Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 1998
-------------
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to_______________
Commission File Number: 0-22399
-------
HARRIS FINANCIAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2889833
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
235 North Second Street PO Box 1711, Harrisburg, Pennsylvania 17105
- ------------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
717-236-4041
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
Indicate the number of shares outstanding of each of the Bank's classes
of common stock, as of the latest practicable date 33,964,950 shares of stock,
par value of $.01 per share, outstanding at July 31, 1998.
<PAGE>
Part I. Financial Information.
Part 1, Item 1 Financial Statements.
(Balance of this page is left intentionally blank.)
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Assets
- ------
Cash and cash equivalents $ 43,334 $ 24,466
Marketable securities held to maturity (Note 2) -- 96,412
Marketable securities available for sale (Note 2) 1,262,180 1,102,782
Loans receivable, net 921,765 890,484
Loans held for sale, net 20,395 14,886
Loan servicing rights (Note 3) 13,370 11,830
Real estate investments 7,602 6,698
Premises and equipment, net of accumulated
depreciation of $16,070 and $15,393 19,652 18,722
Accrued interest receivable 16,627 13,538
Income taxes receivable -- 5,757
Intangible assets 18,164 19,396
Other assets 2,513 2,088
----------- -----------
Total assets $ 2,325,602 $ 2,207,059
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits $ 1,126,150 $ 1,146,238
Escrow 14,913 8,552
Accrued interest payable 6,619 4,297
Postretirement benefit obligation 2,822 2,297
Other borrowings (Note 4) 961,288 853,978
Deferred tax liability 6,594 8,279
Income taxes payable 1,254 --
Other liabilities 17,134 4,384
----------- -----------
Total liabilities 2,136,774 2,028,025
----------- -----------
Common stock, $.01 par value, authorized 100,000,000
shares 33,964,950 shares issued and outstanding at
June 30, 1998, 33,790,400 shares issued and
outstanding at December 31, 1997
(Notes 8 and 9) 340 338
Paid in capital 29,378 28,016
Retained earnings 150,369 141,043
Net unrealized gain on marketable securities 9,693 10,732
Employee stock ownership plan (446) (529)
Recognition and retention plans (506) (566)
----------- -----------
Total stockholders' equity 188,828 179,034
----------- -----------
Total liabilities and stockholders' equity $ 2,325,602 $ 2,207,059
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
All 1997 share data and per share data have been restated to give effect to the
3 for 1 stock split on November 18, 1997.
1
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------ --------------------------
Interest Income: 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Loans receivable:
First mortgage loans $ 24,385 $ 22,881 $ 12,045 $ 11,721
Commercial 4,803 2,736 2,604 1,461
Consumer and other loans 9,768 9,576 5,061 4,801
Taxable investments 14,579 10,022 7,144 5,286
Taxfree investments 3,062 2,720 1,528 1,414
Dividends 4,551 3,595 2,306 2,077
Mortgage backed securities 19,318 14,642 9,390 8,024
Money market securities 43 130 24 64
-------- -------- -------- --------
Total interest income 80,509 66,302 40,102 34,848
-------- -------- -------- --------
Interest Expense:
Deposits 25,602 27,198 12,622 13,603
Borrowed funds (Note 4) 26,714 15,064 13,402 8,771
Escrow 35 69 18 36
-------- -------- -------- --------
Total interest expense 52,351 42,331 26,042 22,410
-------- -------- -------- --------
Net interest income 28,158 23,971 14,060 12,438
Provision for loan losses 1,400 305 570 153
-------- -------- -------- --------
Net int. inc. after provision for loan losses 26,758 23,666 13,490 12,285
-------- -------- -------- --------
Non-interest Income:
Service charges on deposits 1,236 726 767 402
ATM fees 737 266 270 149
Other svc. charges/commissions/fees 342 411 163 200
Net servicing income 180 1,086 234 528
Gain on sale of securities, net (Note 2) 2,970 3,193 586 1,738
Gain on sale of loans, net 2,068 805 994 365
Other 447 231 38 61
-------- -------- -------- --------
Total non-interest income 7,980 6,718 3,052 3,443
-------- -------- -------- --------
Non-interest Expense:
Salaries and benefits 10,696 8,132 5,361 4,058
Equipment expense 1,493 911 814 482
Occupancy expense 1,443 1,451 714 699
Advertising and public relations 1,077 972 585 533
FDIC insurance 357 381 178 190
Director fees 155 141 79 65
Income from real estate operations (368) (333) (207) (237)
Amortization of intangibles 1,233 1,187 628 600
Other 4,136 3,049 2,247 1,844
-------- -------- -------- --------
Total non-interest expense 20,222 15,891 10,399 8,234
-------- -------- -------- --------
Income before income taxes 14,516 14,493 6,143 7,494
Income tax expense 4,292 4,719 1,668 2,429
-------- -------- -------- --------
Net Income $ 10,224 $ 9,774 $ 4,475 $ 5,065
======== ======== ======== ========
Basic earnings per share (Note 8) $ 0.30 $ 0.29 $ 0.13 $ 0.15
======== ======== ======== ========
Diluted earnings per share (Note 8) $ 0.30 $ 0.29 $ 0.13 $ 0.15
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
All share and per share data have been restated to give effect for a 3 for 1
stock split on November 18, 1997.
2
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Net Employee
Unrealized Stock
Common Paid in Retained Gain/(Loss) Ownership
Stock Capital Earnings on Securities Plan
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 336 $ 25,678 $ 124,812 $ 3,615 $ (1,024)
Net income 17,771
Dividends paid at $.20 per share (1,540)
Exercised stock options 2 480
Change in unrealized gain (loss) on marketable
securities, net of tax effect of $4,658 7,117
ESOP stock committed for release 495
Earned portion of RRP plan
Excess of fair value above cost of ESOP stock
committed for release 1,139
Excess of fair value above cost of earned portion
of RRP stock 492
Tax benefit of RRP shares awarded and options
exercised 227
------------------------------------------------------------------
Balance at December 31, 1997 $ 338 $ 28,016 $ 141,043 $ 10,732 $ (529)
Net income 10,224
Dividends paid at $.055 per share (898)
Exercised stock options 2 631
Change in unrealized gain on available-for-sale
securities, net of tax effect of ($716) (1,039)
ESOP stock committed for release 83
Earned portion of RRP plan
Excess of fair value above cost of ESOP stock
committed for release 453
Excess of fair value above cost of earned portion
of RRP stock 278
------------------------------------------------------------------
Balance at June 30, 1998 $ 340 $ 29,378 $ 150,369 $ 9,693 $ (446)
==================================================================
<CAPTION>
Recognition
And
Retention
Plan Total
--------------------------
<S> <C> <C>
Balance at January 1, 1997 $ (665) $ 152,752
Net income 17,771
Dividends paid at $.20 per share (1,540)
Exercised stock options 482
Change in unrealized gain (loss) on marketable
securities, net of tax effect of $4,658 7,117
ESOP stock committed for release 495
Earned portion of RRP plan 99 99
Excess of fair value above cost of ESOP stock
committed for release 1,139
Excess of fair value above cost of earned portion
of RRP stock 492
Tax benefit of RRP shares awarded and options
exercised 227
-------------------------
Balance at December 31, 1997 $ (566) $ 179,034
Net income 10,224
Dividends paid at $.055 per share (898)
Exercised stock options 633
Change in unrealized gain on available-for-sale
securities, net of tax effect of ($716) (1,039)
ESOP stock committed for release 83
Earned portion of RRP plan 60 60
Excess of fair value above cost of ESOP stock
committed for release 453
Excess of fair value above cost of earned portion
of RRP stock 278
-------------------------
Balance at June 30, 1998 $ (506) $ 188,828
=========================
</TABLE>
See accompanying notes to consolidated financial statements.
All share and per share data have been restated to give effect for the 3 for 1
stock split on November 18, 1997.
3
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 10,224 $ 9,774
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 1,400 305
Net depreciation, amortization, and accretion 3,839 1,528
(Increase) in loans held for sale (4,008) (418)
Net gain on sales of interest earning assets (5,038) (3,998)
Gain on sale of foreclosed real estate (49) (40)
Equity (income)/losses from joint ventures (21) 44
Increase in accrued interest receivable (3,089) (2,241)
Increase in accrued interest payable 2,322 599
Amortization of intangibles 1,232 1,187
Earned ESOP shares 536 508
Earned RRP shares 338 106
Deferred income taxes (968) 285
Change in income taxes receivable/payable 7,011 3,657
Other, net (107) (804)
--------- ---------
Net cash provided by operating activities 13,622 10,492
--------- ---------
Cash flows from investing activities:
Proceeds from maturities and principal reductions of marketable securities:
Held to maturity 1,032 8,316
Available-for-sale 209,567 9,988
Proceeds from sales of marketable securities available for sale 376,052 340,010
Purchase of marketable securities available for sale (634,943) (591,491)
Loans sold 72,759 21,029
Net increase in loan originations less principal payments on
loans (108,465) (67,272)
Purchase of loan servicing rights (2,564) (469)
Investment in real estate held for investment (210) (25)
Proceeds from payments on real estate held for investment 40 130
Purchases of premises and equipment (2,027) (3,221)
Cash proceeds received from the sale of foreclosed real
estate 687 623
--------- ---------
Net cash used in investing activities $ (88,072) $(282,382)
--------- ---------
</TABLE>
See accompanying notes to the consolidated financial statements.
