<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Amendment No. 1)
[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
--------------
Securities registered pursuant to
Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(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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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: July 6, 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
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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>
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.
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<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>
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<TABLE>
<CAPTION>
Year Ended March 31,
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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>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Harbor Federal Bancorp, Inc.
Baltimore, Maryland:
We have audited the accompanying consolidated statements of
financial condition of Harbor Federal Bancorp, Inc. and
subsidiary as of March 31, 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. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Harbor Federal Bancorp, Inc. and subsidiary as of
March 31, 1998 and 1997, and the results of their operations and
their cash flows for each of the years in the three-year period
ended March 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
May 15, 1998
15<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
March 31, 1998 and 1997
==============================================================================
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash:
On hand and due from banks $ 2,752,630 1,482,872
Interest-bearing deposits 173,728 275,962
Federal funds sold 313,047 3,939,419
Investment securities, fair value of $51,779,610
and $46,968,577, respectively (notes 2 and 8) 51,826,542 47,543,418
Mortgage-backed securities, fair value of
$21,324,796 and $14,251,468, respectively
(notes 3 and 8) 21,159,954 14,161,239
Loans receivable, net (note 4) 147,901,019 144,701,746
Investment in Federal Home Loan Bank
stock, at cost (note 10) 1,433,500 1,366,000
Investments in real estate, net -- 465,136
Investment in and advances to affiliated
corporation (note 5) 2,850,000 2,775,000
Property and equipment, net (note 6) 1,820,909 1,938,699
Prepaid expenses and other assets 908,861 812,693
- ------------------------------------------------------------------------------
$231,140,190 219,462,184
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings accounts (note 7) $172,902,844 171,466,629
Borrowed funds (note 8) 25,266,250 16,500,000
Advance payments by borrowers for taxes,
insurance and ground rents 1,935,804 1,902,414
Accrued expenses and other liabilities 1,560,098 1,296,861
Federal and state income taxes payable 152,384 71,501
- ------------------------------------------------------------------------------
Total liabilities 201,817,380 191,237,405
Stockholders' equity (notes 1, 10, 11 and 12):
Preferred stock $0.01 par value; authorized
5,000,000 shares; none issued -- --
Common stock $0.01 par value; authorized
20,000,000 shares; issued and outstanding
1,693,420 and 1,754,420 shares, respectively 16,934 17,544
Additional paid-in capital 13,069,233 13,611,599
Unearned ESOP shares (912,830) (1,136,840)
Retained income, substantially restricted 16,939,169 16,068,969
Unrealized holding gain (loss) on securities
available for sale, net 210,304 (336,493)
- ------------------------------------------------------------------------------
Total stockholders' equity 29,322,810 28,224,779
Commitments and contingencies (notes 10, 11,
12 and 14)
- ------------------------------------------------------------------------------
$231,140,190 219,462,184
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
16<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended March 31, 1998, 1997 and 1996
==============================================================================
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $11,644,544 10,426,017 8,258,649
Mortgage-backed securities 1,121,238 1,211,214 1,297,242
Investment securities 3,321,342 3,437,112 1,901,219
Interest-bearing deposits and other
short-term investments 313,561 294,470 325,511
- ------------------------------------------------------------------------------
Total interest income 16,400,685 15,368,813 11,782,621
- ------------------------------------------------------------------------------
Interest expense:
Savings accounts:
Certificates 6,858,210 6,375,035 4,351,237
NOW and money market deposit
accounts 985,810 1,054,961 800,607
Passbook and statement savings 1,001,263 1,037,527 792,324
- ------------------------------------------------------------------------------
8,845,283 8,467,523 5,944,168
Borrowed funds:
Federal Home Loan Bank advances 147,292 -- --
Securities sold under agreements
to repurchase 846,842 903,821 268,528
- ------------------------------------------------------------------------------
994,134 903,821 268,528
- ------------------------------------------------------------------------------
Total interest expense 9,839,417 9,371,344 6,212,696
- ------------------------------------------------------------------------------
Net interest income 6,561,268 5,997,469 5,569,925
