As filed with the Securities and Exchange Commission on September 22, 1997
Registration No. 33-___________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
Harris Financial, Inc.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2889833
(State of Incorporation) (IRS Employer Identification No.)
235 North Second Street
Harrisburg, Pennsylvania 17101
(Address of Principal Executive Offices)
---------------------------
Harris Savings Bank 1994 Stock Option Plan for Outside Directors
Harris Savings Bank 1994 Incentive Stock Option Plan
Harris Savings Bank 1996 Incentive Stock Option Plan
(Full Title of the Plans)
Copies to:
William J. McLaughlin Kenneth R. Lehman, Esquire
President and Chief Executive Officer Edward A. Quint, Esquire
Harris Financial, Inc. Luse Lehman Gorman Pomerenk & Schick
235 North Second Street A Professional Corporation
Harrisburg, Pennsylvania 17101 5335 Wisconsin Ave., N.W., #400
(717) 236-4041 Washington, D.C. 20015
(202) 274-2000
(Name, Address and Telephone
Number of Agent for Service)
---------------------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. |X|
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Title of Proposed Proposed
Securities Amount Maximum Maximum Amount of
to be to be Offering Price Aggregate Registration
Registered Registered (1) Per Share Offering Price Fee
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options to Purchase
Common Stock
Common Stock, par
value $.01 per share 29,375 shares (2) $18.28(3) $ 536,826 $163
Common Stock, par
value $.01 per share 89,650 shares (4) $10.82(3) $ 942,813 $286
Common Stock, par
value $.01 per share 21,800 shares (5) $42.53(3) $ 927,184 $281
Total: 140,825 shares $2,406,823 $730
============== ========== ====
</TABLE>
- --------------
(1) Together with an indeterminate number of additional shares which may be
necessary to adjust the number of shares reserved for issuance pursuant to
the Harris Savings Bank 1994 Stock Option Plan for Outside Directors (the
"1994 Stock Option Plan"), the Harris Savings Bank 1994 Incentive Stock
Option Plan (the "1994 Incentive Plan") and the Harris Savings Bank 1996
Incentive Stock Option Plan (the "1996 Incentive Plan") as the result of a
stock split, stock dividend or similar adjustment of the outstanding Common
Stock of Harris Financial, Inc. pursuant to 17 C.F.R. ss. 230.416(a).
(2) Represents the number of shares currently reserved for issuance pursuant to
the 1994 Stock Option Plan.
(3) Determined by the exercise price of the options pursuant to 17 C.F.R.
ss. 230.457(h)(1).
(4) Represents the number of shares currently reserved for issuance pursuant to
the 1994 Incentive Plan.
(5) Represents the number of shares currently reserved for issuance pursuant to
the 1996 Incentive Plan.
------------------------------------
This Registration Statement shall become effective upon filing in
accordance with Section 8(a) of the Securities Act of 1933 and 17 C.F.R.
ss. 230.462.
2
<PAGE>
PART I.
Items 1 and 2. Plan Information and Registrant Information and Employee Plan
Annual Information
This Registration Statement relates to the registration of (i) options
to purchase up to 29,675 shares of Common Stock of Harris Financial, Inc. (the
"Company") pursuant to the 1994 Stock Option Plan; (ii) 29,675 shares of Common
Stock reserved for issuance and delivery upon the exercise of options under the
1994 Stock Option Plan; (iii) options to purchase up to 89,650 shares of Common
Stock of Harris Financial, Inc. pursuant to the 1994 Incentive Plan; (iv)
89,650 shares of Common Stock reserved for issuance and delivery upon the
exercise of options under the 1994 Incentive Plan; (v) options to purchase up to
21,800 shares of Common Stock of Harris Financial, Inc. pursuant to the 1996
Incentive Plan; and (vi) 21,800 shares of Common Stock reserved for issuance
and delivery upon the exercise of options under the 1996 Incentive Plan.
Documents containing the information required by Part I of the Registration
Statement have been or will be sent or given to participants in the 1994 Stock
Option Plan, the 1994 Incentive Plan, and the 1996 Incentive Plan, as
appropriate, as specified by Securities Act Rule 428(b)(1). Such documents are
not filed with the Securities and Exchange Commission (the "Commission" or
"SEC") either as part of this Registration Statement or as prospectuses or
prospectus supplements pursuant to Rule 424 in reliance on Rule 428.
PART II.
Item 3. Incorporation of Documents by Reference
All documents filed by the Company pursuant to Sections 13(a) and (c),
14 or 15(d) of the Exchange Act after the date hereof and prior to the filing of
a post-effective amendment which indicates that all securities offered hereby
have been sold or which deregisters all securities then remaining unsold, shall
be deemed to be incorporated by reference into this registration statement and
be part hereof from the date of filing of such documents. Any statement
contained in this Registration Statement, or in a document incorporated by
reference herein, shall be deemed to be modified or superseded for purposes of
this Registration Statement to the extent that a statement contained herein, or
in any other subsequently filed document which also is incorporated by reference
herein, modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Registration Statement.
The following document filed or to be filed with the Commission is
incorporated by reference in this Registration Statement:
(A) The description of the Common Stock contained in the Registration
Statement on Form S-4 (Commission File No. 333-22415), originally filed by the
Company with the SEC under the Securities Act of 1933 on February 26, 1997, as
amended on March 17, 1997.
Item 4. Description of Securities
Not applicable.
Item 5. Interests of Named Experts and Counsel
None.
Item 6. Indemnification of Directors and Officers
Article VI of the Registrant's Bylaws provide for the
following indemnification for Directors and Officers.
6.1 Third Party Actions. The Corporation shall indemnify any
person who was or is a party, or is threatened to be made a party, to
any threatened, pending or completed action or
3
<PAGE>
proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation), by reason
of the fact that he is or was a director or officer of the Corporation,
or is or was serving at the request of the Corporation as a
representative of another domestic or foreign corporation for profit or
not-for-profit, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with the action or proceeding if he acted in good faith and
in a manner he reasonably believed to be in, or not opposed to, the
best interests of the Corporation and, with respect to any criminal
proceeding, had no reasonable cause to believe his conduct was
unlawful, provided that the Corporation shall not be liable for any
amounts which may be due to any such person in connection with a
settlement of any action or proceeding effected without its prior
written consent or any action or proceeding initiated by any such
person (other than an action or proceeding to enforce rights to
indemnification hereunder).
6.2 Derivative and Corporate Actions. The Corporation shall
indemnify any person who was or is a party, or is threatened to be made
a party, to any threatened, pending or completed action by or in the
right of the Corporation to procure a judgment in its favor by reason
of the fact that he is or was a director or officer of the Corporation
or is or was serving at the request of the Corporation as a
representative of another domestic or foreign corporation for profit or
not-for-profit, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees) actually and reasonably
incurred by him in connection with the defense or settlement of the
action if he acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the Corporation,
provided that the Corporation shall not be liable for any amounts which
may be due to any such person in connection with a settlement of any
action or proceeding affected without its prior written consent.
Indemnification shall not be made under this Section 6.2 in respect of
any claim, issue or matter as to which the person has been adjudged to
be liable to the Corporation unless and only to the extent that the
court of common pleas of the judicial district embracing the county in
which the registered office of the Corporation is located or the court
in which the action was brought determines upon application that,
despite the adjudication of liability but in view of all the
circumstances of the case, the person is fairly and reasonably entitled
to indemnity for the expenses that the court of common pleas or other
court deems proper.
6.3 Mandatory Indemnification. To the extent that a
representative of the Corporation has been successful on the merits or
otherwise in defense of any action or proceeding referred to in Section
6.1 or Section 6.2 or in defense of any claim, issue or matter therein,
he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
6.4 Procedure for Effecting Indemnification. Unless ordered by
a court, any indemnification under Section 6.1 or Section 6.2 shall be
made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the representative is proper in
the circumstances because he has met the applicable standard of conduct
set forth in those sections. The determination shall be made:
(1) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to the action or
proceeding;
(2) if such a quorum is not obtainable, or if obtainable and a
majority vote of a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion; or
(3) by the stockholders.
6.5 Advancing Expenses. Expenses (including attorneys' fees)
incurred in defending any action or proceeding referred to in this
Article VI shall be paid by the Corporation in advance of
4
<PAGE>
the final disposition of the action or proceeding upon receipt of an
undertaking by or on behalf of the director or officer to repay the
amount if it is ultimately determined that he is not entitled to be
indemnified by the Corporation as authorized in this Article VI or
otherwise.
6.6 Insurance. The Corporation shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
representative of the Corporation or is or was serving at the request
of the Corporation as a representative of another domestic or foreign
corporation for profit or not-for-profit, partnership, joint venture,
trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status
as such, whether or not the Corporation would have the power to
indemnify him against that liability under the provisions of this
Article VI.
6.7 Modification. The duties of the Corporation to indemnify
and to advance expenses to a director or officer provided in this
Article VI shall be in the nature of a contract between the Corporation
and each such person, and no amendment or repeal of any provision of
this Article VI shall alter, to the detriment of such person, the right
of such person to the advance of expenses or indemnification related to
a claim based on an act or failure to act which took place prior to
such amendment or repeal.
Item 7. Exemption From Registration Claimed.
Not applicable.
5
<PAGE>
Item 8. List of Exhibits.
The following exhibits are filed with or incorporated by reference into
this Registration Statement on Form S-8:
4.1 Harris Savings Bank 1994 Stock Option Plan (Incorporated by
reference to Exhibit 10.3 of the Registrant's Registration
Statement on Form S-4 (Registration No. 333-22415), originally
filed with the SEC on February 26, 1997, as amended on March
17, 1997).
4.2 Harris Savings Bank 1994 Incentive Plan (Incorporated by
reference to Exhibit 10.1 of the Registrant's Registration
Statement on Form S-4 (Registration No. 333-22415), originally
filed with the SEC on February 26, 1997, as amended on March
17, 1997).
4.3 Harris Savings Bank 1996 Incentive Plan (Incorporated by
reference to Exhibit 10.2 of the Registrant's Registration
Statement on Form S-4 (Registration No. 333-22415), originally
filed with the SEC on February 26, 1997, as amended on March
17, 1997).
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, A
Professional Corporation as to the legality of the Common
Stock registered hereby.
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, A
Professional Corporation (contained in the opinion included as
Exhibit 5).
23.2 Consent of KPMG Peat Marwick LLP.
99.1 Annual Report on Form F-2 of Harris Savings Bank for
the fiscal year ended December 31, 1997.
99.2 Quarterly Report on Form F-4 of Harris Savings Bank for the
fiscal quarter ended March 31, 1997.
99.3 Quarterly Report on Form F-4 of Harris Savings Bank for the
fiscal quarter ended June 30, 1997.
Item 9. Undertakings
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to include any
material information with respect to the Registration Statement not previously
disclosed in this Registration Statement or any material change to such
information in this Registration Statement;
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the 1994 Stock Option Plan, the 1994 Incentive Plan and the 1996 Incentive Plan;
and
4. That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the Registration Statement shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
5. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the
6
<PAGE>
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
7
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, A
Professional Corporation as to the legality of the
Common Stock registered hereby.
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick,
A Professional Corporation (contained in the opinion
included as Exhibit 5)
23.2 Consent of KPMG Peat Marwick LLP.
99.1 Annual Report on Form F-2 of Harris Savings Bank for
the fiscal year ended December 31, 1997.
99.2 Quarterly Report on Form F-4 of Harris Savings Bank
for the fiscal quarter ended March 31, 1997.
99.3 Quarterly Report on Form F-4 of Harris Savings Bank
for the fiscal quarter ended June 30, 1997.
8
<PAGE>
SIGNATURES
The Registrant. Pursuant to the requirements of the Securities Act of
1933, the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-8 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Harrisburg, State of Pennsylvania, on this 18th
day of September, 1997.
Harris Financial, Inc.
By: \s\ William J. McLaughlin
--------------------------------------
William J. McLaughlin, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
By: \s\ William J. McLaughlin By: \s\ James L. Durrell
------------------------------------ -------------------------------------------
William J. McLaughlin, President and James L. Durrell, Executive Vice President
Chief Executive Officer and Chief Financial Officer
(Principal Executive Officer) (Principal Financial Officer)
Date: September 18, 1997 Date: September 18, 1997
By: \s\ Samuel M. Altdoerffer, Sr. By: \s\ Ernest P. Davis
------------------------------------ -------------------------------------------
Samuel M. Altdoerffer, Sr., Director Ernest P. Davis, Director
Date: September 18, 1997 Date: September 18, 1997
By: \s\ Jimmie C. George By: \s\ Robert A. Houck
------------------------------------ -------------------------------------------
Jimmie C. George, Director Robert A. Houck, Director
Date: September 18, 1997 Date: September 18, 1997
By: \s\ Robert E. Kessler By: \s\ Robert R. Roebuck
------------------------------------ -------------------------------------------
Robert E. Kessler, Director Robert R. Roebuck, Director
Date: September 18, 1997 Date: September 18, 1997
By: \s\ William A. Siverling By: \s\ Frank R. Sourbeer
------------------------------------ -------------------------------------------
William A. Siverling, Director Frank R. Sourbeer, Director
Date: September 18, 1997 Date: September 18, 1997
By: \s\ Bruce S. Isaacman By:
------------------------------------ -------------------------------------------
Bruce S. Isaacman, Director William E. McClure, Jr., Director
Date: September 18, 1997 Date:
</TABLE>
9
<PAGE>
By: ------------------------------------
Donald B. Springer, Director
Date:
10
<PAGE>
The Plans. Pursuant to the requirements of the Securities Act of 1933,
the Committee which administers the 1994 Stock Option Plan, the 1994 Incentive
Plan, and the 1996 Incentive Plan have duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Harrisburg, State of Pennsylvania, on this 18th day of September 1997.
Harris Savings Bank 1994 Stock Option Plan
Harris Savings Bank 1994 Incentive Stock Option Plan
Harris Savings Bank 1996 Incentive Stock Option Plan
\s\ William J. McLaughlin
-------------------------------------------
William J. McLaughlin, President and
Chief Executive Officer
11
<PAGE>
EXHIBIT 5
OPINION OF LUSE LEHMAN GORMAN POMERENK & SCHICK, P.C.
<PAGE>
[LETTERHEAD OF LUSE LEHMAN GORMAN POMERENK & SCHICK, P.C.]
Septmber 18, 1997 (202) 274-2000
Board of Directors
Harris Financial, Inc.
235 North Second Street
Harrisburg, Pennsylvania 17101
Re: Harris Financial, Inc.
Registration Statement on Form S-8
Ladies and Gentlemen:
You have requested the opinion of this firm as to certain matters in
connection with the offer and sale of Harris Financial, Inc. (the "Company")
common stock, par value $.01 per share (the "Common Stock"), pursuant to the
Harris Savings Bank 1994 Stock Option Plan for Outside Directors, the 1994
Incentive Stock Option Plan, and the 1996 Incentive Stock Option Plan (the
"Plans"). We have reviewed the Company's Certificate of Incorporation,
Registration Statement on Form S-8 (the "Form S-8"), as well as applicable
statutes and regulations governing the Company and the offer and sale of the
Common Stock.
Based on the foregoing, we are of the following opinion:
Upon the effectiveness of the Form S-8, the Common Stock, when sold in
connection with the exercise of options granted pursuant to the Plans,
will be legally issued, fully paid and non-assessable.
This opinion has been prepared solely for the use of the Company in
connection with the preparation and filing of the Form S-8, and should not be
used for any other purpose or relied upon by any other person without the prior
written consent of this firm. We hereby consent to the use of this opinion in
the Form S-8.
Very truly yours,
/s/ Luse Lehman Gorman Pomerenk & Schick
---------------------------------------------
LUSE LEHMAN GORMAN POMERENK & SCHICK
A Professional Corporation
<PAGE>
EXHIBIT 23.2
CONSENT OF KPMG PEAT MARWICK LLP
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
Independent Auditors' Consent
-----------------------------
The Board of Directors
Harris Financial, Inc.:
We consent to the filing in the registration statement on Form S-8 of Harris
Financial, Inc. of our report dated January 21, 1997, relating to the
consolidated statements of financial condition of Harris Savings Bank and
subsidiaries as of December 31, 1996, and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1996, which report appears in the
December 31, 1996 Annual Report on Form F-2 of Harris Savings Bank.
/s/ KPMG PEAT MARWICK LLP
Harrisburg, Pennsylvania
September 19, 1997
<PAGE>
EXHIBIT 99.1
ANNUAL REPORT ON FORM F-2 OF
HARRIS SAVINGS BANK FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1997
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
Form F-2 -- Annual Report Under Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
------------------------------------------------------
FDIC Certificate No. 30174
-----------------------------------------------------------
(Exact name of bank as specified in its charter) Harris Savings Bank
-------------------------------
(State or other jurisdiction of incorporation or organization) Pennsylvania
-----------------
(I.R.S. Employer Identification No.) 25-1720585
-------------------------------------------
(Address of principal office) 235 N. Second Street, Harrisburg, PA
--------------------------------------------------
(ZIP Code) 17101
---------------------------------------------------------------------
Bank's telephone number, including area code (717) 236-4041
-----------------------------------
Securities registered under section 12(b) of the Act: None
---------------------------
Title of each class None
------------------------------------------------------------
Name of each exchange on which registered None
--------------------------------------
Securities registered under section 12(g) of the Act:
(Title of class) Common stock, par value of $.01 per share
---------------------------------------------------------------
Indicate by check mark if the bank, as a "small business issuer" as
defined under 17 CFR 240.12b-2, is providing alternative disclosures as
permitted for small business issuers in this Form F-2.[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
item 10 is not contained herein and will not be contained, to the best of bank's
knowledge, in definitive proxy or information statements incorporated by
reference in part III of this Form F-2 or any amendment of this Form F-2. [ ]
Indicate by check mark whether the bank (1) has filed all reports
required to be filed by section 13 of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the bank was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
State the aggregate market value of the voting stock held by
nonaffiliates of the bank. The aggregate market value shall be computed by
reference to the price at which the stock was sold, or the average bid and asked
prices of such stock, as of a specified date within 60 days prior to the date of
filing. $58,146,413 at March 3, 1997
Indicated the number of shares outstanding of each of the bank's classes
of common stock, as of the latest practicable date. 11,220,300 shares of common
stock, par value of $.01 per share, outstanding at March 3, 1997
Documents Incorporated by Reference
List hereunder the following documents if incorporated by reference and the part
of the Form F-2 into which the document is incorporated:
Document incorporated by reference Selected Parts of F-2 in which incorporated
- -------------------------------------------------------------------------------
Harris Savings Bank 1996 Annual Part I, Item 1
Report to Stockholders Part II, Items 5,6,7, and 8
Part IV, Item 11
Definitive Proxy Statement dated Part I, Item 4
March 14, 1997 for the 1997 Part III, Items 9,10 and 11
Annual Meeting of Shareholders Part IV, Item 11
1
<PAGE>
Documents Incorporated by Reference (continued)
Document incorporated by reference Selected Parts of F-2 in which incorporated
- -------------------------------------------------------------------------------
Definitive Proxy Statement dated Part IV, Item 11
March 20, 1996 for the 1996
Annual Meeting of Shareholders
Part I
ITEM 1 BUSINESS
Harris Savings Bank
Harris Savings Bank (the Bank) commonly referred to as "Harris Savings"
was formed as a state chartered mutual savings and loan association in 1886. In
1991, Harris Savings Association converted its charter to a state chartered
mutual savings bank and on January 25, 1994, the Bank became a state chartered
stock savings bank.
The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation (FDIC) under the Savings Association Insurance Fund (SAIF) to the
extent provided by law. The Bank has been a member of the Federal Home Loan Bank
System since 1941.
The Bank's principal business has been, and continues to be, attracting
deposits from the general public and investing those deposits, together with
funds generated from operations and borrowings, primarily in one- to four-family
residential mortgage loans and mortgage-backed securities, and to a lesser
extent, home equity lines of credit and second mortgage loans, multi-family
residential mortgage loans, real estate construction loans, commercial real
estate loans, and consumer loans.
The Bank operates thirty-two full service offices, two mortgage lending
offices, a business center, and an operations center. The Bank primarily
operates in the five central Pennsylvania counties of Dauphin, Cumberland, York,
Lancaster, and Lebanon, as well as in Washington County, Maryland. It is the
largest SAIF insured institution headquartered in the six county area that it
serves. It serves small businesses in the same area. Residential mortgages are
written in Pennsylvania plus four other states through the mortgage banking
subsidiary in Blue Bell, Pennsylvania. Mobile home loans are purchased
throughout most of the eastern United States. At December 31, 1996, the Bank had
total assets of $1.768 billion with deposits of $1.173 billion and stockholders'
equity of $152.8 million.
Acquisitions
On April 19, 1996, the Bank acquired First Harrisburg Bancor, Inc.
("First Harrisburg"), a local thrift institution. The acquisition was a 100%
cash purchase of all outstanding First Harrisburg common shares at $14.77 per
share, which resulted in a total cost of approximately $38 million, and was
accounted for by the Bank as a purchase transaction. As of April 19, 1996, First
Harrisburg had total assets of approximately $276.6 million and total
liabilities of approximately $252.2 million. The Bank recorded approximately
$13.8 million of goodwill upon consummation of this acquisition, which is being
amortized over a fifteen year period using the straight-line method.
2
<PAGE>
ITEM 1 BUSINESS (continued)
Reorganization
On December 15, 1992, the Board of Trustees of the Bank unanimously
adopted a plan of reorganization whereby the Bank would reorganize into a
Pennsylvania chartered mutual holding company. The reorganization was
accomplished on January 25, 1994 through a purchase and assumption of assets and
liabilities whereby the Bank: (i) incorporated as a Pennsylvania capital stock
savings bank; (ii) transferred most of its assets (except $1.0 million) and all
of its liabilities, including all of its deposit liabilities, to the
newly-formed bank in exchange for all of the common stock of the Bank not sold
in the Offering; and (iii) adopted a new charter issued by the Pennsylvania
Department of Banking changing its form to that of a state chartered mutual
holding company. Each savings account of the Bank at the time of the
reorganization became a savings account in the newly-formed bank in the same
amount and upon the same terms and conditions, except the holder of each such
deposit account retains liquidation rights with respect to the holding company
rather than the Bank.
Prior to the reorganization, the Bank received the approval of the
Federal Reserve, the Pennsylvania Department of Banking and the FDIC for
transactions contemplated by the plan of reorganization. The plan of
reorganization authorized the Bank to offer stock in one or more stock offerings
up to a maximum of 49% of the issued and outstanding shares of its common stock.
The common stock was offered on a priority basis to: (i) eligible depositors as
of December 1, 1992; (ii) the employee stock ownership plan (ESOP); (iii)
officers. trustees and employees of the Bank, and the Bank's recognition and
retention plans (RRP); (iv) other depositors and borrowers as of October 29,
1993; and (v) the general public. Subscriptions received during the offering
period which ended December 29, 1993, including shares reserved for the ESOP,
exceeded the maximum offering of 2,500,000 shares ($25,000,000). As a result of
the maximum subscription, Harris Financial, MHC (mutual holding company)
received 8,500,000 shares (76.4%) of Harris Savings Bank stock. Also, the ESOP
received 247,500 shares and the RRP received 125,000 shares.
On January 27, 1997, The Board of Directors of the Bank approved the
reorganization of the Bank and its existing mutual holding company into a
two-tier mutual holding company structure with the establishment of a state
chartered corporation as the stock holding company of the Bank. Completion of
the reorganization is subject to regulatory and stockholder approval and is
expected to be completed during the second quarter of 1997.
3
<PAGE>
ITEM 1 BUSINESS (continued)
Competition
The Bank's market area has a high density of financial institutions,
many of which are significantly larger and have greater financial resources
than the Bank, and all of which are competitors of the Bank to varying degrees.
The Bank's competition for loans comes principally from savings banks, savings
and loan associations, mortgage banking companies, and commercial banks. The
Bank's most direct competition for savings has historically come from savings
banks, savings and loan associations, commercial banks, and credit unions. The
Bank faces additional and increasing competition for deposits from other
financial intermediaries such as brokerage firms and insurance companies.
Competition may also increase as a result of the reduction of restrictions on
the interstate operations of financial institutions.
Employees
At December 31, 1996, the Bank employed 543 persons, with full-time
equivalent employees totaling 481 at that date.
Regulation and Supervision
Regulations
The information for this item is incorporated by reference from
information presented under the heading "Regulations" which appears on page 25
of the Harris Savings Bank 1996 Annual Report to Stockholders, a copy of which
accompanies this report as Exhibit 6.
Monetary Policy
The information for this item is incorporated by reference from
information presented under the heading "Monetary Policy" which appears on page
25 of the Harris Savings Bank 1996 Annual Report to Stockholders, a copy of
which accompanies this report as Exhibit 6.
Environmental Regulation
The information for this item is incorporated by reference from
information presented under the heading "Environmental Regulation" which appears
on page 25 of the Harris Savings Bank 1996 Annual Report to Stockholders, a copy
of which accompanies this report as Exhibit 6.
Federal Securities Laws
Shares of the Bank's common stock issued and sold in the Reorganization
and Offering are exempt from registration under Section 3(a)(5) of the
Securities Exchange Act of 1934 ("Exchange Act"). The Bank's common stock is
registered under Section 12(g) of the Exchange Act with the FDIC. Consequently,
the proxy rules, tender offer rules, insider trading restrictions, annual and
periodic reporting and other requirements of the Exchange Act are applicable to
the Bank but under the jurisdiction of the FDIC.
4
<PAGE>
ITEM 2 PROPERTIES
The Bank conducts its business through thirty-two full service offices,
two mortgage lending offices, a business center, an operations center and a
mortgage banking subsidiary location. The Bank's main office is located at 235
North Second Street, Harrisburg, Pennsylvania. The Bank believes that its
current facilities are adequate to meet its present and immediately foreseeable
needs. Aggregate annual rentals for real estate and equipment paid during 1996
did not exceed five percent of the Bank's operating expenses.
Year Leased Leased
Location or Acquired or Owned
- -------- ------------ ---------
Main Office
235 N. Second Street
Harrisburg, PA 17101 1935 Owned
Operations Center
635 North 12th Street
Lemoyne, PA 17043 1989 Owned
Business Center
234 N. Second Street
Harrisburg, PA 17101 1996 Owned
Branch Offices:
4075 Market Street
Camp Hill, PA 17011 1994 Leased
1832 Market Street
Camp Hill, PA 17011 1969 Owned
3555 Capital City Mall
Camp Hill, PA 17011 1974 Leased
3100 Market Street
Camp Hill, PA 17011 1996 Owned
Camp Hill Mall
Camp Hill, PA 17011 1996 Leased
17 West High Street
Carlisle, PA 17013 1987 Owned
Colonial Park Mall
Harrisburg, PA 17109 1976 Leased
9 South Market Street
Elizabethtown, PA 17022 1982 Leased
5
<PAGE>
ITEM 2 PROPERTIES (continued)
Year Leased Leased
Location or Acquired or Owned
- -------- ------------ ---------
36 East Main Street
Ephrata, PA 17522 1989 Leased
100 East King Street
Lancaster, PA 17603 1982 Owned
1195 Quentin Road
Lebanon Plaza Mall
Lebanon, PA 17042 1980 Leased
33 Market Square
Manheim, PA 17545 1984 Leased
600 East Simpson Street
Mechanicsburg, PA 17055 1987 Owned
Silver Spring Commons
Mechanicsburg, PA 17055 1996 Leased
99 Old York Road
New Cumberland, PA 17070 1980 Leased
921 Cavalry Road
Carlisle, PA 17013 1987 Owned
1677 Oregon Pike
Lancaster, PA 17601 1991 Owned
6075 Allentown Boulevard
Harrisburg, PA 17112 1990 Owned
355 Fifth Street
Quarryville, PA 17566 1987 Leased
2081 Springwood Road
York, PA 17403 1989 Leased
401 Enola Road
Enola, PA 17025 1979 Owned
Suite #3, Point Mall
Harrisburg, PA 17111 1975 Leased
320 Newberry Commons
Etters, PA 17319 1992 Leased
6
<PAGE>
ITEM 2 PROPERTIES (continued)
Year Leased Leased
Location or Acquired or Owned
- -------- ------------ ---------
West Shore Plaza
1200 Market Street
Lemoyne, PA 17043 1982 Leased
2450 Eastern Boulevard
York, PA 17402 1979 Owned
100 West Washington Street
Hagerstown, MD 21740 1995 Leased
1591 Potomac Avenue
Hagerstown, MD 21742 1995 Leased
526 S. 29th Street
Harrisburg, PA 17104 1996 Owned
Beaufort Farms Plaza
Harrisburg, PA 17110 1996 Leased
114 W. Chocolate Avenue
Hershey, PA 17033 1996 Owned
Hershey Square
1161 Mae Street
Hummelstown, PA 17033 1996 Owned
Mortgage Lending Offices:
4755 Linglestown Road
Suite 101
Harrisburg, PA 17112 1991 Leased
2500 Kingston Road
York, PA 17402 1987 Owned
Mortgage Banking Location:
Avstar Mortgage Corporation
Dublin Hall
1777 Sentry Parkway West, Suite 200
Blue Bell, PA 19422 1996 Leased
7
<PAGE>
ITEM 3 LEGAL PROCEEDINGS
The nature of the Bank's business generates a certain amount of litigation
involving matters arising in the ordinary course of business. However, in the
opinion of management of the Bank, there are no proceedings pending to which the
Bank is a party or to which its property is subject which, if determined
adversely to the Bank, would be material in relation to the Bank's financial
condition or results of operations, nor are there any proceedings pending other
than ordinary routine litigation incidental to the business of the Bank. In
addition, no material proceedings are pending or are known to be threatened or
contemplated against the Bank by government authorities or others.
ITEM 4 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information for this item is incorporated by reference from the
information presented under the heading "Principal Beneficial Owners of the
Bank's Common Stock" which appears in the Bank's Definitive Proxy Statement
dated March 14, 1997, a copy of which accompanies this report as Exhibit 2.
Part II
ITEM 5 MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
(a) The information for this item is incorporated by reference from the
information presented under the heading "Stockholder Information"
which appears on page 57 of the Harris Savings Bank 1996 Annual Report
to Stockholders, a copy of which accompanies this report as Exhibit 6.
(b) The number of common stock stockholders of record as of March 1, 1997
was approximately 4,100.
(c) Historical dividend information for the Bank's common stock is
incorporated by reference from information presented under the heading
"Stockholder Information" which appears on page 57 of the Harris
Savings Bank 1996 Annual Report to Stockholders, a copy of which
accompanies this report as Exhibit 6.
8
<PAGE>
ITEM 5 MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
(continued)
During 1997, the Bank currently expects to pay quarterly dividends of
$.145 per share on its common stock outstanding. No assurances can be given,
however, that any dividends will be declared or, if declared, what the amount of
the dividends will be, or whether dividends will continue to be paid in the
future. Harris Financial, MHC, which owned 8,500,000 shares (75.8%) of the
Bank's common stock as of March 1, 1997, generally intends to waive receipt of
its dividends to the extent permitted by law and regulation. In certain
instances, however, Harris Financial, MHC may elect not to waive its right to
receive a dividend where such dividend may be necessary to carry out Harris
Financial, MHC's ordinary course of business. Future dividends must necessarily
depend upon net income, capital requirements, appropriate legal restrictions and
other factors relevant at the time the Board of Directors of the Bank considers
dividend policy. Under the Pennsylvania Banking Code of 1965, as amended,
restrictions are placed on the availability of capita1 surplus for payment of
dividends.
Additional information in response to this item regarding waived dividends
is incorporated by reference from the information presented under the heading
"Corporate Reorganization and Stock Issuance", which appears on page 26 of the
Harris Savings Bank 1996 Annual Report to Stockholders, a copy of which
accompanies this report as Exhibit 6.
ITEM 6 SELECTED FINANCIAL DATA
The information for this item is incorporated by reference from the
information presented under the heading "Selected Consolidated Financial Data"
which appears on page 1 of the Harris Savings Bank 1996 Annual Report to
Stockholders, a copy of which accompanies this report as Exhibit 6.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information for this item is incorporated by reference from the section
titled "Management's Discussion and Analysis of Financial Condition and Results
of Operations" appearing on pages 9 through 26 of the Harris Savings Bank 1996
Annual Report to Stockholders, a copy of which accompanies this report as
Exhibit 6.
All statistical information presented in the above referenced document that
requires averages have been compiled using average daily amounts.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information for this item is incorporated by reference from the
Independent Auditors' Report, Consolidated Financial Statements, and Notes to
Consolidated Financial Statements appearing on pages 28 through 55 of the Harris
Savings Bank 1996 Annual Report to Stockholders, a copy of which accompanies
this report as Exhibit 6.
9
<PAGE>
Part III
ITEM 9 DIRECTORS AND PRINCIPAL OFFICERS OF THE BANK
The information for this item is incorporated by reference from the section
titled "Election of Directors" which appears in the Bank's Definitive Proxy
Statement dated March 14, 1997, a copy of which accompanies this report as
Exhibit 2.
ITEM 10 MANAGEMENT COMPENSATION AND TRANSACTIONS
The information for this item is incorporated by reference from the
information presented under the heading "Executive Compensation" which appears
in the Bank's Definitive Proxy Statement dated March 14, 1997, a copy of which
accompanies this report as Exhibit 2.
The information for the items required to be reported under Item 21 of 12
C.F.R Section 335.212 are incorporated by reference from the information
presented under the heading "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" which appears in the Bank's Definitive Proxy Statement
dated March 14, 1997, a copy of which accompanies this report as Exhibit 2.
Part IV
ITEM 11 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM F-3
(a) Contents
(a) 1. Financial Statements
The consolidated financial statements to be included in Part
II, Item 8, are incorporated by reference from the Harris
Savings Bank 1996 Annual Report to Stockholders, a copy of
which accompanies this report as Exhibit 6.
(a) 2. Financial Statement Schedules
All schedules applicable to the Bank are shown in the
respective financial statements or in the notes thereto
included in the Harris Savings Bank 1996 Annual Report to
Stockholders, a copy of which accompanies this report as
Exhibit 6.
(b) Reports on Form F-3
During the last quarter of the period covered by this
report, there were no Forms F-3 filed or required to be
filed..
10
<PAGE>
ITEM 11 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM F-3
(continued)
(c) Exhibits
(c) 1. Articles of Incorporation and Bylaws
(c) l.(i) The Articles of Incorporation of the Bank, as adopted on
January 25, 1994, are incorporated by reference from Part
II, Item 11 of the Bank's FDIC Form F-2 for the fiscal year
ended December 31, 1993.
(c) l.(ii) The Bylaws of the Bank, as adopted on January 25, 1994, are
incorporated by reference from Part II, Item 11 of the
Bank's FDIC Form F-2 for the fiscal year ended December 31,
1993.
(c) 2. Instruments defining the rights of security holders
The Bank's Definitive Proxy Statement dated March 14, 1997.
(c) 3. Material contracts
(c) 3.(i) There were no material business contracts, of the nature
described in 12 C.F.R Section 335.312, that arose outside of
the normal course of business.
(c) 3.(ii)(a) The Bank's 1994 Incentive Stock Option Plan is incorporated
by reference from Part II, Item 11 of the Bank's FDIC Form
F-2 for the fiscal year ended December 31, 1993.
(c) 3.(ii)(b) The Bank's 1994 Stock Option Plan for Outside Directors is
incorporated by reference from Part II, Item 11 of the
Bank's FDIC Form F-2 for the fiscal year ended December 31,
1993.
(c) 3.(ii)(c) The Bank's Recognition and Retention Plan for Officers and
Employees is incorporated by reference from Part II, Item 11
of the Bank's FDIC Form F-2 for the fiscal year ended
December 31, 1993.
(c) 3.(ii)(d) The Bank's Recognition and Retention Plan for Outside
Directors is incorporated by reference from Part II, Item 11
of the Bank's FDIC Form F-2 for the fiscal year ended
December 31, 1993.
(c) 3.(ii)(e) The Employment Contract dated March 13,1993 between the Bank
and Bernard H. Sarfert, Sr. is incorporated by reference
from Part II, Item 11 of the Bank's FDIC Form F-2 for the
fiscal year ended December 31, 1993.
(c) 3.(ii)(f) The Employment Contract dated March 13, 1993 between the
Bank and Lyle B. Shughart is incorporated by reference from
Part II, Item 11 of the Bank's FDIC Form F-2 for the fiscal
year ended December 31, 1993.
1l
<PAGE>
ITEM 11 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM F-3
(continued)
(c) 3.(ii)(g) The Change in Control Agreement dated January 25, 1994
between the Bank and William J. McLaughlin is incorporated
by reference from Part II, Item 11 of the Bank's FDIC Form
F-2 for the fiscal year ended December 31, 1993.
(c) 3.(ii)(h) The Change in Control Agreement dated January 25, 1994
between the Bank and James L. Durrell is incorporated by
reference from Part II, Item 11 of the Bank's FDIC Form F-2
for the fiscal year ended December 31, 1993.
(c) 3.(ii)(i) The Change in Control Agreement dated January 25, 1994
between the Bank and Bernard H. Sarfert, Sr. is incorporated
by reference from Part II, Item 11 of the Bank's FDIC Form
F-2 for the fiscal year ended December 31, 1993.
(c) 3.(ii)(j) The Change in Control Agreement dated January 25, 1994
between the Bank and William M. Long is incorporated by
reference from Part II, Item 11 of the Bank's FDIC Form F-2
for the fiscal year ended December 31, 1993.
(c) 3.(ii)(k) The Change in Control Agreement dated January 25, 1994
between the Bank and Lyle B. Shughart is incorporated by
reference from Part II, Item 11 of the Bank's FDIC Form F-2
for the fiscal year ended December 31, 1993.
(c) 3.(ii)(l) The Bank's 1996 Incentive Stock Option Plan is incorporated
by reference to Exhibit "A" of the Bank's Definitive Proxy
Statement dated March 20, 1996.
(c) 4. Statement regarding computation of per share earnings
A table showing the Bank's calculation of per share earnings
is included on the following page of this report.
(c) 5. Statement regarding computation of ratios of earnings to
fixed charges
The Bank has not issued debt securities requiring
registration under section 12 of the Securities Exchange Act
of 1934.
(c) 6. The Harris Savings Bank 1996 Annual Report to Stockholders.
12
<PAGE>
FDIC Form F-2
Part IV, Item 11, Exhibit 4
Statement regarding computation of Per Share Earnings
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1996 December 31, 1995
---------------------------- ------------------------------
Primary Fully Diluted Primary Fully Diluted
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding:
Common stock 10,984,498 10,984,498 10,879,741 10,879,741
----------- ----------- ----------- -----------
Common stock equivalents:
Stock options 65,420 72,317 85,434 87,934
Stock awards 14,878 15,919 40,375 41,000
ESOP shares 24,750 24,750 24,750 24,750
----------- ----------- ----------- -----------
Total common stock equivalents 105,048 112,986 150,559 153,684
----------- ----------- ----------- -----------
Total weighted average shares outstanding 11,089,546 11,097,484 11,030,300 11,033,425
=========== =========== =========== ===========
Net income $ 1,031,000 $ 1,031,000 $ 9,214,000 $ 9,214,000
=========== =========== =========== ===========
Net income per share $0.09 $0.09 $0.84 $0.84
=========== =========== =========== ===========
</TABLE>
13
<PAGE>
ITEM 11 EXHIBlTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM F-3
(continued)
(c) 7. Letter regarding change in accounting principles
The Bank made no changes in its accounting principles or methods
of application of accounting principles, other than those
required by the Financial Accounting Standards Board and the
American Institute of Certified Public Accountants, that would
materially affect the financial statements included in this
report.
