998 from $295,000 for the year ended March 31, 1997 as a
result of an increase in average short-term investments and
other interest earning assets of $88,000, or 1.4%, to $6.5
million for the year ended March 31, 1998 from $6.4 million for
the year ended March 31, 1997 and an increase in average yield
on short-term investments and other interest-earning assets to
4.8% for the year ended March 31, 1998 from 4.6% for the year
ended March 31, 1997.
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,
<PAGE>
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.
Interest Expense. Total interest expense increased
$468,000, or 5.0% to $9.8 million for the year ended March 31,
1998 from $9.4 million for the year ended March 31,1997. The
increase resulted from an $8.3 million, or 5.0% , increase in
average deposits to $172.8 million for the year ended March 31,
1998 from $164.5 million for the year ended March 31, 1997, and
$2.3 million or 14.8% increase in average borrowed funds to
$17.5 million for the year ended March 31, 1998 from $15.2
million for the year ended March 31, 1997. These increases were
partially offset by a reduction in the average cost of funds to
5.17% for the year ended March 31, 1998 from 5.21% for the year
ended March 31, 1997.
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 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 used to
fund loan originations.
Net Interest Income. Net interest income increased
by $564,000, or 9.4%, to $6.6 million for the year ended March
31, 1998 from $6.0 million for the year ended March 31, 1997.
The principal reason for the increase in net interest income was
the increase in average outstanding loans and an increase in the
interest rate spread to 2.4% for the year ended March 31, 1998
from 2.3% for the year ended March 31, 1997.
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.
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 $110,000 provision
for losses on loans for the year ended March 31, 1998 as
compared to $33,000 provision for the year ended March 31, 1997
and no provision for the year ended March 31, 1996. 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
$260,000, or 113.5%, to $489,000 for the year ended March 31,
1998 from $229,000 for the year ended March 31, 1997. The
increase was due primarily to loan origination fees of $160,000
<PAGE>
earned by Bank Street Mortgage Company, a subsidiary of the Bank
formed in June 1997, and a sale of loans in December 1997 which
resulted in a gain of $96,000.
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 Expense. Noninterest expense decreased
by $594,000, or 12.6%, to $4.1 million for the year ended March
31, 1998 from $4.7 million for the year ended March 31, 1997.
The decrease in noninterest expense was due to a reduction in
the SAIF premiums of $939,000, partially offset by increases in
compensation and benefits expense of $239,000, or 9.9%, to $2.7
million for the year ended March 31, 1998 from $2.4 million for
the year ended March 31, 1997 and other expenses of $127,000, or
18.7%, to $809,000 for the year ended March 31, 1998 from
$682,000 for the year ended March 31, 1997.
The decrease in SAIF premiums occurred because
premiums for the year ended March 31, 1997 included a
nonrecurring assessment for recapitalization of the SAIF of
$806,000 and because deposit insurance rates were reduced. The
increases in compensation and benefits expense and other
expenses were due to operations of Bank Street Mortgage Company
and general increases in costs.
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 recapitalization of
Savings Association Insurance Fund as of September 30, 1996.
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.
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, 1998, 1997 and 1996 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.
<PAGE>
<PAGE>
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,
------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- --------------------------- --------------------------
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 . . . . . . . . $147,967 $11,645 7.87% $133,674 $10,426 7.80% $103,861 $ 8,259 7.95%
Investment securities. . . 46,893 3,321 7.08 48,895 3,437 7.03 26,426 1,901 7.19
Mortgage-backed securities . 15,768 1,121 7.11 16,810 1,211 7.21 18,136 1,297 7.15
Short-term investments and
other interest-earning
assets (2). . . . . . . 6,545 314 4.79 6,456 295 4.56 8,115 326 4.01
-------- ------- -------- ------- -------- -------
Total interest-earning
assets. . . . . . . . 217,173 16,401 7.55 205,835 15,369 7.47 156,538 11,783 7.53
------- ------- -------
Non-interest-earning assets. . 4,598 4,347 4,387
-------- -------- --------
Total assets. . . . . . $221,771 $210,182 $160,925
======== ======== ========
Interest-bearing liabilities:
Deposits . . . . . . . $172,797 8,845 5.12 $164,531 8,468 5.15 $122,575 5,944 4.85
Borrowed funds . . . . . 17,463 994 5.69 15,210 904 5.94 4,554 269 5.90
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities . . . . . 190,260 9,839 5.17 179,741 9,372 5.21 127,129 6,213 4.89
------- ------- -------
Non-interest bearing
liabilities . . . . . . 3,040 2,489 2,115
-------- -------- --------
Total liabilities. . . . 193,300 182,230 129,244
Stockholders' equity . . . . 28,471 27,952 31,681
-------- -------- --------
Total liabilities and
stockholders' equity. . . $221,771 $210,182 $160,925
======== ======== ========
Net interest income . . . . $ 6,562 $ 5,997 $ 5,570
======= ======= =======
Interest rate spread (3). . . 2.38% 2.26% 2.64%
==== ==== ====
Net yield on interest-earning
assets (4). . . . . . . 3.02% 2.91% 3.56%
==== ==== ====
Ratio of average interest-
earning assets to average
interest-bearing
liabilities . . . . . 114.15% 114.52% 123.13%
====== ====== ======
<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. 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,
-------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
------------------------------- ----------------------------
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 . . . . . . . . . $1,115 $ 94 $10 $1,219 $2,370 $(158) $ (45) $2,167
Investment securities . . . . (141) 24 1 (116) 1,617 (44) (37) 1,536
Mortgage-backed securities . . (75) (17) 2 (90) (95) 10 (1) (86)
Short-term investments and
other interest-earning
assets (1) . . . . . . . 4 15 0 19 (67) 45 (9) (31)
------ ---- --- ------ ------ ----- ----- ------
Total interest income. . . 903 116 13 1,032 3,825 (147) (92) 3,586
Interest expense:
Deposits . . . . . . . . 425 (49) 1 377 2,034 364 126 2,524
Borrowed funds . . . . . . 134 (38) (6) 90 628 2 5 635
------ ---- --- ------ ------ ----- ----- ------
Total interest expense . . 559 (87) (5) 467 2,662 366 131 3,159
------ ---- --- ------ ------ ----- ----- ------
Change in net interest income. . . $ 344 $203 $18 $ 565 $1,163 $(513) $(223) $ 427
====== ==== === ====== ====== ===== ===== ======
<FN>
________
(1) Includes interest on interest-bearing deposits, certificates of deposit,
short-term investments, secured demand loan to Bankers Affiliate, Inc. 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>
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 reduction in its NPV as
a result of a hypothetical 200 basis point change in market
interest rates. A resulting change in NPV of more than 2% may
require the institution to deduct from its capital 50% of the
excess change times the estimated market value of its assets.
