<PAGE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
Commission File Number: 0-24194
HARBOR FEDERAL BANCORP, INC.
---------------------------------------------------
(Exact name of small business issuer as specified
in its charter)
Maryland 52-1860591
--------------------------------- ------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
705 York Road, Baltimore, Maryland 21204
--------------------------------------- --------------
(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
--- ---
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:
$17,661,877.
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:
$19,747,408 (1,234,213 shares at the most recent price of which
management was aware as of June 2, 1999 ($16.00 per
share)).
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date: 1,676,515 shares of common stock as of June 1, 1999.
Transitional small business disclosure format (check one):
YES NO X
___ ___
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's Annual Report to
Stockholders for the Fiscal Year Ended March 31, 1999 (the
"Annual Report"). (Part II)
2. Portions of the Proxy Statement for the registrant's
1999 Annual Meeting of Stockholders (the "Proxy Statement").
(Part III)
<PAGE>
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
- --------------------------------
GENERAL
Harbor Federal Bancorp, Inc. Harbor Federal Bancorp, Inc.
(the "Company") was incorporated under the laws of the State of
Maryland in January 1994 at the direction of the Board of
Directors of the predecessor of Harbor Federal Savings Bank
("Harbor Federal" or the "Bank") for the purpose of serving as
the holding company of Harbor Federal upon its conversion from
mutual to stock form (the "Conversion"), which was effective
August 11, 1994. Before the Conversion, the Company did not
engage in any material operations. Since the Conversion, the
Company has had no significant assets other than the outstanding
capital stock of Harbor Federal, a portion of the net proceeds
of the Conversion, investment securities and a note payable from
the Company's employee stock ownership plan ("ESOP"), and the
Company's principal business has been the business of Harbor
Federal.
The holding company structure permits the Company to
expand the financial services currently offered through Harbor
Federal, although there currently are no definitive plans or
arrangements for such expansion. As a holding company, the
Company has greater flexibility than Harbor Federal to diversify
its business activities through existing or newly formed
subsidiaries or through acquisition or merger with other
financial institutions, although the Company currently does not
have any plans, agreements, arrangements or understandings with
respect to any such acquisitions or mergers. The Company is
classified as a unitary savings institution holding company and
is subject to regulation by the Office of Thrift Supervision
("OTS"). As long as the Company remains a unitary savings
institution holding company, the Company currently may diversify
its activities in such a manner as to include any activities
allowed by law or regulation to a unitary savings institution
holding company. For additional information, see "Regulation of
the Company."
The Company's executive offices are located at 705 York
Road, Baltimore, Maryland 21204, and its main telephone number
is (410) 321-7041.
Harbor Federal Savings Bank. Harbor Federal was
originally organized in 1887 as "Riverside Permanent Building
and Loan Association," a Maryland-chartered mutual savings
institution. In 1941, it converted to a federally chartered
mutual savings and loan association, obtained federal deposit
insurance, became a member of the Federal Home Loan Bank
("FHLB") System and changed its name to "Riverside Federal
Savings and Loan Association." In 1981, Riverside Federal
combined with Highland Federal Savings and Loan Association and
changed its name to "Harbor Federal Savings and Loan
Association." Effective August 11, 1994, Harbor Federal
converted from a federally chartered mutual savings and loan
association to a federally chartered stock savings bank and
adopted its current name. Effective February 16, 1996, Harbor
Federal acquired from Sequoia National Bank, Bethesda, Maryland,
three branch offices in the Baltimore area with deposits
totaling approximately $44.1 million. Harbor Federal currently
operates through nine banking offices in the City of Baltimore
and the Counties of Baltimore and Anne Arundel in Maryland.
Harbor Federal is primarily engaged in the business of
attracting deposits from the general public and originating
loans secured by first mortgages on one- to four-family
residences in Harbor Federal's market area. Harbor Federal also
makes commercial and multi-family real estate loans,
construction loans, commercial business loans and other loans.
For additional information, see the Consolidated Financial
Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Annual Report.
<PAGE>
As a federally chartered savings institution, Harbor
Federal is subject to extensive regulation by the OTS. The
lending activities and other investments of Harbor Federal must
comply with various federal regulatory requirements, and the OTS
periodically examines Harbor Federal for compliance with various
regulatory requirements. The Federal Deposit Insurance
Corporation ("FDIC") also has the authority to conduct special
examinations. Harbor Federal must file reports with OTS
describing its activities and financial condition and is also
subject to certain reserve requirements
1
<PAGE>
<PAGE>
promulgated by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). For additional information,
see "Regulation of the Bank."
PROPOSED LEGISLATIVE CHANGES
The Banking Committee and Commerce Committee of the U.S.
House of Representatives have each passed differing versions of
H.R. 10 (the "Act"), which calls for a sweeping modernization of
the banking system that would permit affiliations between
commercial banks, securities firms and insurance companies. The
Act removes the restrictions contained in the Glass-Steagall Act
of 1933 and the Bank Holding Company Act of 1956, thereby
allowing qualified financial holding companies to control banks,
securities firms, insurance companies, and other financial
firms. Conversely, securities firms, insurance companies and
financial firms would be allowed to own or affiliate with a
commercial bank. The Act preserves the thrift charter and all
existing thrift powers, but restricts the activities of new
unitary thrift holding companies. The Senate has passed S. 900,
which is similar to the Act but would exempt small rural banks
from the Community Reinvestment Act. At this time, it is
unknown whether the Act will be enacted, or if enacted, what
form the final version of such legislation might take.
LENDING ACTIVITIES
General. Harbor Federal's principal lending activity
consists of the origination of loans secured by first mortgages
on existing one- to four-family residences in Harbor Federal's
market area. Harbor Federal also makes commercial and multi-
family real estate loans, construction loans, land loans and
other loans.
Historically, Harbor Federal's residential lending
activities consisted primarily of originating fixed rate
mortgage loans with maturities of up to 30 years for retention
in the loan portfolio. Since the early 1980s, Harbor Federal
has sought to build a more rate-sensitive loan portfolio by also
originating adjustable rate mortgages. In recent years,
management has sought to manage Harbor Federal's interest rate
risk by emphasizing the origination of adjustable rate mortgage
loans and fixed rate mortgage loans with terms of 15 years or
less, as well as by investing in significant amounts of short
and medium term mortgage-backed securities and other
investments. In recent periods of both falling and rising
market interest rates, borrowers have tended to prefer longer
term, fixed rate mortgage loans rather than shorter term or
adjustable rate mortgage loans. Prevailing market conditions,
regulatory considerations and the need for a balanced portfolio
have necessitated that Harbor Federal continue to offer fixed
rate mortgages. Since Harbor Federal is a portfolio lender
(i.e., its loans are originated for retention in portfolio
rather than for sale in the secondary market), Harbor Federal's
fixed rate loan originations are a function of the level of
interest rate risk that Harbor Federal is willing to accept
given its capital, profitability and other factors.
2
<PAGE>
<PAGE>
Loan Portfolio Composition. The following table sets forth
selected data relating to the composition of Harbor Federal's
loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- --------------
Amount % Amount % Amount %
------ ----- ------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential. . $114,994 71.20% $118,815 77.23% $119,924 80.84%
Multi-family residential . . . . . 900 .56 929 .60 956 .64
Commercial . . . . . . . . . . . . 19,784 12.25 16,392 10.66 12,183 8.21
Construction (1) . . . . . . . . . 14,848 9.19 8,296 5.39 6,633 4.47
Land . . . . . . . . . . . . . . . 3,293 2.04 2,934 1.91 1,473 .99
Loans held for sale. . . . . . . . 2,659 1.65 2,756 1.79 3,866 2.61
Consumer loans:
Savings accounts . . . . . . . . . 290 .18 621 .40 651 .44
Home equity loans. . . . . . . . . 533 .33 456 .30 400 .27
Other. . . . . . . . . . . . . . . 511 .31 224 .15 112 .08
Commercial business (2). . . . . . . 2,907 1.80 1,661 1.08 1,396 .94
Accrued interest receivable. . . . . 793 .49 759 .49 761 .51
-------- ------ -------- ------ -------- ------
161,512 100.00% 153,843 100.00% 148,355 100.00%
====== ====== ======
Less:
Loans in process . . . . . . . . . 6,225 4,438 2,307
Discounts, deferred loan fees
and other. . . . . . . . . . . . 911 1,014 966
Allowance for loan losses. . . . . 457 490 380
-------- -------- --------
Total . . . . . . . . . . . . . $153,919 $147,901 $144,702
======== ======== ========
<FN>
___________
(1) Consisted solely of one- to four-family residences under construction at March 31, 1999, 1998 and
1997.
(2) Includes financing leases of $1.4 million, $850,000 and $277,000 at March 31, 1999, 1998 and
1997, respectively.
</FN>
</TABLE>
3
<PAGE>
<PAGE>
The following table sets forth information at March 31, 1999
regarding the dollar amount of loans maturing in Harbor
Federal's portfolio, including scheduled repayments of
principal, based on contractual terms to maturity. Demand
loans, loans having no schedule of repayments and no stated
maturity and overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
3 Months 6 Months
or Less 3-6 Months - 1 Year 1-3 Years 3-5 Years 5-10 Years
-------- ---------- -------- --------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential mortgage (1) . . . $ 4,352 $7,594 $ 9,204 $21,805 $11,804 $ 6,213
Construction and Land
Development. . . . . . . . . 3,790 50 143 974 335 5
Commercial . . . . . . . . . . 1,869 549 2,124 234 4,994 1,123
Non-real estate (2) . . . . . . 1,512 215 527 282 520 408
Accrued interest receivable . . 793 -- -- -- -- --
------- ------ ------- ------- ------- -------
Total . . . . . . . . . . . $12,316 $8,408 $11,998 $23,295 $17,653 $ 7,749
======= ====== ======= ======= ======= =======
<CAPTION>
More Than
10-20 Years 20 Years Total
----------- --------- --------
(In thousands)
<S> <C> <C> <C>
Real estate:
Residential mortgage (1) . . . $21,139 $36,975 $119,086
Construction and Land
Development. . . . . . . . . 2,542 4,077 11,916
Commercial . . . . . . . . . . 5,412 3,479 19,784
Non-real estate (2) . . . . . . 244 -- 3,708
Accrued interest receivable . . -- -- 793
------- ------- --------
Total . . . . . . . . . . . $29,337 $44,531 $155,287
======= ======= ========
</TABLE>
The following table sets forth the dollar amount of all loans
at March 31, 1999 due on or after March 31, 2000 which have
predetermined interest rates and floating or adjustable interest
rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rate Adjustable Rates Total
---------- ---------------- -------
(In thousands)
<S> <C> <C> <C>
Real Estate:
Residential mortgage (1) . . $66,085 $31,851 $ 97,936
Construction and Land
Development. . . . . . . . 7,058 875 7,933
Commercial . . . . . . . . . 15,119 123 15,242
Non-real estate (2). . . . . 1,454 -- 1,454
------- ------- --------
Total. . . . . . . . . $89,716 $32,849 $122,565
======= ======= ========
<FN>
__________
(1) Includes both one- to four-family residential and multi-family residential.
(2) Includes commercial business loans, loans secured by savings accounts, home
improvement loans and financing leases.
</FN>
</TABLE>
4
<PAGE>
<PAGE>
Scheduled contractual principal repayments of loans do not
necessarily reflect the actual life of such assets. The average
life of long-term loans is substantially less than their
contractual terms, due to prepayments. The average life of
mortgage loans tends to increase when current mortgage loan
market rates are substantially higher than rates on existing
mortgage loans and tends to decrease when current mortgage loan
market rates are substantially lower than rates on existing
mortgage loans.
Originations, Purchases and Sales of Loans. The following
table sets forth certain information with respect to Harbor
Federal's loan originations, purchases and sales during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1999 1998 1997
----- ------ ------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
One- to four-family. . . . . . . $ 17,396 $ 12,806 $ 18,456
Land . . . . . . . . . . . . . . 1,250 2,423 844
Commercial . . . . . . . . . . . 2,536 4,350 2,606
Construction . . . . . . . . . . 19,256 14,405 16,714
Commercial business. . . . . . . . 368 -- --
-------- -------- --------
Total loans originated . . . . . 40,806 33,984 38,620
Loan repayments. . . . . . . . . . . (35,523) (28,253) (20,307)
-------- -------- --------
Net loan originations. . . . . . $ 5,283 $ 5,731 $ 18,313
======== ======== ========
Loans purchased:
Real estate loans:
One- to four-family. . . . . . . . $ 160 $ 1,355 $ 9,102
Land . . . . . . . . . . . . . . . -- -- 214
Commercial . . . . . . . . . . . . 781 750 19
-------- -------- --------
Total loans purchased. . . . . . $ 941 $ 2,105 $ 9,335
======== ======== ========
Loans sold:
Real estate loans:
One- to four-family. . . . . . . $ 1,017 $ 4,803 $ --
======== ======== ========
</TABLE>
In June 1997, Harbor Federal formed a mortgage company,
Bank Street Mortgage Company to provide additional one- to four-
family loan production. Even with the establishment of the new
mortgage company, market demand was not as great in one- to
four-family and construction real estate loans in fiscal 1998 as
in the prior year. For additional information regarding Harbor
Federal's commercial real estate lending, see "Commercial and
Multi-Family Real Estate Lending" below.
One- to Four-Family Residential Lending. Historically,
Harbor Federal's principal lending activity has been the
origination of loans secured by first mortgages on existing one-
to four-family residences in Harbor Federal's market area.
Harbor Federal also originates significant amounts of loans for
the construction of such residences. The purchase price or
appraised value of most of such residences historically has been
between $50,000 and $300,000, with Harbor Federal's loan amounts
averaging less than $150,000. At March 31, 1999, $118.2
million, or 73.2%, of Harbor Federal's total loans were secured
by one- to four-family residences, a substantial majority of
which were existing, owner-occupied, single-family residences in
Harbor Federal's market area. At March 31, 1999, $51.0 million,
or 42.8%, of Harbor Federal's one- to four-family residential
loans had adjustable interest rates, and $68.1 million, or
57.2%, had fixed-rates.
5
<PAGE>
Harbor Federal's one- to four-family residential mortgage
loans generally are for terms of 5 to 30 years, amortized on a
monthly basis, with principal and interest due each month.
Residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms.
Borrowers may refinance or prepay loans at their option without
penalty. These loans customarily contain "due-on-sale" clauses
which permit Harbor Federal to accelerate repayment of a loan
upon transfer of ownership of the mortgaged property.
Harbor Federal's lending policies generally limit the
maximum loan-to-value ratio on one- to four-family residential
mortgage loans secured by owner-occupied properties to 95% of
the lesser of the appraised value or purchase price, with
private mortgage insurance required on loans with loan-to-value
ratios in excess of 80%. The maximum loan-to-value ratio on
mortgage loans secured by non-owner-occupied properties is
limited to 90%.
Harbor Federal's fixed-rate, one- to four-family
residential mortgage loans are underwritten in accordance with
applicable guidelines and requirements for sale in the secondary
market. Harbor Federal currently originates and holds most
loans for portfolio.
Harbor Federal offers adjustable-rate, one- to four-family
residential mortgage loans. These loans generally are indexed
to the weekly average rate on U.S. Treasury securities adjusted
to a constant maturity (usually, one year). The rates at which
interest accrues on these loans are adjustable periodically
(usually, annually), generally with limitations on adjustments
of 2% per adjustment period and 6% over the life of the loan.
Some of Harbor Federal's adjustable rate mortgage loans have an
initial term of five to seven years before the first interest
rate adjustment, with annual rate adjustments thereafter.
The retention of adjustable-rate loans in Harbor Federal's
portfolio helps reduce Harbor Federal's exposure to increases in
prevailing market interest rates. However, there are
unquantifiable credit risks resulting from potential increases
in costs to borrowers in the event of upward repricing of
adjustable-rate loans. It is possible that during periods of
rising interest rates, the risk of default on adjustable-rate
loans may increase due to increases in interest costs to
borrowers. Further, adjustable-rate loans which provide for
initial rates of interest below the fully indexed rates may be
subject to increased risk of delinquency or default as the
higher, fully indexed rate of interest subsequently replaces the
lower, initial rate. Further, although adjustable-rate loans
allow Harbor Federal to increase the sensitivity of its
interest-earning assets to changes in interest rates, the extent
of this interest sensitivity is limited by the initial fixed
rate period before the first adjustment and the periodic and
lifetime interest rate adjustment limitations and the ability of
borrowers to convert the loans to fixed-rates. Accordingly,
there can be no assurance that yields on Harbor Federal's
adjustable-rate loans will fully adjust to compensate for
increases in Harbor Federal's cost of funds. Finally,
adjustable-rate loans increase Harbor Federal's exposure to
decreases in prevailing market interest rates, although
decreases in Harbor Federal's cost of funds tend to offset this
effect.
Construction and Land Lending. Harbor Federal offers
single family residential construction loans to qualified
borrowers for construction of one- to four-family residences in
Harbor Federal's market area. At March 31, 1999, one- to four-
family residential construction loans constituted $14.8 million,
or 9.2%, of Harbor Federal's total loans. Typically, Harbor
Federal limits its construction lending to single-settlement,
construction-permanent loans to individuals building their
primary residences and, to a lesser extent, interim construction
loans to selected local developers to build single-family
dwellings where a permanent purchase commitment has been
obtained. These loans generally have adjustable interest rates
and are underwritten in accordance with the same standards as
Harbor Federal's mortgages on existing properties, except the
loans generally provide for disbursement in stages during a
construction period of up to 12 months, during which period the
borrower is required to make monthly payments of accrued
interest on the outstanding loan balance. Construction loans
generally have a maximum loan-to-value ratio of 90%. Borrowers
must satisfy all credit requirements which would apply to Harbor
Federal's permanent mortgage loan financing for the subject
property. While Harbor Federal's construction-permanent
construction loans convert to permanent loans following
construction, Harbor Federal's interim construction loans
generally require repayment in full upon the completion of
construction.
6
<PAGE>
<PAGE>
Harbor Federal also offers loans for the acquisition and
development of land. At March 31, 1999, land acquisition and
development loans constituted $3.3 million, or 2.0%, of Harbor
Federal's total loans. These loans are made on a selective
basis to borrowers which management believes have the requisite
experience in land development and financial strength to ensure
repayment. These loans also are made in limited amounts,
usually not in excess of 65% of the appraised value of the
property. These loans generally provide for payments of only
interest during development, and the maximum loan amount and
term on these loans generally are $2,000,000 and 36 months,
respectively.
Construction and land financing are considered to involve
a higher degree of risk of loss than long-term financing on
improved, occupied real estate. Risk of loss on a construction
or land loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of
development or construction and the estimated cost (including
interest) thereof. During the development and construction
phases, a number of factors could result in delays and cost
overruns. If the estimate of development or construction costs
proves to be inaccurate, Harbor Federal may be required to
advance funds beyond the amount originally committed to permit
completion of the project. If the estimate of value proves to
be inaccurate, Harbor Federal may be confronted, at or prior to
the maturity of the loan, with a project having a value which is
insufficient to assure full repayment. The ability of a
developer to sell developed lots or a builder to sell completed
dwelling units will depend on, among other things, demand,
pricing, availability of comparable properties and economic
conditions. Harbor Federal has sought to limit this risk by
restricting construction and land lending to qualified borrowers
in Harbor Federal's market area and by restricting the aggregate
amounts of outstanding construction and land loans.
Commercial and Multi-Family Real Estate Lending. Harbor
Federal originates limited amounts of commercial and multi-
family real estate loans in order to benefit from the higher
origination fees and interest rates, as well as shorter terms to
maturity, than could be obtained from single-family mortgage
loans. Harbor Federal's commercial and multi-family real estate
loans are secured by apartments, offices, warehouses, shopping
centers and other income-producing multi-family and commercial
properties. At March 31, 1999, Harbor Federal had 110 of these
loans, with a median loan balance of $205,000.
Harbor Federal's commercial and multi-family real estate
loans generally are limited to loans not exceeding $1,000,000 on
properties in Harbor Federal's market area, with amortization
periods and maturities of up to 30 years. These loans generally
have annually adjustable interest rates, with limitations on
adjustments of 2% per year, and maximum loan-to-value ratios of
80%.
The following paragraphs set forth information regarding
Harbor Federal's commercial and multi-family real estate loans
with outstanding balances exceeding $1.0 million at March 31,
1999. None of these loans was classified by management as
substandard, doubtful or loss or designated by management as
special mention at that date. For information regarding Harbor
Federal's asset classification policies, see "Asset
Classification, Allowances for Losses and Non-Performing
Assets."
Retail Space/Restaurant in Ocean City, Maryland. In
December 1995, Harbor Federal granted a $2,500,000
construction/permanent loan secured by a restaurant and
six retail outlets with Boardwalk frontage. At that time
an appraisal indicated a market value of $3,600,000 for a
loan to value ratio of 69%. The loan is being amortized
over a period of twenty years, and the full balance is due
in January 2016. At March 31, 1999 the outstanding
balance was $2,335,000, and the loan was fully performing
in accordance with its terms.
<PAGE>
Professional Real Estate Offices in Central
Maryland. In January 1996 and July 1997, Harbor Federal
originated several loans to the same borrowers totaling
$2,637,202 secured by several full service real estate
brokerage offices. The commercial office buildings are
situated in Howard County, Maryland, Anne Arundel County,
Maryland and Harford County, Maryland. At the time the
appraisals indicated a combined market value of $4,360,000
for a total loan to value ratio of 60%. The loans are
being amortized over thirty years for the purpose of
monthly payments of principal and interest, and the full
balance of the loans will be due
7
<PAGE>
<PAGE>
in February 2026. At March 31, 1999 the outstanding
aggregate balance was $2,575,000, and the loans were fully
performing in accordance with their terms.
Three Commercial Buildings in Cockeysville,
Maryland. Harbor Federal made two separate loans to the
same borrowers. One was settled in February 1996 for
$450,000 and matures January 2016 with possible annual
interest rate changes. This property is a large
commercial strip specializing in antique sales. The
appraisal indicated a value of $1,141,500 for a loan-to-
value ratio of 39%. Furthermore a mortgage was issued to
the same borrowers for $850,000 in October 1996 with the
security being a full service restaurant with a liquor
license and a separate catering hall. The note comes due
September 2016 with interest rate changes possible on an
annual basis. At the inception an appraisal was completed
indicating a value of $1,520,000 for a loan-to-value ratio
of 56%. At March 31, 1999 the outstanding aggregate
balance was $1,230,000, and the loans were fully
performing in accordance with their terms.
Luxury Apartments/Professional Offices in Towson,
Maryland. In December 1997, Harbor Federal made a
$1,920,000 loan secured by high-end residential apartments
and first floor professional offices with private parking.
At the time, an appraisal indicated a market value of
$2,400,000, for a loan to value ratio of 80%. The loan is
being amortized over thirty years for the purpose of
monthly payments of principal and interest, and the full
balance of the loan will be due in January 2002. At March
31, 1999 the outstanding balance was $1,904,000, and the
loan was fully performing in accordance with its terms.
In addition, at March 31, 1999 Harbor Federal had $11.2
million in 100 commercial and multi-family real estate loans
with outstanding balances not exceeding $1.0 million, none of
which was adversely classified or designated by management.
Commercial and multi-family real estate lending entails
significant additional risks compared with one- to four-family
residential lending. For example, commercial and multi-family
real estate loans typically involve large loan balances to
single borrowers or groups of related borrowers, the payment
experience on such loans typically is dependent on the
successful operation of the real estate project, and these risks
can be significantly impacted by supply and demand conditions in
the market for multi-family residential units and commercial
office, retail and warehouse space.
The aggregate amount of loans which federally chartered
savings institutions may make on the security of liens on
commercial real estate currently may not exceed 400% of the
institution's capital; however, the limits on commercial real
estate lending do not require divestiture of any loan or
investment that was lawful when made.
Commercial Business Lending. Under laws and regulations
enacted during the past several years, Harbor Federal is
permitted to make secured and unsecured loans for commercial,
corporate, business and agricultural purposes, including issuing
letters of credit and engaging in inventory financing and
commercial leasing activities. The aggregate outstanding amount
of such loans generally may not exceed 10% of Harbor Federal's
assets. Harbor Federal offers commercial business loans on a
selected basis and in limited amounts. At March 31, 1999,
Harbor Federal's commercial business loans totaled $2.9 million
and primarily consisted of line of credit loans to developers
and nine term loans to six leasing companies. There are seven
direct line of credit loans with local developers of up to $1.7
million in the aggregate, each secured by personal guarantee of
the respective borrower. At March 31, 1999, the total
outstanding balance of these loans was $1.5 million, and all of
these loans were performing in accordance with their respective
terms. In addition, loans to the leasing companies with an
aggregate original balance of $1.6 million have an aggregate
outstanding balance at March 31, 1999 of $1.4 million and were
fully performing in accordance with their terms.
Commercial business loans, including finance leases,
generally involve more risk than first mortgage loans.
Repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding credit
obligation as a result of damage, loss or depreciation, and the
remaining deficiency often does not warrant further substantial
collection efforts against the obligor. In addition,
collections are dependent on the obligor's continuing
8
<PAGE>
<PAGE>
financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy.
Further, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may
limit the amount which can be recovered. These financings may
also give rise to claims and defenses by an obligor against
Harbor Federal, and an obligor may be able to assert against
Harbor Federal claims and defenses which it has against the
seller of the underlying collateral. In underwriting commercial
business loans, Harbor Federal considers the obligor's credit
history, an analysis of the obligor's income, expenses and
ability to repay the obligation and the value of the collateral.
Harbor Federal's risks associated with commercial business loans
have been minimized by the immaterial amount of such loans made
by Harbor Federal.
Consumer Lending. Federally chartered thrift institutions
are authorized to make secured and unsecured consumer loans up
to 35% of the institution's assets. In addition, a federal
thrift institution has lending authority above the 35% category
for certain consumer loans, such as home equity loans, property
improvement loans, mobile home loans and loans secured by
savings accounts. Harbor Federal currently does not emphasize
consumer lending. Harbor Federal's consumer loans primarily
consist of loans secured by deposit accounts at Harbor Federal.
Harbor Federal makes deposit account loans for up to 90% of the
face amount of the deposit balance. The interest rate on these
loans generally is two percent above the rate paid on the
account, and interest is billed on a monthly basis. The account
must be pledged as collateral to secure the loan. For
information regarding the consumer lending activities of Harbor
Federal's partially owned subsidiary, Bankers Affiliate, Inc.,
see "Subsidiary Activities."
Loan Solicitation and Processing. Harbor Federal's loan
originations are derived from a number of sources, including
referrals by realtors, builders, depositors, borrowers and
mortgage brokers, as well as walk in customers. Harbor
Federal's solicitation programs consist of regular calls by
Harbor Federal's branch managers and loan officers to local
realtors and builders and advertisements in local newspapers and
radio and television broadcasts. Real estate loans are
originated by Harbor Federal's salaried staff loan officers as
well as Harbor Federal's branch managers who also receive only
salaries. Loan applications are accepted at each of Harbor
Federal's offices and then submitted to the main office for
processing and approval. Loans made through brokers are
underwritten by Harbor Federal prior to settlement and are
funded by Harbor Federal. For information regarding mortgage
brokerage activities of Harbor Federal's wholly owned
subsidiary, Bank Street Mortgage Company, see "Subsidiary
Activities."