(Continued)
4
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net decrease in deposits $ (20,088) $ (10,865)
Net increase in other borrowings 107,310 272,667
Net increase in escrow 6,361 2,059
Cash dividends (898) (736)
Proceeds from the exercise of stock options 633 67
--------- ---------
Net cash provided by financing operations 93,318 263,192
--------- ---------
Net increase (decrease) in cash and cash equivalents 18,868 (8,698)
Cash and cash equivalents at beginning of period 24,466 29,693
--------- ---------
Cash and cash equivalents at end of period $ 43,334 $ 20,995
========= =========
Supplemental disclosures:
Cash paid during the years for:
Interest on deposits, advances and other borrowings
(includes interest credited to deposit accounts) $ 47,642 $ 37,323
Income taxes 1,340 2,532
Cash received during the years for:
Income tax refunds $ 3,089 $ --
Non-cash investing activities:
Transfer from loans to foreclosed real estate $ 1,027 $ 85
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(Unaudited)
(1) Accounting Policies
The Consolidated Financial Statements include the accounts of Harris
Financial, Inc. (the "Registrant" or "HFI") and its wholly-owned subsidiary
Harris Savings Bank (the "Bank"). In turn, the Bank is comprised of the
following subsidiaries: Avstar Mortgage Corporation, Harris Delaware
Corporation, H. S. Service Corporation, First Harrisburg Service Corporation and
C.B.L. Service Corporation. All intercompany balances have been eliminated in
consolidation.
The accompanying interim financial statements have been prepared in
accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the results of interim periods
have been made. Operating results for the six month period ended June 30, 1998,
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998, or any other interim period.
The accounting policies followed in the presentation of interim
financial results are consistent with those followed on an annual basis. These
policies are presented on pages 36 through 38 of the 1997 Annual Report to
Stockholders.
(2) Marketable Securities
Marketable Securities consist of the following as of the date indicated:
<TABLE>
<CAPTION>
June 31, December 31, June 31,
1998 1997 1997
----------- -------------- -------------
<S> <C> <C> <C>
Held-to-maturity, at amortized cost (1) $ -- $ 96,412 $ 101,069
----------- -------------- -------------
Available-for-sale, at amortized cost 1,246,367 1,085,214 958,346
Available-for-sale, net unrealized gain 15,813 17,568 7,888
----------- -------------- -------------
Available-for-sale, at fair value 1,262,180 1,102,782 966,234
----------- -------------- -------------
Total marketable securities $ 1,262,180 $ 1,199,194 $ 1,067,303
=========== ============== =============
</TABLE>
(1) In January 1998, the remaining held-to-maturity portfolio with a book value
of $96.4 million was transferred to the available-for-sale segment of the
portfolio and $63.0 million of the amount transferred was subsequently sold for
a gain of $1.4 million. The market value of these securities at time of transfer
was $97.5 million. The sale of these securities was executed in order to improve
the Registrant's interest rate risk profile and to align the portfolio with the
Registrant's current investment strategies. Under generally accepted accounting
principles, the sale of these securities eliminated the Registrant's ability to
use the held-to-maturity classification of securities for a period of two years.
6
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(Unaudited)
(2) Marketable Securities (continued)
The amortized cost and fair value of marketable securities at June 30,
1998, 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>
Available-for-sale
Due in one year or less (1) $ 152,438 $ 152,318
Due after one year through five years 221,707 223,137
Due after five years through ten years 112,255 115,019
Due after ten years 53,994 54,056
Equity securities 148,735 157,405
Mortgage-backed securities 557,238 560,245
---------- ----------
Total securities available-for-sale 1,246,367 $1,262,180
========== ==========
</TABLE>
(1) In January 1998, the held-to-maturity portfolio of $96.4 million was
transferred to the available-for-sale segment and $63.0 million of the amount
transferred was subsequently sold. The net addition to the available-for-sale
segment from the held-to-maturity classification was $33.0 million.
Activity from the sale of marketable securities is as follows:
For the six months ended
June 30,
-------------------------
1998 1997
-------- ---------
Proceeds $376,052 $ 340,010
======== =========
Gross gains $ 2,970 $ 3,262
Gross losses -- 69
-------- ---------
Net gain $ 2,970 $ 3,193
======== =========
7
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(Unaudited)
(3) Loans Serviced for Others
The following table sets forth information concerning loans serviced
for others as of the dates indicated. These balances are not included in the
accompanying consolidated statements of financial condition:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
-------- ------------ ----------
<S> <C> <C> <C>
Unpaid principal balances of mortgage loans serviced for:
FHLMC $ 808,456 $ 670,426 $ 640,776
FNMA 381,151 328,086 338,653
Other investors 13,442 68,389 68,852
----------- ---------- ----------
Total mortgage loans serviced $ 1,203,049 $1,066,901 $1,048,281
=========== ========== ==========
Carrying value of mortgage loan servicing
rights $ 13,370 $ 11,830 $ 12,081
=========== ========== ==========
Fair value of mortgage loan servicing
rights $ 14,360 $ 14,181 $ 16,139
=========== ========== ==========
Valuation allowance for impairment related to
mortgage loan servicing rights $ 219 $ 126 $ 126
=========== ========== ==========
</TABLE>
8
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(Unaudited)
(4) Other Borrowings
The following table presents the composition of the Registrant's other
borrowings as of the dates indicated.
June 30, December 31, June 30,
1998 1997 1997
--------- ----------- ---------
FHLB advances $ 618,525 $ 575,440 $ 531,308
Repurchase agreements 342,268 277,548 161,000
ESOP loan 495 990 990
--------- ---------- ---------
Total other borrowings $ 961,288 $ 853,978 $ 693,298
========= ========== =========
(5) Treasury Stock Repurchase Program
On February 27, 1998, the Registrant received authorization from the
Pennsylvania Department of Banking to repurchase 450,000 shares of its
outstanding common stock at the prevailing market price at time of repurchase.
Repurchase of shares must be completed within one year of the program's
authorization date. The approval may be extended for one year if a written
request for extension is received by the Pennsylvania Department of Banking
before February 29, 1999. As of June 30, 1998, no shares have been repurchased.
9
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(Unaudited)
(6) New Accounting Standards
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. 98-1 (SOP 98-1) "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
defines the characteristics of internal-use software and sets guidance regarding
the classification of internal-use software costs based on the type of cost
incurred and the stage of the software implementation. SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998.
Management does not expect the adoption of SOP 98-1 to have a material effect on
the financial condition or results of operations of the Registrant.
In April 1998, the AICPA issued Statement of Position No. 98-5 (SOP
98-5), "Reporting on the Costs of Start Up Activities." This statement is
effective for financial statements for fiscal years beginning after December 15,
1998. SOP 98-5 sets forth criteria for defining start up costs and requires that
all such costs be expensed as incurred. The adoption of SOP 98-5 will require
the write-off of previously capitalized start-up costs, which should be reported
as the cumulative effect of a change in accounting principle in the period of
the statement's adoption. Management believes that the adoption of this
statement will not have a material effect on the Registrant's financial
condition or results of operation.
During June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities." The Statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting treatment.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance. The Statement cannot be applied retroactively.
Management has not yet quantified the impact of adopting SFAS 133 on
the financial statements and has not determined the timing of or method of
adoption of the Statement. However, the application of the Statement could
increase volatility in earnings and comprehensive income.
(7) Commitments and Contingent Liabilities
In the ordinary course of business, the Registrant makes commitments to
extend letters of credit to its customers. At June 30, 1998, and December 31,
1997, standby letters of credit issued and outstanding amounted to $5,045,000
and $2,281,000 respectively. These letters of credit are not reflected in the
accompanying financial statements. Management does not anticipate any
significant losses as a result of these transactions.
At June 30, 1998, the Registrant has $67,217,000 in unused line of
credit commitments extended to its customers, $44,487,000 of undistributed funds
on construction loans and $72,734,000 of loan origination commitments.
10
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(Unaudited)
(8) Earnings per share
On October 21, 1997, the Board of Directors of the Registrant declared
a 3 for 1 stock split to be effected in the form of a dividend to stockholders
of record as of November 4, 1997, and payable on November 18, 1997. All share
and per share information in this report has been restated to reflect the stock
split as if it had been in effect during all periods presented.
The following table shows the allocation of earnings per share to basic
earnings per share and diluted earnings per share.
(The balance of this page is left intentionally blank.)
11
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(Unaudited)
(8) Earnings per share (continued)
<TABLE>
<CAPTION>
Per Share
For the six months ended June 30, 1998 Income Shares Amount
----------------------------------------
<S> <C> <C> <C>
Basic earnings per share
Income available to common shareholders $10,224,000 33,917,123 $ 0.30
----------------------------------------
Options held by management and directors 303,703
----------------------------------------
Diluted earnings per share
Income available to common shareholders
plus assumed conversion $10,224,000 34,220,826 $ 0.30
========================================
For the six months ended June 30, 1997
Basic earnings per share
Income available to common shareholders $ 9,774,000 33,154,719 $ 0.29
----------------------------------------
Options held by management and directors 255,762
----------------------------------------
Diluted earnings per share
Income available to common shareholders
plus assumed conversion $ 9,774,000 33,410,481 $ 0.29
========================================
Per Share
For the three months ended June 30, 1998 Income Shares Amount
Basic earnings per share -----------------------------------------
Income available to common shareholders $ 4,475,000 $33,953,331 $ 0.13
Options held by management and directors 307,121
-----------------------------------------
Diluted earnings per share
Income available to common shareholders
plus assumed conversion $ 4,475,000 $34,260,452 $ 0.13
=========================================
For the three months ended June 30, 1997
Basic earnings per share
Income available to common shareholders $ 5,065,000 $33,180,633 $ 0.15
Options held by management and directors 254,697
----------------------------------------
Diluted earnings per share
Income available to common shareholders
plus assumed conversion $ 5,065,000 $33,435,330 $ 0.15
========================================
</TABLE>
12
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(Unaudited)
(9) Reorganization
On September 17, 1997, the Bank and its existing mutual holding company
parent, Harris Financial, MHC (the "Mutual Company"), reorganized into a
two-tier mutual holding company structure (the "Two-Tier Reorganization"), with
the establishment of the Registrant as the parent of the Bank. Under the terms
of this reorganization, each share of Harris Savings Bank stock was exchanged
for one share of Harris Financial, Inc. stock.
