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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
OR
[ ] TRANSITION REPORT UNDER 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.
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(Name of Small Business Issuer as Specified in Its Charter)
Maryland 52-1860591
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
705 York Road, Baltimore, Maryland 21204
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (410) 321-7041
--------------
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange
Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act 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 there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B is not 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:
$18,801,009.
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:
$21,482,546 (1,245,365 shares at the most recent price of which
management was aware as of June 1, 2000 ($17.25 per share)).
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date: 1,664,515 shares of common stock as of June 1, 2000.
Transitional small business disclosure format (check
one): YES NO X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
None.
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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 receivable
from the Company's employee stock ownership plan ("ESOP"), and
the Company's principal business has been the business of Harbor
Federal.
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 included elsewhere herein.
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 promulgated by the Board
of Governors of the Federal Reserve System ("Federal Reserve
Board"). For additional information, see "Regulation of the
Bank."
1
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PENDING MERGER
On May 3, 2000, the Company entered into an Agreement and
Plan of Merger (the "Merger Agreement") with Provident
Bankshares Corporation ("Provident") pursuant to which the
Company will merge with and into Provident (the "Merger"). As a
result of the Merger, each outstanding share of Harbor common
stock, par value $0.01 per share ("Harbor Common Stock"), will
be converted into the right to receive 1.256 shares (the
"Exchange Ratio") of common stock of Provident, par value $1.00
per share ("Provident Common Stock"). The Merger is conditioned
upon, among other things, approval by holders of two-thirds of
the outstanding shares of Harbor Common Stock and the receipt of
certain regulatory and governmental approvals. It is currently
anticipated that the Merger will close in the third quarter of
2000.
FINANCIAL MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed legislation
which could have a far-reaching impact on the financial services
industry. The Gramm-Leach-Bliley ("G-L-B") Act authorizes
affiliations between banking, securities and insurance firms and
authorizes bank holding companies and national banks to engage
in a variety of new financial activities. Among the new
activities that will be permitted to bank holding companies are
securities and insurance brokerage, securities underwriting,
insurance underwriting and merchant banking. The Board of
Governors of the Federal Reserve System (the "Federal Reserve
Board"), in consultation with the Secretary of the Treasury, may
approve additional financial activities. The G-L-B Act,
however, prohibits future acquisitions of existing unitary
savings and loan holding companies, like the Company, by firms
which are engaged in commercial activities and limits the
permissible activities of unitary holding companies formed after
May 4, 1999.
The G-L-B Act imposes new requirements on financial
institutions with respect to customer privacy. The G-L-B Act
generally prohibits disclosure of customer information to
non-affiliated third parties unless the customer has been given
the opportunity to object and has not objected to such
disclosure. Financial institutions are further required to
disclose their privacy policies to customers annually.
Financial institutions, however, will be required to comply with
state law if it is more protective of customer privacy than the
G-L-B Act. The G-L-B Act directs the federal banking agencies,
the National Credit Union Administration, the Secretary of the
Treasury, the Securities and Exchange Commission and the Federal
Trade Commission, after consultation with the National
Association of Insurance Commissioners, to promulgate
implementing regulations within six months of enactment.
The G-L-B Act contains significant revisions to the FHLB
System. The G-L-B Act imposes new capital requirements on the
FHLB and authorizes them to issue two classes of stock with
differing dividend rates and redemption requirements. The G-L-B
Act deletes the current requirement that the FHLBs annually
contribute $300 million to pay interest on certain government
obligations in favor of a 20% of net earnings formula. The
G-L-B Act expands the permissible uses of Federal Home Loan Bank
advances by community financial institutions (under $500 million
in assets) to include funding loans to small businesses, small
farms and small agri-businesses. The G-L-B Act makes membership
in the Federal Home Loan Bank voluntary for federal savings
associations.
The G-L-B Act contains a variety of other provisions
including a prohibition against ATM surcharges unless the
customer has first been provided notice of the imposition and
amount of the fee. The G-L-B Act reduces the frequency of
Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository
institutions that make payments to non-governmental entities in
connection with the Community Reinvestment Act. The G-L-B Act
eliminates the SAIF special reserve and authorizes a federal
savings association that converts to a national or state bank
charter to continue to use the term "federal" in its name and to
retain any interstate branches.
2
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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.
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,
---------------------------------------------------
2000 1999 1998
--------------- --------------- --------------
Amount % Amount % Amount %
------ ----- ------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential. . . .$128,184 70.78% $114,994 71.20% $118,815 77.23%
Multi-family residential . . . . . . . 1,048 .58 900 .56 929 .60
Commercial . . . . . . . . . . . . . . 20,003 11.05 19,784 12.25 16,392 10.66
Construction (1) . . . . . . . . . . . 19,471 10.75 14,848 9.19 8,296 5.39
Land . . . . . . . . . . . . . . . . . 3,032 1.68 3,293 2.04 2,934 1.91
Loans held for sale. . . . . . . . . . 2,143 1.18 2,659 1.65 2,756 1.79
Consumer loans:
Savings accounts . . . . . . . . . . . 328 .18 290 .18 621 .40
Home equity loans. . . . . . . . . . . 792 .44 533 .33 456 .30
Other. . . . . . . . . . . . . . . . . 1,252 .69 511 .31 224 .15
Commercial business (2). . . . . . . . . 3,958 2.19 2,907 1.80 1,661 1.08
Accrued interest receivable. . . . . . . 876 .48 793 .49 759 .49
-------- ------ -------- ------ -------- ------
181,087 100.00% 161,512 100.00% 153,843 100.00%
====== ====== ======
Less:
Loans in process . . . . . . . . . . . 4,951 6,225 4,438
Discounts, deferred loan fees and
other. . . . . . . . . . . . . . . . 986 911 1,014
Allowance for loan losses. . . . . . . 474 457 490
-------- -------- --------
Total . . . . . . . . . . . . . . .$174,676 $153,919 $147,901
======== ======== ========
<FN>
_________
(1) Consisted solely of one- to four-family residences under construction at March 31, 2000, 1999 and
1998, respectively.
(2) Includes financing leases of $1.8 million, $1.4 million and $850,000 at March 31, 2000, 1999 and
1998, respectively.
</FN>
</TABLE>
3
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The following table sets forth information at March 31,
2000 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 and overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
Due within 1 Due 1 through Due after 5
year after 5 years after years after
March 31, March 31, March 31,
2000 2000 2000
------------ ------------- -----------
(In thousands)
<S> <C> <C> <C>
Real Estate:
Residential mortgage (1) . . . . . $12,841 $26,545 $ 92,781
Construction and land. . . . . . . 6,192 1,337 14,974
Commercial . . . . . . . . . . . . 2,625 6,303 11,075
Non-real estate (2). . . . . . . . . 1,179 1,899 2,460
Accrued interest receivable. . . . . 876 -- --
------- ------- --------
Total. . . . . . . . . . . . . . $23,713 $36,084 $121,290
======= ======= ========
<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>
The following table sets forth the dollar amount of all
loans at March 31, 2000 due one year or more 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) . . . . $ 88,847 $30,479 $119,326
Construction and land. . . . . . 11,281 5,030 16,311
Commercial . . . . . . . . . . . 17,052 326 17,378
Non-real estate (2). . . . . . . . 4,359 -- 4,359
-------- ------- --------
Total. . . . . . . . . . . . . $121,539 $35,835 $157,374
======== ======= ========
<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>
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.
4
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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,
----------------------------
2000 1999 1998
----- ------ ------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
One- to four-family. . . . . . . $ 18,514 $ 17,396 $ 12,806
Land . . . . . . . . . . . . . . 1,065 1,250 2,423
Commercial . . . . . . . . . . . 2,136 2,536 4,350
Construction . . . . . . . . . . 20,859 19,256 14,405
Commercial business. . . . . . . . -- 368 --
-------- -------- --------
Total loans originated . . . . . 42,574 40,806 33,984
Loan repayments. . . . . . . . . . (25,598) (35,523) (28,253)
-------- -------- --------
Net loan originations. . . . . . $ 16,976 $ 5,283 $ 5,731
======== ======== ========
Loans purchased:
Real estate loans:
One- to four-family. . . . . . . $ 644 $ 160 $ 1,355
Land . . . . . . . . . . . . . . 225 -- --
Commercial . . . . . . . . . . . 3,112 781 750
-------- -------- --------
Total loans purchased. . . . . $ 3,981 $ 941 $ 2,105
======== ======== ========
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. Due to the decline in demand for one-
to four-family and construction real estate loans, the Bank
decided to close the mortgage company in September 1999. 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, 2000, $131.1
million, or 72.4%, 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, 2000, $46.9 million,
or 35.7%, of Harbor Federal's one- to four-family residential
loans had adjustable interest rates, and $84.2 million, or
64.3%, had fixed rates.
Harbor Federal's one- to four-family residential mortgage
loans generally are for terms of 5 to 30 years, amortized on a
monthly basis, with principal and interest due each month.
Residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms.
Borrowers may refinance or prepay loans at their option without
penalty. These loans customarily contain "due-on-sale" clauses
which permit Harbor Federal to accelerate repayment of a loan
upon transfer of ownership of the mortgaged property.
5
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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, 2000, one- to four-
family residential construction loans constituted $19.5 million,
or 10.8%, 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.
Harbor Federal also offers loans for the acquisition and
development of land. At March 31, 2000, land acquisition and
development loans constituted $3.0 million, or 1.7%, 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.
6
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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, 2000, Harbor Federal had 85 of these
loans, with a median loan balance of $254,000.
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%.
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. 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, 2000, Harbor
Federal's commercial business loans totaled $4.0 million and
primarily consisted of line of credit loans to developers and
nine term loans to seven leasing companies. There are twelve
direct line of credit loans with local developers of up to $2.7
million in the aggregate, each secured by personal guarantee of
the respective borrower. At March 31, 2000, the total
outstanding balance of these loans was $2.2 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 $2.3 million have an aggregate
outstanding balance at March 31, 2000 of $1.8 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
7
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<PAGE>
substantial collection efforts against the obligor. In
addition, collections are dependent on the obligor's continuing
financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy.
Further, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may
limit the amount which can be recovered. These financings may
also give rise to claims and defenses by an obligor against
Harbor Federal, and an obligor may be able to assert against
Harbor Federal claims and defenses which it has against the
seller of the underlying collateral. In underwriting commercial
business loans, Harbor Federal considers the obligor's credit
history, an analysis of the obligor's income, expenses and
ability to repay the obligation and the value of the collateral.
Harbor Federal's risks associated with commercial business loans
have been minimized by the immaterial amount of such loans made
by Harbor Federal.
Consumer Lending. Federally chartered thrift institutions
are authorized to make secured and unsecured consumer loans up
to 35% of the institution's assets. In addition, a federal
thrift institution has lending authority above the 35% category
for certain consumer loans, such as home equity loans, property
improvement loans, mobile home loans and loans secured by
savings accounts. Harbor Federal currently does not emphasize
consumer lending.
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.
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.
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
8
<PAGE>
<PAGE>
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, 2000, Harbor Federal had no assets classified as loss,
$415,000 of assets classified as doubtful, $122,000 of assets
classified as substandard and $409,000 of assets designated as
special mention. Harbor Federal's total adversely classified
and designated assets were $946,000, which represented 0.37% of
Harbor Federal's total assets and 5.3% of Harbor Federal's core
regulatory capital, at March 31, 2000. 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.
9
<PAGE>
<PAGE>
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 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 estimated fair value less costs to sell. 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,
2000, Harbor Federal held no properties acquired in settlement
of loans for which market prices were unavailable. Any amount
of cost in excess of fair value is charged-off against the
allowance for loan losses. Harbor Federal records an allowance
for estimated selling costs of the property immediately after
foreclosure. Subsequent to acquisition, the property is
periodically evaluated by management and an allowance is
established if the estimated fair value of the property, less
estimated costs to sell, declines. If, upon ultimate
disposition of the property, net sales proceeds exceed the net
carrying value of the property, a gain on sale of real estate is
recorded.
The OTS has adopted a policy statement regarding
maintenance of an adequate allowance for loan and lease losses
and an effective loan review system. This policy includes an
arithmetic formula for checking the reasonableness of an
institution's allowance for loan loss estimate compared to the
average loss experience of the industry as a whole. Examiners
will review an institution's allowance for loan losses and
compare it against the sum of (i) 50% of the portfolio that is
classified doubtful; (ii) 15% of the portfolio that is
classified as substandard; and (iii) for the portions of the
portfolio that have not been classified (including those loans
designated as special mention), estimated credit losses over the
upcoming twelve months given the facts and circumstances as of
the evaluation date. This amount is considered neither a
"floor" nor a "safe harbor" of the level of allowance for loan
losses an institution should maintain, but examiners will view a
shortfall relative to the amount as an indication that they
should review management's policy on allocating these allowances
to determine whether it is reasonable based on all relevant
factors.
10
<PAGE>
<PAGE>
The following table sets forth an analysis of Harbor
Federal's allowance for loan losses (there were no recoveries)
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
2000 1999 1998
----- ------ ------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of period . . . $ 457 $ 490 $ 380
----- ----- -----
Charge-offs:
Real estate - mortgage . . . . . . 48 108 --
Commercial business. . . . . . . . -- -- --
----- ----- -----
Total charge-offs. . . . . . . . 48 108 --
----- ----- -----
Provision for loan losses. . . . . . 65 75 110
----- ----- -----
Balance at end of period . . . . . . $ 474 $ 457 $ 490
===== ===== =====
Ratio of net charge-offs to
average loans outstanding
during the period. . . . . . . . . 0.03% 0.07% 0.00%
===== ===== =====
</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,
--------------------------------------------------------------------------
2000 1999 1998
------------------------ ----------------------- ----------------------
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. . . . . . . . $257 72.52% $290 71.76% $ 265 77.83%
Construction . . . . . . . 50 10.75 -- 9.51 50 5.72
Commercial . . . . . . . . 150 11.05 150 11.93 175 10.33
Commercial business. . . . . 17 2.19 17 .88 -- 1.08
---- ---- -----
Total allowance for loan
losses . . . . . . . . . . $474 $457 $ 490
==== ==== =====
</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.