(c) 8. Previously Unfiled Documents
There were no contracts or other documents of a type required to
be filed as an exhibit to Forms F-1, F-2, and F-4 that were
executed or in effect during the year ended December 31, 1996,
and not previously filed.
(c) 9. List of all Subsidiaries of the Bank
The Bank's unnamed subsidiaries, considered in the aggregate as a
single subsidiary, would not constitute, as of or during the year
ended December 31, 1996, a significant subsidiary under 12
C.F.R. Section 335.102.
14
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Bank has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HARRIS SAVINGS BANK
March 18, 1997 By: /s/ William J. McLaughlin
-------------------------------
William J. McLaughlin
President and Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Bank
and in the capacities and on the dates indicated.
/s/ William J. McLaughlin President and Chief Executive March 18, 1997
- ------------------------------ Officer and Director
William J. McLaughlin (Principal Executive Officer)
/s/ James L. Durrell Executive Vice President March 18, 1997
- ------------------------------ and Chief Financial Officer
James L. Durrell (Principal Accounting and
Executive Officer)
/s/ Samuel M. Altdoerffer, Sr. Director March 18, 1997
- ------------------------------
Samuel M. Altdoerffer, Sr.
/s/ Ernest P. Davis Director March 18, 1997
- ------------------------------
Ernest P. Davis
/s/ Jimmie C. George Director March 18, 1997
- ------------------------------
Jimmie C. George
/s/ Robert A. Houck Director March 18, 1997
- ------------------------------
Robert A. Houck
15
<PAGE>
/s/ Bruce S. Isaacman Director March 18, 1997
- ------------------------------
Bruce S. Isaacman
/s/ Robert E. Kessler Director March 18, 1997
- ------------------------------
Robert E. Kessler
/s/ Robert R. Roebuck Director March 18, 1997
- ------------------------------
Robert R. Roebuck
/s/ William A. Siverling Director March 18, 1997
- ------------------------------
William A. Siverling
Director March , 1997
- ------------------------------
Frank R. Sourbeer
16
<PAGE>
"Exhibit 6"
<PAGE>
1996 ANNUAL REPORT
positioning to build a
stronger bank
<PAGE>
table of
Selected Consolidated Financial Data 1
President's Message 2
Board of Directors 5
Officers 5
Positioning to Build a Stronger Bank 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Results of Operations 10
Financial Condition 14
Management Report 27
Independent Auditors' Report 28
Consolidated Statements of Financial Condition 29
Consolidated Statements of Income 30
Consolidated Statements of Stockholders' Equity 31
Consolidated Statements of Cash Flows 32
Notes to Consolidated Financial Statements 34
Office Locations 56
Stockholder Information 57
VISION STATEMENT
Harris Savings Bank will be foremost on the minds of the people of southcentral
Pennsylvania and northern Maryland when they look to a strong and responsive
financial institution for their individual and family savings and lending needs.
Regarded as strong, responsive and progressive, Harris Savings Bank serves the
savings, investment and credit needs of individuals, families and local
businesses in its growing market area.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(All dollar amounts presented in the tables, except for per share amounts,
are in thousands.)
Set forth below are selected financial data of Harris Savings Bank. This
information is derived in part from and should be read in conjunction with the
Consolidated Financial Statements of Harris Savings Bank and Notes which are
presented later in this report.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At Year End:
Total assets ...................................... $ 1,768,112 $ 1,255,864 $ 1,058,088 $ 1,087,006 $ 1,051,740
Loans receivable, net ............................. 823,916 651,605 574,794 566,550 706,588
Loans held-for-sale, net .......................... 9,053 0 0 0 31,392
Marketable securities ............................. 828,910 524,932 409,123 424,181 193,425
Deposits .......................................... 1,173,423 1,073,710 910,576 937,903 950,662
Escrow/stock over-subscriptions ................... 8,203 4,649 5,116 11,643 5,700
Advances from FHLB-Pittsburgh
and other borrowed funds .......................... 419,146 17,200 0 0 0
Other borrowings .................................. 1,485 1,980 2,475 0 0
Retained earnings, (partially restricted) (1) ..... 124,812 125,244 117,292 107,886 90,228
Paid in capital and common stock .................. 26,014 25,434 24,656 0 0
Unearned ESOP and RRP shares ...................... (1,689) (2,339) (3,007) 0 0
Net unrealized gain (loss) on
marketable securities.............................. 3,615 3,120 (3,905) 0 0
</TABLE>
(1) Retained earnings are partially restricted in connection with regulations
related to the insurance of savings accounts which require the Bank to
maintain certain statutory reserves.
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years:
Interest income ............................ $ 107,988 $ 80,625 $ 73,932 $ 81,020 $ 94,620
Interest expense ........................... 67,326 47,696 38,241 41,409 52,333
--------- --------- --------- --------- ---------
Net interest income ..................... 40,662 32,929 35,691 39,611 42,287
Provision for loan losses ............. 1,957 0 0 800 2,484
--------- --------- --------- --------- ---------
Net interest income after provision
for loan losses ......................... 38,705 32,929 35,691 38,811 39,803
Non-interest income ........................ 3,996 2,564 2,503 4,563 7,902
Non-interest expense ....................... 42,187 20,776 20,793 17,966 23,813
--------- --------- --------- --------- ---------
Income before income taxes and
cumulative effect of accounting changes.. 514 14,717 17,401 25,408 23,892
Income taxes ............................... (517) 5,503 7,348 9,170 10,654
--------- --------- --------- --------- ---------
Income after taxes and before
cumulative effect of accounting changes 1,031 9,214 10,053 16,238 13,238
Cumulative effect of accounting changes .... 0 0 0 1,420 0
--------- --------- --------- --------- ---------
Net income .............................. $ 1,031 $ 9,214 $ 10,053 $ 17,658 $ 13,238
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
----------------------------------------------------------------
1996 (1) 1995 1994 1993 1992
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Ratios:
Return on average assets ............ 0.07% 0.81% 0.93% 1.67% 1.26%
Return on average equity ............ 0.68% 6.34% 7.59% 17.75% 15.41%
Average equity to average assets .... 9.88% 12.83% 12.27% 9.42% 8.16%
Per Share Data:
Combined pre- and post-reorganization
earnings per share ................ $ 0.09 $ 0.84 $ 0.92
Earnings per share (2) .............. $ 0.09 $ 0.84 $ 0.85
Dividends per share ................. $ 0.58 $ 0.51 $ 0.27
Book value per share ................ $ 13.62 $13.51 $12.08
Dividend payout ratio (3) ........... 141.90% 13.70% 6.44%
</TABLE>
(1) Includes the acquisition of First Harrisburg Bancor in 1996.
(2) Earnings per share for 1994 includes only earnings generated subsequent to
the corporate reorganization and stock issuance completed January 25, 1994.
(3) Excludes dividends waived by the Bank's mutual holding company parent,
Harris Financial, MHC, totaling approximately $4.9 million in 1996, $4.3
million in 1995 and $2.3 million in 1994.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 1
<PAGE>
president's message
To our Stockholders:
"Positioning to Build a Stronger Bank" characterizes 1996 at Harris Savings
Bank. Many exciting changes marked the period; many significant events
transpired in a year that was challenging and full of opportunities. Our Board
of Directors and Management have witnessed these occurrences and have taken the
opportunity to enhance our operational procedures and strengthen our position in
the marketplace. We fully understand that to continue as a vital, profitable and
dynamic financial institution serving the needs of the people and businesses in
our community, we must achieve exceptional performance in all facets of our
business.
As anticipated, the most significant event occurred on April 19, 1996, when
the former First Federal Savings and Loan Association of Harrisburg became part
of the Harris organization. The addition of this institution brought about
several notable changes at Harris Savings.
[PHOTO]
William J. McLaughlin
President and Chief Executive Officer
We converted the old headquarters office of First Federal (just across
Second Street from the Harris Savings Bank main office) to our Harris Savings
Business Center which houses several departments, including our newly formed
Business Banking Group, which I will speak about in greater detail later in this
report. We closed the First Federal branch office on Jonestown Road because of
the proximity to our Paxton Square office. The acquisition of First Federal
increased our number of branch locations to 31 and our total assets by $276
million to approximately $1.5 billion. It also gave us the opportunity to
further penetrate a market in which we already had considerable presence and
recognition. This, in turn, allows us to offer better service through more
locations than ever before.
Along with the purchase of First Federal came its wholly owned subsidiary,
Avstar Mortgage Corporation, which is licensed to operate in five states and is
the largest originator of FHA mortgages in the Philadelphia area. Avstar
favorably enhances our existing status as a premier mortgage lender in
southcentral Pennsylvania through a vastly expanded marketing area. This
enhancement should provide a significant increase in mortgage loan production.
Even though the transition was extremely smooth and the overall
assimilation of First Federal is now complete, the purchase also had its down
side. A preexisting problematic relationship between First Federal and a
Maryland mortgage banking firm caused after tax profits at Harris to be reduced
by $2.5 million in the second quarter.
A second dramatic event occurred that will strengthen future operations at
the Bank. As you may be aware, Harris Savings Bank deposits are insured by the
Savings Association Insurance Fund (SAIF). The commercial banks with which we
compete generally have their deposits insured by the Bank Insurance Fund (BIF).
We have been at a serious competitive disadvantage relative to the premium per
deposit dollar versus the commercial banks' premiums. Our premium has been at 23
basis points versus their average premium of slightly over six basis points. In
1996 we made a one-time payment of $7 million to the FDIC, which had an
immediate negative impact on earnings. However, this allows us to reduce our
premiums to a much lower 6.44 basis points beginning in 1997. This assures that
we will have relative parity with commercial banks. Because of this one-time
outlay, we will be realizing very substantial savings on future FDIC premiums.
One of the major accomplishments of 1996 was the creation and development of
our Business Banking Group. This newly formed department has already made a
great impact upon the market. It offers a comprehensive range of business
banking services, including business checking, direct deposit services, business
banking employee services, cash management assistance, merchant credit card
service and corporate credit cards, multipurpose term loans, lines of credit,
2 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
development and construction financing, commercial real estate financing and an
incredible commitment to provide an unparalleled business banking service level.
We have increased our capabilities of penetrating regional business through the
use of focus groups with both Harris and non-Harris customers. This research
allowed us to gather qualitative data to measure service levels, product design
and expectations. We will use this information to guide our product and service
offerings and our marketing thrust in order to become a dominant force in the
market.
Yet another exciting event took place this past September when we opened an
office near Hummelstown at Hershey Square. Bringing our number of offices to the
current total of 32, this newest addition to the Harris Savings branch system
with its three drive-up windows and a drive-up ATM is geared toward people who
value convenience and accessibility. Also, we are eagerly awaiting our first
in-store branch. We anticipate the grand opening of our branch inside the
Festival Foods store in the Swatara Shopping Center by Spring, 1997. The
in-store branch gives us a presence in the area between our Hershey locations
and the Union Deposit branch. We will continue to seek opportunities to fill
gaps in our market coverage area in order to provide individuals and businesses
with the convenience they desire and deserve.
[PHOTO]
Hershey Square Grand Opening
September 21, 1996
We saw several other significant changes and activities in 1996:
o We have undertaken a sincere effort to make a real difference in the
quality of service we provide to our customers. In a time when so many
financial institutions compete with rates, our goal is to deliver an
uncommonly high level of service excellence as well as competitive rates in
order to differentiate us from our competitors. After visiting many of our
branches throughout the past several years, one thing has become evident --
people want and expect to receive superb personal service, and they will
migrate to a provider of such service. We have taken this key issue to
heart. I have issued the challenge to our entire staff, "Harris Savings
must establish a standard of quality service that is envied by every other
financial institution. And, we must tangibly demonstrate our commitment to
each client we serve, every time, everywhere." We are currently reviewing
and revising our service standards to ensure continuous improvement.
o For many years Harris has had a Marketing committee which met regularly to
discuss strategies, campaigns and activities to sell our products and
services. In an effort to involve more people and more departments in this
process, the committee was restructured to include six (6) permanent
members as well as five (5) non-voting advisory members who are appointed
for a one year period. These members come from a wide variety of
departments and bring fresh ideas and feedback to our efforts.
o We embarked upon one of the most aggressive marketing programs in the
history of Harris Savings Bank when we introduced our High Performance
Checking accounts. What a success it has been! We have opened over 12,000
new checking accounts and the interest is not slowing. Signs have filled
our lobbies, mailings blanket our communities and the Tell-A-Friend
campaign, which rewards Harris clients for referring new checking clients,
has been a rousing success. Not only has this program brought in additional
deposits, it has also created a sizable group of new Harris Savings
clients. We will expend considerable effort not just in marketing of our
present product lines to these clients, but also in assessing their future
product and service needs. We believe this will benefit both Harris and our
community.
o Another reason 1996 was special was that this year marked the celebration
of our 110th anniversary. Since that event ran concurrently with the
dedication of our new branches acquired in the First Federal purchase, we
proudly celebrated the milestone with festivities and contests in all the
Harris branches. This event was especially significant because it gave us
an opportunity to examine our roots and traditions as a community bank. We
reflected upon our original purpose which was to be a community financial
institution. While many factors such as automated delivery systems, an
array of modern bank products and convenient new services have brought
innovation, our basic philosophy has never wavered.
o Our Board of Directors, during our Fall Retreat, agreed upon several very
important guidelines for Harris Savings Bank. They restated our Core Values
which are Integrity, Honesty, Corporate Social Responsibility and Financial
Strength. These values are vital in determining how well we will continue
to serve our community and how we will build a better bank as we proceed in
the future. In fact, they go hand-in-hand with our Core Purpose: "To
satisfy individual, family and business financial needs in whatever market
we choose to serve." In order to achieve that purpose, we see the
increasing need for accountability, for responsiveness to our customers and
shareholders, and the necessity for progressive practices that will ensure
our continued success. These are lofty ideals, indeed, but a firm
commitment has been made and will be kept. A leader in community banking
makes and keeps its promises.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 3
<PAGE>
o We introduced our Harris Savings Bank web site on the Internet this past
year. Now our customers and browsers can receive information about our
products and services via their computers. We are constantly updating the
information that we feature and are looking into ways to use this medium as
a delivery system. We can be reached at the following web address:
http://www.harrissavingsbank.com.
o Harris Savings continued its commitment to the communities in which it
operates through its contributions and volunteer activities to charitable
organizations such as Habitat for Humanity's "House Blitz '96," support for
area United Way organizations, South Central Pennsylvania Food Bank,
American Diabetes "WalkOctoberfest" and many other groups throughout the
communities where Harris is a neighbor. We are always proud to participate
and actively support Harris Savings employees who give their time and labor
so willingly and eagerly. Also, we have made a commitment to sponsor "Music
for Jake," a concert benefiting the Jake Gittlen Cancer Research Institute
at Hershey Medical Center of Penn State University. This event will take
place in September, 1997.
o Recognizing the growth of the diverse minority groups in many communities
in which we have a presence, we have taken an ever more active posture to
attract and serve these groups. We appreciate and value the cultural
diversity these minority groups represent. As an example of our desire to
provide the best possible service, we recruit Spanish-speaking personnel
for those branches in neighborhoods where we have a large Latino client
base and also in our Telephone Banking Center. We maintain our dedication
to providing low to moderate income home financing in many inner city
neighborhoods and our willingness to provide other products and services
that will benefit these individuals and their communities.
o In an ongoing effort to make all of our bank services increasingly
user-friendly, we have begun to restyle many of our statements, including
our maturity notices. In the case of our mortgage accounts, we are
replacing the coupon books with monthly billing statements which will allow
us to include messages to our customers that may feature other products and
services as well as notify them of any special requirements or changes in
their account status. We will continue to seek ways to keep clients
informed and to simplify and clarify their dealings with us.
o Our Consumer Loan Department has embarked upon an aggressive third party
lending program, especially with area home improvement contractors. Through
this program, Harris Savings will provide these contractors with the
information and materials necessary to explain Harris home improvement
financing to individuals so that they may schedule their home improvement
and obtain financing for it with one convenient stop. Financing options
through this new program include our traditional fixed rate home equity
loan, home equity line of credit, and FHA Title I Property Improvement
Equity (P.I.E.) Loans. These various programs provide affordable financing
options and flexibility for the consumer as well as offer the contractor or
sales organization very convincing sales tools to attract and increase
business.
[PHOTO]
Our Telephone Bankers provide a
number of banking services -- just a
phone call away.
o The final area I want to mention is the Telephone Banking Center. Created
and designed specifically to make banking easier and guarantee clients
prompt and direct service, this new group has done precisely that. Now we
can answer clients' questions on the spot, provide product and service
details and even take applications and open accounts, in many cases at the
time of inquiry. We plan to increase the hours of operation of the
Telephone Banking Center as well as utilize this capability for outbound
telemarketing opportunities.
Many initiatives have been brought to fruition in 1996. Our activities laid
the groundwork for future growth and development. These endeavors allow Harris
Savings Bank to continue as a strong and independent financial institution
serving southcentral Pennsylvania and northern Maryland. We will continue to
learn who our clients are and their expectations so that we may remain
responsive to their needs. We will strive to keep in touch with them. We will
work hard to maintain our heritage of service excellence. We will remain a vital
and dynamic community bank who values its reputation and its commitment to the
people who look to us for solutions to their financial needs.
So much in our industry is changing. We must change to keep pace. But we
will never abandon the time-tested core values that must be embedded in a
successful community bank. Our employees, our managers and our directors are
firm in their resolve to build upon our strength and past success in forging a
future that ensures continued vitality and profitability. The time is now for
Harris Savings Bank to stride confidently into the future.
/s/ William J. McLaughlin
-------------------------------------
William J. McLaughlin
President and Chief Executive Officer
4 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
board of directors
DIRECTORS
Samuel M. Altdoerffer, Sr.
Ernest P. Davis
Jimmie C. George
Robert A. Houck
Bruce S. Isaacman
Robert E. Kessler
William J. McLaughlin
Robert R. Roebuck
William A. Siverling
Frank R. Sourbeer
DIRECTORS EMERITUS
Robert A. Adams
Bernard S. Brenner
C. Ted Lick
[PHOTO]
Senior Officers, from left:
Bernard H. Sarfert, James L. Durrell, William J. McLaughlin,
William M. Long, Lyle B. Shughart.
officers
OFFICERS
William J. McLaughlin
President and Chief Executive Officer
James L. Durrell
Executive Vice President and Chief Financial Officer
William M. Long
Senior Vice President, Lending Division
Bernard H. Sarfert, Sr.
Senior Vice President, Administration Division and Corporate Secretary
Lyle B. Shughart
Senior Vice President, Retail Services Division
Joseph S. Arthur
Vice President and Treasurer
Steven E. Gifford
Vice President, Consumer Loans
Charles J. Glunz, II
Vice President, Mortgage Loan Manager
Barry F. Gulden
Vice President, Management Information Systems
Robert L. Hoster
Vice President, Internal Auditor
Barbara E. Roth
Vice President, Human Resources
Andrew Samuel
Vice President, Business Banking
Robert A. Shaffer
Vice President, General Services
James W. Steiber
Vice President and Controller
Richard H. Steltzer
Vice President, Marketing and Assistant Secretary
J. Douglas Thomas
Vice President, Retail Banking
Paul R. Wagner
Vice President, Loan Support Services
Thomas A. Bream
Assistant Vice President and Commercial Loan Officer
Harry W. Deiter
Assistant Vice President and Financial Controls Officer
Joan E. Dickinson
Assistant Vice President and Commercial Loan Officer
Ronald E. Guss
Assistant Vice President, Compliance
Marci J. Heidelbaugh
Assistant Vice President and Regional Mortgage Loan Manager
Nora J. McGuire
Assistant Vice President, Retail Administration
Donald L. Wiest, II
Assistant Vice President and Investment Manager
Michael R. Yuhas
Assistant Vice President and Indirect Loan Manager
Doris K. Ney
Assistant Secretary and Loan Servicing Manager
Mary E. Rieder
Assistant Secretary and Direct Consumer Loan Manager
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 5
<PAGE>
positioning to
a stronger bank
[PHOTO]
Harris customers appreciate the
convenience afforded by our new ATM
locations. Pictured above is one of our
three new Turkey Hill ATMs.
Harris Savings Bank is a community bank. We have made a conscious effort to
provide meaningful financial products and services to the people in the
communities we serve. If that means we change our old ways of doing things to
make things easier for our clients, we will do it. If it means we introduce new
products and services to meet the expectations of today's families, individuals
and businesses, we do it. Our concept of a community bank is one that meets the
dynamic and growing needs of the people who depend upon us for their financial
needs.
[PHOTO]
At Harris, we are dedicated to continuous
improvement in service to our clients.
PERSONAL SERVICE
Now more than ever, you are able to deal with Harris people at your
convenience. Our Telephone Bankers provide information, give product details,
take applications, open accounts and move funds from one account to another. Our
plans call for an expanded Telephone Banking Department with more people and
extended hours of operation.
[PHOTO]
Our Community Banking Representatives are an
asset to customer service at Harris.
The number of Harris ATMs was dramatically increased, including three ATMs
in Turkey Hill Minit Markets. Our new Harris Savings Check and ATM Card allows
our checking clients to use these handy cards just like cash at restaurants,
retail stores, service stations and anywhere the Visa(Registration Trademark)
symbol is displayed.
Our Consumer Loan Department streamlined the application and approval
processes to the point where we can provide a turnaround on some loans in
minutes. Also, our network of Mortgage Representatives provides the individual
attention that everyone deserves when looking for the financing for his or her
new home.
[PHOTO]
Acquired in the purchase of First
Federal Savings and Loan Association
of Harrisburg, Avstar Mortgage
Corporation adds to the strength of
Harris' Mortgage Lending Services.
6 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
PRODUCT INNOVATION
Providing the financial products that clients ask for is a tradition at
Harris Savings. That is why we offered seven new checking accounts this year.
Each one is designed to appeal to a certain segment of our market. The success
of these accounts was overwhelming. We continue to offer our Saver's Advantage
account which allows our clients, in combination with any Harris checking
account, to earn higher interest than our regular statement savings or passbook
account. Also, our Liquid Asset Manager account, which offers an indexed annual
percentage yield, ATM access and check writing privileges, among other features,
continues to be popular. With a minimum initial investment of $25,000, this
account provides a competitive rate of return while ensuring the liquidity
required by some clients.
[PHOTO]
1996 featured the introduction of
seven new checking account programs,
including Totally Free Checking.
Our Consumer Loan Department aggressively pursues third-party lending
arrangements with home improvement contractors. By offering a variety of
programs such as FHA Title I and Property Improvement Equity (P.I.E.), and our
commitment to prompt loan processing and rapid response time for approvals, we
are able to compete effectively in this specialty lending market.
[PHOTO]
Our Business Banking Group partners with area businesses
to help them grow and succeed.
BUSINESS BANKING
New to Harris Savings Bank is our Business Banking Group. Now we are
positioned to serve local and regional businesses with a full complement of
convenient and accessible business banking products and services. We partner
with businesses to help with their checking and deposit requirements, their real
estate and capital improvements financing, line of credit needs and cash
management.
Our experienced team of Business Bankers will meet with clients, assess
their unique situations and requirements and arrange the accounts necessary to
accomplish their goals. We believe that Harris Savings provides the same
financial services that can be found at the "megabanks" but with the personal
attention a community bank can deliver. As we become an increasingly dominant
force in the business banking area, many other business owners and professionals
will realize that our commitment to establishing business partnerships will have
far reaching beneficial effects on their bottom line. That is, after all, one of
our missions -- to see that area businesses thrive and prosper.
RELATIONSHIPS
Because we employ qualified, caring people and train them well, we are able
to pledge an uncommon level of service to everyone. That is the essence of
community banking -- knowing and respecting the needs and wants of each person
we are called upon to serve, and providing those products and services to assist
them in achieving a fuller, richer life.
[PHOTO]
Harris Savings Bank provides an
uncommon level of service to everyone.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 7
<PAGE>
financial
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
This section presents Management's discussion and analysis of the financial
condition and results of operations of Harris Savings Bank and Subsidiaries.
This discussion and analysis should be read in conjunction with the consolidated
financial statements and notes which appear later in this report.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements. 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 Bank undertakes no
obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Bank files
from time to time with the Federal Deposit Insurance Corporation, including the
Quarterly Reports on Form F-4 to be filed by the Bank in 1997, and any Current
Reports on Form F-3 filed by the Bank.
SUMMARY
Harris Savings Bank ("the Bank" or "Harris Savings") began providing
financial services as a state chartered mutual savings and loan association in
1886. Harris Savings continued to operate under this charter until 1991, when
Harris Savings Association converted its charter to a state chartered mutual
savings bank. On January 25, 1994, with its conversion to a state chartered
stock savings bank, Harris Savings became for the first time a publicly traded
stock bank. As an integral part of this conversion, the Bank completed a
successful stock issuance that raised net proceeds of $23.7 million. On January
27, 1997, the Bank announced the intention to reorganize the existing mutual
holding company into a two-tier holding company with the establishment of a
state chartered corporation at the stock holding company parent of the Bank. The
deposits of the Bank are insured by Federal Deposit Insurance Corporation (FDIC)
under the Savings Association Insurance Fund (SAIF). As the largest SAIF insured
institution headquartered in southcentral Pennsylvania, Harris contributed
$7,044,000 to the recapitalization of the fund on September 30, 1996. The Bank
has been a member of the Federal Home Loan Bank System since 1941. The Bank
presently operates 32 full service offices, an operations center and a business
center and primarily serves depositors in the five central Pennsylvania counties
of Dauphin, Cumberland, York, Lancaster, and Lebanon and in the northern
Maryland county of Washington. It serves small businesses in the same area.
Residential mortgages are written in Pennsylvania plus four other states through
the mortgage banking subsidiary in Blue Bell, Pennsylvania. Mobile home loans
are purchased throughout most of the eastern United States.
At December 31, 1996, the Bank had total assets of $1.8 billion with
deposits of $1.2 billion and stockholders' equity of $153 million.
The Bank's primary lending activities continue to be the origination of
loans secured by first mortgages on owner-occupied one-to-four family
residences. At December 31, 1996, such loans totaled $514.7 million or 62.3% of
total loans. The Bank began originating commercial loans in 1996 and its
portfolio totaled $17.6 million at December 31, 1996.
The net income of the Bank is dependent to a substantial extent on net
interest income, which represents the difference between interest income earned
on loans and investments and interest expense incurred on deposit accounts and
borrowings. Interest income is derived from the average interest yield earned on
average interest earning assets, while interest expense represents the average
interest cost incurred on average interest-bearing liabilities. Because of this
reliance on net interest income, Harris Savings is affected by changes in the
overall level of interest rates and prevailing economic conditions. Generally,
as interest rates rise, the percentage of net interest income of the Bank will
tend to fall and conversely, when interest rates fall, the percentage of net
interest income will tend to rise. This condition is often referred to as
"interest rate risk". Financial institutions which accept and manage substantial
degrees of interest rate risk are generally susceptible to larger net interest
income fluctuations when compared to peer institutions which accept less
interest rate risk. Accordingly, successful management of interest rate risk is
a primary determinant of the Bank's return on equity.
During most of 1996, interest rates remained relatively stable with swings
in interest rates moving within a narrow range, primarily due to low inflation
and a relatively stable economy. Therefore, there was not a lot of fluctuation
in the net interest margin percentages. Two factors contributed to the change in
net interest income from 1995. The acquisition of First Harrisburg Bancor on
April 19, 1996 increased the size of the operation. Secondly, the Bank
aggressively leveraged the balance sheet in order to utilize its excess capital.
The leveraging exercise added absolute dollars to net income but resulted in
reduced margins. This had the effect of reducing the overall net interest margin
percentage. Many of the investments were tax reduced or tax free investments,
actually contributing to the overall net interest margin percentage on a
tax-equivalent basis. However, the net interest margin percentage decreased in
total to 2.87% for the year ended December 31, 1996 compared to 3.00% for the
year ended December 31, 1995.
Another major risk normally undertaken by financial institutions is "credit
risk". This is the risk that a borrower will not repay a loan and that the
underlying collateral will be insufficient to prevent a significant loss. Credit
losses in 1996, 1995, and 1994 were considered to be immaterial and consistent
with Harris' long history of being among the top performers in the industry in
asset quality. In 1996, Harris began to underwrite commercial loans on
businesses and as such, it began to take on more credit risk and become more
like a full service community bank. This is part of a planned restructuring to
place less reliance on interest rate risk and to diversify the assets of the
Bank.
The Bank has historically practiced expense control. As it continued the
transition to a community bank, additional expenses were incurred during the
year ended December 31, 1996 compared to the year ended December 31, 1995. Some
were planned, some were not. Planned expenses included an increase of $.9
million in marketing expense to develop low cost transaction accounts, and $1.5
million was an addition to amortization of intangibles incurred to expand our
operation into Washington County, Maryland. As described in more detail later,
the unplanned expenses included a one-time SAIF adjustment of $7.0 million to
recapitalize the SAIF fund and a $4.3 million expense associated with a fraud
incurred at First Harrisburg.
The pages that follow present detailed discussion and analysis of the
matters discussed in the summary as well as other significant components of the
Bank's financial condition and results of operations.
9 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
RESULTS OF OPERATIONS
Net Interest Income The primary component of the Bank's earnings is its net
interest income. Net interest income is the excess of interest income earned on
average interest-earning assets above interest expense incurred on average
interest-bearing liabilities. Net interest income is significantly affected by
changes in average account balances (volume), interest rates, and by the mix of
interest-earning assets and interest-bearing liabilities. Net interest income,
before provision for loan losses, on a taxable equivalent basis, was $42.1
million in 1996, an increase of $9.2 million, or 28.0%, from $32.9 million in
1995. Net interest income in 1995 decreased $2.8 million, or 7.8%, from $35.7
million in 1994.
Table 1 presents the average asset and liability balances, interest rates,
interest income and interest expense for each of the years in the three year
period ended December 31, 1996.
Table 1 Average Balance Sheets, Rates and Interest Income and Expense Summary
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------------------------
1996 (6) 1995
-----------------------------------------------------------------------------
Average Average Average Average
Balance Interest (7) Yield/Cost Balance Interest (7) Yield/Cost
---------- ----------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans, net (1) (8) ....... $ 601,299 $ 48,453 8.06% $ 454,057 $ 36,577 8.06%
Commercial loans .................. 68,262 5,413 7.93% 49,256 4,276 8.68%
Other loans, net (8) .............. 188,409 15,759 8.36% 103,671 8,857 8.54%
Marketable securities --
taxable, net (2) ................. 530,557 33,983 6.41% 458,804 28,711 6.26%
Marketable securities--
tax-free, net (2) ................ 46,055 4,005 8.70% 0 0 0.00%
Other interest-earning assets (3) . 28,567 1,777 6.22% 33,587 2,204 6.56%
---------- -------- ------- ---------- --------- --------
Total interest-earning assets ....... 1,463,149 109,390 7.48% 1,099,375 80,625 7.33%
---------- -------- ------- ---------- --------- --------
Non-interest-earning assets ......... 64,318 34,095
---------- -------- ------- ---------- --------- --------
Total assets ........................ $1,527,467 $1,133,470
========== ======== ======= ========== ========= ========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits .................. $ 146,929 $ 4,171 2.84% $ 151,085 $ 4,679 3.10%
Time deposits ..................... 814,658 45,668 5.61% 677,211 37,928 5.60%
NOW and money
market accounts .................. 171,004 5,965 3.49% 118,275 4,098 3.46%
Escrow/stock subscriptions ........ 8,182 130 1.59% 5,435 128 2.36%
Borrowed funds .................... 196,672 11,392 5.79% 14,458 863 5.97%
---------- -------- ------- ---------- --------- --------
Total interest-bearing liabilities .. 1,337,445 67,326 5.03% 966,464 47,696 4.94%
---------- -------- ------- ---------- --------- --------
Non-interest-bearing liabilities .... 39,039 21,592
---------- -------- ------- ---------- --------- --------
Total liabilities ................... 1,376,484 988,056
Stockholders' equity ................ 150,983 145,414
---------- -------- ------- ---------- --------- --------
Total liabilities and
stockholders' equity .............. $1,527,467 $1,133,470
========== ======== ======= ========== ========= ========
Net interest income ................. $ 42,064 $ 32,929
========== ======== ======= ========== ========= ========
Interest rate spread (4) ............ 2.45% 2.39%
Net interest-earning assets ......... $ 125,704 $ 132,911
========== ======== ======= ========== ========= ========
Net interest margin (5) ............. 2.87% 3.00%
Ratio of interest-earning assets
to interest-bearing liabilities ... 1.09x 1.14x
========== ======== ======= ========== ========= ========
</TABLE>
-------------------------------------
1994
-------------------------------------
Average Average
Balance Interest (7) Yield/Cost
---------- ------------ ----------
Assets:
Interest-earning assets:
Mortgage loans, net (1) (8) ....... $ 442,666 $ 36,323 8.21%
Commercial loans .................. 46,468 3,675 7.91%
Other loans, net (8) .............. 88,655 7,357 8.30%
Marketable securities --
taxable, net (2) ................. 431,529 24,837 5.76%
Marketable securities --
tax-free, net (2) ................ 0 0 0.00%
Other interest-earning assets (3) . 43,196 1,740 4.03%
---------- ---------- --------
Total interest-earning assets ....... 1,052,514 73,932 7.02%
---------- ---------- --------
Non-interest-earning assets ......... 27,027
---------- ---------- --------
Total assets ........................ $1,079,541
========== ========== ========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits .................. $ 234,090 $ 7,361 3.14%
Time deposits ..................... 571,710 27,381 4.79%
NOW and money
market accounts .................. 112,072 3,163 2.82%
Escrow/stock subscriptions ........ 7,629 202 2.65%
Borrowed funds .................... 2,312 134 5.80%
---------- ---------- --------
Total interest-bearing liabilities .. 927,813 38,241 4.12%
---------- ---------- --------
Non-interest-bearing liabilities .... 19,218
---------- ---------- --------
Total liabilities ................... 947,031
Stockholders' equity ................ 132,510
---------- ---------- --------
Total liabilities and
stockholders' equity .............. $1,079,541
========== ========== ========
Net interest income ................. $ 35,691
========== ========== ========
Interest rate spread (4) ............ 2.90%
Net interest-earning assets ......... $ 124,701
========== ========== ========
Net interest margin (5) ............. 3.39%
Ratio of interest-earning assets
to interest-bearing liabilities ... 1.13x
========== ========== ========
- ------------------------
(1) Includes mortgage loans held-for-sale.
(2) Includes available-for-sale.
(3) Includes interest-earning deposits in the FHLB-Pittsburgh, federal funds
sold and FHLB-Pittsburgh stock.
(4) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income before provision for loan
losses divided by average interest-earning assets.
(6) Amounts presented on a tax-equivalent basis using an effective tax rate of
35%.
(7) Includes income recognized on deferred loan fees of $1,423,000, $1,199,000
and $1,879,000 in 1996, 1995 and 1994, respectively.
(8) Includes non-accrual loans.
10 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
RESULTS OF OPERATIONS (continued)
Net Interest Income (continued) Table 2 presents an analysis of the changes in
tax equivalent net interest income attributable to changes in the volume and
rate components of net interest income. During 1996, there was an increase in
net interest income of $8.6 million due to changes in volume and an increase of
$.5 million due to changes in rates. In 1995, there was an increase in net
interest income of $ .3 million due to changes in volume and a decrease of $3.1
million due to changes in rates.
Table 2 Rate-Volume Analysis of Changes in Net Interest Income
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Year Ended December 31, 1995
Compared to Compared to
Year Ended December 31, 1995 Year Ended December 31, 1994
Increase (Decrease) Increase (Decrease)
-------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
---------- ----------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans, net...................... $ 11,868 $ 9 $ 11,877 $ 939 $ (685) $ 254
Commercial loans......................... 1,650 (513) 1,137 221 380 601
Other loans, net......................... 7,245 (345) 6,900 1,246 254 1,500
Marketable securities -- taxable, net.... 4,492 781 5,273 1,571 2,303 3,874
Marketable securities -- tax-free, net... 4,005 0 4,005 0 0 0
Other interest-earning assets............ (329) (98) (427) (387) 851 464
--------- --------- --------- --------- --------- --------
Total interest-earning assets......... 28,931 (166) 28,765 3,590 3,103 6,693
--------- --------- --------- --------- --------- --------
Interest-bearing liabilities:
Savings deposits......................... (129) (379) (508) (2,606) (76) (2,682)
Time deposits............................ 7,696 44 7,740 5,053 5,492 10,545
NOW and money market accounts............ 1,825 42 1,867 175 762 937
Escrow/stock subscriptions............... 65 (63) 2 (58) (16) (74)
Borrowed funds........................... 10,878 (349) 10,529 704 25 729
--------- --------- --------- --------- --------- --------
Total interest-bearing liabilities.... 20,335 (705) 19,630 3,268 6,187 9,455
--------- --------- --------- --------- --------- --------
Net change in net interest income........ $ 8,596 $ 539 $ 9,135 $ 322 $ (3,084) $ (2,762)
========= ========= ========= ======== ========= =========
</TABLE>
Note: Changes in interest income and interest expense arising from the
combination of rate and volume variances are allocated entirely as rate
variances.
As shown in Table 2, the increase in net interest income for 1996 was
primarily due to an increase in volume. The average balance of total earning
assets in 1996 increased $363.8 million from 1995 and the average balance of
total interest bearing liabilities increased $371.0 million from 1995. The
primary sources of the increases were the acquisition of First Harrisburg Bancor
and the increased leveraging of excess capital. The interest rate spread for
1996 was 2.45% compared to 2.39% in 1995 and 2.90% in 1994. The net interest
margin was 2.87% in 1996 as compared to 3.00% for 1995 and 3.39% for 1994. The
decrease in net interest income recorded in 1995 was due primarily to
competitive pricing policies applied during 1995 to recapture market share in
residential loans and maintain the deposit market share, resulting in
compression of the net interest spread.
A lag exists between the time changes occur in market interest rates and
when such changes are reflected in the performance of the Bank's
interest-earning asset and interest-bearing liability portfolios. The average
yield on average interest-earning assets is influenced by the rate of repayments
and prepayments, purchases and sales, and the mix of asset maturities as well as
current market rates. Similarly, the average cost of average interest-bearing
liabilities is influenced by redemptions, early withdrawals, deposit purchases,
deposit raising activities, borrowed funds activity and the mix of liability
maturities as well as current market rates.
Provision for Loan Losses The Bank maintains an allowance for loan losses
to provide for possible future losses in its loan portfolio. During 1996,
provisions for loan losses of $1,957,000 were charged against earnings due to
actual loan growth in the commercial loan portfolio, as compared to no
provisions charged against earnings in 1995 and 1994. The lack of provisions in
1995 and 1994 reflects management's assessment of the loan portfolio in
consideration of the modest good health of the economy and a continued low level
of delinquencies.