Upon receipt of a loan application from a prospective
borrower, a credit report and verifications are ordered to
verify specific information relating to the loan applicant's
employment, income and credit standing. It is Harbor Federal's
policy to obtain an appraisal of the real estate intended to
secure a proposed mortgage loan from an independent fee
appraiser approved by Harbor Federal. It is Harbor Federal's
policy to obtain personal guarantees from the principals on all
loans. Except when Harbor Federal becomes aware of a particular
risk of environmental contamination, Harbor Federal generally
does not obtain a formal environmental report on the real estate
at the time a loan is made.
It is Harbor Federal's policy to record a lien on the real
estate securing the loan and to obtain a title insurance policy
which insures that the property is free of prior encumbrances.
Borrowers must also obtain hazard insurance policies prior to
closing and, when the property is in a designated flood plain,
paid flood insurance policies. Most borrowers are also required
to advance funds on a monthly basis together with each payment
of principal and interest to a mortgage escrow account from
which Harbor Federal makes disbursements for items such as real
estate taxes.
The Board of Directors has the overall responsibility and
authority for general supervision of Harbor Federal's loan
policies. The Board has established written lending policies
for Harbor Federal. One- to four-family real estate loans are
generally underwritten in accordance with FHLMC guidelines. The
Board approves all commercial business and acquisition,
development and construction loans and all loans over $500,000,
the President is authorized to approve loans up to $500,000, the
Executive Vice President is authorized to approve loans up to
$350,000, and Harbor Federal's branch managers are authorized to
approve share loans up to 90% of a borrower's deposit balance.
9
<PAGE>
<PAGE>
Loan applicants are promptly notified of the decision of
Harbor Federal. It has been management's experience that
substantially all approved loans are funded.
Interest Rates and Loan Fees. Interest rates charged by
Harbor Federal on mortgage loans are primarily determined by
competitive loan rates offered in its market area and Harbor
Federal's minimum yield requirements. Mortgage loan rates
reflect factors such as prevailing market interest rate levels,
the supply of money available to the savings industry and the
demand for such loans. These factors are in turn affected by
general economic conditions, the monetary policies of the
federal government, including the Federal Reserve Board, the
general supply of money in the economy, tax policies and
governmental budget matters.
Harbor Federal receives fees in connection with loan
commitments and originations, loan modifications, late payments
and changes of property ownership and for miscellaneous services
related to its loans. Income from these activities varies from
period to period with the volume and type of loans originated,
sold and purchased, which in turn is dependent on prevailing
market interest rates and their effect on the demand for loans
in Harbor Federal's market area. Loan origination fees are
calculated as a percentage of the loan principal. Harbor
Federal typically receives fees of between zero and two points
(one point being equivalent to 1% of the principal amount of the
loan) in connection with the origination of fixed-rate and
adjustable-rate residential mortgage loans. The excess, if any,
of loan origination fees over direct loan origination expenses
is deferred and accreted into income over the contractual life
of the loan using the interest method. If a loan is prepaid,
refinanced or sold, all remaining deferred fees with respect to
such loan are taken into income at such time.
In addition to the foregoing fees, Harbor Federal receives
fees for servicing loans for others. Servicing activities
include the collection and processing of mortgage payments,
accounting for loan funds and paying real estate taxes, hazard
insurance and other loan-related expenses out of escrowed funds.
Loan servicing fees usually are charged as a percentage
(usually, between 1/4% and 3/8%) of the balance of the loans
being serviced.
Collection Policies. When a borrower fails to make a
payment on a loan, Harbor Federal generally takes immediate
steps to have the delinquency cured and the loan restored to
current status. Once the payment grace period has expired (in
most instances 15 days after the due date), a late notice is
promptly mailed to the borrower, and a late charge is imposed,
if applicable. If payment is not promptly received, the
borrower is contacted, and efforts are made to formulate an
affirmative plan to cure the delinquency. If a loan becomes 30
days in default, a letter is mailed to the borrower requesting
payment by a specified date. If a mortgage becomes 60 days past
due, a certified letter is sent to the borrower demanding
payment by a certain date and indicating that a foreclosure suit
will be filed if the deadline is not met. If payment is not
made, management may pursue foreclosure or other appropriate
action. Before foreclosure, it is Harbor Federal's policy to
conduct an informal inspection of the subject property and, when
warranted, to obtain an appropriate environmental report.
Asset Classification, Allowances for Losses and Non-
Performing Assets. Federal regulations require savings
institutions to classify their assets on the basis of quality on
a regular basis. An asset is classified as substandard if it is
determined to be inadequately protected by the current net worth
and paying capacity of the obligor or of the collateral pledged,
if any. An asset is classified as doubtful if full collection
is highly questionable or improbable. An asset is classified as
loss if it is considered uncollectible, even if a partial
recovery could be expected in the future. The regulations also
provide for a special mention designation, described as assets
which do not currently expose a savings institution to a
sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving
management's close attention. Assets classified as substandard
or doubtful require a savings institution to establish general
allowances for loan losses. If an asset or portion thereof is
classified loss, a savings institution must either establish a
specific allowance for loss in the amount of the portion of the
asset classified loss, or charge off such amount. Federal
examiners may disagree with a savings institution's
classifications. If a savings institution does not agree with
an examiner's classification of an asset, it may appeal this
determination to the OTS Regional Director. Harbor Federal
regularly reviews its assets to determine whether any assets
require classification or re-classification. The Board of
Directors reviews and approves all classifications. At March
31, 1999, Harbor
10
<PAGE>
<PAGE>
Federal had no assets classified as loss, $986,000 of assets
classified as doubtful, $112,000 of assets classified as
substandard and $371,000 of assets designated as special
mention. Harbor Federal's total adversely classified
and designated assets were $1,469,000, which represented 0.61%
of Harbor Federal's total assets and 6.1% of Harbor Federal's
core regulatory capital, at March 31, 1999. At that date,
substantially all of Harbor Federal's adversely classified or
designated assets were one- to four-family residences in Harbor
Federal's market area, and none of such assets was in excess of
$300,000.
In extending credit, Harbor Federal recognizes that losses
will occur and that the risk of loss will vary with, among other
things, the type of credit being extended, the creditworthiness
of the obligor over the term of the obligation, general economic
conditions and, in the case of a secured obligation, the quality
of the security. It is management's policy to maintain adequate
allowances for losses based on, among other things, regular
reviews of delinquencies and credit portfolio quality, character
and size, Harbor Federal's and the industry's historical and
projected loss experience and current economic conditions.
Harbor Federal increases its allowance for loan losses by
charging provisions for losses against income. Federal
examiners may disagree with a savings institution's allowance
for loan losses.
Management actively monitors Harbor Federal's asset
quality and charges off loans and properties acquired in
settlement of loans against the allowances for losses on such
loans and such properties when appropriate and provides specific
loss allowances when necessary. Although management believes it
uses the best information available to make determinations with
respect to the allowances for losses, future adjustments may be
necessary if economic or other conditions differ substantially
from the assumptions used in making the initial determinations.
Harbor Federal's methodology for establishing the
allowance for losses takes into consideration probable losses
that have been identified in connection with specific assets as
well as losses that have not been identified but can be expected
to occur. Management conducts regular reviews of Harbor
Federal's assets and evaluates the need to establish allowances
on the basis of this review. Allowances are established by the
Board of Directors on a monthly basis based on an assessment of
risk in Harbor Federal's assets taking into consideration the
composition and quality of the portfolio, delinquency trends,
current charge-off and loss experience, the state of the real
estate market, regulatory reviews conducted in the regulatory
examination process and economic conditions generally.
Allowances are provided for individual assets, or portions of
assets, when ultimate collection is considered improbable by
management based on the current payment status of the assets and
the fair value or net realizable value of the security. At the
date of foreclosure or other repossession, Harbor Federal
transfers the property to real estate acquired in settlement of
loans at the lower of cost or fair value. Fair value is defined
as the amount in cash or cash-equivalent value of other
consideration that a property would yield in a current sale
between a willing buyer and a willing seller. Fair value is
measured by market transactions. If a market does not exist,
fair value of the property is estimated based on selling prices
of similar properties in active markets or, if there are no
active markets for similar properties, by discounting a forecast
of expected cash flows at a rate commensurate with the risk
involved. Fair value generally is determined through
independent appraisal at the time of foreclosure. At March 31,
1999, Harbor Federal held no properties acquired in settlement
of loans for which market prices were unavailable. Any amount
of cost in excess of fair value is charged-off against the
allowance for loan losses. Harbor Federal records an allowance
for estimated selling costs of the property immediately after
foreclosure. Subsequent to acquisition, the property is
periodically evaluated by management and an allowance is
established if the estimated fair value of the property, less
estimated costs to sell, declines. If, upon ultimate
disposition of the property, net sales proceeds exceed the net
carrying value of the property, a gain on sale of real estate is
recorded.
The OTS has adopted a policy statement regarding
maintenance of an adequate allowance for loan and lease losses
and an effective loan review system. This policy includes an
arithmetic formula for checking the reasonableness of an
institution's allowance for loan loss estimate compared to the
average loss experience of the industry as a whole. Examiners
will review an institution's allowance for loan losses and
compare it against the sum of (i) 50% of the portfolio that is
classified doubtful; (ii) 15% of the portfolio that is
classified as substandard; and (iii) for the portions of the
portfolio that have not been classified (including those loans
designated as special mention), estimated credit losses over the
upcoming twelve months given the facts and circumstances as of
the evaluation date. This amount is considered neither a
"floor" nor a "safe harbor" of the level of allowance for loan
losses an institution should maintain,
11
<PAGE>
<PAGE>
but examiners will view a shortfall relative to the amount as an
indication that they should review management's policy on
allocating these allowances to determine whether it is
reasonable based on all relevant factors.
The following table sets forth an analysis of Harbor
Federal's allowance for loan losses (there were no recoveries)
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------
1999 1998 1997
----- ------ ------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of period . . . $ 490 $ 380 $ 438
----- ----- -----
Charge-offs:
Real estate - mortgage . . . . . . 108 -- --
Commercial business. . . . . . . . -- -- 91
----- ----- -----
Total charge-offs. . . . . . 108 -- 91
----- ----- -----
Provision for loan losses. . . . . . 75 110 33
----- ----- -----
Balance at end of period . . . . . . $ 457 $ 490 $ 380
===== ===== =====
Ratio of net charge-offs to average
loans outstanding during the
period . . . . . . . . . . . . . . 0.07% .00% 0.07%
===== ===== =====
</TABLE>
The following table allocates the allowance for loan
losses by asset category at the dates indicated. The allocation
of the allowance to each category is not necessarily indicative
of future losses and does not restrict the use of the allowance
to absorb losses in any category.
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------------------------------------
1999 1998 1997
------------------------ ----------------------- ----------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ -------------- ------ --------------- ------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Residential. . . . . . . . $ 290 71.76% $ 265 77.83% $ 155 81.48%
Construction . . . . . . . -- 9.51 50 5.72 125 4.47
Commercial . . . . . . . . 150 11.93 175 10.33 100 8.21
Commercial business. . . . . 17 .88 -- 1.08 -- .94
----- ----- -----
Total allowance for loan
losses . . . . . . . . . . $ 457 $ 490 $ 380
===== ===== =====
</TABLE>
While management believes Harbor Federal has established
its existing loss allowances in accordance with generally
accepted accounting principles, there can be no assurance that
regulators, in reviewing Harbor Federal's assets, will not make
Harbor Federal adjust its loss allowance, thereby affecting
Harbor Federal's reported financial condition and results of
operations.
Harbor Federal ceases accruing interest on a loan when, in
the opinion of management, full collection of principal or
interest is in doubt, or payment of principal or interest has
become 90 days or more past due. Interest accrued prior to a
loan becoming 90 days past due is retained in income. Such
interest is considered as part of the total investment in
determining the need for an allowance for losses. Any interest
received in excess of the amount previously accrued on such a
loan is recorded in income in the period of recovery.
12
<PAGE>
The following table sets forth information with respect to
Harbor Federal's nonperforming assets at the dates indicated.
At these dates, Harbor Federal did not have any restructured
loans within the meaning of Statement of Financial Accounting
Standards No. 15.
<TABLE>
<CAPTION>
At March 31,
--------------------------
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual
basis:
Real Estate:
Residential. . . . . . . . . . .$ 986 $ 975 $ 289
====== ====== ======
Percentage of nonperforming loans
to total loans . . . . . . . . . 0.64% 0.66% 0.20%
====== ====== ======
Other nonperforming assets (1) . .$ 447 $ -- $ 465
====== ====== ======
Percentage of nonperforming assets
to total assets. . . . . . . . . 0.41% 0.42% 0.34%
====== ====== ======
<FN>
__________
(1) Other nonperforming assets represents property acquired by
Harbor Federal through foreclosure of repossession. The
property is carried at the lower of its fair market value or
the principal balance of the related loan.
</FN>
</TABLE>
During the year ended March 31, 1999, gross interest
income of $86,000 would have been recorded on loans accounted
for on a non-accrual basis if the loans had been current
throughout the year. Interest on such loans included in income
during the year amounted to $60,000. At March 31, 1999,
management had identified approximately $483,000 of loans which
were not reflected in the preceding table but as to which known
information about possible credit problems of borrowers caused
management to have doubts as to the ability of the borrowers to
comply with present loan repayment terms, and all of such loans
were classified as substandard, doubtful or loss or designated
as special mention. This group comprised six loans, all of
which had balances below $300,000, and substantially all of
which were secured by one- to four-family residences.
Management does not expect Harbor Federal to experience any
material loss on these loans in the future.
MORTGAGE-BACKED SECURITIES
Harbor Federal maintains a significant portfolio of
mortgage-backed securities in the form of FHLMC, GNMA and FNMA
participation certificates. FNMA and FHLMC certificates are
each guaranteed by their respective agencies as to principal and
interest, and GNMA certificates are backed by the full faith and
credit of the U.S. Government. Mortgage-backed securities
generally entitle Harbor Federal to receive a pro rata portion
of the cash flows from an identified pool of mortgages.
Although mortgage-backed securities generally yield less than
the loans which are exchanged for such securities, they present
substantially lower credit risk, they are more liquid than
individual mortgage loans, and they may be used to collateralize
obligations of Harbor Federal.
<PAGE>
The following table sets forth information regarding
Harbor Federal's mortgage-backed securities at the dates
indicated.
<TABLE>
<CAPTION>
At March 31,
--------------------------
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
FHLMC . . . . . . . . . . . . $ 2,215 $ 3,949 $ 5,753
GNMA. . . . . . . . . . . . . 10,757 15,310 6,048
FNMA. . . . . . . . . . . . . 1,097 1,747 2,243
------- ------- -------
Total . . . . . . . . . . $14,069 $21,006 $14,044
======= ======= =======
</TABLE>
13
<PAGE>
<PAGE>
The following table sets forth information regarding the
scheduled maturities, amortized cost, market value and weighted
average yields for Harbor Federal's mortgage-backed securities
at March 31, 1999. Expected maturities will differ from
contractual maturities due to scheduled repayments and because
borrowers may have the right to call or prepay obligations with
or without prepayment penalties. The following table does not
take into consideration the effects of scheduled repayments or
the effects of possible prepayments.
<TABLE>
<CAPTION>
One to Five Years More Than Five Years Total Portfolio
--------------------- -------------------- ---------------------------
Carrying Average Carrying Average Carrying Fair Average
Value Yield Value Yield Value Value Yield
-------- ------- -------- --------- -------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
FHLMC . . . . . . . . $ 7 10.00% $ 2,208 7.41% $ 2,215 $ 2,237 7.48%
GNMA. . . . . . . . . -- -- 10,757 7.48 10,757 10,804 7.48
FNMA. . . . . . . . . 524 6.14 573 9.04 1,097 1,137 7.66
---- ------- ------- -------
Total . . . . . . $531 $13,538 $14,069 $14,178
==== ======= ======= =======
</TABLE>
For additional information, see the Management's
Discussion and Analysis of Financial Condition and Results of
Operations and Note 3 of the Notes to Consolidated Financial
Statements in the Annual Report.
INVESTMENT ACTIVITIES
Harbor Federal is permitted under federal law to make
certain investments, including investments in securities issued
by various federal agencies and state and municipal governments,
deposits at the FHLB of Atlanta, certificates of deposits in
federally insured institutions, certain bankers' acceptances and
federal funds. Harbor Federal may also invest, subject to
certain limitations, in commercial paper having one of the two
highest investment ratings of a nationally recognized credit
rating agency, and certain other types of corporate debt
securities and mutual funds. Federal regulations require Harbor
Federal to maintain an investment in FHLB of Atlanta stock and a
minimum amount of liquid assets which may be invested in cash
and specified securities. From time to time, the OTS adjusts
the percentage of liquid assets which savings associations are
required to maintain. For additional information, see
"Regulation of the Bank."
Harbor Federal invests in investment securities in order
to diversify its assets, manage cash flow, obtain yield and
maintain the minimum levels of liquid assets required by
regulatory authorities. Such investments generally include
federal funds, securities purchased for short terms under
repurchase agreements, federal government and agency
obligations, investment grade corporate bonds and notes and
qualified deposits in other financial institutions. Investment
decisions generally are made by the Chief Executive Officer and
ratified by the Board of Directors.
Since February 1996, Harbor Federal has placed all
purchased U.S. government or agency obligations in the
"Available for Sale" category to remain more flexible for
investment purposes. These securities and the investment in
FHLMC preferred stock at March 31, 1999 had an aggregate
carrying value of $59.5 million.
14
<PAGE>
<PAGE>
The following table sets forth information regarding
Harbor Federal's investment securities and other investments at
the dates indicated.
<TABLE>
<CAPTION>
At March 31,
--------------------------
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Investment securities:
U.S. government and agency
obligations . . . . . . . . . . . $50,372 $50,821 $46,783
Trust preferred securities 8,640 -- --
Other. . . . . . . . . . . . . . 447 370 213
------- ------- -------
Total investment securities 59,459 51,191 46,996
Federal funds sold . . . . . . . . 2,545 313 3,939
Interest-earning deposits. . . . . 114 174 276
FHLB stock . . . . . . . . . . . . 1,434 1,434 1,366
------- ------- -------
Total. . . . . . . . . . . . . $63,552 $53,112 $52,577
======= ======= =======
</TABLE>
15
<PAGE>
<PAGE>
The following table sets forth information regarding the
scheduled maturities, market value and weighted average yields
for Harbor Federal's investment securities and certain other
investments at March 31, 1999.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years
------------------- -------------------- ----------------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- ------- --------- -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and
agency obligations . . . . $ -- -- % $ -- --% $ 4,007 6.77%
Trust preferred securities . -- -- -- -- -- --
FHLMC stock. . . . . . . . . 447 1.05 -- -- -- --
------ ------ -------
Total investment
securities . . . . . . . 447 -- 4,007
Federal funds sold . . . . . . 2,545 5.00 -- -- -- --
Interest-earning deposits. . . 114 5.05 -- -- -- --
FHLB stock . . . . . . . . . . 1,434 7.50 -- -- -- --
------ ------ -------
Total. . . . . . . . . . $4,540 $ -- $ 4,007
====== ====== =======
<CAPTION>
More than Ten Years Total Investment Portfolio
------------------- ----------------------------------
Carrying Average Carrying Market Average
Value Yield Value Value Yield
-------- ------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and
agency obligations . . . . $46,365 6.87% $50,372 $50,372 6.78%
Trust preferred securities . 8,640 8.55 8,640 8,640 8.55
FHLMC stock. . . . . . . . . -- -- 447 447 1.05
------- ------- -------
Total investment
securities . . . . . . . 55,005 59,459 59,459
Federal funds sold . . . . . . -- -- 2,545 2,545 5.00
Interest-earning deposits. . . -- -- 114 114 5.05
FHLB stock . . . . . . . . . . -- -- 1,434 1,434 7.50
------- ------- -------
Total. . . . . . . . . . $55,005 $63,552 $63,552
======= ======= =======
</TABLE>
For additional information, see the Management's
Discussion and Analysis of Financial Condition and Results of
Operations and Note 2 of the Notes to Consolidated Financial
Statements in the Annual Report. At March 31, 1999, all
investment securities include provisions which allow the issuers
to call them under certain terms and conditions at par value.
16
<PAGE>
<PAGE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of Harbor
Federal's funds for lending and other investment purposes. In
addition to deposits, Harbor Federal derives funds from loan
principal repayments, interest payments and maturing
investments. Loan repayments and interest payments are a
relatively stable source of funds, while deposit inflows and
outflows are significantly influenced by prevailing market
interest rates and money market conditions. Borrowings may be
used to supplement Harbor Federal's available funds. Harbor
Federal is authorized to borrow from the FHLB of Atlanta as well
as to obtain funds through reverse repurchase agreements.
Deposits. Harbor Federal attracts deposits principally
from within its market area by offering a variety of deposit
instruments, including passbook and statement accounts and
certificates of deposit which range in term from three to 60
months. Deposit terms vary, principally on the basis of the
minimum balance required, the length of time the funds must
remain on deposit and the interest rate. Harbor Federal also
offers Individual Retirement Accounts ("IRAs").
Harbor Federal's policies are designed primarily to
attract deposits from local residents through Harbor Federal's
branch network rather than from outside Harbor Federal's market
area. Harbor Federal does not accept deposits from brokers due
to their rate sensitivity. Harbor Federal's interest rates,
maturities, service fees and withdrawal penalties on deposits
are established by management on a periodic basis. Management
determines deposit interest rates and maturities based on Harbor
Federal's funds acquisition and liquidity requirements, the
rates paid by Harbor Federal's competitors, Harbor Federal's
growth goals and applicable regulatory restrictions and
requirements.
Deposits in Harbor Federal as of March 31, 1999 were
represented by the various programs described below.
<TABLE>
<CAPTION>
Weighted Average Minimum Minimum Percentage of
Interest Rate (1) Term Category Amount Balances Total Savings
- ---------------- ------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C>
1.01% None NOW accounts $ 300 $ 6,657 3.63%
3.05 None Passbook accounts 100 29,265 15.96
0.00 None Commercial checking 750 1,631 .89
3.05 None Christmas club 10 330 .18
Money Market
------------
3.25 None Money market passbook 2,500 7,733 4.22
3.25 None Money market checking 2,500 2,718 1.48
3.50 None Money market plus
passbook 10,000 12,322 6.72
3.25 None IRA money market
passbook 100 349 .19
Certificates of Deposit
-----------------------
3.20 3 month Fixed-Term, Fixed-Rate 1,000 182 .10
5.10 6 month Fixed-Term, Fixed-Rate 1,000 7,275 3.97
5.10 6 month Fixed-Term, Fixed-Rate 10,000 4,251 2.32
5.15 12 month Fixed-Term, Fixed-Rate 1,000 16,466 8.98
5.15 12 month Fixed-Term, Fixed-Rate 10,000 13,951 7.61
5.20 18 month Fixed-Term, Fixed-Rate 1,000 9,140 4.98
5.30 24 month Fixed-Term, Fixed-Rate 1,000 20,585 11.23
6.07 30 month Fixed-Term, Fixed-Rate 1,000 106 .06
5.40 36 month Fixed-Term, Fixed-Rate 1,000 19,244 10.49
5.50 48 month Fixed-Term, Fixed-Rate 1,000 14,856 8.10
5.60 60 month Fixed-Term, Fixed-Rate 1,000 16,300 8.89
-------- ------
$183,361 100.00%
======== ======
</TABLE>
17
<PAGE>
<PAGE>
The following table sets forth the change in dollar amount
of deposits in the various types of accounts offered by Harbor
Federal between the dates indicated.
<TABLE>
<CAPTION>
Balance at
March 31, % Increase
1999 Deposits (Decrease)
--------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Certificates . . . . . . . . . . $122,356 66.73% $ 7,732
Money market . . . . . . . . . . 23,122 12.61 (253)
Passbook . . . . . . . . . . . . 29,265 15.96 (391)
NOW. . . . . . . . . . . . . . . 6,657 3.63 953
Christmas Club . . . . . . . . . 330 .18 (7)
Commercial checking. . . . . . . 1,631 .89 168
-------- ------ -------
Total. . . . . . . . . . . . $183,361 100.00% $ 8,202
======== ====== =======
<CAPTION>
Balance at Balance at
March 31, % Increase March 31, %
1998 Deposits (Decrease) 1997 Deposits
--------- -------- --------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Certificates . . . . . . $114,624 65.44% $ 3,398 $111,226 63.89%
Money market . . . . . . 23,375 13.35 (1,425) 24,800 14.24
Passbook . . . . . . . . 29,656 16.93 (1,598) 31,254 17.95
NOW. . . . . . . . . . . 5,704 3.26 278 5,426 3.12
Christmas Club . . . . . 337 .19 4 333 .19
Commercial checking. . . 1,463 .83 397 1,066 .61
-------- ------ ------- -------- ------
Total. . . . . . . . $175,159 100.00% $ 1,054 $174,105 100.00%
======== ====== ======= ======== ======
</TABLE>
18
<PAGE>
<PAGE>
The following table sets forth the average balances and
interest rates based on month-end balances for certificates of
deposit and non-certificate accounts as of the dates indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------------------
1999 1998 1997
------------------- -------------------- ----------------------
Interest- Interest- Interst-
Bearing Bearing Bearing
Demand Time Demand Time Demand Time
Deposits Deposits Deposits Deposits Deposits Deposits
-------- -------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average Balance. . . . . . . $58,092 $118,439 $58,947 $113,850 $61,222 $103,309
Average Rate . . . . . . . . 3.02% 5.82% 3.13% 5.81% 3.19% 5.94%
</TABLE>
The following table sets forth the time deposits in Harbor
Federal classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
--------------------------
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
2 - 3.99% . . . . . . . . . . . $ 189 $ 101 $ 118
4 - 5.99% . . . . . . . . . . . 98,092 79,438 67,143
6 - 7.99% . . . . . . . . . . . 24,075 35,085 43,874
8 - 9.99% . . . . . . . . . . . -- -- 91
-------- -------- --------
$122,356 $114,624 $111,226
======== ======== ========
</TABLE>
The following table sets forth the amount and maturities of
time deposits in Harbor Federal at March 31, 1999.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
---- --------- ---------- ---------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
2 - 3.99% . . . . $ 189 $ -- $ -- $ -- $ 189
4 - 5.99% . . . . 59,679 20,542 7,257 10,614 98,092
6 - 7.99% . . . . 11,547 10,402 1,602 524 24,075
------- ------- ------ ------- --------
$71,415 $30,944 $8,859 $11,138 $122,356
======= ======= ====== ======= ========
</TABLE>
The following table indicates the amount of the certificates
of deposit of $100,000 or more in Harbor Federal by time
remaining until maturity at March 31, 1999.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- ------------
(In thousands)
<S> <C>
Three months or less . . . . . . . $ 1,533
Three through six months . . . . . 1,540
Six through nine months. . . . . . 1,585
Nine through twelve months . . . . 1,714
Over twelve months . . . . . . . . 5,281
-------
Total. . . . . . . . . . . . . . $11,653
=======
</TABLE>
19
<PAGE>
<PAGE>
The following table sets forth the deposit activities of
Harbor Federal for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Deposits . . . . . . . . . . . . $235,623 $187,564 $191,670
Withdrawals. . . . . . . . . . . 218,603 177,665 173,760
-------- -------- --------
Net increase before interest
credited . . . . . . . . . . 17,020 9,899 17,910
Interest credited. . . . . . . . 8,818 8,845 8,467
-------- -------- --------
Net increase in deposits . . . $ 8,202 $ 1,054 $ 9,443
======== ======== ========
</TABLE>
Borrowings. Savings deposits historically have been the
primary source of funds for Harbor Federal's lending, investment
and general operating activities. Harbor Federal is authorized,
however, to use advances from the FHLB of Atlanta to supplement
its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Atlanta functions as a central
reserve bank providing credit for savings institutions and
certain other member financial institutions. As a member of the
FHLB system, Harbor Federal is required to own stock in the FHLB
of Atlanta and is authorized to apply for advances. Advances
are made pursuant to several different programs, each of which
has its own interest rate and range of maturities. Advances
from the FHLB of Atlanta are secured by Harbor Federal's stock
in the FHLB and a portion of Harbor Federal's mortgage loan
portfolio. At March 31, 1999, Harbor Federal had $10 million in
advances outstanding from the FHLB of Atlanta. This advance was
made in December 1997 at a fixed rate of 5.05% and is set to
mature in December 2007, subject to an early termination option.