11
<PAGE>
<PAGE>
The following table sets forth information with respect to
Harbor Federal's non-performing 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,
--------------------------
2000 1999 1998
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Loans accounted for on a non-accrual
basis:
Real Estate:
Residential. . . . . . . . . . . $ 559 $ 986 $ 975
===== ===== =====
Percentage of non-performing loans
to total loans . . . . . . . . . 0.32% 0.64% 0.66%
===== ===== =====
Other non-performing assets (1). . $ 74 $ 447 $ --
===== ===== =====
Percentage of non-performing
assets to total assets. . . . . 0.22% 0.41% 0.42%
===== ===== =====
<FN>
____________
(1) Other non-performing assets represents property acquired by
Harbor Federal through foreclosure of repossession. The
property is carried at the lower of its fair market value
less costs to sell or the principal balance of the related
loan.
</FN>
</TABLE>
During the year ended March 31, 2000, gross interest
income of $41,000 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 $29,000. At March 31, 2000,
management had identified approximately $387,000 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 $150,000, 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,
--------------------------
2000 1999 1998
------ ------ ------
(In thousands)
<S> <C> <C> <C>
FHLMC . . . . . . . . . . . . $ 1,537 $ 2,215 $ 3,949
GNMA. . . . . . . . . . . . . 8,213 10,757 15,310
FNMA. . . . . . . . . . . . . 807 1,097 1,747
------- ------- -------
Total . . . . . . . . . . $10,557 $14,069 $21,006
======= ======= =======
</TABLE>
12
<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, 2000. 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. . . . . . . . $ 3 10.00% $ 1,534 7.37% $1,537 $ 1,544 7.38%
GNMA . . . . . . . . -- -- 8,213 7.51 8,213 8,235 7.51
FNMA . . . . . . . . 330 6.16 477 9.18 807 820 7.94
----- ------- ------- -------
Total. . . . . . $ 333 $10,244 $10,557 $10,599
===== ======= ======= =======
</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
included elsewhere herein.
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, 2000 had an aggregate
carrying value of $57.6 million.
13
<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,
--------------------------
2000 1999 1998
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Investment securities:
U.S. government and agency
obligations . . . . . . . . . . .$48,901 $50,372 $50,821
Trust preferred securities . . . . 8,403 8,640 --
FHLMC preferred stock. . . . . . . 345 447 370
------- ------- -------
Total investment securities. . . 57,649 59,459 51,191
Federal funds sold . . . . . . . . . 699 2,545 313
Interest-earning deposits. . . . . . 84 114 174
FHLB stock . . . . . . . . . . . . 2,200 1,434 1,434
------- ------- -------
Total. . . . . . . . . . . . . $60,632 $63,552 $53,112
======= ======= =======
</TABLE>
14
<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, 2000.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years
------------------- -------------------- ----------------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- ------- --------- -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and
agency obligations . . . . . $ -- -- % $ -- -- % $2,842 6.68%
Trust preferred securities . . 488 6.77 -- -- -- --
FHLMC preferred stock. . . . . 345 1.54 -- -- -- --
------ ------ ------
Total investment securities. 833 -- 2,842
Federal funds sold . . . . . . . 699 6.25 -- -- -- --
Interest-earning deposits. . . . 84 6.29 -- -- -- --
FHLB stock . . . . . . . . . . . 2,200 7.75 -- -- -- --
------ ------ ------
Total. . . . . . . . . . $3,816 $ -- $2,842
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
More than Ten Years Total Investment Portfolio
------------------- ---------------------------
Carrying Average Carrying Market Average
Value Yield Value Value Yield
-------- ------- --------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and
agency obligations . . . . . $46,059 6.79% $48,901 $48,901 6.78%
Trust preferred securities . . 7,915 8.84 8,403 8,403 8.74
FHLMC preferred stock. . . . . -- -- 345 345 1.54
------- ------- -------
Total investment securities. 53,974 57,649 57,649
Federal funds sold . . . . . . . -- -- 699 699 6.25
Interest-earning deposits. . . . -- -- 84 84 6.29
FHLB stock . . . . . . . . . . . -- -- 2,200 2,200 7.75
------- ------- -------
Total. . . . . . . . . . $53,974 $60,632 $60,632
======= ======= =======
</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 included elsewhere herein. At March 31, 2000, all
investment securities include provisions which allow the
issuers to call them under certain terms and conditions at par
value.
15
<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, 2000 were
represented by the various programs described below.
<TABLE>
<CAPTION>
Weighted Average Minimum Minimum Balance Percentage of
Interest Rate (1) Term Category Amount (In thousands) Total Savings
---------------- ------- -------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C>
1.00% None NOW accounts $ 300 $ 7,342 4.06%
3.05 None Passbook accounts 100 30,441 16.83
-- None Commercial checking 750 2,324 1.28
3.04 None Christmas club 10 313 .17
Money Market
------------
3.25 None Money market passbook 2,500 8,155 4.51
3.29 None Money market checking 2,500 2,822 1.56
3.80 None Money market plus
passbook 10,000 11,077 6.12
3.25 None IRA money market
passbook 100 426 .24
Certificates of Deposit
-----------------------
3.20 3 month Fixed-Term, Fixed rate 1,000 47 .03
5.32 6 month Fixed-Term, Fixed rate 1,000 5,542 3.06
5.32 6 month Fixed-Term, Fixed rate 10,000 3,250 1.80
5.30 9 month Fixed-Term, Fixed rate 1,000 3,428 1.90
5.67 12 month Fixed-Term, Fixed rate 1,000 22,956 12.69
5.55 12 month Fixed-Term, Fixed rate 10,000 11,835 6.54
5.42 18 month Fixed-Term, Fixed rate 1,000 6,516 3.60
5.66 24 month Fixed-Term, Fixed rate 1,000 20,211 11.17
6.26 30 month Fixed-Term, Fixed rate 1,000 100 .06
6.06 36 month Fixed-Term, Fixed rate 1,000 17,824 9.85
5.67 48 month Fixed-Term, Fixed rate 1,000 11,145 6.16
6.26 60 month Fixed-Term, Fixed rate 1,000 15,143 8.37
-------- ------
$180,897 100.00%
======== ======
</TABLE>
16
<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
2000 Deposits (Decrease)
--------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Certificates . . . . . . . . . . $117,997 65.23% $(4,359)
Money market . . . . . . . . . . 22,480 12.43 (642)
Passbook . . . . . . . . . . . . 30,441 16.83 1,176
NOW. . . . . . . . . . . . . . . 7,342 4.06 685
Christmas Club . . . . . . . . . 313 .17 (17)
Commercial checking. . . . . . . 2,324 1.28 693
-------- ------ -------
Total. . . . . . . . . . . . $180,897 100.00% $(2,464)
======== ====== =======
<CAPTION>
Balance at Balance at
March 31, % Increase March 31, %
1999 Deposits (Decrease) 1998 Deposits
--------- -------- --------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Certificates . . . . . . $122,356 66.73% $ 7,732 $114,624 65.44%
Money market . . . . . . 23,122 12.61 (253) 23,375 13.35
Passbook . . . . . . . . 29,265 15.96 (391) 29,656 16.93
NOW. . . . . . . . . . . 6,657 3.63 953 5,704 3.26
Christmas Club . . . . . 330 .18 (7) 337 .19
Commercial checking. . . 1,631 .89 168 1,463 .83
-------- ------ ------- -------- ------
Total. . . . . . . . $183,361 100.00% $ 8,202 $175,159 100.00%
======== ====== ======= ======== ======
</TABLE>
17
<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,
--------------------------------------------------------------------
2000 1999 1998
------------------- -------------------- ----------------------
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. . . . . . . $59,670 $121,964 $58,092 $118,439 $58,947 $113,850
Average Rate . . . . . . . . 2.96% 5.54% 3.02% 5.82% 3.13% 5.81%
</TABLE>
The following table sets forth the time deposits in Harbor
Federal classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
--------------------------
2000 1999 1998
------ ------ ------
(In thousands)
<S> <C> <C> <C>
2 - 3.99% . . . . . . . . . . .$ 47 $ 189 $ 101
4 - 5.99% . . . . . . . . . . . 98,501 98,092 79,438
6 - 7.99% . . . . . . . . . . . 19,449 24,075 35,085
-------- -------- --------
$117,997 $122,356 $114,624
======== ======== ========
</TABLE>
The following table sets forth the amount and maturities of
time deposits in Harbor Federal at March 31, 2000.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
---- --------- ---------- ---------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
2 - 3.99% . . . . .$ 47 $ -- $ -- $ -- $ 47
4 - 5.99% . . . . . 69,622 10,101 12,061 6,365 98,149
6 - 7.99% . . . . . 11,363 3,863 2,992 1,582 19,801
------- ------- ------- ------ --------
$81,033 $13,964 $15,053 $7,947 $117,997
======= ======= ======= ====== ========
</TABLE>
The following table indicates the amount of the certificates
of deposit of $100,000 or more in Harbor Federal by time
remaining until maturity at March 31, 2000.
Certificates
Maturity Period of Deposit
--------------- -------------
(In thousands)
Three months or less . . . . . . . .$ 1,934
Three through six months . . . . . . 2,212
Six through nine months. . . . . . . 1,912
Nine through twelve months . . . . . 1,905
Over twelve months . . . . . . . . . 5,531
-------
Total. . . . . . . . . . . . . . .$13,494
=======
18
<PAGE>
<PAGE>
The following table sets forth the deposit activities of
Harbor Federal for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
2000 1999 1998
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Deposits . . . . . . . . . . . . .$225,644 $235,623 $187,564
Withdrawals. . . . . . . . . . . . 219,597 218,603 177,665
-------- -------- --------
Net increase
before interest credited . . 6,047 17,020 9,899
Interest credited. . . . . . . . . 8,511 8,818 8,845
-------- -------- --------
Net increase (decrease) in
deposits. . . . . . . . . .$ (2,464) $ 8,202 $ 1,054
======== ======== ========
</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, 2000, Harbor Federal had $34.5 million
in advances outstanding from the FHLB of Atlanta. These
advances were made between September 1999 and March 2000 at
fixed rates averaging 5.75% and are set to mature from September
2004 to March 2010, subject to early termination options.
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 repurchase agreements of $10.2 million
and $17.6 million at March 31, 2000 and 1999, respectively. The
average rates of interest on these repurchase agreements
were 5.98% and 5.08%, 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 included elsewhere herein.
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. Harbor Federal's only subsidiary
is Harbor Service Corporation ("HSC"), a wholly owned subsidiary
that receives insurance commissions on sale of annuities. The
net book value of Harbor Federal's investment in HSC is
immaterial. Harbor Federal is also authorized to make
investments of any amount in operating subsidiaries that engage
solely in activities that federal savings institutions may
conduct directly.
<PAGE>
In September 1999, Harbor Federal closed Bank Street
Mortgage Company, a wholly owned subsidiary formed by the Bank
in June 1997, as it did not generate the income anticipated.
While the entity has not been dissolved, it does not currently
conduct any business.
19
<PAGE>
<PAGE>
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, 2000, management believed that most of
Harbor Federal's depositors and borrowers resided within ten
miles of one of Harbor Federal's offices. The majority of loans
originated by Harbor Federal are from the Central Maryland area,
which is located within the greater Baltimore metropolitan area
and the larger Washington-Baltimore area. The Baltimore
metropolitan area is the largest in Maryland and has had a
relatively stable and diversified labor force and economic base.
The heaviest employment concentrations in the greater Baltimore
metropolitan area in manufacturing industries are in primary
metals (steel and copper), transportation equipment, fabricated
materials, chemicals, machinery and electrical equipment. In
addition, the Port of Baltimore is the fourth largest foreign
tonnage port in the U.S. and the second largest container
tonnage port on the East and Gulf Coasts.
COMPETITION
Harbor Federal faces strong competition for deposits and
loans. Harbor Federal's principal competitors for deposits are
other banking institutions, such as commercial banks, credit
unions and other savings institutions, as well as mutual funds
and other investments. Harbor Federal principally competes for
deposits by offering a variety of deposit accounts, convenient
business hours and branch locations, customer service and a well
trained staff. Harbor Federal competes for loans with other
depository institutions, as well as specialty mortgage lenders
and brokers and consumer finance companies. Harbor Federal
principally competes for loans on the basis of interest rates
and the loan fees it charges, the types of loans it originates
and the convenience and service it provides to borrowers. In
addition, Harbor Federal believes it has developed strong
relationships with the businesses, realtors, builders and
general public in its market area. Due to Harbor Federal's
small size relative to the many and various other depository and
lending institutions in its market area, management believes
that Harbor Federal has an insubstantial overall share of the
deposit and loan market.
REGULATION OF THE BANK
As a federally chartered savings institution, Harbor
Federal is subject to extensive regulation by the OTS. The
lending activities and other investments of the Bank must comply
with various federal regulatory requirements, and the OTS
periodically examines the Bank for compliance with various
regulatory requirements. The FDIC also has the authority to
conduct special examinations. The Bank must file reports with
OTS describing its activities and financial condition and is
also subject to certain reserve requirements promulgated by the
Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors.
Federal Home Loan Bank System. Harbor Federal is a member
of the FHLB System, which consists of 12 district FHLBs subject
to supervision and regulation by the Federal Housing Finance
Board. The FHLBs provide a central credit facility primarily
for member institutions. As a member of the FHLB of Atlanta,
the Bank is required to acquire and hold shares of capital stock
in the FHLB of Atlanta in an amount at least equal to 1% of the
aggregate unpaid principal of its home mortgage loans, home
purchase contracts, and similar obligations at the beginning of
each year or 1/20 of its advances (borrowings) from the FHLB of
Atlanta, whichever is greater. The Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock at
March 31, 2000 of $2,200,000. For additional information, see
Note 10 of the Notes to Consolidated Financial Statements
included herein.
20
<PAGE>
<PAGE>
The FHLB of Atlanta serves as a reserve or central bank
for its member institutions within its assigned district. It is
funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes advances
to members in accordance with policies and procedures
established by the OTS and the Board of Directors of the FHLB of
Atlanta. Long term advances may only be made for the purpose of
providing funds for residential housing finance. At March 31,
2000, Harbor Federal had $34.5 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. 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
2000 was 24.3%.