Provision for losses on loans (note 4) 110,000 32,605 --
- ------------------------------------------------------------------------------
Net interest income after provision
for losses on loans 6,451,268 5,964,864 5,569,925
- ------------------------------------------------------------------------------
Noninterest income:
Loan fees and service charges 225,431 65,687 65,916
Other 263,955 163,587 76,203
- ------------------------------------------------------------------------------
Total noninterest income 489,386 229,274 142,119
- ------------------------------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income, Continued
<TABLE>
<CAPTION>
Years ended March 31, 1998, 1997 and 1996
==============================================================================
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest expense:
Compensation and benefits (note 12) $2,652,242 2,412,898 2,498,000
Occupancy and equipment 450,958 438,675 323,800
SAIF deposit insurance premiums
(note 10) 90,278 1,029,651 297,295
Advertising 129,040 162,434 235,969
Other 809,366 681,800 714,586
- ------------------------------------------------------------------------------
Total noninterest expense 4,131,884 4,725,458 4,069,650
Income before income taxes 2,808,770 1,468,680 1,642,394
Income taxes (note 9) 1,139,963 567,200 1,638,182
- ------------------------------------------------------------------------------
Net income $1,668,807 901,480 1,004,212
==============================================================================
Net income per share of common
stock (note 1):
Basick $ 1.05 0.55 0.54
Diluted 1.02 0.54 0.53
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
18<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Years ended March 31, 1998, 1997 and 1996
====================================================================================
Common Additional Unearned
stock paid-in capital ESOP Shares
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1995 $21,801 20,827,843 (1,569,660)
Compensation under stock-based benefit
plans -- 451,677 206,410
Purchase of 425,666 shares of common stock (4,257) (5,973,431) --
Purchase of 87,203 shares of common stock
for MRP Trust -- (1,242,522) --
Purchase of 58,707 shares of common stock
for Stock Option Trust -- (875,242) --
Exercise of 12,020 stock options by
Stock Option Trust -- 127,713 --
Adjustment to unrealized holding gain
(loss) on securities available for
sale, net (note 1) -- -- --
Dividends ($.20 per share) -- -- --
Net income - 1996 -- -- --
- ------------------------------------------------------------------------------------
Balance at March 31, 1996 17,544 13,316,038 (1,363,250)
Compensation under stock-based benefit
plans -- 236,240 226,410
Purchase of 698 shares of common stock
for Stock Option Trust -- (8,987) --
Exercise of 6,429 stock options by
Stock Option Trust -- 68,308 --
Adjustment to unrealized holding gain
(loss) on securities available for
sale, net (note 1) -- -- --
Dividends ($.40 per share) -- -- --
Net income - 1997 -- -- --
- ------------------------------------------------------------------------------------
Balance at March 31, 1997 17,544 13,611,599 (1,136,840)
Compensation under stock-based benefit
plans -- 317,391 244,010
Purchase of 61,000 shares of common stock (610) (965,687) --
Exercise of 9,970 stock options by
Stock Option Trust -- 105,930 --
Adjustment to unrealized holding gain
(loss) on securities available for
sale, net (note 1) -- -- --
Dividends ($.47 per share) -- -- --
Net income - 1998 -- -- --
- ------------------------------------------------------------------------------------
Balance at March 31, 1998 $16,934 $13,069,233 $ (912,830)
====================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years ended March 31, 1998, 1997 and 1996
====================================================================================
Retained Unrealized holding
income gain (loss) on Total
substantially securities available stockholders'
restricted for sale equity
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1995 15,441,620 68,523 34,790,127
Compensation under stock-based benefit
plans -- -- 658,087
Purchase of 425,66 shares of common stock -- -- (5,977,688)
Purchase of 87,203 shares of common stock
for MRP Trust -- -- (1,242,522)
Purchase of 58,707 shares of common stock
for Stock Option Trust -- -- (875,242)
Exercise of 12,020 stock options by
Stock Option Trust -- -- 127,713
Adjustment to unrealized holding gain
(loss) on securities available for
sale, net (note 1) -- (191,760) (191,760)
Dividends ($.20 per share) (403,833) -- (403,833)
Net income - 1996 1,004,212 -- 1,004,212
- ------------------------------------------------------------------------------------
Balance at March 31, 1996 16,041,999 (123,237) 27,889,094
Compensation under stock-based benefit
plans -- -- 462,650
Purchase of 698 shares of common stock
for Stock Option Trust -- -- (8,987)
Exercise of 6,429 stock options by
Stock Option Trust -- -- 68,308
Adjustment to unrealized holding gain
(loss) on securities available for
sale, net (note 1) -- (213,256) (213,256)
Dividends ($.40 per share) (874,510) -- (874,510)
Net income - 1997 901,480 -- 901,480
- ------------------------------------------------------------------------------------
Balance at March 31, 1997 16,068,969 (336,493) 28,224,779
Compensation under stock-based benefit
plans -- -- 541,401
