Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 1997
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File Number: 0-22399
-------
HARRIS FINANCIAL, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2889833
- ------------------------------ -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
235 North Second Street, PO Box 1711, Harrisburg, Pennsylvania 17105
- -------------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) 717-236-4041
------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
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 90 days. Yes _X_. No ___.
Indicate the number of shares outstanding of each of the Bank's classes of
common stock, as of practicable date 33,779,325 shares of stock, par value of
$.01 per share, outstanding at October 31, 1997.
<PAGE>
Part I. Financial Information.
Part 1, Item 1 Financial Statements.
(Balance of this page is left intentionally blank.)
Page 2
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -----------
<S> <C> <C>
Assets
- -------------
Cash and Cash Equivalents $ 71,050 $ 29,693
Marketable Securities held to maturity (note 2) 99,121 109,417
Marketable Securities available for sale (note 2) 970,838 719,493
Loans receivable, net 882,394 823,916
Loans held for sale, net 11,318 9,053
Loan Servicing Rights (note 3) 12,014 12,264
Real estate held for investment 617 898
Foreclosed real estate 6,940 7,042
Premises and equipment, net of accumulated
depreciation of $14,344 and $13,845 17,931 14,595
Accrued interest receivable 14,665 12,052
Income taxes receivable -- 4,677
Intangible assets 20,001 21,695
Other Assets 3,410 3,317
----------- -----------
Total Assets $ 2,110,299 $ 1,768,112
=========== ===========
Liabilities and Stockholders' Equity
Deposits $ 1,128,191 $ 1,173,423
Escrow 4,293 8,203
Accrued Interest Payable 9,734 3,012
Postretirement benefit obligation 2,583 2,360
Other borrowings (note 4) 786,309 420,631
Deferred tax liability 2,734 3,257
Other liabilities 3,438 4,474
----------- -----------
Total Liabilities $ 1,937,282 $ 1,615,360
=========== ===========
Common stock, $ .01 par value, authorized 50,000,000 shares 33,779,325 shares
issued and outstanding at September 30, 1997, 33,649,200 shares issued and
outstanding at December 31, 1996
All share and per share data has been restated to give effect to the 3 for 1
stock split on November 18, 1997
(notes 8 and 9) $ 338 $ 112
Paid in Capital 26,945 25,902
Retained Earnings 138,734 124,812
Net unrealized gain on marketable securities 8,243 3,615
Employee stock ownership plan (653) (1,024)
Recognition and retention plans (590) (665)
----------- -----------
Total stockholders' equity 173,017 152,752
----------- -----------
Total liabilities and stockholders' equity $ 2,110,299 $ 1,768,112
=========== ===========
</TABLE>
See accompanying notes to the financial statements.
Page 3
<PAGE>
Consolidated Statements of Income
(in thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------------- ----------------------------
Interest Income 1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Loans Receivable:
First mortgage loans $ 34,515 $ 35,077 $ 11,634 $ 13,120
Commercial, Consumer, Other 19,149 14,999 6,837 5,412
Taxable investments 15,149 8,951 5,127 3,067
Taxfree investments 4,225 1,396 1,505 885
Dividends 5,683 2,024 2,088 944
Mortgage backed securities 24,807 14,293 10,164 4,702
Money market securities 150 180 21 121
------------ ------------ ------------ ------------
Total Interest Income 103,678 76,920 37,376 28,251
------------ ------------ ------------ ------------
Interest Expense:
Deposits 40,883 41,894 13,685 14,463
Borrowed Funds 26,202 5,636 11,138 3,732
Escrow 101 102 32 31
------------ ------------ ------------ ------------
Total Int. Expense 67,186 47,632 24,855 18,226
------------ ------------ ------------ ------------
Net Int. Income 36,492 29,288 12,521 10,025
Provision for Loan losses 457 1,362 153 942
------------ ------------ ------------ ------------
Net int. inc. after provision for loan losses 36,035 27,926 12,368 9,083
------------ ------------ ------------ ------------
Non-interest income:
Service Charges on Deposits 1,187 642 458 216
Other Svc. Charges/Commissions/Fees 1,016 618 364 173
Net Servicing income 1,616 992 530 745
Gain/(loss) on sale of mortgage backed securities (note 2) 3,424 (352) 690 (1,017)
Gain/(loss) on sale of other securities, net (note 2) 481 262 22 --
Gain on sale of loans, net 1,544 1,017 739 1,013
Other 1,760 574 1,507 551
------------ ------------ ------------ ------------
Total non-interest income 11,028 3,753 4,310 1,681
------------ ------------ ------------ ------------
Non-interest expense:
Salaries and benefits 12,685 10,912 4,553 4,207
Equipment expense 1,472 1,051 561 437
Occupancy expense 2,163 1,796 712 676
Advertising/Public Relations 1,466 1,019 494 550
FDIC insurance 567 2,018 186 713
SAIF assessment -- 7,044 -- 7,044
Director fees 206 230 65 71
Income from real estate operations (518) (313) (185) (23)
Amortization of intangibles 1,787 1,501 600 604
Non-operational losses (note 5) -- 4,205 -- --
Other 4,902 4,437 1,852 1,820
------------ ------------ ------------ ------------
Total non-interest expense 24,730 33,900 8,838 16,099
------------ ------------ ------------ ------------
Income before income taxes 22,333 (2,221) 7,840 (5,335)
Income tax expense 7,301 (723) 2,582 (1,940)
------------ ------------ ------------ ------------
Net Income $ 15,032 $ (1,498) $ 5,258 $ (3,395)
============ ============ ============ ============
Net Income per share (note 8) $ 0.44 $ (0.05) $ 0.15 $ (0.10)
============ ============ ============ ============
Weighted average shares outstanding 34,032,342 32,949,993 34,158,039 32,957,994
</TABLE>
See accompanying notes to financial statements
Page 4
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Net Employee Recogni-
Unrealized Stock tion
Gain/ Owner- And
Common Paid in Retained (Loss) on ship Retention
Stock Capital Earnings Securities Plan Plan Total
------ --------- -------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $112 $25,322 $125,244 $3,120 $(1,519) $(820) $ 151,459
Net income (1,498) (1,498)
Dividends paid at $.145 per share (1,097) (1,097)
Exercised stock options 112 112
Change in unrealized gain (loss) on marketable
securities, net of tax effect of ($1,377) (2,284) (2,284)
ESOP stock committed for release 371 371
Earned portion of RRP plan 117 117
Excess of fair value above cost of ESOP stock
committed for release 257 257
Excess of fair value above cost of earned portion
of RRP stock 37 37
------ --------- -------- -------- --------- ------- ---------
Balance at September 30, 1996 $112 $ 25,728 $122,649 $ 836 $(1,148) $(703) $ 147,474
===== ========= ======== ======== ========= ======= =========
Balance at January 1, 1997 $112 $ 25,902 $124,812 $3,615 $(1,024) $(665) $ 152,752
Net income 15,032 15,032
Dividends paid at $.145 per share (1,110) (1,110)
Exercised stock options 1 441 442
Change in unrealized gain (loss) on marketable
securities, net of tax effect of $3,042 4,628 4,628
Additional Shares issued in a three-for-one stock split
effected in the form of a stock dividend (note 8) 225 (225) --
ESOP stock committed for release 371 371
Earned portion of RRP plan 75 75
Excess of fair value above cost of ESOP stock
committed for release 550 550
Excess of fair value above cost of earned portion
of RRP stock 277 277
------ --------- -------- -------- --------- ------- ---------
Balance at September 30, 1997 $338 $ 26,945 $138,734 $8,243 $ (653) $(590) $ 173,017
================= ======== ======== ================= =========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 15,032 $ (1,498)
Adjustments to reconcile net income to net cash provided by
operating activities:
Non-operational loss -- 4,205
Provision for loan losses 457 1,362
Net depreciation, amortization, and accretion 2,330 3,171
Increase in loans held for sale (1,031) (8,007)
Net (gain)/loss on sales of interest earning assets (5,449) 299
(Gain)/loss on sale of foreclosed real estate (24) 148
Equity losses from joint ventures 57 12
Increase in accrued interest receivable (2,613) (2,421)
Increase in accrued interest payable 6,722 7,552
Amortization and write-off of intangibles 1,787 1,754
Earned ESOP shares 921 628
Earned RRP shares 352 154
Deferred income taxes 239 2,668
Other, net (133) 1,168
--------- ---------
Net Cash provided by operating activities 18,647 11,195
--------- ---------
Cash flows from investing activities:
Proceeds from maturities and principal reductions of
marketable securities:
Held to Maturity 10,750 37,839
Available-for-sale 20,485 60,554
Proceeds from sales of marketable securities, available for sale 495,432 176,203
Purchase of marketable securities:
Held to Maturity (500) --
Available-for-sale (755,753) (408,330)
Purchase of loans -- (188,888)
Loans Sold 49,824 2,767
Net increase in loan originations less principal payments on
loans (109,119) (122,121)
Purchase of loan servicing rights (781) (7,050)
Investment in real estate held for investments 45 (43)
Proceeds from payments on real estate held for investment 182 7
Purchases of premises and equipment (4,390) (5,007)
Cash proceeds received from the sale of foreclosed real
estate 759 464
Bank acquisition net of cash received -- (14,771)
Payment for holding company formation (92) --
--------- ---------
Net Cash used in investing activities (293,158) (468,376)
--------- ---------
</TABLE>
See accompanying notes to the financial statements.
