<PAGE>
<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Mark One
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to ____________.
Commission File Number: 0-24194
-------
HARBOR FEDERAL BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 52-1860591
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
705 York Road, Baltimore, Maryland 21204-2562
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(410)321-7041
------------
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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 ninety days. Yes X No
--- ---
As of December 31, 1998, 1,796,767 shares of the
registrant's Common Stock, par value $0.01 per share, were
issued and outstanding.
Transitional small business disclosure format (check one):
YES NO X
--- ---
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.
---------------------------
Baltimore, Maryland
-------------------
INDEX
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Consolidated Statements of Financial Condition --
As of December 31, 1998 (Unaudited) and March 31,
1998
Consolidated Statements of Income and Comprehensive
Income -- (Unaudited) for the nine and three months
ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows -- (Unaudited)
for the nine months ended December 31, 1998 and 1997
Notes to Consolidated Financial Statements --
(Unaudited)
Item 2. Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Item 3. Defaults Upon Senior Securities
-------------------------------
Item 4. Submission of Matters to a Vote of Security
Holders
-------------------------------------------
Item 5. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
2<PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION
3<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
December 31, March 31,
Assets 1998 1998
------ ------------ --------
(Unaudited)
<S> <C> <C>
Cash:
On hand and due from banks $ 2,570,435 2,752,630
Interest-bearing deposits 50,805 173,728
Federal funds sold 2,013,804 313,047
Investment securities, fair value of $45,435,068
and $51,779,610, respectively 45,435,068 51,826,542
Mortgage-backed securities, fair value of
$15,687,992 and $21,324,796, respectively 15,580,835 21,159,954
Loans receivable, net 155,134,780 147,901,019
Investment in Federal Home Loan Bank stock,
at cost 1,433,500 1,433,500
Investment in and advances to affiliated
corporation 2,525,000 2,850,000
Property and equipment , net 1,769,062 1,820,909
Prepaid expenses and other assets 1,048,623 908,861
------------ -----------
Total assets $227,561,912 231,140,190
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings accounts $177,205,035 172,902,844
Borrowed funds 18,810,000 25,266,250
Advance payments by borrowers for taxes,
insurance and ground rents 1,248,213 1,935,804
Accrued expenses and other liabilities 1,266,925 1,560,098
Federal and state income taxes payable -- 152,384
------------ -----------
Total liabilities 198,530,173 201,817,380
------------ -----------
Stockholders' Equity:
Preferred stock $0.01 par value; authorized
5,000,000 shares; none issued -- --
Common stock $0.01 par value; authorized
20,000,000 shares; 1,796,767 and 1,693,420
shares issued and outstanding 17,968 16,934
Additional paid-in capital 15,043,403 13,069,233
Unearned ESOP shares (662,056) (912,830)
Retained income, substantially restricted 14,252,964 16,939,169
Accumulated comprehensive income 379,460 210,304
------------ -----------
Total stockholders' equity 29,031,739 29,322,810
------------ -----------
Total liabilities and stockholders' equity $227,561,912 231,140,190
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
December 31, December 31,
------------------- --------------------
1998 1997 1998 1997
------ ------ ------ --------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $ 8,956,611 8,740,628 3,042,025 2,943,746
Mortgage-backed securities 970,593 738,247 291,397 252,449
Investment securities 2,725,768 2,383,995 866,712 786,637
Interest-earning deposits and
other short-term investments 243,689 235,855 80,617 80,087
----------- ----------- ---------- ----------
Total interest income 12,896,661 12,098,725 4,280,751 4,062,919
----------- ----------- ---------- ----------
Interest expense:
Savings accounts:
Certificates 5,396,096 5,104,960 1,776,509 1,786,520
NOW and money market deposit accounts 698,456 752,006 232,328 247,986
Passbook and statement savings 731,157 760,719 241,798 246,643
----------- ----------- ---------- ----------
6,825,709 6,617,685 2,250,635 2,281,149
----------- ----------- ---------- ----------
Borrowed funds:
Federal Home Loan Bank advances 385,764 21,042 129,056 21,042
Securities sold under agreements to
repurchase 590,610 628,990 192,873 179,814
----------- ----------- ---------- ----------
976,374 650,032 321,929 200,856
Total interest expense 7,802,083 7,267,717 2,572,564 2,482,005
----------- ----------- ---------- ----------
Net interest income 5,094,578 4,831,008 1,708,187 1,580,914
Provision for losses on loans 60,000 80,000 20,000 40,000
----------- ----------- ---------- ----------