Management reviews loan delinquencies on a periodic basis and performs an
analysis of loan quality on a quarterly basis, classifying assets to determine
the adequacy of its allowance for loan losses. The Bank will continue to provide
for possible loan losses when deemed appropriate. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses and valuation of
foreclosed real estate. Such agencies may require the Bank to recognize
additional provision for loan losses based on their judgment about information
available to them at the time of their examination.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 11
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
RESULTS OF OPERATIONS (continued)
Non-Interest Income Table 3 presents an summary of the changes in the
non-interest income for the two-year period ended December 31, 1996.
Table 3 Non-Interest Income
<TABLE>
<CAPTION>
1996/1995 1995/1994
-------------------- -------------------
Increase (Decrease) Increase (Decrease)
------------------- -------------------
1996 Amount % 1995 Amount % 1994
-------- -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposits .......... $ 932 $ 157 20.3 $ 775 $ 46 6.3 $ 729
Other service charges/commissions/fees 857 226 35.8 631 (112) (15.1) 743
Net servicing income ................. 1,322 290 28.1 1,032 121 13.3 911
(Loss) gain on sale of
mortgage-backed securities, net ... (1,221) (1,331) (1,210.0) 110 1,520 107.8 (1,410)
Gain on sale of other securities, net 37 37 N/A 0 (1,421) (100.0) 1,421
Gain (loss) on sale of loans, net .... 1,863 1,931 N/A (68) (68) N/A 0
Other ................................ 206 122 145.2 84 (25) (22.9) 109
------- ------- -------- ------- ------- ------- -------
Total ............................. $ 3,996 $ 1,432 55.9 $ 2,564 $ 61 2.4 $ 2,503
======= ======= ======== ======= ======= ======= =======
</TABLE>
Non-interest income totaled $4.0 million in 1996, which represents an
increase of $1.4 million, or 55.9%, from the $2.6 million of total non-interest
income recorded in 1995. The 1996 increase can be attributed primarily to the
acquisition of First Harrisburg Bancor including its subsidiary, Avstar Mortgage
Corporation, and an increase in purchased servicing. The increase in the loss on
sale of mortgage-backed securities of $1.3 million was due to the restructuring
of the securities portfolio in 1996. All other non-interest income flows were
considered stable during 1996 as compared to 1995.
Non-interest income totaled $2.6 million in 1995, which represents an
increase of $.1 million, or 2.4%, from the $2.5 million of total non-interest
income recorded in 1994. The 1995 increase can be attributed primarily to an
increase of $.1 million in net loan servicing income. All other non-interest
income flows were considered stable during 1995 as compared to 1994.
Non-Interest Expense Table 4 presents a summary of the changes in non-interest
expense for the two year period ended December 31, 1996.
Table 4 Non-Interest Expense
<TABLE>
<CAPTION>
1996/1995 1995/1994
-------------------- -------------------
Increase (Decrease) Increase (Decrease)
------------------- -------------------
1996 Amount % 1995 Amount % 1994
-------- --------- --------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits (1) ............... $ 14,710 $ 3,323 29.2 $ 11,387 $ (3) (0.0) $ 11,390
Equipment expense ....................... 1,647 544 49.3 1,103 (183) (14.2) 1,286
Occupancy expense ....................... 2,467 646 35.5 1,821 112 6.6 1,709
Advertising and public relations ........ 1,545 903 140.7 642 12 1.9 630
FDIC insurance .......................... 9,305 7,190 340.0 2,115 (36) (1.7) 2,151
Trustee fees ............................ 307 (4) (1.3) 311 7 2.3 304
(Income) loss from real estate operations (355) 187 (34.5) (542) (398) 276.4 (144)
Amortization and write-off of intangibles 2,107 1,733 463.4 374 374 N/A 0
Non-operational loss .................... 4,305 4,305 N/A 0 0 0.0 0
Other ................................... 6,149 2,584 72.5 3,565 98 2.8 3,467
-------- -------- ------- -------- ----- ------- --------
Total ................................ $ 42,187 $ 21,411 103.1 $ 20,776 $ (17) (0.1) $ 20,793
======== ======== ======= ======== ===== ======= ========
</TABLE>
- ------------------------
(1) Full-time equivalent employees totaled 481, 362 and 346 at December 31,
1996, 1995 and 1994, respectively. The actual number of employees, including
part-time employees, totaled 543, 403 and 384 at December 31, 1996, 1995 and
1994, respectively.
12 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
RESULTS OF OPERATIONS (continued)
Non-Interest Expense (continued) During 1996, the Bank recorded total
non-interest expense of $42.2 million. This represented an increase of $21.4
million, or 103.1%, from $20.8 million in 1995. This increase was primarily due
to a $7.2 million increase in deposit insurance expense, $7.0 million of which
was due to payment of the Bank's portion of the SAIF insurance fund
recapitalization. Also, a $4.3 million loss was incurred in connection with
identified violations of internal control policies and certain unauthorized
external activities concerning the Bank's relationship with a mortgage brokering
company that followed the acquisition of First Harrisburg by the Bank. An
increase in the amortization of intangibles of $1.7 million was due to the
amortization of goodwill associated with the First Harrisburg acquisition, which
amounted to $.6 million, and an increase of $1.1 million due to the write off of
the deposit premium associated with the 1995 acquisition of two banking offices
located in Hagerstown, Maryland from Columbia First Bank. In general, the
remainder of the increase in non-interest expense was due to the ongoing
expenses associated with the acquisition of First Harrisburg in 1996.
The Bank recorded $20.8 million of total non-interest expense during 1995
and 1994. Reflected in this stable performance was an increase in 1995 of $.4
million in income from real estate operations from the $.1 million of income
from real estate operations recorded in 1994. The Bank's real estate operations
include direct investments by the Bank and its subsidiaries in real estate
projects, equity investments in joint ventures that engage in real estate
projects, and the operation of foreclosed real estate. Offsetting this reduction
in total non-interest expense was an increase of $.4 million in amortization
expense from intangible assets generated by the acquisition of two branch
offices in Northern Maryland on September 29, 1995. This acquisition is
discussed in greater detail in the "Deposits and Borrowings" section which
appears later in this report. Total salaries and benefits expense remained
stable at $11.4 million in both 1995 and 1994.
Provision for Income Taxes Income tax provisions totaled $(.5) million in 1996,
which represents a decrease of $6.0 million, or 109.4%, from the $5.5 million of
income tax expense recorded in 1995. Income tax provisions for 1995 resulted in
an effective tax rate of 37.4% on income before taxes of $14.8 million. The
reduction in the Bank's effective tax rate in 1996 as compared to 1995 can be
attributed primarily to tax exempt income on municipal securities.
Income tax provisions totaled $5.5 million in 1995, which represents a
decrease of $1.8 million, or 24.7%, from the $7.3 million of income tax expense
recorded in 1994. Income tax provisions for 1995 resulted in an effective tax
rate of 37.4% on income before taxes of $14.8 million. Income tax provisions for
1994 resulted in an effective tax rate of 42.2% on income before taxes of $17.4
million. The reduction of 4.8% in the Bank's effective tax rate in 1995 as
compared to 1994 can be attributed primarily to state income tax savings.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 13
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
FINANCIAL CONDITION
Sources and Uses of Funds The Bank's operating activities generated cash
totaling $14.9 million in 1996. In addition to cash flows from operations, the
Bank generates and uses cash in its investing and financing activities. During
1996, the Bank's cash flows from investing activities resulted in a net use of
cash of $276.0 million, which included a net use of cash in securities
transactions totaling $67.0 million and a net use of cash from loan transactions
totaling $177.2 million. During 1996, the Bank's financing activities provided
net cash of $255.3 million, including a net decrease in deposits totaling $71.2
million and an increase from the Bank's borrowing activities totaling $329.5
million.
The Bank's operating activities generated cash totaling $10.0 million in
1995. In addition to cash flows from operations, the Bank generates and uses
cash in its investing and financing activities. During 1995, the Bank's cash
flows from investing activities resulted in a net use of cash of $71.3 million,
which included $115.6 million in cash acquired in branch purchases offset by net
cash used in securities transactions totaling $92.5 million and a net use of
cash from loan transactions totaling $89.1 million. During 1995, the Bank's
financing activities provided net cash of $52.4 million, including a net
increase in deposits totaling $37.2 million and an increase from the Bank's
borrowing activities totaling $16.7 million.
Capital Resources Total equity increased $1.3 million, or .86%, in 1996. This
increase included capital additions of $1.0 million from net income, $.5 million
from a net increase in the market value, net of tax effect, of the
available-for-sale securities portfolio, $1.2 million from earned ESOP and RRP
shares. Offsetting these capital additions in 1996 were $1.5 million of
dividends declared to stockholders.
Total equity increased $16.4 million, or 12.2%, in 1995. This increase
included capital additions of $9.2 million from net income, $7.0 million from a
net increase in the market value, net of tax effect, of the available-for-sale
securities portfolio, $1.1 million from earned ESOP and RRP shares, and $.3
million in proceeds from the exercise of stock options. Offsetting these capital
additions in 1995 were $1.3 million of dividends declared to stockholders.
During 1996 and 1995, the ratio of average equity to average assets
amounted to 9.88% and 12.83%, respectively. Ratios of capital to assets are
common measures of adequate capitalization for financial institutions. The Bank,
as an FDIC-insured state-chartered savings bank, must maintain minimum levels of
capital under regulations of the FDIC and the Pennsylvania Department of Banking
("the Department"). The FDIC required institutions to maintain a minimum
regulatory leverage capital ratio equal to 4% and a risk-based capital ratio
equal to 8% during 1996 and 1995. The Department required institutions to
maintain a minimum regulatory leverage capital ratio equal to 4% and a
risk-based capital ratio equal to 8% in 1996. During 1995, the Department
required minimum corresponding capital ratios of 3% and 8%.
Under FDIC capital definitions, leverage capital is composed of equity
capital reduced by goodwill and other intangible assets. The leverage ratio
equals leverage capital divided by total assets. Under FDIC capital definitions,
risk-based capital is composed of Tier 1 and Tier 2 capital. Tier 1 capital
equates to leverage capital and Tier 2 capital includes the allowance for loan
losses and qualifying debt obligations. The risk-based capital ratio equals the
total of Tier 1 and Tier 2 capital divided by total risk-weighted assets. Table
5 presents an analysis of the Bank's regulatory capital ratios as of December
31, 1996 and 1995. At December 31, 1996 and 1995, the Bank exceeded all
regulatory capital requirements.
Table 5 Capital Analysis
At December 31,
--------------------------
1996 1995
---------- ----------
Capital:
Tier 1 capital ....................... $ 126,217 $ 136,757
Tier 2 capital ....................... 8,322 6,113
---------- ----------
Total capital ........................ $ 134,539 $ 142,870
========== ==========
Total risk-weighted assets ........... $ 914,383 $ 669,021
========== ==========
Ratios:
Tier 1 capital to risk-weighted assets 13.8% 20.5%
Tier 2 capital to risk-weighted assets 0.9% 0.9%
---------- ----------
Total capital to risk-weighted assets 14.7% 21.4%
========== ==========
Leverage ratio ....................... 7.3% 11.0%
========== ==========
14 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
FINANCIAL CONDITION (continued)
Interest Rate Sensitivity The largest component of the Bank's net income is net
interest income, which the Bank attempts to maximize by properly managing a
variety of risks, including credit risk, liquidity risk, market risk, call risk,
and interest rate risk. This section discusses interest rate risk, which the
Bank manages primarily through its Asset/Liability Management Committee
("ALCO"). ALCO generally meets monthly to review the Bank's current and
projected interest rate risk position; monitor current asset and liability
products, risks and rates; and communicate to the Bank's Board of Directors
concerning the Bank's interest rate risk exposure. ALCO primarily uses three
tools to measure the Bank's interest rate risk exposure including standard
repricing analysis ("GAP"), market value of portfolio equity analysis ("MVPE"),
and net interest income analysis ("NII"). Of the three measures, the Bank places
the greatest emphasis on NII simulation. The Bank maintains an interest rate
risk policy, which establishes acceptable limits and ranges for the GAP, MVPE
and NII positions. ALCO monitors the Bank's various interest rate measures in
light of current and expected market conditions and approves desired asset and
liability transactions and offerings accordingly. The Bank also approves the
securitization and subsequent sale of conforming mortgage loans where ALCO has
determined that carrying such loans in the loan portfolio would raise the Bank's
interest rate risk exposure to unacceptable levels.
Table 6 sets forth the amounts of the Bank's interest-earning assets and
interest-bearing liabilities at December 31, 1996, which are anticipated by the
Bank to reprice or mature in each of the future time periods shown.
Table 6 Gap Analysis
<TABLE>
<CAPTION>
At December 31, 1996
--------------------------------------------------------------------------------------
More Than More Than More Than More Than
One Year One Year to Three Years to Five Years to Ten Years to
or Less Three Years Five Years Ten Years Twenty Years Total
---------- ------------ -------------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate, commercial and consumer
loans (2) (3)........................ $ 233,260 $ 124,495 $ 88,827 $ 131,093 $ 248,308 $ 825,983
Marketable securities................... 388,285 33,699 10,713 161,686 234,527 828,910
Other interest-earning assets........... 5,265 0 0 0 0 5,265
--------- --------- --------- --------- --------- ----------
Total interest-earning assets........ 626,810 158,194 99,540 292,779 482,835 1,660,158
--------- --------- --------- --------- --------- ----------
Interest-bearing liabilities:
Savings accounts........................ 1,663 0 0 0 148,356 150,019
NOW accounts (1) ....................... 0 0 0 0 52,946 52,946
Money market accounts................... 129,096 0 0 0 0 129,096
Time deposits........................... 503,328 165,411 76,075 51,733 13,046 809,593
Escrow ................................. 0 0 0 0 8,203 8,203
Other borrowings........................ 174,832 45,304 25,495 175,000 0 420,631
--------- --------- --------- --------- --------- ----------
Total interest-bearing liabilities... $ 808,919 $ 210,715 $ 101,570 $ 226,733 $ 222,551 $1,570,488
--------- --------- --------- --------- --------- ----------
Interest sensitivity gap per period..... $(182,109) $ (52,521) $ (2,030) $ 66,046 $ 260,284 $ 89,670
Cumulative interest sensitivity gap..... $(182,109) $(234,630) $(236,660) $(170,614) $ 89,670
--------- --------- --------- --------- --------- ----------
Cumulative interest sensitivity gap
as a percentage of total assets...... (10.30)% (13.27)% (13.38)% (9.65)% 5.07%
--------- --------- --------- --------- --------- ----------
Cumulative net interest-earning assets
as a percentage of net interest-
bearing liabilities.................. 77.49% 76.99% 78.89% 87.34% 105.71%
--------- --------- --------- --------- --------- ----------
</TABLE>
- -----------------------
(1) Excludes non-interest bearing accounts.
(2) Excludes deferred loan costs and fees.
(3) Excludes loans held for sale.
Generally, the amount of assets and liabilities shown in Table 6 were
determined in accordance with the contractual terms of the underlying financial
instruments. However, certain instruments have been presented based on the
estimated effects of general repricing and prepayment assumptions. In the
current economic environment, refinancing activity is expected to be only
slightly above average; therefore, slightly higher prepayment speeds have been
assumed for both mortgage loans and mortgage-backed securities. Most of the
remaining marketable securities reflect contractual maturities; however,
preferred equities and municipal bonds are assumed to reprice on their first
call date. Consumer loans are expected to prepay at average speeds. Time
deposits, money market accounts, and escrow accounts reflect the contractual
maturities of the underlying deposits. Remaining transaction accounts, all NOW
accounts, and most of the Bank's short-term savings accounts are considered not
to be interest rate sensitive, and are assumed to mature beyond five years.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 15
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
FINANCIAL CONDITION (continued)
Marketable Securities The Bank maintains a marketable securities portfolio to
provide liquidity, to manage risks and to invest excess cash. The Bank's
investment policy currently provides for held-to-maturity, available-for-sale,
and trading portfolios as defined by Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS 115); however, the Bank currently does not engage in trading portfolio
activities. During 1996, the Bank recorded an increase in capital of $.5
million, net of deferred tax expense of $.3 million, from net unrealized gains
in the market value of its available-for-sale portfolio. During 1995, the Bank
recorded an increase in capital of $7.0 million, net of a deferred tax expense
of $4.2 million, from net unrealized gains in the market value of its
available-for-sale portfolio.
During 1996, the fair market value of the portfolio grew $288.0 million
from a December 31, 1995 level of $546.7 million to a December 31, 1996 level of
$834.7 million. This growth was primarily accomplished through the
securitization of mortgage loans and a significant increase in leveraged
investments. The securitized mortgage loans were subsequently sold and the
proceeds reinvested in securities more consistent with the goals of the
portfolio. Leveraged investments grew from a December 31, 1995 level of $17.2
million to a December 31, 1996 level of $210.2 million. During 1996, the Bank
significantly increased its use of tax advantaged investments. The fair market
value of preferred equities increased $63.1 million and the fair market value of
municipal bonds increased $90.2 million. In total, the size of the
available-for-sale portfolio as a percent of the total portfolio grew from 71.2%
at December 31, 1995 to 86.7% at December 31, 1996. Fixed rate investments as a
percent of total investments fell from 72% at December 31, 1996 to 60% at
December 31, 1996. On a nontaxable equivalent basis, the weighted average yield
on the portfolio was 6.81% at December 31, 1996 compared to 6.40% at December
31, 1995.
Management believes the Bank's marketable securities portfolio is properly
structured at December 31, 1996 to limit the Bank's exposure to interest rate
risk while achieving an acceptable investment yield. Table 7 presents the
marketable securities portfolio maturity stratification as of December 31, 1996.
Following Table 7 is Table 8 which presents a summary of the Bank's marketable
securities portfolio as of December 31, 1996, 1995, and 1994.
Table 7 Analysis of Investments
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Bank's marketable
securities, including available-for-sale, at December 31, 1996. The
stratification of balances is based on expected final maturities.
<TABLE>
<CAPTION>
At December 31, 1996
---------------------------------------------------------------------------------
One Year After One Through After Five Through
or Less Five Years Ten Years
---------------------------------------------------------------------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
U.S. government
and agency obligations................ $ 0 0.00% $66,276 6.48% $ 6,237 6.68%
Mortgage-backed securities (3):
FNMA PC's............................. 0 0.00 4,780 6.64 0 0.00
Private issue CMO's................... 0 0.00 3,515 7.48 28,609 7.27
------ ----- ------- ------ -------- ------
Total mortgage-backed securities........ 0 0.00 8,295 7.00 28,609 7.27
------ ----- ------- ------ -------- ------
Total securities held-to-maturity....... $ 0 0.00% $74,571 6.54% $ 34,846 7.16%
------ ----- ------- ------ -------- ------
Available-for-sale:
U.S. government
and agency obligations................ $ 0 0.00% $ 0 0.00% $143,370 7.49%
Corporate bonds......................... 0 0.00 0 0.00 17,000 7.34
SBA's................................... 0 0.00 0 0.00 0 0.00
Municipal securities.................... 0 0.00 0 0.00 2,595 7.81
Equity (1) (2).......................... 1,344 4.90 0 0.00 0 0.00
Asset-backed securities................. 0 0.00 2,756 5.73 0 0.00
Mortgage-backed securities:
FNMA PC's............................. 0 0.00 0 0.00 0 0.00
FHLMC PC's............................ 0 0.00 0 0.00 17,438 7.51
GNMA PC's............................. 0 0.00 0 0.00 0 0.00
Private issue PC's.................... 0 0.00 0 0.00 0 0.00
FNMA CMO's............................ 0 0.00 0 0.00 0 0.00
FHLMC CMO's........................... 0 0.00 0 0.00 0 0.00
Private issue CMO's................... 0 0.00 0 0.00 0 0.00
------ ----- ------- ------ -------- ------
Total mortgage-backed securities........ 0 0.00 0 0.00 17,438 7.51
Total securities available-for-sale..... $1,344 4.90% $ 2,756 5.73% $180,403 7.44%
------ ----- ------- ------ -------- ------
Total marketable securities............. $1,344 4.90% $77,327 6.51% $215,249 7.40%
====== ===== ======= ====== ======== ======
<CAPTION>
Over Ten Years Total
-------------------------------------------------------------
Weighted Weighted
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Held-to-maturity:
U.S. government
and agency obligations................ $ 0 0.00% $ 72,513 $72,783 6.49%
Mortgage-backed securities (3):
FNMA PC's............................. 0 0.00 4,780 4,901 6.64
Private issue CMO's................... 0 0.00 32,124 32,228 7.29
-------- ---- -------- --------- ----
Total mortgage-backed securities........ 0 0.00 36,904 37,129 7.21
-------- ---- -------- --------- ----
Total securities held-to-maturity....... $ 0 0.00% $109,417 $ 109,912 6.73%
-------- ---- -------- --------- ----
Available-for-sale:
U.S. government
and agency obligations................ $ 0 0.00% $143,370 $ 142,721 7.49%
Corporate bonds......................... 0 0.00 17,000 16,660 7.34
SBA's................................... 31,522 6.26 31,522 31,705 6.26
Municipal securities.................... 87,245 8.72 89,840 90,155 8.70
Equity (1) (2).......................... 101,543 6.55 102,887 107,808 6.53
Asset-backed securities................. 0 0.00 2,756 2,758 5.73
Mortgage-backed securities:
FNMA PC's............................. 10,040 7.42 10,040 10,077 7.42
FHLMC PC's............................ 53,504 7.54 70,942 71,858 7.53
GNMA PC's............................. 1,565 6.48 1,565 1,593 6.48
Private issue PC's.................... 36,598 7.33 36,598 36,749 7.33
FNMA CMO's............................ 62,597 6.78 62,597 62,698 6.78
FHLMC CMO's........................... 122,851 6.82 122,851 122,866 6.82
Private issue CMO's................... 21,732 6.59 21,732 21,845 6.59
-------- ---- -------- --------- ----
Total mortgage-backed securities........ 308,887 7.00 326,325 327,686 7.03
Total securities available-for-sale..... $529,197 6.62% $713,700 $ 719,493 6.82%
-------- ---- -------- --------- ----
Total marketable securities............. $529,197 6.62% $823,117 $ 829,405 6.81%
======== ==== ======== ========= ====
</TABLE>
- ------------------------
(1) Includes FHLMC, FNMA and FHLB stocks.
(2) The yield on the equities has not been computed on a tax equivalent basis.
(3) Based on current prepayment trends, $298.9 million of mortgage-backed
securities are anticipated to prepay or reprice within three years.
16 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
FINANCIAL CONDITION (continued)
Marketable Securities (continued)
Table 8 Composition of Marketable Securities Portfolios
The following table sets forth certain information regarding the amortized
cost and fair values of the Bank's marketable securities portfolio at December
31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------------------- -------------------- --------------------
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 ..................................... $ 72,513 $ 72,783 $ 77,578 $ 79,422 $ 37,052 $ 35,080
FHLB certificates of deposit ..................................... 0 0 700 700 301 301
Mortgage-backed securities:
FNMA PC's ..................................................... 4,780 4,901 5,574 5,848 1,469 1,477
FHLMC PC's .................................................... 0 0 2,997 2,975 3,841 3,838
FNMA CMO's .................................................... 0 0 7,193 7,164 89,704 85,484
FHLMC CMO's ................................................... 0 0 17,557 17,522 90,368 86,850
Private issue CMO's ........................................... 32,124 32,228 38,064 38,750 0 0
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities ................................. 36,904 37,129 71,385 72,259 185,382 177,649
-------- -------- -------- -------- -------- --------
Total securities held-to-maturity ................................ $109,417 $109,912 $149,663 $152,381 $222,735 $213,030
-------- -------- -------- -------- -------- --------
Available-for-sale:
U.S. Government and agencies ..................................... $143,370 $142,721 $ 44,018 $ 44,639 $ 16,028 $ 16,048
Corporate bonds .................................................. 17,000 16,660 0 0 0 0
SBA's ............................................................ 31,522 31,705 0 0 0 0
Municipal securities ............................................. 89,840 90,155 0 0 0 0
Equity ........................................................... 102,887 107,808 23,019 25,846 22,574 22,516
Asset-backed securities .......................................... 2,756 2,758 0 0 0 0
Mortgage-backed securities:
FNMA PC's ..................................................... 10,040 10,077 13,908 13,758 18,580 18,071
FHLMC PC's .................................................... 70,942 71,858 125,721 128,244 135,463 129,753
GNMA PC's ..................................................... 1,565 1,593 0 0 0 0
Private issue PC's ............................................ 36,598 36,749 49,741 49,658 0 0
FNMA CMO's .................................................... 62,597 62,698 65,423 64,943 0 0
FHLMC CMO's ................................................... 122,851 122,866 48,439 48,181 0 0
Private issue CMO's ........................................... 21,732 21,845 0 0 0 0
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities ................................. 326,325 327,686 303,232 304,784 154,043 147,824
-------- -------- -------- -------- -------- --------
Total securities available-for-sale .............................. $713,700 $719,493 $370,269 $375,269 $192,645 $186,388
-------- -------- -------- -------- -------- --------
Other interest-earning securities:
FHLB daily investment ............................................ $ 5,265 $ 5,265 $ 19,036 $ 19,036 $ 29,685 $ 29,685
-------- -------- -------- -------- -------- --------
Total marketable securities and interest-bearing investments ..... $828,382 $834,670 $538,968 $546,686 $445,065 $429,103
======== ======== ======== ======== ======== ========
</TABLE>
The Bank maintains a significant investment in mortgage-backed securities,
including balloon, adjustable rate, and fixed rate participation certificates
("PC's") as well as collateralized mortgage obligations ("CMOs"). Most of the
Bank's mortgage-backed securities are directly insured or guaranteed by the
FHLMC, FNMA, or GNMA. The Bank's CMO securities are predominantly "planned
amortization class one". In addition, all of the Bank's CMOs pass established
Federal Financial Institution Examination Council ("FFIEC") standards for
inclusion in the portfolio. The Bank also invests in insured non-agency
mortgage-backed securities on a limited basis.
Table 9 presents selected financial information related to the Bank's
held-to-maturity and available-for-sale portfolios at, or for the years ended,
December 31, 1996, 1995, and 1994.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 17
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
FINANCIAL CONDITION (continued)
Marketable Securities (continued)
Table 9 Marketable Securities Classification
The following table shows the amortized cost, percent of total assets,
portfolio yields, pre-tax profit on sales, volume of sales and net unrealized
gains and losses in marketable securities at, or for the years ended, December
31, 1996, 1995 and 1994.
1996 1995 1994
--------- --------- ---------
(dollar amounts in millions)
Held-to-maturity portfolio:
Year-end amortized cost ..................... $ 109.4 $ 149.7 $ 222.7
Percent of total assets ..................... 6.19% 11.92% 21.05%
Year-end portfolio yields ................... 6.73% 6.49% 5.59%
Year-end net unrealized gains (losses) ...... $ 0.5 $ 2.7 $ (9.7)
Available-for-sale portfolio:
Year-end amortized cost ..................... $ 713.7 $ 370.3 $ 192.6
Percent of total assets ..................... 40.37% 29.48% 18.20%
Year-end portfolio yields ................... 6.82% 6.36% 6.37%
Pre-tax (loss) profit on sales .............. $ (1.18) $ 0.10 $ 0.01
Volume of sales ............................. $ 422.8 $ 2.6 $ 108.6
Year-end net unrealized gains (losses) ...... $ 5.8 $ 5.0 $ (6.3)
At December 31, 1996, the Bank had no material involvement with derivative
financial instruments that meet the definition of SFAS 119.
Loans The Bank continues to emphasize the origination of one-to-four family
residential mortgage loans. These mortgage loans, the majority of which are
secured by owner-occupied residences, are generally considered to have less
credit risk than other types of loans. The Bank also emphasizes commercial
loans, home equity lines of credit and second mortgage loans, multi-family
residential mortgage loans, commercial real estate mortgage loans, and consumer
loans. The Bank offers its loan products with fixed and adjustable interest
rates and a wide variety of repayment terms.
The Bank increased its mortgage loan and consumer loan origination activity
in 1996 as compared to 1995. During 1996, the Bank originated mortgage loans
totaling $300.3 million, commercial loans totaling $24.3 million, and consumer
loans totaling $111.7 million. This compares favorably to 1995, during which
period the Bank's mortgage loan originations totaled $140.7 million and consumer
loan originations totaled $56.7 million. Management attributes the increase in
1996 to a combination of the addition of a mortgage banking subsidiary, more
aggressive loan origination and purchase programs operated by the Bank
throughout 1996, and the successful offering of new loan products within the
Bank's primary market area.
The Bank's mortgage, consumer and commercial loan portfolios include
primarily loans to borrowers within the Central Pennsylvania region.
Accordingly, future fluctuations in the economic conditions prevailing within
this region may have a material impact on the Bank's financial condition and
results of operations.
18 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
FINANCIAL CONDITION (continued)
Loans (continued) Table 10 presents the composition of the Bank's mortgage,
consumer and other loan portfolios as of December 31, 1996, 1995, 1994, 1993,
and 1992, respectively.
Table 10 Loan Composition
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
0f of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One-to-four family................. $514,694 62.31% $472,998 71.54% $433,206 73.87% $439,230 75.77% $575,983 79.92%
Other residential real estate
(multi-family)................... 21,299 2.58 27,171 4.11 27,443 4.68 27,004 4.66 26,785 3.71
Construction (1)................... 25,647 3.11 23,415 3.54 8,642 1.47 5,915 1.02 11,664 1.62
Other.............................. 21,777 2.63 23,015 3.48 22,299 3.80 25,257 4.36 25,127 3.49
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans............ 583,417 70.63 546,599 82.67 491,590 83.82 497,406 85.81 639,559 88.74
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer and other loans:
Mobile home........................ 65,794 7.97 20,991 3.18 10,767 1.84 7,196 1.24 4,773 0.66
Home equity and second mortgage.... 153,464 18.58 83,031 12.56 74,295 12.67 66,941 11.55 68,945 9.57
Credit cards....................... 0 0.00 3,258 0.49 3,765 0.64 3,881 0.67 3,862 0.54
Commercial......................... 17,636 2.13 2,240 0.34 1,884 0.32 880 0.15 389 0.05
Other.............................. 5,672 0.69 5,031 0.76 4,196 0.71 3,377 0.58 3,173 0.44
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer and other loans.. 242,566 29.37 114,551 17.33 94,907 16.18 82,275 14.19 81,142 11.26
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Loans receivable, gross......... 825,983 100.00% 661,150 100.00% 586,497 100.00% 579,681 100.00% 720,701 100.00%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Plus:
Dealer reserves.................... 13,880 4,308 2,102 1,300 811
Less:
Unearned discounts................. (327) (220) (78) (131) (183)
Net deferred loan origination fees. 7,952 7,959 7,614 7,978 9,107
Allowance for loan losses.......... 8,322 6,114 6,269 6,584 6,000
-------- -------- -------- -------- --------
15,947 13,853 13,805 14,431 14,924
-------- -------- -------- -------- --------
Loans receivable, net............. $823,916 $651,605 $574,794 $566,550 $706,588
======== ======== ======== ======== ========
Mortgage loans:
ARM................................ $133,544 22.89% $114,185 20.89% $ 95,713 19.47% $91,010 18.30% $131,983 20.64%
Fixed-rate......................... 449,873 77.11 432,414 79.11 395,877 80.53 406,396 81.70% 507,576 79.36
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans............ $583,417 100.00% $546,599 100.00% $491,590 100.00% $497,406 100.00% $639,559 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
- ----------
(1) Net of undisbursed portion of $27,401, $22,301, $10,802, $9,983 and $8,904
at December 31, 1996, 1995, 1994, 1993 and 1992, respectively.
The Bank typically accepts a significant degree of interest rate risk in
its loan portfolio due to its emphasis on conforming residential mortgage loans.
However, when market rates on such loans are considered to be below an
acceptable long-term yield, or when significant prepayment risk is anticipated,
the Bank will, at origination, sell or swap such loans in the secondary mortgage
market.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 19
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
FINANCIAL CONDITION (continued)
Loans (continued) Table 11 shows the maturity or period to repricing of the
Bank's loan portfolio at December 31, 1996. Adjustable rate loans are included
as being due in the period of scheduled rate adjustment. The table does not
include prepayments or scheduled principal amortization.
Table 11 Loan Maturity and Repricing
<TABLE>
<CAPTION>
Amounts Due or Repricing at December 31, 1996
------------------------------------------------------------------------------------------------
After One Year
------------------------------------------------------------
Over One Over Three Over Five Over Ten Over Total
Within Through Through Through Through Twenty After One
One Year Three Years Five Years Ten Years Twenty Years Years Year Total
-------- ----------- ---------- --------- ------------ ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One-to-four family................ $ 68,858 $25,107 $17,743 $ 63,774 $ 94,289 $244,923 $445,836 $514,694
Other residential real estate
(multi-family).................. 12,507 4,539 3,133 344 646 130 8,792 21,299
Construction (1).................. 2,176 2,044 551 611 2,288 17,977 23,471 25,647
Other............................. 14,706 3,821 2,798 167 285 0 7,071 21,777
-------- ------- ------- -------- -------- -------- -------- --------
Total mortgage loans........... 98,247 35,511 24,225 64,896 97,508 263,030 485,170 583,417
-------- ------- ------- -------- -------- -------- -------- --------
Consumer and other loans:
Home equity and second mortgage... 37,802 10,788 18,710 50,610 34,328 1,226 115,662 153,464
Other............................. 20,935 2,892 1,670 2,989 59,452 1,164 68,167 89,102
-------- ------- ------- -------- -------- -------- -------- --------
Total consumer and other loans. 58,737 13,680 20,380 53,599 93,780 2,390 183,829 242,566
-------- ------- ------- -------- -------- -------- -------- --------
Loans receivable, gross........ $156,984 $49,191 $44,605 $118,495 $191,288 $265,420 $668,999 $825,983
======== ======= ======= ======== ======== ======== ======== ========
</TABLE>
- ----------
(1) Includes obligations to convert at contractually stated rates into
permanent mortgage loans.
Asset Quality The Bank's experience in credit losses continues to rank among the
best in the industry. Due to prudent underwriting activities and the relatively
stable economic environment in the Bank's primary market area, the Bank's
overall loan quality remains very strong. To enhance this condition, management
follows a policy of continuous credit loss monitoring, including assessment of
the adequacy of the allowance for loan losses. 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.
On January 1, 1995, the Bank adopted the provisions of Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" (SFAS 114), as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure" (SFAS 118). SFAS 114
and SFAS 118 address the accounting by creditors for impairment of certain
loans. The Statements require that impaired loans that are within the scope of
SFAS 114 be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or the loan's market price or
the fair value of the collateral if the loan is collateral dependent. SFAS 118
amended the provisions of SFAS 114 to allow a creditor to use existing methods
for recognizing interest income on an impaired loan and to require additional
disclosure on interest income recognition related to impaired loans.
When a loan is considered to be impaired, the amount of impairment is
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, at the loan's market price or fair value
of the collateral if the loan is collateral dependent. The majority of loans
deemed to be impaired by management are collateral dependent. Loans are
evaluated individually for impairment. The Bank excludes smaller balance,
homogeneous loans (e.g. primarily consumer and residential mortgages) from the
evaluation for impairment. Impairment losses are included in the allowance for
possible loan losses. Impaired loans are charged-off when management believes
that the ultimate collectability of a loan is not likely. Interest income on
impaired loans is generally recorded as payments are collected. Interest on
impaired loans that are contractually past due ninety days and over is reserved
in accordance with regulatory requirements.
At December 31, 1996 the Bank had no impaired loan balances compared to
$1.0 million at December 31, 1995. No impairment loss reserves were required on
impaired loans at December 31, 1996 or December 31, 1995. The Bank's average
carrying value of impaired loans was $0 in 1996 and $1.0 million in 1995. No
interest income was recognized on impaired loans during 1996 or 1995.
20 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
FINANCIAL CONDITION (continued)
Asset Quality (continued) Table 12 presents an allocation of the allowance for
loan losses by category of loans as of December 31, 1996, 1995, 1994, 1993, and
1992. The specific allocation ascribed to each category may be different than
actual experience. Accordingly, the entire allowance is available to absorb
losses in any category.
Table 12 Allocation of the Allowance for Loan Losses
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- --------------- -------------- -------------- --------------
% of % of % of % of % of
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family mortgage loans. $2,777 62.31% $1,627 71.54% $1,718 73.87% $2,121 75.77% $1,805 79.92%
Commercial loans.................. 2,720 8.32 1,851 11.13 904 9.95 1,073 10.04 311 8.82
Consumer and other loans.......... 1,780 29.37 716 17.33 1,614 16.18 1,183 14.19 2,027 11.26
Impaired loans.................... 0 0.00 0 0.00 0 0.00 0 0.00 0 0.00
Unallocated....................... 1,045 N/A 1,920 N/A 2,033 N/A 2,207 N/A 1,857 N/A
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $8,322 100.00% $6,114 100.00% $6,269 100.00% $6,584 100.00% $6,000 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Table 13 presents an analysis of activity in the Bank's allowance for loan
losses for the five year period ended December 31, 1996. Net additions to the
allowance during this five-year period totaled $2.3 million, or 27.7%, of the
$8.3 million balance in the allowance at December 31, 1996. Charge-offs of
loans, net of recoveries, amounted to $823,000, $155,000, $315,000, $216,000,
and $77,000, for 1996, 1995, 1994, 1993, and 1992, respectively, and totaled
$1,586,000 for the five years combined.
Table 13 Analysis of the Allowance for Loan Losses
<TABLE>
<CAPTION>
At or for the Years Ended December 31, (1)
---------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period .. $ 6,114 $ 6,269 $ 6,584 $ 6,000 $ 3,593
Addition due to acquisition ..... 1,074 0 0 0 0
Provision for loan losses ....... 1,957 0 0 800 2,484
Charge-offs:
One-to-four family mortgage loans (649) (5) (106) (17) (7)
Other mortgage loans ............ (35) (71) (112) (137) (53)
Consumer and other loans ........ (176) (99) (123) (66) (19)
------- ------- ------- ------- -------
Total charge-offs ............ (860) (175) (341) (220) (79)
------- ------- ------- ------- -------
Recoveries:
One-to-four family mortgage loans 19 0 0 0 2
Other mortgage loans ............ 0 0 0 0 0
Consumer and other loans ........ 18 20 26 4 0
------- ------- ------- ------- -------
Total recoveries ............. 37 20 26 4 2
------- ------- ------- ------- -------
Balance at end of period ........ $ 8,322 $ 6,114 $ 6,269 $ 6,584 $ 6,000
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding...... 0.10% 0.03% 0.06% 0.03% 0.01%
</TABLE>
- ----------
(1) During the periods noted, the Bank held no foreign loans.
Table 14 reflects the Bank's non-performing asset balances as of December 31,
1996, 1995, 1994, 1993, and 1992. The Bank's policy is to discontinue the
accrual of interest on all loans, except credit card loans, that become 90 days
or more delinquent. Unpaid interest is charged against income at the time a loan
is placed on non-accrual status. Foreclosed real estate, including properties
that are held for investment, are also included in non-performing assets.