(Continued)
Page 6
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(continued)
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in deposits $ (45,232) $ 102,995
Net increase in other borrowings 365,678 348,528
Net (decrease) increase in escrow, (3,910) 1,197
Cash dividends (1,110) (1,097)
Proceeds from the exercise of stock options 442 60
--------- ---------
Net cash provided by financing operations 315,868 451,683
--------- ---------
Net increase (decrease) in cash and cash equivalents 41,357 (5,498)
Cash and cash equivalents at beginning of period 29,693 35,452
--------- ---------
Cash and cash equivalents at end of period $ 71,050 $ 29,954
========= =========
Supplemental disclosures:
Cash paid during the years for:
Interest on deposits, advances and other borrowings
(includes interest credited to deposit accounts) $ 52,663 $ 40,373
Income taxes 7,638 2,378
Non-cash investing activities:
Transfers from loans to foreclosed real estate $ 516 $ 739
Mortgage backed securities received in exchange for mortgage
loans -- 32,555
(Increase) decrease in carrying value of marketable securities
available for sale (7,670) 3,661
Bank acquisition:
Fair value of assets acquired $ -- $ 276,581
Premium paid -- 13,816
Fair value of liabilities assumed -- 252,211
</TABLE>
See accompanying notes to consolidated financial statements.
Page 7
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(Unaudited)
(1) Accounting Polices
The Consolidated Financial Statements include the accounts of Harris
Financial, Inc. and its wholly-owned subsidiary Harris Savings Bank. In turn,
Harris Savings Bank is the sole owner of the following subsidiaries: Avstar
Mortgage Corporation, Harris Delaware Corporation, H. S. Service Corporation,
First Harrisburg Service Corporation, and C.B.L. Service Corporation. All
material intercompany balances and transactions have been eliminated in
consolidation.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the results of interim periods
have been made. Operating results for the nine months and three months period
ended September 30, 1997 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1997 or any other interim period.
The accounting policies followed in the presentation of interim financial
results are consistent with those followed on an annual basis. These policies
are presented on pages 34 through 36 of the 1996 Annual Report to Stockholders.
(2) Marketable Securities
Marketable Securities consist of the following as of the date indicated:
September 30, December 31, September 30,
1997 1996 1996
------------ ------------ -------------
Held-to-maturity, at amortized cost $ 99,121 $ 109,417 $ 111,774
---------- ---------- ----------
Available-for-sale, at amortized cost 957,375 713,700 542,144
Available-for-sale, net unrealized gain 13,463 5,793 1,339
---------- ---------- ----------
Available-for-sale, at fair value 970,838 719,493 543,483
---------- ---------- ----------
Total Marketable securities $1,069,959 $ 828,910 $ 655,257
========== ========== ==========
Page 8
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(Unaudited)
(2) Marketable Securities (continued)
The amortized cost and fair value of marketable securities at September 30, 1997
by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Fair
Held-to-maturity Cost Value
--------- --------
Due in one year or less $ 9,998 $ 10,027
Due after one year through five years 56,240 56,740
Due after five years through ten years 1,717 1,751
Due after ten years 0 0
Mortgage-backed securities 31,166 31,563
-------- --------
Total securities held-to-maturity $ 99,121 $100,081
======== ========
Available-for-sale
Due in one year or less $101,125 $101,402
Due after one year through five years 97,869 99,204
Due after five years through ten years 80,665 83,108
Due after ten years 29,529 29,803
Equity Securities 132,666 139,534
Mortgage-backed securities 515,521 517,787
-------- --------
Total securities available-for-sale 957,375 $970,838
======== ========
Realized gain/(loss) from the sale of marketable securities is as follows:
For the nine months ended
September 30,
-----------------------------
1997 1996
--------- ---------
Proceeds $ 495,432 $ 176,203
========= =========
Gross gains $ 4,128 $ 2,553
Gross losses 223 2,643
--------- ---------
Net gain (loss) $ 3,905 $ (90)
========= =========
All sales of marketable securities are from the available for sale portfolio.
Page 9
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(Unaudited)
(3) Loans Serviced for Others
The following table sets forth information concerning loans serviced for others
as of the dates indicated. These balances are not included in the accompanying
consolidated statements of financial condition:
<TABLE>
<CAPTION>
September 30 December 31 September 30
1997 1996 1996
------------ ----------- ------------
<S> <C> <C> <C>
Unpaid principal balances of mortgage loans serviced for:
FHLMC $ 651,864 $ 645,403 $ 564,705
FNMA 333,027 349,671 179,961
Other investors 70,069 68,912 67,168
---------- ---------- ----------
Total Mortgage loans serviced $1,054,960 $1,063,986 $ 811,834
========== ========== ==========
Carrying value of mortgage loan servicing
rights $ 12,014 $ 12,264 $ 11,189
========== ========== ==========
Fair value of mortgage loan servicing
rights $ 15,828 $ 12,290 $ 13,290
========== ========== ==========
Valuation allowance for impairment related to
mortgage loan servicing rights $ 126 $ 122 $ 122
========== ========== ==========
</TABLE>
On January 1, 1996, the Registrant adopted Statement of Financial Accounting
Standards No. 122 "Accounting for Mortgage Servicing Rights" (SFAS 122). SFAS
122 requires an institution to recognize as separate assets the rights to
service mortgage loans for others when a mortgage is sold or securitized and the
servicing rights are retained. SFAS 122 also requires the reporting entity to
measure the impairment of the servicing rights based on the difference between
the carrying amount of the servicing rights and their current fair value. On
January 1, 1997, the Registrant adopted SFAS No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities", which
supersedes SFAS No. 122. SFAS 125 expands the method of accounting for loan
servicing rights to apply to purchased mortgage servicing rights. The preceding
table reflects the informational requirements of SFAS 125.
Page 10
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(Unaudited)
(4) Other Borrowings
The following table presents the composition of the Registrant's other
borrowings as of the dates indicated.
September 30, December 31, September 30,
1997 1996 1997
------------- ------------ -------------
FHLB advances $500,878 $419,146 $326,692
Repurchase Agreements 284,441 -- 39,531
ESOP loan 990 1,485 1,485
-------- -------- --------
Total other borrowings $786,309 $420,631 $367,708
======== ======== ========
(5) Non-operational Loss
The Registrant's wholly owned subsidiary, Harris Savings Bank (Bank) experienced
a non-operational loss in the second quarter of 1996. This loss was due to
certain violations of internal control policies and certain unauthorized
external activities concerning the Bank's relationship with a mortgage brokering
company. First Federal Savings and Loan Association of Harrisburg ("First
Federal"), which was merged into the Bank, entered into an agreement to purchase
participation interests from a mortgage brokering company, which originated
mortgages, pursuant to a Mortgage Loan Sale and Servicing Agreement
("Agreement"). The internal control violations and unauthorized activities
described above were consummated in conjunction with this agreement. The
Agreement was assumed by the Bank upon its purchase of First Federal on April
19, 1996. Subsequent to its purchase of First Federal, the Bank became aware of
these activities. The Bank then completed an internal review and an independent
external review was completed to identify the scope, impact and effect of the
unauthorized activities. In addition, certain corrective procedures were
implemented to address this situation. The Bank has ceased purchasing loans
originated by the mortgage brokering company and no longer provides table funds
for loans originated by the mortgage brokering company. Also, the Bank took
possession of certain assets of the mortgage brokering company. As a result of
these activities, the Bank incurred a loss of $4,205,000, which was recorded as
non-interest expense in the second quarter of 1996. It is management's opinion
that this event will not have any adverse impact on ongoing operations.
Subsequent to the occurrence of the activities detailed above, the Registrant
entered legal proceedings against the company that purchased the mortgages.
These proceedings were brought about as a result of alleged negligence by the
mortgage company. During the third quarter of 1997, the Registrant and the
mortgage company entered into a settlement related to this issue. As a result of
this settlement, the Registrant recognized a pre-tax gain of $1,556,000, which
is recorded as other income on the Consolidated Statements of Income for the
nine months and three months ending September 30, 1997.
Page 11
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(Unaudited)
(6) New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share". SFAS
128, which supersedes APB Opinion No. 15 (APB 15), "Earnings Per Share",
specifies the computation, presentation, and disclosure requirements for
earnings per share (EPS) for entities with publicly held common stock. It
replaces the presentation of primary EPS required by APB 15 with a presentation
of basic EPS. Basic EPS, unlike primary EPS, excludes dilution and is computed
by dividing income available to common shareholders by the weighted average
number of common shares outstanding for the period. SFAS 128 also requires the
presentation of diluted EPS, which is computed similarly to fully diluted EPS
under APB 15. Harris Financial, Inc. will adopt SFAS 128 as of December 31,
1997. Management does not expect the adoption of SFAS 128 to have a material
effect on the company's earnings per share calculation.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income" and Statement of Accounting Standards No. 131 (SFAS 131), "Disclosures
About Segments of an Enterprise and Related Information". Both SFAS 130 and SFAS
131 are effective for fiscal years beginning after December 15, 1997.