Net interest income after provision
for losses on loans 5,034,578 4,751,008 1,688,187 1,540,914
----------- ----------- ---------- ----------
Noninterest income:
Loan fees and service charges 350,570 129,645 118,040 57,918
Other 139,840 219,987 52,522 133,999
----------- ----------- ---------- ----------
Total noninterest income 490,410 349,632 170,562 191,917
----------- ----------- ---------- ----------
Noninterest expense:
Compensation and benefits 2,111,884 1,991,909 760,916 654,749
Occupancy and equipment 293,842 336,972 87,824 112,060
SAIF deposit insurance premiums 67,209 67,624 21,846 22,416
Advertising 105,694 100,510 32,498 51,552
Other 588,124 600,147 219,896 217,024
----------- ----------- ---------- ----------
Total noninterest expense 3,166,753 3,097,162 1,122,980 1,057,801
----------- ----------- ---------- ----------
Income before income taxes 2,358,235 2,003,478 735,769 675,030
Income taxes 961,050 773,863 312,900 260,750
----------- ----------- ---------- ----------
Net income 1,397,185 1,229,615 422,869 414,280
Other comprehensive income, net of tax:
Unrealized holding gain (loss) on securities
available for sale 169,156 646,952 (163,420) 81,264
----------- ----------- ---------- ----------
Comprehensive income $ 1,566,341 1,876,567 259,449 495,544
=========== =========== ========== ==========
Net income per share of common stock (Note 5):
Basic (1) $ .80 .71 .25 .24
=========== =========== ========== ==========
Diluted (1) $ .77 .69 .24 .23
=========== =========== ========== ==========
<FN>
(1) Amounts have been restated for the effect of a 10% stock dividend paid on August 10, 1998.
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
5<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $1,397,185 1,229,615
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 71,273 101,735
Provision for losses on loans 60,000 80,000
Amortization of premium on savings deposits 286,038 286,038
Gain on sale of loans available for sale -- (96,428)
Noncash compensation under stock-based
benefit plans 504,689 521,350
Loans originated for sale, net of repayments (988,897) (3,564,722)
Sale of loans originated for sale 1,016,685 4,803,060
Amortization of loan fees, premiums and
discounts, net (109,442) (106,491)
Decrease (increase) in prepaid expenses
and other assets (51,732) 62,162
Decrease in accrued expenses and other
liabilities (87,307) (11,599)
Decrease in federal and state income taxes
payable (355,981) (18,093)
Increase in accrued interest receivable (160,791) (239,489)
Increase (decrease) in accrued interest payable (85,866) 12,172
----------- ----------
Net cash provided by operating
activities 1,495,854 3,059,310
----------- ----------
Cash flows from investing activities:
Maturities of investment securities available for sale 24,000,000 4,000,000
Maturities of investment securities held to maturity 13,000,000 5,000,000
Purchase of investment securities available for sale (30,063,388) (11,000,000)
Purchase of mortgage-backed securities available
for sale -- (10,122,750)
Principal repayments of mortgage-backed securities
held to maturity 1,799,761 1,484,172
Principal repayments of mortgage-backed securities
available for sale 3,631,974 844,303
Sale of real estate owned 76,386 465,136
Loan principal disbursements, net of repayments (6,899,435) (2,680,494)
Loan purchases (341,300) (1,808,911)
Purchases of property and equipment (19,426) (17,871)
Decrease (increase) in investment in and advances
to affiliated corporation, net 325,000 (75,000)
----------- ----------
Net cash provided by (used in)
investing activities 5,509,572 (13,911,415)
----------- ----------
(Continued)
</TABLE>
6<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Net increase in savings deposits 4,016,153 4,918,248
Net increase (decrease) in borrowed funds (6,456,250) 8,593,000
Decrease in advance payments by borrowers
for taxes, insurance and ground rents (687,591) (610,232)
Stock repurchases (1,225,699) (965,687)
Purchases of stock for stock option and incentive
plan trust (642,325) --
Dividends paid (695,888) (578,463)
Exercise of stock options 81,813 86,593
----------- ----------
Net cash provided by (used in) financing
activities (5,609,787) 11,443,459
----------- ----------
Net increase in cash and cash equivalents 1,395,639 591,354
Cash and cash equivalents at beginning of period 3,239,405 5,698,253
----------- ----------
Cash and cash equivalents at end of period $ 4,635,044 6,289,607
=========== ==========
Supplemental information -- noncash investing activities:
Unrealized holding gain on securities available for
sale, net of income tax effect $ 169,156 646,952
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
7<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Nine Months Ended December 31, 1998
(Unaudited)
Note 1 -- Business. The accompanying unaudited consolidated
financial statements include the accounts of Harbor Federal
Bancorp, Inc. (the "Company") and wholly-owned subsidiaries,
including Harbor Federal Savings Bank ("Harbor Federal").