Qualified Thrift Lender Test. A savings institution that
does not meet the Qualified Thrift Lender ("QTL") test must
either convert to a bank charter or comply with the following
restrictions on its operations: (i) the institution may not
engage in any new activity or make any new investment, directly
or indirectly, unless such activity or investment is permissible
for a national bank; (ii) the branching powers of the
institution shall be restricted to those of a national bank; and
(iii) 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 savings
association.
To meet its QTL test, a savings institution must either
satisfy the definition of domestic building and loan institution
under the Internal Revenue Code or its "Qualified Thrift
Investments" must represent 65% of "portfolio assets."
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 include investments in residential mortgages,
home equity loans, loans made for educational purposes, small
business loans, credit card loans and mortgage-backed
securities. 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. 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 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, 2000, 72% 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, Tier 1 or
"core" capital equal to at least 4% of adjusted total assets (or
3% if the institution has a composite 1 CAMELS rating under the
OTS examination rating system) and "total" capital (a
combination of core and "supplementary" capital) equal to at
least 8% of "risk-weighted" assets. In addition, OTS
regulations 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 has a composite 1
CAMELS rating). 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
21
<PAGE>
<PAGE>
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, 2000,
Harbor Federal had no material investments in or extensions of
credit to nonincludable subsidiaries.
Adjusted total assets are a savings institution's total
assets as determined under generally accepted accounting
principles, increased for certain goodwill amounts and by a
prorated portion of the assets of unconsolidated includable
subsidiaries in which the institution holds a minority interest.
Adjusted total assets are reduced by the amount of assets that
have been deducted from capital, the investments in any
unconsolidated includable subsidiaries in which the institution
has a minority interest and, for purposes of the core capital
requirement, qualifying supervisory goodwill. At March 31,
2000, Harbor Federal's adjusted total assets for purposes of the
core and tangible capital requirements were $246.8 million.
In determining compliance with the risk-based capital
requirement, a savings institution is allowed to include core
capital and supplementary capital in its total 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, a portion of the institution's general loss
allowances, and up to 45% of unrealized gains of equity
securities.
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, 2000, the Bank's risk-weighted assets were
approximately $123.1 million.
The risk-based capital requirements also require savings
institutions with more than a "normal" level of interest rate
risk to maintain additional total capital. An institution's
interest rate risk is 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 calculates 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 is 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 requires any exempt
institution that it determines may have a high level of interest
rate risk exposure to file such schedule on a quarterly basis
and may be subject to an additional capital requirement based
upon its level of interest rate risk as compared to its peers.
Harbor Federal is exempt from filing the interest rate risk
schedule with its Thrift Financial Reports and the OTS has not
required it to file such a
22
<PAGE>
<PAGE>
schedule. The interest rate risk rule did not have a material
effect on Harbor Federal's risk-based capital at March 31, 2000.
At March 31, 2000, 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, 2000.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
----------------------
(Dollars in thousands)
<S> <C> <C>
Tier 1/core capital. . . . . . . . .$17,765 7.20%
Core capital requirement . . . . . . 9,871 4.00
------- -----
Excess . . . . . . . . . . . . . . .$ 7,894 3.20%
======= =====
Total capital (i.e., core and
supplementary capital) . . . . . .$18,391 14.94%
Risk-based capital requirement . . . 9,846 8.00
------- -----
Excess . . . . . . . . . . . . .$ 8,545 6.94%
======= =====
<FN>
_________
(1) Based upon adjusted total assets for purposes of the
tangible and Tier 1/core capital requirements, and
risk-weighted assets for purposes 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 included elsewhere
herein.
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
23
<PAGE>
<PAGE>
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.
Under the FDIC's assessment schedule for SAIF deposit
insurance, the assessment rate for well-capitalized institutions
with the highest supervisory ratings is zero and institutions
with the highest risk assessment classification are assessed at
the rate of 0.27% of insured deposits. In addition, insured
institutions are required to pay assessments to the FDIC 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. Prior to
December 31, 1999, SAIF-insured institutions were required to
pay FICO assessments at five times the rate at which Bank
Insurance Fund ("BIF") members were assessed. 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. Insured depository institutions with Tier 1
capital equal to or greater than 2% of total assets may also be
deemed to be operating in an unsafe or unsound condition
notwithstanding such capital level. The regulation further
provides that in considering applications that must be submitted
to it by savings institutions, the FDIC will take into account
whether the institution is meeting the Tier 1 capital
requirement for state non-member banks of 4% of total assets for
all but the most highly rated state non-member banks.
Federal Reserve System. Pursuant to regulations of the
Federal Reserve Board, a thrift institution must maintain
average daily reserves equal to 3% on the first $44.3 million of
transaction accounts, plus 10% on the remainder. 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. Savings institutions must submit
notice to the OTS prior to making a capital distribution
(including cash dividends, stock repurchases and amounts paid to
stockholders of another institution in a cash merger) if (a)
they would not be well capitalized after the distribution, (b)
the distribution would result in the retirement of any of the
institution's common or preferred stock or debt counted as its
regulatory capital, or (c) the institution is a subsidiary of a
holding company. A savings institution must make application to
the OTS to pay a capital distribution if (x) the institution
would not be adequately capitalized following the distribution,
(y) the institution's total distributions for the calendar year
exceed the institution's net income for the calendar year to
date plus its net income (less distributions) for the preceding
two years, or (z) the distribution would otherwise violate
applicable law or regulation or an agreement with or condition
imposed by the OTS.
Under the OTS prompt corrective action regulations, Harbor
Federal 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."
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
24
<PAGE>
<PAGE>
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 regulatory 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, 2000, the maximum amount that Harbor Federal
could have lent to any one borrower under the 15% limit was
approximately $2.7 million. At such date, the largest aggregate
amount of loans that the Bank had outstanding to any one
borrower or group of affiliated borrowers was $2.5 million.
Transactions with Related Parties. Transactions between
savings institutions and any affiliate are governed by Sections
23A and 23B of the Federal Reserve Act. An affiliate of an
institution is any company or entity which controls, is
controlled by or is under common control with the savings
institution. In a holding company context, the parent holding
company of an institution (such as the Company) and any
companies which are controlled by such parent holding company
are affiliates of the savings institution. Generally, Sections
23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10%
of such institution's capital stock and surplus, and contain an
aggregate limit on all such transactions with all affiliates to
an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the
institution or subsidiary as those provided to a non-affiliate.
The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other
types of transactions. In addition to the restrictions imposed
by Sections 23A and 23B, no savings institution may (i) loan or
otherwise extend credit to an affiliate, except for any
affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the
savings institution.
Further, savings institutions are subject to the
restrictions contained in Section 22(h) of the Federal Reserve
Act and the Federal Reserve Board's Regulation O thereunder on
loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director,
executive officer and to a greater than 10% stockholder of an
institution and certain affiliated interests of such persons,
may not exceed, together with all other outstanding loans to
such person and affiliated interests, the institution's loans-
to-one-borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h)
also prohibits the making of loans above amounts prescribed by
the appropriate federal banking agency, to directors, executive
officers and greater than 10% stockholders of an institution,
and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the
institution with any "interested" director not participating in
the voting. Regulation O prescribes the loan amount (which
includes all other outstanding loans to such person) as to which
such prior board of director approval is required as being the
greater of $25,000 or 5% of capital and surplus (up to
$500,000). Further, Section 22(h) requires that loans to
directors, executive officers and principal stockholders be made
on terms substantially the same as offered in
25
<PAGE>
<PAGE>
comparable transactions to other persons. Section 22(h) also
generally prohibits a depository institution from paying the
overdrafts of any of its executive officers or directors.
Savings institutions are also subject to the requirements
and restrictions of Section 22(g) of the Federal Reserve Act and
Regulation O on loans to executive officers and the restrictions
of 12 U.S.C. Section 1972 on certain tying arrangements and
extensions of credit by correspondent banks. Section 22(g) of
the Federal Reserve Act requires approval by the board of
directors of a depository institution for extension of credit to
executive officers of the institution, and imposes reporting
requirements for and additional restrictions on the type, amount
and terms of credits to such officers. Section 1972 (i)
prohibits a depository institution from extending credit to or
offering any other services, or fixing or varying the
consideration for such extension of credit or service, on the
condition that the customer obtain some additional service from
the institution or certain of its affiliates or not obtain
services of a competitor of the institution, subject to certain
exceptions, and (ii) prohibits extensions of credit to executive
officers, directors, and greater than 10% stockholders of a
depository institution by any other institution which has a
correspondent banking relationship with the institution, unless
such extension of credit is on substantially the same terms as
those prevailing at the time for comparable transactions with
other persons and does not involve more than the normal risk of
repayment or present other unfavorable features.
Prompt Corrective Regulatory Action. Under the Federal
Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the federal banking regulators are required to take
prompt corrective action if an insured depository 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 if the institution
would thereafter fail to satisfy the minimum levels for any of
its capital requirements. An institution that fails to meet the
minimum level for any relevant capital measure (an
"undercapitalized institution") may be: (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. In their
discretion, the federal banking regulators may also impose the
foregoing sanctions on an undercapitalized institution if the
regulators determine that such actions are necessary to carry
out the purposes of the prompt corrective provisions. 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 will be
subject to conservatorship or receivership within specified time
periods.
Under the implementing regulations, the federal banking
regulators, including the OTS, generally measure an
institution's capital adequacy on the basis of its total risk-
based capital ratio (the ratio of its total capital to risk-
weighted assets), Tier 1 risk-based capital ratio (the ratio of
its core capital to risk-weighted assets) and leverage ratio
(the ratio of its core capital to adjusted total assets). The
following table shows the capital ratios required for the
various prompt corrective action categories.
26
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ADEQUATELY SIGNIFICANTLY
WELL CAPITALIZED CAPITALIZED UNDERCAPITALIZED UNDERCAPITALIZED
---------------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total risk-based capital
ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0%
Tier 1 risk-based
capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0%
Leverage ratio 5.0% or more 4.0% or more* Less than 4.0%* Less than 3.0%
<FN>
________
* 3.0% if institution has a composite 1 CAMELS rating.
</FN>
</TABLE>
A "critically undercapitalized" savings institution is defined
as an institution that has a ratio of "tangible equity" to total
assets of less than 2.0%. Tangible equity is defined as core
capital plus cumulative perpetual preferred stock (and related
surplus) less all intangibles other than qualifying supervisory
goodwill and certain purchased mortgage servicing rights. 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 (but may not reclassify a significantly
undercapitalized institution as critically undercapitalized) 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 CAMELS 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 has established
standards relating to the adequacy of asset and earnings
quality. In 1995, these agencies, including the OTS, issued
guidelines relating to asset and earnings quality. Under the
guidelines, a savings institution must 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 have a material effect on Harbor Federal.
REGULATION OF THE COMPANY
The Company is a savings institution holding company and,
as such, subject to OTS registration, regulation, examination,
supervision and reporting requirements. As a subsidiary of a
savings institution holding company, Harbor Federal is subject
to certain restrictions in its dealings with the Company and
affiliates thereof. The Company also is required to file
certain reports with, and otherwise comply with the rules and
regulations of, the Securities and Exchange Commission ("SEC")
under the federal securities laws.
Activities Restrictions. The Board of Directors of the
Company presently intends to operate the Company as a unitary
savings institution holding company. There are generally no
restrictions on the activities of a unitary savings
27
<PAGE>
<PAGE>
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."
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 undercapitalized 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 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
28
<PAGE>
<PAGE>
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
QTL or as a "domestic building and loan association" under
Section 7701(a)(19) of the Internal Revenue Code and the total
assets attributable to all branches of the institution in the
state would qualify such branches taken as a whole for treatment
as a domestic building and loan association and (ii) such branch
would not result in (a) formation of a prohibited multi-state
multiple savings holding company, or (b) a violation of certain
statutory restrictions on branching by savings institution
subsidiaries of banking holding companies. Federal associations
generally may not establish new branches unless the institution
meets or exceeds minimum regulatory capital requirements. The
OTS will also consider the institution's record of compliance
with the Community Reinvestment Act of 1977 in connection with
any branch application.
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.
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. Prior
to 1996, institutions such as Harbor Federal which met certain
definitional tests and other conditions prescribed by the Code
benefited 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 were separated into "qualifying real property loans,"
which generally are loans secured by interests in certain real
property, and non-qualifying loans, which are all other loans.
The bad debt reserve deduction with respect to non-qualifying
loans was 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
was based upon actual loss experience (the "experience method")
or a percentage of taxable income determined without regard to
such deduction (the "percentage of taxable income method").
Generally, the 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.
29
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<PAGE>
The legislation provided for a suspension of this
recapture if the institution met 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 a thrift met the "residential loan
requirement" for the taxable year beginning in 1996 or 1997, the
reserve recognition was suspended for such year. Harbor Federal
began recapturing its excess reserve for the tax year ended
March 31, 1999.
State Income Taxation. The State of Maryland imposes a
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 included elsewhere herein.
EMPLOYEES
As of March 31, 2000, Harbor Federal had 43 full-time and
seven part-time employees, none of whom was represented by a
collective bargaining agreement.
EXECUTIVE OFFICERS
The following table sets forth information as of March 31,
2000 regarding the executive officer of Harbor Federal who did
not serve on the Board of Directors.
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
Norbert J. Luken 62 Vice President and Chief
Financial Officer
</TABLE>
NORBERT J. LUKEN has been with Harbor Federal since 1969,
and is currently Vice President and Chief Financial Officer. He
has served as Treasurer of Financial Managers Society, Maryland
Chapter, Committeeman and Treasurer of Boy Scout Troop 746, Shot
Tower District Chairman of the Baltimore Area Council, BSA, and
a member of the St. Joseph's Catholic Church Choir and the
Archdiocesan Choir of Baltimore.
30
<PAGE>
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
--------------------------------
The following table sets forth information regarding
Harbor Federal's locations at March 31, 2000.