SFAS 130 establishes standards for reporting and displaying comprehensive income
and its components. The statement requires that comprehensive income be reported
in a financial statement and be displayed with the same prominence as other
financial information. Comprehensive income, as defined by SFAS 130, is the
total of net income and all other nonowner changes in equity. Management
believes that the adoption of this statement will not have a material effect on
the Registrant's financial condition or results of operations.
(7) Commitments and Contingent Liabilities
In the ordinary course of business, the Registrant makes commitments to extend
letters of credit to its customers. At September 30, 1997 and December 31, 1996,
standby letters of credit issued and outstanding amounted to $2,322,000 and
$3,206,000 respectively. These letters of credit are not reflected in the
accompanying financial statements. Management does not anticipate any
significant losses as a result of these transactions.
At September 30, 1997, the Registrant has $118,019,000 in unused line of credit
commitments extended to its customers.
Page 12
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(Unaudited)
(8) Common Stock Split
On October 21, 1997, the Board of Directors of Harris Financial, Inc. declared a
3 for 1 stock split to be effected in the form of a dividend to stockholders of
record as of November 4, 1997, and payable on November 18, 1997. All share and
per share information in this report has been restated to reflect the stock
split as if it had been in effect during all periods presented.
(9) Reorganization
On September 17, 1997, Harris Savings Bank and its existing mutual holding
company, Harris Financial, MHC, reorganized into a two-tier mutual holding
company structure with the establishment of a state chartered holding company,
Harris Financial, Inc., as the parent of the Bank. Under the terms of this
reorganization, each share of Harris Savings Bank stock was exchanged for one
share of Harris Financial Inc., stock.
The reorganization was accounted for in a manner similar to a pooling of
interest. Accordingly, the prior period consolidated financial statements of
Harris Financial, Inc. are identical to the prior period consolidated financial
statements of Harris Savings Bank.
Prior to the consummation of this reorganization, the Registrant received the
approval of the Federal Reserve, the Pennsylvania Department of Banking, and the
FDIC.
Page 13
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is management's discussion and analysis of the significant
changes in the results of operations, capital resources and liquidity
presented in its accompanying interim consolidated financial statements for
Harris Financial, Inc. Please note that Harris Financial, Inc., (the
Registrant) is the successor to issuer to Harris Savings Bank (the Bank).
This discussion should be read in conjunction with the 1996 Annual Report.
Current performance does not guarantee, and may not be indicative of
similar performance in the future.
In addition to historical information, this Quarterly Report on Form 10-Q
contains forward-looking statements, as such term is defined in the
Securities and Exchange Act of 1934 and the regulations thereunder. The
forward-looking statements contained herein are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those projected in the forward-looking statements. Important factors that
might cause such a difference include, but are not limited to, those
discussed in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations". Readers are cautioned not
to place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Registrant undertakes
no obligation to publicly revise or update these forward-looking statements
to reflect events or circumstances that arise after the date hereof.
(a) Results of Operations
NET INCOME OR LOSS The net income for the current nine month period was
$15,032,000, representing an increase of $16,530,000 or 1,103.5% from the
$1,498,000 loss reported during the first nine months of 1996. The net
income for the current quarter was $5,258,000, which was an $8,653,000 or
254.9% increase from the $3,395,000 loss for the comparable period of 1996.
NET INTEREST INCOME Net interest income, on a tax equivalent basis, totaled
$38,682,000 for the nine months ended September 30, 1997, which represents
an increase of $8,760,000, or 29.3%, from the $29,922,000 of net interest
income recorded in the nine months ended September 30, 1996. This increase
reflected a favorable volume variance of $5,511,000 due to a $477.3 million
increase in total average earning assets to $1.874 billion during the year
to date period ended September 30, 1997 as compared to $1.397 billion
recorded during the same period ending September 30, 1996.
The net volume variance of $5,511,000 was caused by the following factors:
(1) Other loans generated a positive $3,768,000 volume variance which
resulted from increased average balances acquired as part of the
acquisition of First Harrisburg Bancorp.
(2) Marketable Securities - Taxable produced a $18,598,000 favorable
volume variance which is due to growth in average balances that
reflects the ongoing execution of the current investment strategy
intended to deploy surplus capital generated by ongoing operations.
(3) Marketable Securities - Tax Free generated a positive volume variance
of $4,196,000 which is based on the growth in average balances that
reflects the Registrant's emphasis on using investment operations to
enhance overall profitability on a tax-equivalent basis.
(4) Borrowed funds generated an unfavorable volume variance of $20,448,000
which reflects the Registrant's increased reliance on wholesale
funding versus customer deposits.
The net favorable rate variance of $3,249,000 was caused by the following:
(1) Even though the average dollar balances of the Mortgage portfolio
decreased, the yield on this portfolio increased by 23 basis points to
8.23% and created a favorable rate variance of $1,000,000.
(2) The yield on Marketable Securities - Taxable increased by 47 basis
points to 6.86% and produced favorable rate variances of $1,894,000.
Page 14
<PAGE>
The current reliance on wholesale funding sources instead of customer
deposits has had the effect of increasing the Registrant's interest cost of
funds. The reliance on wholesale funding is caused by a redeployment of
excess capital generated from ongoing operations into an interest earning
capacity. The ultimate objective of this leveraging strategy is to redeploy
the current investment purchases into higher yielding assets that are
consistent with prudent Asset Liability Management (ALM) objectives.
However, the initial phases of the asset redeployment strategy generated a
decline in the net interest margin of 11 basis points to 2.75% in the year
to date period ended September 30, 1997 as compared to 2.86% recorded in
the nine month period ended September 30, 1996.
Net interest income, on a tax equivalent basis, totaled $13,307,000 for the
three month period ended September 30, 1997, which represents an increase
of $2,924,000 or 28.2%, from the $10,383,000 of net interest income
recorded in the quarter ended September 30, 1996. This increase reflected a
favorable net volume variance of $1,348,000, due to a $459.5 million
increase in total average earning assets to $2.023 billion during the three
month period ended September 30, 1997 as compared to $1.563 billion
recorded during the same quarter in the prior year. During this time
period, the increased emphasis on Marketable Securities - Taxable
investments produced a favorable volume variance of $8,159,000, while the
increased reliance on borrowed funds generated an unfavorable volume
variance of $7,371,000. Yield improvements in Mortgage loans, Marketable
securities - Taxable and Marketable securities - Taxfree generated positive
rate variances of $747,000, $310,000, and $281,000, respectively. Stable
interest costs produced an unfavorable rate variance of $93,000. Finally,
the leveraging strategy outlined in the preceding paragraph above, produced
a reduction in net interest margin of 3 basis points to 2.63% in the three
month period ended September 30, 1997, from the 2.66% recorded in the three
month period ended September 30, 1996.
Table 1 on the following pages presents the Registrant's average asset and
liability balances, interest rates, interest income, and interest expense
for each of the nine month periods and the quarters ended September 30,
1997 and September 30, 1996, respectively. Table 2 presents a rate-volume
analysis of changes in net interest income.
Page 15
<PAGE>
TABLE 1 - Average Balance Sheets, Rate, and Interest Income and Expense Summary
<TABLE>
<CAPTION>
For the nine months ended,
----------- ----------------------------------------------------------------
September 30, 1997 September 30, 1996
----------- ----------------------------------------------------------------
Average (1) (2) Average Average (1) (2) Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------- --------- ---------- ---------- ---------- ------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest Bearing assets:
Mortgage Loans, net(1) $ 558,887 $ 34,515 8.23% $ 584,217 $ 35,073 8.00%
Commercial loans 73,070 4,364 7.96% 65,863 3,964 8.02%
Other loans, net 237,039 14,785 8.32% 176,621 11,035 8.33%
Marketable Securities - Taxable 871,035 44,793 6.86% 507,218 24,302 6.39%
Marketable Securities - Taxfree(2) 100,932 6,258 8.27% 32,855 1,815 7.37%
Other interest earning assets 33,032 1,153 4.65% 29,907 1,365 6.09%
---------- ---------- ---------- ----------
Total interest-earning assets 1,873,995 $ 105,868 7.53% 1,396,681 $ 77,554 7.40%
---------- ----------
Noninterest-earning assets 63,428 59,031
---------- ----------
Total assets $1,937,423 $1,455,712
========== ==========
Liabilities and stockholders' equity
Interest bearing liabilities:
Savings deposits $ 146,971 $ 3,024 2.74% $ 146,550 $ 3,152 2.87%
Time deposits 791,717 33,021 5.56% 815,526 34,334 5.61%
NOW and money market deposits 191,814 4,838 3.36% 168,093 4,407 3.50%
Escrow 8,454 101 1.59% 8,481 103 1.62%
Borrowed Funds 593,324 26,202 5.89% 130,284 5,636 5.77%
---------- ---------- ---------- ----------
Total interest bearing liabilities $1,732,280 67,186 5.17% $1,268,934 47,632 5.00%
---------- ----------
Noninterest bearing liabilities 45,567 35,682
---------- ----------
Total liabilities 1,777,847 1,304,616
Stockholders' equity 159,576 151,096
Total liabilities and stockholder
equity $1,937,423 $1,455,712
========== ==========
Net interest income before
provision for loan loss $ 38,682 $ 29,922
========== ==========
Interest rate spread (3) 2.36% 2.40%
Net interest-earning assets $ 141,715 $ 127,747
========== ==========
Net interest margin (4) 2.75% 2.86%
Ratio of interest earning assets to
interest bearing liabilities 1.08 1.10
========== ==========
</TABLE>
(1) Includes income recognized on deferred loan fees of $805,000 and $1,146,000
for the comparable 1997 and 1996 periods, respectively.
