FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Mark One
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the quarterly period ended June 30, 2000
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________to ____________________.
Commission File Number: 0-24194
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HARBOR FEDERAL BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 52-1860591
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
705 York Road, Baltimore, Maryland 21204-2562
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code : (410) 321-7041
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the securities exchange act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety days. Yes x no
----- -----
As of June 30, 2000, 1,664,515 shares of the registrant's Common Stock,
par value $0.01 per share, were issued and outstanding.
Transitional small business disclosure format (check one): YES NO X
--- ---
HARBOR FEDERAL BANCORP, INC.
Baltimore, Maryland
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Consolidated Statements of Financial Condition -- As
of June 30, 2000 (Unaudited) and March 31, 2000
Consolidated Statements of Income and Comprehensive
Income (Loss) for the three months ended June 30,
2000 and 1999 -- (Unaudited)
Consolidated Statements of Cash Flows
for the three months ended June 30, 2000 and 1999 --
(Unaudited)
Notes to Consolidated Financial Statements -- (Unaudited)
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Item 3. Defaults Upon Senior Securities
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Item 5. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
2
PART I. FINANCIAL INFORMATION
3
HARBOR FEDERAL BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, March 31,
-------- ---------
Assets 2000 2000
------ ---- ----
(Unaudited)
Cash:
On hand and due from banks $ 1,558,622 1,250,115
Interest-bearing deposits -- 83,504
Federal funds sold 983,765 698,578
Investment securities available-for-sale 66,300,636 66,621,761
Investment securities held-to-maturity,
fair value of $1,441,760 and $1,626,075, respectively 1,405,292 1,584,840
Loans receivable, net 174,276,544 173,800,267
Accrued interest receivable 2,154,969 1,571,426
Investment in Federal Home Loan Bank stock, at cost 2,200,000 2,200,000
Real estate owned 31,983 74,138
Property and equipment, net 1,660,210 1,680,128
Prepaid expenses and other assets 3,070,202 3,547,270
------------- -------------
Total assets $ 253,642,223 253,112,027
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings accounts $ 172,837,947 179,403,009
Borrowed funds 50,400,000 44,700,000
Advance payments by borrowers for taxes,
insurance and ground rents 2,542,020 1,948,647
Accrued expenses and other liabilities 1,917,385 1,563,492
Federal and state income taxes payable 271,643 --
------------- -------------
Total liabilities 227,968,995 227,615,148
------------- -------------
Stockholders' equity:
Preferred stock $0.01 par value; authorized 5,000,000
shares; none issued -- --
Common stock $0.01 par value; authorized 20,000,000
shares; 1,664,515 shares issued and outstanding 16,645 16,645
Additional paid-in capital 13,504,564 13,515,785
Unearned ESOP shares (407,118) (407,118)
Retained income, substantially restricted 15,786,391 15,591,890
Accumulated other comprehensive income (loss) (3,227,254) (3,220,323)
------------- -------------
Total stockholders' equity 25,673,228 25,496,879
------------- -------------
Total liabilities and stockholders' equity $ 253,642,223 253,112,027
============= =============
See accompanying notes to consolidated financial statements.
4
HARBOR FEDERAL BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income (Loss)
(Unaudited)
Three Months Ended
June 30,
---------------------
2000 1999
---- ----
Interest income:
Loans receivable $ 3,359,713 2,989,641
Mortgage-backed securities 185,397 230,525
Investment securities 1,104,139 1,095,612
Interest-earning deposits and other short-term
investments 80,652 82,199
----------- -----------
Total interest income 4,729,901 4,397,977
----------- -----------
Interest expense:
Savings accounts:
Certificates 1,677,294 1,755,595
NOW and money market deposit accounts 222,716 231,268
Passbook and statement savings 252,187 246,414
----------- -----------
2,152,197 2,233,277
Borrowed funds:
Federal Home Loan Bank advances 486,213 127,653
Securities sold under agreements to
repurchase 231,115 218,791
----------- -----------
717,328 346,444
----------- -----------
Total interest expense 2,869,525 2,579,721
----------- -----------
Net interest income 1,860,376 1,818,256
Provisions for losses on loans 35,000 15,000
----------- -----------
Net interest income after provision
for losses on loans 1,825,376 1,803,256
----------- -----------
Noninterest income:
Loan fees and service charges 12,668 91,772
Other 44,610 73,872
----------- -----------
Total noninterest income 57,278 165,644
----------- -----------
Noninterest expense:
Compensation and benefits 681,246 666,307
Occupancy and equipment 79,815 95,885
SAIF deposit insurance premiums 9,442 20,988
Advertising 20,333 42,812
Other 390,881 273,778
----------- -----------
Total noninterest expense 1,181,717 1,099,770
----------- -----------
Income before income taxes 700,937 869,130
Income taxes 290,050 358,800
----------- -----------
Net income 410,887 510,330
Other comprehensive income (loss), net of tax:
Unrealized holding loss on securities available-
for-sale arising during the period (6,931) (1,123,018)
Other comprehensive income (loss) $ 403,956 (612,688)
=========== ===========
Net income per share of common stock:
Basic $ .25 $ .32
----------- -----------
Diluted $ .25 $ .31
----------- -----------
See accompanying notes to consolidated financial statements.