Foreclosed real estate includes $5.9 million and $5.9 million as of
December 31, 1996 and 1995, respectively, that represents the Bank's carrying
value of a large apartment complex located in the Bank's primary market area.
During 1996, 1995 and 1994, the Bank operated the property and recorded $.8
million, $.7 million and $.3 million of related net rental income during these
periods, respectively.
The Bank's ratio of non-performing loans to total loans and its ratio of
non-performing assets to total assets compare favorably to industry peer group
averages. Loans which are considered performing and are current as to payments
of principal and interest but have an above normal risk of becoming
non-performing or requiring restructuring in the future are estimated to total
approximately $14.7 million at December 31, 1996.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 21
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
FINANCIAL CONDITION (continued)
Asset Quality (continued)
Table 14 Non-Performing Assets
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans .......................... $ 4,077 $1,907 $2,830 $2,352 $ 4,603
Non-accrual other loans ............................. 798 40 170 75 60
------- ------ ------ ------ -------
Total non-accrual loans (1) ...................... 4,875 1,947 3,000 2,427 4,663
Loans 90 days or more delinquent and still accruing.. 750 63 78 119 81
------- ------ ------ ------ -------
Total non-performing loans ....................... 5,625 2,010 3,078 2,546 4,744
Total foreclosed real estate (2) ................. 7,042 6,563 6,697 6,523 7,241
------- ------ ------ ------ -------
Total non-performing assets ......................... $12,667 $8,573 $9,775 $9,069 $11,985
======= ====== ====== ====== =======
Non-performing loans to total loans (3) ............. 0.68% 0.31% 0.54% 0.44% 0.66%
Total non-performing loans and
foreclosed real estate to total assets ........... 0.72% 0.68% 0.92% 0.83% 1.14%
</TABLE>
- ----------
(1) The amounts of additional interest income that would have been recorded on
non-accrual loans, had they been current, totaled $293,000, $76,000,
$141,000, $148,000 and $269,000 for the years 1996, 1995, 1994, 1993 and
1992, respectively.
(2) Includes $5,914,000, $5,896,000 and $6,281,000 of foreclosed real estate
held-for-investment at December 31, 1996, 1995 and 1994, respectively.
(3) Total loans excludes loans held-for-sale.
Deposits and Borrowings The Bank's deposit mix as of December 31, 1996 reflects
the First Harrisburg acquisition and the stability in interest rates in 1996. As
of December 31, 1996, the Bank's total deposit portfolio of $1.2 billion
included time deposits of $809.6 million, or 69.0% of total deposits, and NOW,
money market, and savings deposits totaling $363.8 million, or 31.0% of total
deposits.
Table 15 provides a detailed analysis of the Bank's average deposit
balances, average cost, and interest expense for the three-year period ended
December 31, 1996.
Table 15 Average Interest-Bearing Deposits, Interest Expense and Average Cost
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ----------------------------- ---------------------------
Average Average Average Average Average Average
Balance Interest Cost Balance Interest Cost Balance Interest Cost
---------- -------- ------- -------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings deposits......... $ 146,929 $ 4,171 2.84% $151,085 $ 4,679 3.10% $234,090 $ 7,361 3.14%
Time deposits............ 814,658 45,669 5.61% 677,211 37,928 5.60% 571,710 27,381 4.79%
NOW and money
market accounts........ 171,004 5,964 3.49% 118,275 4,098 3.46% 112,072 3,163 2.82%
---------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
deposits............. $1,132,591 $55,804 4.93% $946,571 $46,705 4.93% $917,872 $37,905 4.13%
========== ======= ==== ======== ======= ==== ======== ======= ====
</TABLE>
The Bank's deposit portfolio has experienced some roll-off in 1996 due to the
loss of deposits from First Harrisburg and a general trend away from
certificates of deposit. The aggregate amount of deposits with a minimum
denomination of $100,000 was $123.9 million, $85.6 million, and $69.8 million as
of December 31, 1996, 1995, and 1994, respectively. Table 16 presents a maturity
stratification of the Bank's time deposits with minimum denominations of
$100,000 as of December 31, 1996, 1995, and 1994, respectively.
Table 16 Maturity of Time Deposits of $100,000 or More
At December 31,
---------------------------------
1996 1995 1994
------- ------- -------
Three months or less .................... $ 7,015 $ 9,482 $ 6,134
Over three months through six months .... 10,561 6,919 4,636
Over six months through twelve months ... 16,959 8,593 7,184
Over twelve months ...................... 21,211 21,860 19,147
------- ------- -------
Total ................................ $55,746 $46,854 $37,101
======= ======= =======
22 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
FINANCIAL CONDITION (continued)
Deposits and Borrowings (continued) The Bank pays deposit insurance premiums to
the Savings Association Insurance Fund ("SAIF") of the FDIC. The Bank's
assessment rate, through December 31, 1996, was 23 basis points and the Bank's
insurance premiums paid to the SAIF totaled $2.3 million, $2.1 million, and $2.2
million in 1996, 1995, and 1994, respectively. On September 30, 1996, the
President signed into law the Deposit Insurance Funds Act of 1996 to
recapitalize the Savings Association Insurance Fund ("SAIF") administered by the
Federal Deposit Insurance Corporation ("FDIC") and to provide for repayment of
the FICO (Financial Institution Collateral Obligation) bonds issued by the
United States Treasury Department. The FDIC levied a one-time special assessment
on SAIF deposits equal to 65.7 cents per $100 of the SAIF-assessable deposit
base as of March 31, 1995. The one-time special assessment amounted to an
additional expense to the Bank of approximately $7.0 million in 1996. During the
years 1997, 1998 and 1999, the Bank Insurance Fund ("BIF") will pay $322 million
of FICO debt service, and SAIF will pay $458 million. [Note -- Qualifying Oakar
institutions (BIF-insured banks that acquired SAIF deposits and continue to pay
SAIF assessments on a portion of their deposits) are entitled to reduce their
SAIF assessment base by 20% for purposes of calculating this special assessment.
(Qualified Oakar banks are: any Oakar bank that, as of June 30, 1995, had an
AADA (adjusted attributable deposit amount) that was less than half of all its
total domestic deposits of any Oakar bank that met all the following conditions
as of June 30, 1995: more than $5 billion in total assessable deposits; AADA was
less than 75% of that amount; belonged to a bank holding company system that, in
the aggregate, had more BIF-insured deposits than SAIF-insured deposits.)]
During 1997, 1998 and 1999, the average regular annual deposit insurance
assessment is estimated to be about 1.29 cents per $100 of deposits for BIF
deposits and 6.44 cents per $100 of deposits for SAIF deposits. Individual
institution's assessments will continue to vary according to their capital and
management ratings. As always, the FDIC will be able to raise the assessments as
necessary to maintain the funds at their target capital ratios provided by law.
After 1999, BIF and SAIF will share the FICO costs equally. Under current
estimates, BIF and SAIF assessment bases would each be assessed at the rate of
approximately 2.43 cents per $100 of deposits. The FICO bonds will mature in
2018-2019, ending the interest payment obligation.
The law also provides that BIF and SAIF are to merge to form the Deposit
Insurance Fund ("DIF") at the beginning of 1999, provided that there are no SAIF
institutions in existence at that time. Merger of the Funds will require state
laws to be amended in those states authorizing savings associations to eliminate
that authorization (state chartered savings banks will not be affected). This
provision reflects Congress' apparent intent to merge thrift and commercial bank
charters by January 1999; however, no law has yet been enacted to achieve that
purpose.
The Act also provides regulatory relief to the financial services industry
relative to environmental risks, frequency of examinations, and the
simplification of forms and disclosures.
Based on current deposit levels, management expects that the decrease in
the FDIC assessment rate will favorably impact pretax results of operations in
an amount estimated at $1,968,000 for 1997.
At December 31, 1996 and 1995, the Bank had other borrowings totaling
$420.6 million and $19.2 million, respectively. In both years, borrowings were
comprised of two categories: ESOP borrowings totaling $1.5 million and $2.0
million at December 31, 1996 and December 31, 1995, respectively; and FHLB
advances totaling $419.1 million and $17.2 million at December 31, 1996 and
December 31, 1995, respectively.
Average non-deposit borrowings, which include escrow accounts, stock
subscriptions, and other borrowed funds, amounted to $204.9 million, $19.9
million, and $9.9 million in 1996, 1995, and 1994, respectively. The increase of
$185.0 million in 1996 as compared to 1995 resulted primarily from the addition
of $160.4 million in average FHLB borrowings. The increase in FHLB advances was
the result of management's decision to leverage excess stockholder capital. The
borrowings were used to support increases in both the loan and marketable
securities portfolios, as well as to augment deposit outflows. The increase of
$10.0 million in 1995 compared to 1994 resulted primarily from the addition of
$12.6 million in average FHLB borrowings.
Management believes that with a leverage capital ratio of 7.3% at December
31, 1996, the Bank continues to be well capitalized and that the increased
earnings from leveraged transactions will enhance stockholder value.
Table 17 Other Borrowings Information
<TABLE>
<CAPTION>
FHLB ESOP Total
-------- ------ --------
<S> <C> <C> <C>
Outstanding at December 31, 1996 ............ $419,146 $1,485 $420,631
Weighted average rate at December 31, 1996... 5.79% 5.75% 5.78%
Maximum amount outstanding at any month end.. $419,146 $1,485 $420,631
Average amount outstanding for the year ..... $171,179 $1,517 $172,696
Weighted average rate for the year .......... 5.87% 5.75% 5.86%
</TABLE>
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 23
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
FINANCIAL CONDITION (continued)
Deposits and Borrowings (continued)
Table 18 Maturity of Other Borrowings
At December 31,
-------------------------------
1996 1995 1994
-------- ------- ------
Three months or less ....................... $ 30,495 $17,695 $ 495
Over three months through six months ....... 0 0 0
Over six months through twelve months ...... 137,000 0 0
Over twelve months ......................... 253,136 1,485 1,980
-------- ------- ------
Total ................................... $420,631 $19,180 $2,475
======== ======= ======
Pursuant to collateral agreements with the FHLB, advances are fully secured
by certain debt securities and qualifying first mortgage loans. There were
available lines of credit totaling $959,949,000 and $107,572,000 at December 31,
1996 and 1995, respectively.
In conjunction with the corporate reorganization and stock issuance
accomplished on January 25, 1994, the Bank borrowed $2,475,000 from an unrelated
local institution to fund the purchase of 247,500 shares of Harris Savings Bank
stock. The purpose of this stock purchase was to establish the Bank's ESOP. The
terms of the ESOP borrowing include five equal annual principal installments of
$495,000 beginning January 25, 1995 and on the last day of January each year
thereafter until retirement of the debt. Interest on the borrowing accrues at
the rate of 5.75% per annum and is payable monthly.
During 1996 and 1995, the Bank sold repurchase agreements, the average
balance of which was $22,855,000 and $1,631,000 for the years ended December 31,
1996 and 1995, respectively. The highest month-end balance oustanding was
$54,605,000 and $18,600,000 during the years 1996 and 1995, respectively. The
securities underlying the agreements were under the Bank's control.
Acquisitions On April 19, 1996, the Bank acquired First Harrisburg Bancor, Inc.
("First Harrisburg"), a local thrift institution. The acquisition was a 100%
cash purchase of all outstanding First Harrisburg common shares at $14.77 per
share, which resulted in a total cost of approximately $38 million, and was
accounted for by the Bank as a purchase transaction. As of April 19, 1996, First
Harrisburg had total assets of approximately $276.6 million and total
liabilities of approximately $252.2 million. The Bank recorded approximately
$13.8 million of goodwill upon consummation of this acquisition, which is being
amortized over a fifteen year period using the straight-line method.
Liquidity The Bank's primary sources of funds are deposits, borrowings and
proceeds from principal and interest payments on loans and marketable
securities. While maturities and scheduled amortization of loans and marketable
securities are a predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions, and competition. The Bank is required to maintain a sufficient level
of liquid assets, as determined by management and reviewed for adequacy by the
FDIC during their regular examination. The FDIC, however, does not prescribe by
regulation a minimum amount or percentage of liquid assets. The FDIC allows any
marketable security, whose sale would not impair the capital adequacy of the
Bank, to be eligible for liquidity. The Bank's liquidity is quantified through
the use of three ratios: a standard liquidity ratio of liquid assets to
short-term borrowings plus deposits and two "dependency" ratios of volatile
liabilities (certificates of deposit greater than $100,000 plus short-term
borrowings) less short-term assets, to long-term assets, with the desired result
being a negative percentage. The first dependency ratio is calculated internally
by the Bank and includes investments in the available-for-sale portfolio in
short-term assets. The second dependency ratio is calculated according to FDIC
guidelines and excludes the available-for-sale portfolio from short-term assets.
The Bank's standard FDIC liquidity ratios were 63.7%, 51.1%, and 48.2% at
December 31, 1996, 1995, and 1994, respectively. The Bank's FDIC qualified
liquid assets were $858.8 million, $560.1 million, and $441.8 million at
December 31, 1996, 1995, and 1994, respectively. The Bank's internal
"dependency" liquidity ratios, as calculated by management, were (53.1%),
(16.4%), and (12.4%) at December 31, 1996, 1995, and 1994, respectively. The
FDIC's "dependency" liquidity ratios for the Bank were 13.0%, 3.2%, and .7% at
December 31, 1996, 1995, and 1994, respectively.
The Bank anticipates that it will have sufficient funds available to meet
its current commitments. At December 31, 1996, the Bank had commitments to
originate loans, including funds available on construction loans of $46.1
million. At December 31, 1996, the Bank had commitments to purchase $13.7
million of marketable securities. The Bank also is obligated to pay $9.8 million
under its lease agreements for branch and administrative facilities.
Certificates of deposit which are scheduled to mature in one year or less at
December 31, 1996, totaled $494.6 million. Based on historical experience,
management estimates that a significant portion of such deposits will remain
with the Bank.
24 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
FINANCIAL CONDITION (continued)
Regulations Although the United States Supreme Court has rendered a 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 entrance of banks into the insurance industry is hotly
contested. On the heels of the Supreme Court's ruling, the Office of the
Comptroller of the Currency has issued draft guidelines for national banks to
sell insurance. This federal guidance, however, will not necessarily ease state
restrictions which currently hinder bank insurance sales. States that have
traditionally been opposed to bank insurance sales could impose licensing
requirements and other restrictions hampering bank insurance activities. Because
the insurance industry is opposed to banks selling and underwriting insurance,
it is difficult to determine to what extent banks will be allowed to engage in
insurance activities and the regulatory costs that will be attached to such
activities.
Congress is currently considering legislative reform centered on repealing
the Glass-Steagell Act which prohibits commercial banks from engaging the
securities industry. The major initiative proposed by the House Banking
Committee Chairman, James Leach, has recently been defeated. Leach's proposal
required a financial services holding company structure which would be permitted
to own a bank and a separately capitalized securities firm. Under Leach's
proposal, banks, however, would be prohibited from affiliating with insurance
companies or nonfinancial firms. The holding company structure would be
regulated by the Federal Reserve Board, and its subsidiaries would be supervised
by the applicable regulator based on their respective functions. Alternatively,
Leach's proposal also permitted a securities firm to establish an investment
bank holding company to own an uninsured wholesale financial institution and a
securities unit. Although Leach's proposal, as currently drafted, has been
canceled, he has announced his plans to introduce legislation proposing limited
regulatory relief.
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 Bank. It cannot be predicted whether such legislation will be
adopted or, if adopted, how such legislation would affect the business of the
Bank. As a consequence of the extensive regulation of commercial banking
activities in the United States, the Bank's business is particularly susceptible
to being affected by federal legislation and regulations that may increase the
cost of doing business. Except as specifically described above, liquidity,
capital resources and results of operations of the Bank 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 state laws does have, and in the future may have, a negative
impact on the Bank's results of operations.
Further, the business of the Bank 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 believes that
such consolidations and mergers may enhance its competitive position as a
community bank.
Monetary Policy The earnings of the Bank are affected by domestic economic
conditions and the monetary and fiscal policies of the United States Government
and its agencies. An important function of the Federal Reserve System is to
regulate the money supply and interest rates. Among the instruments used to
implement those objectives are open market operations in United States
government securities and changes in reserve requirements against member bank
deposits. These instruments are used in varying combinations to influence
overall growth and distribution of bank loans, investments and deposits, and
their use may also affect rates charged on loans or paid for deposits.
The Bank is a member of the Federal Reserve System and, therefore, the
policies and regulations of the Federal Reserve Board have a significant effect
on its deposits, loans and investment growth, as well as the rate of interest
earned and paid, and are expected to affect the Bank's operations in the future.
The effect of such policies and regulations upon the future business and
earnings of the Bank cannot be predicted.
Environmental Regulation There are several federal and state statutes which
regulate the obligations and liabilities of financial institutions pertaining to
environmental issues. In addition to the potential for attachment of liability
resulting from its own actions, a bank may be held liable under certain
circumstances for the actions of its borrowers, or third parties, when such
actions result in environmental problems on properties that collateralize loans
held by the bank. Further, the liability has the potential to far exceed the
original amount of the loan issued by the Bank. Currently, the Bank is not a
party to any pending legal proceeding pursuant to any environmental statute, nor
is the Bank aware of any circumstances which may give rise to liability under
any such statute.
Inflation and Changing Prices The consolidated statements in this report 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 changes in the relative purchasing
power of money due to inflation. The impact of inflation is reflected in the
increased cost of the Bank' operations. Unlike most industrial companies, nearly
all the assets and liabilities of the Bank are monetary in nature. As a result,
interest rates have a greater impact on the Bank'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.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 25
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables are in thousands)
FINANCIAL CONDITION (continued)
Corporate Reorganization and Stock Issuance On January 25, 1994, Harris Savings
Bank reorganized into a Pennsylvania chartered mutual holding company. The
reorganization was accomplished through the purchase and assumption of assets
and liabilities whereby the Bank: (i) incorporated a Pennsylvania capital stock
savings bank and transferred most of its assets (except $1.0 million) and all of
its liabilities, including all of its deposit liabilities, to the newly-formed
bank in exchange for all of the common stock of the Bank not sold in the
Offering; and (iii) adopted a new charter issued by the Pennsylvania Department
of Banking changing its form to that of a state chartered mutual holding
company. Each savings account of the Bank at the time of the reorganization
became a savings account in the newly-formed bank in the same amount and upon
the same terms and conditions, except the holder of each such deposit account
retained liquidation rights with respect to the holding company rather than the
Bank.
Prior to the reorganization, the Bank received the approval of the Federal
Reserve, the Pennsylvania Department of Banking and the FDIC for transactions
contemplated by the plan of reorganization. The plan of reorganization
authorized the Bank to offer stock in one or more stock offerings up to a
maximum of 49% of the issued and outstanding shares of its common stock. The
common stock was offered on a priority basis to: (i) eligible depositors as of
December 31, 1992; the employee stock ownership plan (ESOP); (iii) officers,
trustees and employees of the Bank, and the Bank's recognition and retention
plans (RRP); (iv) other depositors and borrowers as of October 29, 1993; and (v)
the general public. Subscriptions received during the offering period which
ended December 29, 1993, including shares reserved for the ESOP, exceeded the
maximum offering of 2,500,000 shares ($25,000,000). As a result of the maximum
subscription, Harris Financial, MHC (mutual holding company) received 8,500,000
shares (76.4%) of Harris Savings Bank (stock bank) stock. Also, the ESOP
received 247,500 shares and the RRP received 125,000 shares. As a result of the
stock offering, Harris Savings Bank received gross proceeds of $25.2 million
which net of expenses associated with the offering of $1.5 million resulted in
net capital additions to the Bank of $23.7 million.
During 1996, 1995 and 1994, the Bank's mutual holding company parent,
Harris Financial, MHC, waived all of its dividends due from Harris Savings Bank.
These dividends, had they not been waived, would have totaled $4.9 million, $4.3
million and $2.3 million in 1996, 1995 and 1994, respectively. Recently, the
Federal Reserve Board and the FDIC have devoted attention to the issue of such
dividend waivers and their potential impact on future appraisals of FDIC-insured
institutions considering a full stock conversion. The Federal Reserve Board and
the FDIC are also reviewing whether such dividend waivers potentially represent
a breach of fiduciary duties by directors of mutual holding companies.
Management is currently monitoring developments related to its existing and
contemplated future dividend waivers.
On January 27, 1997, the Board of Directors of the Bank approved the
reorganization of the Bank and its existing mutual holding company into a
two-tier mutual holding company structure with the establishment of a state
chartered corporation as the stock holding company parent of the Bank.
Completion of the reorganization is subject to regulatory and stockholder
approval and is expected to be completed during the second quarter of 1997.
New Accounting Guidance In June 1996, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 125 (SFAS 125),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". Principally, SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on the consistent application of a financial components
approach (for example, focus on assets and liabilities that remain after the
transfer takes place) that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
In addition, SFAS 125 extends the "available-for-sale" or "trading"
approach of SFAS 115 to all financial assets that contractually can be prepaid
or otherwise settled in such a way that the holder of the asset would not
recover substantially all of its recorded investment. Such financial assets can
no longer be classified as held to maturity.
SFAS 125 is effective for transfers of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. The
extension of SFAS 125 to all financial assets subject to prepayment risk is
effective for financial assets held on or after January 1, 1997. Management does
not believe that this statement will have a material effect on the Bank's
consolidated financial position or results of operations.
In December 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 127 (SFAS 127), "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125". SFAS 127 defers the
effective date of certain provisions of SFAS 125 until after December 31, 1997.
Earlier or retroactive application is not permitted.
26 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
[ LOGO ]
235 North Second Street
P.O. Box 1711
Harrisburg, Pennsylvania 17105
(717) 236-4041
MANAGEMENT REPORT
Financial Statements
Harris Savings Bank (the Bank) is responsible for the preparation,
integrity and fair presentation of its published financial statements as of
December 31, 1996, and the year then ended. The financial statements have been
prepared in accordance with generally accepted accounting principles, and as
such, include amounts, some of which are based on judgements and estimates of
management.
Internal Control Structure Over Financial Reporting
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting presented in conformity with
generally accepted accounting principles and the Federal Financial Institutions
Examination Council instructions for Consolidated Reports of Condition and
Income (call report instructions). The structure contains monitoring mechanisms,
and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal control
structure, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed the Bank's internal control structure over financial
reporting presented in conformity with generally accepted accounting principles
and call report instructions as of December 31, 1996. This assessment was based
on criteria for effective internal control over financial reporting described in
"Internal Control -- Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that, as of December 31, 1996, Harris Savings Bank maintained an
effective internal control structure over financial reporting presented in
conformity with generally accepted accounting principles and call report
instructions.
Compliance With Laws and Regulations
Management is also responsible for compliance with the federal and state
laws and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders designated by the FDIC as safety and
soundness laws and regulations.
Management assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment, management believes
that Harris Savings Bank complied, in all significant respects, with the
designated laws and regulations relating to safety and soundness for the year
ended December 31, 1996.
/s/ William J. McLaughlin
- ----------------------------------------------------------------------
William J. McLaughlin, President and Chief Executive Officer
/s/ James L. Durrell
- ----------------------------------------------------------------------
James L. Durrell, Executive Vice President and Chief Financial Officer
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 27
<PAGE>
INDEPENDENT AUDITORS' REPORT
KPMG Peat Marwick LLP
Certified Public Accountants
225 Market Street Telephone 717 238-7131 Telefax 717 233 1101
Suite 300
P.O. Box 1190
Harrisburg, PA 17108-1190
The Board of Directors
Harris Savings Bank
We have audited the accompanying consolidated statements of financial condition
of Harris Savings Bank and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Harris Savings Bank
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for mortgage servicing rights in 1996 to adopt
the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage
Servicing Rights".
KPMG Peat Marwick LLP
January 21, 1997
Member Firm of
Klynveld Peat Marwick Goerdeler
28 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF FINANCIAL CONDITION
December 31, 1996 and 1995 (in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Assets
Cash and cash equivalents ................................................... $ 29,693 $ 35,452
Marketable securities held-to-maturity
(fair value of $109,912 and $152,381) (note 4) ........................... 109,417 149,663
Marketable securities available-for-sale (note 4) ........................... 719,493 375,269
Loans receivable, net (note 5) .............................................. 823,916 651,605
Loans held for sale, net .................................................... 9,053 0
Loan servicing rights (note 6) .............................................. 12,264 5,489
Real estate held for investment (note 7) .................................... 898 1,003
Foreclosed real estate (note 7) ............................................. 7,042 6,563
Premises and equipment, net (note 8) ........................................ 14,595 10,093
Intangible assets (note 10) ................................................. 21,695 9,986
Accrued interest receivable (note 9) ........................................ 12,052 8,279
Income taxes receivable ..................................................... 4,677 0
Other assets ................................................................ 3,317 2,462
---------- ----------
Total assets ............................................................. $1,768,112 $1,255,864
========== ==========
Liabilities and Stockholders' Equity
Deposits (note 11) .......................................................... $1,173,423 $1,073,710
Escrow ...................................................................... 8,203 4,649
Accrued interest payable .................................................... 3,012 1,078
Other borrowings (note 12) .................................................. 420,631 19,180
Postretirement benefit obligation (note 15) ................................. 2,360 2,247
Deferred tax liability, net (note 18) ....................................... 3,257 1,564
Other liabilities ........................................................... 4,474 1,884
Income taxes payable ........................................................ 0 93
---------- ----------
Total liabilities ........................................................ 1,615,360 1,104,405
---------- ----------
Commitments (notes 14 and 19)
Common stock, $.01 par value, authorized 50,000,000 shares;
11,216,400 shares issued and outstanding at December 31, 1996, and
11,210,400 shares issued and outstanding at December 31, 1995 ............. 112 112
Paid in capital ............................................................. 25,902 25,322
Retained earnings ........................................................... 124,812 125,244
Net unrealized gain on marketable securities (note 4) ....................... 3,615 3,120
Employee stock ownership plan (note 16) ..................................... (1,024) (1,519)
Recognition and retention plans (note 17) ................................... (665) (820)
---------- ----------
Total stockholders' equity ............................................... 152,752 151,459
---------- ----------
Total liabilities and stockholders' equity ............................... $1,768,112 $1,255,864
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 29
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF INCOME
Years ended December 31, 1996, 1995 and 1994
(in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Interest income:
Loans receivable:
First mortgage loans ................................ $ 46,798 $36,577 $36,323
Commercial loans .................................... 5,413 4,276 3,675
Consumer and other loans ............................ 15,759 8,857 7,357
Held-for-sale ....................................... 1,655 0 0
Taxable investments .................................... 10,193 8,647 4,330
Tax-free investments ................................... 2,603 0 0
Dividends .............................................. 3,404 1,508 1,448
Mortgage-backed securities ............................. 21,856 20,726 20,799
Money market investments ............................... 307 34 0
-------- ------- -------
Total interest income ............................... 107,988 80,625 73,932
-------- ------- -------
Interest expense:
Deposits (note 11) ..................................... 55,804 46,705 37,905
Borrowed funds (note 12) ............................... 11,392 863 134
Escrow ................................................. 130 128 202
-------- ------- -------
Total interest expense .............................. 67,326 47,696 38,241
-------- ------- -------
Net interest income ................................. 40,662 32,929 35,691
Provision for loan losses (note 5) ..................... 1,957 0 0
-------- ------- -------
Net interest income after provision for loan losses.. 38,705 32,929 35,691
-------- ------- -------
Non-interest income:
Service charges on deposits ............................ 932 775 729
Other service charges/commissions/fees ................. 857 631 743
Net servicing income ................................... 1,322 1,032 911
(Loss) gain on sale of mortgage-backed securities, net.. (1,221) 110 (1,410)
Gain on sale of other securities, net .................. 37 0 1,421
Gain (loss) on sale of loans, net ...................... 1,863 (68) 0
Other .................................................. 206 84 109
-------- ------- -------
Total non-interest income ........................... 3,996 2,564 2,503
-------- ------- -------
Non-interest expense:
Salaries and benefits .................................. 14,710 11,387 11,390
Equipment expense ...................................... 1,647 1,103 1,286
Occupancy expense ...................................... 2,467 1,821 1,709
Advertising and public relations ....................... 1,545 642 630
FDIC insurance ......................................... 9,305 2,115 2,151
Director fees .......................................... 307 311 304
Income from real estate operations (note 7) ............ (355) (542) (144)
Amortization and write-off of intangibles (note 10)..... 2,107 374 0
Non-operational loss (note 5) .......................... 4,305 0 0
Other .................................................. 6,149 3,565 3,467
-------- ------- -------
Total non-interest expense .......................... 42,187 20,776 20,793
-------- ------- -------
Income before income taxes ............................. 514 14,717 17,401
Income tax (benefit) expense (note 18) ................. (517) 5,503 7,348
-------- ------- -------
Net income .......................................... $ 1,031 $ 9,214 $10,053
======== ======= =======
Earnings per share (notes 1 and 3) ..................... $ 0.09 $ 0.84 $ 0.85
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
30 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994 (in thousands)
<TABLE>
<CAPTION>
Net Employee Recognition
Unrealized Stock And
Common Paid In Retained Gain (Loss) on Ownership Retention
Stock Capital Earnings Securities Plan Plans Total
------ ------- -------- -------------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994............. $ 0 $ 0 $107,886 $ 0 $ 0 $ 0 $107,886
Stock issuance......................... 111 23,606 23,717
Net income............................. 10,053 10,053
Dividends paid at $.27 per share....... (647) (647)
Exercised stock options................ 1 537 538
Implementation of change in accounting
for marketable securities, net of
tax effect of $4,004................. 6,645 6,645
Change in unrealized gain (loss)
on marketable securities, net of
tax effect of ($6,356)............... (10,550) (10,550)
Common stock acquired by ESOP.......... (2,475) (2,475)
ESOP stock committed for release....... 461 461
Common stock acquired by RRP plans..... (1,250) (1,250)
Earned portion of RRP plans............ 257 257
Excess of fair value above cost of
ESOP stock committed for release..... 306 306
Excess of fair value above cost of
earned portion of RRP stock.......... 95 95
---- ------- -------- -------- -------- -------- --------
Balance at December 31, 1994........... 112 24,544 117,292 (3,905) (2,014) (993) 135,036
Net income............................. 9,214 9,214
Dividends paid at $.51 per share....... (1,262) (1,262)
Exercised stock options................ 316 316
Change in unrealized gain (loss)
on marketable securities, net of
tax effect of $4,233................. 7,025 7,025
ESOP stock committed for release....... 495 495
Earned portion of RRP plans............ 173 173
Excess of fair value above cost of
ESOP stock committed for release..... 359 359
Excess of fair value above cost of
earned portion of RRP stock.......... 103 103
---- ------- -------- -------- -------- -------- --------
Balance at December 31, 1995........... 112 25,322 125,244 3,120 (1,519) (820) 151,459
Net income............................. 1,031 1,031
Dividends paid at $.58 per share....... (1,463) (1,463)
Exercised stock options................ 60 60
Change in unrealized gain (loss)
on marketable securities, net of
tax effect of $298................... 495 495
ESOP stock committed for release....... 495 495
Earned portion of RRP plans............ 155 155
Excess of fair value above cost of
ESOP stock committed for release..... 342 342
Excess of fair value above cost of
earned portion of RRP stock.......... 82 82
Tax benefit of RRP shares awarded
and options exercised................ 96 96
---- ------- -------- -------- -------- -------- --------
Balance at December 31, 1996........... $112 $25,902 $124,812 $ 3,615 $ (1,024) $ (665) $152,752
==== ======= ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 31
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994 (in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 1,031 $ 9,214 $ 10,053
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-operational loss (note 5) .......................... 4,305 0 0
Provision for loan losses .............................. 1,957 0 0
Net depreciation, amortization and accretion ........... 4,043 844 (22)
Origination of loans held for sale ..................... (84,824) 0 0
Proceeds from sale of loans held for sale .............. 87,137 0 0
Net loss (gain) on sales of interest earning assets .... (679) (42) (11)
Loss (gain) on the sale of foreclosed real estate ...... 250 (113) 6
Equity (income) losses from joint ventures ............. (15) 69 7
(Increase) decrease in accrued interest receivable ..... (3,773) (2,114) 281
Increase in accrued interest payable ................... 1,934 470 122
Amortization and write-off of intangibles .............. 2,107 374 0
Earned ESOP shares ..................................... 837 854 767
Earned RRP shares ...................................... 237 276 352
Provision for deferred income taxes .................... 1,678 836 3,029
Other, net ............................................. (1,373) (713) 1,229
--------- -------- --------
Net cash provided by operating activities .............. 14,852 9,955 15,813
--------- -------- --------
Cash flows from investing activities:
Proceeds from maturities and principal reductions
of marketable securities:
Held-to-maturity ....................................... 40,180 60,273 54,189
Available-for-sale ..................................... 71,532 31,476 40,254
Proceeds from sales of marketable securities:
Available-for-sale ..................................... 421,605 2,701 108,092
Purchase of marketable securities:
Held-to-maturity ....................................... 0 (110,267) (103,663)
Available-for-sale ..................................... (600,362) (76,674) (82,919)
Purchase of loans ......................................... (8,474) (14,239) 0
Loans sold ................................................ 7,242 5,808 378
Net increase in loan originations less principal
payments of loans ....................................... (175,927) (80,699) (16,473)
Purchase of loan servicing rights ......................... (3,708) (5,866) 0
Investment in real estate held for investment ............. (141) (299) 0
Proceeds from payments on real estate held for investment.. 12 384 355
Purchase of premises and equipment ........................ (2,852) (643) (550)
Cash proceeds received from the sale of
foreclosed real estate .................................. 783 1,120 890
Branch purchase ........................................... 0 115,611 0
Bank acquisition net of cash received ..................... (25,849) 0 0
--------- -------- --------
Net cash (used in) provided by investing activities ....... (275,959) (71,314) 553
--------- -------- --------
</TABLE>
32 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CASH FLOWS (CONTINUED)
Years ended December 31, 1996, 1995 and 1994 (in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits .............................. $ (71,218) $ 37,163 $ (27,327)
Net increase in other borrowings ................................. 329,463 16,705 2,475
Net increase (decrease) in escrow, stock over-subscriptions
and stock subscriptions payable ............................... (1,494) (467) (31,527)
Net proceeds from stock issuance ................................. 0 0 23,717
Cash dividends ................................................... (1,463) (1,262) (647)
Purchase of ESOP shares .......................................... 0 0 (2,475)
Purchase of RRP shares ........................................... 0 0 (1,250)
Proceeds from the exercise of stock options ...................... 60 316 538
--------- --------- ---------
Net cash provided by (used in) financing activities ........... 255,348 52,455 (36,496)
--------- --------- ---------
Net decrease in cash and cash equivalents ..................... (5,759) (8,904) (20,130)
Cash and cash equivalents at beginning of year ................... 35,452 44,356 64,486
--------- --------- ---------
Cash and cash equivalents at end of year ......................... $ 29,693 $ 35,452 $ 44,356
========= ========= =========
Supplemental disclosures:
Cash paid during the years for:
Interest on deposits, advances and other borrowings
(includes interest credited to deposit accounts) ............ $ 65,392 $ 47,226 $ 38,092
Income taxes .................................................. 2,575 5,107 5,494
Non-cash investing activities:
Transfers from loans to foreclosed real estate ................... $ 923 $ 619 $ 1,213
Mortgage-backed securities received in exchange for mortgage loans 176,450 12,518 8,296
Bank acquisition (note 10):
Fair value of assets acquired .................................... $ 276,581 $ 0 $ 0
Premium paid ..................................................... 13,816 0 0
Fair value of liabilities assumed ................................ 252,211 0 0
Branch acquisition (note 10):
Fair value of assets acquired .................................... $ 0 $ 115,611 $ 0
Deposit premium paid ............................................. 0 10,360 0
Fair value of liabilities assumed ................................ 0 125,971 0
</TABLE>
See accompanying notes to consolidated financial statements.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 33
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies The accounting and reporting
policies of Harris Savings Bank and subsidiaries conform to generally accepted
accounting principles and to general practices within the banking industry.
The following is a description of the more significant of those policies.
(a) Basis of Financial Statement Presentation The accompanying consolidated
financial statements include the accounts of Harris Savings Bank ("the Bank"),
Harris Delaware Corporation, Avstar Mortgage Corporation, HS Service
Corporation, First Harrisburg Service Corporation and CBL Service Corporation,
its wholly-owned subsidiaries. The Bank is primarily engaged in attracting
deposits from the general public and investing deposit funds primarily in
one-to-four family residential loans, commercial loans, consumer loans and
marketable securities. Harris Delaware Corporation was incorporated during 1995
for the purpose of managing certain investments in marketable securities. Avstar
Mortgage Corporation is a mortgage banking company which originates primarily
one-to-four family residential loans. HS Service Corporation is primarily
engaged in residential real estate investments in joint ventures. First
Harrisburg Service Corporation is mainly involved with title insurance
activities and an investment in a wholly-owned subsidiary which is primarily
engaged in real estate investments in joint ventures. CBL Service Corporation is
inactive and has negligible assets and liabilities. All significant intercompany
transactions and balances are eliminated in consolidation. The Bank is subject
to the regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
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 balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for loan losses
and foreclosed real estate, management obtains independent appraisals for
significant properties.
Management believes that the allowances for losses on loans and foreclosed
real estate are adequate. While management uses available information to
recognize losses on loans and foreclosed real estate, future additions to the
allowances may be necessary based on changes in economic conditions.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowances for losses on
loans and foreclosed real estate. Such agencies may require the Bank to
recognize additions to the allowances based on their judgments of information
available to them at the time of their examination.
(b) Cash and Cash Equivalents For purposes of the statement of cash flows,
the Bank defines cash equivalents as demand deposits with other financial
institutions.
(c) Marketable Securities Marketable securities are classified in three
categories and accounted for as follows:
o Debt securities that the Bank has the positive intent and ability to hold
to maturity are classified as held-to-maturity securities and reported at
amortized cost.
o Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
o Debt and equity securities not classified as either held-to-maturity or
trading securities are classified as available-for-sale securities and
reported at fair value, with unrealized gains and losses, net of tax,
excluded from earnings and reported in a separate component of
stockholders' equity.
Premiums and discounts are amortized or accreted over the term of the
related securities using a method that approximates the interest method,
adjusted for prepayments. Gains or losses upon sale are determined using the
specific identification method.
Federal law requires a member institution of the Federal Home Loan Bank
(FHLB) system to hold stock of its district FHLB according to a predetermined
formula. This stock is recorded at cost and may be pledged to secure FHLB
advances.
(d) Loans Receivable Loans receivable are stated at unpaid principal
balances, adjusted for the allowance for loan losses, net deferred loan
origination fees and unearned discounts and premiums.
Discounts and premiums on first mortgage loans are amortized to income
using a method that approximates the interest method over the remaining period
to contractual maturity, adjusted for prepayments. Discounts on consumer loans
are recognized over the lives of the loans using methods that approximate the
interest method.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on the Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrowers ability to repay, estimated value of any underlying
collateral and current economic conditions.