The reorganization was accounted for in a manner similar to a pooling
of interest. Accordingly, the prior period consolidated financial statements of
Harris Financial, Inc. are identical to the prior period consolidated financial
statements of the Bank.
Prior to the consummation of this reorganization, the Registrant
received the approval of the Federal Reserve, the Pennsylvania Department of
Banking, and the FDIC.
(10) Comprehensive Income
On January 1, 1998, the Registrant adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS
130 establishes standards for reporting and displaying comprehensive income and
its components. Comprehensive income, as defined by SFAS 130, is the total of
net income and all other nonowner changes in equity. Total comprehensive income
for the six months ended June 30, 1998, and 1997 was $9.2 million and $11.0
million, respectively. Total comprehensive income for the three months ended
June 30, 1998, and 1997 was $5.1 million and $9.9 million, respectively. The
difference between net income and comprehensive income for the above periods is
due to unrealized gains and losses on available for sale securities.
(11) Planned Stock Offering
On June 30, 1998, the Registrant filed a Registration Statement on Form
S-3 with the SEC to register its planned sale of 2,000,000 shares of its common
stock ("the Offering"). The Registrant is a majority-owned subsidiary of the
Mutual Company, a Pennsylvania-chartered mutual holding company, which as of
June 30, 1998, owned 25,500,000 shares or 75.1% of the 33,964,950 outstanding
shares of common stock. At the conclusion of the Offering, the Mutual Company
will contribute to the Registrant 2,000,000 shares of common stock, and the
total number of shares of common stock owned by the Mutual Company will decrease
to 23,500,000, or 69.2% of the June 30, 1998 outstanding shares. Accordingly the
Offering will not result in a change in the number of issued and outstanding
shares of common stock. At the conclusion of the Offering, if consummated, the
total number of shares sold in the Offering (and contributed to the Registrant
by the Mutual Company) may be increased by up to 15%, at the discretion of the
Registrant and the Mutual Company.
(12) Dividend Waivers by the Mutual Holding Company
The Mutual Company has generally waived the receipt of dividends declared by the
Bank, or, subsequent to the Two-Tier Reorganization, dividends paid by the
Registrant. The Mutual Company has not been required to obtain approval of the
Federal Reserve Bank (the "FRB") prior to any such waiver, and through the date
hereof has not sought or received FRB approval of any such waiver. In connection
with the FRB and Federal Deposit Insurance Corporation (the "FDIC") approvals of
the Bank's acquisition of First Harrisburg Bancor, Inc. and its wholly owned
subsidiary, First Federal Savings and Loan Association of Harrisburg
13
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(Unaudited)
(12) Dividend Waivers by the Mutual Holding Company (Continued)
("First Federal"), the Bank and the Mutual Company made several commitments to
the FDIC and the FRB regarding the waiver of dividends by the Mutual Company.
These commitments include the following: (i) Any dividends waived by the Mutual
Company shall be taken into account in any valuation of the Bank and the Mutual
Company, and factored into the calculation used in establishing a fair and
reasonable basis for exchanging Bank shares for holding company shares in any
subsequent conversion of the Mutual Company to stock form; (ii) Dividends waived
by the Mutual Company shall not be available for payment to or the value thereof
transferred to Minority Stockholders by any means including through dividend
payments or at liquidation; (iii) Beginning five years after April 19, 1996, the
date of consummation of the Bank's acquisition of First Federal, the Mutual
Company will make prior application to and shall receive the approval of the FRB
prior to waiving any dividends declared on the capital stock of the Bank, and
the FRB shall have the authority to approve or deny any dividend waiver request
in its discretion, and after such date such application may be made on an annual
basis with respect to any year in which the Mutual Company intends to waive
dividends paid by the Bank; (iv) After April 19, 1996, the date of consummation
of the Bank's acquisition of First Federal, the amount of waived dividends that
are identified as belonging to the Mutual Company shall not be available for
payment to, or the value transferred to, Minority Stockholders, either through
dividend payments, upon the conversion of the Mutual Company to stock form, upon
the redemption of shares of the Bank, upon the Bank's issuance of additional
shares, at liquidation, or by any other means; (v) The Mutual Company shall
notify the FRB of all such transactions and will make available to the FRB such
information as the FRB determines to be appropriate; (vi) The Bank will take
into account when setting its dividend rate the declaration rate in relation to
net income and the rate's effect on the Bank's ability to issue capital; and
(vii) The dividend rate will be reasonable and sustainable upon a full
conversion to stock form of the Mutual Company; (viii) In the event that the FRB
adopts regulations regarding dividends waivers by mutual holding companies, the
Mutual Company will comply with the applicable requirements of such regulations.
After the completion of the two-tier reorganization, the commitments became
applicable to dividends paid by the Registrant that are waived by the Mutual
Company. If the Mutual Company decides that it is in its best interest to waive
the right to receive a particular dividend to be paid by the Registrant, and, if
necessary, the FRB approves such waiver, then the Registrant pays such dividend
only to Minority Stockholders, and the amount of the dividend waived by the
Mutual Company is treated in the manner described above. The Mutual Company's
decision as to whether or not to waive a particular dividend depends on a number
of factors, including the Mutual Company's capital needs, the investment
alternatives available to the Mutual Company as compared to those available to
the Registrant, and the receipt of required regulatory approvals. There can be
no assurance that (i) after the Offering the Mutual Company will waive dividends
paid by the Registrant, (ii) the FRB will approve any dividend waivers by the
Mutual Company after April 2001, or (iii) the terms that may be imposed by the
FRB on any dividend waiver will be favorable to Minority Stockholders. As of the
date hereof, the Mutual Company has waived the right to receive all dividends
paid by the Bank and the Registrant. As of April 19, 1996, the Mutual Company
had waived $9.1 million of dividends declared by the Bank, and through June 30,
1998, had waived a total of $19.5 million of dividends paid by the Bank and the
Registrant.
14
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is management's discussion and analysis of the
significant changes in the results of operations, capital resources and
liquidity presented in its accompanying interim consolidated financial
statements for Harris Financial, Inc. (the "Registrant" or "HFI"), the holding
company for Harris Savings Bank (the "Bank"). This discussion should be read in
conjunction with the 1997 Annual Report. Current performance does not guarantee,
and may not be indicative of similar performance in the future.
In addition to historical information, this Quarterly Report on Form
10-Q contains forward-looking statements, as such term is defined in the
Securities and Exchange Act of 1934 and the regulations thereunder. The
forward-looking statements contained herein are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected in the forward-looking statements. Important factors that might cause
such a difference include, but are not limited to, those discussed in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations". Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. The Registrant undertakes no obligation to publicly revise or
update these forward-looking statements to reflect events or circumstances that
arise after the date hereof.
(a) Results of Operations
Net Income or Loss The net income for the six month period ending June
30, 1998, was $10,224,000. This represented an increase of $450,000 or
4.6% from the $9,774,000 net income figure reported during the
comparable six month period ending June 1997. For the three month
period ending June 30, 1998, net income was $4,475,000 which was
$590,000 or 11.6% less than the net income figure of $5,065,000 for the
comparable period in 1997.
Net Interest Income Net interest income, on a tax equivalent basis,
totaled $29,807,000 for the six months ended June 30, 1998, which
represents an increase of $4,371,000 or 17.2%, from the $25,436,000 of
net interest income recorded in the six month period ended June 30,
1997. This increase reflected primarily a favorable interest income
volume variance of $14,530,000 caused by a $415.5 million increase in
total average earning assets to $2.200 billion during the year to date
period ending June 30, 1998, as compared to $1.784 billion recorded
during the same period ending June 30, 1997.
The favorable net interest income volume variance of $3,529,000 was
caused primarily by the following factors:
(1) Marketable Securities - Taxable: This portfolio segment produced a
$10,478,000 favorable volume variance. This is due to growth in
average balances which reflects the ongoing execution of the
current investment strategy intended to deploy capital generated
by ongoing operations.
(2) Commercial loans generated a positive volume variance of
$1,570,000 which is generated by the growth in average balances
that is indicative of the Registrant's emphasis on increasing its
market share in this loan category.
(3) Borrowed funds generated an unfavorable volume variance of
$11,936,000 which is indicative of the Registrant's wholesale
funding to fuel its current investment strategy.
(4) Time deposits created a favorable volume variance of $1,844,000.
This trend is produced by the Registrant's reduced reliance on
this higher cost of funds and continued emphasis on wholesale
funding sources.
15
<PAGE>
The favorable net interest income rate variance of $842,000 was caused
primarily by the following factors:
(1) During the first half of 1998, the average yield on the mortgage
loan portfolio increased by 31 basis points (8.56% versus 8.25%)
over the same period ending June 30, 1997. This increase was
caused by higher levels of prepayments that accelerated the
recognition of deferred origination income, and moderate rate
increases in new loans which are maintained in the Registrant's
portfolio. Consequently, the mortgage loan portfolio generated a
favorable rate variance of $889,000.
(2) The yield on commercial loans increased by 124 basis points to
8.90%, generating a favorable rate variance of $497,000. The
Registrant is experiencing the activation of lines of credit at
Prime and Prime plus 50 basis points during the six months ending
June 30, 1998, that were not utilized by its customer base in the
comparable period ending June 30, 1997.
(3) The marketable securities - taxable segment of the investment
portfolio was responsible for an unfavorable rate variance of
$836,000 for the six months ended June 30, 1998, versus June 30,
1997. The variance is attributable lower market rates on the new
issues that were added to the portfolio.