5
HARBOR FEDERAL BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
June 30,
---------------------
2000 1999
---- ----
Cash flows from operating activities
Net income $410,887 510,330
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 19,918 15,973
Provision for losses on loans 35,000 15,000
Amortization of premium on savings deposits 95,346 95,346
Noncash compensation under stock-based benefit plans 115,000 111,815
Loans originated for sale, net of repayments 10,067 215,222
Amortization of loan fees, premiums and discounts, net (24,057) 35,123
Decrease in prepaid expenses and other assets 463,313 7,781
Increase (decrease) in accrued expenses and other liabilities 238,893 (78,356)
Increase in federal and state income taxes payable 289,759 345,470
Increase in accrued interest receivable (583,543) (678,027)
Loss on sale of investments in real estate -- 3,300
---------- -----------
Net cash provided by operating activities 1,070,583 598,977
---------- -----------
Cash flows from investing activities:
Purchase of investment securities available-for-sale -- (3,700,000)
Principal repayments of investment securities held-to-maturity 179,507 290,547
Principal repayments of investment securities available-for-sale 293,181 1,120,427
Proceeds from sale of real estate owned 42,155 446,899
Loan principal disbursements, net of repayments (480,594) (4,043,810)
Redemption of Federal Home Loan Bank Stock -- 95,800
Decrease in investments in and advances to affiliated
Corporation, net -- 2,525,000
---------- -----------
Net cash provided by (used in) investing activities $ 34,249 (3,265,137)
---------- -----------
(Continued)
6
HARBOR FEDERAL BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
June 30,
---------------------
2000 1999
---- ----
Cash flows from financing activities:
Net increase (decrease) in savings accounts $(6,660,408) 1,298,674
Net increase (decrease) in borrowed funds 5,700,000 (1,245,000)
Increase in advance payments by borrowers
for taxes, insurance and ground rents 593,373 801,768
Purchase of common stock for Stock Option Trust (47,018) (92,720)
Exercise of stock options by Stock Option Trust 35,797 97,480
Dividends paid (216,386) (217,947)
----------- -----------
Net cash provided by (used in) financing activities (594,642) 642,255
----------- -----------
Net increase (decrease) in cash and cash equivalents 510,190 (2,023,905)
Cash and cash equivalents at beginning of period 2,032,197 4,161,054
----------- -----------
Cash and cash equivalents at end of period $ 2,542,387 2,137,149
=========== ===========
Supplemental information - noncash investing activities:
Unrealized holding gain loss on securities available-for-
sale, net of tax $ (6,931) (1,123,018)
=========== ===========
See accompanying notes to consolidated financial statements.
7
HARBOR FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Three Months Ended June 30, 2000
(Unaudited)
Note 1 -- Business. The accompanying unaudited consolidated financial statements
--------
include the accounts of Harbor Federal Bancorp, Inc. (the "Company") and
wholly-owned subsidiaries, including Harbor Federal Savings Bank ("Harbor
Federal"). Harbor Federal provides a full range of banking services to
individual and corporate customers through its subsidiaries and branch banks in
Maryland. Harbor Federal is subject to competition from other financial
institutions. Harbor Federal is subject to the regulations of certain federal
agencies and undergoes periodic examinations by those authorities.
Note 2 -- Basis of Presentation. The accompanying unaudited consolidated
-----------------------
financial statements were prepared in accordance with instructions for Form
10-QSB and, therefore, do not include information or footnotes necessary for a
complete presentation of financial position, results of operations, and cash
flows in conformity with generally accepted accounting principles. However, all
adjustments (consisting of normal recurring adjustments), which in the opinion
of management, are necessary for a fair presentation of the consolidated
financial statements at and for the three months ended June 30, 2000 have been
recorded.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the statement of financial condition and revenues and expenses for
the period. Actual results could differ significantly from those estimates. The
results of operations for the three months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the entire year
ending March 31, 2001.
Note 3 -- Principles of Consolidation. The accompanying unaudited consolidated
---------------------------
financial statements include the accounts of the Company, Harbor Federal and its
wholly owned subsidiary, Harbor Service Corporation. All significant
intercompany items have been eliminated.