Based on the most recent information provided to Harbor Federal
by the OTS, which is as of December 31, 1997, a 200 basis point
change in market interest rates would not be expected to reduce
the Bank's NPV by more than 2%.
LIQUIDITY AND CAPITAL RESOURCES
Harbor Federal is required to maintain minimum
levels of liquid assets as defined by OTS regulations. This
requirement, which varies from time to time depending upon
economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required
ratio currently is 4.0%. Harbor Federal's liquidity ratio
averaged 7.3% during the month of March 1998. Liquidity ratios
averaged 7.7% for the year ended March 31, 1998. Harbor Federal
adjusts its liquidity levels in order to meet funding needs of
deposit outflows, payment of real estate taxes from mortgage
escrow accounts, repayment of borrowings and loan commitments.
Harbor Federal also adjusts liquidity as appropriate to meet its
asset and liability management objectives.
<PAGE>
<PAGE>
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 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, 1998, $6.5 million, or
12.8%, of Harbor Federal's investment portfolio was scheduled to
mature in one year or less, $1.0 million, or 1.9%, was scheduled
to mature in one to five years, and $43.3 million was scheduled
to mature in over five years. At March 31, 1998, certificates
of deposit which were scheduled to mature in one year or less
totaled $74.3 million. Assets qualifying for liquidity
outstanding at March 31, 1998 amounted to $12.4 million.
Harbor Federal had $933,000 in outstanding loan
commitments at March 31, 1998. 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.
YEAR 2000 ACTION PLAN
In 1997, the Company adopted a Year 2000 Action Plan
(the "Plan"). The Plan identifies the process by which the
Company will address Year 2000 related issues. It also
establishes a committee, lead by senior management, assigned the
responsibility to complete Year 2000 preparations, with a
targeted completion date of December 31, 1998. The Plan
includes several phases as follows; awareness; assessment;
renovation; validation; and implementation.
The Company relies upon its third party service bureau to
provide its data processing services. The Company has reviewed
the Year 2000 plan established by its data processing service
bureau and regularly evaluates the progress being made. In
addition, the Company is working with other vendors in pursuit
of timely completion of the Year 2000 project.
Cost associated with the Year 2000 project will primarily
include costs incurred to upgrade existing software and hardware
not currently Year 2000 compliant. The Company estimates that
these costs will be incurred in the normal course of business as
software and hardware is ordinarily upgraded to keep pace with
technological advances. Management currently expects that these
costs could range to $35,000 over a period of eighteen months.
<PAGE>
NEW ACCOUNTING STANDARDS
In June 1997, The Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive Income
("SFAS No. 130"). SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. It
requires all items that are required to be recognized under
accounting standards as components of comprehensive income be
reported in a financial statement that is displayed in equal
prominence with other financial statements. It requires that an
enterprise display an amount representing total comprehensive
income for each period. It does not require per share amounts
of comprehensive income to be disclosed. SFAS No. 130 is
effective for both interim and annual periods beginning after
December 15, 1997.
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, 1998, there were 437 stockholders of record and
1,693,420 shares of common stock entitled to vote and receive
dividends of which 1,602,137 shares were considered outstanding
for financial reporting purposes due to nonvesting of certain
ESOP shares. See Note 12 of Notes to Consolidated Financial
Statements. The number of stockholders of record does not
reflect the number of persons or entities who hold their stock
in nominee or "street" name.
Two quarterly dividends of $.10 per share and two
quarterly dividends of $.12 per share were paid during the year
ended March 31, 1998 and four quarterly dividends of $.10 per
share were paid during the year ended March 31, 1997. On
February 23, 1998, a dividend of $.13 per share was declared
payable April 10, 1998 to holders of record at the close of
business on April 1, 1998. 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 1998 and 1997 were as
follows (these quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and might not represent
actual transactions):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Market Price Range
Fiscal 1998:
High $19.00 23.00 25.25 25.25
Low 15.38 18.25 19.50 21.50
Fiscal 1997:
High $13.75 14.50 16.00 18.25
Low 12.50 12.38 14.25 15.38
</TABLE>
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1998, 1997 and 1996
________________________________________________________________
(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 agencies.