In December 1998, or at any payment date thereafter, the FHLB
of Atlanta may convert the advance into a three (3) month LIBOR-
based floating rate advance (ARC).
In addition, the Company is authorized to obtain funds
through reverse repurchase agreements. Such agreements are
treated as financings, and the obligation to repurchase
securities sold is reflected as a liability in the consolidated
statements of financial condition. The Company had outstanding
financings under reverse repurchase agreements of $17.6 million
and $15.3 million at March 31, 1999 and 1998, respectively. The
average rates of interest on these reverse repurchase agreements
were 5.08% and 5.80%, respectively.
For additional information, see the Management's
Discussion and Analysis of Financial Condition and Results of
Operations and Notes 7 and 8 of Notes to Consolidated Financial
Statements in the Annual Report.
SUBSIDIARY ACTIVITIES
Federally chartered savings institutions are permitted to
invest up to 2% of their assets in subsidiary service
corporations, plus an additional 1% in subsidiaries engaged in
specified community purposes. In addition, Harbor Federal has
received OTS approval to lend an amount of up to one-half of its
regulatory capital to an affiliate, Bankers Affiliate, Inc.
("BAI"). Harbor Federal's principal subsidiaries are Harbor
Service Corporation ("HSC"), a wholly owned subsidiary that
receives insurance commissions on credit life and health and
accident policies written for Harbor Federal's borrowers; BAI, a
one-third owned subsidiary that makes various types of consumer
and home equity loans, generally in amounts not in excess of
$50,000, for customers of Harbor Federal and two other local
savings institutions; and Bank Street Mortgage Company ("BSM"),
a wholly owned subsidiary formed by the Bank in June 1997
primarily to broker one- to four-family residential real estate
loans for Harbor Federal and various other correspondents. At
March 31, 1999, the net book values of Harbor Federal's
investment in BAI totaled $2,525,000, including advances of
$2,500,000. The net book value of Harbor Federal's investments
in HSC and BSM are immaterial. Harbor Federal is
20
<PAGE>
<PAGE>
also authorized to make investments of any amount in operating
subsidiaries that engage solely in activities that federal
savings institutions may conduct directly.
In April 1999, Harbor Federal sold its interest in BAI to
another thrift institution for the par value of the capital
stock. At that time, the advances were repaid by BAI.
MARKET AREA
Harbor Federal currently conducts its business through
nine banking offices in the City of Baltimore and the Counties
of Baltimore and Anne Arundel in Maryland. While Harbor
Federal's primary market areas tend to be concentrated in the
areas immediately surrounding each of Harbor Federal's offices,
Harbor Federal accepts deposits and loan applications from
throughout the greater Baltimore metropolitan area and central
Maryland. At March 31, 1999, management believed that most of
Harbor Federal's depositors and borrowers resided within ten
miles of one of Harbor Federal's offices. The majority of loans
originated by Harbor Federal are from the Central Maryland area,
which is located within the greater Baltimore metropolitan area
and the larger Washington-Baltimore area. The Baltimore
metropolitan area is the largest in Maryland and has had a
relatively stable and diversified labor force and economic base.
The heaviest employment concentrations in the greater Baltimore
metropolitan area in manufacturing industries are in primary
metals (steel and copper), transportation equipment, fabricated
materials, chemicals, machinery and electrical equipment. In
addition, the Port of Baltimore is the fourth largest foreign
tonnage port in the U.S. and the second largest container
tonnage port on the East and Gulf Coasts.
COMPETITION
Harbor Federal faces strong competition for deposits and
loans. Harbor Federal's principal competitors for deposits are
other banking institutions, such as commercial banks, credit
unions and other savings institutions, as well as mutual funds
and other investments. Harbor Federal principally competes for
deposits by offering a variety of deposit accounts, convenient
business hours and branch locations, customer service and a well
trained staff. Harbor Federal competes for loans with other
depository institutions, as well as specialty mortgage lenders
and brokers and consumer finance companies. Harbor Federal
principally competes for loans on the basis of interest rates
and the loan fees it charges, the types of loans it originates
and the convenience and service it provides to borrowers. In
addition, Harbor Federal believes it has developed strong
relationships with the businesses, realtors, builders and
general public in its market area. Due to Harbor Federal's
small size relative to the many and various other depository and
lending institutions in its market area, management believes
that Harbor Federal has an insubstantial overall share of the
deposit and loan market.
REGULATION OF THE BANK
As a federally chartered savings institution, Harbor
Federal is subject to extensive regulation by the OTS. The
lending activities and other investments of the Bank must comply
with various federal regulatory requirements, and the OTS
periodically examines the Bank for compliance with various
regulatory requirements. The FDIC also has the authority to
conduct special examinations. The Bank must file reports with
OTS describing its activities and financial condition and is
also subject to certain reserve requirements promulgated by the
Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors.
Federal Home Loan Bank System. Harbor Federal is a member
of the FHLB System, which consists of 12 district FHLBs subject
to supervision and regulation by the Federal Housing Finance
Board. The FHLBs provide a central credit facility primarily
for member institutions. As a member of the FHLB of Atlanta,
the Bank is required to acquire and hold shares of capital stock
in the FHLB of Atlanta in an amount at least equal to 1% of the
aggregate unpaid principal of its home mortgage loans, home
purchase contracts, and similar obligations at the beginning of
each year or 1/20 of its advances (borrowings) from the FHLB of
Atlanta, whichever is greater. The Bank was in compliance
21
<PAGE>
<PAGE>
with this requirement with an investment in FHLB of Atlanta
stock at March 31, 1999 of $1,433,500. For additional
information, see Note 10 of the Notes to Consolidated Financial
Statements in the Annual Report.
The FHLB of Atlanta serves as a reserve or central bank
for its member institutions within its assigned district. It is
funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes advances
to members in accordance with policies and procedures
established by the OTS and the Board of Directors of the FHLB of
Atlanta. Long-term advances may only be made for the purpose of
providing funds for residential housing finance. At March 31,
1999, Harbor Federal had $10.0 million in advances outstanding
with the FHLB of Atlanta. See "Deposit Activity and Other
Sources of Funds -- Borrowings."
Liquidity Requirements. Harbor Federal generally is
required to maintain average daily balances of liquid assets
(generally, cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of
certain mutual funds, and specified United States government,
state or federal agency obligations) equal to 4% of its net
withdrawable accounts plus short-term borrowings either at the
end of the preceeding calendar quarter or on an average daily
basis during the preceding quarter. Harbor Federal also is
required to maintain sufficient liquidity to ensure its safe and
sound operation. Monetary penalties may be imposed for failure
to meet liquidity requirements. The average daily balance of
liquid assets ratio of Harbor Federal for March 1999 was 17.4%.
Qualified Thrift Lender Test. A savings institution that
does not meet the Qualified Thrift Lender ("QTL") test must
either convert to a bank charter or comply with the following
restrictions on its operations: (i) the institution may not
engage in any new activity or make any new investment, directly
or indirectly, unless such activity or investment is permissible
for a national bank; (ii) the branching powers of the
institution shall be restricted to those of a national bank;
(iii) the institution shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of
dividends by a national bank. Upon the expiration of three
years from the date the institution ceases to be a QTL, it must
cease any activity and not retain any investment not permissible
for a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations).
To meet its QTL test, a savings institution's "Qualified
Thrift Investments" must represent 65% of "portfolio assets."
Under OTS implementing regulations, portfolio assets are defined
as total assets less intangibles, property used by an
institution in its business and liquidity investments in an
amount not exceeding 20% of assets. Qualified Thrift
Investments consist of (i) loans, equity positions or securities
related to domestic, residential real estate or manufactured
housing and (ii) 50% of the dollar amount of residential
mortgage loans subject to sale under certain conditions. In
addition, subject to a 20% of portfolio assets limit,
institutions are able to treat as Qualified Thrift Investments
200% of their investments in loans to finance "starter homes"
and loans for construction, development or improvement of
housing and community service facilities or for financing small
businesses in "credit-needy" areas. Qualified Thrift
Investments do not include any intangible asset.
A savings institution shall be deemed a Qualified Thrift
Lender as long as its percentage of Qualified Thrift Investments
continues to equal or exceed 65% in at least nine out of each 12
months. An institution will cease to be a Qualified Thrift
Lender if its percentage of Qualified Thrift Investments as
measured by monthly averages over the immediately preceding 12-
month period falls below 65% for four or more months. An
institution that fails to maintain QTL status will be permitted
to requalify once, and if it fails the QTL test a second time,
it will become immediately subject to all penalties as if all
time limits on such penalties had expired.
At March 31, 1999, 73% of Harbor Federal's portfolio
assets were invested in Qualified Thrift Investments as
currently defined.
Regulatory Capital Requirements. Under OTS capital
standards, savings institutions must maintain "tangible" capital
equal to at least 1.5% of adjusted total assets, "core" capital
equal to at least 3% of adjusted total assets and "total"
capital (a combination of core and "supplementary" capital)
equal to at least 8% of "risk-weighted" assets. In
22
<PAGE>
<PAGE>
addition, the OTS has adopted regulations which impose certain
restrictions on institutions that have a total risk-based
capital ratio that is less than 8.0%, a ratio of Tier 1 capital
to risk-weighted assets of less than 4.0% or a ratio of Tier 1
capital to adjusted total assets of less than 4.0% (or 3.0% if
the institution is rated Composite 1 under the OTS examination
rating system). For purposes of these regulations, Tier 1
capital has the same definition as core capital. See "Prompt
Corrective Regulatory Action." Core capital is defined as
common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus,
minority interests in the equity accounts of fully consolidated
subsidiaries, certain nonwithdrawable accounts and pledged
deposits and "qualifying supervisory goodwill." Core capital is
generally reduced by the amount of an institution's intangible
assets for which no market exists. Limited exceptions to the
deduction of intangible assets are provided for purchased
mortgage servicing rights, purchased credit card relationships
and qualifying supervisory goodwill held by an eligible
institution. Tangible capital is given the same definition as
core capital but does not include an exception for qualifying
supervisory goodwill and is reduced by the amount of all the
savings institution's intangible assets with only a limited
exception for purchased mortgage servicing rights and purchased
credit card relationships. The OTS capital rule requires that
core and tangible capital be further reduced by an amount equal
to a savings institution's debt and equity investments in
subsidiaries engaged in activities not permissible to national
banks ("nonincludable subsidiaries"), other than subsidiaries
engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository
institutions or their holding companies. As of March 31, 1999,
Harbor Federal had no material investments in or extensions of
credit to nonincludable subsidiaries.
OTS regulations further provide that core and tangible
capital need not be reduced by the amount of core deposit
intangibles resulting from branch purchase transactions
consummated (or under firm contract) prior to March 4, 1994, to
the extent permitted by OTS, provided that such core deposit
intangibles are valued in accordance with generally accepted
accounting principles, supported by credible assumptions, and
have their amortization adjusted at least annually to reflect
decay rates (past and present) in the acquired customer base.
As of March 31, 1999, Harbor Federal had no such transactions.
Adjusted total assets are a savings institution's total
assets as determined under generally accepted accounting
principles, adjusted for certain goodwill amounts, and increased
by a pro rated portion of the assets of subsidiaries in which
the institution holds a minority interest and which are not
engaged in activities for which the capital rules require the
institution to net its debt and equity investments against
capital, as well as a pro rated portion of the assets of other
subsidiaries for which netting is not fully required under
phase-in rules. Adjusted total assets are reduced by the amount
of assets that have been deducted from capital, the portion of
the institution's investments in subsidiaries that must be
netted against capital under the capital rules and, for purposes
of the core capital requirement, qualifying supervisory
goodwill. At March 31, 1999, Harbor Federal's adjusted total
assets for purposes of the core and tangible capital
requirements were $233.9 million.
In determining compliance with the risk-based capital
requirement, a savings institution is allowed to use both core
capital and supplementary capital provided the amount of
supplementary capital used does not exceed the institution's
core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and
pledged deposits that do not qualify as core capital, certain
approved subordinated debt, certain other capital instruments
and a portion of the institution's general loss allowances.
The risk-based capital requirement is measured against
risk-weighted assets which equal the sum of each asset and the
credit-equivalent amount of each off-balance sheet item after
being multiplied by an assigned risk weight. Under the OTS
risk-weighting system, assets are assigned a risk weight between
zero and 100%, based on their general risk characteristics. As
of March 31, 1999, the Bank's risk-weighted assets were
approximately $114.0 million.
23
<PAGE>
<PAGE>
The OTS has adopted but delayed effectiveness of an
amendment to its risk-based capital requirements that would
require savings institutions with more than a "normal" level of
interest rate risk to maintain additional total capital. An
institution's interest rate risk will be measured in terms of
the sensitivity of its "net portfolio value" to changes in
interest rates. Net portfolio value is defined, generally, as
the present value of expected cash inflows from existing assets
and off-balance sheet contracts less the present value of
expected cash outflows from existing liabilities. An
institution will be considered to have a "normal" level of
interest rate risk exposure if the decline in its net portfolio
value after an immediate 200 basis point increase or decrease in
market interest rates (whichever results in the greater decline)
is less than two percent of the current estimated economic value
of its assets. An institution with a greater than normal
interest rate risk will be required to deduct from total
capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component")
equal to one-half the difference between the institution's
measured interest rate risk and the normal level of interest
rate risk, multiplied by the economic value of its total assets.
The OTS will calculate the sensitivity of an institution's
net portfolio value based on data submitted by the institution
in a schedule to its quarterly Thrift Financial Report and using
the interest rate risk measurement model adopted by the OTS.
The amount of the interest rate risk component, if any, to be
deducted from an institution's total capital will be based on
the institution's Thrift Financial Report filed two quarters
earlier. Institutions with less than $300 million in assets and
a risk-based capital ratio above 12% generally are exempt from
filing the interest rate risk schedule with their Thrift
Financial Reports. However, the OTS will require any exempt
institution that it determines may have a high level of interest
rate risk exposure to file such schedule on a quarterly basis.
Management does not believe that Harbor Federal would have been
deemed to have had more than normal interest rate risk under the
rule as of March 31, 1999.
At March 31, 1999, Harbor Federal substantially exceeded
all regulatory minimum capital requirements. The table below
presents certain information relating to the Bank's regulatory
capital compliance at March 31, 1999.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
------ ----------
(Dollars in thousands)
<S> <C> <C>
Tier 1 Capital. . . . . . . . . . . . $23,945 10.2%
Tier 1 Capital Requirement. . . . . . 9,356 4.0
------- ----
Excess. . . . . . . . . . . . . . . $14,589 6.2%
======= ====
Total Capital . . . . . . . . . . . . $24,600 21.0%
Risk-Based Capital Requirement. . . . 9,122 8.0
------- ----
Excess. . . . . . . . . . . . . . . $15,478 13.0%
======= ====
<FN>
____________
(1) Based on adjusted total assets for purposes of Tier 1
capital requirement, and risk-weighted assets for purpose of
the risk-based capital requirement.
</FN>
</TABLE>
For additional information regarding regulations with
respect to capital, see the paragraphs below and Note 10 of the
Notes to Consolidated Financial Statements in the Annual Report.
The capital standards for savings institutions must be no
less stringent than the capital standards applicable to national
banks. Effective December 31, 1990, regulations of the Office
of the Comptroller of the Currency ("OCC") established a new
minimum core capital ratio of 3% for the most highly rated
national banks, with an additional 100 to 200 basis point
"cushion" amount of additional capital required on a case-by-
case basis, considering the quality of risk management systems
and the overall risk in individual banks. The OTS has proposed
an amendment to its capital
24
<PAGE>
<PAGE>
regulations establishing a minimum core capital ratio of 3% for
institutions rated Composite 1 under the OTS examination rating
system. For all other institutions, the minimum core capital
ratio will be 3% plus at least an additional 100 to 200 points.
In determining the amount of additional core capital, the OTS
will assess both the quality of risk management systems and the
level of overall risk in each individual institution through the
supervisory process on a case-by-case basis.
In addition to requiring generally applicable capital
standards for institutions, the Director of the OTS is
authorized to establish the minimum level of capital for an
institution at such amount or at such ratio of capital-to-assets
as the Director determines to be necessary or appropriate for
such institution in light of the particular circumstances of the
institution. The Director of the OTS may treat the failure of
any institution to maintain capital at or above such level as an
unsafe or unsound practice and may issue a directive requiring
any institution which fails to maintain capital at or above the
minimum level required by the Director to submit and adhere to a
plan for increasing capital. Such an order may be enforced in
the same manner as an order issued by the FDIC.
Deposit Insurance. Harbor Federal is required to pay
assessments based on a percent of its insured deposits to the
FDIC for insurance of its deposits by the SAIF. Under the
Federal Deposit Insurance Act, the FDIC is required to set semi-
annual assessments for SAIF-insured institutions at a level
necessary to maintain the designated reserve ratio of the SAIF
at 1.25% of estimated insured deposits or at a higher percentage
of estimated insured deposits that the FDIC determines to be
justified for that year by circumstances indicating a
significant risk of substantial future losses to the SAIF.
The FDIC has established a risk-based assessment system
for insured depository institutions. Under the system, the
assessment rate for an insured depository institution depends on
the assessment risk classification assigned to the institution
by the FDIC which will be determined by the institution's
capital level and supervisory evaluations. Based on the data
reported to regulators for the date closest to the last day of
the seventh month preceding the semi-annual assessment period,
institutions are assigned to one of three capital groups -- well
capitalized, adequately capitalized or undercapitalized -- using
the same percentage criteria as under the prompt corrective
action regulations. See "Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of
three subgroups on the basis of supervisory evaluations by the
institution's primary supervisory authority and such other
information as the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the
deposit insurance fund. Subgroup A consists of financially
sound institutions with only a few minor weaknesses. Subgroup B
consists of institutions that demonstrate weaknesses which, if
not corrected, could result in significant deterioration of the
institution and increased risk of loss to the deposit insurance
fund. Subgroup C consists of institutions that pose a
substantial probability of loss to the deposit insurance fund
unless effective corrective action is taken.
For the past several semi-annual periods, savings
institutions with SAIF-assessable deposits, like Harbor Federal,
have been required to pay higher deposit insurance premiums than
institutions with deposits insured by the BIF. In order to
recapitalize the SAIF and address the premium disparity, the
Deposit Insurance Funds Act of 1996 authorized the FDIC to
impose a one-time special assessment on institutions with SAIF-
assessable deposits based on the amount determined by the FDIC
to be necessary to increase the reserve levels of the SAIF to
the designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points
based on the amount of their SAIF-assessable deposits as of
March 31, 1995. As a result of the special assessment, the Bank
incurred a pre-tax expense of $806,000 during the quarter ended
September 30, 1996.
<PAGE>
The FDIC has adopted a assessment schedule for SAIF
deposit insurance pursuant to which the assessment rate for
well-capitalized institutions with the highest supervisory
ratings would be reduced to zero and institutions in the least
favorable risk assessment classification will be assessed at the
rate of 0.27% of insured deposits. Until December 31, 1999,
however, SAIF-insured institutions, will be required to pay
assessments to the FDIC at the rate of 6.5 basis points to help
fund interest payments on certain bonds issued by the Financing
Corporation ("FICO") an agency of the federal government
established to finance takeovers of insolvent thrifts. During
this period, BIF members will be assessed for
25
<PAGE>
<PAGE>
these obligations at the rate of 1.3 basis points. After
December 31, 1999, both BIF and SAIF members will be assessed at
the same rate for FICO payments.
The FDIC has adopted a regulation which provides that any
insured depository institution with a ratio of Tier 1 capital to
total assets of less than 2% will be deemed to be operating in
an unsafe or unsound condition, which would constitute grounds
for the initiation of termination of deposit insurance
proceedings. The FDIC, however, would not initiate termination
of insurance proceedings if the depository institution has
entered into and is in compliance with a written agreement with
its primary regulator, and the FDIC is a party to the agreement,
to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common
stockholders' equity, noncumulative perpetual preferred stock
(including any related surplus) and minority interests in
consolidated subsidiaries, minus all intangible assets other
than mortgage servicing rights and qualifying supervisory
goodwill eligible for inclusion in core capital under OTS
regulations and minus identified losses and investments in
certain securities subsidiaries. Insured depository
institutions with Tier 1 capital equal to or greater than 2% of
total assets may also be deemed to be operating in an unsafe or
unsound condition notwithstanding such capital level. The
regulation further provides that in considering applications
that must be submitted to it by savings institutions, the FDIC
will take into account whether the institution is meeting the
Tier 1 capital requirement for state non-member banks of 4% of
total assets for all but the most highly rated state non-member
banks.
Federal Reserve System. Pursuant to regulations of the
Federal Reserve Board, all FDIC-insured depository institutions
must maintain average daily reserves against their transaction
accounts. No reserves are required on the first $4.9 million of
transaction accounts maintained; reserves of 3% are required on
the next $46.5 million of transaction accounts and a reserve of
10% must be maintained against all remaining transaction
accounts. These reserve requirements are subject to adjustment
by the Federal Reserve Board. Because required reserves must be
maintained in the form of vault cash or in a non-interest
bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's
interest-earning assets.
Dividend Restrictions. OTS regulations impose additional
limitations on the payment of dividends and other capital
distributions (including stock repurchases and cash mergers) by
Harbor Federal. Under these regulations, an institution that,
immediately prior to, and on a pro forma basis after giving
effect to, a proposed capital distribution, has total capital
(as defined by OTS regulation) that is equal to or greater than
the amount of its fully phased-in capital requirements (a "Tier
1 Bank") is generally permitted, after notice, to make capital
distributions during a calendar year in the amount equal to the
greater of: (a) 75% of its net income for the previous four
quarters; or (b) 100% of its net income to date during the
calendar year plus an amount that would reduce by one-half the
amount by which its ratio of total capital to assets exceeded
its fully phased-in risk-based capital ratio requirement at the
beginning of the calendar year. An institution with total
capital in excess of current minimum capital ratio requirements
but not in excess of the fully phased-in requirements (a "Tier 2
Bank") is permitted, after notice, to make capital distributions
without OTS approval of up to 75% of its net income for the
previous four quarters, less dividends already paid for such
period. An institution that fails to meet current minimum
capital requirements (a "Tier 3 Bank") is prohibited from making
any capital distributions without the prior approval of the OTS.
A Tier 1 Bank that has been notified by the OTS that its is in
need of more than normal supervision will be treated as either a
Tier 2 or Tier 3 Bank. Despite the above authority, the OTS may
prohibit any institution from making a capital distribution that
would otherwise be permitted by the regulation, if the OTS were
to determine that the distribution constituted an unsafe or
unsound practice.
Under the OTS prompt corrective action regulations, the
Bank would be prohibited from making any capital distributions
if, after making the distribution, it would have: (i) a total
risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-
based capital ratio of less than 4.0%; or (iii) a Tier 1 core
capital ratio of less than 4.0%. See "Prompt Corrective
Regulatory Action."
26
<PAGE>
<PAGE>
In addition to the foregoing, earnings of the Bank
appropriated to bad debt reserves and deducted for federal
income tax purposes are not available for payment of cash
dividends or other distributions to the Company without payment
of taxes at the then current tax rate on the amount of earnings
removed from the reserves for such distributions. See
"Taxation." The Company intends to make full use of this
favorable tax treatment afforded to the Bank and the Company and
does not contemplate use of any post-Conversion earnings of the
Bank in a manner which would limit either company's bad debt
deduction or create federal tax liabilities. Also, Harbor
Federal would not be permitted to pay dividends on its capital
stock if its regulatory capital would thereby be reduced below
the remaining balance of the liquidation account established for
the benefit of certain depositors of the Bank at the time of the
Conversion.
Limits on Loans to One Borrower. Savings institutions
generally are subject to the lending limits applicable to
national banks. With certain limited exceptions, an
institution's loans and extensions of credit outstanding to a
person at one time shall not exceed 15% of the unimpaired
capital and surplus of the institution. An institution may lend
an additional amount, equal to 10% of unimpaired capital and
surplus, if such loan is fully secured by readily marketable
collateral. Savings institutions are additionally authorized to
make loans to one borrower, for any purpose, in an amount not to
exceed $500,000 or, by order of the Director of the OTS, in an
amount not to exceed the lesser of $30,000,000 or 30% of
unimpaired capital and surplus to develop residential housing,
provided: (i) the purchase price of each single-family dwelling
in the development does not exceed $500,000; (ii) the
institution is in compliance with its fully phased-in capital
requirements; (iii) the loans comply with applicable loan-to-
value requirements, and; (iv) the aggregate amount of loans made
under this authority does not exceed 150% of unimpaired capital
and surplus. A savings institution is also authorized to make
loans to one borrower to finance the sale of real property
acquired in satisfaction of debts in an amount up to 50% of
unimpaired capital and surplus. The lending limits generally do
not apply to purchase money mortgage notes taken from the
purchaser of real property acquired by the institution in
satisfaction of debts previously contracted if no new funds are
advanced to the borrower and the institution is not placed in a
more detrimental position as a result of the sale. Certain
types of loans are excepted from the lending limits, including
loans secured by savings deposits.
At March 31, 1999, the maximum amount that Harbor Federal
could have lent to any one borrower under the 15% limit was
approximately $3.6 million. At such date, the largest aggregate
amount of loans that the Bank had outstanding to any one
borrower or group of affiliated borrowers was $2.6 million.