Purchase of 61,000 shares of common stock -- -- (966,297)
Exercise of 9,970 stock options by
Stock Option Trust -- -- 105,930
Adjustment to unrealized holding gain
(loss) on securities available for
sale, net (note 1) -- 546,797 546,797
Dividends ($.47 per share) (798,607) -- (798,607)
Net income - 1998 1,668,807 -- 1,668,807
- ------------------------------------------------------------------------------------
Balance at March 31, 1998 16,939,169 210,304 29,322,810
====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
19<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended March 31, 1998, 1997 and 1996
====================================================================================
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,668,807 901,480 1,004,212
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 135,661 150,976 151,322
Amortization of premium on savings
deposits 381,384 381,384 25,314
Provision for losses on loans 110,000 32,605 --
Deferred income tax provision (87,876) (104,374) 14,275
Noncash compensation under stock-
based benefit plans 541,401 462,650 658,087
Loans originated for sale (3,682,878) (2,666,457) (1,199,431)
Proceeds from sales of loans originated
for sale 4,803,060 -- --
Amortization of loan fees, premiums
and discounts, net (172,819) (85,708) (48,941)
Gain on sale of loans (96,428) -- --
Loss on sale of mortgage-backed
securities available for sale -- 7,787 --
Decrease (increase) in prepaid
expenses and other assets (358,403) 47,091 (2,535)
Increase in accrued expenses and
other liabilities 215,834 324,297 317,536
Increase (decrease) in federal and
state income taxes payable 80,883 277,065 (279,093)
Increase in accrued interest receivable (116,104) (120,068) (238,981)
- ------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 3,422,522 (391,272) 401,765
- ------------------------------------------------------------------------------------
Cash flows from investing activities:
Premium paid on savings deposits -- -- (3,044,642)
Purchases of investment securities
available for sale (30,000,000) (4,997,965) (21,981,389)
Maturities of investment securities
available for sale 17,000,000 4,000,000 --
Principal repayments of mortgage-backed
securities available for sale 1,463,947 1,193,668 2,462,614
Purchases of mortgage-backed securities
available for sale (10,122,750) (4,996,875) (10,484,123)
Sales of mortgage-backed securities
available for sale -- 3,538,099 --
Principal repayments of mortgage-backed
securities 1,883,401 3,890,273 1,818,389
Maturities of investment securities 9,500,000 2,000,000 11,000,000
Purchases of investment securities -- -- (10,986,501)
Loan principal disbursements, net of
repayments (2,048,299) (16,110,791) 1,166,299
Loan purchases (2,105,334) (9,334,785) (14,424,603)
Increase in investment in Federal Home
Loan Bank stock (67,500) (96,400) --
Proceeds from sales of investments in
real estate 465,136 43,848 --
Purchases of property and equipment (17,871) (111,133) (275,361)
Decrease (increase) in investment in and
advances to affiliated corporation, net (75,000) 50,000 (50,000)
- ------------------------------------------------------------------------------------
Net cash used in investing activities (14,124,270) (20,932,061) (44,799,317)
- ------------------------------------------------------------------------------------
(Continued)
</TABLE>
20<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
Years ended March 31, 1998, 1997 and 1996
====================================================================================
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in savings accounts $ 1,054,831 9,441,933 52,870,177
Net increase in borrowed funds 8,766,250 12,000,000 2,500,000
Increase (decrease) in advance payments by
borrowers for taxes, insurance and
ground rents 33,390 (27,121) (164,902)
Purchase of common stock (966,297) -- (5,977,688)
Purchase of common stock for MRP Trust -- -- (1,242,522)
Purchase of common stock for Stock
Option Trust -- (8,987) (875,242)
Exercise of stock options by Stock Option Trust 105,930 68,308 127,713
Dividends paid (751,204) (701,768) (403,833)
- ------------------------------------------------------------------------------------
Net cash provided by financing activities 8,242,900 20,772,365 46,833,703
- ------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (2,458,848) (550,968) 2,436,151
Cash and cash equivalents at beginning of year 5,698,253 6,249,221 3,813,070
- ------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $3,239,405 5,698,253 6,249,221
====================================================================================
Supplemental information:
Interest paid on savings accounts and
borrowed funds $9,450,511 8,899,748 6,217,000
Income taxes paid 1,146,956 628,000 900,000
====================================================================================
Schedule of noncash investing and
financing transactions:
Transfers of loans receivable to investments
in real estate $ -- 465,136 43,848
Unrealized holding gains (loss) on securities
available for sale 546,797 (213,256) (191,760)
====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
21 <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)
37<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/A of Harbor
Federal Bancorp, Inc.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Baltimore, Maryland
July 7, 1998