(2) Interest income and yields are shown on a tax equivalent basis.
(3) Represents the difference between the average yield on interest-earning
assets and the average cost on interest-bearing liabilities.
(4) Represents the annualized net interest income before the provision for loan
losses divided by average interest-earning assets.
Page 16
<PAGE>
TABLE 1 - Average Balance Sheets, Rate, and Interest Income and Expense
Summary (continued)
<TABLE>
<CAPTION>
For the quarter ended,
------------ -----------------------------------------------------------------------
September 30, 1997 September 30, 1996
------------ -----------------------------------------------------------------------
Average (1) (2) Average Average (1) (2) Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------ ---------- ---------- ---------- ---------- ----------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest Bearing assets:
Mortgage Loans, net (1) $ 565,994 $ 11,619 8.21% $ 649,912 $ 12,563 7.73%
Commercial loans 83,876 1,628 7.76% 77,069 1,348 7.00%
Other loans, net 241,655 5,209 8.62% 222,235 4,619 8.31%
Marketable Securities - Taxable 988,455 17,035 6.89% 514,112 8,566 6.66%
Marketable Securities - Taxfree (2) 108,745 2,242 8.25% 61,306 1,026 6.69%
Other interest earning assets 34,151 429 5.02% 38,698 487 5.03%
----------- ---------- ---------- ----------
Total interest-earning assets 2,022,876 38,162 7.55% 1,563,332 28,609 7.32%
---------- ----------
Noninterest-earning assets 64,301 64,772
---------- ----------
Total assets $2,087,177 $1,628,104
========== ==========
Liabilities and stockholders' equity
Interest bearing liabilities:
Savings deposits $ 146,770 $ 1,020 2.78% $ 150,985 $ 1,051 2.78%
Time deposits 777,281 10,979 5.65% 843,568 11,861 5.62%
NOW and money market deposits 196,042 1,686 3.44% 179,025 1,550 3.46%
Escrow 8,003 32 1.60% 9,406 32 1.36%
Borrowed Funds 746,981 11,138 5.96% 252,545 3,732 5.91%
---------- ---------- ---------- ----------
Total interest bearing liabilities 1,875,077 24,855 5.30% 1,435,529 18,226 5.08%
---------- ---------- ---------- ----------
Non interest bearing liabilities 45,878 42,164
---------- ----------
Total liabilities 1,920,955 1,477,693
Stockholders' equity 166,222 150,411
========== ==========
Total liabilities and shareholders'
equity $2,087,177 $1,628,104
========== ==========
Net interest income before
provision for loan losses $ 13,307 $ 10,383
========== ==========
Interest rate spread (3) 2.25% 2.24%
Net interest-earning assets $ 147,799 $ 127,803
========== ==========
Net interest margin (4) 2.63% 2.66%
Ratio of interest earning assets to
interest-bearing liabilities 1.08 1.09
========== ==========
</TABLE>
(1) Includes income recognized on deferred loan fees of $311,000 and $320,000
for the comparable 1997 and 1996 periods, respectively.
(2) Interest income and yields are shown on a tax-equivalent basis.
(3) Represents the difference between the average yield on interest earning
assets and the average cost on interest-bearing liabilities.
(4) Represents the annualized net interest income before provision for loan
loss divided by average interest-earning assets.
Page 17
<PAGE>
TABLE 2 - Rate/Volume Analysis of Changes in Net Interest Income
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997 Quarter Ended September 30, 1997
Compared to Compared to
Nine Months Ended September 30, 1996 Quarter Ended September 30, 1996
Increase (Decrease) Increase (Decrease)
------------------------------------- -------------------------------------
Volume Rate Net Volume Rate Net
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans, net $ (1,558) $ 1,000 $ (558) $ (1,691) $ 747 $ (944)
Commercial loans 428 (29) 399 125 155 280
Other loans, net 3,768 (18) 3,750 413 177 590
Marketable securities - Taxable 18,598 1,894 20,492 8,159 310 8,469
Marketable securities - Taxfree 4,196 246 4,442 935 281 1,216
Other interest earning assets 133 (344) (211) (57) (1) (58)
-------- -------- -------- -------- -------- --------
Total interest earning assets 25,565 2,749 28,314 7,884 1,669 9,553
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities
Savings Deposits 9 (137) (128) (31) -- (31)
Time deposits (1,011) (302) (1,313) (944) 62 (882)
NOW and money market deposits 608 (177) 431 145 (9) 136
Escrow and stock subscriptions -- (2) (2) (5) 5 --
Borrowed funds 20,448 118 20,566 7,371 35 7,406
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 20,054 (500) 19,554 6,536 93 6,629
-------- -------- -------- -------- -------- --------
Net change in net interest income $ 5,511 $ 3,249 $ 8,760 $ 1,348 $ 1,576 $ 2,924
======== ======== ======== ======== ======== ========
</TABLE>
Note: Changes in interest income and interest expense arising from the
combination of rate and volume variances are allocated to rate and volume
variances on a pro-rata basis.
Page 18
<PAGE>
PROVISION FOR LOAN LOSSES There was a $457,000 provision for loan losses
recorded in the nine months ended September 30, 1997, due to actual and
anticipated loan growth, versus a $1,362,000 provision for loan losses recorded
in the nine months ended September 30, 1996.
In addition, there was a $153,000 provision for loan losses recorded in the
three months ended September 30, 1997, due to actual and anticipated loan
growth, versus $942,000 recorded in the quarter ended September 30, 1996.
NONINTEREST INCOME Noninterest income totaled $11,028,000 for the nine months
ended September 30, 1997. This represents an increase of $7,275,000, or 193.8%,
from the $3,753,000 recorded in the year to date period ending September 30,
1996. This increase can be attributed to several factors. The primary reason was
a $3,424,000 gain associated with the sale of mortgage backed securities in the
nine months ending September 30, 1997. This represents a $3,776,000 increase
over the $352,000 loss reported in the comparable period in 1996. In addition,
the sale of mortgage loans produced a $1,544,000 gain for the nine months ending
September 30, 1997. The year to date 1997 performance represents a $527,000
increase over the comparable nine month period in 1996. Finally, other income
generated $1,760,000, or a $1,186,000 increase over the prior nine month period
that ended in September 1996 primarily due a recovery associated with the
non-operational loss described in Notes to Consolidated Financial Statements,
Item (5) Non-operational Loss. The nine month period ending September 30, 1996,
included a non-recurring gain of $389,000 from the sale of the Registrant's
credit card portfolio.
Noninterest Income totaled $4,310,000 for the three month period ended September
30, 1997, which represents an increase of $2,629,000 or 156.4%, from the
$1,681,000 recorded in the three month period ended September 30, 1996. This
increase can be attributed primarily to the following factors. Gains on the sale
of mortgage backed securities totalled $690,000 for the quarter ending September
30, 1997. This represents an increase of $1,707,000 over the $1,017,000 loss
generated during the comparable third quarter in 1996. Other income totalled
$1,507,000 for the quarter ending September 30, 1997, a $956,000 or 173.5%
increase from the same quarter in 1996. This increase was primarily caused by a
recovery associated with the non-operational loss which is described in Notes to
Consolidated Financial Statements, Item (5) Non-operational Loss. The three
month period ending September 30, 1996, included a non-recurring gain of
$389,000 from the sale of the Registrant's credit card portfolio.
NONINTEREST EXPENSE Noninterest Expense was $24,730,000 for the nine month
period ending September 30, 1997. This is a decrease of $9,170,000, or 27.1%,
from the $33,900,000 reported for the nine month period ending September 30,
1996. The decrease in Noninterest Expense was caused, primarily, by a one-time
Savings Association Insurance Fund assessment paid in 1996, as required by the
Deposit Insurance Funds Act of 1996. In addition, the Registrant recognized a
non-operating loss of $4,205,000, in the second quarter of 1996, which loss was
associated with a mortgage warehouse fraud. No such losses or assessments were
recorded in 1997.
Offsetting these decreases were the following increases which are primarily
attributable to the acquisition of First Harrisburg Bancor, Inc. in 1996:
(1) A $1,773,000 or 16.3% increase in Salaries and Benefits to $12,685,000 for
the nine months ended September 30, 1997 vs. the $10,912,000 for the nine
months ended September 30, 1996.