BASIS OF PRESENTATION
The financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing
the financial statements, management is required to make
estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent
assets and liabilities as of the dates of the statements of
financial condition and revenues and expenses for the
periods. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to
significant change in the near-term relate to the
determination of the allowance for loan losses and the
valuation of real estate owned. In connection with the
determination of the allowance and the valuation of real
estate, management prepares fair value analyses and obtains
independent appraisals for significant properties, where
appropriate.
Management believes that the allowances for losses on loans
and 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)
22<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 securities not classified as held to maturity
and equity securities with readily determinable fair values
are classified as trading securities if bought and held
principally for the purpose of selling them in the near
term. Trading securities are reported at fair value, with
unrealized gains and losses included in income. Investments
not classified as held to maturity or trading are considered
available for sale and are reported at fair value, with
unrealized holding gains and losses excluded from income and
reported as a separate component of stockholders' equity
(net of tax effects). Fair value is determined based on
published bid prices or bid quotations received from
securities dealers. Realized gains and losses on sales are
determined using the specific identification method.
DISCOUNTS AND PREMIUMS ON LOANS AND 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 primarily of mortgage loans at
March 31, 1998 and 1997. 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)
23<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.
LOANS RECEIVABLE
Loans are stated at the amount of unpaid principal reduced
by unearned income and the allowance for credit losses.
Interest on loans is not accrued when, in the opinion of
management, full collection of principal or interest is in
doubt, or payment of principal or interest has become 90
days past due. Interest accrued prior to a loan becoming 90
days past due is retained in income. Such interest is
considered in management's determination of the allowance
for loan losses. Any interest received in excess of the
amount previously accrued on such loans is recorded in
income in the period of recovery.
The provision for losses on loans is determined based on
management's review of the loan portfolio and analyses of
borrowers' ability to pay, past collection experience, risk
characteristics of individual loans or groups of similar
loans and underlying collateral, current 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.
(Continued)
24<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(1) CONTINUED
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. In accordance with
SFAS No. 114 Accounting by Creditors for Impairment of a
Loan(SFAS No. 114), impairment of a loan is measured based
on the present value of expected future cash flows
discounted at the loan's effective interest rate, or at the
loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. If the
measure of the impaired loan is less than the recorded
investment in the loan, an impairment is recognized through
a valuation allowance. SFAS No. 114 does not apply to large
groups of smaller balance homogenous loans, including
residential mortgage loans and consumer installment loans,
that are collectively evaluated for impairment.
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.
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, 1998 and
1997. 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.
(Continued)
25<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(1) CONTINUED
STOCK-BASED BENEFIT PLANS
The Company uses the intrinsic value method to account for
stock-based employee compensation plans. Under this method,
compensation cost is recognized for awards of shares of
common stock to employees only if the quoted market price of
the stock at the grant date (or other measurement date, if
later) is greater than the amount the employee must pay to
acquire the stock. Compensation cost is recorded on a pro-
rata basis as the employees perform the services required to
acquire the stock.
The Company has established an Employee Stock Ownership Plan
(ESOP) for its employees. The Company recognizes the costs
associated with the ESOP in accordance with provisions of
AICPA Statement of Position 93-6, Employers' Accounting for
Employee Stock Ownership Plans. Accordingly, compensation
expense is recorded based on the market value of shares
committed-to-be-released to the ESOP for allocation to
participants for services rendered.
NET INCOME PER SHARE OF COMMON STOCK
The Company adopted Statement of Financial Accounting
Standards No. 128 Earnings per Share (SFAS No. 128) in 1998.
SFAS No. 128 establishes revised standards for computing and
presenting earnings per share (EPS) data. It requires dual
presentation of "basic" and "diluted" EPS on the face of the
statements of income and reconciliation of the numerators
and denominators used in the basic and diluted EPS
calculations. As required by SFAS No. 128, EPS data for
prior periods presented have been restated to conform to the
new standard.