Transactions with Related Parties. Transactions between
savings institutions and any affiliate are governed by Sections
23A and 23B of the Federal Reserve Act. An affiliate of an
institution is any company or entity which controls, is
controlled by or is under common control with the savings
institution. In a holding company context, the parent holding
company of an institution (such as the Company) and any
companies which are controlled by such parent holding company
are affiliates of the savings institution. Generally, Sections
23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10%
of such institution's capital stock and surplus, and contain an
aggregate limit on all such transactions with all affiliates to
an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the
institution or subsidiary as those provided to a non-affiliate.
The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other
types of transactions. In addition to the restrictions imposed
by Sections 23A and 23B, no savings institution may (i) loan or
otherwise extend credit to an affiliate, except for any
affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the
savings institution.
Further, savings institutions are subject to the
restrictions contained in Section 22(h) of the Federal Reserve
Act and the Federal Reserve Board's Regulation O thereunder on
loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director,
executive officer and to a greater than 10% stockholder of an
institution and certain affiliated interests of such persons,
may not exceed, together with all other outstanding loans to
such person and affiliated interests, the institution's loans-
to-one-borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h)
also prohibits the making of loans above amounts prescribed
27
<PAGE>
<PAGE>
by the appropriate federal banking agency, to directors,
executive officers and greater than 10% stockholders of an
institution, and their respective affiliates, unless such loan
is approved in advance by a majority of the board of directors
of the institution with any "interested" director not
participating in the voting. Regulation O prescribes the loan
amount (which includes all other outstanding loans to such
person) as to which such prior board of director approval is
required as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Further, Section 22(h) requires that
loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered
in comparable transactions to other persons. Section 22(h) also
generally prohibits a depository institution from paying the
overdrafts of any of its executive officers or directors.
Savings institutions are also subject to the requirements
and restrictions of Section 22(g) of the Federal Reserve Act and
Regulation O on loans to executive officers and the restrictions
of 12 U.S.C. Section1972 on certain tying arrangements and
extensions
of credit by correspondent banks. Section 22(g) of the Federal
Reserve Act requires approval by the board of directors of a
depository institution for extension of credit to executive
officers of the institution, and imposes reporting requirements
for and additional restrictions on the type, amount and terms of
credits to such officers. Section 1972 (i) prohibits a
depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such
extension of credit or service, on the condition that the
customer obtain some additional service from the institution or
certain of its affiliates or not obtain services of a competitor
of the institution, subject to certain exceptions, and (ii)
prohibits extensions of credit to executive officers, directors,
and greater than 10% stockholders of a depository institution by
any other institution which has a correspondent banking
relationship with the institution, unless such extension of
credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does
not involve more than the normal risk of repayment or present
other unfavorable features.
Prompt Corrective Regulatory Action. Under the Federal
Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the federal banking regulators are required to take
prompt corrective action if an institution fails to satisfy
certain minimum capital requirements, including a leverage
limit, a risk-based capital requirement, and any other measure
deemed appropriate by the federal banking regulators for
measuring the capital adequacy of an insured depository
institution. All institutions, regardless of their capital
levels, are restricted from making any capital distribution or
paying any management fees that would cause the institution to
become undercapitalized. An institution that fails to meet the
minimum level for any relevant capital measure (an
"undercapitalized institution") generally is: (i) subject to
increased monitoring by the appropriate federal banking
regulator; (ii) required to submit an acceptable capital
restoration plan within 45 days; (iii) subject to asset growth
limits; and (iv) required to obtain prior regulatory approval
for acquisitions, branching and new lines of businesses. The
capital restoration plan must include a guarantee by the
institution's holding company that the institution will comply
with the plan until it has been adequately capitalized on
average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the
institution's total assets or the amount necessary to bring the
institution into capital compliance as of the date it failed to
comply with its capital restoration plan. A significantly
undercapitalized institution, as well as any undercapitalized
institution that does not submit an acceptable capital
restoration plan, may be subject to regulatory demands for
recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible
replacement of directors and officers, and restrictions on
capital distributions by any bank holding company controlling
the institution. Any company controlling the institution may
also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive
officers of a significantly undercapitalized institution may not
receive bonuses or increases in compensation without prior
approval and the institution is prohibited from making payments
of principal or interest on its subordinated debt, with certain
exceptions. If an institution's ratio of tangible capital to
total assets falls below the "critical capital level"
established by the appropriate federal banking regulator, the
institution is subject to conservatorship or receivership within
90 days unless periodic determinations are made that forbearance
from such action would better protect the deposit insurance
fund. Unless appropriate findings and certifications are made
by the appropriate federal bank regulatory agencies, a
critically undercapitalized institution must be placed in
receivership if it remains critically undercapitalized on
average during the calendar quarter beginning 270 days after the
date it became critically undercapitalized.
28
<PAGE>
<PAGE>
Under the OTS regulation implementing the prompt
corrective action provisions of FDICIA, the OTS measures an
institution's capital adequacy on the basis of its total risk-
based capital ratio (the ratio of its total capital to risk-
weighted assets), Tier 1 risk-based capital ratio (the ratio of
its core capital to risk-weighted assets) and Tier 1 core
capital ratio (the ratio of its core capital to adjusted total
assets). An institution that is not subject to an order or
written directive to meet or maintain a specific capital level
is deemed "well capitalized" if it also has: (i) a total risk-
based capital ratio of 10% or greater; (ii) a Tier 1 risk-based
capital ratio of 6.0% or greater; and (iii) a Tier 1 core
capital ratio of 5.0% or greater. An "adequately capitalized"
savings institution is an institution that does not meet the
definition of well capitalized and has: (i) a total risk-based
capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-
based ratio of 4.0% or greater; and (iii) a Tier 1 core capital
ratio of 4.0% or greater (or 3.0% or greater if the savings
institution has a Composite 1 rating). An "undercapitalized
institution" is an institution that has (i) a total risk-based
capital ratio less than 8.0%; or (ii) a Tier 1 risk-based
capital ratio of less than 4.0%; or (iii) a Tier 1 core capital
ratio of less than 4.0% (or 3.0% if the institution has a
Composite 1 rating). A "significantly undercapitalized"
institution is defined as an institution that has: (i) a total
risk-based capital ratio of less than 6.0%; or (ii) a Tier 1
risk-based capital ratio of less than 3.0%; or (iii) a Tier 1
core capital ratio of less than 3.0%. A "critically
undercapitalized" savings institution is defined as an
institution that has a ratio of core capital to total assets of
less than 2.0%. The OTS may reclassify a well capitalized
savings institution as adequately capitalized and may require an
adequately capitalized or undercapitalized institution to comply
with the supervisory actions applicable to institutions in the
next lower capital category if the OTS determines, after notice
and an opportunity for a hearing, that the savings institution
is in an unsafe or unsound condition or that the institution has
received and not corrected a less-than-satisfactory rating for
any Composite rating category.
Standards for Safety and Soundness. FDICIA requires each
federal bank regulatory agency to prescribe, by regulation,
safety and soundness standards for institutions under its
authority. In 1995, these agencies, including the OTS, released
interagency guidelines establishing such standards and adopted
rules with respect to safety and soundness compliance plans.
The OTS guidelines require savings institutions to maintain
internal controls and information systems and internal audit
systems that are appropriate for the size, nature and scope of
the institution's business. The guidelines also establish
certain basic standards for loan documentation, credit
underwriting, interest rate risk exposure and asset growth. The
guidelines further provide that savings institutions should
maintain safeguards to prevent the payment of compensation, fees
and benefits that are excessive or that could lead to material
financial loss and should take into account factors such as
comparable compensation practices at comparable institutions.
If the OTS determines that a savings institution is not in
compliance with the safety and soundness guidelines, it may
require the institution to submit an acceptable plan to achieve
compliance with the guidelines. A savings institution must
submit an acceptable compliance plan to the OTS within 30 days
of receipt of a request for such a plan. Failure to submit or
implement a compliance plan may subject the institution to
regulatory sanctions. Management believes that Harbor Federal
meets substantially all the standards adopted in the interagency
guidelines.
Additionally, each federal banking agency is required to
establish standards relating to the adequacy of asset and
earnings quality. In 1995, these agencies, including the OTS,
issued proposed guidelines relating to asset and earnings
quality. Under the proposed guidelines, a savings institution
should maintain systems, commensurate with its size and the
nature and scope of its operations, to identify problem assets
and prevent deterioration in those assets as well as to evaluate
and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves. Management does not
believe that the asset and earnings standards, in the form
proposed by the OTS, would have a material effect on Harbor
Federal.
REGULATION OF THE COMPANY
The Company is a savings institution holding company and,
as such, subject to OTS registration, regulation, examination,
supervision and reporting requirements. As a subsidiary of a
savings institution holding company, Harbor Federal is subject
to certain restrictions in its dealings with the Company and
affiliates thereof. The Company also is required to file
certain reports with, and otherwise comply with the rules and
regulations of, the Securities and Exchange Commission ("SEC")
under the federal securities laws.
29
<PAGE>
<PAGE>
Activities Restrictions. The Board of Directors of the
Company presently intends to operate the Company as a unitary
savings institution holding company. There are generally no
restrictions on the activities of a unitary savings institution
holding company. However, if the Director of the OTS determines
that there is reasonable cause to believe that the continuation
by an institution holding company of an activity constitutes a
serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, the Director of the OTS may
impose such restrictions as deemed necessary to address such
risk including limiting: (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution
and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be
imposed on the savings institution. Notwithstanding the above
rules as to permissible business activities of unitary savings
institution holding companies, if the savings institution
subsidiary of such a holding company fails to meet the QTL test,
then such unitary holding company shall also presently become
subject to the activities restrictions applicable to multiple
holding companies and, unless the savings institution
requalifies as a QTL within one year thereafter, register as,
and become subject to, the restrictions applicable to a bank
holding company. See "Regulation of the Bank -- Qualified
Thrift Lender Test." Legislative initiatives have been
introduced in the U.S. Congress which could result in the
imposition of restrictions on the activities of unitary savings
institution holding companies in the future.
If the Company were to acquire control of another savings
institution, other than through merger or other business
combination with Harbor Federal, the Company would thereupon
become a multiple savings institution holding company. Except
where such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary savings
institution meets the QTL test, the activities of the Company
and any of its subsidiaries (other than the Bank or other
subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings
institution holding company or subsidiary thereof which is not
an institution shall commence or continue for a limited period
of time after becoming a multiple savings institution holding
company or subsidiary thereof, any business activity, upon prior
notice to, and no objection by, the OTS, other than: (i)
furnishing or performing management services for a subsidiary
savings institution; (ii) conducting an insurance agency or
escrow business; (iii) holding, managing, or liquidating assets
owned by or acquired from a subsidiary savings institution; (iv)
holding or managing properties used or occupied by a subsidiary
savings institution; (v) acting as trustee under deeds of trust;
(vi) those activities authorized by regulation as of March 5,
1987 to be engaged in by multiple holding companies; or (vii)
unless the Director of the OTS by regulation prohibits or limits
such activities for savings institution holding companies, those
activities authorized by the Federal Reserve Board as
permissible for bank holding companies. A multiple savings
institution holding company must obtain the approval of the OTS
prior to engaging in the activities described in (vii) above.
Restrictions on Acquisitions. Savings institution holding
companies may not acquire, without prior approval of the
Director of the OTS, (i) control of any other savings
institution or savings institution holding company or
substantially all the assets thereof or (ii) more than 5% of the
voting shares of an institution or holding company thereof which
is not a subsidiary. Under certain circumstances, a registered
savings institution holding company is permitted to acquire,
with the approval of the Director of the OTS, up to 15% of the
voting shares of an under-capitalized savings institution
pursuant to a "qualified stock issuance" without that savings
institution being deemed controlled by the holding company. In
order for the shares acquired to constitute a "qualified stock
issuance," the shares must consist of previously unissued stock
or treasury shares, the shares must be acquired for cash, the
savings institution holding company's other subsidiaries must
have tangible capital of at least 6-1/2% of total assets, there
must not be more than one common director or officer between the
savings institution holding company and the issuing savings
institution, and transactions between the savings institution
and the savings institution holding company and any of its
affiliates must conform to Sections 23A and 23B of the Federal
Reserve Act. Except with the prior approval of the Director of
the OTS, no director or officer of an institution holding
company or person owning or controlling by proxy or otherwise
more than 25% of such company's stock, may also acquire control
of any savings institution, other than a subsidiary savings
institution, or of any other savings institution holding
company.
The Director of the OTS may only approve acquisitions
resulting in the formation of a multiple savings institution
holding company which controls savings institutions in more than
one state if: (i) the multiple savings
30
<PAGE>
<PAGE>
institution holding company involved controls an institution
which operated a home or branch office in the state of the
institution to be acquired as of March 5, 1987; (ii) the
acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of
the FDIC Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit
institutions to be acquired by state-chartered institutions or
savings institution holding companies located in the state where
the acquiring entity is located (or by a holding company that
controls such state-chartered savings institutions).
OTS regulations permit federal savings institutions to
branch in any state or states of the United States and its
territories. Except in supervisory cases or when interstate
branching is otherwise permitted by state law or other statutory
provision, a federal institution may not establish an out-of-
state branch unless (i) the federal institution qualifies as a
"domestic building and loan association" under
Section7701(a)(19) of the Internal Revenue Code and the total
assets attributable to all branches of the institution in the
state would qualify such branches taken as a whole for treatment
as a domestic building and loan association and (ii) such branch
would not result in (a) formation of a prohibited multi-state
multiple savings holding company or (b) a violation of certain
statutory restrictions on branching by savings institution
subsidiaries of banking holding companies. Federal associations
generally may not establish new branches unless the institution
meets or exceeds minimum regulatory capital requirements. The
OTS will also consider the institution's record of compliance
with the Community Reinvestment Act of 1977 in connection with
any branch application. Legislative initiatives have been
introduced in the U.S. Congress which could result in the
imposition of restrictions on the branching activities of
federal savings institutions in the future.
Under the Bank Holding Company Act of 1956, as amended,
bank holding companies are specifically authorized to acquire
control of any savings institution. Pursuant to rules
promulgated by the Federal Reserve Board, owning, controlling or
operating an institution is a permissible activity for bank
holding companies, if the savings institution engages only in
deposit-taking activities and lending and other activities that
are permissible for bank holding companies. A bank holding
company that controls an institution may merge or consolidate
the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank which is
a member of the BIF with the approval of the appropriate federal
banking agency and the Federal Reserve Board. The resulting
bank will be required to continue to pay assessments to the SAIF
at the rates prescribed for SAIF members on the deposits
attributable to the merged savings institution plus an annual
growth increment. In addition, the transaction must comply with
the restrictions on interstate acquisitions of commercial banks
under the Bank Holding Company Act.
Federal Securities Law. The Common Stock is registered
with the SEC under the Securities Exchange Act of 1934, as
amended ("Securities Exchange Act"), and under OTS regulations
generally may not be deregistered for at least three years after
the Conversion. The Company is subject to the information,
proxy solicitation, insider trading restrictions and other
requirements of the Securities Exchange Act.
TAXATION
The Company and its subsidiaries file a consolidated
federal income tax return on a fiscal year basis. Consolidated
returns have the effect of eliminating intercompany
distributions, including dividends, from the computation of
consolidated taxable income for the taxable year in which the
distributions occur.
Federal Income Taxation. Thrift institutions are subject
to the provisions of the Internal Revenue Code of 1986 (the
"Code") in the same general manner as other corporations.
However, institutions such as Harbor Federal which meet certain
definitional tests and other conditions prescribed by the Code
may benefit from certain favorable provisions regarding their
deductions from taxable income for annual additions to their bad
debt reserve. For purposes of the bad debt reserve deduction,
loans are separated into "qualifying real property loans," which
generally are loans secured by interests in certain real
property, and nonqualifying loans, which are all other loans.
The bad debt reserve deduction with respect to nonqualifying
loans must be based on actual loss experience. For tax years
beginning before January 1, 1996, the amount of the bad debt
reserve deduction with respect to qualifying real property loans
may be based upon
31
<PAGE>
<PAGE>
actual loss experience (the "experience method") or a percentage
of taxable income determined without regard to such deduction
(the "percentage of taxable income method").
Legislation that is effective for tax years beginning
after December 31, 1995 requires institutions to recapture into
taxable income over a six taxable year period the portion of the
tax loan loss reserve that exceeds the pre-1988 tax loan loss
reserve. Harbor Federal is no longer allowed to use the
percentage of taxable income method for tax loan loss
provisions, but is allowed to use the experience method of
accounting for bad debts. There has been no effect on net
income of Harbor Federal from the recapture because the taxes on
these bad debts reserves were accrued as a deferred tax
liability.
The legislation provides for a suspension of this
recapture if the institution meets the "residential loan
requirement." This requirement is met if the principal amount
of residential loans that the institution originates during its
first taxable year after December 31, 1995, exceeds the average
of the principal amounts of residential loans made by the
institution during the six most recent taxable years beginning
before January 1, 1996. If the requirement is met, the
recapture is suspended until a taxable year beginning December
31, 1997, or until the residential loan requirement is not met
in a subsequent year. Harbor Federal met this requirement for
the taxable year ended March 31, 1999.
Harbor Federal historically elected to use the percentage
of taxable income method. Under the percentage of taxable
income method, the bad debt reserve deduction for qualifying
real property loans is computed as a percentage, which Congress
has reduced from as much as 60% in prior years to 8% of taxable
income, with certain adjustments, effective for taxable years
beginning after 1986. The allowable deduction under the
percentage of taxable income method (the "percentage bad debt
deduction") for taxable years beginning before 1987 was scaled
downward in the event that less than 82% of the total dollar
amount of the assets of an association were within certain
designated categories. When the percentage method bad debt
deduction was lowered to 8%, the 82% qualifying assets
requirement was lowered to 60%. For all taxable years, there is
no deduction in the event that less than 60% of the total dollar
amount of the assets of an association falls within such
categories. Moreover, in such case, the Bank could be required
to recapture, generally over a period of up to four years, their
existing bad debt reserve. As of March 31, 1999, more than the
required amount of the Bank's total assets fell within such
category.
Earnings appropriated to an institution's bad debt reserve
and claimed as a tax deduction are not available for the payment
of cash dividends or for distribution to shareholders (including
distributions made on dissolution or liquidation), unless such
amount is included in taxable income, along with the amount
deemed necessary to pay the resulting federal income tax.
State Income Taxation. The State of Maryland imposes an
income tax of approximately 7% on income measured substantially
the same as federal taxable income. In addition, Maryland
imposes a franchise tax, at a rate of 0.013% of the total
withdrawal value of the deposits that a savings and loan
association holds in Maryland at December 31 each year.
Harbor Federal's federal and state income tax returns have
been audited through December 31, 1993. For additional
information, see Note 9 of the Notes to Consolidated Financial
Statements in the Annual Report.
EMPLOYEES
As of March 31, 1999, Harbor Federal had 49 full-time and
seven part-time employees, none of whom was represented by a
collective bargaining agreement.
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth information as of March 31,
1999 regarding the executive officer of Harbor Federal who did
not serve on the Board of Directors.
32
<PAGE>
<PAGE>
Name Age Title
- ---- --- -----
Norbert J. Luken 61 Vice President and Chief Financial
Officer
NORBERT J. LUKEN has been with Harbor Federal since 1969,
and is currently Vice President and Chief Financial Officer. He
has served as Treasurer of Financial Managers Society, Maryland
Chapter, Committeeman and Treasurer of Boy Scout Troop 746, Shot
Tower District Chairman of the Baltimore Area Council, BSA, and
a member of the St. Joseph's Catholic Church Choir, and the
Archdiocesan Choir of Baltimore.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The following table sets forth information regarding
Harbor Federal's locations at March 31, 1999.
<TABLE>
<CAPTION>
Year Book Value Deposits at
Opened or Owned or at March 31, Approximate March 31, 1999
Acquired Leased 1999 Square Footage (In thousands)
--------- -------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Main Office:
Towson --
705 York Road 1993 Owned $1,155,400 8,300 $17,290
Branch Offices:
South Baltimore --
132 East Fort Avenue 1887 Owned 24,100 3,300 26,003
Riviera Beach --
8553 Ft. Smallwood Road 1972 Owned 43,700 2,200 28,991
Locust Point --
1350 East Fort Avenue 1981 Owned 67,800 1,400 12,268
Highlandtown --
3200 Eastern Avenue 1910 Owned 107,700 5,300 30,886
Parkville --
7917 Harford Road 1989 Owned 122,100 1,600 21,740
Pikesville --
507 Reisterstown Road 1996 Leased 4,900 1,500 20,329
Putty Hill --
8030 Belair Road 1996 Owned 230,800 2,400 13,005
Roland Park --
4806 Roland Avenue 1996 Leased 4,000 1,800 12,849
</TABLE>
The book value of Harbor Federal's investment in premises
and equipment totaled $1.8 million at March 31, 1999.
33
<PAGE>
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
From time to time, Harbor Federal is a party to various
legal proceedings incident to its business. At March 31, 1999,
there were no legal proceedings to which the Company, Harbor
Federal or its subsidiaries was a party, or to which any of
their property was subject, which were expected by management to
result in a material loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders
during the fourth quarter of fiscal 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
- ---------------------------------------------------------
The information required by this item is incorporated by
reference to "Item 1. Business -- Regulation -- Dividend
Limitations" herein and "Market Information," "Market Price of
Common Stock and Dividend Information" and Note 11 of the Notes
to Consolidated Financial Statements in the portions of the
Annual Report filed as Exhibit 13 to this report.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
- --------------------------------------------------------
The information required by this item is incorporated by
reference to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the portions of the
Annual Report filed as Exhibit 13 to this report.
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
The financial statements required by this item are
incorporated by reference to the consolidated financial
statements, notes to consolidated financial statements and
independent auditors' report in the portions of the Annual
Report filed as Exhibit 13 to this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ----------------------------------------------------------
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT
- ---------------------------------------------------------------
The information required by this item is incorporated by
reference to "Election of Directors" in the Proxy Statement and
"Item 1. Description of Business -- Executive Officers" herein.
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
The information required by this item is incorporated by
reference to "Executive Compensation" in the Proxy Statement.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
- -------------------------------------------------------------
The information required by this item is incorporated by
reference to "Voting Securities and Principal Holders Thereof"
and "Election of Directors" in the Proxy Statement.
34
<PAGE>
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated by
reference to "Transactions with Management" in the Proxy
Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) The following exhibits either are filed as part of
this report or are incorporated herein by reference:
No. Description
--- -----------
3.1 Articles of Incorporation of Harbor Federal
Bancorp, Inc. (1)
3.2 Bylaws of Harbor Federal Bancorp, Inc. (1)
4 Form of Common Stock Certificate (1)
10.1 Employment and Guaranty Agreements between
Harbor Federal Bancorp, Inc. and Harbor
Federal Savings Bank and Robert A. Williams
and Lawrence W. Williams, as amended (2)
10.2 Severance Agreements between Harbor Federal
Bancorp, Inc. and Harbor Federal Savings
Bank and Norbert J. Luken, as amended (2)
10.3 Employment Agreement and Guaranty Agreement
between Thomas J. Riehl and Bank Street
Mortgage Company and Harbor Federal Bancorp,
Inc. (3)
10.4 Harbor Federal Savings Bank Non-Employee
Director Retirement Plan, as amended * (2)
10.5 Harbor Federal Savings Bank Deferred
Compensation Plan, as amended (4)
10.6 Harbor Federal Savings Bank Supplemental
Executive Retirement Agreement with Robert
Williams (renamed Grantor Trust), as amended
* (4)
10.7 Harbor Federal Bancorp, Inc. Incentive
Compensation Plan, as amended (4)
10.8 Harbor Federal Bancorp, Inc. 1995 Stock
Option and Incentive Plan and Trust, as
amended (3)
10.9 Harbor Federal Bancorp, Inc. Management
Recognition Plan and Trust, as amended (3)
10.10 Harbor Federal Bancorp, Inc. 1999 Stock
Incentive Plan *
13 1999 Annual Report to Stockholders *
21 Subsidiaries (5)
23 Consent of KPMG LLP *
27.1 Financial Data Schedule *
27.2 Restated Financial Data Schedule for
fiscal 1998 *
27.3 Restated Financial Data Schedule for
fiscal 1997 *
[FN]
__________
* Some or all filed as an exhibit to this report.
(1) Some or all incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 33-75624).
(2) Some or all incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the Quarterly Period
ended June 30, 1994 and the Company's Annual Report on Form
10-KSB for the year ended March 31, 1998.
(3) Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended March 31, 1998.
(4) Some or all incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 33-75624) and
the Company's Annual Report on Form 10-KSB for the year
ended March 31, 1998.
(5) Incorporated by reference to "Item 1. Business --
Subsidiary Activities" in this report.
(b) No report on Form 8-K was filed during the last
quarter of the fiscal year covered by this report.
35
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HARBOR FEDERAL BANCORP, INC.
Date: June 21, 1999 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 and in the capacities and on
the dates indicated.
By: /s/ Robert A. Williams Date: June 21, 1999
-------------------------------
Robert A. Williams
President
(Director and Principal Executive Officer)
By: /s/ Norbert J. Luken Date: June 21, 1999
-------------------------------
Norbert J. Luken
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Joseph J. Lacy Date: June 21, 1999
-------------------------------
Joseph J. Lacy
Director
By: /s/ John H. Riehl, III Date: June 21, 1999
-------------------------------
John H. Riehl, III
Director
By: /s/ J. Kemp Roche Date: June 21, 1999
-------------------------------
J. Kemp Roche
Director
By: /s/ Gideon N. Stieff, Jr. Date: June 21, 1999
-------------------------------
Gideon N. Stieff, Jr.
Director
By: /s/ Lawrence W. Williams Date: June 21, 1999
-------------------------------
Lawrence W. Williams
Director
HARBOR FEDERAL SAVINGS BANK
RETIREMENT PLAN FOR NON-EMPLOYEE DIRECTORS
_________________
1999 Amendment
_________________
WHEREAS, Harbor Federal Savings Bank (the "Bank") maintains
the Harbor Federal Savings Bank Retirement Plan for Non-employee
Directors (the "Plan"); and
WHEREAS, the Bank's Board of Directors has determined that
it is in the best interests of the Bank and the Plan
participants to amend the Plan in the manner set forth herein.
NOW, THEREFORE, the Plan shall be amended as follows,
pursuant to Article XI thereof, effective May 24, 1999:
1. Article VI of the Plan shall be amended by adding the
following paragraph at the end thereof as follows:
Notwithstanding any provision of the Plan to the
contrary, each Participant may at any time irrevocably
elect, on the form attached hereto as Exhibit "A" (the
"Election Form"), to surrender all or part of his
vested Benefits under the Plan in consideration of
receiving a deferred share award, of equivalent value,
pursuant to the Harbor Federal Bancorp, Inc. 1999 Stock
Incentive Plan. In addition, each Participant may also
irrevocably elect on the Election Form to cease to
accrue future benefits under this Plan and instead to
accrue future deferred share awards under the Harbor
Federal Bancorp, Inc 1999 Stock Incentive Plan rather
than under the Plan.
WHEREFORE, the undersigned hereby execute this 1999
Amendment to the Plan on May 24, 1999.