(2) A $421,000 or 40.1% increase in Equipment Expense to $1,472,000 for the
nine months ended September 30, 1997 compared to $1,051,000 for the nine
months ended September 30, 1996.
(3) A $367,000 or 20.4% increase in Occupancy Expense to $2,163,000 for the
nine months ended September 30, 1997 compared to $1,796,000 for the
comparable period in 1996.
(4) A $286,000 or 19.1% increase in Amortization of Intangibles to $1,787,000
for the nine months
Page 19
<PAGE>
ended September 30, 1997 compared to $1,501,000 for the nine months ended
September 30, 1996.
The remaining significant increase is a $447,000 or 43.9% increase in
Advertising and Public relations from the September 30, 1997 nine month
period balance of $1,466,000 versus the $1,019,000 expenditure for the
comparable period in 1996. This change reflects additional costs of a
marketing campaign designed to increase the market share penetration in
certain deposit accounts, especially transaction accounts, of the Bank, the
Registrant's wholly-ownded subsidiary.
Noninterest expense equaled $8,838,000 for the quarter ended September 30,
1997, which represents a decrease of $7,261,000, or 45.1%, from the
$16,099,000 figure recorded in the quarter ended September 30, 1996. The
major reason for this performance was the one time recapitalization of the
SAIF fund that transpired in the fiscal quarter ending September 30, 1996.
PROVISION FOR INCOME TAXES Corporate income tax expense totaled $7,301,000
for the nine month period ended September 30, 1997, which resulted in an
effective tax rate of 32.7% on pretax income of $22,333,000. This
represents an increase of $6,578,000 from the $723,000 reversal of
corporate tax expense recorded during the nine month period ended September
30, 1996. During the nine month period in 1996 Harris Savings Bank produced
a pretax operating loss of $2,221,000.
Income tax expense totaled $2,582,000 for the quarter ended September 30,
1997, which resulted in an effective tax rate of 32.9% on a pretax income
of $7,840,000. During the comparable period in 1996, the Registrant, as
successor to the Bank, recorded a pretax operating loss of $5,335,000 that
produced a reduction in the tax provision of $1,940,000.
Item 2 Management's Discussion of Financial Condition and Results of
Operations
(b) Material Changes in Financial Condition
SOURCES AND USES OF FUNDS Total cash and cash equivalents increased $41.4
million during the nine month period ended September 30, 1997. For the
comparable period ending September 30, 1996, cash and cash equivalents
decreased by $5.5 million. Operating activities generated cash totaling
$18.7 million and $11.2 million during the nine month periods ended
September 30, 1997 and September 30, 1996, respectively. During the nine
month period ending September 30, 1997, investing activities of the
Registrant resulted in a net use of cash of $293.2 million, due mainly to
$755.8 million in purchases of marketable securities which was partially
offset by marketable security sales totaling $495.4 million. During the
nine month period ending September 30, 1996, purchases for the Bank's
portfolio of marketable securities used cash of $408.3 million, and loan
purchases absorbed another $188.9 million. These purchases were partially
offset by security sales totaling $176.2 million. The increase in
marketable securities activity in 1997 relative to 1996 results primarily
from the Registrant's reliance on using this portfolio to profitably deploy
excess capital generated by net income. The Bank's financing activities for
the nine month period ending September 30, 1997, resulted in a net sources
of cash totaling $315.9 million, which is primarily attributable to
borrowing increases of $365.7 million. The borrowing increases result from
the Registrant's reliance on primarily wholesale funding sources to support
investment operations. During the nine months ending September 30, 1996,
deposits inflows and other borrowings provided cash of $103.0 million and
$348.5 million, respectively.
STOCKHOLDERS' EQUITY Stockholders' equity totaled $173.0 million, $152.8
million, and $147.5 million at September 30, 1997, December 31, 1996, and
September 30, 1996, respectively. Stockholders' Equity amounted to 8.2% on
total assets of $2.110 billion as of September 30, 1997, compared to 8.6%
on total assets of $1.768 billion at December 31, 1996, and 8.6% on total
assets of $1.724 billion at September 30, 1996.
The increase in Stockholders' equity of $20.3 million or 13.3% in the nine
months ended
Page 20
<PAGE>
September 30, 1997 resulted mainly from the increase of $15.0 million in
income from ongoing operations, and $4.6 million from an increase in the
market value, net of tax effect, of the available-for-sale securities
portfolio. The increase in Stockholders' equity of $25.5 million or 17.3%
in the twelve month period ended September 30, 1997, consisted primarily of
net additions of $17.6 million in income from ongoing operations and a net
increase of $7.4 million in the market value, net of tax effect, of the
available-for-sale securities portfolio.
(Balance of this page is left intentionally blank.)
Page 21
<PAGE>
REGULATORY CAPITAL COMPLIANCE Risk-based capital standards are issued by
bank regulatory agencies in the United States. These capital standards link
a banking company's capital to the risk profile of its assets and provide
the basis by which all banking companies and banks are evaluated in terms
of capital adequacy. These risk-based capital standards require all banks
to have Tier 1 capital of at least 4.0% and total capital, including Tier
1 capital, equal to at least 8.0% of risk-adjusted assets. Tier 1 capital
consists of common stockholders' equity and qualifying perpetual preferred
stock along with related surpluses and retained earnings. Total capital is
comprised of Tier 1 capital, limited life preferred stock, qualifying debt
instruments, and the reserves for possible loan losses. Furthermore, the
banking regulators also issue leverage ratio requirements. The leverage
ratio requirement is measured at the ratio Tier 1 capital to adjusted
average assets. The following table provides a comparison of Harris
Financial, Inc.'s risk-based capital ratios and leverage ratio to the
minimum regulatory requirements for the period indicated.
<TABLE>
<CAPTION>
Minimum Minimum
Requirement Requirement
for Capital to be "Well Cap-
Actual Adequacy italized"
HARRIS FINANCIAL, INC. ------------------ ----------- ----------------
As of September 30, 1997 Amount Ratio Amount Ratio Amount Ratio
- ------------------------- ------ ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $153,468 14.3% $ 85,594 8.0% $106,992 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 144,744 13.5% 42,797 4.0% 64,195 6.0%
Tier 1 Capital
(to Avg. Assets) 144,744 7.5% 77,497 4.0% 96,871 5.0%
</TABLE>
The mid-tier holding company Harris Financial, Inc. was not formed until
September 17, 1997. Consequently, no historical information for September 30,
1996 and December 31, 1996 exists.
Page 22
<PAGE>
The following table provides a comparison of Harris Savings Bank's
risk-based capital ratios and leverage ratio to the minimum regulatory
requirements for the period indicated.
<TABLE>
<CAPTION>
Minimum Minimum
Requirement Requirement
for Capital to be "Well Cap-
Actual Adequacy italized"
HARRIS FINANCIAL, INC. ------------------ ----------- ----------------
As of September 30, 1997 Amount Ratio Amount Ratio Amount Ratio
- ------------------------- ------ ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $143,535 13.4% $ 85,599 8.0% $106,999 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 134,841 12.6% 42,800 4.0% 64,199 6.0%
Tier 1 Capital
(to Avg. Assets) 134,841 7.0% 77,497 4.0% 96,871 5.0%
As of December 31, 1996
- -----------------------
Total Capital
(to Risk Weighted Assets) $134,539 14.7% $ 73,151 8.0% $ 91,438 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 126,217 13.8% 36,575 4.0% 54,863 6.0%
Tier 1 Capital
(to Avg. Assets) 126,217 8.3% 61,099 4.0% 76,373 5.0%
As of September 30, 1996
- -------------------------
Total Capital
(to Risk Weighted Assets) $130,158 16.9% $ 61,750 8.0% $ 77,187 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 122,016 15.8% 30,875 4.0% 46,312 6.0%
Tier 1 Capital
(to Avg. Assets) 122,016 8.4% 58,228 4.0% 72,786 5.0%
</TABLE>
Pursuant to the Federal Deposit Insurance Registrant Improvement Act of
1991 ("FDICIA"), the FDIC has issued a rule which sets the capital level
for certain capital categories established in FDICIA. At September 30,
1997, Harris Financial, Inc. met the regulatory definition of a "well
capitalized" financial institution (i.e., a leverage ratio exceeding 5.0%,
Tier 1 capital exceeding 6.0%, and total capital exceeding 10.0%.)
Page 23
<PAGE>
MARKETABLE SECURITIES Marketable securities, excluding cash, totaled
$1,070.0 million, $828.9 million, and $655.3 million at September 30, 1997,
December 31, 1996, and September 30, 1996, respectively. Total marketable
securities increased $241.1 million, or 29.1%, during the first nine months
of 1997. Total marketable securities increased $414.7 million, or 63.3%, in
the twelve month period ended September 30, 1997.
Based on amortized cost, during the nine month period ending September 30,
1997, total mortgage backed securities increased $183.5 million or 50.5%,
municipal bonds increased $17.8 million or 19.8%, and equity securities
increased $50.8 million or 62.0%. For the 12 month period ending September
30, 1997 mortgage backed securities increased $196.0 million or 55.9%,
municipal securities increased $28.8 million or 36.5%, while equity
securities increased $477.0 million or 56.2%.