Basic EPS is calculated by dividing net income by the
weighted average number of common shares outstanding for the
applicable period. Diluted EPS is calculated after
adjusting the numerator and the denominator of the basic EPS
calculation for the effect of all dilutive potential common
shares outstanding during the period. The dilutive effects
of options and
(Continued)
26<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(1) CONTINUED
unvested restricted stock awards are computed during the
"treasury stock" method. Unearned ESOP shares are not
included in outstanding shares. Information related to the
calculation of net income per share of common stock is
summarized as follows for the years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ----------------- --------------------
Basic Diluted Basic Diluted Basic Diluted
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $1,668,807 1,668,807 901,480 901,480 1,004,212 1,004,212
Dividends on unvested
common stock awards (14,098) (11,441) (18,138) (16,213) (17,441) (15,868)
- ------------------------------------------------------------------------------------------------
Adjusted net income
used in EPS
calculations $1,654,709 1,657,366 883,342 885,267 986,771 988,344
================================================================================================
Weighted average
shares outstanding 1,574,314 1,574,314 1,596,392 1,596,392 1,825,883 1,825,883
Dilutive securities:
Options -- 51,527 -- 24,095 -- 15,419
Unvested common
stock awards -- 5,653 -- 4,811 -- 6,289
- ------------------------------------------------------------------------------------------------
Adjusted weighted-average
shares used in EPS
computation 1,574,314 1,631,494 1,596,392 1,625,298 1,825,883 1,847,591
================================================================================================
</TABLE>
(Continued)
27<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(2) INVESTMENT SECURITIES
Investment securities and accrued interest receivable
thereon are summarized as follows at March 31:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------
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 $14,987,212 4,387 (51,319) 14,940,280 14,987,212
- --------------------------------------------------------------------------------------------------
Available for sale:
U.S. Government and
agency obligations 35,994,884 41,594 (202,398) 35,834,080 35,834,080
Preferred stock -
Federal Home Loan
Mortgage Corporation 6,339 363,674 -- 370,013 370,013
- ---------------------------------------------------------------------------------------------------
36,001,223 405,268 (202,398) 36,204,093 36,204,093
Accrued interest receivable 635,237 -- -- 635,237 635,237
- ---------------------------------------------------------------------------------------------------
$51,623,672 409,655 (253,717) 51,779,610 51,826,542
===================================================================================================
</TABLE>
<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>
(Continued)
28<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>
1998 1997
------------------------ --------------------------
Amortized Fair Amortized Fair
cost value cost value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
Due in one year or less $ 6,499,429 6,490,245 2,000,140 2,001,880
Due after one through
five years -- -- 8,494,899 8,403,015
Due after five through
ten years 8,487,783 8,450,035 12,981,572 12,497,655
Due after ten years -- -- 1,000,000 999,220
- --------------------------------------------------------------------------------------------
14,987,212 14,940,280 24,476,611 23,901,770
- -------------------------------------------------------------------------------------------------------------
Available for sale:
Due after one through
five years 1,000,000 992,510 1,000,000 966,410
Due after five through
ten years 8,996,986 9,012,100 17,984,611 17,519,280
Due after ten years 25,997,898 25,829,470 3,993,242 3,820,910
- --------------------------------------------------------------------------------------------
35,994,884 35,834,080 22,977,853 22,306,600
Accrued interest receivable 635,237 635,237 547,657 547,657
- --------------------------------------------------------------------------------------------
$51,617,333 51,409,597 48,002,121 46,756,027
============================================================================================
</TABLE>
There were no sales of investment securities during the years
ended March 31, 1998, 1997 and 1996.
(Continued)
29<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>
1998
-----------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair Carrying
cost gains losses value amount
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Held to maturity:
Government National
Mortgage Association
(GNMA) $1,042,252 70,645 -- 1,112,897 1,042,252
Federal National
Mortgage Association
(FNMA) 1,747,152 56,724 (2,980) 1,800,896 1,747,152
Federal Home Loan
Mortgage Corporation
(FHLMC) 1,286,191 41,576 (1,123) 1,326,644 1,286,191
- ---------------------------------------------------------------------------------------------------
4,075,595 168,945 (4,103) 4,240,437 4,075,595
Available for sale:
GNMA 14,127,943 139,307 -- 14,267,250 14,267,250
FHLMC 2,663,085 448 -- 2,663,533 2,663,533
- ---------------------------------------------------------------------------------------------------
16,791,028 139,755 -- 16,930,783 16,930,783
Accrued interest receivable 153,576 -- -- 153,576 153,576
- ---------------------------------------------------------------------------------------------------
$21,020,199 308,700 (4,103) 21,324,796 21,159,954
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair Carrying
cost gains losses value amount
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Held to maturity:
GNMA $ 1,319,880 66,667 -- 1,386,547 1,319,880
FNMA 2,243,013 58,086 (31,432) 2,269,667 2,243,013
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 -- 3,361,197 3,361,181
- --------------------------------------------------------------------------------------------------
8,162,215 13,966 (87,215) 8,088,966 8,088,950
Accrued interest receivable 117,197 -- -- 117,197 117,197
- --------------------------------------------------------------------------------------------------
$14,234,504 184,412 (167,448) 14,251,468 14,161,239
==================================================================================================
</TABLE>
(Continued)
30<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(3) CONTINUED
Contractual maturities of mortgage-backed
securities are as follows at March 31:
<TABLE>
<CAPTION>
1998 1997
------------------------ --------------------------
Amortized Fair Amortized Fair
cost value cost value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
Due in one year or less $ 465,345 464,222 695,097 692,776
Due after one through five years 1,010,984 1,012,661 1,832,768 1,753,954
Due after five through ten years 143,118 150,467 58,590 60,201
Due after ten years 2,456,148 2,613,087 3,368,637 3,538,374
- ---------------------------------------------------------------------------------------------
4,075,595 4,240,437 5,955,092 6,045,305
Available for sale:
Due after ten years 16,791,028 16,930,783 8,162,215 8,088,950
Accrued interest receivable 153,576 153,576 117,197 117,197
- ---------------------------------------------------------------------------------------------
$21,020,199 21,324,796 14,234,504 14,251,452
=============================================================================================
</TABLE>
Contractual maturities do not consider possible prepayments.
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, 1998 and 1996.