<TABLE>
<CAPTION>
Year Book Value Deposits at
Opened or Owned or at March 31, Approximate March 31, 2000
Acquired Leased 2000 Square Footage (In thousands)
--------- -------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Main Office:
Towson --
705 York Road 1993 Owned $1,106,700 8,300 $16,992
Branch Offices:
South Baltimore --
132 East Fort Avenue 1887 Owned 17,500 3,300 25,439
Riviera Beach --
8553 Ft. Smallwood Road 1972 Owned 40,400 2,200 29,043
Locust Point --
1350 East Fort Avenue 1981 Owned 65,100 1,400 12,583
Highlandtown --
3200 Eastern Avenue 1910 Owned 101,500 5,300 29,997
Parkville --
7917 Harford Road 1989 Owned 111,700 1,600 20,732
Pikesville --
507 Reisterstown Road 1996 Leased 3,500 1,500 19,510
Putty Hill --
8030 Belair Road 1996 Owned 222,200 2,400 13,635
Roland Park --
4806 Roland Avenue 1996 Leased 2,900 1,800 12,966
</TABLE>
The book value of Harbor Federal's investment in premises
and equipment totaled $1.7 million at March 31, 2000.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
From time to time, Harbor Federal is a party to various
legal proceedings incident to its business. At March 31, 2000,
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.
Subsequent to March 31, 2000 a lawsuit captioned Joyce
-----
Lancaster v. Harbor Federal Savings Bank, Harbor Federal
--------------------------------------------------------
Bancorp, Inc. and Robert A. Williams and Lawrence W. Williams
-------------------------------------------------------------
was filed on May 23, 2000 in the Circuit Court for Baltimore
City, Maryland. The lawsuit which was filed by a former
employee of the Bank alleges defamation of character, breach of
contract and respondeat superior and seeks $2.0 million in money
damagages for each count. The Company and the Bank do not
believe that there is any merit in the allegations and have
referred this matter to counsel for response.
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 2000.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
---------------------------------------------------------
The Company's common stock is traded on the over-the-
counter market under the symbol "HRBF" and trading information
is reported by the Nasdaq Stock Market. As of March 31, 2000,
there were 382 stockholders of record and
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<PAGE>
<PAGE>
1,664,515 shares of common stock entitled to vote and receive
dividends. 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 years 2000 and 1999
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 2000
Market Price Range:
High $16.88 17.13 15.06 15.25
Low 15.25 13.38 12.63 11.25
Dividend Paid (1) .13 .13 .13 .13
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 .118 .13 .13 .13
<FN>
_________________
(1) On March 6, 2000, a dividend of $.13 per share was declared payable April
14, 2000 to holders of record at the close of business on April 3, 2000.
</FN>
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
--------------------------------------------------------
GENERAL
The earnings of the Company depend primarily on its level
of net interest income, which is the difference between interest
earned on the Company'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 and other borrowed funds. Net interest income
is a function of the Company'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. The Company'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 the Company also
are affected significantly by general economic and competitive
conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, which
are beyond the control of the Company.
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 SEC,
32
<PAGE>
<PAGE>
including the Annual, Quarterly and Current Reports on Forms
10-KSB, 10-QSB and 8-K filed in the past and to be filed in the
future.
FINANCIAL CONDITION
The Company's total assets increased by $13.8 million or
5.8% to $253.1 million at March 31, 2000 from $239.3 million at
March 31, 1999, primarily due to increases in loans receivable
of $20.7 million, partially offset by a reduction in investment
securities of $2.3 million and by a reduction in mortgage-backed
securities of $3.6 million. Return on average assets was .82%
and return on average equity was 7.90% for the year ended March
31, 2000.
Net loans receivable increased $20.7 million or 13.5% to
$173.8 million at March 31, 2000 from $153.9 million at March
31, 1999. This increase was due primarily to a normal level of
loan originations over repayments.
The Company's savings accounts decreased $2.1 million or
1.1% to $179.4 million at March 31, 2000 from $181.5 million at
March 31, 1999, and its borrowings increased by $17.1 million or
62.2% to $44.7 million at March 31, 2000 from $27.6 million at
March 31, 1999. The increase in borrowings was due primarily to
increased Federal Home Loan Bank advances used to fund most of
the increase in net loans receivable.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE FISCAL YEARS
ENDED MARCH 31, 2000, 1999 AND 1998
The Company had net income totaling $2.0 million and $1.8
million and $1.7 million for fiscal years 2000, 1999 and 1998,
respectively.
Interest Income. Total interest income increased by $1.3
million or 7.9% to $18.4 million for the year ended March 31,
2000 from $17.0 million for the year ended March 31, 1999. The
increase in interest income was principally attributable to a
$16.2 million or 7.1% increase in the balance of average
interest-earning assets to $243.8 million for the year ended
March 31, 2000 from $227.6 million for the year ended March 31,
1999 and an increase in the average yield on the Company's
average interest-earning assets to 7.54% for the year ended
March 31, 2000 from 7.48% for the year ended March 31, 1999.
The increase in interest-earning assets during the year ended
March 31, 2000 compared to the year ended March 31, 1999
reflects management's use of funds received from borrowings.
The increase in average interest-earning assets was largely the
result of a $12.3 million increase in average loans receivable
and a $10.6 million increase in average investment securities,
partially offset by a $5.6 million decrease in average mortgage-
backed securities. The increase in average yield was caused
primarily by increase in rates available on long-term
investments.
Interest income on first mortgages and other loans
increased by $814,000 or 6.8% to $12.7 million for the year
ended March 31, 2000 from $11.9 million for the year ended March
31, 1999. This increase was attributable to an increase in the
average investment in first mortgages and other loans to $164.6
million for the year ended March 31, 2000 from $152.3 million
for the year ended March 31, 1999, partially offset by a
reduction in the average yield on first mortgage and other loans
to 7.72% for the year ended March 31, 2000 from 7.81% for the
year ended March 31, 1999. 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 $1.2 million or 32.4% to $4.8 million for
the year ended March 31, 2000 from $3.6 million for the year
ended March 31, 1999. This increase was attributable to an
increase in the average investment securities to $60.8 million
for the year ended March 31, 2000 from $50.2 million for the
year ended March 31, 1999 and an increase in the average yield
on investment securities to 7.83% for the year ended March 31,
2000 from 7.15% for the year ended March 31, 1999 due to higher
interest rates on long-term investments. Interest income on
mortgage-backed securities decreased by $446,000 or 36.3% to
$781,000 for the year ended March 31, 2000 from $1.2 million for
the year ended March 31, 1999. This decrease was attributable
to a decrease in average mortgage-backed securities to $11.9
million for the year ended March 31, 2000 from $17.6 million for
the year ended March 31, 1999 and a reduction in the average
yield on mortgage-backed securities to 6.55% for the year ended
March 31, 2000 from 6.99% for the year ended March 31, 1999.
The lower average yield on mortgage-backed securities reflects
primarily the pay down of principal on higher rate mortgage
pools.
33
<PAGE>
<PAGE>
Total interest income increased by $622,000 or 3.8% to
$17.0 million for the year ended March 31, 1999 from $16.4
million for the year ended March 31, 1998. 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 the Company'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 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.
Interest Expense. Total interest expense increased
$729,000 or 7.1% to $11.0 million for the year ended March 31,
2000 from $10.3 million for the year ended March 31, 1999. The
increase resulted from a $5.1 million, or 2.9%, increase in
average deposits to $181.6 million for the year ended March 31,
2000 from $176.5 million for the year ended March 31, 1999, and
a $16.0 million, or 68.9% increase in average borrowed funds to
$39.2 million for the year ended March 31, 2000 from $23.2
million for the year ended March 31, 1999. These increases were
partially offset by a reduction in the average cost of funds to
4.98% for the year ended March 31, 2000 from 5.14% for the year
ended March 31, 1999 due primarily to lower rates on
certificates of deposit.
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.
Net Interest Income. Net interest income increased by
$618,000 or 9.1%, to $7.4 million for the year ended March 31,
2000 from $6.8 million for the year ended March 31, 1999. The
principal reason for the increase in the net interest income was
the increase in average outstanding loans and investments and an
increase in the interest rate spread to 2.56% for the year ended
March 31, 2000 from 2.34% for the year ended March 31, 1999.
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
34
<PAGE>
<PAGE>
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.
Provisions for Losses on Loans. The Company 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, the status of
nonperforming loans, reviews conducted in the regulatory
examination process and other relevant factors. There was a
$65,000 provision for losses on loans for the year ended March
31, 2000 as compared to a $75,000 provision for the year ended
March 31, 1999 and a $110,000 provision for the year ended March
31, 1998. 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 decreased $208,000
or 32.5%, to $431,000 for the year ended March 31, 2000 from
$638,000 for the year ended March 31, 1999. The decrease was
due primarily to a decrease in loan origination fees of $242,000
earned by Bank Street Mortgage Company, partially offset by an
increase of $64,000 in insurance commissions earned by Harbor
Service Corporation. Bank Street Mortgage Company was closed in
October 1999.
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 Expense. Noninterest expense increased by
$87,000, or 2.1% to $4.3 million for the year ended March 31,
2000 from $4.2 million for the year ended March 31, 1999. The
increase in noninterest expense was due primarily to an increase
in computer data expense of $83,000, or 49.8%, to $248,000 for
the year ended March 31, 2000 from $165,000 for the year ended
March 31, 1999. The primary reasons for the increase in
computer data expense were Year 2000 preparations and start-up
costs for internet banking. The increase in noninterest expense
is net of a $120,000 decrease in compensation and benefits
expense. This decrease was due primarily to lower compensation
costs under stock-based benefit plans and the closing of Bank
Street Mortgage Company.
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 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.
Income Taxes. The changes in the Company's income tax
provision reflect the changes in income before income taxes.
Income tax provisions for the years ended March 31, 2000, 1999
and 1998 are generally reflective of the amounts of the
Company'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.
35
<PAGE>
<PAGE>
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following tables set forth certain information
relating to the Company'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.
36
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- --------------------------- --------------------------
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 . . . . . . . . $164,587 $12,704 7.72% $152,331 $11,890 7.81% $147,967 $11,645 7.87%
Investment securities. . . 65,484 4,760 7.28 53,395 3,595 6.59 49,774 3,321 6.56
Mortgage-backed securities . 11,929 781 6.55 17,563 1,227 6.99 15,768 1,121 7.11
Short-term investments and
other interest-earning
assets (2) . . . . . . 1,748 125 7.15 4,325 311 7.19 3,664 314 8.57
-------- ------- -------- ------- -------- -------
Total interest-earning
assets. . . . . . 243,748 18,370 7.54 227,614 17,023 7.48 217,173 16,401 7.55
Non-interest-earning assets . 5,278 ------- 4,289 ------- 4,598 -------
-------- -------- --------
Total assets. . . . $249,026 $231,903 $221,771
======== ======== ========
Interest-bearing liabilities:
Deposits . . . . . . $181,634 8,898 4.90 $176,531 9,029 5.12 $172,797 8,845 5.12
Borrowed funds . . . . 39,199 2,101 5.36 23,210 1,240 5.34 17,463 994 5.69
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities . . 220,833 10,999 4.98 199,741 10,269 5.14 190,260 9,839 5.17
------- ------- -------
Non-interest bearing
liabilities . . . . . . 2,696 3,110 3,040
-------- -------- --------
Total liabilities . . 223,529 202,851 193,300
Stockholders' equity. . . . 25,497 29,052 28,471
-------- -------- --------
Total liabilities and
stockholders'
equity . . . . . $249,026 $231,903 $221,771
======== ======== ========
Net interest income . . . . $ 7,371 $ 6,754 $ 6,562
======= ======= =======
Interest rate spread (3). . . 2.56% 2.34% 2.38%
====== ====== ======
Net yield on interest-earning
assets (4) . . . . . . 3.02% 2.97% 3.02%
====== ====== ======
Ratio of average interest-earning
assets to average interest-
bearing liabilities. . . . 110.38% 113.95% 114.15%
====== ====== ======
<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>
37
<PAGE>
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding
changes in interest income and interest expense of the Company
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,
-------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
------------------------------- ----------------------------
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 . . . . . . . . . $ 957 $(137) $ (6) $ 814 $ 343 $(89) $ (10) $ 245
Investment securities . . . . 797 368 -- 1,165 238 15 22 274
Mortgage-backed securities . . (394) (77) 25 (446) 128 (19) (3) 106
Short-term investments and
other interest-earning
assets (1) . . . . . . (185) (2) 1 (186) 57 (51) (9) (3)
------ ----- ---- ------ ------ ---- ----- -------
Total interest income . 1,175 152 20 1,347 765 (143) -- 622
Interest expense:
Deposits . . . . . . . . 261 (388) (5) (132) 191 -- (7) 184
Borrowed funds . . . . . . 854 5 3 862 327 (61) (20) 246
------ ----- ---- ------ ------ ---- ----- -------
Total interest expense. . . 1,115 (383) (2) 730 518 (61) (27) 430
------ ----- ---- ------ ------ ---- ----- -------
Change in net interest income . . . $ 60 $ 536 $ 21 $ 617 $ 247 $(82) $ 27 $ 192
====== ===== ==== ====== ====== ==== ===== =======
<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 sensitive 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, the
Company 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>
The Company'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 and 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 the Company 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, the
38
<PAGE>
<PAGE>
Company is able to reinvest a higher percentage of its assets
more quickly in response to changes in market interest rates,
thereby reducing its exposure to interest rate volatility.
However, prevailing market conditions, regulatory considerations
and the need for a balanced portfolio have necessitated that the
Company continue to offer fixed rate mortgage loans. In
addition to emphasizing adjustable rate loans and high levels of
liquidity, the Company 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, 1999, 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
24.3% during the month of March 2000. Liquidity ratios averaged
19.2% for the year ended March 31, 2000. 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, 2000, certificates of deposit which were scheduled
to mature in one year or less totaled $81.0 million. Assets
qualifying for liquidity outstanding at March 31, 2000 amounted
to $20.1 million.
Harbor Federal had $1.7 million in outstanding loan
commitments at March 31, 2000. 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 the
Company's operations. Unlike most industrial companies, nearly
all the assets and liabilities of the Company are monetary. As
a result, interest rates have a greater impact on the Company'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.
39
<PAGE>
<PAGE>
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities", as amended (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, 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. 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.