Note 4 -- Retained Income. Harbor Federal is required to maintain certain levels
---------------
of regulatory capital. At June 30, 2000, Harbor Federal was in compliance with
all regulatory capital requirements.
Note 5 -- Earnings per Common Share. Information related to the calculation of
-------------------------
net income per share of common stock is summarized as follows for the three
months ended June 30, 2000 and 1999:
June 30, 2000 June 30, 1999
------------- -------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net Income $ 410,887 410,887 $ 510,330 510,330
Dividends on unvested common stock awards -- -- (2,045) (1,555)
---------- --------- ---------- ---------
Adjusted net income used in EPS calculations $ 410,887 410,887 $ 508,285 508,775
========== ========= ========== =========
Weighted average shares outstanding 1,619,732 1,619,732 1,587,958 1,587,958
Dilutive securities:
Options -- 34,626 -- 41,743
Unvested common stock awards -- -- -- 3,771
---------- --------- ---------- ---------
Adjusted weighted-average shares used in EPS
calculations 1,619,732 1,654,358 1,587,958 1,633,472
========== ========= ========== =========
8
Note 6 - Reclassification of Prior Year's Statements. Certain amounts in the
---------------------------------------------
prior year financial statements have been reclassified to conform to the current
year presentation.
9
HARBOR FEDERAL BANCORP, INC.
AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion analyzes the financial condition of the
Company at June 30, 2000 and the results of operations of the Company for the
three months ended June 30, 2000 and 1999.
When used in this Form 10-QSB, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market area, and
competition that could cause actual results to differ materially from historical
earnings and those presently anticipated or projected. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The Company wishes to advise
readers that the factors listed above could affect the Company's financial
performance and could cause the Company's actual results for the future periods
to differ materially from any opinions or statements expressed with respect to
future periods in any current statements.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Financial Condition
- -------------------
Harbor Federal's total assets increased by $530,000 or 0.2% to $253.6
million at June 30, 2000 from $253.1 million at March 31, 2000. Loans
receivable, net increased by $500,000 or 0.3% to $174.3 million at June 30, 2000
from $173.8 million at March 31, 2000. This increase was due in part to a
greater demand for loans during the quarter. Savings accounts decreased by $6.6
million or 3.7% to $172.8 million at June 30, 2000 from $179.4 million at March
31, 2000. This was partially offset by an increase in borrowed funds of $5.7
million or 12.8% to $50.4 million from $44.7 million at March 31, 2000.
Results of Operations
- ---------------------
The earnings of Harbor Federal depend primarily on its level of net
interest income, which is the difference between interest earned on Harbor
Federal's interest-earning assets, consisting primarily of mortgage loans,
mortgage-backed securities, interest-bearing deposits at other institutions,
investment securities and other investments, and the interest paid on
interest-bearing liabilities consisting of savings accounts and borrowed funds.
Net income for the three months ended June 30, 2000 decreased $99,000 or 19.5%
to $411,000 from $510,000 for the three months ended June 30, 1999. This
decrease was primarily due to merger expenses of $156,000 net of income taxes of
approximately $60,000.
Interest Income. Total interest income increased by $332,000 or 7.5% to
$4.7 million for the three months ended June 30, 2000 from $4.4 million for the
three months ended June 30, 1999. This increase is explained by the changes
stated in the following paragraphs.
Interest income on loans receivable increased by $370,000 due to an
increase in average loans receivable to $169.3 million for the quarter ended
June 30, 2000 from $155.6 million for the quarter ended June 30, 1999 and to an
increase in the average yield to 7.94% for the three months ended June 30, 2000
from 7.68% for the three months ended June 30, 1999. The increase in average
loans receivable was primarily due to increased loan production over normal
repayments. The higher average yield on mortgage loans reflects primarily an
increase in interest rates on all types of mortgage loans.
Interest income on investment securities increased by $9,000 due to an
increase in average yield on those securities to 7.53% for the three months
ended June 30, 2000 from 6.99% for the three months ended June 30, 1999,
10
partially offset by a decrease in average investment securities to $58.6 million
for the quarter ended June 30, 2000 from $62.7 million for the quarter ended
June 30, 1999.
Interest income on mortgage-backed securities decreased by $45,000 due
to a decrease in average mortgage-backed securities to $11.2 million for the
quarter ended June 30, 2000 from $13.4 million for the quarter ended June 30,
1999 and a reduction in the average yield on those securities to 6.61% for the
three months ended June 30, 2000 from 6.89% for the three months ended June 30,
1999. The decrease in average mortgage-backed securities and 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 by $290,000 or 11.2%
to $2.9 million for the three months ended June 30, 2000 from $2.6 million for
the three months ended June 30, 1999. The increase was attributable to an
increase in average cost of deposits and borrowings to 5.20% for the three
months ended June 30, 2000 from 4.92% for the three months ended June 30, 1999
and to an increase in average deposits and borrowings of $11.0 million or 5.2%
to $220.6 million for the three months ended June 30, 2000 from $209.6 million
for the three months ended June 30, 1999.