Harbor Federal provides a full range of banking services to
individual and corporate customers through its subsidiaries and
branch offices in Maryland. Harbor Federal is subject to
competition from other financial institutions. Harbor Federal is
subject to the regulations of certain federal agencies and
undergoes periodic examinations by those agencies.
Note 2 -- Basis of Presentation. The accompanying unaudited
consolidated financial statements were prepared in accordance
with instructions for Form 10-QSB and, therefore, do not include
information or footnotes necessary for a complete presentation
of financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles.
However, all adjustments (consisting of normal, recurring
adjustments) which in the opinion of management, are necessary
for a fair presentation of the consolidated financial statements
at and for the nine and three months ended December 31, 1998
have been recorded.
Effective January 1, 1998, the Company adopted the provisions of
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"),
which establishes standards for reporting and display of
comprehensive income and its components in a full set of general
purpose financial statements. It requires all items that are
required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed in equal prominence with other
financial statements. It requires that an enterprise display an
amount representing total comprehensive income for each period.
It does not require per share amounts of comprehensive
income to be disclosed. The adoption of the provisions of SFAS
No. 130 did not affect the financial condition or results of
operations of the Company.
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the statement of
financial condition and revenues and expenses for the period.
Actual results could differ significantly from those estimates.
The results of operations for the nine and three months ended
December 31, 1998 are not necessarily indicative of the results
that may be expected for the entire year ending March 31, 1999.
Note 3 -- Principles of Consolidation. The accompanying
unaudited consolidated financial statements include the accounts
of the Company and Harbor Federal, and its wholly owned
subsidiaries, Harbor Service Corporation and Bank Street
Mortgage Company. All significant intercompany items have been
eliminated.
Note 4 -- Retained Income. Harbor Federal is required to
maintain certain levels of regulatory capital. At December 31,
1998, Harbor Federal was in compliance with all regulatory
capital requirements.