HARBOR FEDERAL SAVINGS BANK
Witnessed by:
/s/ Deborah A. Epps By: /s/ J. Kemp Roche
- ----------------------- -------------------------
A director other than
Robert A. Williams
HARBOR FEDERAL SAVINGS BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
FOR ROBERT A. WILLIAMS
______________
1999 Amendment
______________
WHEREAS, Harbor Federal Savings Bank (the "Bank") has
entered into a Supplemental Executive Retirement Agreement (the
"Agreement") with Robert A. Williams (the "Executive"), and the
Bank's Board of Directors and the Executive have agreed to amend
the Agreement in the manner set forth herein.
NOW, THEREFORE, the Agreement shall be amended a follows,
pursuant to Article XI thereof, effective May 24, 1999:
1. Article VI of the Agreement shall be amended by adding
the following paragraph at the end thereof as follows:
Notwithstanding any provision of the Agreement to the
contrary, the Executive may at any time irrevocably
elect, on the form attached hereto as Exhibit "A" (the
"Election Form"), to surrender all or part of his vested
Benefits under the Agreement in consideration of
receiving a deferred share award, of equivalent value,
pursuant to the Harbor Federal Bancorp, Inc. 1999 Stock
Incentive Plan. In addition, the Executive may also
irrevocably elect on the Election Form to cease to
accrue future benefits under this Agreement and instead
to accrue future deferred share awards under the Harbor
Federal Bancorp, Inc. 1999 Stock Incentive Plan.
WHEREFORE, the undersigned hereby execute this 1999
Amendment to the Agreement on May 24, 1999.
HARBOR FEDERAL SAVINGS BANK
Witnessed by:
/s/ Deborah A. Epps By: /s/ J. Kemp Roche
- ----------------------- --------------------------
A director other than
Robert A. Williams
EXECUTIVE
Witnessed by:
/s/ Deborah A. Epps /s/ Robert A. Williams
- ----------------------- -------------------------
Robert A. Williams
HARBOR FEDERAL BANCORP, INC.
1999 STOCK INCENTIVE PLAN
1. PURPOSE OF THE PLAN.
The purpose of this Plan is to advance the interests of the
Company through providing select key Employees and Directors of
the Bank, the Company, and their Affiliates with the opportunity
to receive Options, SARs, and Deferred Shares. By encouraging
stock ownership through these awards, the Company seeks to
attract, retain and motivate the best available personnel for
positions of substantial responsibility and to provide
additional incentives to Directors and key Employees of the
Company or any Affiliate to promote the success of the business.
It is intended that options issued pursuant to this Plan may
constitute either ISOs or Non-ISOs as defined below.
2. DEFINITIONS.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or
"subsidiary corporation" of the Company, as such terms are
defined in Section 424(e) and (f), respectively, of the Code.
(b) "Agreement" shall mean a written agreement entered into
in accordance with Paragraph 5(c).
(c) "Awards" shall mean, collectively, Options, SARs, and
Deferred Shares.
(d) "Bank" shall mean Harbor Federal Savings Bank.
(e) "Board" shall mean the Board of Directors of the
Company.
(f) "Change in Control" shall mean any one of the following
events: (1) the acquisition of ownership, holding or power to
vote more than 25% of the Bank's or the Company's voting stock,
(2) the acquisition of the ability to control the election of a
majority of the Bank's or the Company's directors, (3) the
acquisition of a controlling influence over the management or
policies of the Bank or the Company by any person or by persons
acting as a "group" (within the meaning of Section 13(d) of the
Securities Exchange Act of 1934), or (4) during any period of
two consecutive years, individuals (the "Continuing Directors")
who at the beginning of such period constitute the Board of
Directors of the Company or the Bank (the "Existing Board")
cease for any reason to constitute at least two-thirds thereof,
provided that any individual whose election or nomination for
election as a member of the Existing Board was approved by a
vote of at least two-thirds of the Continuing Directors then in
office shall be considered a Continuing Director. In the case
of subsections (1), (2), and (3) above, ownership or control of
the Bank by the Company itself shall not constitute a "Change in
Control." For purposes of defining Change in Control, the term
"person" refers to an individual or a corporation, partnership,
trust, association, joint venture, pool, syndicate, sole
proprietorship,
<PAGE>
<PAGE>
unincorporated organization or any other form of entity not
specifically listed herein. The decision of the Committee as to
whether a Change in Control has occurred shall be conclusive and
binding.
(g) "Code" shall mean the Internal Revenue Code of 1986,
as amended.
(h) "Committee" shall mean the Stock Option Committee
appointed by the Board in accordance with Paragraph 5(a) hereof;
provided that the Board may act in lieu of the Committee with
respect to any matter as to which the Committee may act.
(i) "Common Stock" shall mean the common stock of the
Company.
(j) "Company" shall mean Harbor Federal Bancorp, Inc.
(k) "Continuous Service" shall mean the absence of any
interruption or termination of service as an Employee or
Director of the Company or an Affiliate. Continuous Service
shall not be considered interrupted in the case of sick leave,
military leave or any other leave of absence approved by the
Company, in the case of transfers between payroll locations of
the Company or between the Company, an Affiliate or a successor,
or in the case of a Director's performance of services in an
emeritus or advisory capacity.
(l) "Deferred Shares" shall mean Shares that the Company
has credited, pursuant to Paragraph 10 hereof, to a deferred
compensation account in the name of a Participant.
(m) "Director" shall mean any member of the Board, and any
member of the board of directors of any Affiliate that the Board
has by resolution designated as being eligible for participation
in this Plan.
(n) "Disability" shall mean a physical or mental condition,
which in the sole and absolute discretion of the Committee, is
reasonably expected to be of indefinite duration and to
substantially prevent a Participant from fulfilling his or her
duties or responsibilities to the Company or an Affiliate.
(o) "Effective Date" shall mean the date specified in
Paragraph 14 hereof.
(p) "Employee" shall mean any person employed by the
Company, the Bank, or an Affiliate.
(q) "Exercise Price" shall mean the price per Optioned
Share at which an Option may be exercised.
(r) "ISO" means an option to purchase Common Stock which
meets the requirements set forth in the Plan, and which is
intended to be and is identified as an "incentive stock option"
within the meaning of Section 422 of the Code.
(s) "Market Value" shall mean the fair market value of the
Common Stock, as determined under Paragraph 7(b) hereof.
2
<PAGE>
<PAGE>
(t) "Non-Employee Director" shall have the meaning provided
in Rule 16b-3.
(u) "Non-ISO" means an option to purchase Common Stock
which meets the requirements set forth in the Plan but which is
not intended to be and is not identified as an ISO.
(v) "Option" means an ISO and/or a Non-ISO.
(w) "Optioned Shares" shall mean Shares subject to an Award
granted pursuant to this Plan.
(x) "Participant" shall mean any person who receives an
Option, SAR, or Deferred Shares pursuant to the Plan.
(y) "Plan" shall mean The Peoples BancTrust Company, Inc.
1999 Stock Option Plan.
(z) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as
amended.
(aa) "Share" shall mean one share of Common Stock.
(bb) "SAR" (or "Stock Appreciation Right") shall mean a
right to receive the appreciation in value, or a portion of the
appreciation in value, of a specified number of shares of Common
Stock.
3. TERM OF THE PLAN AND AWARDS.
(a) Term of the Plan. The Plan shall continue in effect
for a term of ten years from the Effective Date, unless sooner
terminated pursuant to Paragraph 16 hereof. No Option shall be
granted under the Plan after ten years from the Effective Date.
(b) Term of Options. The term of each Option granted under
the Plan shall be established by the Committee, but shall not
exceed 10 years; provided, however, that in the case of an
Employee who owns Shares representing more than 10% of the
outstanding Common Stock at the time an ISO is granted, the term
of such ISO shall not exceed five years.
4. Shares Subject to the Plan.
Except as otherwise required under Paragraph 11, the
aggregate number of Shares deliverable pursuant to the Plan
shall not exceed 170,000 Shares. Such Shares may either be
authorized but unissued Shares, Shares held in treasury, or
Shares held in a grantor trust created by the Company. If any
Awards should expire, become unexercisable, or be forfeited for
any reason without having resulted in the issuance of Shares to
Participants, the Optioned Shares shall, unless the Plan shall
have been terminated, be available for the grant of additional
Awards under the Plan.
3
<PAGE>
<PAGE>
5. ADMINISTRATION OF THE PLAN.
(a) Composition of the Committee. The Plan shall be
administered by the Committee, appointed by the Board,
consisting of at least two members of the Board who are
Non-Employee Directors. Members of the Committee shall serve at
the pleasure of the Board. In the absence at any time of a duly
appointed Committee, the Plan shall be administered by those
members of the Board who are Non-Employee Directors.
(b) Powers of the Committee. Except as limited by the
express provisions of the Plan or by resolutions adopted by the
Board, the Committee shall have sole and complete authority and
discretion (i) to select Participants and grant Awards, (ii) to
determine the form and content of Awards to be issued in the
form of Agreements under the Plan, (iii) to interpret the Plan,
(iv) to prescribe, amend and rescind rules and regulations
relating to the Plan, and (v) to make other determinations
necessary or advisable for the administration of the Plan. The
Committee shall have and may exercise such other power and
authority as may be delegated to it by the Board from time to
time. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at
any meeting at which a quorum is present, or acts approved in
writing by a majority of the Committee without a meeting, shall
be deemed the action of the Committee.
(c) Agreement. Each Award shall be evidenced by a written
agreement containing such provisions as may be approved by the
Committee. Each such Agreement shall constitute a binding
contract between the Company and the Participant, and every
Participant, upon acceptance of such Agreement, shall be bound
by the terms and restrictions of the Plan and of such Agreement.
The terms of each such Agreement shall be in accordance with the
Plan, but each Agreement may include such additional provisions
and restrictions determined by the Committee, in its discretion,
provided that such additional provisions and restrictions are
not inconsistent with the terms of the Plan. In particular, the
Committee shall set forth in each Agreement (i) the Exercise
Price of each Option or SAR, (ii) the number of Shares subject
to, and the expiration date of, each Award, (iii) the manner,
time and rate (cumulative or otherwise) of exercise or vesting
of such Award, and (iv) the restrictions, if any, to be placed
upon such Award, or upon Shares which may be issued pursuant to
such Award.
The Chairman of the Committee and such other Directors and
officers as shall be designated by the Committee are hereby
authorized to execute Agreements on behalf of the Company and to
cause them to be delivered to the recipients of Awards.
(d) Effect of the Committee's Decisions. All decisions,
determinations and interpretations of the Committee shall be
final and conclusive on all persons affected thereby.
(e) Indemnification. In addition to such other rights of
indemnification as they may have, the members of the Committee
shall be indemnified by the Company in connection with any
claim, action, suit or proceeding relating to any action taken
or failure to act under or in connection with the Plan or any
Award granted hereunder to the full extent provided for under
the Company's governing instruments with respect to the
indemnification of Directors.
4
<PAGE>
<PAGE>
6. GRANT OF AWARDS.
(a) General Rule. The Committee shall have the discretion
to make discretionary grants of Awards to Employees and
Directors, including members of the Committee.
(b) Special Rules for ISOs. The aggregate Market Value,
as of the date the Option is granted, of the Shares with respect
to which ISOs are exercisable for the first time by an Employee
during any calendar year (under all incentive stock option
plans, as defined in Section 422 of the Code, of the Company or
any present or future Affiliate of the Company) shall not exceed
$100,000. Notwithstanding the foregoing, the Committee may
grant Options in excess of the foregoing limitations, in which
case such Options granted in excess of such limitation shall be
Options which are Non-ISOs.
7. EXERCISE PRICE FOR OPTIONS.
(a) Limits on Committee Discretion. The Exercise Price as
to any particular Option shall not be less than 100% of the
Market Value of the Optioned Shares on the date of grant. In
the case of an Employee who owns Shares representing more than
10% of the Company's outstanding Shares of Common Stock at the
time an ISO is granted, the Exercise Price shall not be less
than 110% of the Market Value of the Optioned Shares at the time
the ISO is granted.
(b) Standards for Determining Exercise Price. If the
Common Stock is listed on a national securities exchange,
including the Nasdaq National Market System, on the date in
question, then the Market Value per Share shall be the average
of the highest and lowest selling price on such exchange on such
date, or if there were no sales on such date, then the Exercise
Price shall be the mean between the bid and asked price on such
date. If the Common Stock is traded otherwise than on a
national securities exchange on the date in question, then the
Market Value per Share shall be the mean between the bid and
asked price on such date, or, if there is no bid and asked price
on such date, then on the next prior business day on which there
was a bid and asked price. If no such bid and asked price is
available, then the Market Value per Share shall be its fair
market value as determined by the Committee, in its sole and
absolute discretion.
8. EXERCISE OF OPTIONS.
(a) Conditions for Exercise. Any Option granted hereunder
shall be exercisable at such times and under such conditions as
the Committee shall specify in the Agreement granting the Option
to the Optionee.
(b) Procedure for Exercise. A Participant may exercise an
Option, subject to provisions relative to its termination and
limitations on its exercise, only by (1) written notice of
intent to exercise the Option with respect to a specified number
of Shares, and (2) payment to the Company (contemporaneously
with delivery of such notice) in cash, in Common Stock, or a
combination of cash and Common Stock, of the amount of the
Exercise Price for the number of Shares with respect to which
the Option is then being exercised. Each such notice, and
payment where required, shall be delivered, or mailed by prepaid
registered or certified mail, addressed to
5
<PAGE>
<PAGE>
the Treasurer of the Company at its executive offices. Common
Stock utilized in full or partial payment of the Exercise Price
for Options shall be valued at its Market Value at the date of
exercise and have been held for at least six months. An Option
may not be exercised for a fractional Share.
(c) Period of Exercisability. Except to the extent
otherwise provided in the terms of an Agreement, an Option may
be exercised by a Participant only during his Continuous
Service, or within one year after termination of such Continuous
Service (but not later than the date on which the Option would
otherwise expire), except if the Participant's Continuous
Service terminates by reason of -
(1) "Just Cause" which for purposes hereof shall have
the meaning set forth in any unexpired employment or
severance agreement between the Participant and the Bank
and/or the Company (and, in the absence of any such
agreement, shall mean termination because of the
Participant's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties,
willful violation of any law, rule or regulation (other
than traffic violations or similar offenses) or final
cease-and-desist order), then the Participant's rights to
exercise such Option shall expire on the date of such
termination;
(2) death, then to the extent that the Participant
would have been entitled to exercise the Option immediately
prior to his death, such Option of the deceased Participant
may be exercised within two years from the date of his
death, but not later than the date on which the Option
would otherwise expire, by the personal representatives of
his estate or person or persons to whom his rights under
such Option shall have passed by will or by laws of descent
and distribution.
(d) Effect of the Committee's Decisions. The Committee's
determination whether a Participant's Continuous Service has
ceased, and the effective date thereof, shall be final and
conclusive on all persons affected thereby.
(e) Mandatory Six-Month Holding Period. Notwithstanding
any other provision of this Plan to the contrary, Common Stock
that is purchased upon exercise of an Option may not be sold
within the six-month period following the grant date of that
Option, except in the event of the Participant's death or
Disability, or such other event as the Board may specifically
deem appropriate.
9. SARS (STOCK APPRECIATION RIGHTS).
(a) Granting of SARs. In its sole discretion, the
Committee may from time to time grant SARs to Employees or
Directors either in conjunction with, or independently of, any
Options granted under the Plan. An SAR granted in conjunction
with an Option may be an alternative right wherein the exercise
of the Option terminates the SAR to the extent of the number of
shares purchased upon exercise of the Option and,
correspondingly, the exercise of the SAR terminates the Option
to the extent of the number of Shares with respect to which the
6
<PAGE>
<PAGE>
SAR is exercised. Alternatively, an SAR granted in conjunction
with an Option may be an additional right wherein both the SAR
and the Option may be exercised. An SAR may not be granted in
conjunction with an ISO under circumstances in which the
exercise of the SAR affects the right to exercise the ISO or
vice versa, unless the SAR, by its terms, meets all of the
following requirements: (1) the SAR will expire no later than
the ISO; (2) the SAR may be for no more than the difference
between the Exercise Price of the ISO and the Market Value of
the Shares subject to the ISO at the time the SAR is exercised;
(3) the SAR is transferable only when the ISO is transferable,
and under the same conditions; (4) the SAR may be exercised only
when the ISO may be exercised; and (5) the SAR may be exercised
only when the Market Value of the Shares subject to the ISO
exceeds the Exercise Price of the ISO.
(b) Exercise Price. The Exercise Price as to any
particular SAR shall not be less than the Market Value of the
Optioned Shares on the date of grant.
(c) Timing of Exercise. The provisions of Paragraph 8(b)
regarding the period of exercisability of Options are
incorporated by reference herein, and shall determine the period
of exercisability of SARs.
(d) Exercise of SARs. An SAR granted hereunder shall be
exercisable at such times and under such conditions as shall be
permissible under the terms of the Plan and of the Agreement
granted to a Participant, provided that an SAR may not be
exercised for a fractional Share. Upon exercise of an SAR, the
Participant shall be entitled to receive, without payment to the
Company except for applicable withholding taxes, an amount equal
to the excess of (or, in the discretion of the Committee if
provided in the Agreement, a portion of) the excess of the then
aggregate Market Value of the number of Optioned Shares with
respect to which the Participant exercises the SAR, over the
aggregate Exercise Price of such number of Optioned Shares.
This amount shall be payable by the Company, at the discretion
of the Committee, in cash or in Shares valued at the then Market
Value thereof, or any combination thereof.
(e) Procedure for Exercising SARs. To the extent not
inconsistent herewith, the provisions of Paragraph 8(a) as to
the procedure for exercising Options are incorporated by
reference, and shall determine the procedure for exercising
SARs.
10. DEFERRED SHARE CREDITS.
(a) Annual Awards. The Committee shall have the discretion
to make discretionary awards of Deferred Shares to the accounts
of Employees and Directors (including members of the Committee).
On the last day of each fiscal year of the Company, the
Committee shall credit 300 Deferred Shares to the account of
each Director who has not accrued benefits during the fiscal
year under either the Harbor Federal Savings Bank Retirement
Plan for Non-Employee Directors or the Harbor Federal Savings
Bank Supplemental Executive Retirement Agreement.
(b) Credit for Benefits under Certain Plans. Each Employee
or Director who has accrued benefits under the Bank's Retirement
Plan for Non-Employee Directors, or the Supplemental Executive
Retirement Agreement may elect, at any time, to cancel his
rights to all or a whole percentage of those benefits, and in
consideration to receive a credit under this Plan
7
<PAGE>
<PAGE>
for a number of Deferred Shares that have a value on that date
equal to the benefits being cancelled.
(c) Elections to Defer. The Committee may permit any
Participant who is a member of a select group of management or
highly compensated employees, within the meaning of the
Employees' Retirement Income Security Act of 1973, to
irrevocably elect to forego the receipt of cash compensation and
in lieu thereof to have the Company credit an equal value of
Deferred Shares to an account payable to the Participant.
(d) Vesting. All Deferred Shares shall be 100% vested,
unless an Agreement specifically provides to the contrary.
(e) Cash Earnings on Deferred Shares. On the last day of
each fiscal year of the Company, the Committee shall credit to
each Participant's account Deferred Shares having a value equal
to the sum of any cash dividends paid on Deferred Shares during
the year. The Trustees shall hold each Participant's Deferred
Shares and deferred earnings until distribution is required
pursuant to subparagraph (f) hereof.
(f) Distributions of Deferred Shares and Earnings. The
Trustee shall distribute a Participant's Deferred Shares and
deferred earnings in five substantially equal annual
installments that are paid before the last day of each of the
five fiscal years of the Company that end after the date on
which the Participant's Continuous Service terminates, unless
the Committee has accepted the form attached hereto as Exhibit
"A" (the "Distribution Election Form"), in which case
distributions shall be made in accordance with the method
selected on the form. Acceptance by the Committee shall be
presumed to occur on delivery of a Distribution Election Form to
the Committee, unless (i) the Committee returns it within five
business days, with a written notice that sets forth the reasons
for its rejection, or (ii) the Participant delivers the
Distribution Election Form to the Committee either within 90
days of a Change in Control or within one year of the date on
which the Participant's Continuous Service terminates prior to a
Change in Control for any reason other than the Participant's
death.
(g) Hardship Withdrawals. Notwithstanding any other
provision of the Plan or a Participant's Distribution Election
Form, in the event the Participant suffers an unforeseeable
hardship within the contemplation of this paragraph, the
Participant may apply to the Committee for an immediate
distribution of all or a portion of his Deferred Shares. The
hardship must result from a sudden and unexpected illness or
accident of the Participant or a dependent of the Participant,
casualty loss of property, or other similar conditions beyond
the control of the Participant. Examples of purposes which are
not considered hardships include post-secondary school expenses
or the desire to purchase a residence. In no event will a
distribution be made to the extent the hardship could be
relieved through reimbursement or compensation by insurance or
otherwise, or by liquidation of the Participant's nonessential
assets to the extent such liquidation would not itself cause a
severe financial hardship. The amount of any distribution
hereunder shall be limited to the amount necessary to relieve
the Participant's financial hardship. The determination of
whether a Participant has a qualifying hardship and the amount
which qualifies for distribution, if any, shall be made by the
Committee in its sole discretion. The
8
<PAGE>
<PAGE>
Committee may require evidence of the purpose and amount of the
need, and may establish such application or other procedures as
it deems appropriate.
(h) Rights to Deferred Shares and Earnings. A Participant
may not assign his or her claim to Deferred Shares and
associated earnings during his or her lifetime. A Participant's
right to Deferred Shares and associated earnings shall at all
times constitute an unsecured promise of the Company to pay
benefits as they come due. The right of the Participant or his
or her beneficiary to receive benefits hereunder shall be solely
an unsecured claim against the general assets of the Company.
Neither the Participant nor his or her beneficiary shall have
any claim against or rights in any specific assets or other fund
of the Company.
11. CHANGE IN CONTROL; EFFECT OF CHANGES IN COMMON STOCK
SUBJECT TO THE PLAN.
(a) Change in Control. Upon a Change in Control (or, if
earlier, the execution of an agreement to effect a Change in
Control), all Options and SARs shall become fully exercisable,
notwithstanding any other provision of the Plan or any
Agreement.
(b) Recapitalizations; Stock Splits, Etc. The number and
kind of Shares reserved for issuance under the Plan, and the
number and kind of Shares subject to outstanding Awards, and the
Exercise Price for Options and SARs, shall be proportionately
adjusted for any increase, decrease, change or exchange of
Shares for a different number or kind of shares or other
securities of the Company which results from a merger,
consolidation, recapitalization, reorganization,
reclassification, stock dividend, split-up, combination of
shares, or similar event in which the number or kind of shares
is changed without the receipt or payment of consideration by
the Company.
(c) Transactions in which the Company is Not the Surviving
Entity. In the event of (i) the liquidation or dissolution of
the Company, (ii) a merger or consolidation in which the Company
is not the surviving entity, or (iii) the sale or disposition of
all or substantially all of the Company's assets (any of the
foregoing to be referred to herein as a "Transaction"), all
Deferred Shares and all outstanding Options and SARs, together
with the Exercise Prices thereof, shall be equitably adjusted
for any change or exchange of Shares for a different number or
kind of shares or other securities which results from the
Transaction.
(d) Special Rule for ISOs. Any adjustment made pursuant
to subparagraphs (a) or (b) hereof shall be made in such a
manner as not to constitute a modification, within the meaning
of Section 424(h) of the Code, of outstanding ISOs, unless a
Participant has consented in writing to the change.
(e) Conditions and Restrictions on New, Additional, or
Different Shares or Securities. If, by reason of any adjustment
made pursuant to this Paragraph, a Participant becomes entitled
to new, additional, or different shares of stock or securities,
such new, additional, or different shares of stock or securities
shall thereupon be subject to all of the conditions and
restrictions which were applicable to the Deferred Shares and
Optioned Shares before the adjustment was made.
9
<PAGE>
<PAGE>
(f) Other Issuances. Except as expressly provided in this
Paragraph, the issuance by the Company or an Affiliate of shares
of stock of any class, or of securities convertible into Shares
or stock of another class, for cash or property or for labor or
services either upon direct sale or upon the exercise of rights
or warrants to subscribe therefor, shall not affect, and no
adjustment shall be made with respect to, the number, class, or
Exercise Price of Shares then subject to Awards or reserved for
issuance under the Plan.
12. NON-TRANSFERABILITY.
Awards may not be sold, pledged, assigned, hypothecated,
transferred or disposed of in any manner other than by will or
by the laws of descent and distribution. Notwithstanding the
foregoing, or any other provision of this Plan, a Participant
who holds SARs or Options may transfer such SARs or Options (but
not ISOs) to his or her spouse, lineal ascendants, lineal
descendants, or to a duly established trust for the benefit of
one or more of these individuals. SARs and Options so
transferred may thereafter be transferred only to the
Participant who originally received the grant or to an
individual or trust to whom the Participant could have initially
transferred the SARs or Options pursuant to this Paragraph.
SARs and Options which are transferred pursuant to this
Paragraph shall be exercisable by the transferee according to
the same terms and conditions as applied to the Participant.
13. TIME OF GRANTING OPTIONS.
The date of grant of an Option or SAR shall, for all
purposes, be the date on which the Committee makes the
determination of granting such Option. Notice of the
determination shall be given to each Participant to whom an
Option is so granted within a reasonable time after the date of
such grant.
14. EFFECTIVE DATE.
The Plan shall become effective May 24, 1999, but its
effectiveness and the effectiveness of any Awards shall be
contingent upon the Plan's approval by a favorable vote of
stockholders owning at least a majority of the total votes cast
at a duly called meeting of the Company's stockholders held in
accordance with applicable laws.
15. MODIFICATION OF AWARDS.
At any time, and from time to time, the Board may authorize
the Committee to direct execution of an instrument providing for
the modification of any outstanding Award, provided no such
modification shall confer on the holder of said Award any right
or benefit which could not be conferred on him by the grant of a
new Award at such time, or impair the Award without the consent
of the holder of the Award.
16. AMENDMENT AND TERMINATION OF THE PLAN.
The Board may from time to time amend the terms of the Plan
and, with respect to any Shares at the time not subject to
outstanding Awards, suspend or terminate the Plan. No
10
<PAGE>
<PAGE>
amendment, suspension or termination of the Plan shall, without
the consent of any affected holders of an Award, alter or impair
any rights or obligations under any Award theretofore granted.
17. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Compliance with Securities Laws. Shares of Common
Stock shall not be issued pursuant to any provision of this Plan
unless the issuance and delivery of such Shares shall comply
with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the rules
and regulations promulgated thereunder, any applicable state
securities law, and the requirements of any stock exchange upon
which the Shares may then be listed.
(b) Special Circumstances. The inability of the Company
to obtain approval from any regulatory body or authority deemed
by the Company's counsel to be necessary to the lawful issuance
and sale of any Shares hereunder shall relieve the Company of
any liability in respect of the non-issuance or sale of such
Shares. As a condition to the exercise of an Option or SAR, the
Company may require the person exercising the Option or SAR to
make such representations and warranties as may be necessary to
assure the availability of an exemption from the registration
requirements of federal or state securities law.