34 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies (continued)
(d) Loans Receivable (continued) Recognition of interest income on loans is
computed using the interest method. Interest on loans that are contractually
past due ninety days and over is reserved in accordance with regulatory
requirements. Loans are returned to accrual status when the collectability of
past due principal and interest is reasonably assured.
The Bank adopted the provisions of Statement of Financial Accounting
Standard No. 114, "Accounting by Creditors for Impairment of a Loan", SFAS 114,
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosure", SFAS 118, on January 1, 1995. Generally, all
non-accrual loans are deemed to be impaired. In addition, management,
considering current information and events regarding the borrowers' ability to
repay their obligations, considers a loan to be impaired when it is probable
that the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement. In evaluating whether a loan is
impaired, management considers not only the amount that the Bank expects to
collect but also the timing of collection. Generally, if a delay in payment is
insignificant (e.g. less than 30 days), a loan is not deemed to be impaired.
When a loan is considered to be impaired, the amount of impairment is
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, at the loan's market price or fair value
of the collateral if the loan is collateral dependent. The majority of loans
deemed to be impaired by management are collateral dependent. Loans are
evaluated individually for impairment. The Bank excludes smaller balance,
homogeneous loans (e.g. primarily consumer and residential mortgages) from the
evaluation for impairment. Impairment losses are excluded from the allowance for
possible loan losses. Impaired loans are charged-off when management believes
that the ultimate collectibility of a loan is not likely.
Interest income on impaired loans is generally recorded as payments are
collected. Interest on impaired loans that are contractually past due ninety
days and over is reserved in accordance with regulatory requirements.
(e) Loans Held for Sale Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or market, net of deferred
fees relating to the specific loans. Gains and losses on the sale of loans are
determined using the specific identification method.
(f) Real Estate Held for Investment and Foreclosed Real Estate In 1996, the
Bank adopted the provisions of Financial Accounting Standard No. 121 (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". SFAS 121 provides guidance for recognition and measurement of
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to both assets to be held and used and assets to be disposed of. The
adoption of SFAS 121 did not impact the Bank's financial position or results of
operations. Real estate properties acquired through loan foreclosure are
initially recorded at the lower of the carrying or fair value less estimated
costs to sell at the date of foreclosure. At the time of foreclosure the excess,
if any, of the carrying value over the estimated fair value of the property is
charged to the allowance for loan losses. Real estate properties held for
investment are carried at the lower of cost, including cost of improvements and
amenities incurred subsequent to acquisition, or estimated net realizable value.
Costs relating to development and improvement of property are capitalized,
whereas costs relating to holding property are expensed.
Valuations are periodically performed by management on both real estate
held for investment and foreclosed real estate. An allowance for losses is
established by a charge to operations if the carrying value of real estate held
for investment exceeds its estimated net realizable value, or the carrying value
of foreclosed real estate exceeds its estimated fair value.
(g) Premises and Equipment Buildings, leasehold improvements, furniture,
fixtures, and equipment are carried at cost, less accumulated depreciation and
amortization. Buildings, furniture, fixtures, and equipment are depreciated
using the straight-line method over the estimated useful lives of the assets.
The cost of leasehold improvements is being amortized using the straight-line
method over the lesser of the estimated useful lives or the terms of the related
leases.
(h) Loan Origination and Commitment Fees and Related Costs Loan fees and
certain direct loan origination costs are deferred and the net fee or cost is
recognized as an adjustment to interest income using the interest method over
the contractual life of the loans. Calculation of the interest method is done on
a loan-by-loan basis. The amortization of deferred fees and costs is
discontinued on non-performing loans.
(i) Intangible Assets Deposit premiums are amortized over the estimated
benefit period (approximately 7 years). The amortization period for deposit
premiums is subject to periodic review for reasonableness by management.
(j) Goodwill Goodwill results when, under the purchase method of accounting
for acquisitions, the amount paid for the acquired entity is greater than the
net of the fair value of the assets acquired less the fair value of the
liabilities assumed. The Bank amortizes goodwill over the estimated benefit
period (15 years). The amortization period for goodwill is subject to periodic
review by management.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 35
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies (continued)
(k) Loan Servicing Effective January 1, 1996, the Bank adopted the
provisions of Statement of Financial Accounting Standards No. 122, "Accounting
for Mortgage Servicing Rights, an amendment of FASB Statement No. 65" (SFAS
122). SFAS 122 amended Statement 65 to require an institution to recognize as
separate assets the rights to service mortgage loans for others when a mortgage
loan is sold or securitized and servicing rights retained. When capitalizing
mortgage servicing rights, the Bank allocates the total cost of the mortgage
loans (the recorded investment in the mortgage loans including net deferred fees
or costs and any purchase premium or discount) to the mortgage servicing rights
and loans (without the mortgage servicing rights) based on their relative fair
values. Such fair value is primarily based on observable market prices. Mortgage
servicing rights (including purchased mortgage servicing) are amortized in
proportion to, and over the period of, estimated net servicing revenue based on
management's best estimate of remaining loan lives. The effect of adoption of
SFAS 122 was an increase to income of approximately $1,896,000 in 1996.
The Bank measures the impairment of servicing rights based on the
difference between the carrying amount of the servicing rights and their current
fair value as obtained from an independent mortgage consultant. Impairment of
servicing rights is recognized through a valuation allowance. The amount of
impairment recognized is the amount by which the capitalized mortgage servicing
rights exceed their fair value. For the purpose of evaluating and measuring
impairment of capitalized mortgage servicing rights, the Bank stratifies those
rights based on the predominant risk characteristics of the underlying loans.
The Bank primarily stratifies mortgage servicing rights by loan type (for
example, conventional or government guaranteed and adjustable rate or fixed rate
mortgage loans) and interest rate. Valuation techniques for measuring fair value
incorporate assumptions that market participants use in estimating future
servicing income and expense, including assumptions about prepayment, default
and interest rates.
(l) Income Taxes The Bank accounts for income taxes using the asset and
liability method. The objective of the asset and liability method is to
establish deferred tax assets and liabilities for temporary differences between
the financial reporting and tax basis of the Bank's assets and liabilities based
on enacted tax rates expected to be in effect when such amounts are realized or
settled.
(m) Derivative Financial Instruments The Bank has no material involvement
with derivative financial instruments that meet the definition of SFAS 119.
(n) Earnings Per Share Earnings per share are based on the weighted average
number of common shares outstanding during each period and common equivalent
shares (using the treasury share method) outstanding at the end of the year. The
Bank's common equivalent shares consist of dilutive stock options, unearned
shares for the RRPs and unearned shares under the ESOP, and amounted to 104,997,
131,130, and 139,920 for the twelve months ended December 31, 1996, 1995 and
1994, respectively. The resulting number of shares used in computing earnings
per share was 11,089,495, 11,014,583 and 10,908,964 in 1996, 1995 and 1994,
respectively. Per share net income for the 25-day period ended January 25, 1994
totaled $.07 per share and is excluded from 1994 earnings per share.
(o) Dividends The Bank may not pay dividends on or repurchase any of its
common stock if the effect thereof would reduce net worth below the level of
adequate capitalization as defined by the FDIC and the Pennsylvania Department
of Banking.
During 1996, 1995 and 1994, the Bank's mutual holding company parent,
Harris Financial, MHC, waived all of its dividends due from the Bank. These
dividends, had they not been waived, would have totaled $4,930,000, $4,335,000
and $2,312,000 in 1996, 1995 and 1994, respectively.
(p) Stock-Based Compensation In 1996, the Bank adopted Statement of
Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation", SFAS 123, for disclosure purposes only. SFAS 123 defines a fair
value based method of accounting for employee stock compensation plans. The pro
forma disclosure of net income and earnings per share is included in footnote
17. The Bank continues to account for stock-based compensation under the
intrinsic value based method under APB Opinion No. 25.
(q) Reclassifications Certain amounts in prior years' financial statements
may have been reclassified to conform with the current year's classifications.
(2) Regulatory Structure The Bank's primary regulators are the Pennsylvania
Department of Banking and the Federal Deposit Insurance Corporation (FDIC). The
Bank also is bound by many of the provisions of Financial Institutions Reform,
Recovery and Enforcement Act of 1989 (FIRREA).
The Bank is subject to various regulatory capital requirements administered
by the federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined by the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
36 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thounsands)
(2) Regulatory Structure (continued) As of June 30, 1996, the most recent
notification from the Federal Deposit Insurance Corporation categorized the Bank
as well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that notification that management
believes have changed the Bank's category.
The Bank's actual and required capital amounts and ratios are presented in
the following table.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
--------------- ----------------------------------------------------------------
Amount Ratio Amount Ratio
------- ----- -------------------------------- -----------------------------
<S> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted Assets).. $134,539 14.7% greater than or equal to $73,151 greater than or equal to 8.0%
Tier I Capital (to Risk Weighted Assets). 126,217 13.8% greater than or equal to 36,575 greater than or equal to 4.0%
Tier I Capital (to Average Assets)....... 126,217 8.3% greater than or equal to 61,099 greater than or equal to 4.0%
As of December 31, 1995:
Total Capital (to Risk Weighted Assets).. $142,870 21.4% greater than or equal to $53,522 greater than or equal to 8.0%
Tier I Capital (to Risk Weighted Assets). 136,757 20.5% greater than or equal to 26,761 greater than or equal to 4.0%
Tier I Capital (to Average Assets)....... 136,757 12.1% greater than or equal to 45,339 greater than or equal to 4.0%
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
-----------------------------------------------------------------
Amount Ratio
-------------------------------- ------------------------------
<C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted Assets).. greater than or equal to $91,438 greater than or equal to 10.0%
Tier I Capital (to Risk Weighted Assets). greater than or equal to 54,863 greater than or equal to 6.0%
Tier I Capital (to Average Assets)....... greater than or equal to 76,373 greater than or equal to 5.0%
As of December 31, 1995:
Total Capital (to Risk Weighted Assets).. greater than or equal to $66,902 greater than or equal to 10.0%
Tier I Capital (to Risk Weighted Assets). greater than or equal to 40,141 greater than or equal to 6.0%
Tier I Capital (to Average Assets)....... greater than or equal to 56,674 greater than or equal to 5.0%
</TABLE>
The Pennsylvania Department of Banking also required a minimum regulatory
leverage capital ratio of 3% and a risk-based capital ratio of 8% as of December
31, 1996 and December 31, 1995. The Bank exceeded minimum regulatory capital
ratios at December 31, 1996 and 1995.
(3) Corporate Reorganization and Stock Issuance On January 25, 1994, the Bank
reorganized into a Pennsylvania chartered mutual holding company through a
purchase and assumption of assets and liabilities whereby the Bank: (i)
incorporated a Pennsylvania capital stock savings bank; (ii) transferred most of
its assets (except $1.0 million) and all of its liabilities, including all of
its deposit liabilities, to the newly-formed bank in exchange for all of the
common stock of the Bank not sold in the Offering; and (iii) adopted a new
charter issued by the Pennsylvania Department of Banking changing its form to
that of a state chartered mutual holding company. Each savings account of the
Bank at the time of the reorganization became a savings account in the
newly-formed bank in the same amount and upon the same terms and conditions,
except the holder of each such deposit account retains liquidation rights with
respect to the holding company rather than the Bank.
Prior to the reorganization, the Bank received the approval of the Federal
Reserve, the Department of Banking and the FDIC for transactions contemplated by
the plan of reorganization. The plan of reorganization authorized the Bank to
offer stock in one or more stock offerings up to a maximum of 49% of the issued
and outstanding shares of its common stock. The common stock was offered on a
priority basis to: (i) eligible depositors as of December 31, 1992; (ii) the
employee stock ownership plan (ESOP); (iii) officers, trustees and employees of
the Bank, and the Bank's recognition and retention plans (RRP); (iv) other
depositors and borrowers as of October 29, 1993; and (v) the general public.
Subscriptions received during the offering period which ended December 29, 1993,
including shares reserved for the ESOP, exceeded the maximum offering of
2,500,000 shares ($25,000,000). As a result of the maximum subscription, Harris
Financial, MHC (mutual holding company) received 8,500,000 shares (76.4%) of
Harris Savings Bank (stock bank) stock. Also, the ESOP received 247,500 shares
and the RRP received 125,000 shares.
As a result of the stock offering, Harris Savings Bank received gross
proceeds of $25,250,000. Expenses associated with the offering totaled
$1,533,000, resulting in net capital additions to the Bank of $23,717,000. The
Bank recorded common stock at par of $111,000 and paid in capital of $23,606,000
from the stock issuance.
On January 27, 1997, the Board of Directors of the Bank approved the
reorganization of the Bank and its existing mutual holding company into a
two-tier mutual holding company structure with the establishment of a state
chartered corporation as the stock holding company parent of the Bank.
Completion of the reorganization is subject to regulatory and stockholder
approval and is expected to be completed during the second quarter of 1997.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 37
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands)
(4) Marketable Securities The amortized cost, gross unrealized holding gains,
gross unrealized holding losses and fair value for held-to-maturity and
available-for-sale securities by major security type at December 31, 1996, were
as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. Government and agencies ...... $ 72,513 $ 408 $ (138) $ 72,783
Mortgage-backed securities:
FNMA PC's ...................... 4,780 121 0 4,901
Private issue CMO's ............ 32,124 110 (6) 32,228
-------- -------- -------- --------
Total mortgage-backed securities .. 36,904 231 (6) 37,129
-------- -------- -------- --------
Total securities held-to-maturity . $109,417 $ 639 $ (144) $109,912
======== ======== ======== ========
Available-for-sale:
U.S. Government and agencies ........ $143,370 $ 312 $ (961) $142,721
Corporate bonds ..................... 17,000 0 (340) 16,660
SBA's ............................... 31,522 183 0 31,705
Municipal obligations ............... 89,840 1,294 (979) 90,155
FHLB stock .......................... 20,972 0 0 20,972
Other equities ...................... 81,915 4,966 (45) 86,836
Asset-backed securities ............. 2,756 2 0 2,758
Mortgage-backed securities:
FNMA PC's ........................ 10,040 37 0 10,077
FHLMC PC's ....................... 70,942 1,147 (231) 71,858
GNMA PC's ........................ 1,565 28 0 1,593
Private issue PC's ............... 36,598 155 (4) 36,749
FNMA CMO's ....................... 62,597 106 (5) 62,698
FHLMC CMO's ...................... 122,851 145 (130) 122,866
Private issue CMO's .............. 21,732 165 (52) 21,845
-------- -------- -------- --------
Total mortgage-backed securities .... 326,325 1,783 (422) 327,686
-------- -------- -------- --------
Total securities available-for-sale.. $713,700 $ 8,540 $ (2,747) $719,493
======== ======== ======== ========
</TABLE>
The amortized cost and fair value of marketable securities at December 31,
1996 by expected maturity are shown below.
Amortized Fair
Cost Value
-------- --------
Held-to-maturity:
Due in one year or less ........................ $ 0 $ 0
Due after one year through five years .......... 71,307 71,555
Due after five years through ten years ......... 1,206 1,228
Due after ten years ............................ 0 0
Mortgage-backed securities ..................... 36,904 37,129
-------- --------
Total securities held-to-maturity ........... $109,417 $109,912
======== ========
Available-for-sale:
Due in one year or less ........................ $ 74,892 $ 74,050
Due after one year through five years .......... 122,135 121,895
Due after five years through ten years ......... 53,183 53,591
Due after ten years ............................ 31,522 31,705
Equity securities .............................. 102,887 107,808
Asset-backed securities ........................ 2,756 2,758
Mortgage-backed securities ..................... 326,325 327,686
-------- --------
Total securities available-for-sale ......... $713,700 $719,493
======== ========
Marketable securities having a carrying value of $5,031,000 at December 31,
1996 were pledged to secure public deposits. Marketable securities having a
carrying value of $445,914,000 were pledged as collateral for FHLB advances at
December 31, 1996.
38 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands)
(4) Marketable Securities (continued) The amortized cost, gross unrealized
holding gains, gross unrealized holding losses and fair value for
held-to-maturity and available-for-sale securities by major security type at
December 31, 1995, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. Government and agencies ...... $ 77,578 $ 1,844 $ 0 $ 79,422
FHLB securities ................... 700 0 0 700
Mortgage-backed securities:
FNMA PC's ...................... 5,574 274 0 5,848
FHLMC PC's ..................... 2,997 0 (22) 2,975
FNMA CMO's ..................... 7,193 0 (29) 7,164
FHLMC CMO's .................... 17,557 6 (41) 17,522
Private issue CMO's ............ 38,064 686 0 38,750
-------- -------- -------- --------
Total mortgage-backed securities .. 71,385 966 (92) 72,259
-------- -------- -------- --------
Total securities held-to-maturity . $149,663 $ 2,810 $ (92) $152,381
======== ======== ======== ========
Available-for-sale:
U.S. Government and agencies ...... $ 44,018 $ 696 $ (75) $ 44,639
FHLB stock ........................ 6,576 0 0 6,576
Other equities .................... 16,443 2,827 0 19,270
Mortgage-backed securities:
FNMA PC's ...................... 13,908 0 (150) 13,758
FHLMC PC's ..................... 125,721 2,998 (475) 128,244
Private issue PC's ............. 49,741 8 (91) 49,658
FNMA CMO's ..................... 65,423 10 (490) 64,943
FHLMC CMO's .................... 48,439 73 (331) 48,181
-------- -------- -------- --------
Total mortgage-backed securities .. 303,232 3,089 (1,537) 304,784
-------- -------- -------- --------
Total securities available-for-sale $370,269 $ 6,612 $ (1,612) $375,269
======== ======== ======== ========
</TABLE>
Activity from the sale of marketable securities is as follows:
1996 1995 1994
--------- --------- ---------
Proceeds ................... $ 421,605 $ 2,701 $ 108,092
========= ========= =========
Gross gains ................ $ 514 $ 110 $ 2,556
Gross losses ............... 1,698 0 2,545
--------- --------- ---------
Net (loss) gain ............ $ (1,184) $ 110 $ 11
========= ========= =========
All sales of marketable securities occurred in the available-for-sale
portfolio in 1996, 1995 and 1994.
During 1995, the FASB promulgated a one-time "window" during which entities
would be allowed to reclassify securities from the held-to-maturity portfolio to
the available-for-sale portfolio without tainting securities remaining as
held-to-maturity. During this period, the Bank reclassified $122.1 million of
marketable securities from held-to-maturity to available-for-sale, recording an
unrealized loss of approximately $1.6 million in the carrying value of the
available-for-sale portfolio. The corresponding decrease to stockholders'
equity, net of tax, was approximately $1.0 million. The transfer of securities
was done primarily to provide the Bank with increased flexibility in managing
interest rate risk.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 39
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands)
(5) Loans Receivable Loans receivable at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
First mortgage loans (principally conventional):
Principal balances:
Secured by one-to-four family residences ...................... $ 514,694 $ 472,998
Secured by other residential real estate properties ........... 21,299 27,171
Construction loans (net of undisbursed
portion of $27,401 and $22,301) ............................. 25,647 23,415
Other ......................................................... 21,777 23,015
--------- ---------
583,417 546,599
Less:
Unearned premiums ............................................. (327) (220)
Net deferred loan origination fees ............................ 8,504 8,235
--------- ---------
Total first mortgage loans .................................... 575,240 538,584
--------- ---------
Consumer and other loans:
Principal balances:
Mobile home ................................................... 65,794 20,991
Home equity and second mortgage ............................... 153,464 83,031
Credit cards .................................................. 0 3,258
Commercial .................................................... 17,636 2,240
Other ......................................................... 5,672 5,031
--------- ---------
242,566 114,551
Plus:
Net deferred loan origination costs ........................... 552 276
Dealer reserves ............................................... 13,880 4,308
--------- ---------
Total consumer and other loans ................................ 256,998 119,135
--------- ---------
Less allowance for loan losses ................................... 8,322 6,114
--------- ---------
Net loans ..................................................... $ 823,916 $ 651,605
========= =========
</TABLE>
Loans having a carrying value of $719,408,000 were pledged as collateral
for FHLB advances at December 31, 1996.
Activity in the allowance for loan losses is summarized as follows for the
years ended December 31:
1996 1995 1994
------- ------- -------
Balance at beginning of year ......... $ 6,114 $ 6,269 $ 6,584
Addition due to acquisition .......... 1,074 0 0
Provision charged to income .......... 1,957 0 0
Charge-offs and recoveries, net ...... (823) (155) (315)
------- ------- -------
Balance at end of year ............... $ 8,322 $ 6,114 $ 6,269
======= ======= =======
Nonaccrual and renegotiated loans for which interest has been reduced
totaled approximately $4,875,000, $1,947,000 and $3,000,000 at December 31,
1996, 1995 and 1994, respectively. Interest income foregone on these loans
amounted to $293,000, $76,000 and $141,000 during 1996, 1995 and 1994,
respectively.
At December 31, 1996, the Bank had no impaired loans. At December 31, 1995,
the Bank had impaired loans totaling $1.0 million. The Bank recorded no
impairment loss reserves at December 31, 1996 and 1995. The Bank's average
carrying value of impaired loans was $0 in 1996 and $1.0 million in 1995. No
interest income was recognized on impaired loans during 1996 or 1995.
40 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands)
(5) Loans Receivable (continued) In connection with identified violations of
internal control policies and certain unauthorized external activities
concerning the Bank's relationship with a mortgage brokering company that
followed the acquisition of First Harrisburg by the Bank, a $4.3 million loss
was incurred in 1996.
The Bank's mortgage banking subsidiary sells loans with recourse. At
December 31, 1996, the amount of loans sold with recourse was approximately $1.2
million.
(6) Loan Servicing Mortgage loans serviced for others are not included in the
accompanying consolidated statements of financial condition. The unpaid
principal balances of these loans at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Mortgage loan portfolios serviced for:
FHLMC..................................... $ 645,403 $ 424,188 $ 198,022
FNMA...................................... 349,671 22,094 1,937
Other investors........................... 68,912 1,476 2,003
---------- ---------- ---------
$1,063,986 $ 447,758 $ 201,962
========== ========== =========
</TABLE>
Activity associated with mortgage servicing rights is summarized as follows:
<TABLE>
<CAPTION>
Purchased Originated Total
---------- ----------- ---------
<S> <C> <C> <C>
Balance at December 31, 1994.................. $ 0 $ 0 $ 0
Additions..................................... 5,866 0 5,866
Amortization.................................. (377) 0 (377)
-------- -------- ---------
Balance at December 31, 1995.................. 5,489 0 5,489
Acquired in business combination.............. 2,120 132 2,252
Additions..................................... 3,708 2,411 6,119
Amortization.................................. (1,081) (393) (1,474)
Net change in valuation allowance............. (122) 0 (122)
-------- -------- ---------
Balance at December 31, 1996.................. $ 10,114 $ 2,150 $ 12,264
======== ======= ========
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $11,347,000 and $3,397,000 at December 31, 1996 and
1995, respectively.
(7) Real Estate The Bank and its wholly-owned subsidiaries have direct
investments in real estate projects and participate in joint ventures with third
parties engaged primarily in acquiring, developing and constructing residential
housing units. Real estate held at December 31 is summarized as follows:
1996 1995
-------- --------
Investments in real estate partnerships, gross........ $ 3,104 $ 2,992
Equity in partnerships................................ (363) (355)
Reserves.............................................. (1,843) (1,634)
-------- --------
Investments in real estate partnerships, net.......... 898 1,003
Foreclosed real estate................................ 7,042 6,563
-------- --------
$ 7,940 $ 7,566
======== ========
Income from real estate operations for the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Equity income (losses) in partnerships................. $ 15 $ (69) $ (7)
Net (loss) gain on sale of foreclosed real estate...... (250) 113 (6)
Foreclosed real estate income, net..................... 590 498 157
------- ------- ------
Net income.......................................... $ 355 $ 542 $ 144
======= ======= ======
</TABLE>
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 41
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands)
(7) Real Estate (continued) Summaries of assets, liabilities and partners'
deficit of the partnerships and operations for the years ended December 31,
1996, 1995 and 1994 are as follows:
1996 1995 1994
------- ------- ------
Assets:
Cash ....................................... $ 12 $ 72 $ 105
Land, buildings and construction in progress 2,892 2,513 2,762
Other assets ............................... 372 538 711
------- ------- -------
Total assets ............................ $ 3,276 $ 3,123 $ 3,578
======= ======= =======
Liabilities and partners' deficit:
Mortgage loans payable to the Bank ......... $ 3,104 $ 2,992 $ 3,322
Other liabilities .......................... 706 847 806
------- ------- -------
Total liabilities ....................... 3,810 3,839 4,128
------- ------- -------
Partners' deficit:
HS Service Corporation ..................... (423) (358) (275)
Second Harrisburg Service Corporation ...... 116 0 0
Other ...................................... (227) (358) (275)
------- ------- -------
Total partners' deficit ................. (534) (716) (550)
------- ------- -------
Total liabilities and partners' deficit . $ 3,276 $ 3,123 $ 3,578
======= ======= =======
1996 1995 1994
------- ------- -------
Operations of partnerships:
Real estate sales ....................... $ 652 $ 425 $ 738
Other income ............................ 8 34 18
------- ------- -------
660 459 756
Cost of sales .............................. (387) (273) (444)
Selling and other expenses ................. (298) (320) (297)
------- ------- -------
Net (loss) income ....................... $ (25) $ (134) $ 15
======= ======= =======
(8) Premises and Equipment A summary of premises and equipment at
December 31, 1996 and 1995 follows:
Estimated
1996 1995 Useful Lives
---------- ------- ------------
Land.................................. $ 2,315 $ 1,654
Buildings and improvements............ 11,706 9,531 5-50 years
Leasehold improvements................ 2,126 1,849 5-10 years
Furniture and equipment............... 10,346 7,921 5-10 years
Automobiles........................... 164 111 3 years
Software.............................. 1,783 1,397 5 years
Accumulated depreciation.............. (13,845) (12,370)
--------- --------
$ 14,595 $ 10,093
========= ========
Depreciation expense for the years 1996, 1995 and 1994 amounted to
$1,216,000, $934,000 and $1,115,000, respectively.
(9) Accrued Interest Receivable Accrued interest receivable at December 31 is
summarized as follows:
1996 1995
------- -------
Government and other securities ................ $ 5,530 $ 2,117
Mortgage-backed securities ..................... 2,021 2,399
Loans receivable ............................... 4,501 3,763
------- -------
$12,052 $ 8,279
======= =======
42 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands)
(10) Intangible Assets In November 1995, the Bank and First Harrisburg Bancor,
Inc. ("First Harrisburg"), a local thrift institution, signed a definitive
agreement for the Bank to acquire First Harrisburg. The acquisition, which was
consummated on April 19, 1996, was a 100% cash purchase of all outstanding First
Harrisburg common shares at $14.77 per share, which resulted in a total cost of
approximately $38 million, and was accounted for by the Bank as a purchase
transaction. As of April 19, 1996, First Harrisburg had total assets of
approximately $276.6 million and total liabilities of approximately $252.2
million. The Bank recorded approximately $13.8 million of goodwill upon
consummation of this acquisition, which is being amortized over a fifteen year
period using the straight-line method.
Effective September 29, 1995, Harris Savings Bank completed an acquisition of
two banking offices located in Hagerstown, Maryland from Columbia First Bank.
The acquisition included the purchase of $126.0 million in deposit liabilities,
$115.4 million of cash and cash equivalents and $.3 million in selected loans
and fixed assets. The acquisition was accounted for as a purchase and resulted
in a deposit premium of $10.4 million, which is being amortized over a seven
year period using the straight-line method.
The activity in intangible assets was as follows:
Deposit
Premium Goodwill Total
-------- -------- --------
Balance at December 31, 1994 ...... $ 0 $ 0 $ 0
Additions ......................... 10,360 0 10,360
Amortization ...................... (374) 0 (374)
-------- -------- --------
Balance at December 31, 1995 ...... 9,986 0 9,986
Additions ......................... 0 13,816 13,816
Amortization ...................... (1,479) (628) (2,107)
-------- -------- --------
Balance at December 31, 1996 ...... $ 8,507 $ 13,188 $ 21,695
======== ======== ========
Accumulated amortization .......... $ 1,853 $ 628 $ 2,481
======== ======== ========
(11) Deposits The Bank pays deposit insurance premiums to the Savings
Association Insurance Fund ("SAIF") of the FDIC. The Bank's deposit insurance
premium rate through December 31, 1996 was .23% of its assessed deposit base,
resulting in total premiums assessed of $2,261,000, $2,115,000 and $2,151,000 in
1996, 1995 and 1994, respectively. In addition, on September 30, 1996, the
President signed into law the Deposit Insurance Funds Act of 1996 to
recapitalize the Savings Association Insurance Fund ("SAIF") administered by the
Federal Deposit Insurance Corporation ("FDIC") and to provide for repayment of
the Financial Institution Collateral Obligation bonds issued by the United
States Treasury Department. The FDIC levied a one-time special assessment on
SAIF deposit equal to 65.7 cents per $100 of the SAIF-assessable deposit base as
of March 31, 1995. The one-time special assessment amounted to an additional
expense to the Bank of approximately $7.0 million in 1996. Beginning in 1997,
the insurance premium rate will be .0644% of the assessed deposit base.
Deposits at December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
Weighted average rate ------------------------ ------------------------
at December 31, 1996 Amount Percent Amount Percent
---------------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
Demand and NOW accounts, including non-interest
bearing deposits of $31,769 and $15,705 ................ 2.01% $ 84,715 7.22 $ 64,586 6.02
Money market .............................................. 4.08% 129,096 11.00 95,628 8.91
Savings ................................................... 2.76% 150,019 12.78 140,715 13.10
--------- ------ --------- ------
363,830 31.00 300,929 28.03
--------- ------ --------- ------
Certificates of deposit:
0% to 3.99% ............................................. 3.31% 9,748 0.83 8,767 0.82
4% to 4.99% ............................................. 4.91% 217,156 18.50 54,686 5.09
5% to 5.99% ............................................. 5.43% 355,712 30.33 437,878 40.78
6% to 6.99% ............................................. 6.34% 182,729 15.57 220,929 20.58
7% to 7.99% ............................................. 7.13% 30,571 2.60 36,543 3.40
8% to 8.99% ............................................. 8.37% 11,126 0.95 11,383 1.06
9% to 9.99% ............................................. 9.01% 1,301 0.11 1,417 0.13
10% and over .............................................. 0.00% 0 0.00 30 0.00
--------- ------ --------- ------
808,343 68.89 771,633 71.86
Clubs ..................................................... 2.42% 1,250 0.11 1,148 0.11
--------- ------ --------- ------
Total time deposits ....................................... 809,593 69.00 772,781 71.97
--------- ------ --------- ------
Total deposits ............................................ 4.49% $1,173,423 100.00 $1,073,710 100.00
========== ====== ========== ======
</TABLE>
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 43
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands)
(11) Deposits (continued) The aggregate amount of time deposits with a minimum
denomination of $100,000 was approximately $55,746,000 and $46,854,000 at
December 31, 1996 and 1995, respectively. At December 31, 1996, scheduled
maturities by weighted average rate of certificates of deposit are as follows:
Year ending December 31,
------------------------------------------
Weighted average rate 1997 1998 1999
--------------------- -------- -------- --------
0% to 3.99% ............... $ 9,726 $ 22 $ 0
4% to 4.99% ............... 184,668 27,015 5,202
5% to 5.99% ............... 207,481 98,892 28,600
6% to 6.99% ............... 83,928 43,474 38,537
7% to 7.99% ............... 2,661 6,028 914
8% to 8.99% ............... 4,952 2,895 2,652
9% to 9.99% ............... 1,137 61 100
10% and over ................ 0 0 0
-------- -------- --------
$494,553 $178,387 $ 76,005
======== ======== ========
Year ending December 31,
-----------------------------------------
Weighted average rate 2000 2001 Thereafter
--------------------- ------- ------- --------
0% to 3.99% .................. $ 0 $ 0 $ 0
4% to 4.99% .................. 157 0 114
5% to 5.99% .................. 9,760 9,151 1,828
6% to 6.99% .................. 12,437 706 3,647
7% to 7.99% .................. 17,865 1,180 1,923
8% to 8.99% .................. 487 4 136
9% to 9.99% .................. 3 0 0
10% and over ................... 0 0 0
------- ------- -------
$40,709 $11,041 $ 7,648
======= ======= =======
Interest expense on deposits for the years ended December 31 is summarized as
follows:
1996 1995 1994
------- ------- -------
Money market ......................... $ 4,853 $ 3,036 $ 2,056
Savings .............................. 4,171 4,679 7,361
NOW .................................. 1,112 1,064 1,107
Certificates of deposit .............. 45,615 37,871 27,326
Clubs ................................ 53 55 55
------- ------- -------
$55,804 $46,705 $37,905
======= ======= =======
(12) Other Borrowings Borrowed funds at December 31 are summarized as follows:
1996 1995
-------- --------
FHLB advances ............................ $419,146 $ 17,200
ESOP loan ................................ 1,485 1,980
-------- --------
Total other borrowings ................... $420,631 $ 19,180
======== ========
Pursuant to collateral agreements with the FHLB, advances are fully secured
by certain debt securities and qualifying first mortgage loans. There were
available lines of credit totaling $959,949,000 and $107,572,000 at December 31,
1996 and 1995, respectively.
In conjunction with the corporate reorganization and stock issuance
accomplished on January 25, 1994, as discussed in note (3), the Bank borrowed
$2,475,000 from an unrelated local institution to fund the purchase of 247,500
shares of Harris Savings Bank stock. The purpose of this stock purchase was to
establish the Bank's ESOP. The terms of the ESOP borrowing include five equal
annual principal installments of $495,000 beginning January 25, 1995 and on the
last day of January each year thereafter until retirement of the debt. Interest
on the borrowing accrues at the rate of 5.75% per annum and is payable monthly.
During 1996 and 1995, the Bank sold repurchase agreements, the average
balance of which was $22,855,000 and $1,631,000 for the years ended December 31,
1996 and 1995, respectively. The highest month-end balance outstanding was
$54,605,000 and $18,600,000 during the years 1996 and 1995, respectively. The
securities underlying the agreements were under the Bank's control.
44 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands)
(12) Other Borrowings (continued) At December 31, 1996, FHLB advances consisted
of the following:
Weighted
Amount Average Rate Maturities
-------- ------------- -----------------
$167,000 5.58% Less than 1 year
77,149 6.07% 1 to 3 years
174,997 5.86% 3 to 5 years
-------- ---- ----------------
$419,146 5.79%
======== ====
Interest expense on other borrowings for the years ended December 31 is
summarized as follows:
1996 1995 1994
------- ------- -------
FHLB advances ..................... $10,040 $ 646 $ 0
Repurchase agreements ............. 1,265 100 0
ESOP .............................. 87 117 134
------- ------- -------
$11,392 $ 863 $ 134
======= ======= =======
(13) Restrictions Retained earnings are partially restricted in connection with
regulations related to the insurance of deposit accounts which require the Bank
to maintain certain statutory reserves. The Bank is required, by the Federal
Reserve Bank, to maintain cash reserves. At December 31, 1996, the Bank's
reserve requirement was $5,162,000.
(14) Off-Balance Sheet Items The Bank issues financial instruments with
off-balance sheet risk in the normal course of business to meet the financial
needs of its customers. These financial instruments include commitments to
extend credit and performance standby letters of credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the balance sheet. The Bank also makes commitments
to sell loans and to purchase marketable securities.
At December 31, 1996 and 1995, the Bank had the following off-balance sheet
items:
1996 1995
------- -------
Commitments:
To extend credit:
Unused open-end consumer lines of credit .......... $41,287 $27,949
Unused open-end commercial lines of credit ........ 45,214 0
Unused credit card lines .......................... 0 24,929
Funds available on construction loans ............. 27,401 22,301
Loan originations and purchases ................... 18,677 23,217
To sell loans ........................................ 6,894 0
To purchase marketable securities .................... 13,745 0
Performance standby letters of credit ................ 3,206 1,549
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
The Bank evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the Bank upon
extension of credit is based on management's credit evaluation of the customer.
Collateral held includes residential and income-producing commercial properties.
Performance standby letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. The terms of the letters of credit vary from 6 months to 36 months
and may have renewal features. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loans to customers.
The Bank holds collateral supporting those commitments for which collateral is
deemed necessary.
Most of the Bank's business activity is with customers located within the
Bank's defined market area. The Bank grants commercial, residential and consumer
loans throughout central Pennsylvania. Since the majority of the Bank's loan
portfolio is located in central Pennsylvania, a substantial portion of the
Bank's debtors' ability to honor their contracts and increases or decreases in
the market value of the real estate collateralizing such loans may be
significantly affected by the level of economic activity in this area.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 45
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands)
(15) Employee Benefits The Bank has a qualified non-contributory defined benefit
pension plan covering substantially all of its employees. Benefits are based on
years of service and the employee's average monthly pay using the five highest
years of Bank employment. Contributions are intended to provide not only for
benefits attributed to service to date but also for those expected to be earned
in the future.
The following sets forth the plan's funded status and amounts recognized in
the Bank's statement of financial condition at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested ................................................................... $ 6,523 $ 6,337
Non-vested ............................................................... 123 90
-------- --------
6,646 6,427
Effect of projected future compensation ....................................... 2,502 2,206
-------- --------
Projected benefit obligation for service rendered to date ..................... 9,148 8,633
Plan assets at fair value ..................................................... 10,999 9,935
-------- --------
Plan assets above projected benefit obligation ................................ 1,851 1,302
Unrecognized net (gain) ....................................................... (1,025) (77)
Unrecognized prior service cost ............................................... 195 210
Unrecognized net asset being amortized over 22 years .......................... (461) (499)
-------- --------
Prepaid pension cost ....................................................... $ 560 $ 936
======== ========
</TABLE>
The components of net pension expense for the years ended December 31, 1996,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost-benefits earned during the period .................... $ 591 $ 483 $ 539
Interest cost on projected benefit obligation ..................... 593 558 510
Actual return on plan assets ...................................... (1,335) (1,534) (205)
Net amortization and deferral of gains and (losses) (1) ........... 527 845 (443)
------- ------- -------
Net pension expense ............................................ $ 376 $ 352 $ 401
======= ======= =======
(1) This item comprises:
Current year's net asset gain (loss) deferred for later recognition $ 550 $ 869 $ (429)
Amortization of prior service cost ................................ 15 15 15
Amortization of unrecognized net asset or obligation at transaction (38) (39) (38)
Amortization of net loss .......................................... 0 0 9
------- ------- -------
$ 527 $ 845 $ (443)
======= ======= =======
Assumptions used to develop the net pension cost were:
1996 1995 1994
---- ----- ----
Discount rate ..................................................... 7.5% 7.0% 7.0%
Expected long-term rate of return on asset ........................ 8.0% 8.0% 8.0%
Rate of increase in compensation levels ........................... 5.0% 4.5% 5.0%
</TABLE>
Assets of the Bank's qualified non-contributory defined benefit pension plan
consist primarily of U.S. Government securities, corporate bonds, equity
securities and collective investment funds.
The Bank also has a defined contribution pension plan covering substantially
all employees. The Bank will provide a matching contribution of 25% of employee
contributions to a maximum of 6% of employee compensation. Pension expense
related to the defined contribution plan was $73,000, $61,000 and $60,000 in
1996, 1995 and 1994, respectively.