(4) Consumer indirect loans experienced a 73 basis point decline
(8.93% for the six months ending June 30, 1998, versus 9.66% for
the comparable period ending June 30, 1997). The rate decreases
reflect efforts to stimulate market demand for the product and
created an unfavorable rate variance amounting to $295,000.
(5) Now and money market deposits were responsible for a favorable
rate variance of $450,000. The interest rate paid on these
accounts was 2.89% for the six months ending June 30, 1998. This
cost of funds was 43 basis points below the 3.32% for the
comparable period ending June 30, 1997.
(6) Borrowed funds produced a favorable rate variance of $286,000.
This reflects the 11 basis point reduction (5.74% versus 5.85%)
in the market cost of funds between the six month period ending
June 30, 1998, and the comparable period ending June 30, 1997.
Net interest income (on a tax equivalent basis) was $14,884,000 for the
three months ended June 30, 1998. This figure represents an increase of
$1,854,000, or 14.2%, from the $13,030,000 of net interest income
recorded in the three month period ended June 30, 1997. This increase
primarily reflected a net favorable volume variance of $1,710,000
primarily caused by a $335.8 million increase in total average earning
assets to $2.202 billion during the three month period ended June 30,
1998, as compared to $1.866 billion recorded during the same quarter
ending June 30, 1997.
The Registrant continues to rely on wholesale funding sources to
support an investment leveraging strategy and mitigate the impact of
the runoff of time deposits. The reliance on wholesale funding is
effected by a redeployment of capital generated from ongoing operations
(leveraging) into an interest earning capacity. The ultimate objective
of this leveraging strategy is to deploy the current investment
purchases into higher yielding assets that are consistent with the
Registrant's prudent Asset Liability Management (ALM) objectives.
However, there is a higher cost of funds associated with this
leveraging strategy even though the general trend of market rates
resumed its downward trend. For the six months ending June 30, 1998,
the average cost of funds of 5.06% decreased 4 basis points against the
5.10% average cost for the period ending June 30, 1997. During the same
time periods, the six month annualized yield on interest earning assets
dropped 13 basis points to 7.47% from the 7.60% yield for the six month
period ending June 30, 1997. These factors are also reflected in the
net interest margin decline of 14 basis points from the 2.71% yield for
the six months ending June 30, 1998, versus the 2.85% yield for the
comparable period ending June 30, 1997.
16
<PAGE>
The following table summarizes the impact of the leveraging strategy on
the Return on Average Assets (ROAA) and Net Interest Margin (NIM) for
the six month and three month periods ending June 30, 1998, and June
30, 1997, respectively.
<TABLE>
<CAPTION>
Comparison of Financial Performance with and without a Capital Leveraging Strategy
- ----------------------------------------------------------------------------------
(All figures in 000's)
With Without Difference in
Six month period ending June 30, 1998 Leveraging Leveraging Basis Points
- ------------------------------------- ---------- ---------- -------------
<S> <C> <C> <C>
Return on Average Assets 0.90% 0.82% 8
Net Interest Margin 2.71% 3.51% (80)
Three month period ending June 30, 1998
- ---------------------------------------
Return on Average Assets 0.79% 0.67% 12
Net Interest Margin 2.70% 3.50% (80)
Six month period ending June 30, 1997
- -------------------------------------
Return on Average Assets 1.04% 0.99% 5
Net Interest Margin 2.85% 3.24% (39)
Three month period ending June 30, 1997
- ---------------------------------------
Return on Average Assets 1.03% 0.96% 7
</TABLE>
Table 1 on the following pages presents the Registrant's average asset
and liability balances, interest rates, interest income, and interest expense
for the six month periods and three month periods ended June 30, 1998, and June
30, 1997, respectively. Table 2 presents a rate-volume analysis of changes in
net interest income for the same periods of time.
For information on qualitative and quantitative disclosures regarding
market risk, refer to Management's Discussion and Analysis included in the 1997
Annual Report to Stockholders. There have been no significant changes in the
Registrant's market risk profile nor in the Registrant's risk management
procedures, in the current year.
17
<PAGE>
TABLE 1 - Average Balance Sheets, Rate, and Interest Income and Expense Summary
(All figures in 000's)
<TABLE>
<CAPTION>
For the six months ended,
-------------------------------------------------------------------------------
June 30, 1998 June 30, 1997
-------------------------------------------------------------------------------
Average (1)(2) Average Average (1)(2) Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
---------------------------------------- -------------------------------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest Bearing assets:
Mortgage Loans, net (1) $ 570,014 $ 24,385 8.56% $ 555,275 $ 22,881 8.25%
Commercial loans 107,941 4,803 8.90% 71,455 2,736 7.66%
Direct consumer loans 155,365 5,861 7.54% 153,446 5,838 7.61%
Indirect consumer loans 87,447 3,906 8.93% 77,370 3,738 9.66%
Marketable Securities - Taxable 1,127,214 37,307 6.62% 811,354 27,665 6.82%
Marketable Securities - Taxfree (2) 113,511 4,711 8.30% 96,961 4,185 8.63%
Other interest earning assets 38,365 1,185 6.18% 18,512 724 7.82%
---------- ---------- ---------- ----------
Total interest-earning assets 2,199,857 82,158 7.47% 1,784,373 67,767 7.60%
---------- ----------
Noninterest-earning assets 77,837 74,934
---------- ----------
Total assets $2,277,694 $1,859,307
========== ==========
Liabilities and stockholders' equity:
Interest bearing liabilities:
Savings deposits $ 151,409 $ 1,881 2.48% $ 147,073 $ 2,004 2.73%
Time deposits 731,777 20,184 5.52% 799,054 22,042 5.52%
NOW and money market deposits 245,139 3,537 2.89% 189,665 3,152 3.32%
Escrow 10,978 35 0.64% 8,683 69 1.59%
Borrowed Funds 930,639 26,714 5.74% 515,222 15,064 5.85%
---------- ---------- ---------- ----------
Total interest bearing liabilities $2,069,942 52,351 5.06% $1,659,697 42,331 5.10%
---------- ----------
Noninterest bearing liabilities 25,128 43,411
---------- ----------
Total liabilities 2,095,070 1,703,108
Stockholders' equity 182,624 156,199
---------- ----------
Total liabilities and stockholder equity $2,277,694 $1,859,307
========== ==========
Net interest income before
provision for loan loss $ 29,807 $ 25,436
========== ==========
Interest rate spread (3) 2.41% 2.50%
Net interest-earning assets $ 129,915 $ 124,676
========== ==========
Net interest margin (4) 2.71% 2.85%
Ratio of interest earning assets to
interest bearing liabilities 1.06 1.08
---------- ----------
</TABLE>
(1) Includes income recognized on deferred loan fees of $1,583,000 and $494,000
for the 1998 and 1997 periods, respectively
(2) Interest income and yields are shown on a tax equivalent basis using an
effective tax rate of 35%.
(3) Represents the difference between the average yield on interest-earning
assets and the average cost on interest-bearing liabilities.
(4) Represents the annualized net interest income before the provision for loan
losses divided by average interest-earning assets.
18
<PAGE>
TABLE 1 - Average Balance Sheets, Rate, and Interest Income and Expense Summary
(All figures in 000's)
<TABLE>
<CAPTION>
For the quarter ended,
----------------------------------------------------------------------------
June 30, 1998 June 30, 1997
-------------------------------------- ------------------------------------
Average (1)(2) Average Average (1)(2) Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------------------------------------- ------------------------------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest Bearing assets:
Mortgage Loans, net (1) $ 573,031 $ 12,045 8.41% $ 561,577 $ 11,721 8.35%
Commercial loans 117,384 2,604 8.87% 75,512 1,461 7.74%
Direct consumer loans 156,197 2,973 7.61% 153,574 2,818 7.34%
Indirect consumer loans 85,879 2,091 9.74% 77,434 1,983 10.24%
Marketable Securities - Taxable 1,119,841 18,154 6.48% 880,246 15,117 6.87%
Marketable Securities - Taxfree (2) 112,905 2,349 8.32% 101,103 2,006 7.94%
Other interest earning assets 36,342 710 7.81% 16,293 334 8.20%
---------- ---------- ---------- ----------
Total interest-earning assets 2,201,579 40,926 7.44% 1,865,739 35,440 7.60%
---------- ----------
Noninterest-earning assets 76,924 75,613
---------- ----------
Total assets $2,278,503 $1,941,352
========== ==========
Liabilities and stockholders' equity:
Interest bearing liabilities:
Savings deposits $ 154,201 $ 923 2.39% $ 146,538 $ 1,006 2.75%
Time deposits 714,700 9,904 5.54% 793,058 11,002 5.55%
NOW and money market deposits 252,323 1,795 2.85% 190,431 1,595 3.35%
Escrow 11,852 18 0.61% 8,821 36 1.63%
Borrowed Funds 930,174 13,402 5.76% 596,310 8,771 5.88%
---------- ---------- ---------- ----------
Total interest bearing liabilities 2,063,250 26,042 5.05% 1,735,158 22,410 5.17%
---------- ----------
Noninterest bearing liabilities 31,039 47,875
---------- ----------
Total liabilities 2,094,289 1,783,033
Stockholders' equity 184,214 158,319
---------- ----------
Total liabilities and shareholders' equity $2,278,503 $1,941,352
========== ==========
Net interest income before
provision for loan losses $ 14,884 $ 13,030
========== ==========
Interest rate spread (3) 2.39% 2.43%
Net interest-earning assets $ 138,329 $ 130,581
========== ==========
Net interest margin (4) 2.70% 2.79%
Ratio of interest earning assets to
interest-bearing liabilities 1.07 1.08
---------- ----------
</TABLE>
(1) Includes income recognized on deferred loan fees of $634,000 and $242,000
for the 1998 and 1997 periods, respectively.