(c) Committee Discretion. The Committee shall have the
discretionary authority to impose in Agreements such
restrictions on Shares as it may deem appropriate or desirable,
including but not limited to the authority to impose a right of
first refusal, or to establish repurchase rights, or to pay a
Participant the in-the-money value of his Award in consideration
for its cancellation, or all of these restrictions.
18. RESERVATION OF SHARES.
The Company, during the term of the Plan, will reserve and
keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
19. WITHHOLDING TAX.
The Company's obligation to deliver Shares pursuant to the
Plan shall be subject to the Participant's satisfaction of all
applicable federal, state and local income and employment tax
withholding obligations. The Committee, in its discretion, may
permit the Participant to satisfy the obligation, in whole or in
part, by irrevocably electing to have the Company withhold
Shares, or to deliver to the Company Shares that he already
owns, having a value equal to the amount required to be
withheld. The value of the Shares to be withheld, or delivered
to the Company, shall be based on the Market Value of the Shares
on the date the amount of tax to be withheld is to be
determined. As an alternative, the Company may retain, or sell
without notice, a number of such Shares sufficient to cover the
amount required to be withheld.
11
<PAGE>
<PAGE>
20. NO EMPLOYMENT OR OTHER RIGHTS.
In no event shall an Employee's or Director's eligibility
to participate or participation in the Plan create or be deemed
to create any legal or equitable right of the Employee,
Director, or any other party to continue service with the
Company, the Bank, or any Affiliate of such corporations. No
Employee or Director shall have a right to be granted an Award
or, having received an Award, the right to again be granted an
Award. However, an Employee or Director who has been granted an
Award may, if otherwise eligible, be granted an additional Award
or Awards.
21. GOVERNING LAW.
The Plan shall be governed by and construed in accordance
with the laws of the State of Maryland, except to the extent
that federal law shall be deemed to apply.
12
<PAGE>
HARBOR FEDERAL BANCORP, INC.
ANNUAL REPORT TO STOCKHOLDERS
1999
<PAGE>
<PAGE>
[LETTERHEAD]
Dear Stockholders,
The Board of Directors of Harbor Federal Bancorp, Inc. ("the
Company") is pleased to announce its most successful year since
its inception in 1887. This is our sixth annual report as a
stock corporation.
Consolidated net income for the year ended March 31, 1999 was
$1.8 million or $.99 per diluted share. This compares to $1.7
million or $.93 per diluted share for the year ended March 31,
1998, an increase of 7%. Net income was $387,000 for the three
months ended March 31, 1999 as compared to $440,000 for the
three months ended March 31, 1998.
Net interest income increased by $192,000 or 2.9% to $6.8
million for the year ended March 31, 1999 from $6.6 million for
the year ended March 31, 1998. Noninterest income increased
$149,000 or 30.5% to $638,000 for the year ended March 31, 1999
from $489,000 for the year ended March 31, 1998. The increase
was due primarily to an increase in loan origination fees of
$224,000 earned by Bank Street Mortgage Company, a Bank
subsidiary. Noninterest expense increased by $123,000 or 3.0%
to $4.2 million for the year ended March 31, 1999 from $4.1
million for the year ended March 31, 1998. There was a $75,000
addition to allowance for losses on loans for the year ended
March 31, 1999. The total allowance as of March 31, 1999 was
$457,000 after write offs of $108,000. Harbor Federal continues
its conservative risk management with only a .41% ratio of
nonperforming assets to total assets at March 31, 1999.
Harbor Federal assets increased by $8.2 million or 3.5% from
$231.1 million at March 31, 1998 to $239.3 million at March 31,
1999, primarily due to an increase in loans of $6.0 million and
investment securities of $8.1 million, partially offset by a
reduction in mortgage-backed securities of $7.0 million. Return
on average assets was .77% and return on equity was 6.14% for
the year ended March 31, 1999.
The Company had stockholders' equity of $26.8 million or 11.2%
of total assets. The book value of the Company as of March 31,
1999 was $15.99 per share. Shares outstanding total 1,676,515.
The efficiency ratio was 57.6% as of March 31, 1999.
With continuing financial improvement in mind, the Company has
focused on expanding services and personnel to better serve our
customers. During the fiscal year just completed, Harbor
Federal has continued Bank Street Mortgage Company as a
subsidiary to further expand our lending products, including VA
and FHA loans. Additionally we have continued to broaden our
business checking and commercial lending operations.
Regarding the Year 2000 issue, Harbor Federal has developed and
implemented a plan to address this date change. Management
currently expects that this issue will have no adverse effect on
our operations and service to customers.
The staff and management continue to focus their work towards
our primary goal, that of being responsive to our customers and
shareholders.
Sincerely,
/s/ Robert A. Williams, President
Robert A. Williams, President
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.
Harbor Federal Bancorp, Inc. (the "Company") was organized at
the direction of the Board of Directors of Harbor Federal
Savings and Loan Association for the purpose of becoming a
holding company to own all of the outstanding capital stock of
the Association upon its conversion to capital stock form.
Effective with the conversion of Harbor Federal Savings and Loan
Association to capital stock form on August 11, 1994, the name
of the association was changed to Harbor Federal Savings Bank
("Harbor Federal" or the "Bank"). Since the conversion, the
Company's primary assets have been the outstanding capital stock
of the Bank, a portion of the net proceeds of the Bank's
conversion from mutual to stock form and a note receivable from
the Company's Employee Stock Ownership Plan, and the Company has
been engaged primarily in the business of directing, planning
and coordinating the business activities of the Bank.
Harbor Federal was chartered in 1887. The Bank is a member of
the Federal Home Loan Bank System, and its deposits are insured
by the Federal Deposit Insurance Corporation. The Bank
currently operates through nine banking offices in the City of
Baltimore and the Counties of Baltimore and Anne Arundel in
Maryland.
Harbor Federal is primarily engaged in the business of
attracting deposits from the general public and originating
loans secured by first mortgages on one-to four-family
residences in the Bank's market area. The Bank also makes
commercial and multi-family real estate loans, construction
loans, commercial loans and other loans.
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, 1999, there were 1,676,515 shares of the common stock
outstanding and approximately 397 holders of record of the
common stock. During fiscal year ended March 31, 1999, one
dividend was paid on the common stock at $0.118 per share
(giving effect to a 10% stock dividend that was paid on August
10, 1998) and three dividends were paid at $0.13 per share. On
April 12, 1999 a dividend of $0.13 per share was also paid.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
SELECTED CONSOLIDATED FINANCIAL CONDITION INFORMATION
The following table sets forth selected consolidated financial
condition information with respect to the Company at the dates
indicated.
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets . . . . . . . . $239,298 $231,140 $219,462 $196,762 $151,233
Loans receivable, net . . . 153,919 147,901 144,702 116,892 102,247
Investment securities . . . 59,963 51,827 47,543 48,739 26,999
Mortgage-backed securities. . 14,172 21,160 14,161 17,937 11,763
Savings accounts . . . . . 181,486 172,903 171,467 161,643 111,792
Borrowed funds . . . . . 27,555 25,266 16,500 4,500 2,000
Retained income-substantially
restricted. . . . . . 14,423 16,939 16,069 16,042 15,442
Number of:
Loans outstanding . . . 1,581 1,507 1,521 1,429 1,348
Savings accounts . . . . . 15,291 14,957 15,327 15,313 11,693
Offices open . . . . . . 9 9 9 9 6
</TABLE>
2
<PAGE>
<PAGE>
SELECTED CONSOLIDATED INCOME INFORMATION
The following table sets forth selected consolidated income information with
respect to the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest income . . . . . . $17,023 $16,401 $15,369 $11,783 $10,308
Interest expense . . . . . . 10,269 9,839 9,371 6,213 4,685
------- ------- ------- ------- -------
Net interest income . . . . . 6,754 6,562 5,998 5,570 5,623
Provision for losses on loans. . 75 110 33 -- 3
------- ------- ------- ------- -------
Net interest income after
provisions for losses on
loans . . . . . . . . 6,679 6,452 5,965 5,570 5,620
Noninterest income . . . . . 638 489 229 142 198
Noninterest expense . . . . . 4,255 4,132 4,726 4,070 3,188
------- ------- ------- ------- -------
Income before income taxes. . . 3,062 2,809 1,468 1,642 2,630
Income taxes . . . . . . . 1,277 1,140 567 638 1,016
------- ------- ------- ------- -------
Net income . . . . . . . . $1,785 $ 1,669 $ 901 $ 1,004 $ 1,614
======= ======= ======= ======= =======
Net income per common share (1):
Basic
Post-conversion $1.03 $0.96 $0.50 $0.49 $0.48
======= ======= ======= ======= =======
Proforma N/A N/A N/A N/A $0.85
======= ======= ======= ======= =======
Diluted
Post-conversion $0.99 $0.93 $0.49 $0.48 $0.48
======= ======= ======= ======= =======
Proforma N/A N/A N/A N/A $0.85
======= ======= ======= ======= =======
<FN>
__________
(1) Net income per share amounts have been restated for the 10% stock dividend
paid on August 10, 1998 to shareholders of record on July 31, 1998. Fractional
shares were rounded up or down to the nearest whole share.
</FN>
</TABLE>
3
<PAGE>
<PAGE>
KEY OPERATING RATIOS
The following table sets forth selected financial ratios
with respect to the Company at the dates and for the periods
indicated.
<TABLE>
<CAPTION>
At or for the
Year Ended March 31,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Return on assets (net income
divided by average total
assets) . . . . . . . . .0.77% 0.75% 0.44%
Return on equity (net income
divided by average equity) . . 6.14 5.86 3.23
Tangible equity-to-assets ratio
(average equity divided by
average total assets). . . . 11.86 11.73 11.95
Interest rate spread . . . . 2.34 2.38 2.26
Net interest margin. . . . . 2.97 3.02 2.91
Nonperforming loans to total
loans . . . . . . . . 0.64 0.66 0.20
Nonperforming assets to total
assets . . . . . . . 0.41 0.42 0.34
Noninterest expense to average
assets . . . . . . . 1.83 1.86 2.25
Average interest-earning assets
to average interest-bearing
liabilities . . . . . . 113.95 114.15 114.52
</TABLE>
REGULATORY CAPITAL COMPLIANCE
At March 31, 1999, Harbor Federal exceeded all regulatory
minimum capital requirements. The table below presents certain
information relating to Harbor Federal's regulatory capital at
March 31, 1999.
<TABLE>
<CAPTION>
Percent
of
Amount Assets(1)
------ --------
(Dollars in thousands)
<S> <C> <C>
Tier 1Core Capital . . . . . $23,945 10.24
Tier 1 Core Capital Requirement . 9,356 4.00
------- -----
Excess $14,589 6.24
======= =====
Total Risk-Based Capital . . . . . $24,600 21.57
Total Risk-Based Capital
Requirement . . . . . . . . 9,122 8.00
------- -----
Excess $15,478 13.57
======= =====
<FN>
_______________
(1) Based on adjusted total assets for the core capital
requirement, and risk-weighted assets for the risk-based
capital requirement.
</FN>
</TABLE>
4
<PAGE>
<PAGE>
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 noninterest expense, including primarily
compensation and employee benefits and occupancy and equipment
expenses. 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.
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.
FINANCIAL CONDITION
Harbor Federal's total assets increased by $8.2 million or
3.5% from $231.1 million at March 31, 1998 to $239.3 million at
March 31, 1999, primarily due to increases in loans of $6.0
million and investment securities of $8.1 million, partially
offset by a reduction in mortgage-backed securities of $7.0
million.
Net loans receivable increased $6.0 million or 4.1% from
$147.9 million at March 31, 1998 to $153.9 million at March 31,
1999. This increase was due primarily to a normal level of loan
originations over repayments.
Harbor Federal's savings accounts increased $8.6 million or
5.0% from $172.9 million at March 31, 1998 to $181.5 million at
March 31, 1999, and its borrowings increased by $2.3 million or
9.1% from $25.3 million at March 31, 1998 to $27.6 million at
March 31, 1999. The increases in savings accounts and
borrowings were used to fund the increases in net loans
receivable and total assets and to repurchase shares of common
stock for an aggregate of $4.1 million.
RESULTS OF OPERATIONS
Harbor Federal had net income totaling $1.8 million, $1.7
million and $.9 million for fiscal years 1999, 1998 and 1997,
respectively.
<PAGE>
Interest Income. Total interest income increased by
$622,000 or 3.8% from $16.4 million for the year ended March 31,
1998 to $17.0 million for the year ended March 31, 1999. The
increase in interest income was principally attributable to a
$10.4 million or 4.8% increase in the balance of average
interest-earning assets to $227.6 million for the year ended
March 31, 1999 from $217.2 million for the year ended March 31,
1998, partially offset by a reduction in the average yield on
Harbor Federal's average interest-earning assets to 7.48% for
the year ended March 31, 1999 from 7.55% for the year ended
March 31, 1998. The increase in interest-earning assets during
the year ended March 31, 1999 compared to the year ended March
31, 1998 reflects management's use of funds received from
deposits and borrowings. The increase in average interest-
earning assets was largely the result
5
<PAGE>
<PAGE>
of a $4.4 million increase in average loans receivable, $3.4
million increase in average investment securities and $1.8
million increase in average mortgage-backed securities. The
decrease in average yield was caused primarily by decreases in
adjustable rates on one-to four-family residential mortgage
loans and rates available on short-term investments.
Interest income on first mortgages and other loans increased
by $245,000 or 2.1% to $11.9 million for the year ended March
31, 1999 from $11.6 million for the year ended March 31, 1998.
This increase was attributable to an increase in the average
investment in first mortgages and other loans to $152.3 million
for the year ended March 31, 1999 from $148.0 million for the
year ended March 31, 1998, partially offset by a reduction in
the average yield on first mortgage and other loans to 7.81% for
the year ended March 31, 1999 from 7.87% for the year ended
March 31, 1998. The lower average yield on mortgage loans
reflects primarily a reduction in interest rates on adjustable
rate mortgage loans. Interest income on investment securities
increased $274,000 or 8.2% to $3.6 million for the year ended
March 31, 1999 from $3.3 million for the year ended March 31,
1998. This increase was attributable to an increase in the
average investment securities to $50.2 million for the year
ended March 31, 1999 from $46.9 million for the year ended
March 31, 1998 and an increase in the average yield on
investment securities to 7.15% for the year ended March 31, 1999
from 7.08% for the year ended March 31, 1998. Interest income
on mortgage-backed securities increased by $106,000 or 9.4% to
$1.2 million for the year ended March 31, 1999 from $1.1 million
for the year ended March 31, 1998. This increase was
attributable to an increase in average mortgage-backed
securities to $17.6 million for the year ended March 31, 1999
from $15.8 million for the year ended March 31, 1998, partially
offset by a reduction in the average yield on mortgage-backed
securities to 6.99% for the year ended March 31, 1999 from 7.11%
for the year ended March 31, 1998. The lower average yield on
mortgage-backed securities reflects primarily the pay down of
principal on higher rate mortgage pools.
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 an $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 yield 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 an increase in the
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 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
6
<PAGE>
<PAGE>
and other interest-earning assets to 4.79% for the year ended
March 31, 1998 from 4.56% for the year ended March 31, 1997.
Interest Expense. Total interest expense increased $430,000
or 4.4% to $10.3 million for the year ended March 31, 1999 from
$9.8 million for the year ended March 31, 1998. The increase
resulted from a $3.7 million, or 2.2%, increase in average
deposits to $176.5 million for the year ended March 31, 1999
from $172.8 million for the year ended March 31, 1998, and $5.7
million, or 32.9% increase in average borrowed funds to $23.2
million for the year ended March 31, 1999 from $17.5 million for
the year ended March 31, 1998. These increases were partially
offset by a reduction in the average cost of funds to 5.14% for
the year ended March 31, 1999 from 5.17% for the year ended
March 31, 1998.
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.
Net Interest Income. Net interest income increased by
$192,000 or 2.9%, to $6.8 million for the year ended March 31,
1999 from $6.6 million for the year ended March 31, 1998. The
principal reason for the increase in the net interest income was
the increase in average outstanding loans, investments and
mortgage-backed securities, partially offset by a reduction in
the interest rate spread to 2.34% for the year ended March 31,
1999 from 2.38% for the year ended March 31, 1998.
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
2.38% for the year ended March 31, 1998 from 2.26% for the year
ended March 31, 1997.
Provisions for Losses on Loans. 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 economic conditions, status of nonperforming
loans and regulatory reviews conducted in the regulatory
examination process. There was a $75,000 provision for losses
on loans for the year ended March 31, 1999 as compared to a
$110,000 provision for the year ended March 31, 1998 and a
$33,000 provision for the year ended March 31, 1997. Management
believes that the current level of the loan loss allowance is
adequate to provide for losses, although there can be no
assurance that losses will not exceed estimated amounts. See
Notes 1 and 4 of the Notes to Consolidated Financial Statements
for additional information on the allowance for losses on loans.
Noninterest Income. Noninterest income increased $149,000
or 30.5%, to $638,000 for the year ended March 31, 1999 from
$489,000 for the year ended March 31, 1998. The increase was
due primarily to an increase in loan origination fees of
$224,000 earned by Bank Street Mortgage Company, partially
offset by a reduction in gain on loans sold of $96,000.
Noninterest 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 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 Expense. Noninterest expense increased by
$123,000, or 3.0% to $4.2 million for the year ended March 31,
1999 from $4.1 million for the year ended March 31, 1998. The
increase in noninterest expense was due primarily to an increase
in compensation and benefits expense of $180,000, or 6.8%, to
$2.8 million for the year ended March 31, 1999 from $2.6 million
for the year ended March 31, 1998, partially offset by a
reduction in occupancy and equipment expense of $61,000, or
13.5%, to $390,000 for the year ended March 31, 1999 from
$451,000 for the year ended March 31, 1998. The primary reason
for the compensation and benefits expense
7
<PAGE>
<PAGE>
increase was an increase in compensation to employees of Bank
Street Mortgage Company of $126,000 or 96.5%, to $257,000 for
the year ended March 31, 1999 from $131,000 for the year ended
March 31, 1998. The primary reason for the reduction in
occupancy and equipment expense was a reduction in the
depreciation expense of $39,000, or 28.6% , to $97,000 for the
year ended March 31, 1999 from $136,000 for the year ended March
31, 1998, and a reduction in rent of $32,000, or 36.3%, to
$57,000 for the year ended March 31, 1999 from $89,000 for the
year ended March 31, 1998. These reductions were due to the
aging of the fixed assets and the closing of an ATM location in
November 1997, respectively. The ATM was reinstated in an
existing branch location in June 1998 with no additional cost to
facilities.
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 $2.6 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.
Income Taxes. The changes in Harbor Federal's income tax
provision reflect the changes in income before income taxes.
Income tax provisions for the years ended March 31, 1999, 1998
and 1997 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 loans category.
The table also presents information for the periods
indicated with respect to the difference between the weighted
average yield earned on interest-earning assets and the weighted
average rate paid on interest-bearing liabilities, or "interest
rate spread," which savings institutions have traditionally used
as an indicator of profitability. Another indicator of an
institution's net interest income is its "net yield on
interest-earning assets," which is its net interest income
divided by the average balance of interest-earning assets. Net
interest income is affected by the interest rate spread and by
the relative amounts of interest-earning assets and interest-
bearing liabilities. When interest-earning assets approximate
or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.
8
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- --------------------------- --------------------------
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 . . . . . . . . $152,331 $11,890 7.81% $147,967 $11,645 7.87% $133,674 $10,426 7.80%
Investment securities. . . 50,245 3,595 7.15 46,893 3,321 7.08 48,895 3,437 7.03
Mortgage-backed securities . 17,563 1,227 6.99 15,768 1,121 7.11 16,810 1,211 7.21
Short-term investments and
other interest-earning
assets (2) . . . . . . 7,475 311 4.17 6,545 314 4.79 6,456 295 4.56
-------- ------- -------- ------- -------- -------
Total interest-earning
assets. . . . . . 227,614 17,023 7.48 217,173 16,401 7.55 205,835 15,369 7.47
Non-interest-earning assets . 4,289 ------- 4,598 ------- 4,347 -------
-------- -------- --------
Total assets. . . . $231,903 $221,771 $210,182
======== ======== ========
Interest-bearing liabilities:
Deposits . . . . . . $176,531 9,029 5.12 $172,797 8,845 5.12 $164,531 8,468 5.15
Borrowed funds . . . . 23,210 1,240 5.34 17,463 994 5.69 15,210 904 5.94
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities . . 199,741 10,269 5.14 190,260 9,839 5.17 179,741 9,372 5.21
------- ------- -------
Non-interest bearing
liabilities . . . . . . 3,110 3,040 2,489
-------- -------- --------
Total liabilities . . 202,851 193,300 182,230
Stockholders' equity. . . . 29,052 28,471 27,952
-------- -------- --------
Total liabilities and
stockholders'
equity . . . . . $231,903 $221,771 $210,182
======== ======== ========
Net interest income . . . . $ 6,754 $ 6,562 $ 5,997
======= ======= =======
Interest rate spread (3). . . 2.34% 2.38% 2.26%
====== ====== ======
Net yield on interest-earning
assets (4) . . . . . . 2.97% 3.02% 2.91%
====== ====== ======
Ratio of average interest-earning
assets to average interest-
bearing liabilities. . . . 113.95% 114.15% 114.52%
====== ====== ======
<FN>
___________________________
(1) Represents interest income or expense as a percentage of average interest-earning assets or average
interest-bearing liabilities.
(2) Includes interest-bearing deposits, short-term investments, secured demand loans to Bankers Affiliate,
Inc. and Federal Home Loan Bank stock.
(3) Interest rate spread represents the difference between the average yield on interest-earning assets
and the average cost of interest-bearing liabilities.
(4) Net yield on interest-earning assets represents net interest income as a percentage of average
interest-earning assets.
</FN>
</TABLE>
9
<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,
-------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------- ----------------------------
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 . . . . . . . . . $ 343 $ (89) $ (9) $ 245 $1,115 $ 94 $ 10 $ 1,219
Investment securities . . . . 237 33 4 274 (141) 24 1 (116)
Mortgage-backed securities . . 128 (19) (3) 106 (75) (17) 2 (90)
Short-term investments and
other interest-earning
assets (1) . . . . . . 45 (41) (7) (3) 4 15 0 19
------ ----- ---- ----- ------ ---- ----- -------
Total interest income . 753 (116) (15) 622 903 116 13 1,032
Interest expense:
Deposits . . . . . . . . 191 0 (7) 184 425 (49) 1 377
Borrowed funds . . . . . . 327 (61) (20) 246 134 (38) (6) 90
------ ----- ---- ----- ------ ---- ----- -------
Total interest expense. . . 518 (61) (27) 430 559 (87) (5) 467
------ ----- ---- ----- ------ ---- ----- -------
Change in net interest income . . . $ 235 $ (55) $ 12 $ 192 $ 344 $203 $ 18 $ 565
====== ===== ==== ===== ====== ==== ===== =======
<FN>
________________________
(1) Includes interest on interest-bearing deposits, short-term investments, secured demand
loan to Bankers Affiliate, Inc. and dividends on Federal Home Loan Bank stock.
</FN>
</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,
10
<PAGE>
<PAGE>
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, 1998, 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
17.4% during the month of March 1999. Liquidity ratios averaged
16.2% for the year ended March 31, 1999. Harbor Federal adjusts
its liquidity levels in order to meet funding needs of deposit
outflows, payment of real estate taxes from mortgage escrow
accounts, repayment of borrowings and loan commitments. Harbor
Federal also adjusts liquidity as appropriate to meet its asset
and liability management objectives.
Harbor Federal's primary sources of funds are deposits,
amortization and prepayment of loans and mortgage-backed
securities, and other investments, and earnings and funds
provided from operations. While scheduled principal repayments
on loans and mortgage-backed securities are a relatively
predictable source of funds, deposit flows and loan prepayments
are greatly influenced by general interest rates, economic
conditions, and competition. Harbor Federal manages the pricing
of its deposits to maintain a desired deposit balance. In
addition, Harbor Federal invests in short-term interest-earning
assets, which provide liquidity to meet lending requirements.
At March 31, 1999, certificates of deposit which were scheduled
to mature in one year or less totaled $71.4 million. Assets
qualifying for liquidity outstanding at March 31, 1999 amounted
to $12.4 million.
Harbor Federal had $2.4 million in outstanding loan
commitments at March 31, 1999. 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.
11
<PAGE>
<PAGE>
YEAR 2000 READINESS DISCLOSURE
The entire concept behind the Year 2000 issue is the way the
computer stores the year. In the beginning of the computer age,
computers had limited storage space. In an effort to save this
storage space, programmers utilized a two-digit year field.
This means that the year 1998 is stored as 98 in some systems.
This year format implies that 2000 is stored as 00 and
interpreted as 1900. In order for calculations to be performed
accurately, these computer systems have to be reprogrammed.
Achieving Year 2000 readiness has been a major part of Harbor
Federal Savings Bank's strategic planning process for well over
two years. In 1997, the Company adopted a Year 2000 Action Plan
(the "Plan"). The Plan called for Year 2000 readiness by the
end of December 1998, a full year ahead of the millennium and
the Company's Year 2000 Plan has largely been accomplished. The
Company relies on its third party service bureaus to provide
data processing services and is dependent upon vendor
application software. Internal and external mission critical
systems have been upgraded with Year 2000 compliant versions.
These systems include data processing, accounting, payroll,
mortgage management and electronic systems. The Company's
testing of these mission critical systems has revealed no Year
2000 discrepancies. In addition to software, all hardware has
been replaced and tested successfully. It is the Company's goal
to follow the Plan and to continue to aggressively monitor Year
2000 issues.
In addition to the Plan, the Company has devised a Year 2000
contingency plan. The contingency plan addresses any issues
that may occur to software. It states alternative solutions and
deadlines for any software that is not Year 2000 compliant. In
addition, the contingency plan handles any outside variables
that may affect the Company when the Year 2000 approaches.
Although precautions have been taken, the contingency plan does
not guarantee all external and internal variables. However, the
Company will continue to design and implement solutions to avoid
interruptions to service.
Cost associated with the Year 2000 primarily relate to upgrade
existing software and replacing hardware. The Company is
incurring these costs in the normal course of business as
software and hardware are ordinarily upgraded to keep pace with
technological advances. Management's cost associated with the
Year 2000 efforts have totalled $27,600 to date. No significant
spending is anticipated.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts. (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
It is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, although the FASB recently
proposed extending the required effective date to June 15, 2000.
Initial application of this Statement should be as of the
beginning of an entity's fiscal quarter. On the effective date,
hedging relationships must be designated anew and documented
pursuant to the provisions of SFAS No. 133. Earlier application
is encouraged, but is permitted only as of the beginning of any
fiscal quarter that begins after issuance of SFAS No. 133. SFAS
No. 133 does not apply retroactively. While the Company has not
completed its analysis of SFAS No. 133 and has not made a
decision regarding timing of adoption, management does not
believe that adoption will have a material effect on the
financial condition or results of operations of the Company.