In addition to pension benefits, the Bank provides certain health care and
supplemental retirement benefits for retired employees. The Bank accounts for
these postretirement benefits under the accrual method of accounting for
postretirement benefits other than pensions. Previously, the Bank accounted for
these benefits on a pay-as-you-go (cash) basis.
46 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands)
(15) Employee Benefits (continued) The components of net periodic postretirement
benefit cost for the years ended December 31, 1996, 1995 and 1994, and the
accumulated postretirement benefit obligation at December 31, 1996 and 1995 are
as follows:
1996 1995 1994
------ ----- -----
Net periodic postretirement benefit cost:
Service cost .................................... $ 120 $ 124 $ 126
Interest cost ................................... 129 139 103
Amortization of unrecognized prior service cost . 4 (9) 6
------ ----- -----
Total net periodic postretirement benefit cost $ 253 $ 254 $ 235
====== ===== =====
1996 1995
------ -----
Accumulated postretirement benefit obligation:
Fully eligible active and former members ...... $ 345 $ 327
Other active members .......................... 978 1,019
Retired members ............................... 414 402
------ ------
1,737 1,748
Unrecognized net gain ......................... 623 499
------ ------
Accumulated postretirement benefit obligation
recognized in the statement of condition ... $2,360 $2,247
====== ======
The postretirement benefit obligation was determined using a discount rate
of 7.5%. The assumed health care cost rate used in measuring the accumulated
postretirement benefit obligation was 7.5% in 1996, decreasing by 0.5% per year
to an ultimate rate of 5.5% in 2000 and thereafter over the projected payout
period of benefits.
The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, a 1.0% increase in the health care trend rate
would increase the accumulated postretirement benefits obligation by
approximately $389,000 at December 31, 1996 and increase the aggregate of the
service and interest cost components by $67,000 for the year ended December 31,
1996.
(16) Employee Stock Ownership Plan On January 25, 1994, the Bank established a
leveraged employee stock ownership plan (ESOP) for the benefit of substantially
all employees. The Bank makes annual contributions to the ESOP equal to the
ESOP's debt service less dividends received on unearned shares. The ESOP shares
initially were pledged as collateral for its debt. As the debt is repaid, shares
are released from collateral and become eligible for allocation to employee
accounts. Actual ESOP share allocations to employee accounts are based on each
employee's relative portion of the Bank's total eligible compensation recorded
during the year shares are earned. ESOP compensation expense was $838,000 and
$854,000 for 1996 and 1995, respectively.
The Bank accounts for its ESOP in accordance with Statement of Position
93-6. Accordingly, the debt of the ESOP is recorded as debt of the Bank and the
shares pledged as collateral are reported as unearned ESOP shares in the Bank's
statement of condition. As shares are earned, the Bank reports compensation
expense equal to the current market price of the shares, and the shares become
outstanding for earnings-per-share (EPS) computations. Dividends on allocated
ESOP shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of accrued interest.
The ESOP shares as of December 31, 1996 and 1995 were as follows:
1996 1995
--------- --------
Allocated shares ............................ 62,565 33,672
Shares released for allocation .............. 34,928 15,828
Earned shares not yet released for allocation 49,500 49,500
Shares distributed .......................... (5,445) (1,507)
Unearned shares ............................. 99,000 148,500
--------- ---------
240,548 245,993
---------
Fair value of unearned shares at December 31 $ 1,807 $ 2,970
========= =========
(17) Stock Award and Option Plans The Bank's stock award plans include the
Recognition and Retention Plan for Officers and Employees and the Recognition
and Retention Plan for Outside Directors ("the RRPs") which were established on
January 25, 1994 (note 3). The RRPs provide for the granting of restricted stock
awards to key employees and unrestricted stock awards to outside directors.
Restricted stock awards will vest only if the Bank achieves certain financial
goals over one-year performance periods. Recipients of restricted and
unrestricted stock awards are not required to provide consideration to the Bank
other than rendering service and have the right to vote the shares and receive
dividends.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 47
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables, except for per share amounts,
are in thousands)
(17) Stock Award and Option Plans (continued) The following table summarizes the
activity in the Bank's RRPs during 1996 and 1995:
<TABLE>
<CAPTION>
Restricted Unrestricted Unawarded Total
Shares Shares Shares Shares
---------- ------------ ------- -------
Plan activity during 1995:
<S> <C> <C> <C> <C>
Unearned at December 31, 1994 44,000 20,000 52,250 116,250
Earned ...................... (9,925) (7,999) 0 (17,924)
------ ----- ------ ------
Unearned at December 31, 1995 34,075 12,001 52,250 98,326
Plan activity during 1996:
Earned ...................... (9,925) (6,999) 0 (16,924)
------ ----- ------ ------
Unearned at December 31, 1996 24,150 5,002 52,250 81,402
====== ===== ====== ======
</TABLE>
At the time of inception of the RRPs, the cost of the plan shares was
recorded as unearned compensation in stockholders' equity. As granted shares are
earned, compensation is charged to expense at market value (restricted shares)
or at cost (unrestricted shares), unearned compensation is reduced at share cost
($10 per share), thereby increasing stockholders' equity, and paid in capital is
increased by the appreciated portion of the restricted shares' market value. The
Bank recorded compensation expense for earned RRP shares totaling $237,000,
$276,000 and $352,000 in 1996, 1995 and 1994, respectively.
The Bank's stock option plans include the 1994 Incentive Stock Option Plan
for key employees and the 1994 Stock Option Plan for Outside Directors ("the
Option Plans") which were established on January 25, 1994 (note 3). Recipients
of options under the Option Plans are required to pay consideration to the Bank
to exercise option shares as well as render service over the applicable vesting
periods. Recipients of options have no rights with respect to share voting or
receipt of dividends on unexercised option shares. Stock options under the
Option Plans vest over periods of one to five years, or at the time of certain
qualified events, and are exercisable within a ten-year period from the date
options become vested.
The Board of Directors has adopted the Harris Savings Bank 1996 Stock
Option Plan ("the 1996 Stock Option Plan") and has reserved 25,000 shares of
Common Stock for issuance under the plan. This plan was approved by the
stockholders at the annual meeting of stockholders on April 16, 1996. Recipients
of options under the 1996 Stock Option Plan are required to pay consideration to
the Bank to exercise option shares as well as render service over the applicable
vesting periods. Recipients of options have no rights with respect to share
voting or receipt of dividends on unexercised option shares. Stock options under
the 1996 Stock Option Plan vest over a period of three years, or at the time of
certain qualified events, and are exercisable within a ten-year period from the
date options become vested.
The following table summarizes the activity in the Bank's Option Plans
during the periods ending December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------- ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Price Number Exercise Price Number Exercise Price
-------- -------------- -------- -------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year........... 160,850 $10.00 192,500 $10.00 0 $0.00
Granted................................ 5,000 $16.95 0 $0.00 246,250 $10.00
Exercised.............................. (6,000) $10.00 (31,650) $10.00 (53,750) $10.00
------- ------ ------- ------ ------- ------
Balance at end of year................. 159,850 $10.22 160,850 $10.00 192,500 $10.00
======= ====== ======= ====== ======= ======
Exercisable at end of year............. 97,016 74,183 2,500
======= ====== ======= ====== ======= ======
Weighted average grant date fair value
of options granted during the year.. $7.73 N/A N/A
======= ====== ======= ====== ======= ======
</TABLE>
The following table presents the options outstanding and exercisable at
December 31, 1996:
<TABLE>
<CAPTION>
Exercise Price Exercise Price
$10 - $15 $15 - $20 Total
-------------- --------------- -------
<S> <C> <C> <C>
Options Outstanding:
Number of options................................. 154,850 5,000 159,850
Weighted average exercise price................... $10.00 $16.95 $10.22
Weighted average remaining contractual life....... 7 years 9 years 7 years
Options Exercisable:
Number of options................................. 97,016 0 97,016
Weighted average exercise price................... $10.00 $16.95 $10.00
</TABLE>
48 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables, except for per share amounts,
are in thousands)
(17) Stock Award and Option Plans (continued) Although the exercise of
options under the Option Plans normally does not result in the recording of
compensation expense, a total of $159,000 of compensation expense was recorded
in 1994 due to the settlement of certain exercised shares for cash. The Bank
recorded no compensation expense related to the Option Plans during 1996 and
1995.
The Bank applies APB Opinion No. 25 and related interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized for its
stock option plans. Had compensation cost for the Bank's 1996 stock option plan
been determined consistent with FASB Statement No. 123, the Bank's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
1996 1995
---------- ----------
Net income
As reported.................................. $ 1,031 $ 9,214
Pro forma.................................... $ 1,027 $ 9,214
Earnings per share
As reported.................................. $ 0.09 $ 0.84
Pro forma.................................... $ 0.09 $ 0.84
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996: dividend yield of 3.36 percent for all
years; expected volatility of 38.21 percent; risk-free interest rate of 6.469
percent; and expected lives of seven years. The effects of applying SFAS No. 123
may not be representative of the effects on reported net income in future years.
(18) Income Taxes The Bank and subsidiaries file consolidated federal income tax
returns on a calendar year basis. The Small Business Job Protection Act of 1996,
enacted on August 20, 1996, provides for the repeal of the tax bad debt
deduction computed under the percentage of taxable income method. The repeal of
the use of this method is effective for tax years beginning after December 31,
1995. Prior to the change in law, the Bank had qualified under the provisions of
the Internal Revenue Code which permitted it to deduct from taxable income an
allowance for bad debts based on 8% of taxable income.
Due to the change in tax law, the Bank is required to recapture into
income, over a six year period, the portion of its tax bad debt reserves that
exceed its base tax year reserves (i.e. tax reserves for tax years beginning
before 1988). The base tax year reserves, which may be subject to recapture if
the Bank ceases to qualify as a bank for federal income tax purposes, are
restricted with respect to certain distributions. The Bank's total tax bad debt
reserves at December 31, 1996 are approximately $39.0 million, of which $32.4
million represents the base year amount and $6.6 million is subject to
recapture. The $6.6 million has been previously reserved as a deferred tax
liability, therefore, this recapture will not affect reported net income.
Income tax expense for the years ended December 31, 1996, 1995 and 1994 is
summarized as follows:
1996 1995 1994
-------- ------- -------
Federal:
Current ................. $(2,192) $ 4,162 $ 2,854
Deferred ................ 1,803 836 3,029
------- ------- -------
(389) 4,998 5,883
State:
Current ................. (3) 505 1,465
Deferred ................ (125) 0 0
------- ------- -------
Income tax (benefit) expense $ (517) $ 5,503 $ 7,348
======= ======= =======
Total income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 35% for the years ended December 31, 1996, 1995
and 1994 to income before income taxes as a result of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Expected income tax expense at federal tax rate ........ $ 180 $ 5,151 $ 6,090
State tax (benefit) expense, net of federal income taxes (165) 328 973
Tax-exempt interest income ............................. (809) 0 0
Amortization of goodwill ............................... 220 0 0
Dividends received deduction ........................... (423) (238) (246)
Non-deductible employee stock option plan expense ...... 120 126 107
Deferred interest income ............................... 240 240 180
Other, net ............................................. 120 (104) 244
------- ------- -------
Total ............................................. $ (517) $ 5,503 $ 7,348
======= ======= =======
</TABLE>
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 49
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands)
(18) Income Taxes (continued) On April 19, 1996, the Bank acquired First
Harrisburg Bancor in tax-free acquisition. As a result of this acquisition, the
Bank was able to record a net deferred tax asset of approximately $282,000. For
state tax purposes, the Bank has approximately $3,355,000 and $0 of net
operating loss carryforwards as of December 31, 1996 and 1995, respectively.
$1,348,000 of the net operating loss carryforward will expire on December 31,
1998 if not utilized, while $2,007,000 will expire on December 31, 1999 if not
utilized.
The significant components of deferred income tax expense attributable to
income for the years ended December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Deferred tax expense (exclusive of the effects of the components below)... $ 1,923 $ 836 $ 3,029
State tax net operating loss utilization (benefit) ....................... (245) 0 0
------- ------- -------
Deferred tax expense ..................................................... $ 1,678 $ 836 $ 3,029
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below.
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Reserve for uncollected interest .............................. $ 326 $ 51
Deferred compensation expense ................................. 639 320
Postretirement benefits expense ............................... 826 786
Excess loan servicing fees .................................... 290 251
Allowance for loan losses ..................................... 2,884 2,140
Deposit intangible amortization ............................... 346 70
Excess purchased mortgage servicing amortization .............. 106 (96)
Stock-based compensation expense .............................. 82 86
State tax net operating loss carry forward .................... 245 0
Other ......................................................... 106 0
------- -------
Total ...................................................... 5,850 3,608
------- -------
Deferred tax liabilities:
Deferred loan costs (fees) and dealer reserves, net ........... $ 2,501 $ (315)
Pension expense ............................................... 196 223
Prepaid expenses .............................................. 210 540
Depreciation .................................................. 160 155
Net unrealized gain on marketable securities available for sale 2,178 1,880
Purchase accounting ........................................... 690 0
Originated mortgage servicing rights .......................... 784 0
Excess tax bad-debt reserves over base year ................... 2,314 2,677
Other ......................................................... 74 12
------- -------
Total ...................................................... 9,107 5,172
------- -------
Net deferred tax liability ............................... $(3,257) $(1,564)
======= =======
</TABLE>
Management has determined that it is not required to establish a valuation
reserve for its gross deferred tax assets of $5.9 million since it is more
likely than not that the deferred tax assets will be realized through future
reversals of existing temporary differences, future taxable income and
implementation of prudent tax planning strategies.
(19) Leases At December 31, 1996, the Bank was obligated under non-cancelable
operating leases for office space. Certain leases contain escalation clauses
providing for increased rentals based on increases in the average consumer price
index. Rental expenses for these facilities aggregated $836,000, $494,000 and
$413,000 for 1996, 1995 and 1994, respectively.
50 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands)
(19) Leases (continued) The projected minimum rental payments under the terms of
the leases at December 31, 1996, net of projected sub-lease rentals, are as
follows:
Years ending December 31 Amount
- ------------------------ -------
1997.......................................... $ 925
1998.......................................... 809
1999.......................................... 775
2000.......................................... 782
2001.......................................... 796
2002 and thereafter........................... 5,706
-------
$ 9,793
=======
(20) Fair Value Accounting The Bank is required to disclose the fair value of
its financial instruments and liabilities. For Harris Savings Bank, as for most
financial institutions, the majority of its assets and liabilities are
considered financial instruments as defined in SFAS 107. Many of the Bank's
financial instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in an exchange
transaction. Since it is the Bank's general practice not to engage in trading
activities, significant assumptions and estimations were used in calculating
present values in discounted cash flow models.
Estimated fair values at December 31, 1996 and 1995 have been determined by
the Bank using the best available data with an estimation methodology suitable
for each category of financial instrument.
Fair value estimates, methods and assumptions are set forth below for the
Bank's financial instruments.
Cash and Cash Equivalents The carrying amounts for short-term investments
approximate fair value because of the short maturity of, and negligible credit
concerns within, those instruments.
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents........................ $ 29,693 $ 29,693 $ 35,452 $ 35,452
</TABLE>
Marketable Securities (including available-for-sale securities) The fair
value of marketable securities actively traded in the secondary market have been
valued based on quotations received from securities dealers.
<TABLE>
<CAPTION>
1996 1995
----------------------- ----------------------
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Securities held-to-maturity....................... $ 109,912 $ 109,417 $ 152,381 $ 149,663
Securities available-for-sale..................... 719,493 713,700 375,269 370,269
---------- ---------- ---------- ---------
$ 829,405 $ 823,117 $ 527,650 $ 519,932
========== ========== ========== =========
</TABLE>
Deposits, Escrow and Other Borrowings Under SFAS 107, the fair value of
deposits with no stated maturity, such as demand deposit accounts, NOW accounts,
money market accounts and savings accounts, is equal to the amount payable on
demand. The fair value of time deposits and other borrowings is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities. The
fair value of escrow, which has no stated maturity, is equal to the amount on
deposit. The fair value of other borrowings is estimated using current rates for
debt with similar terms and remaining maturities.
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Demand and NOW accounts.......................... $ 84,715 $ 84,715 $ 64,586 $ 64,586
Money market accounts............................ 129,096 129,096 95,628 95,628
Savings.......................................... 150,019 150,019 140,715 140,715
Time deposits.................................... 804,247 809,593 778,909 772,781
---------- ---------- ---------- ---------
$1,168,077 $1,173,423 $1,079,838 $1,073,710
========== ========== ========== =========
Escrow........................................... $ 8,203 $ 8,203 $ 4,649 $ 4,649
========== ========== ========== =========
Other borrowings................................. $ 408,321 $ 420,631 $ 19,180 $ 19,180
========== ========== ========== =========
</TABLE>
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 51
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands)
(20) Fair Value Accounting (continued)
Loans Fair values are estimated for portfolios of loans with similar
characteristics. Residential mortgages make up a substantial percentage of the
Bank's loan portfolio. These residential mortgages, which are generally
underwritten to standards substantially in conformity with Federal Home Loan
Mortgage Corporation ("Freddie Mac") standards, have been estimated based on the
discounted value of expected cash flows.
Construction loans are of relatively short maturity and have an estimated
fair value equal to the carrying value. Fair values for all other loans have
been calculated by discounting scheduled cash flows. The discount rate used in
these calculations is the market rate for similar instruments adjusted for
non-interest operating costs, credit risk and assumed prepayment risk.
<TABLE>
<CAPTION>
1996 1995
------------------------ -----------------------
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
----------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
One-to-four family mortgages.................... $ 527,618 $ 530,230 $ 475,907 $ 470,596
Construction loans.............................. 25,647 25,647 23,415 23,415
Credit cards.................................... 0 0 3,258 3,258
Other loans..................................... 273,727 276,361 160,607 160,450
Less: Allowances for loan losses................ 0 (8,322) 0 (6,114)
---------- ---------- ---------- ---------
$ 826,992 $ 823,916 $ 663,187 $ 651,605
========== ========== ========== =========
</TABLE>
Commitments to Extend Credit, Sell Loans, Purchase Marketable Securities and
Performance Standby Letters of Credit The fair value of commitments to extend
credit is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
present creditworthiness of the counterparties. For fixed rate loan commitments,
fair value also considers the difference between current levels of interest
rates and the committed rates. The fair value of performance standby letters of
credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations with the
counterparties.
<TABLE>
<CAPTION>
1996
-------------------------------------
Contract Carrying Estimated
Amount Amount (1) Fair Value
----------- ------------ ----------
<S> <C> <C> <C>
Commitments:
Commitments to extend credit:
Unused open-end consumer lines of credit.................. $ 41,287 $ 0 $ 0
Unused open-end commercial lines of credit................ 45,214 0 0
Funds available on construction loans..................... 27,401 822 822
Loan originations and purchases........................... 18,677 206 206
Performance standby letters of credit..................... 3,206 3 3
---------- ---------- ---------
$ 135,785 $ 1,031 $ 1,031
========== ========== =========
Commitments to sell loans.................................... $ 9,053 $ 0 $ 0
Commitments to purchase securities........................... $ 13,745 $ 0 $ 0
1995
-------------------------------------
Contract Carrying Estimated
Amount Amount (1) Fair Value
----------- ------------ ----------
Commitments to extend credit:
Unused open-end consumer lines of credit..................... $ 27,949 $ 0 $ 0
Unused credit card lines..................................... 24,929 0 0
Funds available on construction loans........................ 22,301 669 669
Loan originations and purchases.............................. 23,217 570 570
Performance standby letters of credit........................ 1,549 1 1
---------- ---------- ---------
$ 99,945 $ 1,240 $ 1,240
========== ========== =========
</TABLE>
- ------------------
(1) The amounts shown under "carrying amount" represent deferred income arising
from these unrecognized financial instruments.
52 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands)
(20) Fair Value Accounting (continued)
Limitations Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instruments. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Bank's entire holdings or of a
particular financial instrument. Because no market exists for a significant
portion of the Bank's financial instruments, fair value estimates are based on
judgements regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgement and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Management is concerned that reasonable comparability between financial
institutions may not be likely due to the wide range of permitted valuation
techniques and the estimates and assumptions that must be made.
(21) New Accounting Standards In June 1996, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 125 (SFAS 125),"
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". Principally, SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on the consistent application of a financial components
approach (for example, focus on assets and liabilities that remain after the
transfer takes place) that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
In addition, SFAS 125 extends the "available-for-sale" or "trading"
approach of SFAS 115 to all financial assets that contractually can be prepaid
or otherwise settled in such a way that the holder of the asset would not
recover substantially all of its recorded investment. Such financial assets can
no longer be classified as held to maturity.
SFAS 125 is effective for transfers of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. The
extension of SFAS 125 to all financial assets subject to prepayment risk is
effective for financial assets held on or after January 1, 1997. Management does
not believe that this statement will have a material effect on the Bank's
consolidated financial position or results of operations.
In December 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 127 (SFAS 127), "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125". SFAS 127 defers the
effective date of certain provisions of SFAS 125 until after December 31, 1997.
Earlier or retroactive application is not permitted.
(22) Acquisitions On April 19, 1996, the Bank acquired First Harrisburg Bancor,
Inc. ("First Harrisburg"), a local thrift institution. The acquisition was a
100% cash purchase of all outstanding First Harrisburg common shares at $14.77
per share, which resulted in a total cost of approximately $38 million, and was
accounted for by the Bank as a purchase transaction. As of April 19, 1996, First
Harrisburg had total assets of approximately $276.6 million and total
liabilities of approximately $252.2 million. The Bank recorded approximately
$13.8 million of goodwill upon consummation of this acquisition, which is being
amortized over a fifteen year period using the straight-line method. The net
effect on income before taxes of goodwill and purchase accounting amortization
was $(328,000) for the year ended December 31, 1996.
The following unaudited pro forma financial information presents the
combined results of operations of Harris Savings Bank and First Harrisburg
Bancor as if the acquisition had occurred as of the beginning of 1996 and 1995,
after giving effect to certain adjustments, including amortization of goodwill
and related income tax effects. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had
Harris Savings Bank and First Harrisburg Bancor constituted a single entity
during such periods.
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------
1996 1995
---------- ----------
(unaudited)
<S> <C> <C>
Interest income................................ $ 114,983 $ 104,321
Net (loss) income.............................. $ (551) $ 11,583
========== ==========
(Loss) earnings per share...................... $ (0.05) $ 1.05
========= ==========
</TABLE>
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 53
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands)
(23) Mortgage Banking Subsidiary In conjunction with the acquisition of First
Harrisburg, the Bank acquired Avstar Mortgage Corporation, a mortgage banking
company. The condensed financial statements of this subsidiary are presented
below.
<TABLE>
<CAPTION>
At December 31,
------------------------------------
1996 1995
---------- ----------
<S> <C> <C>
Assets
Cash and cash equivalents...................... $ 5,114 $ 5,577
Loans receivable............................... 235 634
Loans held for sale............................ 6,894 13,039
Other assets................................... 1,262 865
---------- ----------
Total assets................................... $ 13,505 $ 20,115
========== ==========
Liabilities and Stockholder's Equity
Escrow......................................... $ 4,192 $ 4,484
Other borrowings............................... 7,000 13,283
Other liabilities.............................. 376 564
Stockholder's equity........................... 1,937 1,784
---------- ----------
Total liabilities and stockholder's equity..... $ 13,505 $ 20,115
========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------
1996 1995
---------- ----------
<S> <C> <C>
Interest income................................ $ 2,499 $ 2,954
Interest expense............................... 629 797
---------- ----------
Net interest income............................ 1,870 2,157
Provision for loan losses...................... 265 115
Non-interest income............................ 3,305 3,118
Non-interest expense........................... 4,649 4,792
---------- ----------
Income before taxes............................ 261 368
Income tax expense............................. 108 118
---------- ----------
Net income..................................... $ 153 $ 250
========== ==========
</TABLE>
54 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables, except for per share amounts.
are in thousands)
(24) Consolidated Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
1996
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Interest income................................. $ 21,851 $ 26,818 $ 28,251 $ 31,068
Interest expense................................ 13,421 15,985 18,226 19,694
---------- ---------- --------- ---------
Net interest income.......................... 8,430 10,833 10,025 11,374
Provision for loan losses....................... 210 210 942 595
Non-interest income............................. 248 1,824 1,681 243
Non-interest expense............................ 5,705 12,096 16,099 8,287
---------- ---------- --------- ---------
Income (loss) before income taxes............ 2,763 351 (5,335) 2,735
Income taxes (benefit).......................... 1,052 166 (1,940) 205
---------- ---------- --------- ---------
Net income (loss)............................ $ 1,711 $ 185 $ (3,395) $ 2,530
========== ========== ========== =========
Earnings (loss) per share....................... $ 0.15 $ 0.02 $ (0.30) $ 0.23
========== ========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income................................. $ 18,800 $ 19,693 $ 20,054 $ 22,078
Interest expense................................ 10,225 11,456 12,196 13,819
---------- ---------- ---------- ---------
Net interest income.......................... 8,575 8,237 7,858 8,259
Provision for loan losses....................... 0 0 0 0
Non-interest income............................. 566 711 694 593
Non-interest expense............................ 4,980 4,910 5,129 5,757
---------- ---------- ---------- ---------
Income before income taxes................... 4,161 4,038 3,423 3,095
Income taxes.................................... 1,472 1,521 1,278 1,232
---------- ---------- ---------- ---------
Net income................................... $ 2,689 $ 2,517 $ 2,145 $ 1,863
========== ========== ========== =========
Earnings per share.............................. $ 0.24 $ 0.23 $ 0.19 $ 0.17
========== ========== ========== =========
</TABLE>
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 55
<PAGE>
OFFICE LOCATIONS
PENNSYLVANIA OFFICES (Area Code 717)
Cumberland County
* 19th and Market Streets, Camp Hill ........... 761-4460
Capital City Mall, Camp Hill ................. 761-7218
* 3100 Market Street, Camp Hill ................ 737-0457
* 4075 Market Street, Camp Hill ................ 730-8626
Camp Hill Mall, Camp Hill .................... 737-2323
* Summerdale Plaza, Enola ...................... 732-3637
West Shore Plaza, Lemoyne .................... 761-7810
17 W. High Street, Carlisle .................. 243-2915
* 921 Cavalry Road, Carlisle ................... 243-8868
* 600 E. Simpson Street, Mechanicsburg ......... 697-4603
Silver Spring Commons, Mechanicsburg ......... 766-3100
Dauphin County
* 235 N. Second Street, Harrisburg (Main Office) 236-4041
* 526 S. 29th Street, Harrisburg ............... 238-9720
Beaufort Farms Plaza, Harrisburg ............. 652-0900
Colonial Park Mall, Harrisburg ............... 545-4791
The Point Mall, Harrisburg ................... 564-1470
* Paxton Square, Harrisburg .................... 541-8360
* 114 W. Chocolate Avenue, Hershey ............. 533-5500
* Hershey Square, 1161 Mae Street, Hummelstown . 566-3800
Lancaster County
100 E. King Street, Lancaster ................ 393-0705
* 1677 Oregon Pike, Lancaster .................. 291-1072
9 S. Market Street, Elizabethtown ............ 367-8973
36 E. Main Street, Ephrata ................... 733-8635
33 Market Square, Manheim .................... 665-7754
* 335 Fifth Street, Quarryville ................ 786-4800
Lebanon County
Lebanon Plaza, Lebanon ....................... 273-8194
York County
* 2450 Eastern Boulevard, York ................. 757-9417
Queensgate Shopping Center, York ............. 843-4854
* Newberry Commons, Etters ..................... 938-5900
* Fairview Plaza, New Cumberland ............... 774-4555
MARYLAND (Area Code 301)
Washington County
100 W. Washington Street, Hagerstown ......... 739-1001
* Longmeadow Shopping Center, Hagerstown ....... 739-1000
LOAN CENTERS
235 N. Second Street, Harrisburg ......... (717) 231-2900
4755 Linglestown Road, Harrisburg ........ (717) 657-5733
4075 Market Street, Camp Hill ............ (717) 730-0844
2500 Kingston Road, York ................. (717) 757-9481
17 W. High Street, Carlisle .............. (717) 243-6403
1677 Oregon Pike, Lancaster .............. (717) 397-4338
100 W. Washington Street, Hagerstown...... (301) 739-1001
ATM LOCATIONS
Camp Hill Mall, Camp Hill
Capital City Mall, Camp Hill
921 Cavalry Road, Carlisle
Summerdale Plaza, Enola
Newberry Commons, Etters
234 N. Second Street, Harrisburg
Colonial Park Mall, Harrisburg
Paxton Square, Harrisburg
The Point Mall, Harrisburg
Hershey Square, 1161 Mae Street, Hummelstown
1677 Oregon Pike, Lancaster
Willow Valley Market, Lancaster
Lebanon Plaza, Lebanon
600 E. Simpson Street, Mechanicsburg
335 Fifth Street, Quarryville
2450 Eastern Boulevard, York
100 W. Washington Street, Hagerstown
Longmeadow Shopping Center, Hagerstown
Turkey Hill o 101 South Main Street, Manheim
Turkey Hill o 111 Rothsville Road, Ephrata
Turkey Hill o Route 230 & Cloverleaf Road, Elizabethtown
IMPORTANT PHONE NUMBERS
Harris Access Line(TM)
In Harrisburg, Pennsylvania area.......... 731-1135
Other areas............................... 1-800-327-7997
Telephone Banking Center................. 1-800-232-6995
Business Banking Group................... (717) 232-6661
INTERNET ADDRESS
http://www.harrissavingsbank.com
* Drive-in window
56 HARRIS SAVINGS BANK 1996 ANNUAL REPORT
<PAGE>
STOCKHOLDER INFORMATION
EXECUTIVE OFFICE
235 N. Second Street, Harrisburg, Pennsylvania 17101
(717) 236-4041
ANNUAL MEETING
The annual meeting of Harris Savings Bank will be held at 10:00 a.m., Tuesday,
April 15, 1997, at Zembo Temple, Third and Division Streets, Harrisburg,
Pennsylvania.
F2 REPORT
Upon written request of any shareholder, a copy of the Bank's report
on Form F-2 for the year ended December 31, 1996, including the Financial
Statements and Schedules thereto, required to be filed with the FDIC pursuant to
the Securities Exchange Act of 1934, as amended, may be obtained, without
charge, from James L. Durrell, Chief Financial Officer, Harris Savings Bank, 235
N. Second Street, P.O. Box 1711, Harrisburg, PA 17105.
INTERNAL CONTROLS
Management's letter on internal controls is included in this report on page 27.
STOCK LISTING
The Bank's common stock trades on the NASDAQ Stock Market under the
symbol "HARS."
MARKET MAKERS
The following investment-brokerage houses make a market in Harris Savings Bank's
stock: Ryan Beck & Co.; Legg Mason; Sandler O'Neill & Partners; Wheat First
Securities, Inc.; F.J. Morrissey & Co., Inc.; Herzog, Heine, Geduld, Inc.;
Friedman, Billings, Ramsey & Co., Inc.; Boenning & Scattergood, Inc.
REGISTRAR AND TRANSFER AGENT
ChaseMellon Shareholder Services L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
ACCOUNTANTS
KPMG Peat Marwick LLP
225 Market Street
Harrisburg, Pennsylvania 17108
LEGAL COUNSEL
Richard C. Ruben
113 Locust Street
Harrisburg, PA 17101-1410
STOCKHOLDERS
The number of common stock stockholders of record as of December 31, 1996
was 4,167.
PRICE RANGE OF HARRIS SAVINGS BANK STOCK AND DIVIDENDS PAID
The price information provided below reflects actual high and low closing prices
as quoted on the NASDAQ Stock Market.
Cash Dividends
1996 High Low Paid Per Share
---- ------- ------- --------------
First Quarter 20 1/4 17 3/4 $.145
Second Quarter 18 3/4 15 $.145
Third Quarter 17 14 3/4 $.145
Fourth Quarter 18 5/8 15 $.145
Cash Dividends
1995 High Low Paid Per Share
---- ------ ------ --------------
First Quarter 16 3/4 13 1/4 $.125
Second Quarter 16 3/4 15 1/2 $.125
Third Quarter 18 1/2 15 3/4 $ .13
Fourth Quarter 20 1/2 18 $ .13
DIVIDEND REINVESTMENT PLAN
The Dividend Reinvestment Plan offers you a simple and inexpensive way to
increase your investment in Harris Savings Bank common stock through the
automatic investment of your dividends in additional shares of Harris Savings
Bank common stock under the plan.
HARRIS SAVINGS BANK 1996 ANNUAL REPORT 57
EXHIBIT 99.2
QUARTERLY REPORT ON FORM F-4 OF
HARRIS SAVINGS BANK FOR THE
FISCAL QUARTER ENDED MARCH 31, 1997
<PAGE>
Federal Deposit Insurance Corporation
Form F4
Quarterly Report Under Section 13 of the Securities Exchange Act of 1934
for the Quarter
Ended March 31. 1997
--------------------------------------------------------------------------
FDIC Insurance Certificate Number 30174
----------------------------------------------
Harris Savings Bank
- --------------------------------------------------------------------------------
(Exact name of bank as specified in its charter)
Pennsylvania
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation of organization)
25-1720585
- --------------------------------------------------------------------------------
(I.R.S. Employer Identification No.)
235 North Second Street, P.O. Box 1711. Harrisburg, Pennsylvania
- --------------------------------------------------------------------------------
(Address of principal executive offices)
17105
- --------------------------------------------------------------------------------
(Zip Code)
Bank's telephone number, including area code (717) 236-4041
-----------------------------------
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the bank (1) has filed all reports required
to be filed by section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the bank was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes __ No__
Indicate the number of shares outstanding of each of the bank's classes of
common stock, as of the latest practicable date 11.221.800 shares of common
--------------------------------
stock, par value of $.01 per share, outstanding at April 30. 1997
- -----------------------------------------------------------------
<PAGE>
Federal Deposit Insurance Corporation Form F-4
March 31, 1997
Item 1 Financial Statements and related Notes to Financial Statements
The contents of Item 1 appear beginning on the next page of this report.
(Balance of this page left intentionally blank.)
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1997 1996 1996
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 25,646 $ 29,693 $ 19,312
Marketable securities held-to-maturity (note 2) 102,728 109,417 129,585
Marketable securities available-for-sale (note 2) 891,340 719,493 382,298
Loans receivable, net 840,803 823,916 672,717
Loans held for sale, net 9,035 9,053 0
Loan servicing rights (note 3) 11,991 12,264 7,428
Real estate held for investment 700 898 868
Foreclosed real estate 6,833 7,042 6,559
Premises and equipment, net of accumulated
depreciation of $14,176, $13,845, and $12,586 14,964 14,595 10,147
Accrued interest receivable 14,023 12,052 8,018
Income taxes receivable 910 4,677 0
Intangible assets 21,110 21,695 9,616
Other assets 3,244 3,317 2,949
----------- ----------- -----------
Total assets $ 1,943,327 $ 1,768,112 $ 1,249,497
=========== =========== ===========
Liabilities and Stockholders' Equity
Deposits $ 1,175,462 $ 1,173,423 $ 1,062,227
Escrow 8,175 8,203 5,988
Accrued interest payable 8,522 3,012 6,147
Postretirement benefit obligation 2,430 2,360 2,154
Other borrowings (note 4) 589,720 420,631 18,585
Deferred tax liability, net 1,055 3,257 147
Income taxes payable 0 0 778
Other liabilities 4,159 4,474 2,636
----------- ----------- -----------
Total liabilities 1,789,523 1,615,360 1,098,662
----------- ----------- -----------
Common stock, $.01 par value, authorized 50,000,000 shares;
11,221,300 shares issued and outstanding at March 31, 1997,
11,216,400 shares issued and outstanding at December 31, 1996, and
11,211,400 shares issued and outstanding at March 31, 1996 112 112 112
Paid in capital 26,105 25,902 25,511
Retained earnings 129,153 124,812 126,594
Net unrealized (loss) gain on marketable securities (note 2) (26) 3,615 794
Employee stock ownership plan (900) (1,024) (1,395)
Recognition and retention plans (640) (665) (781)
----------- ----------- -----------
Total stockholders' equity 153,804 152,752 150,835
----------- ----------- -----------
Total liabilities & stockholders' equity $ 1,943,327 $ 1,768,112 $ 1,249,497
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Interest income: (unaudited) (unaudited)
Loans receivable:
First mortgage loans $ 11,160 $ 9,947
Commercial loans 1,275 1,055
Consumer and other loans 4,775 2,406
Taxable investments 4,736 2,193
Taxfree investments 1,306 93
Dividends 1,518 383
Mortgage-backed securities 6,618 5,757
Money market securities 66 17
------------ ------------
Total interest income 31,454 21,851
------------ ------------
Interest expense:
Deposits 13,595 13,108
Borrowed funds 6,293 281
Escrow 33 32
------------ ------------
Total interest expense 19,921 13,421
------------ ------------
Net interest income 11,533 8,430
Provision for loan losses 152 210
------------ ------------
Net interest income after provision for loan losses 11,381 8,220
------------ ------------
Non-interest income:
Service charges on deposits 348 195
Other service charges/commissions/fees 288 216
Net servicing income 558 (314)
Gain on sale of mortgage-backed securities (note 2) 1,044 154
Gain (loss) on sale of other securities, net (note 2) 411 (15)
Gain on sale of loans, net 440 0
Other 186 12
------------ ------------
Total non-interest income 3,275 248
------------ ------------
Non-interest expense:
Salaries and benefits 4,074 2,730
Equipment expense 429 270
Occupancy expense 752 513
Advertising and public relations 439 219
FDIC insurance 191 612
Director fees 76 78
Income from real estate operations (96) (136)
Amortization and write-off of intangibles 587 370
Other 1,205 1,049
------------ ------------
Total non-interest expense 7,657 5,705
------------ ------------
Income before income taxes 6,999 2,763
Income tax expense (note 5) 2,290 1,052
------------ ------------
Net income $ 4,709 $ 1,711
============ ============
Net income per share $ 0.42 $ 0.15
============ ============
Weighted average shares outstanding 11,131,356 11,069,166
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Net Employee Recognition
Unrealized Stock And
Common Paid In Retained Gain (Loss) Ownership Retention
Stock Capital Earnings on Securities Plan Plans 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 1,711 1,711
Dividends paid at $.145 per share (361) (361)
Exercised stock options 61 61
Change in unrealized gain (loss) on marketable
securities, net of tax effect of ($1,401) (2,326) (2,326)
ESOP stock committed for release 124 124
Earned portion of RRP plans 39 39
Excess of fair value above cost of ESOP
stock committed for release 108 108
Excess of fair value above cost of earned
portion of RRP stock 20 20
-------- -------- -------- -------- -------- -------- --------
Balance et March 31, 1996 $ 112 $ 25,511 $126,594 $ 794 $ (1,395) $ (781) $150,835
======== ======== ======== ======== ======== ======== ========
Balance at January 1, 1997 $ 112 $ 25,902 $124,812 $ 3,615 $ (1,024) $ (665) $152,752
Net income 4,709 4,709
Dividends paid at $.145 per share (368) (368)
Exercised stock options 49 49
Change in unrealized gain (loss) on marketable
securities, net of tax effect of ($2,216) (3,641) (3,641)
ESOP stock committed for release 124 124
Earned portion of RRP plans 25 25
Excess of fair value above cost of ESOP
stock committed for release 130 130
Excess of fair value above cost of earned
portion of RRP stock 24 24
-------- -------- -------- -------- -------- -------- --------
Balance at March 31, 1997 $ 112 $ 26,105 $129,153 $ (26) $ (900) $ (640) $153,804
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,709 $ 1,711
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 152 210
Net depreciation, amortization and accretion 850 1,555
Origination of loans held for sale (18,829) 0
Proceeds from sale of loans held for sale 19,221 0
Net gain on sales of interest earning assets (1,895) (139)
Loss (gain) on the sale of foreclosed real estate (16) 8
Equity losses from joint ventures 52 4
Increase (decrease) in accrued interest receivable (1,971) 261
Increase in accrued interest payable 5,510 5,330
Amortization and write-off of intangibles 585 370
Earned ESOP shares 254 232
Earned RRP shares 49 59
Deferred income taxes 285 (15)
Other, net 3,327 743
--------- --------
Net cash provided by operating activities 12,283 10,329
--------- --------
Cash flows from investing activities:
Proceeds from maturities and principal reductions of
marketable securities:
Held-to-maturity 6,687 20,049
Available-for-sale 7,188 17,210
Proceeds from sales of marketable securities available-for-sale 145,485 27,952
Purchase of marketable securities available-for-sale (328,943) (55,823)
Loans sold 4,409 0
Net increase in loan originations less principal
payments of loans (21,632) (21,836)
Purchase of loan servicing rights (29) (2,762)
Investment in real estate held for investment 20 0
Proceeds from payments on real estate held for investment 130 9
Purchase of premises and equipment (691) (270)
Cash proceeds received from the sale of foreclosed
real estate 276 42
--------- --------
Net cash used in investing activities (187,100) (15,429)
--------- --------
</TABLE>
(continued)
6
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(continued)
(in thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $ 2,039 $(11,483)
Net increase (decrease) in other borrowings 169,090 (595)
Net (decrease) increase in escrow, stock over-subscriptions,
and stock subscriptions payable (40) 1,339
Cash dividends (368) (362)
Proceeds from the exercise of stock options 49 61
-------- --------
Net cash provided by financing activities 170,770 (11,040)
-------- --------
Net (decrease) increase in cash and cash equivalents (4,047) (16,140)
Cash and cash equivalents at beginning of year 29,693 35,452
-------- --------
Cash and cash equivalents at end of year $ 25,646 $ 19,312
======== ========
Supplemental disclosures:
Cash paid during the years for:
Interest on deposits, advances and other borrowings
includes interest credited to deposit accounts) $ 13,457 $ 8,365
Income taxes 26 317
Non-cash investing activities:
Transfers from loans to foreclosed real estate $ 0 $ 79
Mortgage-backed securities received in exchange for
mortgage loans 0 25,753
Decrease (increase) in carrying value of marketable
securities available-for-sale 5,857 3,727
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(1) Accounting Policies
The Consolidated Financial Statements include the accounts of Harris Savings
Bank and its wholly-owned 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 information contained in the Consolidated Financial Statements is unaudited.