(Continued)
31<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>
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans on real estate:
One to four-family residential $118,814,885 119,924,528
Multifamily residential 929,111 955,952
Commercial 16,392,236 12,182,568
Construction 8,296,150 6,632,972
Land 2,934,061 1,473,445
Loans held for sale 2,755,614 3,865,888
- ------------------------------------------------------------------------------
Total first mortgage loans 150,122,057 145,035,353
Loans secured by savings accounts 621,080 650,540
Home equity loans 455,744 400,088
Home improvement loans 224,493 112,163
Financing leases 850,046 277,112
Commercial loans 811,022 1,118,630
Accrued interest receivable 758,781 760,571
- ------------------------------------------------------------------------------
153,843,223 148,354,457
- ------------------------------------------------------------------------------
Less:
Undisbursed portion of loans in process 4,438,239 2,306,965
Unearned discount on loans purchased 38,638 46,130
Unearned loan fees 975,327 919,616
Allowance for losses 490,000 380,000
- ------------------------------------------------------------------------------
5,942,204 3,652,711
- ------------------------------------------------------------------------------
Loans receivable, net $147,901,019 144,701,746
==============================================================================
</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)
32<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 $975,000 and
$289,000 at March 31, 1998 and 1997, respectively. For the
years ended March 31, 1998, 1997 and 1996, 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 $79,000,
$11,000 and $14,000, respectively. The actual interest
income recorded on these loans for the years ended March
31, 1998, 1997 and 1996 was approximately $67,000, $5,000
and $11,000, 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 $385,000 and $1,170,000 at
March 31, 1998 and 1997, respectively, are not included
above in nonperforming loans, but have exhibited potential
or actual weaknesses, which, if not corrected, would cause
management to have doubts as to the ability of the
borrowers to comply with the present loan repayment terms
and which could result in classification of such loans as
nonperforming in the future.
Changes in the allowance for losses were as follows for the
years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $380,000 438,500 465,000
Provision for losses on loans 110,000 32,605 --
Charge-offs -- (91,105) (26,500)
- -----------------------------------------------------------------
Ending balance $490,000 380,000 438,500
=================================================================
</TABLE>
(Continued)
33<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>
1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Residential mortgage $265,000 155,000 155,000
Commercial mortgage 175,000 100,000 100,000
Construction 50,000 125,000 125,000
Commercial and financing leases -- -- 58,500
- -----------------------------------------------------------------
$490,000 380,000 438,500
=================================================================
</TABLE>
At March 31, 1998, 1997 and 1996, the Bank was servicing
loans owned by others of approximately $13,718,000,
$9,215,000 and $9,550,000, respectively.
The Bank made loans to certain of its directors and a
company in which an executive officer holds a 50% interest.
These loans, which were repaid in 1998, 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. 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, 1998 was 7.5%.
The Bank accounts for its investment using the equity
method. As of March 31, 1998, all profits to date have been
reinvested. Each of the three investors share profits and
losses equally at 33-1/3%.
The investment in and advances to Bankers Affiliate, Inc.
are as follows at March 31:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Capital stock, at cost $ 25,000 25,000
Advances 2,825,000 2,750,000
- -----------------------------------------------------------------
$2,850,000 2,775,000
=================================================================
</TABLE>
(Continued)
34<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(5) CONTINUED
Summarized financial information as of June 30, 1997 and
1996 and for the years ended June 30, 1997, 1996 and 1995
for Bankers Affiliate, Inc. is as follows:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
Cash $ 191,991 233,189
Finance receivables, net 8,333,119 8,124,742
Other assets 32,811 24,461
Real estate owned 101,851 117,729
- -----------------------------------------------------------------
$8,659,772 8,500,121
=================================================================
Loans payable to Harbor Federal $2,850,000 2,800,000
Other loans payable 5,700,000 5,600,000
Other liabilities 27,670 34,162
- -----------------------------------------------------------------
8,577,670 8,434,162
Stockholders' equity 82,102 65,959
- -----------------------------------------------------------------
$8,659,772 8,500,121
=================================================================
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
Income:
Interest $830,949 897,767 852,817
Other income 37,865 33,866 28,920
- -----------------------------------------------------------------
868,814 931,633 881,737
- -----------------------------------------------------------------
Expenses:
Interest 588,769 686,482 594,761
Salaries 128,006 120,997 119,428
Provision for losses 67,788 40,392 73,694
Other expenses 75,744 78,013 78,890
- -----------------------------------------------------------------
860,307 925,884 866,773
- -----------------------------------------------------------------
Income before income taxes (benefit) 8,507 5,749 14,964
Income taxes (benefit) (7,636) 3,050 15,688
- -----------------------------------------------------------------
Net income (loss) $ 16,143 2,699 (724)
=================================================================
</TABLE>
(Continued)
35<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(6) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at March
31:
<TABLE>
<CAPTION>
1998 1997 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 847,131 829,189 5-10 years
Automobiles 24,128 24,128 3 years
- ------------------------------------------------------------------------------
Total, at cost 2,993,946 2,976,004
Less accumulated depreciation
and amortization 1,173,037 1,037,305
- --------------------------------------------------------------
Property and equipment, net $1,820,909 1,938,699
==============================================================
</TABLE>
At March 31, 1998, the Bank was obligated under
noncancellable long-term operating leases for two of its
branch offices. These leases expire at dates to 2000 and
provide for approximate aggregate rentals of $47,000 in
1999 and $25,000 in 2000.
Rent expense was $89,495, $103,618 and $6,248 for the years
ended March 31, 1998, 1997 and 1996, respectively.