8
<PAGE>
<PAGE>
Note 5 -- Earnings per Common Share. On August 10, 1998 the
Company paid a 10% stock dividend to shareholders of record on
July 31, 1998. Information related to the calculation of net
income per share of common stock is summarized as follows for
the nine and three months ended December 31, 1998 and December
31, 1997, adjusted for the effect of the 10% stock dividend:
<TABLE>
<CAPTION>
Nine Months Ended
December 31, 1998 December 31, 1997
-------------------- ---------------------
Basic Diluted Basic Diluted
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $1,397,185 1,397,185 1,229,615 1,229,615
Dividend on unvested common
stock awards (11,892) (8,034) (15,412) (11,017)
---------- --------- --------- ---------
Adjusted net income used in EPS
calculations $1,385,293 1,389,151 1,214,203 1,218,598
========== ========= ========= =========
Weighted average shares outstanding 1,739,784 1,739,784 1,715,646 1,715,646
Dilutive securities:
Options --- 56,679 --- 40,747
Unvested common stock awards --- 10,205 --- 14,223
--------- --------- --------- ---------
Adjusted weighted-average shares
used in EPS computation 1,739,784 1,806,668 1,715,646 1,770,616
========= ========= ========= =========
<CAPTION>
Three Months Ended
December 31, 1998 December 31, 1997
-------------------- ---------------------
Basic Diluted Basic Diluted
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 422,869 422,869 414,280 414,280
Dividend on unvested common stock
awards (4,090) (2,764) (5,436) (3,690)
---------- ---------- --------- ---------
Adjusted net income used in EPS
calculations $ 418,779 420,105 408,844 410,590
========== ========= ========= =========
Weighted average shares outstanding 1,702,539 1,702,539 1,712,474 1,712,474
Dilutive securities:
Options --- 56,640 --- 45,906
Unvested common stock awards --- 10,198 --- 16,024
---------- ---------- --------- ---------
Adjusted weighted-average shares used
in EPS computation 1,702,539 1,769,377 1,712,474 1,774,404
========== ========= ========= =========
</TABLE>
Note 6 -- Investment Securities. Investment securities
available for sale included in investment securities have a
carrying value and fair market value of $42,618,310 at December
31, 1998 and
$36,204,093 at March 31, 1998 and related accrued interest of
$754,990 at December 31, 1998 and $432,389 at March 31, 1998.
Note 7 -- Mortgage-Backed Securities. Mortgage-backed
securities available for sale included in mortgage-backed
securities have a carrying value and fair market value of
$13,187,201 at December
31, 1998 and $16,930,783 at March 31, 1998 and related accrued
interest of $93,487 at December 31, 1998 and $121,011 at March
31, 1998.
9<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.
AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion analyzes the financial condition
of the Company at December 31, 1998 and the results of
operations of the Company for the nine and three months ended
December 31, 1998 and 1997.
FINANCIAL CONDITION
- -------------------
Harbor Federal's total assets decreased by $3.6 million or
1.5% to $227.6 million at December 31, 1998 from $231.1 million
at March 31, 1998.
Loans receivable, net, increased by $7.2 million or 4.9% to
$155.1 million at December 31, 1998 from $147.9 million at March
31, 1998. This increase was due in part to a greater demand
for residential loans during this period. The increase was
funded by a reduction in investment securities of $6.4 million
or 12.3% to $45.4 million at December 31, 1998 from $51.8
million at March 31,1998 and a reduction in mortgage-backed
securities of $5.6 million or 26.4% to $15.6 million at December
31, 1998 from $21.2 million at March 31, 1998. Cash and federal
funds sold increased by $1.4 million.
Borrowed funds were reduced by $6.5 million or 25.6% to
$18.8 million at December 31, 1998 from $25.3 million at March
31, 1998. This reduction was funded partially by an increase in
savings accounts of $4.3 million or 2.5% to $177.2 million at
December 31, 1998 from $172.9 million at March 31, 1998. The
balance came from repayments on investments and mortgage-backed
securities as mentioned above.
RESULTS OF OPERATIONS
- ---------------------
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 consisting primarily of
savings accounts. Net income for the nine and three months
ended December 31, 1998 increased $168,000 and $9,000
respectively.
Interest Income. Total interest income for the nine months
ended December 31, 1998 increased by $798,000 or 6.6% to $12.9
million from $12.1 million for the same period in 1997. Total
interest income for the three months ended December 31, 1998
increased by $218,000 or 5.4% to $4.3 million from $4.1 million
for the same period in 1997. The increases in interest income
resulted from a $13.8 million or 6.5% and $11.3 million or 5.3%
increase in average interest-earning assets for the nine and
three months ended December 31, 1998 as compared to the
same periods in 1997. The average yields on Harbor Federal's
average interest-earning assets was 7.55% for the nine and three
months ended December 31, 1998 and December 31, 1997.
Interest on loans for the nine months ended December 31,
1998 increased $216,000 or 2.5% as compared to the same period
in 1997. Interest on loans for the three months ended December
31, 1998 increased $98,000 or 3.3% as compared to the same
period in 1997. The increases were due primarily to increases
in average loans receivable of $3.7 million or 2.5% and
$5.2 million or 3.5% for the nine and three months ended
December 31, 1998, respectively, as compared to the same periods
in 1997. The increase in average loans receivable was due
primarily to increased loan production over normal repayments.