(2) Interest income and yields are shown on a tax-equivalent basis using an
effective tax rate of 35%.
(3) Represents the difference between the average yield on interest earning
assets and the average cost on interest-bearing liabilities.
(4) Represents the annualized net interest income before provision for loan
loss divided by average interest-earning assets.
19
<PAGE>
TABLE 2 - Rate/Volume Analysis of Changes in Net Interest Income
(All figures in 000's)
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998 Quarter Ended June 30, 1998
Compared to Compared to
Six Months Ended June 30, 1997 Quarter Ended June 30, 1997
Increase (Decrease) Increase (Decrease)
-------------------------------- --------------------------------
Volume Rate Net Volume Rate Net
-------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest - earning assets:
Mortgage loans, net $ 615 $ 889 $ 1,504 $ 240 $ 84 $ 324
Commercial loans 1,570 497 2,067 904 239 1,143
Direct consumer loans 73 (50) 23 49 106 155
Indirect consumer loans 463 (295) 168 208 (100) 108
Marketable securities - Taxable 10,478 (836) 9,642 3,925 (888) 3,037
Marketable securities - Taxfree 691 (165) 526 243 100 343
Other interest earning assets 640 (179) 461 392 (16) 376
-------- -------- -------- -------- -------- --------
Total interest earning assets $ 14,530 $ (139) $ 14,391 $ 5,961 $ (475) $ 5,486
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities
Savings Deposits 59 (182) (123) 51 (134) (83)
Time deposits (1,844) (14) (1,858) (1,084) (14) (1,098)
NOW and money market deposits 835 (450) 385 465 (265) 200
Escrow accounts 15 (49) (34) 10 (28) (18)
Borrowed funds 11,936 (286) 11,650 4,809 (178) 4,631
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 11,001 (981) 10,020 4,251 (619) 3,632
-------- -------- -------- -------- -------- --------
Net change in net interest income $ 3,529 $ 842 $ 4,371 $ 1,710 $ 144 $ 1,854
======== ======== ======== ======== ======== ========
</TABLE>
Note: Changes in interest income and interest expense arising from the
combination of rate and volume variances are prorated across rate and
volume variances.
20
<PAGE>
Provision for Loan Losses There was a $1,400,000 provision for loan losses
recorded in the six months ending June 30, 1998, versus a $305,000 provision for
loan losses recorded in the six months ending June 30, 1997. This trend is also
reflected in the $570,000 provision recorded for the three months ending June
30, 1998, and the $153,000 provision recorded for the three months ending June
30, 1997. The increase in the provision results from the Registrant's ongoing
commitment to commercial lending and the recognition of the greater credit risks
inherent in this type of lending. The increased provision also addresses
probable known and unknown Year 2000 problems pertaining to the computer
applications (hardware or software) of the Registrant's commercial clients which
could impair the clients' ability to meet scheduled loan repayments. Please
refer to the comments in the Asset Quality section which follows.
Noninterest Income Noninterest income totaled $7,980,000 for the six months
ending June 30, 1998. This represents an increase of $1,262,000, or 18.8%, from
the $6,718,000 recorded in the six months ended June 30, 1997. This increase is
predicated on several different factors. The primary reason was a $2,068,000 net
gain on the sale of loans in the six months ending June 30, 1998. The gain is a
$1,263,000 increase over the $805,000 gain reported in the comparable six month
period ending in 1997. This income recognition was triggered by favorable market
rates and an ongoing repositioning of the balance sheet to meet the Registrant's
ALM objectives. Secondly, service charges on deposits generated $1,236,000, or a
$510,000 increase over the prior six month period ending June 30, 1997, figure
of $726,000. This trend is attributable to the Registrant's strategy of
emphasizing growth in transaction accounts and the associated fees for
transaction accounts. Third, ATM Fees registered $737,000 for the six months
ending June 30, 1998. This was a $471,000 increase over the $266,000 reported
for the six months ending June 30, 1997. This increase reflects the impact of an
expanding ATM network, higher transaction levels and the institution of
surcharging. Counterbalancing these increases was a $906,000 drop in net
servicing income to the year to date June 30, 1998, figure of $180,000 from the
year to date June 30, 1997, figure of $1,086,000. This decrease is caused by the
prepayment of loan balances and the corresponding acceleration of the
amortization of the loan servicing rights carried on the Registrant's balance
sheet. This expense is an offset to the income stream generated by loan
servicing. The income stream is also impacted by prepayments which reduce the
total amount of fee income paid by FNMA and Freddie Mac to the Registrant. For
the six months ending June 30, 1998, gross servicing income equalled $1,711,000
which was offset by $1,531,000 for the amortization of loan servicing rights.
This produced a net servicing income figure of $180,000. For the six months
ending June 30, 1997, gross servicing income totalled $1,801,000, while the
amortization of loan servicing rights created a $715,000 offset. The final
result is net servicing income equalling $1,086,000 for the six month time
period. Additionally, a $242,000 write-off of servicing rights resulting from
the sale of servicing and a $94,000 provision for the impairment of servicing
rights where recorded in the first quarter of 1998. This write-off was mitigated
by a $390,000 gain on the sale of servicing rights that was recognized in the
three month period ending March 31, 1998, and which is included in other income.
Noninterest income equalled $3,052,000 for the three months ending June 30,
1998. This is a $391,000 or 11.4% decrease from the $3,443,000 reported in the
comparable period ending June 30, 1997. The major reason for the decline was the
$1,152,000 decrease in the gains on the sale of securities to the $586,000
reported for the three month period ending June 30, 1998, from $1,738,000
recognized in the comparable quarter ending June 30, 1997. Gains on the sale of
loans, net produced a $629,000 increase ($994,000 versus $365,000) for the three
month period ending June 30, 1998, over June 30, 1997. This performance is
attributable to the ALM strategy detailed in the preceding paragraph. In
addition, service charges on deposits totalled $767,000 for the quarter ended
June 30, 1998, a $365,000 increase from the
21
<PAGE>
$402,000 reported for the comparable quarter ended June 30, 1997. This change
reflects the Registrant's increased emphasis on generating transaction accounts
and the corresponding fee income from these accounts. During the three months
ending June 30, 1998, gross servicing income equalled $876,000 which was offset
by $642,000 for the amortization of loan servicing rights. This produced a net
servicing income figure of $234,000. The reasons for the increase in the
amortization of loan servicing rights for the three month period ending June 30,
1998, were detailed in the preceding paragraph. For the three month period
ending June 30, 1997, gross servicing income totalled $891,000, while the
amortization of loan servicing rights produced a $363,000 reduction to gross
servicing income. The final result is net servicing income equalling $528,000
for the three month period ending June 30, 1997.
Noninterest Expense Noninterest expense was $20,222,000 for the six month period
ending June 30, 1998. This is an increase of $4,331,000, or 27.3%, from the
$15,891,000 reported for the six month period ending June 30, 1997. The increase
in noninterest expense was caused, primarily, by a $2,564,000 increase in salary
and benefit expense ($10,696,000 for the six months ending June 30, 1998, versus
$8,132,000 for the six months ending June 30, 1997). This increase represents
salary expenditures for the acquisition of staff to support the Registrant's
transition to a full service community bank. In addition, the Registrant
recognized other expenses of $4,136,000 for the six month period ending June 30,
1998; representing a $1,087,000 increase in other expenses over the $3,049,000
incurred during the six month period ending June 30, 1997. A significant portion
of the increase represents additional loan and deposit support activity and
consulting costs incurred in the three month period ending March 31, 1998. These
costs were incurred after the conversion to the new mainframe computer system in
November 1997. Equipment expense was $1,493,000 for the six month period ending
June 30, 1998. This represents a $582,000 increase over the $911,000 figure for
the comparable period ending June 30, 1997. The increase is attributable to
higher depreciation expense for the new mainframe computer system installed in
November 1997.
Noninterest expense was $10,399,000 for the three month period ending June 30,
1998. This is an increase of $2,165,000, or 26.3%, from the $8,234,000 reported
for the six month period ending June 30, 1997. Salary and benefit expense was
$5,361,000 for the three month period ending June 30, 1998, versus the
$4,058,000 for the three month period ending June 30, 1997. The $1,303,000
increase is attributable to the staff expenditures detailed in the preceding
paragraph. Other expense was $2,247,000 for the three month period ending June
30, 1998. This represents an increase of $403,000 from the $1,844,000 reported
for the three month period ending June 30, 1997 and resulted primarily for the
reason described above. Additionally, equipment expense totaled $814,000 for the
three month period ending June 30, 1998, a $332,000 increase from the $482,000
figure for the comparable period ending June 30, 1997. The reason for this
increase is the additional depreciation expense associated with the November
1997 mainframe computer conversion.
Provision for Income Taxes Corporate income tax expense equalled $4,292,000 for
the six month period ended June 30, 1998, generating an effective tax rate of
29.6% on pretax income of $14,516,000. This is a decrease of $427,000 from the
$4,719,000 of corporate tax expense, resulting in an effective tax rate of 32.6%
on pretax income of $14,493,000, recorded during the six month period ended June
30, 1997. The decrease in the effective tax rate is the result of the
Registrant's heightened focus on increasing tax exempt sources of income.
Income tax expense totaled $1,668,000 (effective tax rate of 27.2%) for the
three months ended June 30, 1998. This represents a $761,000 decrease from the
tax expense of $2,429,000 (effective tax rate of 32.4%) recorded for the three
month period ending June 30, 1997. These changes are indicative of increases in
tax exempt sources of income in the loan portfolio which reflect a recent
emphasis on
22
<PAGE>
providing intermediate to long term capital project financing to local
municipalities and school districts.