40
<PAGE>
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
-----------------------------
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Table of Contents
March 31, 2000, 1999 and 1998
________________________________________________________________
PAGE
Independent Auditors' Report.................................42
Consolidated Financial Statements:
Statements of Financial Condition.........................43
Statements of Income and Comprehensive Income.............45
Statements of Stockholders' Equity........................47
Statements of Cash Flows..................................48
Notes to Consolidated Financial Statements...................50
________________________________________________________________
41
<PAGE>
<PAGE>
[LOGO OF KPMG]
111 South Calvert Street
Baltimore, MD 21202
INDEPENDENT AUDITOR'S 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, 2000 and 1999, 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, 2000. The 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 auditing standards
generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and
their cash flows for each of the years in the three-year period
ended March 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
May 8, 2000
42
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
March 31, 2000 and 1999
==============================================================================
2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash:
On hand and due from banks $ 1,250,115 1,501,358
Interest-bearing deposits 83,504 114,259
Federal funds sold 698,578 2,545,437
Investment securities available-for-sale
(note 2) 66,621,761 71,305,678
Investment securities held-to-maturity,
fair value of $1,626,075 and $2,330,876,
respectively (note 3) 1,584,840 2,222,330
Loans receivable (note 4):
First mortgage loans on real estate:
One-to-four family residential 128,184,304 114,992,363
Multifamily residential 1,047,951 899,962
Commercial 20,003,673 19,784,395
Construction 19,471,104 14,847,822
Land 3,031,704 3,292,436
Loans held for sale 2,143,067 2,659,319
Loans secured by automobiles 855,071 2,419
Loans secured by savings accounts 327,959 290,767
Home equity loans 792,391 533,206
Home improvement loans 396,335 511,088
Financing leases 1,773,214 1,427,157
Commercial loans 2,184,548 1,479,439
------------------------------------------------------------------------------
Total loans 180,211,321 160,720,373
Less:
Undisbursed portion of loans in process 4,950,749 6,225,479
Unearned discount on loans purchased 73,906 60,006
Unearned loan fees 912,299 851,009
Allowance for losses 474,100 457,000
------------------------------------------------------------------------------
Loans receivable, net 173,800,267 153,126,879
Investment in Federal Home Loan Bank stock,
at cost (note 10) 2,200,000 1,433,500
Real estate owned 74,138 446,899
Investment in and advances to affiliated
corporation (note 5) -- 2,525,000
Property and equipment, net (note 6) 1,680,128 1,760,516
Accrued interest receivable 1,571,426 1,427,032
Prepaid expenses and other assets 3,547,270 888,747
------------------------------------------------------------------------------
$253,112,027 239,297,635
==============================================================================
(Continued)
</TABLE>
43
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition, Continued
<TABLE>
<CAPTION>
March 31, 2000 and 1999
==============================================================================
2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings accounts (note 7) $179,403,009 181,485,848
Borrowed funds (note 8) 44,700,000 27,555,000
Advance payments by borrowers for taxes,
insurance and ground rents 1,948,647 1,841,672
Accrued expenses and other liabilities 1,563,492 1,612,963
------------------------------------------------------------------------------
Total liabilities 227,615,148 212,495,483
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
1,664,515 and 1,676,515 shares, respectively 16,645 16,765
Additional paid-in capital 13,515,785 13,071,570
Unearned ESOP shares (407,118) (662,056)
Retained income, substantially restricted 15,591,890 14,422,503
Accumulated other comprehensive income (3,220,323) (46,630)
------------------------------------------------------------------------------
Total stockholders' equity 25,496,879 26,802,152
Commitments and contingencies (notes 10, 11,
12 and 14)
------------------------------------------------------------------------------
$253,112,027 239,297,635
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
Years ended March 31, 2000, 1999 and 1998
==============================================================================
2000 1999 1998
------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $12,703,906 11,890,112 11,644,544
Investment securities 4,759,821 3,594,695 3,321,342
Mortgage-backed securities 781,100 1,227,043 1,121,238
Interest-bearing deposits and other
short-term investments 125,221 311,540 313,561
------------------------------------------------------------------------------
Total interest income 18,370,048 17,023,390 16,400,685
------------------------------------------------------------------------------
Interest expense:
Savings accounts:
Certificates 6,992,455 7,137,897 6,858,210
NOW and money market deposit
accounts 916,796 924,405 985,810
Passbook and statement savings 988,867 967,676 1,001,263
------------------------------------------------------------------------------
8,898,118 9,029,978 8,845,283
Borrowed funds:
Federal Home Loan Bank advances 1,224,439 512,014 147,292
Securities sold under agreements
to repurchase 876,209 727,862 846,842
------------------------------------------------------------------------------
2,100,648 1,239,876 994,134
------------------------------------------------------------------------------
Total interest expense 10,998,766 10,269,854 9,839,417
------------------------------------------------------------------------------
Net interest income 7,371,282 6,753,536 6,561,268
Provision for losses on loans (note 4) 65,000 75,000 110,000
------------------------------------------------------------------------------
Net interest income after provision
for losses on loans 7,306,282 6,678,536 6,451,268
------------------------------------------------------------------------------
Noninterest income:
Loan fees and service charges 202,292 459,700 225,431
Other 228,669 178,787 263,955
------------------------------------------------------------------------------
Total noninterest income 430,961 638,487 489,386
------------------------------------------------------------------------------
</TABLE>
(Continued)
45
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income,
Continued
<TABLE>
<CAPTION>
Years ended March 31, 2000, 1999 and 1998
==============================================================================
2000 1999 1998
------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest expense:
Compensation and benefits
(notes 12 and 13) $2,712,021 2,832,077 2,652,242
Occupancy and equipment 371,299 390,130 450,958
SAIF deposit insurance premiums
(note 10) 74,096 89,547 90,278
Advertising 164,892 142,926 129,040
Other 1,020,239 800,624 809,366
------------------------------------------------------------------------------
Total noninterest expense 4,342,547 4,255,304 4,131,884
Income before income taxes 3,394,696 3,061,719 2,808,770
Income taxes (note 9) 1,357,550 1,277,050 1,139,963
------------------------------------------------------------------------------
Net income 2,037,146 1,784,669 1,668,807
------------------------------------------------------------------------------
Other comprehensive income, net of
tax unrealized holding gain
(loss) on securities available-
for-sale (3,173,693) (256,934) 546,797
------------------------------------------------------------------------------
Comprehensive income $(1,136,547) 1,527,735 2,215,604
==============================================================================
Net income per share of common
stock (note 1):
Basic $ 1.25 1.03 0.96
Diluted 1.23 0.99 0.93
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Years ended March 31, 2000, 1999 and 1998
====================================================================================
Common Additional Unearned
stock paid-in capital ESOP shares
------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
Compensation under stock-based benefit
plans -- 336,555 254,938
Purchase of 12,000 shares of common stock (120) (173,068) --
Purchase of 11,318 shares of common stock
for Stock Option Trust -- (164,808) --
Exercise of stock options by
Stock Option Trust -- 445,536 --
Other comprehensive income -- -- --
Dividends ($.52 per share) -- -- --
Net income - 2000 -- -- --
------------------------------------------------------------------------------------
Balance at March 31, 2000 $ 16,645 13,515,785 (407,118)
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
Years ended March 31, 2000, 1999 and 1998
====================================================================================
Retained Accumulated
income, other Total
substantially comprehensive stockholders'
restricted income equity
------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
Compensation under stock-based
benefit plans -- -- 591,493
Purchase of 12,000 shares of common
stock -- -- (173,188)
Purchase of 11,318 shares of common stock
for Stock Option Trust -- -- (164,808)
Exercise of stock options by
Stock Option Trust -- -- 445,536
Other comprehensive income -- (3,173,693) (3,173,693)
Dividends ($.52 per share) (867,759) -- (867,759)
Net income - 2000 2,037,146 -- 2,037,146
------------------------------------------------------------------------------------
Balance at March 31, 2000 15,591,890 (3,220,323) 25,496,879
====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
47
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended March 31, 2000, 1999 and 1998
====================================================================================
2000 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $2,037,146 1,784,669 1,668,807
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 90,285 97,012 135,661
Amortization of premium on savings
deposits 381,384 381,384 381,384
Provision for losses on loans 65,000 75,000 110,000
Deferred income tax provision (67,932) (107,015) (87,876)
Noncash compensation under stock-
based benefit plans 591,493 722,313 541,401
Loans originated for sale, net of
repayments 516,252 (920,390) (3,682,878)
Proceeds from sales of loans originated
for sale -- 1,016,685 4,803,060
Amortization of loan fees, premiums
and discounts, net (70,067) (198,331) (172,819)
Gain on sale of loans -- -- (96,428)
Loss on sales of real estate owned 47,899 3,219 --
Decrease (increase) in prepaid
expenses and other assets (593,718) 102,627 (277,520)
Increase (decrease) in accrued expenses
and other liabilities (47,911) 50,667 215,834
Decrease (increase)in accrued
interest receivable (144,394) 270,285 (116,104)
------------------------------------------------------------------------------------
Net cash provided by operating activities 2,805,437 3,278,125 3,422,522
------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investment securities
available-for-sale (4,184,845) (56,675,792) (40,122,750)
Proceeds from maturities and principal
repayments of investment securities
available-for-sale 3,565,819 37,971,956 18,463,947
Proceeds from maturities and principal
repayments of investment securities
held-to-maturity 637,490 16,855,587 11,383,401
Loan principal disbursements, net of
repayments (17,492,164) (5,562,643) (2,048,299)
Loan purchases (3,980,692) (941,300) (2,105,334)
Investment in Federal Home Loan
Bank stock (766,500) -- (67,500)
Proceeds from sales of real estate owned 745,522 79,605 465,136
Purchases of property and equipment (9,897) (36,619) (17,871)
Decrease (increase) in investment in and
advances to affiliated corporation, net 2,525,000 325,000 (75,000)
------------------------------------------------------------------------------------
Net cash used in investing activities (18,960,267) (7,984,206) (14,124,270)
------------------------------------------------------------------------------------
(Continued)
</TABLE> 48
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
Years ended March 31, 2000, 1999 and 1998
====================================================================================
2000 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in savings
accounts $(2,464,223) 8,201,620 1,054,831
Net increase in borrowed funds 17,145,000 2,288,750 8,766,250
Increase (decrease) in advance payments
by borrowers for taxes, insurance and
ground rents 106,975) (94,132) 33,390
Purchases of common stock (173,188) (3,470,996) (966,297)
Purchases of common stock for Stock
Option Trust (164,808) (652,544) --
Exercise of stock options by Stock Option
Trust 445,536 266,649 105,930
Dividends paid (869,319) (911,617) (751,204)
------------------------------------------------------------------------------------
Net cash provided by financing activities 14,025,973 5,627,730 8,242,900
------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (2,128,857) 921,649 (2,458,848)
Cash and cash equivalents at beginning of
year 4,161,054 3,239,405 5,698,253
------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,032,197 4,161,054 3,239,405
====================================================================================
Supplemental information:
Interest paid on savings accounts and
borrowed funds $10,558,000 9,975,000 9,451,000
Income taxes paid 1,353,000 1,457,000 1,147,000
====================================================================================
Schedule of noncash investing and
financing transactions:
Transfers of loans receivable to
investments in real estate owned $ 420,660 529,723 --
Unrealized holding gain (loss) on
securities available for sale,
net of tax (3,173,693) (256,938) 546,797
====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
_________________________________________________________________
(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. Certain amounts for prior years
have been reclassified to conform to the presentation for
2000.
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 real estate owned 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 real estate owned.
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)
50
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
_________________________________________________________________
(1) CONTINUED
INVESTMENT 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, reported as 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 INVESTMENT SECURITIES
Discounts and premiums on loans and investment securities
are deferred and amortized to income using the level-yield
method over the contractual term of the loan or security.
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, 2000 and 1999. These loans 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.
REAL ESTATE OWNED
Real estate acquired through foreclosure is recorded 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 improvements are capitalized, and
costs of repairs and maintenance are expensed as
incurred. The related cost and accumulated depreciation or
amortization are eliminated from the accounts when an asset
is sold or retired and the resulting gain or loss is
credited or charged to income.
(Continued)
51
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
_________________________________________________________________
(1) CONTINUED
LOAN FEES
Origination and commitment fees and direct origination costs
of loans 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.
LOANS RECEIVABLE
Loans are stated at the amount of unpaid principal reduced
by discounts, unearned loan fees and the allowance for
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 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 uncollectible by
management.
A loan is considered impaired when, based on current
information and events, it is probable that the Bank will
be unable to collect all amounts due according to the
contractual terms of the loan agreement. Loans that
experience insignificant payment delays (90 days or less) or
shortfalls generally are not considered impaired. 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 and a corresponding
provision for credit losses.
Large groups of smaller balance homogenous loans, including
residential mortgage loans and consumer installment loans,
are collectively evaluated for impairment. Accordingly, the
Bank does not separately identify individual consumer and
residential loans for impairment disclosures.
PREMIUM ON SAVINGS ACCOUNTS
In 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)
52
<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, 2000 and
1999. This bad debt reserve could 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
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.
(Continued)
53
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
_________________________________________________________________
(1) CONTINUED
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 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>
2000 1999 1998
-------------------- ----------------- --------------------
Basic Diluted Basic Diluted Basic Diluted
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $2,037,146 2,037,146 1,784,669 1,784,669 1,668,807 1,668,807
Dividends on unvested
common stock awards -- -- (7,991) (5,460) (14,098) (11,441)
------------------------------------------------------------------------------------------------
Adjusted net income
used in EPS
calculations $2,037,146 2,037,146 1,776,678 1,779,209 1,654,709 1,657,366
================================================================================================
Weighted average
shares outstanding 1,625,776 1,625,776 1,731,587 1,731,587 1,731,745 1,731,745
Effect of dilutive securities:
Options -- 32,852 -- 61,269 -- 54,680
Unvested common
stock awards -- -- -- 4,983 -- 6,161
------------------------------------------------------------------------------------------------
Adjusted weighted-average
shares used in EPS
computation 1,625,776 1,658,628 1,731,587 1,797,839 1,731,745 1,792,586
================================================================================================
</TABLE>
COMPREHENSIVE INCOME
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.