Table 3 on the following page presents the composition of the Registrant's
marketable securities portfolio as of September 30, 1997, December 31,
1996, and September 30, 1996, respectively.
(Balance of this page left intentionally blank.)
Page 24
<PAGE>
TABLE 3 - Composition of Marketable Securities Portfolios
The following table sets forth certain information regarding the amortized cost
and fair values of the Registrant's marketable securities portfolio at September
30, 1997, December 31, 1996, and September 30, 1996.
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996 September 30, 1996
-----------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
U.S. Government and agencies $ 67,455 $ 68,018 $ 72,513 $ 72,783 $ 72,529 $ 72,102
Israel Bond 500 500 -- -- -- --
Mortgage-backed securities:
FNMA PC's 4,272 4,383 4,780 4,901 4,927 4,990
FHLMC CMO's -- -- -- -- 1,060 1,058
Private Issue CMO's 26,894 27,180 32,124 32,228 33,258 33,164
------------------------------------------------------------------------------------
Total mortgage-backed securities 31,166 31,563 36,904 37,129 39,245 39,212
------------------------------------------------------------------------------------
Total securities held-to-maturity $ 99,121 $ 100,081 $ 109,417 $ 109,912 $ 111,774 $ 111,314
------------------------------------------------------------------------------------
Available-for-sale:
U.S. Government and agencies $ 159,647 $ 160,266 $ 143,370 $ 142,721 $ 63,480 $ 63,639
Corporate bonds 17,000 16,950 17,000 16,660 502 502
SBA's -- -- 31,522 31,705 -- --
Municipal obligations 107,646 111,123 89,840 90,155 78,867 77,420
FHLB stock -- -- 20,972 20,972 -- --
Equities (Common and Preferred) 132,666 139,534 81,915 86,836 84,932 87,809
Asset Backed Securities 24,895 25,178 2,756 2,758 2,903 2,905
Mortgage-backed securities:
FNMA PC's -- -- 10,040 10,077 10,455 10,371
FHLMC PC's 3,195 3,356 70,942 71,858 112,286 112,884
GNMA PC's -- -- 1,565 1,593 1,608 1,630
Private Issue PC's -- -- 36,598 36,749 39,253 39,296
FNMA CMO'S 156,221 156,806 62,597 62,698 46,104 46,016
FHLMC CMO's 277,108 277,891 122,851 122,866 91,738 91,022
Private Issue CMO's 78,997 79,734 21,732 21,845 10,016 9,989
------------------------------------------------------------------------------------
Total mortgage-backed securities 515,521 517,787 326,325 327,686 311,460 311,208
------------------------------------------------------------------------------------
Total securities available-for-sale $ 957,375 $ 970,838 $ 713,700 $ 719,493 $ 542,144 $ 543,483
------------------------------------------------------------------------------------
Other interest-earning securities:
FHLB daily investment $ 50,012 $ 50,012 $ 5,265 $ 5,265 $ 29,954 $ 29,954
------------------------------------------------------------------------------------
Total marketable securities and
interest bearing investments $1,106,508 $1,120,931 $ 828,382 $ 834,670 $ 683,872 $ 684,751
------------------------------------------------------------------------------------
</TABLE>
Page 25
<PAGE>
LOANS Net loans, including loans held for sale, totaled $893.7 million, $833.0
million, and $960.6 million at September 30, 1997, December 31, 1996, and
September 30, 1996, respectively. The increase of $60.7 million, or 7.3%, for
the nine months ended September 30, 1997, reflects primarily growth in
Commercial Loans. The decrease of $66.8 million, or 7.0%, for twelve month
period ended September 30, 1997, resulted from the Registrant's emphasis on
selling conforming mortgage loans. These developments are part of a strategy
designed to enhance the Registrant's ROE (Return on Equity) and maximize
shareholder value, while managing interest rate risk.
Table 4 on the following page presents an analysis of the Registrant's loan
portfolio as of September 30, 1997, December 31, 1996, and September 30, 1996,
respectively.
(Balance of this page left intentionally blank.)
Page 26
<PAGE>
TABLE 4 - Loan Composition
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996 September 30, 1996
---------------------------------------------------------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family (1) $ 546,956 60.84% $ 523,642 62.71% $ 646,690 67.00%
Other residential real estate (multi family) 17,048 1.90% 19,186 2.30% 726 0.08%
Construction (2) 24,151 2.69% 25,647 3.07% 30,809 3.19%
Other 9,616 1.07% 8,319 1.00% 8,345 0.86%
---------------------------------------------------------------------
Total mortgage loans $ 597,771 66.49% $ 576,794 69.07% $ 686,570 71.13%
---------------------------------------------------------------------
Commercial Loans 69,573 7.74% 33,058 3.96% 51,788 5.37%
Consumer and other loans:
Automobile 765 0.09% 340 0.04% 165 0.02%
Mobile Home 69,688 7.75% 65,794 7.88% 64,824 6.72%
Home equity and second mortgage 154,624 17.20% 153,464 18.38% 157,186 16.29%
Credit cards -- 0.00% 4 0.00% -- 0.00%
Other 6,638 0.74% 5,582 0.67% 4,662 0.48%
---------------------------------------------------------------------
Total consumer and other loans 231,715 25.77% 225,184 26.97% 226,837 23.50%
---------------------------------------------------------------------
Loans Receivable, gross $ 899,059 100.00% $ 835,036 100.00% $ 965,195 100.00%
---------------------------------------------------------------------
Plus:
Dealer Reserves 14,860 13,880 13,541
Less:
Unearned discounts (221) (327) (340)
Net deferred loan origination fees 11,733 7,952 10,383
Allowance for loan loss 8,695 8,322 8,141
--------- ---------- ----------
20,207 15,947 18,184
--------- ---------- ----------
Loans Receivable, net $ 893,712 $ 832,969 $ 960,552
========= ========== ==========
Mortgage Loans
ARM $ 120,751 20.20% $ 120,492 20.89% $ 135,460 19.73%
Fixed Rate 477,020 79.80% 456,302 79.11% 551,110 80.27%
---------------------------------------------------------------------
Total Mortgage Loans $ 597,771 100.00% $ 576,794 100.00% $ 686,570 100.00%
=====================================================================
</TABLE>
- ------------------
(1) Includes net loans for sale of $11,318, $9,053, and $9,512 at September 30,
1997, December 31, 1996 and September 30, 1996.
(2) Net of undistributed portion of $33,312, $27,401, $34,910 at September 30,
1997, December 31, 1996 and September 30, 1996 respectively.
Page 27
<PAGE>
MORTGAGE SERVICING RIGHTS As of September 30, 1997, December 31, 1996, and
September 30, 1996 the Bank held mortgage loan servicing rights with carrying
values totaling $12.0 million, $12.3 million, and $11.2 million, respectively.
The unpaid principal balances of loans serviced for others totaled $1.055
billion, $1.064 billion, and $812 million at September 30, 1997, December 31,
1996, and September 30, 1996, respectively. The Bank recorded amortization
expense on mortgage loan servicing rights totaling $1,095,000 during the nine
months ended September 30, 1997. The Bank recorded amortization expense on
mortgage loan servicing rights of $1,154,000, which included an impairment
valuation allowance of $122,000, in the first nine months of 1996.
At September 30, 1997, the total amount of capitalized mortgage servicing rights
(including mortgage servicing rights purchased) was $12,014,000 before the
valuation allowance. The valuation allowance for impairment related to such
rights was $126,000 at September 30, 1997. The fair value of such rights was
approximately $15,828,000 at September 30, 1997.
ASSET QUALITY The Registrant's experience in credit losses continues to rank
among the best in the community banking industry. Due to prudent underwriting
activities and the relatively stable economic environment in the Registrant's
primary market area, the Registrant's overall loan quality remains strong. To
enhance this condition, management follows a policy of continuous credit loss
monitoring, including an assessment of the adequacy of the allowance for loan
loss. This assessment is performed by considering current asset quality,
anticipated external economic conditions, overall trends of internal delinquency
by loan category, and the balance of loans within the portfolio. These
assessments are performed on a quarterly basis and the provision for loan losses
is adjusted accordingly.
Loan charge-offs, net of recoveries, totaled $85,000 for the nine month period
ended September 30, 1997, compared to $409,000 for the nine month period ended
September 30, 1996. Loan charge-offs, net of recoveries, totaled $499,000 for
the twelve month period ended September 30, 1997. Based on management's
continuing review of the loan portfolio, the Registrant recorded provision for
loan losses of $457,000 for the nine month, and $1,052,000 for the 12 month
periods ending September 30, 1996.
The allowance for loan losses totaled $8,695,000, $8,322,000, and $8,141,000 at
September 30, 1997, December 31, 1996, and September 30, 1996, respectively.
Stated as a percentage of total loans receivable, the allowance for loan losses
amounted to .96%, .99%, and .84% at September 30, 1997, December 31, 1996, and
September 30, 1996, respectively.