Sources and Uses of Funds Total cash and cash equivalents increased $18.9
million during the six month period ended June 30, 1998. For the comparable
period ending June 30, 1997, cash and cash equivalents decreased by $8.7
million. Operating activities generated cash inflows totaling $13.6 million and
$10.5 million during the six month periods ended June 30, 1998, and June 30,
1997, respectively. During the six month period ending June 30, 1998, investing
activities of the Registrant resulted in a net use of cash of $88.1 million, due
mainly to $634.9 million in purchases of marketable securities (indicative of
the leveraging strategy detailed elsewhere in the 10-Q) and loan originations
net of principal payments of $108.5 million which were partially offset by
marketable security sales, maturities and principal reductions totaling $586.7
million and loan sales amounting to $72.8 million. During the six month period
ending June 30, 1997, cash out flows from investing activities used $282.4
million. Purchases for the Bank's portfolio of marketable securities used cash
of $591.5 million (results of the previously mentioned leveraging strategy), and
loan originations net of principal payments absorbed another $67.3 million.
These purchases were partially offset by security sales, maturities and
principal reductions totaling $358.3 million. The Registrant's financing
activities for the six month period ending June 30, 1998, resulted in a net
source of cash totaling $93.3 million, which is primarily attributable to
borrowing increases of $107.3 million. However, deposit outflows of $20.1
million reduced the cash provided by financing operations for the six month
period ended June 30, 1998. The deposit outflows are concentrated in certificate
of deposits and reflect the Registrant's effort to pay comparable market rates
instead of playing the role of price leader. The borrowing during this period
results from the Registrant's reliance on primarily wholesale funding sources to
support investment operations and counterbalances these moderate deposit
outflows. During the six months ending June 30, 1997, borrowings provided cash
inflows of $272.7 million and deposit decreases were $10.9 million, contributing
net cash from financing operations equalling $263.2 million.
Stockholders' Equity Stockholders' equity totaled $188.8 million, $179.0
million, and $163.8 million at June 30, 1998, December 31, 1997, and June 30,
1997, respectively. Stockholders' equity amounted to 8.1% on total assets of $
2.326 billion as of June 30, 1998, compared to 8.1% on total assets of $2.207
billion at December 31, 1997, and 8.0% on total assets of $2.044 billion at June
30, 1997.
The increase in stockholders' equity of $9.8 million or 5.5% in the six months
ended June 30, 1998, resulted mainly from $10.2 million in net income and $.6
million due to exercised stock options. Offsetting these increases is a $1.0
million decline in the market value, net of tax effect, of the available-
for-sale securities portfolio and $898,000 in dividends paid. The increase in
stockholders' equity of $25.1 million or 15.3% in the twelve month period ended
June 30, 1998, consisted primarily of net additions of $18.2 million in net
income; a net increase of $4.9 million in the market value, net of tax effect,
of market value increases in the available-for-sale securities portfolio; and a
$2.1 million increase in excess of fair value of ESOP stock committed for
release and excess of fair value of cost of the earned portion of Recognition
and Retention Plan (RRP) stock. In addition, options exercised during the twelve
month period ending June 30, 1998, contributed another $1.0 million to
stockholder's equity.
(Balance of this page is left intentionally blank.)
23
<PAGE>
Regulatory Capital Compliance Risk-based capital standards are issued by bank
regulatory agencies in the United States. These capital standards link a banking
company's capital to the risk profile of its assets and provide the basis by
which all banking companies and banks are evaluated in terms of capital
adequacy. These risk-based capital standards require all banks to have Tier 1
capital of at least 4.0 % and total capital, including Tier 1 capital, equal to
at least 8.0 % of risk-adjusted assets. Tier 1 capital consists of common
stockholders' equity and qualifying perpetual preferred stock along with related
surpluses and retained earnings. Total capital is comprised of Tier 1 capital,
limited life preferred stock, qualifying debt instruments, and the reserves for
possible loan losses. Furthermore, the banking regulators also issue leverage
ratio requirements. The leverage ratio requirement is measured as the ratio of
Tier 1 capital to adjusted average assets. The following table provides a
comparison of the Registrant's risk-based capital ratios and leverage ratio to
the minimum regulatory requirements for the period indicated.
<TABLE>
<CAPTION>
Minimum Minimum
Requirement Requirement
for Capital to be "Well Cap-
Actual Adequacy italized"
HARRIS FINANCIAL, INC. ------------------ ---------------------- ------------------
As of June 30, 1998 Amount Ratio Amount Ratio Amount Ratio
- -------------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $168,788 13.0% $104,553 8.0% $130,692 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 160,524 12.3% 52,277 4.0% 78,415 6.0%
Tier 1 Capital
(to Avg. Assets) 160,524 7.1% 89,945 4.0% 112,431 5.0%
As of December 31, 1997
- -----------------------
Total Capital
(to Risk Weighted Assets) $157,520 13.7% $ 91,979 8.0% $114,973 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 148,906 13.0% 45,989 4.0% 68,984 6.0%
Tier 1 Capital
(to Avg. Assets) 148,906 7.5% 80,649 4.0% 100,811 5.0%
</TABLE>
The Registrant did not become the Bank's holding company until
September 17, 1997. Consequently, no historical information for June 30, 1997
exists.
24
<PAGE>
The following table provides a comparison of the Bank's risk-based
capital ratios and leverage ratio to the minimum regulatory requirements for the
period indicated.
<TABLE>
<CAPTION>
Minimum Minimum
Requirement Requirement
for Capital to be "Well Cap-
Actual Adequacy italized"
HARRIS SAVINGS BANK ------------------ ---------------------- --------------------
As of June 30, 1998 Amount Ratio Amount Ratio Amount Ratio
- -------------------- ------ ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $158,965 12.3% $103,787 8.0% $129,734 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 149,701 11.5% 51,894 4.0% 77,841 6.0%
Tier 1 Capital
(to Avg. Assets) 149,701 6.7% 89,559 4.0% 111,949 5.0%
As of December 31, 1997
- -----------------------
Total Capital
(to Risk Weighted Assets) $147,533 12.9% $ 91,474 8.0% $114,343 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 138,919 12.1% 45,737 4.0% 68,606 6.0%
Tier 1 Capital
(to Avg. Assets) 138,919 7.0% 80,558 4.0% 100,697 5.0%
As of June 30, 1997
- ---------------------
Total Capital
(to Risk Weighted Assets) $145,836 13.7% $ 85,002 8.0% $106,252 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 137,253 12.9% 42,501 4.0% 63,751 6.0%
Tier 1 Capital
(to Avg. Assets) 137,253 6.8% 80,711 4.0% 100,889 5.0%
</TABLE>
During the month of June 1998, the Registrant adhered to the 6.5% Tier
1 minimum stipulated by the Pennsylvania Department of Banking ("Department").
This minimum threshold was a condition required by the Department for the
Treasury Stock Repurchase Program that was approved on February 27, 1998.
25
<PAGE>
Marketable Securities In January 1998, the Registrant sold securities
from the held-to-maturity (HTM) portfolio. The book value of these securities
totalled $63.0 million and a gain of $1.4 million was realized from the
transaction. The sale of these securities was executed in order to improve the
Registrant's interest rate risk profile and to align the portfolio with the
Registrant's current investment strategies. Under generally accepted accounting
principles, the sale of these securities eliminated the Registrant's ability to
use the held-to-maturity classification of securities for a period of two years.
As a result, the remaining securities in the held-to-maturity portfolio were
transferred to the available-for-sale portfolio. This transfer resulted in a
$209,565 increase, net of taxes, to the net unrealized gains on marketable
securities.
Marketable securities, excluding cash, totaled $1,262.2 million, $1,199.2
million, and $1,067.3 million at June 30, 1998, December 31, 1997, and June 30,
1997, respectively. Total marketable securities increased $63.0 million, or
5.3%, during the first six months of 1998. Total marketable securities increased
$194.9 million, or 18.3%, in the twelve month period ended June 30, 1998.
Based on fair market value, during the six month period ending June 30, 1998,
U.S. Government/Agencies increased $68.0 million, corporate bonds increased
$54.6 million, asset backed securities increased $9.7 million, while total
mortgage backed securities decreased $73.1 million. For the 12 month period
ending June 30, 1998, U.S. Government/Agencies increased $111.3 million,
corporate bonds increased $58.0, asset backed securities increased $9.1 million
and mortgage backed securities increased $2.3 million.
Table 3 on the following page presents the composition of the Registrant's
marketable securities portfolio as of June 30, 1998, December 31, 1997, and June
30, 1997, respectively.
(Balance of this page left intentionally blank.)