(Continued)
54
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(2) INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Investment securities available-for-sale are summarized as
follows at March 31:
<TABLE>
<CAPTION>
2000
---------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
agency obligations $52,993,085 -- (4,091,904) 48,901,181
Trust preferred securities 9,757,363 -- (1,354,148) 8,403,215
Preferred stock - Federal
Home Loan Mortgage
Corporation (FHLMC) 6,339 338,324 -- 344,663
Mortgage-backed securities:
Government National Mortgage
Association (GNMA) 7,742,336 -- (102,210) 7,640,126
FHLMC 1,369,173 -- (36,597) 1,332,576
---------------------------------------------------------------------------------------
$71,868,296 338,324 (5,584,859) 66,621,761
=======================================================================================
<CAPTION>
1999
----------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
agency obligations $50,992,523 16,249 (636,718) 50,372,054
Trust preferred securities 8,610,862 90,722 (61,896) 8,639,688
Preferred stock - FHLMC 6,339 440,699 -- 447,038
Mortgage-backed securities:
GNMA 9,949,731 94,160 -- 10,043,891
FHLMC 1,822,194 -- (19,187) 1,803,007
---------------------------------------------------------------------------------------
$71,381,649 641,830 (717,801) 71,305,678
=======================================================================================
</TABLE>
(Continued)
55
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(2) CONTINUED
The amortized cost and estimated fair values of nonequity
investment securities available-for-sale at March 31, 2000
and 1999, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities
as borrowers may have the right to call or prepay
obligations with or without penalties.
<TABLE>
<CAPTION>
2000 1999
------------------------ --------------------------
Amortized Fair Amortized Fair
cost value cost value
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due after five through ten years $ 2,999,007 2,842,320 3,998,882 4,007,160
Due after ten years 59,751,441 54,462,076 55,604,503 55,004,582
Mortgage-backed securities 9,111,509 8,972,702 11,771,925 11,846,898
----------------------------------------------------------------------------------------------
$71,861,957 66,277,098 71,375,310 70,858,640
==============================================================================================
</TABLE>
There were no sales of investment securities available-for-
sale during the years ended March 31, 2000, 1999 and 1998.
Accrued interest receivable on investment securities
available-for-sale was approximately $594,000 and $523,000
at March 31, 2000 and 1999, respectively.
(3) INVESTMENT SECURITIES HELD-TO-MATURITY
Investment securities held-to-maturity are summarized as
follows at March 31:
<TABLE>
<CAPTION>
2000
---------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA $ 573,279 21,993 -- 595,272
FNMA 807,498 20,402 (8,171) 819,729
FHLMC 204,063 7,011 -- 211,074
--------------------------------------------------------------------------------------
$1,584,840 49,406 (8,171) 1,626,075
======================================================================================
<CAPTION>
1999
---------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA $ 713,537 46,780 -- 760,317
FNMA 1,097,280 39,424 (90) 1,136,614
FHLMC 411,513 22,432 -- 433,945
--------------------------------------------------------------------------------------
$2,222,330 108,636 (90) 2,330,876
======================================================================================
</TABLE>
(Continued)
56
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(3) CONTINUED
There were no sales of investment securities held-to-
maturity during the years ended March 31, 2000, 1999 and
1998. Accrued interest receivable on investment securities
held-to-maturity was approximately $65,000 and $84,000 at
March 31, 2000 and 1999, respectively.
(4) LOANS RECEIVABLE
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.
Nonperforming loans amounted to approximately $559,000 and
$986,000 at March 31, 2000 and 1999, respectively. For the
years ended March 31, 2000, 1999 and 1998, 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 $41,000,
$86,000 and 79,000, respectively. The actual interest
income recorded on these loans for the years ended March
31, 2000, 1999 and 1998 was approximately $29,000, $60,000,
and $67,000, 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 $387,000 and $483,000 at
March 31, 2000 and 1999, 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.
(Continued)
57
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(4) CONTINUED
Changes in the allowance for losses were as follows for the
years ended March 31:
<TABLE>
<CAPTION>
2000 1999 1998
-----------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 457,000 490,000 380,000
Provision for losses on loans 65,000 75,000 110,000
Charge-offs (47,900) (108,000) --
-----------------------------------------------------------------
Ending balance $ 474,100 457,000 490,000
=================================================================
</TABLE>
At March 31, 2000, 1999 and 1998, the Bank was servicing
loans owned by others of approximately $2,985,000,
$11,156,000 and $13,718,000, respectively.
The Bank participates in a loan made to one of its directors
by another financial 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 on this loan was approximately $494,000
and $500,000 at March 31, 2000 and 1999, respectively.
Accrued interest receivable on loans receivable was $876,000
and $792,000 at March 31, 2000 and 1999, respectively.
(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>
2000 1999
-----------------------------------------------------------------
<S> <C> <C>
Capital stock, at cost $ -- 25,000
Advances -- 2,500,000
-----------------------------------------------------------------
$ -- 2,525,000
=================================================================
</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 financial institutions. Advances were due on
demand and bore interest at a rate determined by the Bank
and the two other institutions. In April 1999, the Bank sold
its interest in Bankers Affiliate, Inc. to one of the other
institutions for the par value of the capital stock. At that
time, the advances were repaid by Bankers Affiliate, Inc.
(Continued)
58
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(6) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at March
31:
<TABLE>
<CAPTION>
2000 1999 Useful life
------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 733,189 733,189 --
Buildings and improvements 1,227,405 1,227,405 15-30 years
Leasehold improvements 33,000 33,000 5-10 years
Furniture, fixtures and equipment 892,481 882,584 5-10 years
Automobiles 24,128 24,128 3 years
-------------------------------------------------------------- ============
Total, at cost 2,910,203 2,900,306
Less accumulated depreciation
and amortization 1,230,075 1,139,790
--------------------------------------------------------------
Property and equipment, net $1,680,128 1,760,516
==============================================================
</TABLE>
At March 31, 2000, the Bank was obligated under
noncancellable long-term operating leases for two of its
branch offices. These leases expire at dates to 2002 and
provide for approximate aggregate rentals of $52,000 in
2001 and $9,000 in 2002. Rent expense was $57,072, $56,979
and $89,495 for the years ended March 31, 2000, 1999 and
1998, respectively.
(Continued)
59
<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 2000 1999
--------------------- ------------------- --------------------
2000 1999 Amount % Amount %
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Certificates 5.59% 5.31% $117,996,786 65.2% 122,356,375 66.7%
Money market 3.44% 3.38% 22,479,778 12.4% 23,121,853 12.6%
Passbook 3.05% 3.05% 30,440,696 16.8% 29,265,439 16.0%
NOW 0.71% 1.01% 7,342,685 4.1% 6,656,017 3.6%
Commercial checking -- -- 2,323,913 1.3% 1,631,153 0.9%
Christmas Club 3.04% 3.05% 312,943 0.2% 330,187 0.2%
----------------------------------------------------------------------------------------------
180,896,801 100.0% 183,361,024 100.0%
==============================================================================================
Acquisition premium, net of
accumulated amortization
of $1,550,850 and $1,169,466,
respectively (1,493,792) (1,875,176)
----------------------------------------------------------------------------------------------
$179,403,009 181,485,848
==============================================================================================
Certificate accounts maturing:
Under 12 months $ 81,033,219 68.7% 71,414,952 58.4%
12 months to 24 months 13,964,038 11.8% 30,944,369 25.3%
24 months to 36 months 15,052,729 12.8% 8,858,634 7.2%
36 months to 48 months 4,473,701 3.8% 9,102,547 7.4%
48 months to 60 months 3,473,099 2.9% 2,035,873 1.7%
----------------------------------------------------------------------------------------------
$117,996,786 100.0% 122,356,375 100.0%
==============================================================================================
</TABLE>
At March 31, 2000 and 1999, certificates of $100,000 or
more were approximately $13,494,000 and $11,653,000,
respectively.
(Continued)
60
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(8) BORROWED FUNDS
Borrowed funds with interest rates and maturities are
summarized as follows at March 31:
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Securities sold under agreements to
repurchase:
4.9% matured June 1999 $ -- 4,675,000
5.0% matured May 1999 -- 6,000,000
5.7% matured May 1999 -- 3,880,000
4.8% matured October 1999 -- 3,000,000
5.93% due April 2000 5,500,000 --
6.00% due May 2000 3,000,000 --
6.08% due May 2000 1,700,000 --
Federal Home Loan Bank advances,
5.05%, due December 2007 -- 10,000,000
5.71% due September 2004 7,000,000 --
5.48% due December 2009 10,000,000 --
5.92% due March 2010 17,500,000 --
---------------------------------------------------------------------------
$44,700,000 27,555,000
===========================================================================
</TABLE>
The Bank enters into sales of mortgage-backed securities
and investment securities with agreements to repurchase.
Such agreements are treated as financings, and the
obligations to repurchase securities sold are reported as
liabilities in the consolidated statements of financial
condition. The securities underlying the agreements are
book-entry securities. The securities are delivered by
appropriate entry into the counterparties' accounts
maintained at the Federal Reserve Bank of New York.
Information with respect to repurchase agreements is as
follows for the years ended March 31:
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount outstanding at year-end $10,200,000 17,555,000 15,266,250
Maximum outstanding at any month-end 23,310,000 17,555,000 16,500,000
Average outstanding 15,878,333 13,119,000 14,210,000
Fair value of securities sold under
repurchase agreements at year-end:
Mortgage-backed securities 7,587,722 10,043,892 2,017,108
Investment securities 11,136,300 8,902,100 13,950,500
Amortized cost of securities sold under
repurchase agreements at year-end:
Mortgage-backed securities 7,742,336 9,949,732 1,980,396
Investment securities 11,995,856 8,995,502 14,000,000
==================================================================================
</TABLE>
(Continued)
61
<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 $34,500,000 were
pledged as collateral at March 31, 2000. At the discretion
of the FHLB, the interest rate on advances can be converted
to a variable rate on a quarterly basis, at which time the
Bank may repay the advances.
(9) INCOME TAXES
The income tax provision is composed of the following for
the years ended March 31:
<TABLE>
<CAPTION>
2000 1999 1998
----------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,167,111 1,133,199 1,005,289
State 258,371 250,866 222,550
----------------------------------------------------------------
1,425,482 1,384,065 1,227,839
Deferred:
Federal (55,621) (87,618) (71,948)
State (12,311) (19,397) (15,928)
----------------------------------------------------------------
(67,932) (107,015) (87,876)
----------------------------------------------------------------
$1,357,550 1,277,050 1,139,963
================================================================
</TABLE>
The net deferred tax asset at March 31, 2000 and 1999
consists of total deferred tax assets of $2,911,192 and
$854,550, respectively, and total deferred tax liabilities
of $394,844 and $403,007, 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>
2000 1999
----------------------------------------------------------------------------
<S> <C> <C>
Interest and fees on loans $ 33,856 41,071
Allowance for losses on loans 183,097 176,493
Accrual basis of accounting and deferred compensation 392,422 400,941
Unamortized premium on savings deposits 275,605 206,704
Federal Home Loan Bank stock dividends (207,351) (207,351)
Prepaid pension cost (46,249) (19,100)
Tax bad debt reserve in excess of base year (141,244) (176,556)
Unrealized (gain) loss on investments available-
for-sale 2,026,212 29,341
----------------------------------------------------------------------------
$2,516,348 451,543
============================================================================
</TABLE>
(Continued)
62
<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>
2000 1999 1998
----------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate $1,154,197 1,040,984 954,982
State income taxes, net of
Federal income tax benefit 162,400 152,770 136,371
Nondeductible compensation
costs 42,318 94,612 59,239
Other, net (1,365) (11,316) (10,629)
----------------------------------------------------------------
Income tax provision $1,357,550 1,277,050 1,139,963
================================================================
</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 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.
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 March 31, 2000,
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)
63
<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, 2000:
Tier I core capital (a) $17,765 7.20% $9,871 4% $12,239 >5%
Tier I risk-based capital (b) 17,765 14.43% 4,923 4% 7,384 >6%
Total risk-based capital (b) 18,391 14.94% 9,846 8% 12,307 >10%
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%
(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.
(Continued)
64
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(11) CONTINUED
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.
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 5% and 10%
of the then outstanding shares, respectively. During the
years ended March 31, 2000, 1999 and 1998, the Bank
purchased 12,000, 186,280 and 61,000 shares, respectively,
pursuant to these authorizations. The average cost of the
shares purchased was $14.43, $18.63 and $15.84 per share,
respectively.
(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.
(Continued)
65
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(12) CONTINUED
For the years ended March 31, 2000, 1999 and 1998,
compensation expense related to the ESOP was approximately
$364,000, $494,000, and $378,000, respectively. Dividends
on ESOP shares used for debt service by the ESOP for the
years ended March 31, 2000, 1999 and 1998 were
approximately $81,000, $77,000, and $50,000, respectively.
The ESOP shares were as follows at March 31:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------
<S> <C> <C>
Allocated shares 147,065 119,022
Unearned shares 44,783 72,826
----------------------------------------------------------------
191,848 191,848
----------------------------------------------------------------
Fair value of unearned shares
at March 31 $582,179 1,210,749
================================================================
</TABLE>
STOCK OPTION PLAN
The Company has 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>
2000 1999 1998
(shares) (shares) (shares)
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year - $9.66 per share 149,467 177,291 189,756
Exercised (48,786) (27,502) (10,967)
Forfeited (528) (322) (1,498)
----------------------------------------------------------------------------------
Outstanding at end of year - $9.66 per share 100,153 149,467 177,291
----------------------------------------------------------------------------------
Exercisable at end of year 100,153 118,721 115,807
==================================================================================
</TABLE>
In connection with the stock option plan, the Company
established a Stock Option Trust to purchase shares in the
open market or unissued shares of stock. The Company
purchased for the trust 11,318 shares for $164,808 and
35,841 shares for $652,544 in 2000 and 1999, respectively.
No shares were purchased for the trust in 1998. The Company
is authorized to purchase up to 6,124 shares for the Stock
Option Trust in the open market at March 31, 2000.
(Continued)
66
<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.
Shares awarded to participants in the MRP vested at a rate
of 20% per year on each anniversary of the effective date
of the MRP. For the years ended March 31, 2000, 1999 and
1998, compensation expense related to the MRP was $24,456,
$61,581 and $113,790, respectively.
(13) RETIREMENT PLANS
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, 2000, 1999 and 1998, pension expense
was $89,370, $122,673 and $112,459, respectively.