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 three month period ended March 31,
1997 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997.
The accounting policies followed in the presentation of interim financial
results are the same as 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 dates indicated:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1997 1996 1996
--------- ----------- ---------
<S> <C> <C> <C>
Held-to-maturity, at amortized cost $102,728 $109,417 $129,585
-------- -------- --------
Available-for-sale, at amortized cost 891,404 713,700 381,025
Available-for-sale, net unrealized (loss) gain (64) 5,793 1,273
-------- -------- --------
Available-for-sale, at fair value 891,340 719,493 382,298
-------- -------- --------
Total marketable securities $994,068 $828,910 $511,883
======== ======== ========
</TABLE>
8
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(2) Marketable Securities (continued)
The amortized cost and fair value of marketable securities at March 31, 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
Cost Value
--------- -----
Held-to-maturity:
Due in one year or less $ 0 $ 0
Due after one year through five years 61,258 60,651
Due after five years through ten years 6,239 6,216
Due after ten years 0 0
Mortgage-backed securities 35,231 35,150
-------- --------
Total securities held-to-maturity $102,728 $102,017
======== ========
Available-for-sale:
Due in one year or less $ 83,368 $ 81,252
Due after one year through five years 154,376 152,820
Due after five years through ten years 55,306 55,448
Due after ten years 11,649 11,563
Equity securities 139,234 143,165
Mortgage-backed securities 447,471 447,092
-------- --------
Total securities available-for-sale $891,404 $891,340
======== ========
Activity from the sale of marketable securities is as follows:
For the three months ended
March 31,
--------------------------
1997 1996
-------- -------
Proceeds $143,414 $27,952
======== =======
Gross gains $ 1,511 $ 157
Gross losses 56 18
-------- -------
Net gain $ 1,455 $ 139
======== =======
All sales of marketable securities occurred in the available-for-sale portfolio.
9
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(3) Loans Serviced for Others
The following table sets forth information concerning loans serviced for others
as of the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1997 1996 1996
---------- ----------- ---------
<S> <C> <C> <C>
Unpaid principal balances of
mortgage loans serviced for:
FHLMC $ 636,293 $645,403 $507,125
FNMA 317,065 349,671 21,500
Other investors 68,046 68,912 1,352
-------- ---------- --------
Total mortgage loans serviced $1,021,404 $1,063,986 $529,977
========== ========== ========
Carrying value of mortgage loan
servicing rights $ 11,991 $ 12,264 $ 7,428
========== ========== ========
Fair value of mortgage loan
servicing rights $ 12,200 $ 12,290 $ 7,698
========== ========== ========
Valuation allowance for impairment
related to mortgage loan
servicing rights $ 122 $ 122 $ 557
========== ========== ========
</TABLE>
10
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(4) Other Borrowings
The following table presents the composition of the Bank's other borrowings as
of the dates indicated.
March 31, December 31, March 31,
1997 1996 1996
--------- ------------ ---------
FHLB advances $588,730 $419,146 $17,100
ESOP loan 990 1,485 1,485
-------- -------- -------
Total other borrowings $589,720 $420,631 $18,585
======== ======== =======
(5) Income Taxes
Income tax expense for the three month periods ended March 31, 1997 and March
31, 1996 was as follows:
March 31,
--------------------------
1997 1996
------ ------
Federal:
Current $1,584 $ 904
Deferred 285 (15)
------ ------
1,869 889
State 421 163
------ ------
Income tax expense $2,290 $1,052
====== ======
(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 with a presentation of basic EPS and
fully diluted EPS with diluted 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. Diluted
EPS is computed similarly to fully diluted EPS under APB 15. Harris will adopt
SFAS 128 as of December 31, 1997. Management does not expect SFAS 128 to have a
material effect on the EPS of Harris.
11
<PAGE>
Item 2 Management's Discussion 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 consolidated financial statements for Harris Savings Bank. This
discussion should be read in conjunction with the 1996 Annual Report. Current
performance does not guarantee, assure, or may be indicative of similar
performance in the future.
In addition to historical information, this FDIC Form F-4 Report contains
forward-looking statements. 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 Corporation
undertakes no obligation to publicly revise or update these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
(a) Material Changes in Results of Operations
NET INCOME Net income for the three month period ended March 31, 1997 was
$4,709,000, representing an increase of $2,998,000, or 175.2%, from the
$1,711,000 earned for the first three months of 1996. The increase in net income
was due primarily to a $3.1 million, or 36.8%, increase in net interest income,
and an increase of $1.3 million in gains on sales of securities in the first
quarter of 1997 versus the first quarter of 1996.
NET INTEREST INCOME Net interest income, on a tax equivalent basis, totaled
$12,236,000 for the quarter ended March 31, 1997, which represents an increase
of $3,756,000, or 44.3%, from the $8,480,000 of tax equivalent net interest
income recorded in the quarter ended March 31, 1996. This increase reflected a
favorable volume variance of $2,271,000 due to a $497.2 million increase in
total average earning assets to $1.702 billion during the quarter ended March
31, 1997 as compared to $1.205 billion recorded during the quarter ended March
31, 1996, due mainly to the acquisition of First Harrisburg Bancor in April
1996. Also reflected was a net favorable rate variance of $1,485,000, which
resulted from an increase in net interest margin of 6 basis points to 2.88% in
the quarter ended March 31, 1997, as compared to 2.82% recorded in the quarter
ended March 31, 1996.
Table 1 on the following page presents the Bank's average asset and liability
balances, interest rates, interest income, and interest expense for each of the
three month periods ended March 31, 1997 and March 31, 1996, respectively. Table
2 presents a rate-volume analysis of changes in net interest income.
12
TABLE I - Average Balance Sheets. Rate, and Interest Income and Expense Summary
<TABLE>
<CAPTION>
For the quarters ended,
-------------------------------------------------------------------------------
March 31, 1997 March 31 1996
-------------------------------------- ----------------------------------------
Average (1) (4) Average Average (1) (4) Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
---------- -------- ---------- ---------- -------- ----------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans, net $ 548,904 $11,160 8.13% $ 501,816 $ 9,947 7.93%
Commercial loans 67,353 1,275 7.57% 47,874 1,055 8.81%
Other loans, net 230,621 4,775 8.28% 116,446 2,406 8.26%
Marketable securities - Taxable 741,765 12,548 6.77% 512,148 8,025 6.27%
Marketable securities - Taxfree 92,770 2,009 8.66% 7,374 143 7.76%
Other interest-earning assets 20,754 390 7.52% 19,275 325 6.74%
---------- ------- ---------- -------
Total interest-earning assets 1,702,167 32,157 7.56% 1,204,933 21,901 7.27%
------- -------
Non interest-earning assets $ 77,679 48,541
---------- ----------
Total assets $1,779,846 $1,253,474
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings deposits $ 147,614 $ 998 2.70% $ 139,248 $ 1,036 2.98%
Time deposits 805,117 11,040 5.48% 762,501 10,734 5.63%
NOW and money market deposits 182,461 1,557 3.41% 147,065 1,338 3.64%
Escrow 8,545 33 1.54% 5,730 32 2.23%
Borrowed funds 433,232 6,293 5.81% 20,263 281 5.55%
---------- ------- ---------- -------
Total interest-bearing liabilities 1,576,969 19,921 5.05% 1,074,807 13,421 4.99%
------- -------
Non interest-bearing liabilities 48,782 27,044
---------- ----------
Total liabilities 1,625,751 1,101,851
Stockholders' equity 154,095 151,623
---------- ----------
Total liabilities and stockholders' equity $1,779,846 $1,253,474
========== ==========
Net interest income before provision for loan losses $12,236 $ 8,480
======= =======
Interest rate spread (2) 2.51% 2.28%
Net interest-earning assess $ 125,198 $ 130,126
========== ==========
Net interest margin (3) 2.88% 2.82%
Ratio of interest-earning assets to
interest-bearing liabilities 1.08x 1.12x
========== ==========
</TABLE>
- ----------
(1) Includes income recognized on deferred loan fees of $252,000 and $370,000
for the comparable 1997 and 1996 periods, respectively.
(2) Represents the difference between the average yield on interest-earning
assets and the average cost on interest-bearing liabilities.
(3) Represents the annualized net interest income before provision for loan
losses divided by average interest-earning assets.
(4) Interest income and yields are shown on a tax-equivalent basis using an
effective tax rate of 35%.
13
<PAGE>
TABLE 2 - Rate/Volume Analysis of Changes in Tax-Equivalent Net Interest Income
Three Months Ended March 31, 1997
Compared to
Three Months Ended March 31, 1996
Increase (Decrease)
---------------------------------
Volume Rate Net
-------- ------ ----------
(Dollar amounts in thousands)
Interest-earning assets:
Mortgage loans, net $ 933 $ 280 $ 1,213
Commercial loans 429 (209) 220
Other loans, net 2,358 11 2,369
Marketable securities - Taxable 3,599 924 4,523
Marketable securities - Taxfree 1,657 209 1,866
Other interest-earning assets 25 40 65
------ ------ -------
Total interest-earning assets 9,001 1,255 10,256
------ ------ -------
Interest-bearing liabilities:
Savings deposits 62 (100) (38)
Time deposits 600 (294) 306
NOW and money market deposits 322 (103) 219
Escrow and stock subscriptions 16 (15) 1
Borrowed funds 5,730 282 6,012
------ ------ -------
Total interest-bearing liabilities 6,730 (230) 6,500
------ ------ -------
Net change in net interest income $2,271 $1,485 $ 3,756
====== ====== =======
Note: Changes in interest income and interest expense arising from the
combination of rate and volume variances are allocated entirely as rate
variances.
14
<PAGE>
PROVISION FOR LOAN LOSSES There was a $152,000 provision for loan losses
recorded in the quarter ended March 31, 1997, due to loan growth, versus a
$210,000 provision for loan losses recorded in the quarter ended March 31, 1996.
NONINTEREST INCOME Noninterest income totaled $3,275,000 for the quarter ended
March 31, 1997, which represents an increase of $3,027,000 from the $248,000
recorded in the quarter ended March 31, 1996. This increase can be attributed
mainly to an increase in net servicing income of $872,000, due to an increase in
loan servicing rights of $4.6 million from March 31, 1996 to March 31, 1997, and
a $0 valuation writedown in the first quarter of 1997 versus a $557,000
writedown in the first quarter of 1996, and an increase in the gains on sales of
securities of $1,316,000, and a gain on the sale of loans of $440,000.
NONINTEREST EXPENSE Noninterest expense totaled $7,657,000 for the quarter ended
March 31, 1997, which represents an increase of $1,952,000, or 34.2%, from the
$5,705,000 recorded in the quarter ended March 31, 1996. This increase resulted
primarily from additional expenses incurred due to the purchase acquisition of
First Harrisburg Bancor in April 1996.
PROVISION FOR INCOME TAXES Corporate income tax expense totaled $2,290,000 for
the quarter ended March 31, 1997, which resulted in an effective tax rate of
32.7% on pretax income of $6,999,000. This represents an increase of $1,238,000
from the $1,052,000 of corporate income tax expense recorded during the quarter
ended March 31, 1996, which resulted in an effective tax rate of 38.1% for that
period on pretax income of $2,763,000. The decrease in the effective tax rate of
540 basis points was due primarily to the purchase of taxfree investments
totaling approximately $69.8 million in the twelve months ended March 31, 1997.
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 decreased $4.0 million
during the three month period ended March 31, 1997. Operating activities
generated cash totaling $12.3 million during the three month period ended March
31, 1997. During this period, investing activities of the Bank resulted in a
net use of cash of $187.1 million, due mainly to $328.9 million in purchases of
marketable securities. Activities in the bank's portfolio of marketable
securities resulted in a net use of cash of $180.0 million for the three month
period ended March 31, 1997. The bank's financing activities resulted in a net
source of cash totaling $170.8 million during the three month period ended March
31, 1997, as increases in other borrowings provided cash of $169.1 million.
15
<PAGE>
STOCKHOLDERS' EQUITY Stockholders' equity totaled $153.8 million, $152.8
million, and $150.8 million at March 31, 1997, December 31, 1996, and March 31,
1996, respectively. Stockholders' equity amounted to 7.9% on total assets of
$1.943 billion as of March 31, 1997, compared to 8.6% on total assets of $1.768
billion at December 31, 1996, and 12.1% on total assets of $1.249 billion at
March 31, 1996.
The increase in stockholders' equity of $1.1 million in the three months ended
March 31, 1997 resulted mainly from the net of additions of $4.7 million from
net income, and a net decrease of $3.6 million in the market value, net of tax
effect, of the available-for-sale portfolio. The increase in stockholders'
equity of $3.0 million in the twelve month period ended March 31, 1997 included
net additions of $4.0 million from net income, and a net decrease of $0.8
million in the market value, net of tax effect, of the available-for-sale
securities portfolio.
The Bank's leverage capital ratio, calculated using FDIC capital definitions,
totaled 6.9%, 8.3%, and 11.3% at March 31, 1997, December 31, 1996, and March
31, 1996, respectively. The Bank's risk-based capital ratio, calculated using
FDIC capital definitions, totaled 13.9%, 14.7%, and 21.8% at March 31, 1997,
December 31, 1996, and March 31, 1996, respectively. As of these dates, the
Bank's capital ratios exceeded all regulatory minimum capital requirements.
MARKETABLE SECURITIES Marketable securities, excluding cash, totaled $994.1
million, $828.9 million, and $511.9 million at March 31, 1997, December 31,
1996, and March 31, 1996, respectively. Total marketable securities increased
$165.2 million, or 19.9%, during the first three months of 1997, and increased
$482.2 million, or 94.2%, during the twelve month period ended March 31, 1997.
Both of the respective periods' increases were due mainly to increased
leveraging, and the purchase of $69.8 million of AAA and AA rated municipal
bonds in order to realize tax savings due to the nontaxable interest received on
these bonds, and an increase in equity securities of $35.4 million in the three
months ended March 31, 1997, and $112.5 million in the twelve month period
ended March 31, 1997.
Table 3 on the following page presents the composition of the Bank's marketable
securities portfolio as of March 31, 1997, December 31, 1996, and March 31,
1996, respectively,
16
<PAGE>
TABLE 3 - Composition of Marketable Securities Portfolios
The following table sets forth certain information regarding the amortized cost
and fair values of the Bank's marketable securities portfolio at March 31, 1997,
December 31, 1996, and March 31, 1996:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996 March 31, 1996
--------------------------- ------------------------ ------------------------
Amortized Fair Amortized Fair Amortized Pair
Cost Value Cost Value Cost Value
---------- ---------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
U.S. Government and agencies $ 67,497 $ 66,867 $ 72,513 $ 72,783 $ 72,562 $ 72,588
Mortgage-backed securities:
FNMA PC's 4,600 4,660 4,780 4,901 5,368 5,537
FHLMC PC's 0 0 0 0 1,118 1,117
FNMA CMO's 0 0 0 0 4,240 4,223
FHLMC CMO's 0 0 0 0 10,220 10,196
Private issue CMO's 30,631 30,490 32,124 32,228 36,077 36,218
---------- ---------- -------- -------- -------- --------
Total mortgage-backed securities 35,231 35,150 36,904 37,129 57,023 57,291
---------- ---------- -------- -------- -------- --------
Total securities held-to-maturity $ 102,728 $ 102,017 $109,417 $109,912 $129,585 $129,879
---------- ---------- -------- -------- -------- --------
Available-for-sale:
U.S. Government and agencies $ 168,396 $ 165,393 $143,370 $142,721 $ 40,914 $ 41,492
Corporate bonds 17,000 16,448 17,000 16,660 0 0
SBA's 0 0 31,522 31,705 0 0
Municipal obligations 93,636 93,723 89,840 90,155 25,227 23,901
FHLB stock 29,449 29,449 20,972 20,972 7,616 7,616
Other equities 109,785 113,716 81,915 86,836 20,340 23,016
Asset-backed securities 25,667 25,519 2,756 2,758 0 0
Mortgage-backed securities:
FNMA PC's 0 0 10,040 10,077 12,183 12,068
FHLMC PC's 30,842 31,501 70,942 71,858 134,600 135,062
GNMA PC's 0 0 1,565 1,593 0 0
Private issue PC's 21,419 21,511 36,598 36,749 45,640 45,512
FNMA CMO's 108,693 108,698 62,597 62,698 61,870 61,275
FHLMC CMO's 193,401 192,215 122,851 122,866 32,635 32,356
Private issue CMO's 93,116 93,167 21,732 21,845 0 0
---------- ---------- -------- -------- -------- --------
Total mortgage-backed securities 447,471 447,092 326,325 327,686 286,928 286,273
---------- ---------- -------- -------- -------- --------
Total securities available-for-sale $ 891,404 $ 891,340 $713,700 $719,493 $381,025 $382,298
---------- ---------- -------- -------- -------- --------
Other interest-earning securities:
FHLB daily investment $ 6,701 $ 6,701 $ 5,265 $ 5,265 $ 10,175 $ 10,175
---------- ---------- -------- -------- -------- --------
Total marketable securities and
interest bearing investments $1,000,833 $1,000,058 $828,382 $834,670 $520,785 $522,352
========== ========== ======== ======== ======== ========
</TABLE>
17
<PAGE>
LOANS Net loans, including loans held for sale, totaled $849.8 million, $833.0
million, and $672.7 million at March 31, 1997, December 31, 1996, and March 31,
1996, respectively. The increase of $177.1 million, or 26.3%, for twelve month
period ended March 31, 1997, resulted from a combination of increased loan
demand, low prepayment trends, a low level of loan swapping and selling
activities, and the purchase acquisition of First Harrisburg, which accounted
for $195.6 million of the increase.
Table 4 on the following page presents an analysis of the Bank's loan portfolio
as of March 31, 1997, December 31, 1996, and March 31, 1996, respectively.
(Balance of this page left intentionally blank.)
18
<PAGE>
TABLE 4 - Loan Composition
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996 March 31, 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) $646,690 67.00% 473,143 71.57% 454,253 72.19%
Other residential real estate (multi-family) 726 0.08 85 0.01 86 0.01
Construction (2) 30,809 3.19 23,415 3.54 19,157 3.05
Other (primarily commercial real estate) 8,345 0.86 7,037 1.06 6,998 1.11
-------- ------ -------- ------ -------- ------
Total mortgage loans 686,570 71.13 503,680 76.18 480,494 76.36
-------- ------ -------- ------ -------- ------
Commercial loans 51,788 5.37 45,159 6.83 44,024 7.00
Consumer and other loans:
Automobile 165 0.02 29 0.00 32 0.01
Mobile home 64,824 6.72 20,991 3.18 15,371 2.44
Home equity and second mortgage 157,186 16.28 83,031 12.56 81,350 12.92
Credit cards 0 0.00 3,258 0.49 3,271 0.52
Other 4,662 0.48 5,002 0.76 4,714 0.75
-------- ------ -------- ------ -------- ------
Total consumer and other loans 226,837 23.50 112,311 16.99 104,738 16.64
-------- ------ -------- ------ -------- ------
Loans receivable, gross 965,195 100.00% 661,150 100.00% 629,256 100.00%
-------- ====== -------- ====== -------- ======
Plus:
Dealer reserves 13,541 4,308 3,131
Less:
Unearned discounts (340) (220) (247)
Net deferred loan origination fees 10,383 7,959 7,860
Allowance for loan losses 8,141 6,114 6,132
-------- -------- --------
18,184 13,853 13,745
-------- -------- --------
Loans receivable, net $960,552 $651,605 $618,642
======== ======== ========
Mortgage loans:
ARM $131,135 19.10% 105,219 20.89% 103,787 21.60%
Fixed-rate 555,435 80.90 398,461 79.11 376,707 78.40
-------- ------ -------- ------ -------- ------
Total mortgage loans: $686,570 100.00% 503,680 100.00% 480,494 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
- ----------
(1) Includes net loans held for sale of $9,512 at September 30, 1996.
(2) Net of undisbursed portion of $34,910, $22,301, and $23,728 at September
30, 1996, December 31, 1995, and September 30, 1995, respectively.
19
<PAGE>
PURCHASED MORTGAGE SERVICING RIGHTS As of March 31, 1997, December 31, 1996, and
March 31, 1996 the Bank held mortgage loan servicing rights with carrying values
totaling $12.0 million, $12.3 million, and $7.4 million, respectively. The
unpaid principal balances of loans serviced for others totaled $1.021 billion,
$1.064 billion, and $530.0 million at March 31, 1997, December 31, 1996, and
March 31, 1996, respectively. The Bank recorded amortization expense on mortgage
loan servicing rights totaling $351,000 during the three months ended March 31,
1997. The Bank recorded amortization expense on mortgage loan servicing rights
of $823,000 in the first three months of 1996, due mainly to an impairment
valuation allowance of $557,000.
At March 31, 1997, the total amount of capitalized mortgage servicing rights
(including mortgage servicing rights purchased) was $12,113,000 before valuation
allowance. The valuation allowance for impairment related to such rights was
$122,000 at March 31, 1997. The fair value of such rights was approximately
$12,200,000.
ASSET QUALITY The Bank's asset quality continues to remain sound. Loan
charge-offs, net of recoveries, totaled $35,000 for the three month period ended
March 31, 1997 compared to $48,000 for the three month period ended March 31,
1996. Loan charge-offs, net of recoveries, totaled $810,000 for the twelve month
period ended March 31, 1997. Based on management's continuing review of the loan
portfolio, the Bank recorded provision for loan losses of $152,000 for the three
month and $1,899,000 for the twelve month period ended March 31, 1997 due to
loan growth.
The allowance for loan losses totaled $8,439,000, $8,322,000, and $6,276,000 at
March 31, 1997, December 31, 1996, and March 31, 1996, respectively. Stated as a
percentage of total loans receivable, the allowance for loan losses amounted to
1.00%, 1.01%, and .93% at March 31, 1997, December 31, 1996, and March 31, 1996,
respectively.
DEPOSITS Deposits, not including escrow, totaled $1.175 billion, $1.173 billion,
and $1.062 billion at March 31, 1997, December 31, 1996, and March 31, 1996,
respectively. Total deposits grew by $2.0 million, or 0.2%, during the three
months ended March 31, 1997. Total deposits increased $113.2 million, or 10.7%,
during the twelve month period ended March 31, 1997, due mainly to the purchase
acquisition of First Harrisburg, which resulted in an increase of $171.1 million
in deposits.
Table 5 on the following page presents the composition of the Bank's deposit
portfolio as of March 31, 1997, December 31, 1996, and March 31, 1996,
respectively.
20
<PAGE>
TABLE 5 - Deposit Composition
<TABLE>
<CAPTION>
At March 31, 1997 At December 31, 1996 At March 31, 1996
----------------------- ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Demand and NOW accounts $ 91,783 7.81 $ 84,715 7.22 $ 61,451 5.79
Money market 129,629 11.03 129,096 11.00 105,049 9.89
Savings 147,844 12.58 150,019 12.78 139,888 13.17
Time deposits 806,206 68.58 809,593 69.00 755,839 71.15
---------- ------ ---------- ------ ---------- ------
Total deposits $1,175,462 100.00 $1,173,423 100.00 $1,062,227 100.00
========== ====== ========== ====== ========== ======
</TABLE>
(Balance of this page left intentionally blank.)
21
<PAGE>
OTHER BORROWINGS During the three and twelve month periods ended March 31, 1997,
the Bank actively engaged in leveraging activities to utilize the Bank's excess
capital. Other borrowings totaled $589.7 million, $420.6 million, and $18.6
million at March 31, 1997, December 31, 1996, and March 31, 1996, respectively.
These borrowings increased $169.1 million, or 40.2%, during the three months
ended March 31, 1997, and increased $571.1 million, during the twelve months
ended March 31, 1997. The increases were due to the increase in FHLB advances to
$588.7 million, which represents an increase of $169.6 million, or 40.5%, and
$571.6 million, during the three months and twelve months ended March 31, 1997,
respectively.
Table 6 on the following page presents the composition of the Bank's other
borrowings as of March 31, 1997, December 31, 1996, and March 31, 1996,
respectively.
(Balance of this page left blank intentionally.)
22
<PAGE>
TABLE 6 - Other Borrowings
<TABLE>
<CAPTION>
At March 31, 1997 At December 31, 1996 At March 31, 1996
---------------------- ---------------------- ---------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
FHLB advances $588,730 99.83 $419,146 99.65 $17,100 92.01
ESOP loan 990 0.17 1,485 0.35 1,485 7.99
-------- ------ -------- ------ ------- ------
Total other borrowings $589,720 100.00 $420,631 100.00 $18,585 100.00
======== ====== ======== ====== ======= ======
</TABLE>
(Balance of this page left intentionally blank.)
23
<PAGE>
LIQUIDITY The Bank'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 Bank anticipates that it will have sufficient funds available
to meet its current commitments.
The Bank exceeded all regulatory standards for liquidity at March 31, 1997,
December 31, 1996, and March 31, 1996.
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 with a presentation of basic
EPS and fully diluted EPS with diluted 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. Diluted EPS is computed similarly to fully diluted EPS under APB 15.
Harris will adopt SFAS 128 as of December 31, 1997. Management does not expect
SFAS 128 to have a material effect on the EPS of Harris.
OTHER MATTERS The Bank filed a Form F-3 for January, 1997. This Form F-3
disclosed that the Bank's Board of Directors approved the reorganization of the
Bank and its existing mutual holding company into a two-tier mutual holding
company structure with the establishment of a state chartered corporation as the
stock holding company parent of the Bank. The information for this item is
incorporated by reference from information presented under "Item 12 - Other
Materially Important Events" which appears on page 2 of the Form F-3 dated
January, 1997.
24
<PAGE>
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the bank has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Harris Savings Bank
- -------------------------------------------------------------------------------
(Name of bank)
Date 5/14/97 /s/ Wm. J. McLaughlin
--------------------------------------------------------------------------
(Signature)
William J. McLaughlin, President and Chief Executive Officer
- -------------------------------------------------------------------------------
Print name and title of signing officer under his signature.
Date 5/14/97 /s/ James L. Durrell
--------------------------------------------------------------------------
(Signature)
James L. Durrell, Executive Vice President and Chief Financial Officer
- -------------------------------------------------------------------------------
Print name and title of signing officer under his signature.
25
<PAGE>
Federal Deposit Insurance Corporation Form F-4
March 31, 1997
Exhibit 1 Statement Regarding the Computation of Earnings Per Share
Exhibit 1 appears on the next page of this report.
(Balance of this page left intentionally blank.)
26
<PAGE>
Federal Deposit Insurance Corporation
Form F-4
Exhibit 1
Statement regarding computation of Earnings Per Share
For the three month period ended
March 31,
--------------------------------
1997 1996
------------ ----------
Weighted average shares outstanding:
Common stock 11,038,448 10,948,150
---------- ----------
Common stock equivalents: (1)
Stock options 79,428 76,306
Stock awards 7,292 38,522
ESOP shares 6,188 6,188
---------- ----------
Total common stock equivalents: 92,908 121,016
========== ==========
Total weighted average shares outstanding 11,131,356 11,069,166
========== ==========
Net income $4,709,000 $1,711,000
========== ==========
Net income per share $0.42 $0.15
========== ==========
27
EXHIBIT 99.3
Federal Deposit Insurance Corporation
Form F-4
Quarterly Report Under Section 13 of the Securities Exchange Act of 1934 for the
Quarter Ended June 30. 1997
-------------
FDIC Insurance Certificate Number 30174
-----
Harris Savings Bank
------------------------------------------------
(Exact name of bank as specified in its charter)
Pennsylvania
--------------------------------------------------------------
(State or other jurisdiction of incorporation of organization)
25-1720585
------------------------------------
(I.R.S. Employer Identification No.)
235 North Second Street, P.O. Box 1711, Harrisburg Pennsylvania
---------------------------------------------------------------
(Address of principal executive offices)
17105
----------
(Zip Code)
Bank's telephone number, including area code (717) 236-4041
--------------
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the bank (1) has filed all reports required
to be filed by section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the bank was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes___ No___
Indicate the number of shares outstanding of each of the bank's classes of
common stock, as of the latest practicable date 11,222,800 shares of common
-------------------------------
stock, par value of $.01 per share, outstanding at June 30, 1997
- ----------------------------------------------------------------
<PAGE>
Federal Deposit Insurance Corporation Form F-4
June 30, 1997
Item 1 Financial Statements and related Notes to Financial Statements
The contents of Item 1 appear beginning on the next page of this report.
(Balance of this page left intentionally blank.)
2
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1997 1996 1996
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 20,995 $ 29,693 $ 26,937
Marketable securities held-to-maturity (note 2) 101,069 109,417 118,303
Marketable securities available-for-sale (note 2) 966,234 719,493 391,897
Loans receivable, net 869,658 823,916 897,975
Loans held for sale, net 10,206 9,053 34,386
Loan servicing rights (note 3) 12,081 12,264 10,989
Real estate held for investment 675 898 1,014
Foreclosed real estate 6,586 7,042 7,143
Premises and equipment, net of accumulated
depreciation of $14,136, $13,845, and $14,176 17,153 14,595 13,684
Accrued interest receivable 14,293 12,052 10,954
Deferred tax asset, net 0 0 475
Income taxes receivable 1,020 4,677 0
Intangible assets 20,509 21,695 23,905
Other assets 3,815 3,317 4,055
----------- ----------- -----------
Total assets $ 2,044,294 $ 1,768,112 $ 1,541,717
=========== =========== ===========
Liabilities and Stockholders' Equity
Deposits $ 1,162,558 $ 1,173,423 $ 1,227,261
Escrow 10,194 8,203 13,039
Accrued interest payable 3,611 3,012 1,604
Postretirement benefit obligation 2,514 2,360 2,216
Other borrowings (note 4) 693,298 420,631 145,185
Deferred tax liability, net 4,161 3,257 0
Income taxes payable 0 0 (1,924)
Other liabilities 4,196 4,474 4,933
----------- ----------- -----------
Total liabilities 1,880,531 1,615,360 1,392,314
----------- ----------- -----------
Common stock, $.01 par value, authorized 50,000,000 shares;
11,222,800 shares issued and outstanding at June 30, 1997,
11,216,400 shares issued and outstanding at December 31, 1996, and
11,216,400 shares issued and outstanding at June 30, 1996 112 112 112
Paid in capital 26,285 25,902 25,653
Retained earnings 133,928 124,812 126,412
Net unrealized (loss) gain on marketable securities (note 2) 4,829 3,615 (761)
Employee stock ownership plan (776) (1,024) (1,271)
Recognition and retention plans (615) (665) (742)
----------- ----------- -----------
Total stockholders' equity 163,763 152,752 149,403
----------- ----------- -----------
Total liabilities & stockholders' equity $ 2,044,294 $ 1,768,112 $ 1,541,717
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended June 30. Three months ended June 30.
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Interest income: (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Loans receivable:
First mortgage loans $ 22,881 $ 24,573 $ 11,721 $ 13,653
Commercial, Consumer and other loans 12,312 6,971 6,262 4,483
Taxable investments 10,022 5,883 5,286 3,035
Taxfree investments 2,720 513 1,414 419
Dividends 3,595 1,081 2,077 698
Mortgage-backed securities 14,642 9,589 8,024 4,487
Money market securities 130 60 64 43
------------ ------------ ------------ ------------
Total interest income 66,302 48,669 34,848 26,818
------------ ------------ ------------ ------------
Interest expense:
Deposits 27,198 27,431 13,603 14,323
Borrowed funds 15,064 1,904 8,771 1,623
Escrow 69 71 36 39
------------ ------------ ------------ ------------
Total interest expense 42,331 29,406 22,410 15,985
------------ ------------ ------------ ------------
Net interest income 23,971 19,263 12,438 10,833
Provision for loan losses 305 420 153 210
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 23,666 18,843 12,285 10,623
------------ ------------ ------------ ------------
Non-interest income:
Service charges on deposits 729 426 381 231
Other service charges/commissions/fees 652 445 364 229
Net servicing income 1,086 247 528 561
Gain on sale of mortgage-backed securities (note 2) 2,734 927 1,690 788
Gain (loss) on sale of other securities, net (note 2) 459 0 48 0
Gain on sale of loans, net 805 0 365 0
Other 253 21 67 9
------------ ------------ ------------ ------------
Total non-interest income 6,718 2,066 3,443 1,818
------------ ------------ ------------ ------------
Non-interest expense:
Salaries and benefits 8,132 6,705 4,058 3,975
Equipment expense 911 614 482 344
Occupancy expense 1,451 1,120 699 607
Advertising and public relations 972 469 533 250
FDIC insurance 381 1,305 190 693
Director fees 141 159 65 81
Income from real estate operations (333) (290) (237) (154)
Amortization and write-off of intangibles 1,187 897 600 527
Non-operational loss (note 5)) 0 4,205 0 4,205
Other 3,049 2,611 1,844 1,562
------------ ------------ ------------ ------------
Total non-interest expense 15,891 17,795 8,234 12,090
------------ ------------ ------------ ------------
Income before income taxes 14,493 3,114 7,494 351
Income tax expense (note 6) 4,719 1,217 2,429 165
------------ ------------ ------------ ------------
Net income $ 9,774 $ 1,897 $ 5,065 $ 186
============ ============ ============ ============
Net income per share $ 0.88 $ 0.17 $ 0.45 $ 0.02
============ ============ ============ ============
Weighted average shares outstanding 11,136,827 11,094,670 11,145,110 11,087,591
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Net
Unrealized Employee Recognition
on Gain Stock And
Common Pain In Retained (Loss) Ownership Retention
Stock Capital Earnings Securities Plan Plans 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 1,897 1,897
Dividends paid at $.145 per share (729) (729)
Exercised stock options 112 112
Change in unrealized gain (loss) on marketable
securities, net of tax effect of ($1,401) (3,881) (3,881)
ESOP stock committed for release 248 248
Earned portion of RRP plans 78 78
Excess of fair value above cost of ESOP
stock committed for release 188 188
Excess of fair value above cost of earned
portion of RRP stock 31 31
-------- -------- -------- -------- -------- ------------ --------
Balance at June 30, 1996 $ 112 $ 25,653 $126,412 $ (761) $ (1,271) $ (742) $149,403
======== ======== ======== ======== ======== ============ ========
Balance at January 1, 1997 $ 112 $ 25,902 $124,812 $ 3,615 $ (1,024) $ (665) $152,752
Net income 9,774 9,774
Dividends paid at $.145 per share (736) (736)
Adjustment for timing difference subsidiary
elimination entires 78 78
Exercised stock options 67 67
Change in unrealized gain (loss) on marketable
securities, net of tax effect of ($881) 1,214 1,214
ESOP stock committed for release 248 248
Earned portion of RRP plans 50 50
Excess of fair value above cost of ESOP
stock committed for release 260 260
Excess of fair value above cost of earned
portion of RRP stock 56 56
-------- -------- -------- -------- -------- ------------ --------
Balance at June 30, 1997 $ 112 $ 26,285 $133,928 $ 4,829 $ (776) $ (615) $163,763
======== ======== ======== ======== ======== ============ ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,774 $ 1,897
Adjustments to reconcile net income to net cash provided
by operating activities:
Non-operational loss 0 4,205
Provision for loan losses 305 420
Net depreciation, amortization end accretion 1,528 2,084
Origination of loans held for sale (39,430) 0
Proceeds from sale of loans held for sale 39,012 0
Net gain on sales of interest earning assets (3,998) (923)
(Gain) loss on the sale of foreclosed real estate (40) 8
Equity losses from joint ventures 44 2
Increase in accrued interest receivable (2,241) (2,621)
Increase in accrued interest payable 599 788
Amortization and write-off of intangibles 1,187 897
Earned ESOP shares 508 232
Earned RRP shares 106 59
Deferred income taxes 285 (4,742)
Other, net 2,853 4,176
-------- --------
Net cash provided by operating activities 10,492 6,482
-------- --------
Cash flows from investing activities:
Proceeds from maturities and principal reductions of
marketable securities:
Held-to-maturity 8,316 31,319
Available-for-sale 9,988 42,622
Proceeds from sales of marketable securities, available
for sale 340,010 94,797
Purchase of marketable securities, available for sale (591,491) (159,619)
Purchase of loans 0 (186,486)
Loans sold 21,029 0
Net increase in loan originations less principal
payments of loans (67,272) (61,182)
Purchase of loan servicing rights (469) (6,650)
Increase in loans held for sale 0 (38,591)
Investment in real estate held for investment (25) (209)
Proceeds from payments on real estate held for investment 130 36
Purchase of premises and equipment (3,221) (4,037)
Cash proceeds received from the sale of foreclosed
real estate 623 178
Acquisition of intangible asset 0 (14,742)
-------- --------
Net cash used in investing activities (282,382) (302,564)
-------- --------
</TABLE>
(continued)
6
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(continued)
(in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1997 1996
---------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in deposits $ (10,865) $ l53,551
Net increase in other borrowings 272,667 126,005
Net increase in escrow, stock over-subscriptions,
and stock subscriptions payable 2,059 8,391
Cash dividends (736) (729)
Purchase of ESOP shares 0 0
Purchase of RRP shares 0 0
Proceeds from the exercise of stock options 67 349
--------- ---------
Net cash provided by financing activities 263,192 287,567
--------- ---------
Net (decrease) in cash and cash equivalents (8,698) (8,515)
Cash and cash equivalents at beginning of year 29,693 35,452
--------- ---------
Cash and cash equivalents at end of year $ 20,995 $ 26,937
========= =========
Supplemental disclosures:
Cash paid during the years for:
Interest on deposits, advances and other borrowings
(includes interest credited to deposit accounts) $ 37,323 $ 28,914
Income taxes 2,532 2,377
Non-cash investing activities:
Transfers from loans to foreclosed real estate $ 85 $ 105
Mortgage-backed securities received in exchange for
mortgage loans 0 32,555
Decrease (increase) in carrying value of marketable
securities available-for-sale (2,095) 6,221
Fair value of assets acquired $ 0 $ 276,581
Premium paid 0 13,816
Fair value of liabilities assumed 0 252,211
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(1) Accounting Policies
The Consolidated Financial Statements include the accounts of Harris Savings
Bank and its wholly-owned 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 information contained in the Consolidated Financial Statements is unaudited.