27
<PAGE>
TABLE 3 - Composition of Marketable Securities Portfolios (All figures in 000's)
The following table sets forth certain information regarding the amortized cost
and fair values of the Registrant's marketable securities portfolio at June 30,
1998, December 31, 1997, and June 30, 1997.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997 June 30, 1997
--------------------------------------------------------------------------------------
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 $ -- $ -- $ 67,933 $ 68,651 $ 67,476 $ 67,474
Mortgage-backed securities:
FNMA PC's -- -- 4,050 4,150 4,447 4,540
Private Issue CMO's -- -- 24,429 24,744 29,146 29,286
--------------------------------------------------------------------------------------
Total mortgage-backed securities -- -- 28,479 28,894 33,593 33,826
--------------------------------------------------------------------------------------
Total securities held-to-maturity $ -- $ -- $ 96,412 $ 97,545 $ 101,069 $ 101,300
--------------------------------------------------------------------------------------
Available-for-sale:
U.S. Government and agencies $ 321,910 $ 321,183 $ 184,033 $ 184,503 $ 143,424 $ 142,400
Corporate bonds 74,911 74,748 20,117 20,115 17,000 16,703
Municipal obligations 109,426 114,060 109,351 114,023 102,729 104,758
FHLB stock 32,219 32,219 30,027 30,027 28,325 28,325
Equities (Common and Preferred) 116,516 125,186 116,802 124,790 118,818 124,485
Asset backed securities 34,147 34,539 24,551 24,837 25,287 25,430
Mortgage-backed securities:
FHLMC PC's 1,805 1,889 2,920 3,066 3,233 3,371
FNMA CMO'S 133,375 133,864 151,067 152,433 97,707 97,839
FHLMC CMO's 91,652 92,435 272,927 274,281 306,138 307,002
Private Issue CMO's 330,406 332,057 173,419 174,707 115,684 115,921
--------------------------------------------------------------------------------------
Total mortgage-backed securities 557,238 560,245 600,333 604,487 522,762 524,133
--------------------------------------------------------------------------------------
Total securities available-for-sale $1,246,367 $1,262,180 $1,085,214 $1,102,782 $ 958,345 $ 966,234
--------------------------------------------------------------------------------------
Other interest-earning securities:
FHLB daily investment $ 28,632 $ 28,632 $ 11,840 $ 11,840 $ 965 $ 965
--------------------------------------------------------------------------------------
Total marketable securities and
interest bearing investments $1,274,999 $1,290,812 $1,193,466 $1,212,167 $1,060,379 $1,068,499
--------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
Loans Loans receivable, excluding the reduction for the allowance for loan
losses, totaled $931.0 million, $899.1 million, and $878.2 million at June 30,
1998, December 31, 1997, and June 30, 1997, respectively. The increase of $31.9
million, or 3.6%, for the six months ending June 30, 1998 reflects growth in
commercial loans of $55.9 million. However, this increase was offset by a
decline of $16.2 million and $ 7.8 million, in first mortgage loans and consumer
and other loans, respectively, for the six month period ending June 30, 1998.
The total portfolio increase of $52.8 million, or 6.0%, for the twelve month
period ending June 30, 1998, resulted from a $43.8 million increase in
commercial loans and $14.2 million increase in consumer and other loans. During
the same twelve month period ending June 30, 1998, first mortgage loans
decreased by $5.1 million. These trends are the results of a strategy designed
to enhance the Registrant's return on equity by repositioning the loan portfolio
into higher yielding assets, while managing interest rate risk within prudent
tolerance ranges.
Loan charge-offs, net of recoveries, totaled $750,000 for the six month period
ended June 30, 1998, compared to $44,000 for the six month period ended June 30,
1997. This difference is partially attributable to a $400,000 loss on a
participated commercial loan during February 1998. Loan charge-offs, net of
recoveries, totaled $1,024,000 for the twelve month period ended June 30, 1998.
Based on management's continuing review of the loan portfolio, the Registrant
recorded provision for loan losses of $1,400,000 for the six month, and
$1,705,000 for the 12 month periods ending June 30, 1998.
The Registrant considers all loans that are delinquent 90 days or more with
respect to principal and interest repayments to be in a non accrual status. Non
accrual loans were $7,870,000, $6,938,000 and $6,046,000 at June 30, 1998,
December 31, 1997, and June 30, 1997, respectively. These amounts as a
percentage of total loans receivable (including Loans held for sale, net)
equalled .83%, .76%, and .68% at June 30, 1998, December 31, 1997, and June 30,
1997, respectively. During these time periods, the Registrant had no loans that
were more than ninety days delinquent with respect to principal and interest and
considered in an accrual status.
The Registrant conducts an internal loan review to identify those loans which
are considered performing and current with respect to payments of principal and
interest but display an above normal risk of becoming non-performing or
requiring restructuring in the future. This review is conducted on a quarterly
basis and identified problem loans amounting to $8,947,000, $12,400,000 and
$12,300,000 at June 30, 1998, December 31, 1997, and June 30, 1997,
respectively.
The allowance for loan losses totaled $9,264,000, $8,614,000, and $8,583,000 at
June 30, 1998, December 31, 1997, and June 30, 1997, respectively. Stated as a
percentage of total loans receivable (including Loans held for sale, net), the
allowance for loan losses amounted to .97%, .94%, and .97% at June 30, 1998,
December 31, 1997, and June 30, 1997, respectively.
The following table depicts the trend of charge-offs, recoveries, and provisions
to the allowance for loan losses for the six months ended June 30, 1998, the
year ended December 31, 1997, and the six months ended June 30, 1997,
respectively.
29
<PAGE>
<TABLE>
<CAPTION>
As of or for the As of or for the As of or for the
Allowance for Loan Loss six months ending twelve months ending six months ending
(All Figures in 000's) June 30, 1998 December 31, 1997 June 30, 1997
- ------------------------------------------ -------------------- --------------------- -----------------
<S> <C> <C> <C>
Balance at beginning of the period $8,614 $8,322 $8,322
Provision for loan losses 1,400 610 305
Charge Offs
Commercial 400 -- --
Real Estate - construction -- -- --
Real Estate - one to four family 313 360 74
Consumer loans 90 8 4
------ ------ ------
Total Charge Offs 803 368 78
------ ------ ------
Recoveries
Commercial 1 -- --
Real Estate - construction -- -- --
Real Estate - one to four family 42 24 15
Consumer loans 10 26 19
------ ------ ------
Total Recoveries 53 50 34
------ ------ ------
Net Charge Offs 750 318 44
------ ------ ------
Balance at end of period $9,264 $8,614 $8,583
====== ====== ======
</TABLE>
Table 4 on the following page presents an analysis of the Registrant's
loan portfolio as of and for the six months ended June 30, 1997 and 1998, and as
of and for the year ended December 31, 1997, respectively.
(Balance of this page left intentionally blank.)
30
<PAGE>
TABLE 4 - Loan Composition (All Figures in 000's)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997 June 30, 1997
---------------------------------------------------
Amount Amount Amount
---------------------------------------------------
<S> <C> <C> <C>
Mortgage loans:
Principal balances:
One to four family $537,050 $539,248 $547,554
Construction (1) 22,895 36,814 18,141
-------- -------- --------
559,945 576,062 565,695
Less:
Unearned discounts 610 855 1,147
Net deferred loan origination fees 8,487 8,147 8,577
-------- -------- --------
Total first mortgage loans 550,848 567,060 555,971
-------- -------- --------
Commercial loans:
Principal balances:
Secured by other residential real
estate properties 14,914 15,635 17,029
Commercial 122,141 65,620 76,236
-------- -------- --------
137,055 81,255 93,265
Less:
Unearned discounts 434 534 400
-------- -------- --------
Total commercial loans 136,621 80,721 92,865
-------- -------- --------
Consumer and other loans:
Principal balances:
Mobile home 66,254 71,356 68,013
Home equity and second mortgage 155,550 155,861 144,077
Other 7,850 9,097 2,408
-------- -------- --------
Total consumer and other loans 229,654 236,314 214,498
Plus:
Net deferred loan origination costs 672 499 587
Dealer reserves 13,234 14,504 14,320
-------- -------- --------
Total consumer and other loans 243,560 251,317 229,405
-------- -------- --------
Less Allowance for loan losses 9,264 8,614 8,583
-------- -------- --------
Loans Receivable, net $921,765 $890,484 $869,658
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Percent of Percent of Percent of
Mortgage Loans: Amount Total Amount Total Amount Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ARM $ 89,411 15.97% 90,615 15.73% $ 90,511 16.00%
Fixed Rate 470,534 84.03% 485,447 84.27% 475,184 84.00%
---------------------------------------------------------------------------------------------
Total Mortgage Loans $559,945 100.00% $576,062 100.00% $565,695 100.00%
=============================================================================================
</TABLE>
(1) Net of undistributed portion of $44,487, $29,338, and $32,788 at June 30,
1998, December 31, 1997 and June 30, 1997, respectively
31
<PAGE>
Mortgage Servicing Rights As of June 30, 1998, December 31, 1997, and June 30,
1997, the Registrant held mortgage loan servicing rights with carrying values
totaling $13.4 million, $11.8 million, and $12.1 million, respectively. The
unpaid principal balances of loans serviced for others totaled $1.203 billion,
$1.067 billion, and $1.048 billion at June 30, 1998, December 31, 1997, and June
30, 1997, respectively. The Registrant recorded amortization expense on mortgage
loan servicing rights totaling $1,531,000 (this figure includes a $242,000
write-off of servicing rights and $94,000 provision for impairment) during the
six months ended June 30, 1998. The Bank recorded amortization expense on
mortgage loan servicing rights of $715,000, in the first six months of 1997.
At June 30, 1998, the total amount of capitalized mortgage servicing rights
(including mortgage servicing rights purchased) was $13,370,000 before the
valuation allowance. The valuation allowance for impairment related to such
rights was $219,000 at June 30, 1998. The estimated fair value of such rights
was approximately $14,360,000 at June 30, 1998.
Asset Quality The Registrant establishes the allowance for loan loss based on
internal and external factors. The external factors include the general economic
condition of the Registrant's market area and regulatory guidelines. The
internal factors include the current composition of the portfolio, portfolio
growth trends, and the current emphasis on commercial lending as a strategic
directive. These factors are used by the Registrant to help determine the
reserve necessary to provide for unknown, but probable losses within the
portfolio. These assessments are performed on a quarterly basis and the
provision for loan losses is adjusted accordingly.
The commercial loan portfolio is analyzed on an individual loan basis and a
specific reserve is developed for each known loss. In addition, the Registrant
assigns an additional reserve amount for unknown, probable losses in the loan
portfolio, as discussed above.
The mortgage and consumer portfolio is analyzed in pools of similar loans with
similar risk characteristics. Using historical loss experience, management
determines a specific reserve for the loan pools. A reserve for unknown,
probable losses is established in the manner discussed above.