DEPOSITS Deposits, not including escrow funds, totaled $1.128 billion, $1.173
billion, and $1.177 billion at September 30, 1997, December 31, 1996, and
September 30, 1996, respectively. Total deposits declined by $45.2 million, or
3.9%, during the nine months ended September 30, 1997. In addition, total
deposits declined by $48.5 million or 4.1% during the twelve months ending
September 30, 1997. Both the nine month and twelve month declines reflect the
Registrant's strategy of leveraging an existing surplus capital base and paying
competitive, but not top market rates on the remaining deposit base. The deposit
decline has been offset by increased reliance on other borrowings.
Table 5 on the following page presents the composition of the Registrant's
deposit portfolio as of September 30, 1997, December 31, 1996, and September 30,
1996, respectively.
Page 28
<PAGE>
TABLE 5 - Deposit Composition
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996 September 30, 1996
----------------------------- ------------------------------ -----------------------------
Amount Percent Amount Percent Amount Percent
----------------------------- ------------------------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand and NOW Accounts $ 89,902 7.97% $ 84,715 7.22% $ 75,021 6.38%
Money Market 130,278 11.55% 129,096 11.00% 126,510 10.75%
Savings 144,986 12.85% 150,019 12.78% 149,750 12.73%
Time Deposits 763,025 67.63% 809,593 68.99% 825,424 70.15%
============================= ============================== =============================
Total Deposits $1,128,191 100.00% $1,173,423 100.00% $1,176,705 100.00%
============================= ============================== =============================
</TABLE>
(Balance of this page is left intentionally blank.)
Page 29
<PAGE>
OTHER BORROWINGS During the nine and twelve month periods ended September 30,
1997, the Registrant actively engaged in leveraging activities to redeploy its
excess capital. This strategy relies on using external sources of funds to
invest in interest earning assets at a positive spread between the yield on
interest earning asset and the cost of the support borrowing.
Other borrowings totaled $786.3 million, $420.6 million, and $367.7 million at
September 30, 1997, December 31, 1996, and September 30, 1996, respectively.
Borrowings from non-deposit funding sources increased $365.7 million, or 86.9%,
during the nine months ended September 30, 1997, and increased $418.6 million,
or 113.8%, during the twelve month period ended September 30, 1997. The
increases were due to the increase in FHLB advances to $500.9 million, which
represents an increase of $81.7 million, or 19.5%, and $174.2 million, or 53.3%,
during the nine months and twelve months ended September 30, 1997, respectively.
In addition, Other Borrowings were boosted by repurchase agreements, which
amounted to $284.4 million at September 30, 1997, versus $0 at December 31,
1996, and $39.5 million on September 30, 1996.
The implementation of the Registrant's leveraging strategy has not impaired its
access to external funds. At the end of the nine month period ending September
30, 1997, the Registrant had maximum FHLB lines of credit totalling $911.9
million vs $935.2 million in available FHLB credit for the nine month period
ending September 30, 1996. This marginal decline of 2.5% or $23.3 million is
based on increased repurchase activity during 1997. Whenever a financial
institution utilizes repurchases as a funding option, the maximum amount of
credit available from the FHLB is correspondingly reduced. This shift in
external funding sources is predicated on the current cost of funds advantage
associated with the repurchase transactions.
Table 6 on the following page presents the composition of the Registrant's other
borrowings as of September 30, 1997, December 31, 1996, and September 30, 1996,
respectively.
(Balance of this page left blank intentionally.)
Page 30
<PAGE>
TABLE 6 - Other Borrowings
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996 September 30, 1996
Amount Percent Amount Percent Amount Percent
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
FHLB Advances $500,878 63.70% $419,146 99.65% $326,692 88.85%
Repurchase Agreements 284,441 36.17% -- 0.00% 39,531 10.75%
ESOP Loan 990 0.13% 1,485 0.35% 1,485 0.40%
------------------------- ------------------------- -------------------------
Total Other Borrowings $786,309 100.00% $420,631 100.00% $367,708 100.00%
========================= ========================= =========================
</TABLE>
(Balance of this page is left intentionally blank.)
Page 31
<PAGE>
LIQUIDITY The Registrant's primary sources of funds are deposits and proceeds
from principal and interest payments on loans and mortgage-backed securities.
While maturities and scheduled amortization of loans and mortgage-backed
securities are a predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions, and competition. The Registrant anticipates that it will have
sufficient funds available to meet its current commitments.
The Registrant exceeded all regulatory standards for liquidity at September 30,
1997, December 31, 1996, and September 30, 1996.
OTHER MATTERS On January 29, 1997, the Bank filed an F-3 regarding the formation
of a two tier mutual holding company structure which was incorporated by
reference in the March 31, 1997 F-4 report. On September 17, 1997 the Federal
Reserve approved the formation of Harris Financial, Inc. (the Registrant), a
second tier holding company, which owns 100% of the outstanding shares of
Harris Savings Bank (HSB). All September 30, 1997 financial information reflects
the combined operations of the Registrant and it's wholly owned subsidiary,
Harris Savings Bank.
REGULATORY ACTIVITY Recently, Pennsylvania enacted a law to permit State
chartered banking institutions to sell insurance. This follows a U.S. Supreme
Court decision in favor of nationwide insurance sales by banks and which also
bars states from blocking insurance sales by national banks in towns with
populations of no more than 5,000. The Bank is currently evaluating its options
regarding the sale of insurance.
Congress is currently considering legislative reforms to modernize the financial
services industry, including repealing the Glass Steagall Act which prohibits
commercial banks from engaging in the securities industry. Consequently, equity
underwriting activities of banks may increase in the near future.
The Deposit Insurance Funds Act of 1996 also provides regulatory relief to the
financial services industry relative to environmental risks, frequency of
examinations, and the simplification of forms and disclosures.
From time to time, various types of federal and state legislation have been
proposed that could result in additional regulation of, and restrictions on, the
business of the Registrant and the Bank. It cannot be predicted whether such
legislation will be enacted or, if enacted, how such legislation would affect
the business of the Registrant and the Bank. As a consequence of the extensive
regulation of commercial banking activities in the United States, the
Registrant's and the Bank's business is particularly susceptible to being
affected by federal legislation and regulations that may increase the costs of
doing business. Except as specifically described above, Management believes that
the affect of the provisions of the aforementioned legislation on the liquidity,
capital resources, and results of operations of the Registrant will be
immaterial. Management is not aware of any other current specific
recommendations by regulatory authorities or proposed legislation, which if they
were implemented, would have a material adverse effect upon the liquidity,
capital resources, or results of operations, although the general cost of
compliance with numerous and multiple federal and state laws and regulations
does have, and in the future may have, a negative impact on the Registrant's
results of operations.
Page 32
<PAGE>
Further, the business of the Registrant is also affected by the state of the
financial services industry in general. As a result of legal and industry
changes, Management predicts that the industry will continue to experience an
increase in consolidations and mergers as the financial services industry
strives for greater cost efficiencies and market share. Management also expects
increased diversification of financial products and services offered by the Bank
and its competitors. Management believes that such consolidations and mergers,
and diversification of products and services may enhance its competitive
position as a community bank.
YEAR 2000 COMPLIANCE The Registrant is in the process of assessing the cost and
extent of vulnerability of the Registrant's computer systems to the "Year 2000
problem." Modifications or replacements of computer systems to attain Year 2000
compliance have begun, and the Registrant expects to attain Year 2000 compliance
and institute appropriate testing of its modifications and replacements before
the Year 2000 date change. The Registrant believes that, with modifications to
existing software and conversions to new software, the Year 2000 problem will
not pose a significant operational problem for the Registrant. However, because
most computer systems are, by their very nature, interdependent, it is possible
that non-compliant third party computers could "reinfect" the Registrant's
computer systems. The Registrant could be adversely affected by the Year 2000
problem if it or unrelated parties fail to successfully address this problem.
The Registrant has taken steps to communicate with the unrelated parties with
whom it deals to coordinate Year 2000 compliance. The costs incurred in
addressing the Year 2000 Problem will be expensed as incurred, in compliance
with GAAP.
The financial impact to the Registrant of Year 2000 compliance has not been and
is not anticipated to be material to the Registrant's financial position or
results of operations in any given year.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
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.
Page 33
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3(i) Articles of Incorporation of Registrant
(Incorporated by Reference to Exhibit B of the
Prospectus/Proxy Statement included in
Registrant's Registration Statement No. 333-22415
on Form S-4, filed with the Commission on February
26, 1997, and amended on March 17, 1997).
Exhibit 3(ii) Bylaws of Registrant (Incorporated by
Reference to Exhibit C of the Prospectus/Proxy
Statement included in Registrant's Registration
Statement No. 333-22415 on Form S-4, filed with
the Commission on February 26, 1997, and amended
on March 17, 1997).
Exhibit 10.1 Harris Savings Bank 1994 Stock Option Plan
for Outside Directors (Incorporated by Reference
to Exhibit 4.1 to Registrant's Registration
Statement No. 333-36087 on Form S-8, filed with
the Commission on September 22, 1997).
Exhibit 10.2 Harris Savings Bank 1994 Incentive Stock
Option Plan (Incorporated by Reference to Exhibit
4.2 to Registrant's Registration Statement No.