Interest on mortgage-backed securities for the nine and
three months ended December 31,1998 increased by $232,000 or
31.5% and $39,000 or 15.4% respectively, as compared to the
same periods in 1997. The increases were the result of
increases in the average mortgage-backed securities of $4.4
million or 31.2% and $1.7 million or 11.4% for the nine and
three months ended December 31, 1998, respectively, as compared
to the same periods in 1997. The increases in average
mortgage-backed securities were due primarily to the purchase of
a $9.9 million mortgage-backed security in December 1997.
10<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.
AND SUBSIDIARY
Interest on investment securities for the nine and three
months ended December 31, 1998 increased by $342,000 or 14.3%
and $80,000 or 10.2%, respectively, as compared to the same
periods in 1997. The increases were due primarily to increases
in the average investment securities of $4.7 million or 10.4%
and $4.2 million or 9.3% for the nine and three months ended
December 31, 1998, respectively, as compared to the
same periods in 1997. The increases in average investment
securities were due to an increase in purchases of investment
securities in the latter half of fiscal year end March 31, 1998.
Interest Expense. Total interest expense for the nine and
three months ended December 31, 1998 increased by $534,000 or
7.4% and $91,000 or 3.6% to $7.8 million and $2.6 million from
$7.3 million and $2.5 million for the same periods in 1997. The
increases were primarily attributable to increases in the
weighted average balance of deposits and borrowings for the nine
and three months ended December 31, 1998 of $12.1 million or
6.5% and $10.0 million or 5.3%, respectively, over the same
periods in 1997. The weighted average cost of Harbor Federal's
deposits and borrowings increased to 5.21% for the nine months
ended December 31,1998 from 5.17%, for the same period in 1997.
In addition, the weighted average cost of deposits and
borrowings decreased to 5.16% for the three months ended
December 31, 1998 from 5.24% for the same period in 1997. This
was primarily due to rate reductions on various deposit lines
and borrowings.
Net Interest Income. Net interest income for the nine and
three months ended December 31, 1998 increased by $264,000 or
5.5% and $127,000 or 8.1% to $5.1 million and $1.7 million
from $4.8 million and $1.6 million for the same periods in 1997
due to the above-mentioned changes.
Provision for Loan Losses. The Company maintains an
allowance for loan losses based on management's review and
classification of the loan portfolio and analyses of borrowers'
ability to pay, past collection experience, risk characteristics
of individual loans or groups of similar loans and underlying
collateral, current and prospective economic conditions, status
of nonperforming loans and regulatory reviews conducted in the
regulatory examination process and relevant matters. There were
provisions of $60,000 and $20,000 for loan losses during the
nine and three months ended December 31, 1998 as compared to
$80,000 and $40,000 during the same periods in 1997. Based on
the results of management's review and analyses, it was
concluded that the level of the allowance for losses on loans
was adequate at December 31, 1998.
Noninterest Income. Noninterest income for the nine months
ended December 31, 1998 increased by $141,000 or 40.3% to
$490,000 from $350,000 for the same period in 1997. The
increase was due primarily to an increase in fee income of
$215,000 from Bank Street Mortgage Company which commenced
operations in June 1997. This was offset by a reduction of
$18,000 in ATM fees due to the closing of ATM machine in Ocean
City, Maryland in November of 1997. This ATM machine has been
reinstalled in the Parkville branch in September 1998.
Noninterest Expense. Noninterest expense for the nine and
three months ended December 31, 1998 increased by $70,000 or
2.2% and $65,000 or 6.2% to $3.2 million and $1.1 million from
$3.1 million and $1.0 million for the same periods in 1997.
These increases are primarily due to increases in compensation
for Bank Street Mortgage Company of $102,000 and $28,000 for the
nine and three months ended December 31, 1998 over the same
period in 1997. Occupancy and equipment expense decreased by
$43,000 and $24,000 for the nine and three months ended
December 31, 1998 compared to the same periods in 1997. These
reductions were due primarily to a reduction in rent expense for
the ATM location in Ocean City, Maryland that was closed in
November 1997.