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 six month period ended June 30, 1997
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1997.
The accounting policies followed in the presentation of interim financial
results are the same as 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 dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1997 1996 1996
----------- ------------ ---------
<S> <C> <C> <C>
Held-to-maturity, at amortized cost $ 101,069 $ 109,417 $ 118,303
----------- --------- ---------
Available-for-sale, at amortized cost 958,346 713,700 393,118
Available-for-sale, net unrealized gain (loss) 7,888 5,793 (1,221)
----------- --------- ---------
Available-for-sale, at fair value 966,234 719,493 391,897
----------- --------- ---------
Total marketable securities $ 1,067,303 $ 828,910 $ 510,200
----------- --------- ---------
</TABLE>
8
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(2) Marketable Securities (continued)
The amortized cost and fair value of marketable securities at June 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.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- ---------
<S> <C> <C>
Held-to-maturity:
Due in one year or less - $ 9,997 $ 10,009
Due after one year through five years 56,266 56,243
Due after five years through ten years 1,213 1,222
Due after ten years 0 0
Mortgage-backed securities 33,593 33,826
--------- ---------
Total securities held-to-maturity $ 101,069 $ 101,300
========= =========
Available-for-sale:
Due in one year or less $ 84,546 $ 83,517
Due after one year through five years 129,843 133,555
Due after five years through ten years 62,778 64,267
Due after ten years 11,275 11,324
Equity securities 147,142 152,810
Mortgage-backed securities 522,762 520,761
--------- ---------
Total securities available-for-sale $ 958,346 $ 966,234
========= =========
</TABLE>
Activity from the sale of marketable securities is as follows:
For the six months ended
June 30,
------------------------
1997 1996
--------- --------
Proceeds $ 340,010 $ 88,293
========= ========
Gross gains $ 3,262 $ 1,128
Gross losses 69 201
--------- --------
Net gain $ 3,193 $ 927
========= ========
All sales of marketable securities occurred in the available-for-sale portfolio.
9
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(3) Loans Serviced for Others
The following table sets forth information concerning loans serviced for others
as of the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1997 1996 1996
---------- ---------- ----------
<S> <C> <C> <C>
Unpaid principal balances of
mortgage loans serviced for:
FHLMC $ 640,776 $ 645,403 $ 521,330
FNMA 338,653 349,671 184,328
Other investors 68,852 68,912 62,898
---------- ---------- ----------
Total mortgage loans serviced $1,048,281 $1,063,986 $ 768,556
========== ========== ==========
Carrying value of mortgage loan
servicing rights $ 12,081 $ 12,264 $ 10,989
========== ========== ==========
Fair value of mortgage loan
servicing rights $ 16,139 $ 12,290 $ 13,762
========== ========== ==========
Valuation allowance for impairment
related to mortgage loan
servicing rights $ 126 $ 122 $ 241
========== ========== ==========
</TABLE>
On January 1, 1996, the Bank adopted Statement of Financial Accounting Standards
No. 122 "Accounting for Mortgage Servicing Rights, an amendment of FASB
Statement No. 65" (SFAS 122). SFAS 122 amends Statement 65 and 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
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. The preceding table reflects
the informational requirements of SFAS 122.
10
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the cables are in thousands)
(4) Other Borrowings
The following table presents the composition of the Bank's other borrowings as
of the dates indicated.
June 30, December 31, June 30,
1997 1996 1996
-------- ------------ --------
FHLB advances $531,308 $419,146 $124,082
Repurchase Agreements 161,000 0 19,618
ESOP loan 990 1,485 1,485
-------- -------- --------
Total other borrowings $693,298 $420,631 $145,185
======== ======== ========
(5) Non-Operational Loss
The Bank experienced a non-operational loss in the second quarter of 1996. This
was in connection with certain violations of internal control policies and
certain unauthorized external activities concerning Harris Savings Bank's
relationship with a mortgage brokering company. First Federal Savings and Loan
Association of Harrisburg ("First Federal"), which was merged into Harris,
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 Agreement was assumed by Harris upon
its purchase of First Federal on April 19, 1996. The amount of funds involved in
the unauthorized external activities and violations of internal control policies
resulted in a non-operational loss of approximately $4,205,000 in the second
quarter of 1996. Harris 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. Harris 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, Harris took
possession of certain assets of the mortgage brokering company.
Pursuant to the internal review and independent external review, Harris has
determined that the non-operating loss has been mitigated by approximately
$2,500,000. Earnings for the third quarter of 1997 will reflect approximately
$1,500,000 of pretax income or $.13 per share because of this mitigation.
Harris continues to evaluate its options concerning legal recourse with respect
to all aspects of the findings of its review. The non-recurring loss from the
second quarter of 1996 will not have any adverse impact on ongoing operations.
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(6) Income Taxes
Income tax expense for the six month period ended June 30, 1997 and June 30,
1996 was as follows:
June 30,
-------------------------
1997 1996
------ ------
Federal:
Current $3,574 $ 810
Deferred 285 265
------ ------
3,859 1,075
State 860 142
------ ------
Income tax expense $4,719 $1,217
====== ======
(7) 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 with a presentation of basic EPS and
fully diluted 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. Diluted EPS is
computed similarly to fully diluted EPS under APB 15. Harris will adopt SFAS 128
as of December 31, 1997. Management does not expect SFAS 128 to have a material
effect on the balance sheet.
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 starting after December 15, 1997.
12
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(7) New Accounting Standards (Continued)
SFAS 130 establishes standards for reporting and displaying comprehensive income
and its components. The purpose of the statement is to report all changes in
equity that result from transactions and other economic events other than
transactions with owners. Comprehensive income is the total of net income and
all other nonowner changes in equity.
SFAS 131 introduces the "management approach" paradigm for segment reporting.
The management approach is based on the way that the chief operating decision
maker organizes segments within the company for making operating decisions and
assessing performance.
Management believes that the adoption of SFAS 130 and SFAS 131 will not
materially affect the Bank's financial condition or results of operations.
13
<PAGE>
Item 2 Management's Discussion 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 consolidated financial statements for
Harris Savings Bank. This discussion should be read in conjunction with
the 1996 Annual Report. Current performance does not guarantee, assure,
or may be indicative of similar performance in the future.
In addition to historical information, this FDIC Form F-4 Report contains
forward-looking statements. 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 Corporation undertakes no obligation to
publicly revise or update these forward-looking statements to reflect
events or circumstances that arise after the date hereof.
(a) Material Changes in Results of Operations
Net Income or Loss The net income for the current six month period was
$9,774,000, representing an increase of $7,877,000, or 415.2% from the
$1,897,000 reported during the first six months of 1996. The net income
for the current quarter was $5,065,000, which was $4,879,000, or
2,623.1%, above the $186,000 earned for the comparable period of 1996.
Net Interest Income Net interest income, on a tax equivalent basis,
totaled $13,140,000 for the quarter ended June 30, 1997, which represents
an increase of $2,081,000, or 18.8%, from the $11,059,000 of net interest
income recorded in the quarter ended June 30, 1996. This increase
reflected a favorable volume variance of $7,468,000 due to a $447.5
million increase in total average earning assets to $1.866 billion during
the quarter ended June 30, 1997 as compared to $1.418 billion recorded
during the quarter ended June 30, 1996. Also reflected was a net
favorable rate variance of $1,040,000. However, the current reliance on
more expensive external borrowing, due to leveraging operations,
generated a decrease in the net interest margin of 30 basis points to
2.82% in the quarter ended June 30, 1997 as competed to 3.12% recorded in
the quarter ended June 30, 1996.
Net interest income, on a tax equivalent basis, totaled $25,376,000 for
the six month period ended June 30, 1997, which represents an increase of
$5,837,000 or 29.9%, from the $19,539,000 of net interest income recorded
in the six month period ended June 30, 1996. This increase reflected a
favorable volume variance of $16,384,000, due to a $471.3 million
increase in total average earning assets to $ 1.784 billion during the
six month period ended June 30, 1997 as compared to $ 1.313 billion
recorded during the comparable prior period. Also reflected is a
reduction in net interest margin of 14 basis points to 2.84% in the six
month period ended June 30, 1997, from the 2.98% recorded in the six
month period ended June 30, 1996.
Table I on the following pages presents the Bank's average asset and
liability balances, interest rates, interest income, and interest expense
for each of the six month periods and quarters ended June 30, 1997 and
June 30, 1996, respectively. Table 2 presents a rate-volume analysis of
changes in net interest income.
14
<PAGE>
TABLE I - Average Balance Sheets, Rate, and Interest Income and Expense Summary
(continued)
<TABLE>
<CAPTION>
For the quarters ended,
---------------------------------------------------------------------------------------
June 30, 1997 June 30, 1996
----------------------------------------- -----------------------------------------
Average (1) (4) Average Average (1) Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans, net $ 561,577 $11,737 8.36% $ 602,314 $12,562 8.34%
Commercial loans 75,512 1,461 7.74% 71,041 1,561 8.79%
Other loans, net 231,008 4,801 8.31% 186,958 4,010 8.58%
Marketable securities - Taxable 880,246 15,211 6.91% 495,389 7,712 6.23%
Marketable securities - Taxfree 101,103 2,006 7.94% 29,604 645 8.72%
Other interest-earning assets 16,293 334 8.20% 32,886 553 6.73%
---------- ------- ---------- -------
Total Interest earning assets 1,865,739 35,550 7.62% 1,418,192 27,043 7.63%
------- -------
Noninterest-earning assets 75,613 66,811
---------- ----------
Total assets $1,941,352 $1,485,003
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings deposits $ 146,538 $ 1,006 2.75% $149,376 $1,065 2.85%
Time deposits 793,058 11,002 5.55% 840,213 11,738 5.59%
NOW and money marker deposits 190,431 1,595 3.35% 187,272 1,519 3.24%
Escrow and stock subscriptions 8,821 36 1.61% 10,294 39 1.52%
Borrowed funds 596,310 8,771 5.88% 116,720 1,623 5.56%
---------- ------- ---------- -------
Total interest-bearing liabilities 1,735,158 22,410 5.17% 1,303,875 15,984 4.90%
Noninterest-bearing liabilities 47,875 29,764
---------- ----------
Total liabilities 1,783,033 1,333,639
Stockholders' equity 158,319 151,364
---------- ----------
Total liabilities and stockholder $1,941,352 $1,485,003
========== ==========
Net interest income before provision
for loan losses $13,140 $11,059
======= =======
Interest rate spread (2) 2.45% 2.73%
Net interest-earning assets $ 130,581 $ 114,317
========== ==========
Net interest margin (3) 2.82% 3.12%
Ratio of interest-earning assets to
interest-bearing liabilities 1.08 x 1.09 x
========== ==========
</TABLE>
(1) Includes income recognized on deferred loan fees of $242,000 and $456,000
for the comparable 1997 and 1996 periods, respectively.
(2) Represents the difference between the average yield on interest-earning
assets and the average cost on interest-bearing liabilities.
(3) Represents the annualized net interest income before provision for loan
losses divided by average interest-earning assets.
(4) Interest income and yields are shown on a tax-equivalent basis using an
effective tax rate of 35%.
15
<PAGE>
TABLE I - Average Balance Sheets, Rate, and Interest Income and Expense Summary
<TABLE>
<CAPTION>
For the six months ended,
---------------------------------------------------------------------------------------
June 30, 1997 June 30, 1996
----------------------------------------- -----------------------------------------
Average (1) (4) Average Average (1) Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans, net $ 555,275 $22,897 8.25% $ 535,402 $22,510 8.41%
Commercial loans 71,455 2,736 7.66% 63,149 2,616 8.29%
Other loans, net 230,816 9,576 8.30% 166,189 6,416 7.72%
Marketable securities - Taxable 811,354 27,759 6.84% 503,740 15,736 6.25%
Marketable securities - Taxfree 96,961 4,015 8.28% 18,472 789 8.54%
Other Interest-earning assets 18,512 724 7.82% 26,092 878 6.73%
---------- ------- ---------- -------
Total interest-earning assets 1,784,373 67,707 7.59% 1,313,044 48,945 7.46%
------- -------
Noninterest-earning assets 74,934 55,616
---------- ----------
Total assets $1,859,307 $1,368,660
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings deposits $ 147,073 $ 2,004 2.73% $ 144,309 $ 2,101 2.91%
Time deposits 799,054 22,042 5.52% 801,351 22,473 5.61%
NOW and money marker deposit 189,665 3,152 3.32% 170,698 2,857 3.35%
Escrow 8,683 69 1.59% 8,013 71 1.77%
Borrowed funds 515,222 15,064 5.85% 68,482 1,904 5.56%
---------- ------- ---------- -------
Total interest-bearing liabilities 1,659,697 42,331 5.10% 1,192,853 29,406 4.93%
Noninterest-bearing liabilities 43,411 24,317
---------- ----------
Total liabilities 1,703,108 1,217,170
Stockholders' equity 156,199 151,490
--------- ----------
Total liabilities and stockholders $1,859,307 $1,368,660
========== ==========
Net interest income before provision
for loan losses $25,376 $19,539
======= =======
Interest rate spread (2) 2.49% 2.53%
Net interest-earning assets $ 124,676 $ 120,191
========== ==========
Net interest margin (3) 2.84% 2.98%
Ratio of interest-earning assets to
interest-bearing liabilities 1.08 x 1.10 x
========== ==========
</TABLE>
(1) Includes income recognized on deferred loan fees of $494,000 and $826,000
for the comparable 1997 and 1996 periods, respectively.
(2) Represents the difference between the average yield on interest-earning
assets and the average cost on interest-bearing liabilities.
(3) Represents the annualized net interest income before provision for loan
losses divided by average interest-earning assets.
(4) Interest income and yields are shown on a tax-equivalent basis using an
effective tax rate of 35%.
16
<PAGE>
TABLE 2 - Rate/Volume Analysis of Changes in Tax-Equivalent Net Interest Income
<TABLE>
<CAPTION>
Quarter Ended June 30, 1997 Six Months Ended June 30, 1997
Compared to Compared to
Quarter Ended June 30, 1996 Six Months Ended June 30, 1996
Increase (Decrease) Increase (Decrease)
--------------------------------- ------------------------------------
Volume Rate Net Volume Rate Net
------ ------ ------ ------- ------ -------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans, net $ (849) $ 25 $ (825) $ 836 $ (449) $ 387
Commercial loans 98 (198) (100) 345 (225) 120
Other loans, net 945 (154) 791 2,495 666 3,160
Marketable securities - Taxable 5,994 1,505 7,499 9,613 2,410 12,023
Marketable securities - Taxfree 1,559 (198) 1,361 3,352 (125) 3,226
Other interest-earning assets (279) 60 (219) (255) 101 (154)
------ ------ ------ ------- ------ -------
Total interest-earning assets 7,468 1,040 8,507 16,384 2,378 18,762
Interest-bearing liabilities:
Savings deposits (20) (39) (59) 40 (137) (97)
Time deposits (659) (77) (736) (65) (367) (431)
NOW and money market deposits 26 51 76 318 (23) 295
Escrow and stock subscriptions (6) 2 (3) 6 (8) (2)
Borrowed funds 6,666 482 7,148 12,420 741 13,160
Total interest-bearing liabilities 6,007 419 6 426 12,719 207 12,925
------ ------ ------ ------- ------ -------
Net change in net interest income $1,461 $ 621 $2,082 $ 3,666 $2,172 $ 5,837
====== ====== ====== ======= ====== =======
</TABLE>
Note: Changes in interest income and interest expense arising from the
combination of rate and volume variances are allocated entirely as rate
variances.
17
Provision for Loan Losses There was a $153,000 provision for loan losses
recorded in the quarter ended June 30, 1997, due to actual and
anticipated loan growth, versus a $210,000 provision for loan losses
recorded in the quarter ended June 30, 1996.
There was a $305,000 provision for loan losses recorded in the six months
ended June 30, 1997, due to actual and anticipated loan growth, versus
$420,000 recorded in the six months ended June 30, 1996.
Noninterest Income Noninterest income totaled $3,443,000 for the quarter
ended June 30, 1997. This represents an increase of $1,625,000, or 89.4%,
from the $1,818,000 recorded in the quarter ended June 30, 1996. This
increase can be attributed to two reasons. The primary reason was a
$902,000 gain associated with the sale of mortgage backed securities in
the quarter ending June 30, 1997. Secondly, the sale of mortgage loans
netted $365,000 during the same period.
Noninterest income totaled $6,718,000 for the six month period ended June
30, 1997, which represents an increase of $4,652,000, or 225.2%, from the
$2,066,000 recorded in the six month period ended June 30, 1996. This
increase can be attributed primarily to following factors. First, net
loan servicing income (net of amortization), increased $839,000, or
339.7%, to $1,086,000 for the six month period ended June 30, 1997,
primarily due to an increase in the loan servicing portfolio of $600.0
million from January 1, 1996 to June 30, 1997. In addition, the six month
period ended June 30, 1997 total of $2,734,000 for gains on the sale of
mortgage backed securities registered an increase of $1,807,000 or 194.9%
over the comparable 1996 period value of $927,000. The final contributor
to the year to date 1997 increases were gains on the sales of other
securities totaling $459,000, and gains on the sale of loans of $805,000
for the six month period ending June 30, 1997 versus the $0 recorded for
both income categories during the six month period ending June 30, 1996.
Noninterest Expense Noninterest expense equaled $8,234,000 for the
quarter ended June 30, 1997, which represents a decrease of $3,856,000,
or 31.9%, from the $12,090,000 recorded in the quarter ended June 30,
1996. There are two significant factors that produced this performance.
First, the $4,205,000 mortgage warehouse fraud associated with the First
Harrisburg Bancor, Inc. merger which was recognized in the quarter ending
June 30, 1996. Secondly, FDIC premium insurance generated a $503,000
decrease for the quarter ending June 30, 1997. This constitutes a 72.6%
decline from the comparable quarter ending June 30, 1996. This trend for
the quarter ended June 30, 1997 reflects the impact of reduced FDIC
premiums on the Bank which were realized in first and second quarters of
1997.
Noninterest expense totaled $15,891,000 for the six month period ending
June 30, 1997. This represents a $1,904,000, or 10.7% decrease from the
$17,795,000 figure recorded in the six month period ending June 30, 1996.
The major contributor to the decline was the recognition of a
nonoperational loss of $4,205,000 associated with a mortgage warehouse
fraud which was reported in the second quarter of 1996. Another factor
contributing to the decline in noninterest expense was a $924,000 or
70.8% decline in FDIC insurance premium costs resulting from the Deposit
Insurance Funds Act of 1996.
Offsetting these decreases were the following increases which are
primarily attributable to the acquisition of First Harrisburg Bancor,
Inc.:
(1) A $1,427,000 or 21.3% increase in Salaries and Benefits to $8,132,000 for
the six months ended June 30, 1997 vs. the $6,705,000 for the six months
ended June 30, 1996.
(2) A $297,000 or 48.4% increase in Equipment Expense to $911,000 for the six
months ended June 30, 1997 compared to $614,000 for the six months ended
June 30, 1996.
(3) A $331,000 or 29.6% increase in Occupancy Expense to $1,451,000 for the
six months ended June 30, 1997 compared to $1,120,000 for the comparable
period in 1996.
(4) A $290,000 or 32.3% increase in Amortization of Intangibles to $1,187,000
for the six months ended June 30, 1997 compared to $897,000 for the six
months ended June 30, 1996.
18
<PAGE>
The final significant increase is a $503,000 or 107.3% increase in
Advertising and Public relations from the June 30, 1997 six month period
balance of $972,000 versus the $469,000 balance for the comparable period
in 1996. This dollar change represents the additional costs of a
marketing campaign designed to increase the bank's market share
penetration of transaction accounts.
Provision for Income Taxes Corporate income tax expense totaled
$2,429,000 for the quarter ended June 30, 1991, which resulted in an
effective tax rate of 32.4% on a pretax income of $7,494,000. This
represents an increase of $2,264,000 from the $165,000 of corporate
income tax expense recorded during the quarter ended June 30, 1996, which
resulted in an effective tax rate of 47.0% for that period on pretax
income of $351,000. The ensuing decrease in the statutory tax rate is
primarily attributable to an increase in tax exempt securities.
Corporate income tax expense totaled $4,719,000 for the six month period
ended June 30, 1997, which resulted in an effective tax rate of 32.6% on
a pretax income of $14,493,000. This represents an increase of $3,502,000
from the $1,217,000 of corporate tax expense recorded during the six
month period ended June 30, 1996, which resulted in an effective tax rate
of 39.1% for that period on pretax income of $3,114,000. The 6.5%
reduction in the effective tax rate is primarily attributable to the
purchase of $69.1 million in tax exempt securities for the 12 month
period ending June 30, 1997.
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 decreased $8.7
million during the six month period ended June 30, 1997. For the
comparable period ending June 30, 1996, cash and cash equivalents
decreased by $8.5 million. Operating activities generated cash totaling
$10.5 million and $6.5 million during the six month periods ended June
30, 1997 and June 30, 1996, respectively. During the six month period
ending June 1997, investing activities of the Bank resulted in a net use
of cash of $282.4 million, due mainly to $591.5 million in purchases of
marketable securities which was partially offset by marketable security
sales totaling $340.0 million. During the six month period ending June
30, 1996, purchases for the bank's portfolio of marketable securities
used cash of $159.6 million, and loan purchases generated a net cash use
of $186.5 million. The bank's financing activities for the six month
period ending June 30, 1997, resulted in a net sources of cash totaling
$263.2 million which is primarily attributable to borrowing increases of
$272.7 million. During the six month period ended June 30, 1996,
increases in deposits and other borrowings provided cash of $153.6
million and $126.0 million, respectively.
Stockholders' Equity Stockholders' equity totaled $163.8 million, $152.8
million, and $149.4 million at June 30, 1997, December 31, 1996, and June
30, 1996, respectively. Stockholders' Equity amounted to 8.0% on total
assets of $2.044 billion as of June 30, 1997, compared to 8.6% on total
assets of $1.768 billion at December 31, 1996, and 9.7% on total assets
of $1.542 billion at June 30, 1996.
The increase in Stockholders' equity of $11.0 million or 7.2% in the six
months ended June 30, 1997 resulted mainly from the increase of $9.8
million in net income, and $1.2 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 $14.4 million or 9.6% in the
twelve month period ended June 30, 1997 primarily included net additions
of $8.9 million from net income, and a net increase of $5.6 million in
the market value, net of tax effect, of the available-for-sale securities
portfolio.
The Bank's leverage capital ratio, calculated using FDIC capital
definitions, totaled 6.8%, 7.3% and 8.3% at June 30, 1997, December
31, 1996, and June 30, 1996, respectively. The Bank's risk-
19
<PAGE>
based capital ratio, calculated using FDIC capital definitions, totaled
13.7%, 14.7%, and 14.3% at June 30, 1997, December 31, 1996, and June 30,
1996, respectively. As of these dates, the Bank's capital ratios exceeded
all regulatory minimum capital requirements.
Marketable Securities Marketable securities, excluding cash, totaled
$1,067.3 million, $828.9 million, and $510.2 million at June 30, 1997,
December 31, 1996, and June 30, 1996, respectively. Total marketable
securities increased $238.4 million, or 28.8% during the first six months
of 1997. Total marketable securities increased $557.1 million, or 109.2%,
in the twelve month period ended June 30, 1997.
During the six month period ending June 30, 1997, total mortgage backed
securities increased $196.4 million or 60.2%, municipal bonds increased
$12.9 million or 14.3%, and equity securities increased $36.9 million or
45.1%. For the 12 month period ending June 30, 1997 mortgage backed
securities increased $261.2 million or 99.9%, municipal securities
increased $69.1 million or 205.1%, while equity securities increased
$75.7 million or 175.8%.
Table 3 on the following page presents the composition of the Bank's
marketable securities portfolio as of June 30, 1997, December 31, 1996,
and June 30, 1996, respectively.
(Balance of this page left intentionally blank.)
20
<PAGE>
TABLE 3 - Composition of Marketable Securities Portfolios
The following table sets forth certain information regarding the amortized cost
and fair values of the Bank's marketable securities portfolio at June 30, 1997,
December 31, 1996, and June 30, 1996:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996 June 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 $ 67,476 $ 67,474 $ 72,513 $ 72,783 $ 72,546 $ 71,959
FHLB Certificates of Deposit 0 0
Mortgage-backed securities:
FNMA PC's 4,447 4,540 4,780 4,901 5,191 5,299
FNMA CMO's 0 0 0 0 1,085 1,080
FHLMC CMO's 0 0 0 0 4,789 4,778
Private issue CMO's 29,146 29,286 32,124 32,228 34,692 34,564
---------- ---------- -------- -------- -------- --------
Total mortgage-backed securities 33,593 33,826 36,904 37,129 45,757 45,721
---------- ---------- -------- -------- -------- --------
Total securities held-to-maturity $ 101,069 $ 101,300 $109,417 $109,912 $118,303 $117,680
---------- ---------- -------- -------- -------- --------
Available-for-sale:
U.S. Government and agencies $ 143,424 $ 142,400 $143,370 $142,721 $ 5,533 $ 5,498
Corporate bonds 17,000 16,703 17,000 16,660 2,006 2,006
SBA's 0 0 31,522 31,705 34,959 35,412
Municipal obligations 102,729 104,758 89,840 90,155 33,676 31,446
FHLB stock 28,325 28,325 20,972 20,972 9,329 9,329
Other equities 118,818 124,485 81,915 86,836 43,077 45,496
Asset Backed Securities 25,287 25,430 2,756 2,758 3,000 3,020
Mortgage-backed securities:
FNMA PC's 0 0 10,040 10,077 11,020 10,978
FHLMC PC's 3,233 3,371 70,942 71,858 117,133 116,318
GNMA PC's 0 0 1,565 1,593 1,649 1,672
Private issue PC's 0 0 36,598 36,749 44,083 43,944
FNMA CMO's 97,707 97,839 62,597 62,698 59,164 58,559
FHLMC CMO's 306,138 307,002 122,851 122,866 28,490 28,219
Private issue CMO's 115,684 115,921 21,732 21,845 0 0
---------- ---------- -------- -------- -------- --------
Total mortgage-backed securities 522,762 524,133 326,325 327,686 261,539 259,690
---------- ---------- -------- -------- -------- --------
Total securities available-for-sale $ 958,345 $ 966,234 $713,700 $719,493 $393,119 $391,897
---------- ---------- -------- -------- -------- --------
Other interest-earning Securities:
FHLB daily investment $ 965 $ 965 $ 5,265 $ 5,265 $ 17,011 $ 17,011
---------- ---------- -------- -------- -------- --------
Total marketable Securities and
interest bearing investments $1,060,379 $1,068,499 $828,382 $834,670 $528,433 $526,588
---------- ---------- -------- -------- -------- --------
</TABLE>
21
<PAGE>
Loans Net loans, including loans held for sale, totaled $879.9 million,
$833.0 million, and $932.4 million at June 30, 1997, December 31, 1996,
and June 30, 1996, respectively. The increase of $46.9 million, or 5.6%,
for the six months ended June 30, 1997, deflects a moderate level of loan
growth. The decrease of $52.5 million, or minus 5.6%, for twelve month
period ended June 30, 1997, resulted from a relatively flat local market
and the bank's emphasis on investment purchases.
Table 4 on the following page presents an analysis of the Bank's loan
portfolio as of June 30, 1997, December 31, 1996, and June 30, 1996,
respectively.
(Balance of this page left intentionally blank.)
22
<PAGE>
<TABLE>
<CAPTION>
TABLE 4 - Loan Composition
June 30, 1997 December 31, 1996 June 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) $546,319 61.93% $523,642 62.71% $651,979 69.26%
Other residential real estate (multi-family) 17,304 1.96 19,186 2.30 24,640 2.62
Construction (2) 21,292 2.41 25,647 3,07 21,646 2.30
Other 8,924 1.01 8,319 1.00 7,550 0.80
-------- ------ -------- ------ -------- ------
Total mortgage loans $593,839 67.32% $576,794 69.07% $705,815 74.98
-------- ------ -------- ------ -------- ------
Commercial loans 60,426 6.85 33,058 3.96 24,150 2.57
Consumer and other loans:
Automobile 581 0.07 340 0.04 37 0.00
Mobile home 68,014 7.71 65,794 7.88 48,983 5.20
Home equity and second mortgage 154,431 17.51 153,464 18.38 155,110 16.48
Credit cards 21 0.00 4 0.00 2,845 0.30
Other 4,845 0.55 5,582 0.67 4,379 0.47
-------- ------ -------- ------ -------- ------
Total consumer and other loans 227,892 25.83 225,184 26.97 211,354 22.45
-------- ------ -------- ------ -------- ------
Loans receivable, gross 882,157 100.00% 835,036 100.00% 941,319 100.00%
-------- ------ -------- ------ -------- ------
Plus:
Dealer reserves 14,320 13,880 8,062
Less:
Unearned discounts (251) (327) 1,526
Net deferred loan origination fees 8,281 7,952 8,141
Allowance for loan losses 8,583 8,322 7,353
-------- -------- --------
16,613 15,947 17,020
-------- -------- --------
Loans receivable, net 879,864 832,969 932 361
======== ======== ========
Mortgage Loans
ARM 113,634 20.80% 109,389 20.89% 128,635 19.73%
Fixed Rate 432,685 79.20 414,253 79.11 523,344 80.27
-------- ------ -------- ------ -------- ------
Total Mortgage Loans 546,319 100.00% 523,642 100.00% 651,979 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
(1) Includes net loans held for sale of $10,206, $9,053, and $34,386 at June 30,
1997, December 31, 1996 and June 30, 1996.
(2) Net of undisbursed portion of $32,788, $27,401, and $39,649 at June 30,
1997, December 31, 1996 and June 30, 1996, respectively.
23
<PAGE>
Purchased Mortgage Servicing Rights As of June 30, 1997, December 31, 1996, and
June 30, 1996 the Bank held mortgage loan servicing rights with carrying values
totaling $12.1 million, $12.3 million, and $11.0 million, respectively. The
unpaid principal balances of loans serviced for others totaled $1.048 billion,
$1.064 billion, and $769 million at June 30, 1997, December 31, 1996, and June
30, 1996, respectively. The Bank recorded amortization expense on mortgage loan
servicing rights totaling $715,000 during the six months ended June 30, 1997.
The Bank recorded amortization expense on mortgage loan servicing rights of
$903,000, which included an impairment valuation allowance of $241,000 in the
first six months of 1996.
At June 30, 1997, the total amount of capitalized mortgage servicing rights
(including mortgage servicing rights purchased) was $12,207,000 before the
valuation allowance. The valuation allowance for impairment related to such
rights was $126,000 at June 30,1997. The fair value of such rights was
approximately $16,139,000 at June 30, 1997.
Asset Quality The Bank's asset quality remains sound. Loan charge-offs, net of
recoveries, totaled $44,000 for the six month period ended June 30, 1997,
compared to $255,000 for the six month period ended June 30, 1996. Loan
charge-offs, net of recoveries, totaled $612,000 for the twelve month period
ended June 30, 1997. Based on management's continuing review of the loan
portfolio, the Bank recorded provision for loan losses of $305,000 for the six
month, and $ 1,842,000 for the 12 month periods ending June 30, 1996.
The allowance for loan losses totaled $8,583,000, $8,322,000, and $7,353,000 at
June 30, 1997, December 31, 1996, and June 30, 1996, respectively. Stated as a
percentage of total loans receivable, the allowance for loan losses amounted to
.98%, 1.00%, and .79% at June 30, 1997, December 31, 1996, and June 30, 1996,
respectively.
Deposits Deposits, not including escrow, totaled $1.163 billion $1.173 billion,
and $1.227 billion at June 30, 1997, December 31, 1996, and June 30, 1996,
respectively. Total deposits declined by $10.0 million, or .9%, during the six
months ended June 30, 1997. In addition, total deposits declined by $64.7
million or 5.3% during the twelve months ending June 30, 1997. Both the six
month and twelve month declines reflect the Bank's strategy of leveraging an
existing surplus capital base and paying comparable market rates on the
remaining deposit base.
Table 5 on the following page presents the composition of the Bank's deposit
portfolio as of June 30, 1997, December 31, 1996, and June 30, 1996,
respectively.
24
<PAGE>
TABLE 5 - Deposit Composition
<TABLE>
<CAPTION>
At June 30, 1997 At December 31, 1996 At June 30, 1996
-------------------------- --------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
---------- -------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Demand and NOW accounts $ 93,167 8.01 $ 84,715 7.22 $ 79,465 6.47
Money market 129,157 11.11 129,096 11.00 128,949 10.51
Savings 149,434 12.85 150,019 12.78 153,087 12.47
Time deposits 790,800 68.02 809,593 68.99 865,760 70.54
---------- ------ ---------- ------ ---------- ------
Total deposits $1,162,558 100.00 $1,173,423 100.00 $1,227,261 100.00
========== ====== ========== ====== ========== ======
</TABLE>
(Balance of this page left intentionally blank.)
25
<PAGE>
Other Borrowings During the three and six month periods ended June 30,1997, the
Bank actively engaged in leveraging activities to utilize its excess capital.
Other borrowings totaled $693.3 million, $420.6 million, and $145.2 million at
June 30, 1997, December 31, 1996, and June 30, 1996, respectively. These
borrowings increased $272.7 million, or 64.8%, during the six months ended June
30, 1997, and increased $548.1 million, or 377.5%, during the twelve month
period ended June 30, 1997. The increases were due to the increase in FHLB
advances to $531.3 million, which represents an increase of $112.2 million, or
26.8%, and $407.2 million, or 328.2%, during the six months and twelve months
ended June 30, 1997, respectively, and repurchase agreements, which amounted to
$161.0 million at June 30, 1997, versus $0 at December 31, 1996, and $19.6
million on June 30, 1996.
Table 6 on the following page presents the composition of the Bank's other
borrowings as of June 30, 1997, December 31, 1996, and June 30, 1996,
respectively.
(Balance of this page left blank intentionally.)
26
<PAGE>
TABLE 6 - Other Borrowings
<TABLE>
<CAPTION>
At June 30, 1997 At December 31, 1996 At June 30, 1996
-------------------------- --------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
---------- -------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
FHLB advances $531,308 76.63 $419,146 99.65 $124,082 85.46
Repurchase Agreements 161,000 23.22 0 0.00 19,618 13.51
ESOP loan 990 0.14 1,485 0.35 1,485 1.02
-------- ------ -------- ------ -------- ------
Total other borrowings $693,298 100.00 $420,631 100.00 $145,185 100.00
======== ====== ======== ====== ======== ======
</TABLE>
(Balance of this page left intentionally blank.)
27
<PAGE>
Liquidity The Bank'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 Bank anticipates that it will have sufficient funds available
to meet its current commitments.
The Bank exceeded all regulatory standards for liquidity at June 30, 1997,
December 31, 1996, and June 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. At this time, the Bank is still
waiting for final approval from the Pennsylvania Department of Banking and the
Federal Reserve. It is expected that this approval and the subsequent formation
of the holding company will be a third quarter 1997 event.
28
<PAGE>
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the
bank has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Harris Savings Bank
- --------------------------------------------------------------------------------
(Name of bank)
Date 7-29-97 /s/ William J. McLaughlin (Signature)
- --------------------------------------------------------------------------------
William McLaughlin, President and Chief Executive Officer
- --------------------------------------------------------------------------------
Print name and title of signing officer under his signature.
Date 7/29/97 /s/ James L. Durrell
- --------------------------------------------------------------------------------
(Signature)
James L. Durrell, Executive Vice President and Chief Financial Officer
- --------------------------------------------------------------------------------
Print name and title of signing officer under his signature.
29
<PAGE>
Federal Deposit Insurance Corporation Form F-4
September 30, 1996
Exhibit 1 Statement Regarding the Computation of Earnings Per Share
Exhibit 1 appears on the next page of this report
(Balance of this page left intentionally blank.)
30
<PAGE>
Federal Deposit Insurance Corporation
Form F-4
Exhibit 1
Statement regarding computation of Earnings Per Share
<TABLE>
<CAPTION>
For the six month period ended For the quarter ended
June 30, 1997 June 30,
------------------------------ ---------------------
1997 1996 1997 1996
---------- --------- --------- -------
<S> <C> <C> <C> <C>
Weighted average shares outstanding:
Common stock 11,039,198 10,981,748 11,041,648 10,983,498
----------- ----------- ----------- -----------
Common stock equivalents:
Stock options 77,874 68,613 77,781 62,629
Stock awards 7,380 38,121 7,118 35,276
ESOP shares 12,375 6,188 18,563 6,188
----------- ----------- ----------- -----------
Total common stock equivalents: 97,629 112,922 103,462 104,093
----------- ----------- ----------- -----------
Total weighted average shares outstanding 11,136,827 11,094,670 11,145,110 11,087,591
=========== =========== =========== ===========
Net income $9,774,000 $1,897,000 $5,065,000 $186,000
=========== =========== =========== ===========
Net income per share $0.88 $0.17 $0.45 $0.02
=========== =========== =========== ===========
</TABLE>
31