12
<PAGE>
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
---------------------------------------------
A summary of selected quarterly financial data for the years
ended March 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In Thousands Except Per Share Data)
-------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1999:
Interest income $4,319 4,297 4,281 4,126
Net interest income 1,731 1,655 1,708 1,659
Provision for loan losses 10 30 20 15
Net income 495 479 422 389
====== ===== ===== =====
Net income per common share:
Basic $ .27 .29 .25 .22
Diluted .27 .27 .24 .21
====== ===== ===== =====
Fiscal 1998:
Interest income $4,020 4,016 4,063 4,302
Net interest income 1,623 1,627 1,581 1,731
Provision for loan losses 30 10 40 30
Net income 404 411 414 440
====== ===== ===== =====
Net income per common share:
Basic $ .23 .24 .24 .25
Diluted .23 .23 .23 .24
====== ===== ===== =====
Fiscal 1997:
Interest income $3,592 3,809 3,958 4,010
Net interest income 1,421 1,468 1,518 1,590
Provision for loan losses --- 33 --- ---
Net income 319 (144) 328 398
====== ===== ===== =====
Net income per common share:
Basic $ .18 (.09) .18 .23
Diluted .18 (.09) .18 .22
====== ===== ===== =====
</TABLE>
13
<PAGE>
<PAGE>
MARKET PRICE OF COMMON STOCK AND DIVIDEND INFORMATION
- -----------------------------------------------------
The Company's common stock is traded on the over-the-counter
market under the symbol "HRBF" and trading information is
reported by the National Association of Securities Dealers
Automated Quotation (NASDAQ) National Market System. As of
March 31, 1999, there were 397 stockholders of record and
1,676,515 shares of common stock entitled to vote and receive
dividends of which 1,603,688 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.
The dividends paid and the high and low closing sale prices
for the Company's common stock as reported on the NASDAQ stock
market during each quarter of fiscal 1999 and 1998 were as
follows (these quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and might not represent
actual transactions):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- -------- ------- -------
<S> <C> <C> <C> <C>
Fiscal 1999
Market Price Range:
High $23.41 21.75 21.75 20.50
Low 19.20 16.94 18.00 15.75
Dividend Paid (1) .118 .13 .13 .13
Fiscal 1998:
Market Price Range
High $17.27 20.91 22.95 22.95
Low 13.98 16.59 17.73 19.55
Dividend Paid (1) .091 .091 .109 .109
<FN>
___________
(1) The first quarter dividend for the year ended March 31, 1999 and
all of the quarterly dividends for the year ended March 31, 1998
have been adjusted for the 10% stock dividend that was paid
August 10, 1998 to shareholders of record July 31, 1998. On
February 22, 1999, a dividend of $.13 per share was declared
payable April 12, 1999 to holders of record at the close of
business on April 1, 1999.
</FN>
</TABLE>
14
<PAGE>
<PAGE>
[LETTERHEAD OF KPMG LLP]
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, 1999 and 1998, and the related
consolidated statements of income and comprehensive income,
stockholders' equity and cash flows for each of the years in the
three-year period ended March 31, 1999. 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, 1999 and 1998, and the results of their operations and
their cash flows for each of the years in the three-year period
ended March 31, 1999 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Baltimore, Maryland
May 7, 1999
15
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
March 31, 1999 and 1998
==============================================================================
1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash:
On hand and due from banks $ 1,501,358 2,752,630
Interest-bearing deposits 114,259 173,728
Federal funds sold 2,545,437 313,047
Investment securities, fair value of $59,963,291
and $51,779,610, respectively (notes 2 and 8) 59,963,291 51,826,542
Mortgage-backed securities, fair value of
$14,280,938 and $21,324,796, respectively
(notes 3 and 8) 14,172,392 21,159,954
Loans receivable, net (note 4) 153,918,968 147,901,019
Investment in Federal Home Loan Bank
stock, at cost (note 10) 1,433,500 1,433,500
Investments in real estate, net 446,899 --
Investment in and advances to affiliated
corporation (note 5) 2,525,000 2,850,000
Property and equipment, net (note 6) 1,760,516 1,820,909
Prepaid expenses and other assets 916,015 908,861
- ------------------------------------------------------------------------------
$239,297,635 231,140,190
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings accounts (note 7) $181,485,848 172,902,844
Borrowed funds (note 8) 27,555,000 25,266,250
Advance payments by borrowers for taxes,
insurance and ground rents 1,841,672 1,935,804
Accrued expenses and other liabilities 1,612,963 1,560,098
Federal and state income taxes payable -- 152,384
- ------------------------------------------------------------------------------
Total liabilities 212,495,483 201,817,380
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
1,676,515 and 1,862,762 shares, respectively 16,765 16,934
Additional paid-in capital 13,071,570 13,069,233
Unearned ESOP shares (662,056) (912,830)
Retained income, substantially restricted 14,422,503 16,939,169
Accumulated other comprehensive income (46,630) 210,304
- ------------------------------------------------------------------------------
Total stockholders' equity 26,802,152 29,322,810
Commitments and contingencies (notes 10, 11,
12 and 14)
- ------------------------------------------------------------------------------
$239,297,635 231,140,190
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
Years ended March 31, 1999, 1998 and 1997
==============================================================================
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $11,890,112 11,644,544 10,426,017
Mortgage-backed securities 1,227,043 1,121,238 1,211,214
Investment securities 3,594,695 3,321,342 3,437,112
Interest-bearing deposits and other
short-term investments 311,540 313,561 294,470
- ------------------------------------------------------------------------------
Total interest income 17,023,390 16,400,685 15,368,813
- ------------------------------------------------------------------------------
Interest expense:
Savings accounts:
Certificates 7,137,897 6,858,210 6,375,035
NOW and money market deposit
accounts 924,405 985,810 1,054,961
Passbook and statement savings 967,676 1,001,263 1,037,527
- ------------------------------------------------------------------------------
9,029,978 8,845,283 8,467,523
Borrowed funds:
Federal Home Loan Bank advances 512,014 147,292 --
Securities sold under agreements
to repurchase 727,862 846,842 903,821
- ------------------------------------------------------------------------------
1,239,876 994,134 903,821
- ------------------------------------------------------------------------------
Total interest expense 10,269,854 9,839,417 9,371,344
- ------------------------------------------------------------------------------
Net interest income 6,753,536 6,561,268 5,997,469
Provision for losses on loans (note 4) 75,000 110,000 32,605
- ------------------------------------------------------------------------------
Net interest income after provision
for losses on loans 6,678,536 6,451,268 5,964,864
- ------------------------------------------------------------------------------
Noninterest income:
Loan fees and service charges 459,700 225,431 65,687
Other 178,787 263,955 163,587
- ------------------------------------------------------------------------------
Total noninterest income 638,487 489,386 229,274
- ------------------------------------------------------------------------------
</TABLE>
(Continued)
17
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income,
Continued
<TABLE>
<CAPTION>
Years ended March 31, 1999, 1998 and 1997
==============================================================================
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest expense:
Compensation and benefits (note 12) $2,832,077 $2,652,242 2,412,898
Occupancy and equipment 390,130 450,958 438,675
SAIF deposit insurance premiums
(note 10) 89,547 90,278 1,029,651
Advertising 142,926 129,040 162,434
Other 800,624 809,366 681,800
- ------------------------------------------------------------------------------
Total noninterest expense 4,255,304 4,131,884 4,725,458
Income before income taxes 3,061,719 2,808,770 1,468,680
Income taxes (note 9) 1,277,050 1,139,963 567,200
- ------------------------------------------------------------------------------
Net income 1,784,669 1,668,807 901,480
- ------------------------------------------------------------------------------
Other comprehensive income, net of
tax unrealized holding gain
(loss) on securities available
for sale (256,934) 546,797 (213,256)
- ------------------------------------------------------------------------------
Comprehensive income $1,527,735 2,215,604 688,224
==============================================================================
Net income per share of common
stock (note 1):
Basic $ 1.03 0.96 0.50
Diluted 0.99 0.93 0.49
==============================================================================
</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, 1999, 1998 and 1997
====================================================================================
Common Additional Unearned
stock paid-in capital ESOP shares
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 768 shares of common stock
for Stock Option Trust -- (8,987) --
Exercise of stock options by
Stock Option Trust -- 68,308 --
Other comprehensive income -- -- --
Dividends ($.36 per share) -- -- --
Net income - 1997 -- -- --
- ------------------------------------------------------------------------------------
Balance at March 31, 1997 17,544 13,611,599 (1,136,840)
Compensation under stock-based benefit
plans -- 317,391 224,010
Purchase of 61,000 shares of common stock (610) (965,687) --
Exercise of stock options by
Stock Option Trust -- 105,930 --
Other comprehensive income -- -- --
Dividends ($.43 per share) -- -- --
Net income - 1998 -- -- --
- ------------------------------------------------------------------------------------
Balance at March 31, 1998 16,934 13,069,233 (912,830)
Stock dividend - 10% 1,693 3,385,827 --
Compensation under stock-based benefit
plans -- 471,539 250,774
Purchase of 186,280 shares of common stock (1,862) (3,469,134) --
Purchase of 35,841 shares of common stock
for Stock Option Trust -- (652,544) --
Exercise of stock options by
Stock Option Trust -- 266,649 --
Other comprehensive income -- -- --
Dividends ($.51 per share) -- -- --
Net income - 1999 -- -- --
- ------------------------------------------------------------------------------------
Balance at March 31, 1999 $ 16,765 13,071,570 (662,056)
====================================================================================
<CAPTION>
Years ended March 31, 1999, 1998 and 1997
====================================================================================
Retained Accumulated
income, other Total
substantially comprehensive stockholders'
restricted income equity
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1996 16,041,999 (123,237) 27,889,094
Compensation under stock-based benefit
plans -- -- 462,650
Purchase of 768 shares of common stock
for Stock Option Trust -- -- (8,987)
Exercise of stock options by
Stock Option Trust -- -- 68,308
Other comprehensive income -- (213,256) (213,256)
Dividends ($.36 per share) (874,510) -- (874,510)
Net income - 1997 901,480 -- 901,480
- ------------------------------------------------------------------------------------
Balance at March 31, 1997 16,068,969 (336,493) 28,224,779
Compensation under stock-based benefit
plans -- -- 541,401
Purchase of 61,000 shares of common stock -- -- (966,297)
Exercise of stock options by
Stock Option Trust -- -- 105,930
Other comprehensive income -- 546,797 546,797
Dividends ($.43 per share) (798,607) -- (798,607)
Net income - 1998 1,668,807 -- 1,668,807
- ------------------------------------------------------------------------------------
Balance at March 31, 1998 16,939,169 210,304 29,322,810
Stock dividend - 10% (3,387,520) -- --
Compensation under stock-based
benefit plans -- -- 722,313
Purchase of 186,280 shares of common
stock -- -- (3,470,996)
Purchase of 35,841 shares of common stock
for Stock Option Trust -- -- (652,544)
Exercise of stock options by
Stock Option Trust -- -- 266,649
Other comprehensive income -- (256,934) (256,934)
Dividends ($.51 per share) (913,815) -- (913,815)
Net income - 1999 1,784,669 -- 1,784,669
- ------------------------------------------------------------------------------------
Balance at March 31, 1999 14,422,503 (46,630) 26,802,152
====================================================================================
</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, 1999, 1998 and 1997
====================================================================================
1999 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,784,669 1,668,807 901,480
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 97,012 135,661 150,976
Amortization of premium on savings
deposits 381,384 381,384 381,384
Provision for losses on loans 75,000 110,000 32,605
Deferred income tax provision (107,015) (87,876) (104,374)
Noncash compensation under stock-
based benefit plans 722,313 541,401 462,650
Loans originated for sale (920,390) (3,682,878) (2,666,457)
Proceeds from sales of loans originated
for sale 1,016,685 4,803,060 --
Amortization of loan fees, premiums
and discounts, net (198,331) (172,819) (85,708)
Gain on sale of loans -- (96,428) --
Loss on sale of investments in
real estate 3,219 -- --
Loss on sale of mortgage-backed
securities available for sale -- -- 7,787
Decrease (increase) in prepaid
expenses and other assets 252,143 (358,403) 47,091
Increase in accrued expenses and
other liabilities 50,667 215,834 324,297
Increase (decrease) in federal and
state income taxes payable (149,516) 80,883 277,065
Decrease (increase)in accrued
interest receivable 270,285 (116,104) (120,068)
- ------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 3,278,125 3,422,522 (391,272)
- ------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investment securities
available for sale (56,675,792) (30,000,000) (4,997,965)
Maturities of investment securities
available for sale 33,000,000 17,000,000 4,000,000
Principal repayments of mortgage-backed
securities available for sale 4,971,956 1,463,947 1,193,668
Purchases of mortgage-backed securities
available for sale -- (10,122,750) (4,996,875)
Sales of mortgage-backed securities
available for sale -- -- 3,538,099
Principal repayments of mortgage-backed
securities 1,855,587 1,883,401 3,890,273
Maturities of investment securities 15,000,000 9,500,000 2,000,000
(Continued)
</TABLE>
20
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
Years ended March 31, 1999, 1998 and 1997
====================================================================================
1999 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from investing activities (continued):
Loan principal disbursements, net of
repayments $ (5,562,643) (2,048,299) (16,110,791)
Loan purchases (941,300) (2,105,334) (9,334,785)
Investment in Federal Home
Loan Bank stock -- (67,500) (96,400)
Proceeds from sales of investments in
real estate 79,605 465,136 43,848
Purchases of property and equipment (36,619) (17,871) (111,133)
Decrease (increase) in investment in and
advances to affiliated corporation, net 325,000 (75,000) 50,000
- ------------------------------------------------------------------------------------
Net cash used in investing activities (7,984,206) (14,124,270) (20,932,061)
- ------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in savings accounts 8,201,620 1,054,831 9,441,933
Net increase in borrowed funds 2,288,750 8,766,250 12,000,000
Increase (decrease) in advance payments by
borrowers for taxes, insurance and
ground rents (94,132) 33,390 (27,121)
Purchase of common stock (3,470,996) (966,297) --
Purchase of common stock for Stock
Option Trust (652,544) -- (8,987)
Exercise of stock options by Stock Option
Trust 266,649 105,930 68,308
Dividends paid (911,617) (751,204) (701,768)
- ------------------------------------------------------------------------------------
Net cash provided by financing activities 5,627,730 8,242,900 20,772,365
- ------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 921,649 (2,458,848) (550,968)
Cash and cash equivalents at beginning of
year 3,239,405 5,698,253 6,249,221
- ------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $4,161,054 3,239,405 5,698,253
====================================================================================
Supplemental information:
Interest paid on savings accounts and
borrowed funds $9,975,058 9,450,511 8,899,748
Income taxes paid 1,457,031 1,146,956 628,000
====================================================================================
Schedule of noncash investing and
financing transactions:
Transfers of loans receivable to
investments in real estate $ 529,723 -- 465,136
Unrealized holding gains (loss) on
securities available for sale,
net of tax (256,934) 546,797 (213,256)
====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
_________________________________________________________________
(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 the reported amounts of revenues and
expenses for the periods. Actual results could differ from
those estimates.
Material estimates that are particularly susceptible to
significant change in the near-term relate to the
determination of the allowance for loan losses and the
valuation of real estate owned. In connection with the
determination of the allowance and the valuation of real
estate, management prepares fair value analyses and obtains
independent appraisals for significant properties, where
appropriate.
Management believes that the allowances for losses on loans
and 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.
CASH AND CASH EQUIVALENTS
Cash equivalents includes Federal funds sold and are carried
at cost which approximates fair value. Generally, Federal
funds are purchased and sold for one-day periods.
(Continued)
22
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
_________________________________________________________________
(1) CONTINUED
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Debt securities that the Company has the positive intent and
ability to hold to maturity are classified as held to
maturity and recorded at amortized cost. Debt securities
not classified as held to maturity and equity securities
with readily determinable fair values are classified as
trading securities if bought and held principally for the
purpose of selling them in the near term. Trading
securities are reported at fair value, with unrealized gains
and losses included in income. Investments not classified
as held to maturity or trading are considered available for
sale and are reported at fair value, with unrealized
holding gains and losses, net of the related tax effect,
excluded from income and reported as an item of other
comprehensive income until realized. Fair value is
determined based on published bid prices or bid quotations
received from securities dealers. Realized gains and losses
on sales are determined using the specific identification
method.
DISCOUNTS AND PREMIUMS ON LOANS AND 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, 1999 and 1998. 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.
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.
(Continued)
23
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
_________________________________________________________________
(1) CONTINUED
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 economic conditions
and the status of nonperforming loans. Loans or portions
thereof are charged off when considered, in the opinion of
management, uncollectible.
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. The acquisition was
accounted for using the purchase method and the excess of
the purchase cost over the fair values of the net assets
acquired of $3,044,642 was recorded as a premium on savings
accounts which is being amortized to interest expense using
the straight-line method over an estimated life of eight
years.
(Continued)
24
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
_________________________________________________________________
(1) CONTINUED
INCOME TAXES
Deferred income taxes are accounted for using the asset and
liability method. Under this method, deferred income taxes
are recognized, with certain exceptions, for temporary
differences between the financial reporting basis and income
tax basis of assets and liabilities based on enacted tax
rates expected to be in effect when such amounts are
realized or settled. Deferred tax assets are recognized
only to the extent that it is more likely than not that such
amounts will be realized based on consideration of available
evidence, including tax planning strategies and other
factors. The effects of changes in tax laws or rates on
deferred tax assets and liabilities are recognized in the
period that includes the enactment date.
Qualified thrift lenders, such as the Bank, are not required
to provide a deferred tax liability for bad debt reserves
for tax purposes that arose in fiscal years beginning before
December 31, 1987. Such bad debt reserve for the Bank
amounted to approximately $4,600,000 with an income tax
effect of approximately $1,750,000 at March 31, 1999 and
1998. As specified in legislation enacted in August 1996,
this bad debt reserve would become taxable in the future if
certain conditions are not met by the Bank.
STOCK-BASED BENEFIT PLANS
The Company uses the intrinsic value method to account for
stock-based employee compensation plans. Under this method,
compensation cost is recognized for awards of shares of
common stock to employees only if the quoted market price of
the stock at the grant date (or other measurement date, if
later) is greater than the amount the employee must pay to
acquire the stock. Compensation cost is recorded on a
pro-rata basis as the employees perform the services
required to acquire the stock.
The Company has established an Employee Stock Ownership Plan
(ESOP) for its employees. The Company recognizes the costs
associated with the ESOP in accordance with provisions of
AICPA Statement of Position 93-6, Employers' Accounting for
Employee Stock Ownership Plans. Accordingly, compensation
expense is recorded based on the market value of shares
committed-to-be-released to the ESOP for allocation to
participants for services rendered.
PER SHARE DATA AND NET INCOME PER SHARE OF COMMON STOCK
On July 15, 1998, the Board of Directors declared a 10%
stock dividend, which was paid on August 10, 1998. An
amount equal to the fair value of the common shares issued
plus cash in lieu of fractional shares was transferred from
retained income to common stock and additional paid-in
capital, as appropriate. Except for the number of shares
authorized, all references to per share information and
numbers of shares in the consolidated financial statements
have been adjusted to reflect the stock dividend on a
retroactive basis.
Basic earnings per share (EPS) is calculated by dividing net
income by the weighted average number of common shares
outstanding for the applicable period. Diluted EPS is
calculated after adjusting the numerator and the denominator
of the basic EPS calculation for the effect of all dilutive
potential common shares outstanding during the period. The
dilutive effects of options and
(Continued)
25
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
_________________________________________________________________
(1) CONTINUED
unvested restricted stock awards are computed using the
"treasury stock" method. Unearned ESOP shares are not
included in outstanding shares. Information related to the
calculation of net income per share of common stock is
summarized as follows for the years ended March 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ----------------- --------------------
Basic Diluted Basic Diluted Basic Diluted
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $1,784,669 1,784,669 1,668,807 1,668,807 901,480 901,480
Dividends on unvested
common stock awards (7,991) (5,460) (14,098) (11,441) (18,138) (16,213)
- ------------------------------------------------------------------------------------------------
Adjusted net income
used in EPS
calculations $1,776,678 1,779,209 1,654,709 1,657,366 883,342 885,267
================================================================================================
Weighted average
shares outstanding 1,731,587 1,731,587 1,731,745 1,731,745 1,756,031 1,756,031
Effect of dilutive securities:
Options -- 61,269 -- 54,680 -- 26,505
Unvested common
stock awards -- 4,983 -- 6,161 -- 5,292
- ------------------------------------------------------------------------------------------------
Adjusted weighted-average
shares used in EPS
computation 1,731,587 1,797,839 1,731,745 1,792,586 1,756,031 1,787,828
================================================================================================
</TABLE>
COMPREHENSIVE INCOME
Effective April 1, 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income (SFAS No. 130). SFAS No. 130
establishes standards for reporting and presentation of
comprehensive income and its components in financial statements.
Comprehensive income includes all changes in stockholders'
equity during a period, except those relating to investments by
and distributions to stockholders. The Company's comprehensive
income consists of net earnings and unrealized gains and losses
on securities available for sale and is presented in the
statements of income and comprehensive income. Accumulated
other comprehensive income is displayed as a separate component
of stockholders' equity. SFAS No. 130 requires additional
disclosures in the consolidated financial statements but does
not affect the Company's financial position or results of
operations.
(Continued)
26
<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>
1999
----------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair Carrying
cost gains losses value amount
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Available for sale:
U.S. Government and
agency obligations $50,992,523 16,249 (636,718) 50,372,054 50,372,054
Trust preferred securities 8,610,862 90,722 (61,896) 8,639,688 8,639,688
Preferred stock -
Federal Home Loan
Mortgage Corporation 6,339 440,699 -- 447,038 447,038
- ---------------------------------------------------------------------------------------------------
56,609,724 547,670 (698,614) 59,458,780 59,458,780
Accrued interest receivable 504,511 -- -- 504,511 504,511
- ---------------------------------------------------------------------------------------------------
$60,114,235 547,670 (698,614) 59,963,291 59,963,291
===================================================================================================
<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>
(Continued)
27
<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>
1999 1998
------------------------ --------------------------
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
Due after one through
five years -- -- -- --
Due after five through
ten years -- -- 8,487,783 8,450,035
Due after ten years -- -- -- --
- --------------------------------------------------------------------------------------------
-- -- 14,987,212 14,940,280
- -------------------------------------------------------------------------------------------------------------
Available for sale:
Due after one through
five years -- -- 1,000,000 992,510
Due after five through
ten years 3,998,882 4,007,160 8,996,986 9,012,100
Due after ten years 55,604,503 55,004,582 25,997,898 25,829,470
- --------------------------------------------------------------------------------------------
59,603,385 59,011,742 35,994,884 35,834,080
Accrued interest receivable 504,511 504,511 635,237 635,237
- --------------------------------------------------------------------------------------------
$60,107,896 59,516,253 51,617,333 51,409,597
============================================================================================
</TABLE>
There were no sales of investment securities during the years
ended March 31, 1999, 1998 and 1997.
At March 31, 1999, all investment securities include provisions
which allow the issuers to call them under certain terms and
conditions at par value.
(Continued)
28
<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>
1999
-----------------------------------------------------------------
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) $ 713,537 46,780 -- 760,317 713,537
Federal National
Mortgage Association
(FNMA) 1,097,280 39,424 (90) 1,136,614 1,097,280
Federal Home Loan
Mortgage Corporation
(FHLMC) 411,513 22,432 -- 433,945 411,513
- ---------------------------------------------------------------------------------------------------
2,222,330 108,636 (90) 2,330,876 2,222,330
Available for sale:
GNMA 9,949,731 94,160 -- 10,043,891 10,043,891
FHLMC 1,822,194 -- (19,187) 1,803,007 1,803,007
- ---------------------------------------------------------------------------------------------------
11,771,925 94,160 (19,187) 11,846,898 11,846,898
Accrued interest receivable 103,164 -- -- 103,164 103,164
- ---------------------------------------------------------------------------------------------------
$14,097,419 202,796 (19,277) 14,280,938 14,172,392
===================================================================================================
</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 $1,042,252 70,645 -- 1,112,897 1,042,252
FNMA 1,747,152 56,724 (2,980) 1,800,896 1,747,152
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>
(Continued)
29
<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>
1999 1998
------------------------ --------------------------
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
Due after one through five years 530,614 535,092 1,010,984 1,012,661
Due after five through ten years 187,466 196,944 143,118 150,467
Due after ten years 1,504,250 1,598,840 2,456,148 2,613,087
- ---------------------------------------------------------------------------------------------
2,222,330 2,330,876 4,075,595 4,240,437
Available for sale -
due after ten years 11,771,925 11,846,898 16,791,028 16,930,783
Accrued interest receivable 103,164 103,164 153,576 153,576
- ---------------------------------------------------------------------------------------------
$14,097,419 14,280,938 21,020,199 21,324,796
=============================================================================================
</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, 1999 and
1998.
(Continued)
30
<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>
1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans on real estate:
One to four-family residential $114,994,782 118,814,885
Multifamily residential 899,962 929,111
Commercial 19,784,395 16,392,236
Construction 14,847,822 8,296,150
Land 3,292,436 2,934,061
Loans held for sale 2,659,319 2,755,614
- ------------------------------------------------------------------------------
Total first mortgage loans 156,478,716 150,122,057
Loans secured by savings accounts 290,767 621,080
Home equity loans 533,206 455,744
Home improvement loans 511,088 224,493
Financing leases 1,427,157 850,046
Commercial loans 1,479,439 811,022
Accrued interest receivable 792,089 758,781
- ------------------------------------------------------------------------------
161,512,462 153,843,223
- ------------------------------------------------------------------------------
Less:
Undisbursed portion of loans in process 6,225,479 4,438,239
Unearned discount on loans purchased 60,006 38,638
Unearned loan fees 851,009 975,327
Allowance for losses 457,000 490,000
- ------------------------------------------------------------------------------
7,593,494 5,942,204
- ------------------------------------------------------------------------------
Loans receivable, net $153,918,968 147,901,019
==============================================================================
</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.
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.
(Continued)
31
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(4) CONTINUED
Nonperforming loans amounted to approximately $986,000 and
$975,000 at March 31, 1999 and 1998, respectively. For the
years ended March 31, 1999, 1998 and 1997, 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 $86,000,
$79,000 and $11,000, respectively. The actual interest
income recorded on these loans for the years ended March
31, 1999, 1998 and 1997 was approximately $60,000, $67,000
and $5,000, 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 $483,000 and $385,000 at
March 31, 1999 and 1998, 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>
1999 1998 1997
- -----------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 490,000 380,000 438,500
Provision for losses on loans 75,000 110,000 32,605
Charge-offs (108,000) -- (91,105)
- -----------------------------------------------------------------
Ending balance $ 457,000 490,000 380,000
=================================================================
</TABLE>
At March 31, 1999, 1998 and 1997, the Bank was servicing
loans owned by others of approximately $11,156,000,
$13,718,000 and $9,215,000, respectively.