(Continued)
36<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(7) SAVINGS ACCOUNTS
Savings accounts are summarized as follows at March 31:
<TABLE>
<CAPTION>
Weighted average rate 1998 1997
--------------------- ------------------- --------------------
1998 1997 Amount % Amount %
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Certificates 6.08% 5.99% $114,623,651 65.4% 111,226,244 63.9%
Money market 3.57% 3.65% 23,374,603 13.4% 24,799,745 14.2%
Passbook 3.05% 3.05% 29,656,504 16.9% 31,254,100 18.0%
NOW 1.00% 0.96% 5,704,768 3.3% 5,425,414 3.1%
Christmas Club 3.05% 3.05% 336,619 0.2% 333,075 0.2%
Commercial checking -- -- 1,463,259 0.8% 1,065,995 0.6%
- ----------------------------------------------------------------------------------------------
175,159,404 100.0% 174,104,573 100.0%
===== =====
Acquisition premium, net of
accumulated amortization
of $788,082 and $406,698,
respectively (2,256,560) (2,637,944)
------------ -----------
$172,902,844 171,466,629
============ ===========
Certificate accounts maturing:
Under 12 months $ 74,322,514 64.8% 52,551,230 47.2%
12 months to 24 months 23,687,061 20.7% 32,311,982 29.1%
24 months to 36 months 12,243,493 10.7% 17,203,594 15.5%
36 months to 48 months 3,059,413 2.7% 6,710,506 6.0%
48 months to 60 months 1,311,170 1.1% 2,448,932 2.2%
------------ ----- ----------- -----
$114,623,651 100.0% 111,226,244 100.0%
============ ===== =========== =====
</TABLE>
At March 31, 1998 and 1997, customer deposits in savings
accounts of $100,000 or more were approximately $13,240,000
and $12,540,000, respectively.
(Continued)
36<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>
1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Securities sold under agreements to
repurchase with interest rates
and maturities as follows:
5.7% due June 1997 $ -- 4,500,000
5.7% due October 1997 -- 10,000,000
5.6% due November 1997 -- 2,000,000
5.7% due April 1998 966,250 --
5.8% due April 1998 990,000 --
5.8% due May 1998 3,880,000 --
5.9% due December 1998 7,500,000 --
5.6% due March 1999 1,930,000 --
Federal Home Loan Bank advances,
5.05%, due December 2007 10,000,000 --
- ---------------------------------------------------------------------------
$25,266,250 16,500,000
===========================================================================
</TABLE>
The Bank enters into sales of mortgage-backed
securities and investment securities with
agreements to repurchase. Such agreements are
treated as financings, and the obligations to
repurchase securities sold are reported as
liabilities in the consolidated statements of
financial condition. The securities underlying
the agreements are book-entry securities. The
securities are delivered by appropriate entry into
the counterparties' accounts maintained at the
Federal Reserve Bank of New York. 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>
1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount outstanding at year-end $15,266,250 16,500,000 4,500,000
Maximum outstanding at any month-end 16,500,000 21,415,000 7,500,000
Average outstanding 14,210,000 15,210,000 4,700,000
Fair value of securities sold under
reverse repurchase agreements at year-end:
Mortgage-backed securities 2,017,108 9,354,892 4,886,383
Investment securities 13,950,500 8,734,950 --
Amortized cost of securities sold under
reverse repurchase agreements at year-end:
Mortgage-backed securities 1,980,396 9,478,744 4,995,156
Investment securities 14,000,000 9,000,000 --
==================================================================================
</TABLE>
(Continued)
38<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(8) CONTINUED
Under a blanket floating lien security agreement
with the Federal Home Loan Bank of Atlanta (FHLB),
the Bank is required to maintain as collateral for
its advances qualifying first mortgage loans in an
amount equal to 100% of the advances. First
mortgage loans of $10,000,000 were pledged as
collateral at March 31, 1998. At the discretion
of the FHLB, the interest rate can be converted to
a variable rate subsequent to December 1998.
(9) INCOME TAXES
The income tax provision is composed of the
following for the years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,005,289 549,850 510,822
State 222,550 121,724 113,085
- ----------------------------------------------------------------
1,227,839 671,574 623,907
Deferred:
Federal (71,948) (85,457) 11,688
State (15,928) (18,917) 2,587
- ----------------------------------------------------------------
(87,876) (104,374) 14,275
- ----------------------------------------------------------------
$1,139,963 567,200 638,182
================================================================
</TABLE>
The net deferred tax asset at March 31, 1998 and
1997 consists of total deferred tax assets of
$775,388 and $887,301, respectively, and total
deferred tax liabilities of $592,522 and $448,267,
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>
1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Interest and fees on loans $ 46,480 51,457
Allowance for losses on loans 189,238 146,949
Accrual basis of accounting and deferred compensation 401,868 408,271
Unamortized premium on savings deposits 137,802 68,901
Federal Home Loan Bank stock dividends (207,351) (207,351)
Prepaid pension cost (40,983) (29,771)
Tax bad debt reserve in excess of base year (211,867) (211,145)
Unrealized (gain) loss on investments available
for sale (132,321) 211,723
- ----------------------------------------------------------------------------
$ 182,866 439,034
============================================================================
</TABLE>
(Continued)
39<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>
1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate $ 954,982 499,351 558,414
State income taxes, net of
Federal income tax benefit 136,371 67,853 76,344
Other, net, primarily
nondeductible compensation
costs in 1998 48,610 (4) 3,424
- ----------------------------------------------------------------
Income tax provision $1,139,963 567,200 638,182
================================================================
</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, liabilities, and certain off-
balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts
and classification are also subject to qualitative
judgments by the regulators about components, risk
weightings and other factors.
(Continued)
40<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, 1997, the most
recent notification from the Office of Thrift
Supervision (OTS) categorized the Bank as well
capitalized under the regulatory framework for
prompt corrective action. There are no conditions
or events since that notification that management
believes have changed the Bank's category.