333-36087 on Form S-8, filed with the Commission
on September 22, 1997).
Exhibit 10.2 Harris Savings Bank 1996 Incentive Stock
Option Plan (Incorporated by Reference to Exhibit
4.3 to Registrant's Registration Statement No.
333-36087 on form S-8, filed with the Commission
on September 22, 1997).
Exhibit 10.3 Harris Savings Bank Recognition and Retention
Plan for Officers and Employees (Incorporated by
Reference to Exhibit 10.4 to Registrant's
Registration Statement No. 333-22415 on Form S-4,
filed with the Commission on February 26, 1997,
and amended on March 17, 1997).
Exhibit 10.4 Harris Savings Bank Recognition and Retention
Plan for Outside Directors (Incorporated by
Reference to Exhibit 10.5 to Registrant's
Registration Statement No. 333-22415 on Form S-4,
filed with Commission on February 26, 1997, and
amended on March 17, 1997).
Page 34
<PAGE>
Exhibit 10.5 Form of Employment Contracts between the Bank
and Bernard H. Sarfert, Sr. and the Bank and Lyle
B. Shughart, each dated March 13, 1997
(Incorporated by Reference to Exhibit 10.6 to
Registrant's Registration Statement No. 333-22415
on Form S-4, filed with the Commission on February
26, 1997, and amended on March 17, 1997).
Exhibit 10.6 Form of Change in Control Agreements between
the Bank and William J. McLaughlin, James L.
Durrell, William M. Long and Lyle B. Shughart, all
dated January 25, 1994 (Incorporated by Reference
to Exhibit 10.7 to Registrant's Registration
Statement No. 333-22415 on Form S-4, filed with
the Commission on February 26, 1997, and amended
on March 17, 1997).
Exhibit 10.7 Harris Savings Bank Supplemental Executive
Retirement Plan (Incorporated by Reference to
Exhibit 10.8 to Registrant's Registration
Statement No. 333-22415 on Form S-4, filed with
the Commission on February 26, 1997, and amended
on March 17, 1997).
Exhibit 11 Statement Re: Computation of Earnings Per
Share.
Exhibit 27 Financial Data Schedule
(b) Reports on form 8-K.
The Registrant filed the following Current Reports on form 8-K during
the third quarter of 1997:
(i) Current Report on Form 8-K, dated January 30, 1997, re:
Consummation of Reorganization, filed with the Securities and
Exchange Commission on September 22, 1997; and
(ii) Current Report on Form 8-K, dated September 25, 1997, re:
Resignation of Registrant's President and Chief Executive
Officer, filed with the Securities and Exchange Commission on
September 29, 1997.
Page 35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARRIS FINANCIAL, INC.
(Registrant)
By James L. Durrell
---------------------------------------
James L. Durrell, President
and Chief Executive Officer
By Joseph S. Arthur
---------------------------------------
Joseph S. Arthur, Senior Vice President
and Chief Financial Officer
Dated: November 10, 1997
Page 36
<PAGE>
EXHIBIT INDEX
Exhibit Number
- --------------
Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated by
Reference to Exhibit B of the Prospectus/Proxy Statement No.
333-22415 on Form S-4, filed with the Commission on February 26,
1997, and amended on March 17, 1997).
Exhibit 3(ii) Bylaws of Registrant (Incorporated by Reference to Exhibit C of
the Prospectus/Proxy Statement included in Registrant's
Registration Statement No. 333-22415 on Form S-4, filed with the
Commission on February 26, 1997, and amended on March 17, 1997).
Exhibit 10.1 Harris Savings Bank 1994 Stock Option Plan for Outside Directors
(Incorporated by Reference to Exhibit 4.1 to Registrant's
Registration Statement No. 333-36087 on Form S-8, filed with the
Commission on September 22, 1997).
Exhibit 10.2 Harris Savings Bank 1994 Incentive Stock Option Plan
(Incorporated by Reference to Exhibit 4.2 to Registrant's
Registration Statement No. 333-36087 on Form S-8, filed with the
Commission on September 22, 1997).
Exhibit 10.2 Harris Savings Bank 1996 Incentive Stock Option Plan
(Incorporated by Reference to Exhibit 4.3 to Registrant's
Registration Statement No. 333-36087 on Form S-8, filed with the
Commission on September 22, 1997).
Exhibit 10.3 Harris Savings Bank Recognition and Retention Plan for Officers
and Employees (Incorporated by Reference to Exhibit 10.4 to
Registrant's Registration Statement No. 333-22415 On Form S-4,
filed with the Commission on February 26, 1997, and amended on
March 17, 1997).
Exhibit 10.4 Harris Savings Bank Recognition and Retention Plan for Outside
Directors (Incorporated by Reference to Exhibit 10.5 to
Registrant's Registration Statement No. 333-22415 on Form S-4,
filed with Commission on February 26, 1997, and amended on March
17, 1997).
Page 37
<PAGE>
Exhibit 10.5 Form of Employment Contracts between the Bank and Bernard H.
Sarfert, Sr. and the Bank and Lyle B. Shughart, each dated March
13, 1997 (Incorporated by Reference to Exhibit 10.6 to
Registrant's Registration Statement No. 333-22415 on Form S-4,
filed with the Commission on February 26, 1997, and amended on
March 17, 1997).
Exhibit 10.6 Form of Change in Control Agreements between the Bank and William
J. McLaughlin, James L. Durrell, William M. Long and Lyle B.
Shughart, all dated January 25, 1994 (Incorporated by Reference
to Exhibit 10.7 to Registrant's Registration Statement No.
333-22415 on Form S-4, filed with the Commission on February 26,
1997, and amended on March 17, 1997).
Exhibit 10.7 Harris Savings Bank Supplemental Executive Retirement Plan
(Incorporated by Reference to Exhibit 10.8 to Registrant's
Registration Statement No. 333-22415 on Form S-4, filed with the
Commission on February 26, 1997, and amended on March 17, 1997).
Exhibit 11 Statement Re: Computation of Earnings Per Share.
Exhibit 27 Financial Data Schedule
Page 38
<PAGE>
Securities and Exchange Commission
Form 10-Q
Exhibit 11
Statement Regarding the Computation of Earnings Per Share
<TABLE>
<CAPTION>
For the nine month period For the quarter ending
ending September 30, September 30,
------------------------------- -------------------------------
1997(1) 1996(1)(2) 1997(1) 1996(1)(2)
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding:
Common Stock 33,680,124 32,949,993 33,714,075 32,957,994
Common Stock Equivalents(1)
Stock Options 271,227 -- 321,702 --
Stock Awards 25,455 -- 29,910 --
ESOP shares 55,536 -- 92,355 --
------------------------------- -------------------------------
Total common stock equivalents 352,218 -- 443,967 --
------------------------------- -------------------------------
------------------------------- -------------------------------
Total weighted average shares outstanding 34,032,342 32,949,993 34,158,042 32,957,994
=============================== ===============================
Net income $ 15,032,000 $ (1,489,000) $ 5,258,000 $ (3,395,000)
=============================== ===============================
Net income per share $ 0.44 $ (0.05) $ 0.15 $ (0.10)
=============================== ===============================
</TABLE>
(1) The 1997 and 1996 earnings per share calculations reflect the retroactive
effect of a 3 for 1 stock split effected in the form of a dividend that was
approved by the Board of Directors on October 22, 1997. The dividend was
declared to stockholders of record as of November 4, 1997 and will be paid on
November 18, 1997.
(2) Common stock equivalents are not factored into the 1996 per share
calculations as the inclusion of these equivalents would have an anti-dilutive
impact on the calculation.
Page 39
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 21,038
<INT-BEARING-DEPOSITS> 50,012
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 970,838
<INVESTMENTS-CARRYING> 99,121
<INVESTMENTS-MARKET> 100,081
<LOANS> 902,407
<ALLOWANCE> 8,695
<TOTAL-ASSETS> 2,110,299
<DEPOSITS> 1,128,191
<SHORT-TERM> 333,601
<LIABILITIES-OTHER> 22,782
<LONG-TERM> 452,708
0
0
<COMMON> 338
<OTHER-SE> 172,679
<TOTAL-LIABILITIES-AND-EQUITY> 2,110,299
<INTEREST-LOAN> 53,664
<INTEREST-INVEST> 50,014
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 103,678
<INTEREST-DEPOSIT> 40,883
<INTEREST-EXPENSE> 67,186
<INTEREST-INCOME-NET> 36,492
<LOAN-LOSSES> 457
<SECURITIES-GAINS> 3,905
<EXPENSE-OTHER> 24,730
<INCOME-PRETAX> 22,333
<INCOME-PRE-EXTRAORDINARY> 22,333
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,032
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
<YIELD-ACTUAL> 7.53
<LOANS-NON> 5,980
<LOANS-PAST> 797
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 14,793
<ALLOWANCE-OPEN> 8,322
<CHARGE-OFFS> 126
<RECOVERIES> 41
<ALLOWANCE-CLOSE> 8,695
<ALLOWANCE-DOMESTIC> 8,695
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,717
</TABLE>