The Bank has a retirement agreement with the President of
the Bank and a retirement plan for directors who were
members of the Board of Directors at the date of conversion
to a capital stock form of organization and not employees
at that date. 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. Benefits
are payable on each of the ten anniversary dates following
retirement. For the years ended March 31, 2000, 1999 and
1998, compensation expense related to these plans was
$4,461, $11,556 and $97,034, respectively.
(Continued)
67
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(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>
2000 1999
--------------------- ------------------------
Carrying Fair Carrying Fair
amount value amount value
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash $ 1,333,619 1,334,000 1,615,617 1,616,000
Federal funds sold 698,578 699,000 2,545,437 2,545,000
Investment securities
available-for-sale 66,621,761 66,622,000 71,305,678 71,306,000
Investment securities
held-to-maturity 1,584,840 1,626,000 2,222,330 2,331,000
Loans receivable 173,800,267 166,628,000 153,126,879 151,759,000
Investment in Federal Home
Loan Bank stock 2,200,000 2,200,000 1,433,500 1,434,000
Accrued interest receivable 1,571,426 1,571,000 1,427,032 1,427,000
Liabilities:
Savings accounts 179,403,009 181,123,000 181,485,848 182,501,000
Borrowed funds 44,700,000 44,700,000 27,555,000 27,555,000
Advances payments by borrowers
for taxes, insurance and
ground rents 1,948,647 1,949,000 1,841,672 1,842,000
====================================================================================
</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, 2000 and 1999.
CASH AND FEDERAL FUNDS SOLD
The carrying amounts approximate fair value due to the
short maturity of these instruments.
INVESTMENT SECURITIES
The fair values of investment securities are based on bid
prices received from an external pricing service or bid
quotations received from securities dealers.
(Continued)
68
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
________________________________________________________________
(14) CONTINUED
LOANS RECEIVABLE
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 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.
INVESTMENTS IN FEDERAL HOME LOAN BANK STOCK
The carrying amounts approximate fair value based on the
redemption provisions of the Federal Home Loan Bank.
ACCRUED INTEREST RECEIVABLE
The carrying amounts approximate 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.
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)
69
<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 and home equity 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 as follows at
March 31:
<TABLE>
<CAPTION>
2000
---------------------------
Fixed rate Floating Rate
-----------------------------------------------------------------------------
<S> <C> <C>
Residential mortgage loans to be funded $521,600 994,050
Commercial mortgage loans to be funded 199,900 --
Undisbursed lines of credit -- 792,391
------------------------------------------------------------------------------
$721,500 1,786,441
==============================================================================
</TABLE>
Residential mortgage loan commitments usually expire
within thirty days. The interest rate range on fixed rate
mortgage loan commitments was from 7.75% to 8.5% at March
31, 2000. 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)
70
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
_______________________________________________________________
(15) SUBSEQUENT EVENT
On May 3, 2000, the Company signed an agreement to be
acquired by Provident Bankshares Corporation (Provident).
The agreement provides for Provident to exchange 1.256
shares of its common stock for each outstanding share of
the Company's common stock. The transaction is subject to
certain terms and conditions and regulatory approvals and
is expected to be consummated in the third quarter of
2000.
(16) 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
2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 1,631,322 134,860
Investment securities available-for-sale 8,403,215 8,639,687
Investment in the Bank 15,299,090 23,981,868
Prepaid expenses and other assets 815,458 198,110
-------------------------------------------------------------------------
$26,149,085 32,954,525
=========================================================================
Loan payable - Bank $ 407,118 5,884,215
Other liabilities 245,088 268,158
-------------------------------------------------------------------------
652,206 6,152,373
Stockholders' equity 25,496,879 26,802,152
-------------------------------------------------------------------------
$26,149,085 32,954,525
=========================================================================
<CAPTION>
STATEMENTS OF INCOME
2000 1999 1998
------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Interest income $ 840,587 382,457 194,673
------------------------------------------------------------------------------
Expenses:
Interest expense 160,228 114,602 89,742
Professional fees 83,050 40,200 32,837
Other expenses 38,353 37,822 36,891
------------------------------------------------------------------------------
281,631 192,624 159,470
------------------------------------------------------------------------------
Income before income taxes and equity in
net income of subsidiary 558,956 189,833 35,203
Income taxes 215,900 73,300 13,600
------------------------------------------------------------------------------
Income before equity in net income
of subsidiary 343,056 116,533 21,603
Equity in net income of subsidiary 1,694,090 1,668,136 1,647,204
------------------------------------------------------------------------------
Net income $2,037,146 1,784,669 1,668,807
==============================================================================
</TABLE>
(Continued)
71
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
______________________________________________________________
(16) Continued
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
2000 1999 1998
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 2,037,146 1,784,669 1,668,807
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in net income of subsidiary (1,694,090) (1,668,136) (1,647,204)
Noncash compensation under stock-
based benefit plans 591,493 722,313 541,401
Other, net (52,623) (164,282) 94,462
---------------------------------------------------------------------------------
Net cash provided by operating activities 881,926 674,564 657,466
---------------------------------------------------------------------------------
Investing activities:
Dividend distribution from Bank 8,000,000 -- 4,000,000
Purchases of investment securities
available-for-sale (1,146,588) (8,742,848) --
---------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 6,853,412) (8,742,848) 4,000,000
---------------------------------------------------------------------------------
Financing activities:
Purchases of common stock (173,188) (3,470,996) (966,297)
Purchase of common stock for
Stock Option Trust (164,808) (652,544) --
Exercise of stock options by Stock
Option Trust 445,536 266,649 105,930
Increase in (repayment of) borrowings (5,477,097) 4,971,385 (224,010)
Dividends paid (869,319) (911,617) (751,204)
---------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (6,238,876) 202,877 (1,835,851)
---------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 1,496,462 (7,865,407) 2,821,885
Cash and cash equivalents at beginning of year 134,860 8,000,267 5,178,382
---------------------------------------------------------------------------------
Cash and cash equivalents at end of year $1,631,322 134,860 8,000,267
=================================================================================
</TABLE>
72
<PAGE>
<PAGE>
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 following table sets forth the name of each member of
the Board of Directors of the Company. Also set forth is
certain other information with respect to each person's age, the
year he first became a director of Harbor Federal and the
expiration of his term as a director. Each director of the
Company is also a member of the Board of Directors of the Bank.
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED AS CURRENT
DIRECTOR OF TERM
NAME AGE THE BANK TO EXPIRE
---- --- ----------- ---------
<S> <C> <C> <C>
Joseph J. Lacy 67 1963 2000
John H. Riehl, III 70 1990 2000
Lawrence W. Williams 46 1996 2000
Robert A. Williams 70 1955 2001
J. Kemp Roche 67 1965 2002
Gideon N. Stieff, Jr. 70 1969 2002
</TABLE>
Set forth below is information concerning the Company's
directors. Unless otherwise stated, all directors have held the
positions indicated for at least the past five years.
JOSEPH J. LACY served until 1998 as President of Lacy
Foundries, Inc., a manufacturer of iron, brass and aluminum
castings in Baltimore, Maryland. He has been a member of the
Board of Directors of Mercy Medical Center, Jenkins Nursing Home
and associated Catholic charities.
JOHN H. RIEHL, III is General Partner of Riehl Estate
Management Co. in Baltimore, Maryland. He is a former trustee
of Saint Mary's Spiritual Center and a member of the Parish
Council - Shrine of the Sacred Heart Church.
LAWRENCE W. WILLIAMS is Executive Vice President and
Community Reinvestment Officer for Harbor Federal. Mr. Williams
serves as a Board Member for Bel Air Edison Housing Services and
is a certified instructor for the Institute of Financial
Education. He also hosts "The Bankers Hour", a weekly radio
show which airs on WCBM, Baltimore.
ROBERT A. WILLIAMS has been affiliated with Harbor Federal
since 1955 when he was appointed to the Board of Directors. In
March of 1964 he was elected President of Harbor Federal. Mr.
Williams is a past director of the Greater Baltimore Real Estate
Board and for many years was a Director of Neighborhood Housing
Services of Baltimore. He has also served as Chairman of the
Maryland League of Financial Institutions and on the Boards of
the Foundation for Savings Institutions, the South-East
Conference of the U.S. League for Financial Institutions and the
Federal Home Loan Bank of Atlanta.
J. KEMP ROCHE had been employed as a sales representative
for 29 years at St. Joe Paper Co. of Jacksonville, Florida. He
is currently retired.
73
<PAGE>
<PAGE>
GIDEON N. STIEFF, JR. served until 1990 as Executive Vice
President of Kirk-Stieff Co., a manufacturer of silver products,
in Baltimore, Maryland. He has served on the Board of Directors
of the Baltimore Opera Company and as Chairman of the Board of
the Mount Clare Plantation Foundation, and he is a member of the
Kiwanis Club of Baltimore City.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to regulations promulgated under the Exchange
Act, the Company's officers and directors and all persons who
beneficially own more than ten percent of the Common Stock
("Reporting Persons") are required to file reports detailing
their ownership and changes of ownership in the Common Stock and
to furnish the Company with copies of all such ownership reports
that are filed. Based solely on the Company's review of the
copies of such ownership reports which is has received in the
past fiscal year or with respect to the past fiscal year, or
written representations from the Reporting Person that no annual
report of changes in beneficial ownership were required, the
Company believes that during fiscal year 2000 all Reporting
Persons have complied with these reporting requirements.
ITEM 10. EXECUTIVE COMPENSATION
--------------------------------
Summary Compensation Table. The following table sets
forth information regarding cash and noncash compensation for
each of the three fiscal years ended March 31, 2000 awarded to
or earned by the chief executive officer and the one other
executive officer whose salary and bonus exceeded $100,000 for
services rendered in all capacities to the Company and Harbor
Federal and its subsidiaries during those years.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND FISCAL --------------------------
PRINCIPAL POSITIONS YEAR SALARY BONUS OTHER(1) ------------------
- ------ ------ ----- --------
<S> <C> <C> <C> <C>
Robert A. Williams 2000 $123,958 $47,708 $45,352
Chief Executive Officer, 1999 122,372 47,845 45,352
President and Director 1998 118,360 49,755 44,452
Norbert J. Luken 2000 $ 97,864 $34,644 $30,000
Chief Financial 1999 97,094 35,006 30,000
Officer, Treasurer 1998 94,024 37,041 30,000
<FN>
__________________
(1) Reflects combined compensation under the Company's ESOP and
money purchase plan of $30,000 per year for Mr. Williams and
Mr. Luken; for Mr. Williams, also reflects annual deferred
compensation funded by the payment of premium on life
insurance policy of $4,552 and annual director's fees of
$10,800.
</FN>
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year End Value. The following table sets forth information
regarding option exercises during the fiscal year ended March
31, 2000 and the number and potential value at March 31, 2000 of
options held by the named executive officers.
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Options/SARs at Fiscal Year-End at Fiscal Year-End($)(1)
Shares Acquired Value ------------------------------- --------------------------
on exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
--------------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Williams 1,000 $ 14,156 51,702 -- $172,731 $ --
Norbert J. Luken 16,676 204,953 -- -- -- --
<FN>
__________________
(1) Based on the difference between the closing sale price of the Common Stock on
March 31, 2000 as reported on the Nasdaq Stock Market ($13.00 per share) and the
exercise price ($9.6591 per share).
</FN>
</TABLE>
74
<PAGE>
<PAGE>
DIRECTOR COMPENSATION
Fees. Directors received fees of $900 per meeting.
During fiscal 2000, directors' fees totaled $64,800.
Director Retirement Plan. Harbor Federal maintains a
retirement plan for non-employee directors (the "Director
Retirement Plan") for its directors (i) who were members of
Harbor Federal's Board of Directors at the date of completion of
the conversion of Harbor Federal from mutual to stock form (the
"Conversion"), and (ii) who were not then employees. A
participant in the Director Retirement Plan will receive, on
each of the ten annual anniversary dates of his or her
retirement, an amount equal to the product of his or her
"benefit percentage" and the amount of the annual fee he or she
received for service on the Board during the calendar year
preceding his or her retirement. A participant's "benefit
percentage" is based on his or her overall years of service on
the Board of Directors of Harbor Federal (and Highland Federal
Savings and Loan Association, which merged into Harbor Federal
in 1981), and increases in increments of 33-1/3% from 0% for
less than six years of service, to 33-1/3% for six years or more
of service, to 66-2/3% for 15 years or more of service, to 100%
for 25 or more years of service; provided that a participant's
"benefit percentage" accelerates to 100% if the participant
completes five years of service and retires from service on the
Board on or after age 70. If a participant dies, his or her
surviving spouse will receive an amount equal to 50% of the
benefits that would have been paid to the participant under the
Director Retirement Plan if the participant had survived to
collect the full benefits payable for retirement or disability
(provided that disability payments had commenced prior to the
participant's death). Harbor Federal will pay such benefits
from its general assets, and has established a trust in order to
hold assets with which to pay benefits. Trust assets are
subject to the claims of Harbor Federal's general creditors.
Deferred Compensation Plan. Harbor Federal has
established a Deferred Compensation Plan (the "Deferred
Compensation Plan") for the exclusive benefit of members of
Harbor Federal's Board of Directors and executive officers of
Harbor Federal. Pursuant to the terms of the Deferred
Compensation Plan, directors may elect to defer the receipt of
all or part of their future fees, and eligible officers may
elect to defer receipt of up to 25% of their future
compensation. Deferred amounts will be credited to a
bookkeeping account in the participant's name, which will also
be credited quarterly with the investment return which would
have resulted if such deferred amounts had been invested, based
upon the participant's choice, in either Common Stock or Harbor
Federal's highest annual rate of interest on certificates of
deposit, regardless of their term. Participants may cease
future deferrals any time. Each participant may elect the time
and manner of distribution for amounts deferred and any related
accumulated earnings.
Employment Agreements. The Company and Harbor Federal
have entered into an employment agreement with Robert A.
Williams, President and Chief Executive Officer of Harbor
Federal and of the Company. In such capacities, Mr. Williams is
responsible for overseeing all operations of Harbor Federal and
the Company, and for implementing the policies adopted by the
Board of Directors.
The employment agreement provides for a term of three
years, with an annual base salary equal to Mr. Williams'
existing base salary rate in effect on the date of Conversion.