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, 1998:
Tier I core capital (a) $22,215 9.69% $9,169 4% $11,462 >5%
Tier I risk-based capital (b) 22,215 21.59% 4,115 4% 6,173 >6%
Total risk-based capital (b) 22,705 22.07% 8,231 8% 10,289 >10%
As of March 31, 1997:
Tier I core capital (a) 24,479 11.24% 8,715 4% 13,072 >5%
Tier I risk-based capital (b) 24,479 26.83% 3,650 4% 5,475 >6%
Total risk-based capital (b) 24,859 27.17% 7,320 8% 9,150 >10%
=================================================================================================
<FN>
(a) percentage of capital to ending assets.
(b) Percentage of risk-based capital to ending risk-weighted assets.
</FN>
</TABLE>
(11) STOCKHOLDERS' EQUITY AND RELATED MATTERS
In 1994, the Board of Directors approved a plan of
reorganization from a mutual savings association
to a capital stock savings bank and the concurrent
formation of a holding company. The conversion
was accomplished through amendment of the Bank's
charter and the sale (on August 11, 1994) of the
Company's common stock in an amount equal to the
consolidated pro forma market value of the Company
and the Bank after giving effect to the
conversion.
Federal regulations require that, upon conversion
from mutual to stock form of ownership, a
"liquidation account" be established by restricting
a portion of net worth for the benefit of eligible
savings account holders who maintain their savings
accounts with the Bank after conversion. In the
event of complete liquidation (and only in such
event), each savings account holder who continues
to maintain a savings account shall be entitled to
receive a
(Continued)
41<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(11) CONTINUED
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
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.
(Continued)
42<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(11) CONTINUED
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 23, 1998 the Company's Board of
Directors declared a $.13 per share dividend on
common stock payable April 10, 1998, to holders of
record on April 1, 1998.
(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. Shares are
allocated to participants annually based on
principal payments made on the note. The ESOP's
sources of repayment of the note are dividends on
the common stock, if any, and an annual
contribution to the ESOP and earnings thereon.
All employees who attain the age of 21 and
complete six months of service are eligible to
participate in the ESOP. Participants are 100%
vested in their accounts after seven years of
service or, if earlier, upon death, disability or
attainment of normal retirement age. Participants
received credit for service with the Bank prior to
the establishment of the ESOP.
For the years ended March 31, 1998, 1997 and 1996,
compensation expense related to the ESOP was
approximately $378,000, $284,000 and $259,000,
respectively. Dividends on ESOP shares used for
debt service by the ESOP for the years ended
March 31, 1998, 1997 and 1996 were approximately
$50,000, $52,000 and $32,000, respectively.
The ESOP shares were as follows at March 31:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Allocated shares 83,124 60,723
Unearned shares 91,283 113,684
- ----------------------------------------------------------------
174,407 174,407
- ----------------------------------------------------------------
Fair value of unearned shares
at March 31 $2,282,075 1,847,365
================================================================
</TABLE>
(Continued)
43<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(12) CONTINUED
MANAGEMENT RECOGNITION PLAN
Effective January 13, 1995, the Company established a
Management Recognition Plan (MRP) to retain personnel of
experience and ability in key positions of responsibility.
Members of the Board of Directors and certain executive
officers were awarded a total of 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 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,
1998, 1997 and 1996, compensation expense related to the
MRP was $113,790, $150,650 and $383,520, 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, 1998,
1997 and 1996, compensation expense related to the
Directors Retirement Plan was $97,034, $214,668 and
$214,668, 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 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)
44<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>
1998 1997 1996
(shares) (shares) (shares)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year - $10.625 per share 172,505 203,409 218,009
Granted -- -- --
Exercised (9,970) (6,429) (12,020)
Forfeited (1,361) (24,475) (2,580)
- ----------------------------------------------------------------------------------
Outstanding at end of year - $10.625 per share 161,174 172,505 203,409
- ----------------------------------------------------------------------------------
Exercisable at end of year 105,279 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. No shares were purchased
in 1998. The Company is authorized to purchase up
to 49,600 shares for the Stock Option Trust in the
open market at March 31, 1998.
(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, 1998, 1997 and 1996, pension expense was
$112,459, $84,370 and $99,581, 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, 1998 and
1997.
(Continued)
45<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(14) CONTINUED
The carrying amounts and estimated fair values of
financial instruments are summarized as follows at
March 31:
<TABLE>
<CAPTION>
1998 1997
--------------------- ------------------------
Carrying Fair Carrying Fair
amount value amount value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and interest-bearing
deposits $2,926,358 2,926,000 1,758,834 1,759,000
Federal funds sold 313,047 313,000 3,939,419 3,939,000
Investment securities 51,826,542 51,780,000 47,543,418 46,969,000
Mortgage-backed securities 21,159,954 21,325,000 14,161,239 14,251,000
Loans receivable 147,901,019 146,354,000 144,701,746 144,975,000
Liabilities:
Savings accounts 172,902,844 174,024,000 171,466,629 175,433,000
Borrowed funds 25,266,250 25,266,000 16,500,000 16,500,000
Advances payments by borrowers
for taxes, insurance and
ground rents 1,935,804 1,936,000 1,902,414 1,902,000
====================================================================================
</TABLE>
CASH AND INTEREST-BEARING DEPOSITS
The carrying amounts for cash on hand and due from
banks and interest-bearing deposits approximate
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 values of investment securities and
mortgage-backed securities are based on bid prices
received from an external pricing service or bid
quotations received from securities dealers.