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
26.3% and 23.4% for the nine and three months ended December 31,
1998. Harbor Federal adjusts its liquidity levels in order to
meet funding needs of deposit outflows, payment of real estate
taxes on
11<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.
AND SUBSIDIARY
mortgage loans, repayment of borrowings and loan commitments.
Harbor Federal also adjusts liquidity as appropriate to meet
its asset and liability management objectives.
The Company's primary sources of funds are deposits,
amortization and prepayment of loans and mortgage-backed
securities, maturities of investment securities and other
investments and earnings and funds provided from operations and
borrowings. 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. The Company manages the pricing of its deposits to
maintain a desired deposit balance. In addition, the Company
invests in short-term interest-earning assets, which
provide liquidity to meet lending requirements.
During the nine months ended December 31, 1998, Harbor
Federal's cash and cash equivalents (cash and short-term
investments with maturities less than 90 days) increased by $1.4
million.
The Company had $957,000 in outstanding loan commitments at
December 31, 1998. Harbor Federal expects to fund its loan
origination's 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 the
Company's needs.
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 calls for Year 2000
readiness by the end of December 1998, a full year ahead of the
millennium. 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 addressed 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 includes costs
incurred to upgrade existing software and to replace hardware.
The Company estimates that these costs will be incurred in the
normal course of business as software and hardware are
ordinarily upgraded to keep pace with technological advances.
Management currently expects that these costs could reach
$35,000.
STOCK DIVIDEND
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.
12<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.
AND SUBSIDIARY
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities". 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 or fiscal years
beginning after June 15, 1999. Initial application of this
Statement should be as of the beginning of an entity's fiscal
quarter. On that 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. It does not apply
retroactively.
13<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.
AND SUBSIDIARY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
From time to time Harbor Federal is a party to
various legal proceedings incident to its
business. At December 31, 1998, there were no
legal proceedings to which the Company, Harbor
Federal or its subsidiaries were a party, or to
which any of their property was subject, which
were expected by management to result in a
material loss.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security
-------------------------------------------
Holders
-------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
List of Exhibits
27.1 Financial Data Schedule at and for the
nine months ended December 31, 1998
27.2 Restated Financial Data Schedule at and
for the nine months ended December
31, 1997
(b) Form 8-K
None
14<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements 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: February 4, 1999 /s/ Robert A. Williams
___________________________________
Robert A. Williams
President
(Duly Authorized Representative)
Date: February 4, 1999 /s/ Norbert J. Luken
_____________________________________
Norbert J. Luken
Treasurer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 2,570,435
<INT-BEARING-DEPOSITS> 50,805
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<DEPOSITS> 177,205,035
<SHORT-TERM> 18,810,000
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0
0
<OTHER-SE> 29,013,771
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<EXPENSE-OTHER> 3,166,753
<INCOME-PRETAX> 2,358,235
<INCOME-PRE-EXTRAORDINARY> 1,397,185
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,397,185
<EPS-PRIMARY> .80
<EPS-DILUTED> .77
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<LOANS-NON> 0
<LOANS-PAST> 838,508
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<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 6,143,567
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<TRADING-ASSETS> 0
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<COMMON> 16,934
0
0
<OTHER-SE> 29,148,205
<TOTAL-LIABILITIES-AND-EQUITY> 233,572,078
<INTEREST-LOAN> 8,740,628
<INTEREST-INVEST> 3,122,242
<INTEREST-OTHER> 235,855
<INTEREST-TOTAL> 12,098,725
<INTEREST-DEPOSIT> 6,617,685
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<INTEREST-INCOME-NET> 4,831,008
<LOAN-LOSSES> 80,000
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<EXPENSE-OTHER> 3,097,162
<INCOME-PRETAX> 2,003,478
<INCOME-PRE-EXTRAORDINARY> 1,229,615
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<EPS-PRIMARY> .71 <F1>
<EPS-DILUTED> .69 <F1>
<YIELD-ACTUAL> 7.55
<LOANS-NON> 0
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<FN>
<F1> Restated for adoption of SFAS No. 128.
</FN>
</TABLE>