Loan charge-offs, net of recoveries, totaled $750,000 for the six month period
ended June 30, 1998, compared to $44,000 for the six month period ended June 30,
1997. Loan charge-offs, net of recoveries, totaled $1,024,000 for the twelve
month period ended June 30, 1998. Based on management's continuing review of the
loan portfolio, the Registrant recorded provision for loan losses of $1,400,000
for the six month, and $1,705,000 for the 12 month periods ending June 30, 1998.
The allowance for loan losses totaled $9,264,000, $8,614,000, and $8,583,000 at
June 30, 1998, December 31, 1997, and June 30, 1997, respectively. Stated as a
percentage of total loans receivable (including Loans held for sale, net), the
allowance for loan losses amounted to .97%, .94%, and .97% at June 30, 1998,
December 31, 1997, and June 30, 1997, respectively.
Deposits Deposits, not including escrow funds, totaled $1.126 billion, $1.146
billion, and $1.163 billion at June 30, 1998, December 31, 1997, and June 30,
1997, respectively. Total deposits declined by $20.0 million, or 1.8%, during
the six months ended June 30, 1998. Total deposits declined by $37.0 million or
3.1% during the twelve months ending June 30, 1998. Both the six month and
twelve month declines reflect the Registrant's strategy of leveraging its
capital base and paying competitive, but not top market rates on the remaining
deposit base. The deposit decline has been offset by increased reliance on other
borrowings.
Table 5 on the following page presents the composition of the Registrant's
deposit portfolio as of June 30, 1998, December 31, 1997, and June 30, 1997,
respectively.
32
<PAGE>
TABLE 5 - Deposit Composition (All figures in 000's)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997 June 30, 1997
----------------------------- -------------------------- ---------------------------
Amount Percent Amount Percent Amount Percent
----------------------------- -------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand and NOW Accounts $ 121,832 10.82% $ 100,703 8.79% $ 93,167 8.01%
Money Market 137,084 12.17% 128,079 11.17% 129,157 11.11%
Savings 154,482 13.72% 148,718 12.97% 149,434 12.86%
Time Deposits 712,752 63.29% 768,738 67.07% 790,800 68.02%
----------------------------- -------------------------- ---------------------------
Total Deposits $ 1,126,150 100.00% $ 1,146,238 100.00% $ 1,162,558 100.00%
============================= ========================== ===========================
</TABLE>
(Balance of this page is left intentionally blank.)
33
<PAGE>
Other Borrowings During the six and twelve month periods ended June 30, 1998,
the Registrant actively engaged in leveraging activities to deploy its capital.
This strategy relies on using external sources of funds to invest in interest
earning assets at a positive spread between the yield on interest earning assets
and the cost of the support borrowing.
Other borrowings totaled $961.3 million, $854.0 million, and $693.3 million at
June 30, 1998, December 31, 1997, and June 30, 1997, respectively. Funding from
non deposit sources increased $107.3 million or 12.6% for the six month period
ending June 30, 1998, while for the twelve months ending June 30, 1998, Other
borrowings increased $268.0 million or 38.7%. One component of this trend, FHLB
advances increased $43.1 million, or 7.5%, during the six months ended June 30,
1998, and increased $87.2 million, or 16.4%, during the twelve month period
ended June 30, 1998. In addition, repurchase agreements increased $64.7 million
or 23.3%, during the six months ended June 30, 1998, and increased $181.3
million or 112.6 % during the twelve months ended June 30, 1998.
As of June 30, 1998, the Registrant had maximum FHLB lines of credit totaling
$666.6 million versus $1,052.2 million in available FHLB credit at June 30,
1997. This decline of 36.7% or $385.6 million is based on increased repurchase
agreement activity during the second half of 1997 and the first two quarters of
1998. Whenever a financial institution utilizes repurchase agreements as a
funding option, the maximum amount of credit available from the FHLB is
correspondingly reduced. During the six month period ending June 30, 1998,
repurchase agreement balances increased by $64.7 million. For the twelve month
period ending June 30, 1998, repurchase agreements increased by $181.3 million.
This shift in external funding sources is predicated on the current cost of
funds advantage associated with repurchase agreement transactions.
Table 6 on the following page presents the composition of the Registrant's other
borrowings as of June 30, 1998, December 31, 1997, and June 30, 1997,
respectively.
(Balance of this page left blank intentionally.)
34
<PAGE>
TABLE 6 - Other Borrowings (All figures in 000's)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997 June 30, 1997
Amount Percent Amount Percent Amount Percent
----------------------------- --------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
FHLB Advances $618,525 64.34% $575,440 67.38% $531,308 76.64%
Repurchase Agreements 342,268 35.61% 277,548 32.50% 161,000 23.22%
ESOP Loan 495 0.05% 990 0.12% 990 0.14%
----------------------------- --------------------------- ------------------------------
Total Other Borrowings $961,288 100.00% $853,978 100.00% $693,298 100.00%
============================= =========================== ==============================
</TABLE>
(Balance of this page is left intentionally blank.)
35
<PAGE>
Liquidity The Registrant's primary sources of funds are deposits, moderate
amounts of borrowing and proceeds from principal and interest payments on loans
and mortgage-backed securities. While maturities and scheduled amortization of
loans and mortgage-backed securities are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions, and competition. The Registrant anticipates that it will
have sufficient funds available to meet its current commitments.
The Registrant exceeded all regulatory standards for liquidity at June 30, 1998,
December 31, 1997, and June 30, 1997.
Year 2000 Compliance The efficient and reliable operation of the Registrant's
business is significantly dependent upon its computer hardware, software
programs, and operating systems (collectively "computer systems"). As a
financial services company, the Registrant relies on computer systems in
virtually all significant business operations. Management considers Year 2000
readiness to be a major business issue and has implemented a Year 2000 Plan to
successfully address all related risks.
The Registrant is currently evaluating all of its computer systems for Year 2000
readiness, including those systems that do not involve business information
processing. In addition, management is communicating with vendors, business
partners, commercial banking customers, and others to coordinate full Year 2000
conversion. Management expects all business-critical systems to be Year 2000
compliant by December 31, 1998, to allow a full year for adequate integrated
testing and completion of any remaining corrective action. HFI anticipates that
all of its computer systems will be completely tested and made fully Year 2000
compliant during 1999.
36
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 Statement Re: Computation of Earnings Per
Share.
Exhibit 27 Financial Data Schedule
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HARRIS FINANCIAL, INC.
(Registrant)
By /s/ Charles C. Pearson, Jr.
-------------------------------------
Charles C . Pearson, Jr., President
and Chief Executive Officer
By /s/ James L. Durrell
-------------------------------------
James L. Durrell, Executive Vice
President and Chief Financial Officer
Dated: August 11, 1998
38
<PAGE>
EXHIBIT INDEX
Exhibit Number
- --------------
Exhibit 11 Statement Re: Computation of Earnings Per Share.
Exhibit 27 Financial Data Schedule
39
Exhibit 11
Statement Regarding the Computation of Earnings Per Share
<TABLE>
<CAPTION>
For the six month period For the quarter ending
ending June 30, June 30,
--------------------------- ----------------------------
1998 1997(1) 1998 1997(1)
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding:
Total average shares outstanding 33,909,685 33,117,594 33,942,194 33,124,944
Average allocated ESOP shares 7,438 37,125 11,137 55,689
--------------------------- ----------------------------
Basic average shares 33,917,123 33,154,719 33,953,331 33,180,633
--------------------------- ----------------------------
Common Stock Equivalents (1)
Option plans Mgt/Directors 275,826 233,622 279,244 233,343
RRP Management 27,877 22,140 27,877 21,354
--------------------------- ----------------------------
Total average allocated award shares 303,703 255,762 307,121 254,697
--------------------------- ----------------------------
Fully diluted average shares outstanding 34,220,826 33,410,481 34,260,452 33,435,330
============================ ============================
Net income for the period $10,224,000 $ 9,774,000 $ 4,475,000 $ 5,065,000
Basic Earnings per share $ 0.30 $ 0.29 $ 0.13 $ 0.15
============================ ============================
Diluted earnings per share $ 0.30 $ 0.29 $ 0.13 $ 0.15
============================ ============================
</TABLE>
(1) The 1997 earnings per share calculations reflect the retroactive effect of
a 3 for 1 stock split effected in the form of a dividend that was approved
by the Board of Directors on October 22, 1997. The dividend was declared to
stockholders of record as of November 4, 1997 and was paid on November 18,
1997.
40
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 14,702
<INT-BEARING-DEPOSITS> 28,632
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,262,180
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 951,424
<ALLOWANCE> 9,264
<TOTAL-ASSETS> 2,325,602
<DEPOSITS> 1,126,150
<SHORT-TERM> 272,441
<LIABILITIES-OTHER> 49,336
<LONG-TERM> 688,847
0
0
<COMMON> 340
<OTHER-SE> 188,488
<TOTAL-LIABILITIES-AND-EQUITY> 2,325,602
<INTEREST-LOAN> 38,956
<INTEREST-INVEST> 41,553
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 80,509
<INTEREST-DEPOSIT> 25,602
<INTEREST-EXPENSE> 52,351
<INTEREST-INCOME-NET> 28,158
<LOAN-LOSSES> 1,400
<SECURITIES-GAINS> 2,970
<EXPENSE-OTHER> 20,222
<INCOME-PRETAX> 14,516
<INCOME-PRE-EXTRAORDINARY> 14,516
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,224
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
<YIELD-ACTUAL> 7.47
<LOANS-NON> 7,878
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 8,947
<ALLOWANCE-OPEN> 9,048
<CHARGE-OFFS> 362
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 9,264
<ALLOWANCE-DOMESTIC> 5,193
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,071
</TABLE>