(Continued)
46<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)
47<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>
1998
---------------------------
Fixed rate Floating Rate
- -----------------------------------------------------------------------------
<S> <C> <C>
Residential mortgage loans to be funded $ 852,500 --
Commercial mortgage loans to be funded 80,000 --
Undisbursed lines of credit -- 1,116,000
- ------------------------------------------------------------------------------
$ 932,500 1,116,000
==============================================================================
</TABLE>
Residential mortgage loan commitments usually
expire within thirty days. The interest rate
range on fixed rate mortgage loan commitments was
from 6.50% to 8.75% at March 31, 1998. 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)
48<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>
STATEMENTS OF FINANCIAL CONDITION
1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 8,000,267 $ 5,178,382
Investment in the Bank 8,303,510 10,542,516
Federal and state income taxes receivable 17,654 226,254
- -------------------------------------------------------------------------
$16,321,431 15,947,152
=========================================================================
Loan payable - Bank $ 912,830 1,136,840
Other liabilities 232,506 185,450
- -------------------------------------------------------------------------
1,145,336 1,322,290
Stockholders' equity 15,176,095 14,624,862
- -------------------------------------------------------------------------
$16,321,431 15,947,152
=========================================================================
</TABLE>
(Continued)
49<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
______________________________________________________________
(15) CONTINUED
<TABLE>
<CAPTION>
STATEMENT OF INCOME
1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Interest income $ 194,673 112,763 258,840
- ---------------------------------------------------------------------------------
Expenses:
Interest expense 89,742 110,349 233,434
Professional fees 32,837 19,200 75,000
Other expenses 36,891 30,565 42,247
- ---------------------------------------------------------------------------------
159,470 160,114 350,681
- ---------------------------------------------------------------------------------
Income (loss) before equity in net income of
subsidiary and income taxes 35,203 (47,351) (91,841)
Equity in net income of subsidiary 1,647,204 930,531 1,060,703
- ---------------------------------------------------------------------------------
Income before income taxes 1,682,407 883,180 968,862
Income taxes (benefit) 13,600 (18,300) (35,350)
- ---------------------------------------------------------------------------------
Net income $1,668,807 901,480 1,004,212
=================================================================================
</TABLE>
(Continued)
50<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
______________________________________________________________
(15) CONTINUED
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,668,807 901,480 1,004,212
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in net income of subsidiary (1,647,204) (930,531) (1,060,703)
Noncash compensation under stock-
based benefit plans 541,401 462,650 658,087
Other, net 94,462 (396,157) (261,656)
- ---------------------------------------------------------------------------------
Net cash provided by operating activities 657,466 37,442 339,940
- ---------------------------------------------------------------------------------
Investing activities - dividend
distribution from Bank 4,000,000 -- 4,000,000
- ---------------------------------------------------------------------------------
Net cash provided by investing activities 4,000,000 -- 4,000,000
- ---------------------------------------------------------------------------------
Financing activities:
Purchases of common stock (966,297) (8,987) (7,220,210)
Exercise of stock options by
Stock Option Trust 105,930 68,308 127,713
Repayment of borrowings (224,010) (226,410) (206,410)
Dividends paid (751,204) (701,768) (403,833)
- ---------------------------------------------------------------------------------
Net cash used in financing activities (1,835,581) (868,857) (7,702,740)
- ---------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 2,821,885 (831,415) (3,362,800)
Cash and cash equivalents at beginning of year 5,178,382 6,009,797 9,372,597
- ---------------------------------------------------------------------------------
Cash and cash equivalents at end of year $8,000,267 5,178,382 6,009,797
=================================================================================
</TABLE>
51
Accountants' Consent
--------------------
The Board of Directors
Harbor Federal Bancorp, Inc.
We consent to the incorporation by reference in the Registration
Statement on Form S-8 of Harbor Federal Bancorp, Inc. of our
report dated May 15, 1998, relating to the consolidated
statements of financial condition of Harbor Federal Bancorp,
Inc. and subsidiary as of March 31, 1998 and 1997, 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, 1998 which report is incorporated by reference
in the March 31, 1998 annual report on Form 10-KSB of Harbor
Federal Bancorp, Inc.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Baltimore, Maryland
June 25, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> MAR-31-1998
<CASH> 2,752,620
<INT-BEARING-DEPOSITS> 173,728
<FED-FUNDS-SOLD> 313,047
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,688,276
<INVESTMENTS-CARRYING> 19,298,220
<INVESTMENTS-MARKET> 19,416,130
<LOANS> 147,901,019
<ALLOWANCE> 490,000
<TOTAL-ASSETS> 231,140,190
<DEPOSITS> 172,902,844
<SHORT-TERM> 25,266,250
<LIABILITIES-OTHER> 3,648,286
<LONG-TERM> 0
0
0
<COMMON> 16,934
<OTHER-SE> 29,305,876
<TOTAL-LIABILITIES-AND-EQUITY> 231,140,190
<INTEREST-LOAN> 11,644,544
<INTEREST-INVEST> 4,442,580
<INTEREST-OTHER> 313,561
<INTEREST-TOTAL> 16,400,685
<INTEREST-DEPOSIT> 8,845,283
<INTEREST-EXPENSE> 9,839,417
<INTEREST-INCOME-NET> 6,561,268
<LOAN-LOSSES> 110,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,131,884
<INCOME-PRETAX> 2,808,770
<INCOME-PRE-EXTRAORDINARY> 1,668,807
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,668,807
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.02
<YIELD-ACTUAL> 7.55
<LOANS-NON> 0
<LOANS-PAST> 975,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 380,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 490,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 490,000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<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> 28,207,235
<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> .55
<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>