The Bank participates in a loan made to one of its directors
by another thrift institution. This loan was made on
substantially the same terms, including interest rate and
collateral requirements, as those prevailing at the time for
comparable transactions with unrelated customers. The
Bank's outstanding balance at March 31, 1999 on this loan
was $500,000.
(Continued)
32
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(5) INVESTMENT IN AND ADVANCES TO AFFILIATED CORPORATION
The investment in and advances to Bankers Affiliate, Inc.
are as follows at March 31:
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------
<S> <C> <C>
Capital stock, at cost $ 25,000 25,000
Advances 2,500,000 2,825,000
- -----------------------------------------------------------------
$2,525,000 2,850,000
=================================================================
</TABLE>
Bankers Affiliate, Inc. was organized in April 1983 to make
consumer loans and, until April 1999, was owned by the Bank
and two other thrift institutions. 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, 1999 was 6.0%.
In April 1999, the Bank sold its interest in Bankers
Affiliate, Inc. to one of the other thrift institutions
for the par value of the capital stock. At that time, the
advances were repaid by Bankers Affiliate, Inc.
(6) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at March
31:
<TABLE>
<CAPTION>
1999 1998 Useful life
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 733,189 733,189 --
Buildings and improvements 1,227,405 1,356,498 15-30 years
Leasehold improvements 33,000 33,000 5-10 years
Furniture, fixtures and equipment 882,584 847,131 5-10 years
Automobiles 24,128 24,128 3 years
- -------------------------------------------------------------- ============
Total, at cost 2,900,306 2,993,946
Less accumulated depreciation
and amortization 1,139,790 1,173,037
- --------------------------------------------------------------
Property and equipment, net $1,760,516 1,820,909
==============================================================
</TABLE>
At March 31, 1999, the Bank was obligated under
noncancellable long-term operating leases for two
of its branch offices. These leases expire at dates to
2001 and provide for approximate aggregate rentals
of $41,000 in 2000 and $17,000 in 2001.
Rent expense was $56,979, $89,495 and $103,618 for the
years ended March 31, 1999, 1998 and 1997, respectively.
(Continued)
33
<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 1999 1998
--------------------- ------------------- --------------------
1999 1998 Amount % Amount %
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Certificates 5.31% 6.08% $122,356,375 66.7% 114,623,651 65.4%
Money market 3.38% 3.57% 23,121,853 12.6% 23,374,603 13.4%
Passbook 3.05% 3.05% 29,265,439 16.0% 29,656,504 16.9%
NOW 1.01% 1.00% 6,656,017 3.6% 5,704,768 3.3%
Christmas Club 3.05% 3.05% 330,187 0.2% 336,619 0.2%
Commercial checking -- -- 1,631,153 0.9% 1,463,259 0.8%
- ----------------------------------------------------------------------------------------------
183,361,024 100.0% 175,159,404 100.0%
===== =====
Acquisition premium, net of
accumulated amortization
of $1,169,466 and $788,082,
respectively (1,875,176) (2,256,560)
------------ -----------
$181,485,848 172,902,844
============ ===========
Certificate accounts maturing:
Under 12 months $ 71,414,952 58.4% 74,322,514 64.8%
12 months to 24 months 30,944,369 25.3% 23,687,061 20.7%
24 months to 36 months 8,858,634 7.2% 12,243,493 10.7%
36 months to 48 months 9,102,547 7.4% 3,059,413 2.7%
48 months to 60 months 2,035,873 1.7% 1,311,170 1.1%
------------ ----- ----------- -----
$122,356,375 100.0% 114,623,651 100.0%
============ ===== =========== =====
</TABLE>
At March 31, 1999 and 1998, certificates of $100,000 or
more were approximately $11,653,000 and $13,240,000,
respectively.
(Continued)
34
<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>
1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Securities sold under agreements to
repurchase with interest rates
and maturities as follows:
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
4.9% due June 1999 4,675,000 --
5.0% due May 1999 6,000,000 --
5.7% due May 1999 3,880,000 --
4.8% due October 1999 3,000,000 --
Federal Home Loan Bank advances,
5.05%, due December 2007 10,000,000 10,000,000
- ---------------------------------------------------------------------------
$27,555,000 25,266,250
===========================================================================
</TABLE>
The Bank enters into sales of mortgage-backed securities
and investment securities with agreements to repurchase.
Such agreements are treated as financings, and the
obligations to repurchase securities sold are reported as
liabilities in the consolidated statements of financial
condition. The securities underlying the agreements are
book-entry securities. The securities are delivered by
appropriate entry into the counterparties' accounts
maintained at the Federal Reserve Bank of New York.
Information with respect to repurchase agreements is as
follows for the years ended March 31:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount outstanding at year-end $17,555,000 15,266,250 16,500,000
Maximum outstanding at any month-end 17,555,000 16,500,000 21,415,000
Average outstanding 13,119,000 14,210,000 15,210,000
Fair value of securities sold under
repurchase agreements at year-end:
Mortgage-backed securities 10,043,892 2,017,108 9,354,892
Investment securities 8,902,100 13,950,500 8,734,950
Amortized cost of securities sold under
repurchase agreements at year-end:
Mortgage-backed securities 9,949,732 1,980,396 9,478,744
Investment securities 8,995,502 14,000,000 9,000,000
==================================================================================
</TABLE>
(Continued)
35
<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, 1999. At the discretion
of the FHLB, the interest rate can be converted to a
variable rate on a quarterly basis.
(9) INCOME TAXES
The income tax provision is composed of the following for
the years ended March 31:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,133,199 1,005,289 549,850
State 250,866 222,550 121,724
- ----------------------------------------------------------------
1,384,065 1,227,839 671,574
Deferred:
Federal (87,618) (71,948) (85,457)
State (19,397) (15,928) (18,917)
- ----------------------------------------------------------------
(107,015) (87,876) (104,374)
- ----------------------------------------------------------------
$1,277,050 1,139,963 567,200
================================================================
</TABLE>
The net deferred tax asset at March 31, 1999 and 1998
consists of total deferred tax assets of $854,550 and
$775,388, respectively, and total deferred tax liabilities
of $403,007 and $592,522, 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>
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Interest and fees on loans $ 41,071 46,480
Allowance for losses on loans 176,493 189,238
Accrual basis of accounting and deferred compensation 400,941 401,868
Unamortized premium on savings deposits 206,704 137,802
Federal Home Loan Bank stock dividends (207,351) (207,351)
Prepaid pension cost (19,100) (40,983)
Tax bad debt reserve in excess of base year (176,556) (211,867)
Unrealized (gain) loss on investments available
for sale 29,341 (132,321)
- ----------------------------------------------------------------------------
$ 451,543 182,866
============================================================================
</TABLE>
(Continued)
36
<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>
1999 1998 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate $1,040,984 954,982 499,351
State income taxes, net of
Federal income tax benefit 152,770 136,371 67,853
Nondeductible compensation
costs 94,612 59,239 --
Other, net (11,316) (10,629) (4)
- ----------------------------------------------------------------
Income tax provision $1,277,050 1,139,963 567,200
================================================================
</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.
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,
1998, the most recent notification from the Office of
Thrift Supervision (OTS) categorized the Bank as well
capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since
that notification that management believes have changed the
Bank's category.
(Continued)
37
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(10) CONTINUED
Regulatory capital amounts and ratios for the Bank are as
follows (in thousands):
<TABLE>
<CAPTION>
To be well
Minimum capitalized under
for capital prompt corrective
Actual adequacy purposes action provisions
--------------------- ------------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Tier I core capital (a) $23,945 10.24% $9,356 4% $11,964 >5%
Tier I risk-based capital (b) 23,945 21.00% 4,561 4% 6,841 >6%
Total risk-based capital (b) 24,600 21.57% 9,122 8% 11,402 >10%
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%
(a) percentage of capital to ending assets.
(b) Percentage of risk-based capital to ending risk-weighted assets.
=================================================================================================
</TABLE>
(11) STOCKHOLDERS' EQUITY AND RELATED MATTERS
In 1994, the Board of Directors approved a plan of
reorganization from a mutual savings association to a
capital stock savings bank and the concurrent formation of
a holding company. The conversion was accomplished through
amendment of the Bank's charter and the sale (on August 11,
1994) of the Company's common stock in an amount equal to
the consolidated pro forma market value of the Company and
the Bank after giving effect to the conversion.
Federal regulations require that, upon conversion from
mutual to stock form of ownership, a "liquidation account"
be established by restricting a portion of net worth for
the benefit of eligible savings account holders who
maintain their savings accounts with the Bank after
conversion. In the event of complete liquidation (and only
in such event), each savings account holder who continues
to maintain a savings account would be entitled to receive
a distribution from the liquidation account after payment
of all creditors, but before any liquidation distribution
with respect to capital stock. This account will be
proportionately reduced for any subsequent reduction in the
eligible holders' savings accounts. At conversion, the
liquidation account totaled approximately $14,500,000.
OTS regulations impose limitations on all capital
distributions by savings institutions. Capital
distributions include cash dividends, payments to
repurchase or otherwise acquire the institution's capital
stock, payments to shareholders of another institution in a
cash-out merger and other distributions charged against
capital. The regulations establish three tiers of
institutions. An institution, such as the Bank, that
exceeds all capital requirements before and after a
proposed capital distribution (Tier 1 Institution) may,
after prior notice but without the approval of the OTS,
make capital distributions during a calendar year up to
100% of its net income to date during the calendar year
plus the amount that would reduce by one-half its "surplus
capital ratio" (the excess capital over its capital
requirements) at the beginning of the calendar year or 75%
of its net income over the most recent four-quarter period.
Any additional capital distributions require prior OTS
approval.
(Continued)
38
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(11) CONTINUED
Bad debt reserves, deducted from income for federal income
tax purposes and included in retained income of the Bank,
are not available for the payment of cash dividends or
other distributions to stockholders, without payment of
taxes at the then-current tax rate by the Bank on the
amount removed from the reserves for such distributions.
During the years ended March 31, 1999 and 1998, the Board
of Directors authorized the repurchase of up to 10% and 5%
of the then outstanding shares, respectively. During the
years ended March 31, 1999 and 1998, the Bank purchased
186,280 and 61,000 shares, respectively, pursuant to these
authorizations. The average cost of the shares purchased
was $18.63 and $15.84 per share, respectively. There were
no shares purchased during the year ended March 31, 1997.
On February 22, 1999 the Company's Board of Directors
declared a $.13 per share dividend on common stock payable
April 12, 1998, to holders of record on April 1, 1999.
(12) STOCK-BASED BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
On August 11, 1994, the ESOP acquired 191,848 shares of the
Company's common stock in exchange for a note in
conjunction with the conversion to a capital stock form of
organization. The ESOP holds the common stock in a trust
for allocation among participating employees. Shares are
allocated to participants annually based on principal
payments made on the note. The ESOP's sources of repayment
of the note are dividends on the common stock, if any, and
an annual contribution to the ESOP and earnings thereon.
All employees who attain the age of 21 and complete six
months of service are eligible to participate in the ESOP.
Participants are 100% vested in their accounts after seven
years of service or, if earlier, upon death, disability or
attainment of normal retirement age. Participants received
credit for service with the Bank prior to the establishment
of the ESOP.
For the years ended March 31, 1999, 1998 and 1997,
compensation expense related to the ESOP was approximately
$494,000, $378,000 and $284,000, respectively. Dividends
on ESOP shares used for debt service by the ESOP for the
years ended March 31, 1999, 1998 and 1997 were
approximately $77,000, $50,000 and $52,000, respectively.
The ESOP shares were as follows at March 31:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Allocated shares 119,022 91,436
Unearned shares 72,826 100,412
- ----------------------------------------------------------------
191,848 191,848
- ----------------------------------------------------------------
Fair value of unearned shares
at March 31 $1,210,749 2,282,075
================================================================
</TABLE>
(Continued)
39
<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 95,923 shares of stock
which are held in a separate trust that manages the MRP.
The Company funded the MRP in 1996 by purchasing 95,923
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,
1999, 1998 and 1997, compensation expense related to the
MRP was $61,581, $113,790 and $150,650, 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 became one-third
vested for each 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 in
excess of his pension. Nonemployee directors' benefits are
equal to annual directors' fees times a benefit percentage.
Such benefit percentages are 33-1/3%, 66-2/3% and 100% for
6 to 14 years, 15 to 24 years, and 25 years or more of
service on the Board of Directors, respectively.
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, 1999, 1998 and 1997, compensation expense
related to the Directors Retirement Plan was $11,556,
$97,034 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 and key employees.
Option prices are equal to or greater than the estimated
fair market value of the common stock at the date of grant.
Employee options vest at 20% per year from the date of
grant. Director options may be exercised at any time after
the date of grant. Options expire ten years after the date
of grant or one year after the date of an employee's
termination.
Information with respect to options is as follows for the
years ended March 31:
<TABLE>
<CAPTION>
1999 1998 1997
(shares) (shares) (shares)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year - $9.66 per share 177,291 189,756 223,750
Exercised (27,502) (10,967) (7,072)
Forfeited (322) (1,498) (26,922)
- ----------------------------------------------------------------------------------
Outstanding at end of year - $9.66 per share 149,467 177,291 189,756
- ----------------------------------------------------------------------------------
Exercisable at end of year 118,721 115,807 96,471
==================================================================================
</TABLE>
(Continued)
40
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(12) CONTINUED
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 35,841 shares for $652,544 and 768 shares for
$8,987 in 1999 and 1997, respectively. No shares were
purchased in 1998. The Company is authorized to purchase
up to 17,442 shares for the Stock Option Trust in the open
market at March 31, 1999.
(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, 1999, 1998 and 1997, pension expense
was $122,673, $112,459 and $84,370, respectively.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of financial
instruments are summarized as follows at March 31:
<TABLE>
<CAPTION>
1999 1998
--------------------- ------------------------
Carrying Fair Carrying Fair
amount value amount value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and interest-bearing
deposits $ 1,615,617 1,616,000 2,926,358 2,926,000
Federal funds sold 2,545,437 2,545,000 313,047 313,000
Investment securities 59,963,291 59,963,000 51,826,542 51,780,000
Mortgage-backed securities 14,172,392 14,281,000 21,159,954 21,325,000
Loans receivable 153,918,968 152,552,000 147,901,019 146,354,000
Liabilities:
Savings accounts 181,485,848 182,501,000 172,902,844 174,024,000
Borrowed funds 27,555,000 27,555,000 25,266,250 25,266,000
Advances payments by borrowers
for taxes, insurance and
ground rents 1,841,672 1,842,000 1,935,804 1,936,000
====================================================================================
</TABLE>
Fair value estimates and the methods and assumptions used
to determine them are set forth below for financial
instruments outstanding as of March 31, 1999 and 1998.
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.
(Continued)
41
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(14) CONTINUED
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.
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 and FHLB
advances are considered to be at fair value.
ACCRUED INTEREST PAYABLE
The carrying amount of accrued interest payable
approximates its fair value.
ADVANCE PAYMENTS BY BORROWERS FOR TAXES, INSURANCE AND
GROUND RENTS
The carrying amount of advance payments by borrowers for
taxes, insurance and ground rents approximates its fair
value.
(Continued)
42
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(14) CONTINUED
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with
off-balance sheet risk in the normal course of business,
including mortgage loan commitments and lines of credit on
commercial business loans. 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>
1999
---------------------------
Fixed rate Floating Rate
- -----------------------------------------------------------------------------
<S> <C> <C>
Residential mortgage loans to be funded $1,062,250 447,100
Commercial mortgage loans to be funded 910,000 --
Undisbursed lines of credit -- 539,905
- ------------------------------------------------------------------------------
$1,972,250 987,005
==============================================================================
</TABLE>
Residential mortgage loan commitments usually expire
within thirty days. The interest rate range on fixed rate
mortgage loan commitments was from 6.63% to 7.50% at March
31, 1999. These mortgage loan commitments and undisbursed
lines of credit are expected to be settled at face amount
or expire unused. It is impractical to assign any fair
value to these commitments.
The disclosure of fair value amounts does not include the
fair values of any intangibles, including core deposit
intangibles. Core deposit intangibles represent the value
attributable to total deposits based on an expected
duration of customer relationships.
LIMITATIONS
Fair value estimates are made at a specific point in time,
based on relevant market information and information about
financial instruments. These estimates do not reflect any
premium or discount that could result from offering for
sale at one time the entire holdings of a particular
financial instrument. Fair value estimates are based on
judgments regarding future expected loss experience,
current economic conditions, risk characteristics of
various financial instruments and other factors. These
estimates are subjective in nature and involve
uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
(Continued)
43
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
______________________________________________________________
(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
1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 134,860 8,000,267
Investment securities 8,760,541 --
Investment in the Bank 23,981,868 22,450,225
Prepaid expenses and other assets 77,256 17,654
- -------------------------------------------------------------------------
$32,954,525 30,468,146
=========================================================================
Loan payable - Bank $ 5,884,215 912,830
Other liabilities 268,158 232,506
- -------------------------------------------------------------------------
6,152,373 1,145,336
Stockholders' equity 26,802,152 29,322,810
- -------------------------------------------------------------------------
$32,954,525 30,468,146
=========================================================================
<CAPTION>
STATEMENTS OF INCOME
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Interest income $ 382,457 194,673 112,763
- ------------------------------------------------------------------------------
Expenses:
Interest expense 114,602 89,742 110,349
Professional fees 40,200 32,837 19,200
Other expenses 37,822 36,891 30,565
- ------------------------------------------------------------------------------
192,624 159,470 160,114
- ------------------------------------------------------------------------------
Income (loss) before equity in net income
of subsidiary and income taxes 189,833 35,203 (47,351)
Equity in net income of subsidiary 1,668,136 1,647,204 930,531
- ------------------------------------------------------------------------------
Income before income taxes 1,857,969 1,682,407 883,180
Income taxes (benefit) 73,300 13,600 (18,300)
- ------------------------------------------------------------------------------
Net income $1,784,669 1,668,807 901,480
==============================================================================
</TABLE>
(Continued)
44
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
______________________________________________________________
(15) CONTINUED
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,784,669 1,668,807 901,480
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in net income of subsidiary (1,668,136) (1,647,204) (930,531)
Noncash compensation under stock-
based benefit plans 722,313 541,401 462,650
Other, net (164,282) 94,462 (396,157)
- ---------------------------------------------------------------------------------
Net cash provided by operating activities 674,564 657,466 37,442
- ---------------------------------------------------------------------------------
Investing activities:
Dividend distribution from Bank -- 4,000,000 --
Purchases of investment securities
available for sale (8,742,848) -- --
- ---------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities (8,742,848) 4,000,000 --
- ---------------------------------------------------------------------------------
Financing activities:
Purchases of common stock (4,123,540) (966,297) (8,987)
Exercise of stock options by
Stock Option Trust 266,649 105,930 68,308
Increase in (repayment of) borrowings 4,971,385 (224,010) (226,410)
Dividends paid (911,617) (751,204) (701,768)
- ---------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 202,877 (1,835,581) (868,857)
- ---------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents (7,865,407) 2,821,885 (831,415)
Cash and cash equivalents at beginning of year 8,000,267 5,178,382 6,009,797
- ---------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 134,860 8,000,267 5,178,382
=================================================================================
</TABLE>
45
<PAGE>
<PAGE>
Directors And Officers
________________________________________________________________
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
HARBOR FEDERAL BANCORP, INC. AND HARBOR FEDERAL SAVINGS BANK
<S> <C>
Robert A. Williams Joseph J. Lacy
President Retired
Harbor Federal Savings Bank President of Lacy Foundries,Inc.
John H. Riehl, III J. Kemp Roche
General Partner Retired
Riehl Estate Management Co. Sales Representative for St. Joe
Paper Co.
Lawrence W. Williams Gideon N. Stieff, Jr.
Executive Vice President Retired
Harbor Federal Savings Bank Executive Vice President of
Kirk-Stieff Co.
OFFICERS OF HARBOR FEDERAL BANCORP, INC.
Robert A. Williams Lawrence W. Williams
President Vice President
Joyce A. Lancaster Norbert J. Luken
Secretary Treasurer
OFFICERS OF HARBOR FEDERAL SAVINGS BANK
Robert A. Williams Lawrence W. Williams
President and Chief Executive Executive Vice President
Officer
Joyce A. Lancaster Deborah A. Epps
Assistant Vice President - Secretary
Administration
</TABLE>
46
<PAGE>
<PAGE>
Norbert J. Luken Calvin W. Anthony
Vice President and Chief Financial Treasurer
Officer
Thomas F. Costantini, Jr.
Vice President - Business Development
<TABLE>
<CAPTION>
CORPORATE
INFORMATION
_______________________________________________________________________
HARBOR FEDERAL SAVINGS BANK LOCATIONS INDEPENDENT ACCOUNTANTS
<S> <C>
Main Office - Towson KPMG LLP
705 York Road 111 S. Calvert Street
410-321-7041 Baltimore, Maryland 21202
South Baltimore SPECIAL COUNSEL
132 E. Fort Avenue
410-752-1191 Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W.
Locust Point Washington, D.C. 20036
1350 E. Fort Avenue
410-685-0800 TRANSFER AGENT
Highlandtown Registrar and Transfer Company
3200 Eastern Avenue 10 Commerce Drive
410-342-4060 Cranford, New Jersey 07016
Parkville ANNUAL REPORT ON FORM 10-KSB
7917 Harford Road
410-661-0237 A copy of the Bank's Form 10-KSB for
the fiscal year ended March 31,
Riviera Beach 1999, will be furnished without
8553 Ft. Smallwood Road charge to stockholders as May 28,
410-437-1300 1999, upon written request to the
Secretary, Harbor Federal Bancorp,
Pikesville Inc., 705 York Road, Baltimore,
507 Reisterstown Road Maryland 21204 (410) 321-7041.
410-486-5228
Putty Hill
8030 Belair Road
410-665-1020
Roland Park
4806 Roland Avenue
410-366-6676
1999 ANNUAL MEETING OF STOCKHOLDERS
The 1999 annual meeting of stockholders
will be held at 3:00 P.M. local time on Wednesday
July 14, 1999 at the Sheraton Baltimore
North Hotel, 903 Dulaney Valley Road,
Towson, Maryland.
</TABLE>
47
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 7, 1999, relating to the consolidated
statements of financial condition of Harbor Federal Bancorp,
Inc. and subsidiary as of March 31, 1999 and 1998, and the
related consolidated statements of income and comprehensive
income, stockholders' equity, and cash flows for each of the
years in the three-year period ended March 31, 1999 which report
is incorporated by reference in the March 31, 1999 annual report
on Form 10-KSB of Harbor Federal Bancorp, Inc.
/s/ KPMG LLP
Baltimore, Maryland
June 21, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-1-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,501,358
<INT-BEARING-DEPOSITS> 114,259
<FED-FUNDS-SOLD> 2,545,437
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 70,454,673
<INVESTMENTS-CARRYING> 3,681,010
<INVESTMENTS-MARKET> 3,789,557
<LOANS> 153,918,968
<ALLOWANCE> 457,000
<TOTAL-ASSETS> 239,297,635
<DEPOSITS> 181,485,848
<SHORT-TERM> 27,555,000
<LIABILITIES-OTHER> 3,454,635
<LONG-TERM> 0
0
0
<COMMON> 16,765
<OTHER-SE> 26,785,387
<TOTAL-LIABILITIES-AND-EQUITY> 239,297,635
<INTEREST-LOAN> 11,890,112
<INTEREST-INVEST> 4,821,738
<INTEREST-OTHER> 311,540
<INTEREST-TOTAL> 17,023,390
<INTEREST-DEPOSIT> 9,029,978
<INTEREST-EXPENSE> 10,269,853
<INTEREST-INCOME-NET> 6,753,537
<LOAN-LOSSES> 75,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,255,304
<INCOME-PRETAX> 3,061,719
<INCOME-PRE-EXTRAORDINARY> 1,784,669
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,784,669
<EPS-BASIC> 1.03
<EPS-DILUTED> .99
<YIELD-ACTUAL> 7.48
<LOANS-NON> 0
<LOANS-PAST> 986,405
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 490,000
<CHARGE-OFFS> 108,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 457,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 457,000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> MAR-31-1998
<CASH> 2,752,620
<INT-BEARING-DEPOSITS> 173,728
<FED-FUNDS-SOLD> 313,047
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,688,276
<INVESTMENTS-CARRYING> 19,298,220
<INVESTMENTS-MARKET> 19,416,130
<LOANS> 147,901,019
<ALLOWANCE> 490,000
<TOTAL-ASSETS> 231,140,190
<DEPOSITS> 172,902,844
<SHORT-TERM> 25,266,250
<LIABILITIES-OTHER> 3,648,286
<LONG-TERM> 0
0
0
<COMMON> 16,934
<OTHER-SE> 29,305,876
<TOTAL-LIABILITIES-AND-EQUITY> 231,140,190
<INTEREST-LOAN> 11,644,544
<INTEREST-INVEST> 4,442,580
<INTEREST-OTHER> 313,561
<INTEREST-TOTAL> 16,400,685
<INTEREST-DEPOSIT> 8,845,283
<INTEREST-EXPENSE> 9,839,417
<INTEREST-INCOME-NET> 6,561,268
<LOAN-LOSSES> 110,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,131,884
<INCOME-PRETAX> 2,808,770
<INCOME-PRE-EXTRAORDINARY> 1,668,807
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,668,807
<EPS-BASIC> .96
<EPS-DILUTED> .93
<YIELD-ACTUAL> 7.55
<LOANS-NON> 0
<LOANS-PAST> 975,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 380,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 490,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 490,000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-1-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,482,872
<INT-BEARING-DEPOSITS> 275,962
<FED-FUNDS-SOLD> 3,939,419
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,835,141
<INVESTMENTS-CARRYING> 30,869,516
<INVESTMENTS-MARKET> 30,407,833
<LOANS> 144,701,746
<ALLOWANCE> 380,000
<TOTAL-ASSETS> 219,462,184
<DEPOSITS> 171,466,629
<SHORT-TERM> 16,500,000
<LIABILITIES-OTHER> 3,270,776
<LONG-TERM> 0
0
0
<COMMON> 17,544
<OTHER-SE> 28,207,235
<TOTAL-LIABILITIES-AND-EQUITY> 219,462,184
<INTEREST-LOAN> 10,426,017
<INTEREST-INVEST> 4,648,326
<INTEREST-OTHER> 294,470
<INTEREST-TOTAL> 15,368,813
<INTEREST-DEPOSIT> 8,467,523
<INTEREST-EXPENSE> 9,371,344
<INTEREST-INCOME-NET> 5,997,469
<LOAN-LOSSES> 32,605
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,725,458
<INCOME-PRETAX> 1,468,680
<INCOME-PRE-EXTRAORDINARY> 901,480
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 901,480
<EPS-BASIC> .50
<EPS-DILUTED> .49
<YIELD-ACTUAL> 7.47
<LOANS-NON> 288,786
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 438,500
<CHARGE-OFFS> 91,105
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 380,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 380,000
</TABLE>