Net Interest Income. Net interest income increased by $42,000 or 2.3%
to $1.86 million for the three months ended June 30, 2000 from $1.82 million for
the three months ended June 30, 1999 due to the above mentioned changes.
Provision for Losses. The Company maintains an allowance for loan
losses based on management's review and classification of the loan portfolio and
analyses of borrowers' ability to pay, past collection experience, risk
characteristics of individual loans or groups of similar loans and underlying
collateral, current economic conditions, the status of non-performing loans and
regulatory reviews conducted in the regulatory examination process. There was a
$35,000 provision for loan losses during the three months ended June 30, 2000
and a $15,000 provision for loan losses for the same period in 1999. Based on
the results of management's review and analyses, it was concluded that the level
of the allowance for losses on loans was adequate at June 30, 2000.
Noninterest Income. Noninterest income decreased by $108,000 or 65.4%
to $57,000 for the three months ended June 30, 2000 from $166,000 for the three
months ended June 30, 1999. This was due primarily to the closing of Bank Street
Mortgage Company in the fiscal second quarter of 1999.
Noninterest Expense. Noninterest expense increased by $82,000 or 7.5%
to $1.2 million the three months ended June 30, 2000, from $1.1 million for the
three months ended June 30, 1999. This increase was due to merger expenses,
primarily professional services, of $156,000.
Unrealized Holding Loss on Securities Available-For-Sale. Unrealized
holding loss on securities available-for-sale decreased by $1,116,000 to $7,000
for the three months ended June 30, 2000 from $1,123,000 for the three months
ended June 30, 1999. This was due to changes in the fair value of the Company's
investment portfolio available-for-sale, net of the tax benefit, due primarily
to interest rate changes during the respective periods.
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 18.4% for the three months ended June
30, 2000. Harbor Federal adjusts its liquidity levels in order to meet funding
needs of deposit outflows, payment of real estate taxes on mortgage loans,
repayment of borrowings and loan commitments. Harbor Federal also adjusts
liquidity as appropriate to meet its asset and liability management objectives.
The Company's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities and other investments and earnings and funds provided from operations
and borrowings. While scheduled principal repayments on loans and
mortgage-backed securities are a relatively predictable source of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions, and competition. The Company manages the pricing of its
deposits to maintain a desired deposit balance. In addition, the Company invests
in short-term interest-earning assets, which provide liquidity to meet lending
requirements.
11
During the three months ended June 30, 2000, Harbor Federal's cash and
cash equivalents (cash and short-term investments with maturities less than 90
days) increased by $510,000.
The Company had $1.3 million in outstanding loan commitments at June
30, 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 the Company'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.
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 as 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.
Merger with Provident Bankshares Corporation
- --------------------------------------------
On May 3, 2000, the Company signed an agreement to be acquired by
Provident Bankshare Corporation ("Provident"). The agreement provides for
Provident to exchange 1.256 shares of its common stock for each outstanding
share of the Bank's common stock. The merger is subject to approval by the
Company's stockholders at a special meeting scheduled for August 16, 2000. The
merger is also subject to certain other terms and conditions and regulatory
approvals and is expected to be consummated in the third quarter of 2000.
12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
From time to time Harbor Federal is a party to various
legal proceedings incident to its business. A lawsuit
captioned Joyce Lancaster v. Harbor Federal
--------------------------------- Savings Bank, Harbor
Federal Bancorp, Inc. and Robert
-----------------------------------------------------
A. Williams and Lawrence 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
respondent superior and seeks $2.0 million in money
damages for each count. The Company and the individual
defendants have filed an answer to the complaint. The
plaintiff subsequently requested that the civil action
be stayed while she pursues administrative remedies.
The Company and the Bank do not believe that there is
any merit in the allegations.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) List of Exhibits
27 Financial Data Schedule
(b) Form 8-K
The Company filed a report on Form 8-K dated
May 3, 2000 to report that it had entered
into an Agreement and Plan of Merger with
Provident.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARBOR FEDERAL BANCORP, INC.
Date: August 4, 2000 /s/ Robert A. Williams
---------------------------------
Robert A. Williams
President
(Duly Authorized Representative)
Date: August 4, 2000 /s/ Norbert J. Luken
---------------------------------
Norbert J. Luken
Treasurer
(Principal Financial Officer)
14