On each anniversary date from the date of commencement of the
employment agreement, the term of employment is extended for an
additional one-year period beyond the then effective expiration
date, upon a determination by the Board of Directors that the
performance of Mr. Williams has met the required performance
standards and that such employment agreement should be extended.
The employment agreement provides Mr. Williams with a salary
review by the Board of Directors not less often than annually,
as well as with inclusion in any discretionary bonus plans,
retirement and medical plans, customary fringe benefits and
vacation and sick leave. In addition, if the Company terminates
Mr. Williams' employment with the Company for any reason other
than termination for "just cause", then notwithstanding
termination of Mr. Williams' employment and the employment
agreement, Mr. Williams and his dependents shall continue to
participate in the Company's group health insurance plan for the
life of Mr. Williams. The employment agreement will terminate
upon Mr. Williams' death or disability, and is terminable by
Harbor Federal for "just cause" as defined in the employment
agreement. In the event of termination for just cause, no
severance benefits are available. If the Company or Harbor
Federal terminates Mr. Williams without just cause, he will be
entitled to a continuation of his salary and benefits from the
date of termination through the remaining term of the employment
agreement plus an additional 12-month period. If the employment
agreement is terminated due to Mr. Williams' "disability" (as
defined in the employment agreement), he will be entitled to a
continuation of his salary and benefits for up to 180 days
following such termination. Severance
75
<PAGE>
<PAGE>
benefits payable to Mr. Williams or to his estate will be paid
in a lump sum or in installments, as he (or his estate) elects.
Mr. Williams is able to voluntarily terminate his employment
agreement by providing 60 days' written notice to the Boards of
Directors of Harbor Federal and the Company, in which case he is
entitled to receive only his compensation, vested rights and
benefits up to the date of termination.
The employment agreement contains provisions stating that
in the event of Mr. Williams' involuntary termination of
employment in connection with, or within 24 months after, any
change in control of Harbor Federal or the Company, other than
for "just cause," or Mr. Williams voluntarily terminates his
employment within 30 days of such change in control. Mr.
Williams will be paid within 10 days of such termination an
amount equal to the difference between (i) 2.99 times his "base
amount," as defined in Section 280G(b)(3) of the Internal
Revenue Code, and (ii) the sum of any other parachute payments,
as defined under Section 280G(b)(2) of the Internal Revenue
Code, that he receives on account of the change in control.
"Control" generally refers to the acquisition, by any person or
entity, of the ownership or power to vote more than 25% of
Harbor Federal's or Company's voting stock, the control of the
election of a majority of Harbor Federal's or the Company's
directors, or the exercise of a controlling influence over the
management or policies of Harbor Federal or the Company. In
addition, under the employment agreement, a change in control
occurs when, during any consecutive two-year period, directors
of the Company or Harbor Federal at the beginning of such period
cease to constitute two-thirds of the Board of Directors of the
Company or Harbor Federal, unless the election of replacement
directors was approved by a two-thirds vote of the initial
directors then in office. The employment agreement with Harbor
Federal provides that within 5 business days of a change in
control, Harbor Federal shall fund, or cause to be funded, a
trust in the amount of 2.99 times Mr. Williams base amount, that
will be used to pay Mr. Williams amounts owned to him upon
termination other than for just cause within one year of the
change in control. The amount to be paid to Mr. Williams from
this trust upon his termination is determined according to the
procedures outlined in the employment agreement with Harbor
Federal, and any money not paid to Mr. Williams is returned to
Harbor Federal. The employment agreement also provides for a
similar lump sum payment to be made in the event of Mr.
Williams' voluntary termination of employment within one year
following a change in control, upon the occurrence, or within 90
days thereafter, of certain specified events following the
change in control, which have not been consented to in writing
by Mr. Williams, including (i) the requirement that he perform
his principal executive functions more than 35 miles from Harbor
Federal's current primary office, (ii) a reduction in his base
compensation as then in effect, (iii) the failure of the Company
or Harbor Federal to maintain existing or substantially similar
employee benefit plans, including material vacation, fringe
benefits, stock option and retirement plans, (iv) the assignment
to Mr. Williams of duties and responsibilities which are other
than those normally associated with his position with Harbor
Federal, (v) a material reduction in his authority and
responsibility, and (vi) the failure to re-elect Mr. Williams to
the Company's or Harbor Federal's Board of Directors. The
aggregate payments that would be made to Mr. Williams assuming
his termination of employment under the foregoing circumstances
at March 31, 2000 would have been approximately $732,000. These
provisions may have an anti-takeover effect by making it more
expensive for a potential acquiror to obtain control of the
Company. If Mr. Williams were to prevail over the Company and
Harbor Federal in a legal dispute as to the employment
agreement, he would be reimbursed for his legal and other
expenses.
Supplemental Executive Retirement Agreement. Harbor
Federal has entered into a supplemental executive retirement
agreement (the "SERA") with Mr. Williams. Pursuant to the terms
of the SERA, upon Mr. Williams's termination of employment with
the Company or Harbor Federal for reasons other than death,
disability or removal for just cause, he will be entitled to
receive annual payments from Harbor Federal in an amount equal
to 60% of his "Average Annual Compensation" less his "Annual
Offset Amount." "Average Annual Compensation" means the average
of Mr. Williams annual compensation for the three calendar years
preceding his termination of employment, and "Annual Offset
Amount" means the benefits Mr. Williams would receive in the
form of an annuity under Harbor Federal's Money Purchase Plan
upon his termination of employment. Such annual payments shall
be made for 10 years, unless Mr. Williams elects an alternative
time and manner of payment. Harbor Federal has established an
irrevocable grantor trust to hold assets to provide itself with
a source of funds to assist Harbor Federal in meeting its
liabilities under the SERA.
In the event Mr. Williams terminates employment due to
disability as determined under his employment agreement, Mr.
Williams would receive annual payments for 10 years in the
amount equal to 60% of his Average Annual Compensation less his
Annual Offset Amount, beginning on the first day of the second
month after his
76
<PAGE>
<PAGE>
termination of employment. Termination for
"just cause" (as determined under Mr. Williams' employment
agreement) would result in his forfeiture of all retirement
benefits under the SERA. In the event Harbor Federal terminates
Mr. Williams's employment for other than "just cause" or in the
event of termination of employment in connection with a change
in control (as defined in Mr. Williams's employment agreement)
which triggers the payment of compensation to Mr. Williams under
the terms of his employment agreement, then the present value of
the benefits payable to Mr. Williams would be paid in one lump
sum within 10 days of termination of employment or within 10
days following a change in control, if earlier.
Severance Agreement. The Company and Harbor Federal have
entered into a severance agreement with Norbert J. Luken. The
severance agreement will terminate on the earlier of (a) three
years after the date of completion of the Conversion, and (b)
the date on which Mr. Luken terminates employment with the
Corporation and Harbor Federal, provided that the rights under
the severance agreement will continue following termination of
employment if the severance agreement was in effect at the date
of the change in control. On each annual anniversary date from
the date of commencement of the severance agreement, the term of
the severance agreements may be extended for an additional one
year period beyond the then effective expiration date, upon
determination by the Board of Directors that the performance of
Mr. Luken has met the required performance standards and that
such severance agreement should be extended.
The severance agreement contains provisions stating that
in the event of involuntary termination of employment in
connection with, or within 24 months after, any change in
control of Harbor Federal or the Company, other than for "just
cause," Mr. Luken will be paid within 10 days of such
termination an amount equal to the difference between (i) 2.99
times his "base amount," as defined in Section 280G(b)(3) of the
Internal Revenue Code and (ii) the sum of any other parachute
payments, as defined under Section 280G(b)(2) of the Internal
Revenue Code, that the he receives on account of the change in
control. "Control" generally refers to the acquisition, by any
person or entity, of the ownership or power to vote more than
25% of Harbor Federal's or Company's voting stock, the control
of the election of a majority of Harbor Federal's or the
Company's directors or the exercise of a controlling influence
over the management or policies of Harbor Federal or the
Company. In addition, under the severance agreement, a change
in control occurs when, during any consecutive two-year period,
directors of the Company or Harbor Federal at the beginning of
such period cease to constitute two-thirds of the Board of
Directors of the Company or Harbor Federal, unless the election
of replacement directors was approved by a two-thirds vote of
the initial directors then in office. The severance agreement
with Harbor Federal provides that within 5 business days of a
change in control, Harbor Federal shall fund, or cause to be
funded, a trust in the amount of 2.99 times the base amount,
that will be used to pay amounts owed to him upon termination
other than for just cause within one year of the change in
control. The amount to be paid to Mr. Luken from this trust
upon his termination is determined according to the procedures
outlined in the severance agreement with Harbor Federal, and any
money not paid to him is returned to Harbor Federal. The
severance agreement also provides for a similar lump sum payment
to be made in the event of Mr. Luken's voluntary termination of
employment within one year following a change in control, upon
the occurrence, or within 90 days thereafter, of certain
specified events following the change in control, which have not
been consented to in writing by him, including (i) requiring him
to perform his principal executive functions more than 35 miles
from Harbor Federal's current primary office, (ii) reducing his
base compensation as then in effect, (iii) failing to maintain
existing employee benefit plans, including material vacation,
fringe benefits, stock option and retirement plans, (iv)
assigning material duties and responsibilities to him which are
other than those normally associated with his position with
Harbor Federal, and (v) materially diminishing his authority and
responsibility. The aggregate payment that would be made to Mr.
Luken assuming his termination of employment under the foregoing
circumstances at March 31, 2000 would have been approximately
$494,000. These provisions may have an anti-takeover effect by
making it more expensive for a potential acquiror to obtain
control of the Company. In the event that Mr. Luken prevails
over the Company and Harbor Federal in a legal dispute as to the
severance agreement, he will be reimbursed for his legal and
other expenses.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
-------------------------------------------------------------
Persons and groups owning in excess of 5% of the Company's
Common Stock are required to file certain reports regarding such
ownership pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The following table sets forth,
at the Record Date, certain information as to the Common Stock
believed by management
77
<PAGE>
<PAGE>
to be beneficially owned by persons owning in excess of 5% of
the Company's Common Stock, by each individual director and
named executive officers and by all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
Amount and Percent of
Nature of Shares of
Name and Address Beneficial Common Stock
of Beneficial Owner Ownership Outstanding
------------------- ---------- ------------
<S> <C> <C>
Harbor Federal Bancorp, Inc. 174,208 (1) 10.47% (1)
Employee Stock Ownership Plan ("ESOP")
705 York Road
Baltimore, Maryland 21204
Joseph J. Lacy 29,940 1.80
John H. Riehl, III 34,699 2.09
Lawrence W. Williams 65,535 (2) 3.86
Robert A. Williams 114,452 (3) 6.67
J. Kemp Roche 4,719 .28
Gideon N. Stieff, Jr. 22,779 1.37
Norbert J. Luken, Jr. 67,867 (4) 4.08
All directors and 339,991 (5) 19.45%
executive officers
as a group (7 persons)
<FN>
_____________
(1) These shares are held in a suspense account for future allocation among
participating employees as the loan used to purchase the shares is
repaid. The ESOP trustees, currently Directors Lacy, Riehl and Stieff,
vote all allocated shares in accordance with instructions of the
participants. Unallocated shares and shares for which no instructions
have been received are voted by the ESOP trustees in the same ratio as
participants direct the voting of allocated shares or, in the absence of
such direction, in the ESOP trustees' best judgment. The ESOP trustees
vote all allocated shares in accordance with the instructions of the
participating employees. As of March 31, 2000, the ESOP owned an
aggregate of 174,208 shares, of which 129,425 shares had been allocated
to the accounts of participants.
(2) Includes 31,976 shares that may be purchased pursuant to the exercise of
stock options and 12,600 shares allocated to Mr. L. Williams' account
under the ESOP.
(3) Includes 51,702 shares that may be purchased pursuant to the exercise
options and 17,610 shares allocated to Mr. Williams' account under the
ESOP.
(4) Includes 16,649 shares allocated to Mr. Luken's account under the ESOP.
(5) Includes 83,678 shares which all directors and executive officers as a
group had a right to purchase pursuant to the exercise of stock options.
</FN>
</TABLE>
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
Harbor Federal offers loans to its directors, officers and
employees. These loans currently are made in the ordinary
course of business with the same collateral, interest rates and
underwriting criteria as those of comparable transactions
prevailing at the time and do not involve more than the normal
risk of collectibility or present other unfavorable features.
Under current law, Harbor Federal's loans to directors and
executive officers are required to be made on substantially the
same terms, including interest rates, as those prevailing for
comparable transactions and must not involve more than the
normal risk of repayment or present other unfavorable features.
Furthermore, loans to such persons above the greater of $25,000
or 5% of Harbor Federal's capital and surplus must be approved
in advance by a disinterested majority of the Board of
Directors.
78
<PAGE>
<PAGE>
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 (5)
21 Subsidiaries *
23 Consent of KPMG LLP *
27 Financial Data Schedule *
__________
* 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) 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) 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 the Company's Annual Report on
Form 10-KSB for the year ended March 31, 1999.
(b) No report on Form 8-K was filed during the last
quarter of the fiscal year covered by this report.
79
<PAGE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange
Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HARBOR FEDERAL BANCORP, INC.
Date: Date: June 15, 2000 By:/s/ Robert A. Williams
_______________________________
Robert A. Williams
President
(Duly Authorized Representative)
In accordance with the Exchange Act, 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 15, 2000
__________________________________
Robert A. Williams
President
(Director and Principal Executive Officer)
By: /s/ Norbert J. Luken Date: June 15, 2000
__________________________________
Norbert J. Luken
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Joseph J. Lacy Date: June 15, 2000
__________________________________
Joseph J. Lacy
Director
By: /s/ John H. Riehl, III Date: June 15, 2000
__________________________________
John H. Riehl, III
Director
By: /s/ J. Kemp Roche Date: June 15, 2000
__________________________________
J. Kemp Roche
Director
By: /s/ Gideon N. Stieff, Jr. Date: June 15, 2000
__________________________________
Gideon N. Stieff, Jr.
Director
By: /s/ Lawrence W. Williams Date: June 15, 2000
__________________________________
Lawrence W. Williams
Director
