UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _______________________
Commission file number 0-22399
HARRIS FINANCIAL, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2889833
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(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
235 North Second Street, PO Box 1711, Harrisburg, Pennsylvania 17105
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(Address of principal executive offices) (Zip Code)
(717) 236-4041
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act; Common Stock $.01
per share, par value
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 and
Exchange Act of 1934 during the preceding 12 months (or 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K.
The aggregate market value of the shares of Common Stock of the
Registrant held by nonaffiliates of the Registrant was $202,240,800 at March 12,
1998.
As of March 12, 1998, the Registrant had 33,926,700 shares of Common
Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE:
Excerpts from the Registrant's Annual Report to Shareholders for the
year ended December 31, 1997 are incorporated herein by reference in response to
Parts I, II and IV of this report. The Registrant's definitive Proxy Statement
to be used in connection with its 1998 Annual Meeting of Shareholders is
incorporated herein by reference in partial response to Part III, hereof.
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HARRIS FINANCIAL, INC.
PART I
ITEM 1. BUSINESS
Harris Financial, Inc. ("HFI" or the "Registrant"), was organized under
Pennsylvania law in 1997. It is a bank holding company regulated by the Board of
Governors of the Federal Reserve System (the "FRB") and its wholly-owned state
chartered savings bank subsidiary is Harris Savings Bank (the `Bank").
General
The Bank began providing financial services as a state chartered mutual
savings and loan association in 1886. The Bank continued to operate under this
charter until 1991, when it converted to a state chartered mutual savings bank.
In January 1994, the Bank became a state-chartered stock savings bank in
connection with its formation of Harris Financial, MHC, a Pennsylvania mutual
holding company (the "MHC"). As part of this mutual holding company formation,
the Bank completed a stock offering that raised proceeds of $23.7 million. In
September 1997, the Bank and the MHC reorganized into a "two-tier" mutual
holding company whereby HFI was established as a majority-owned subsidiary of
the MHC, and the Bank became a wholly-owned subsidiary of HFI. At the present
time, approximately 75.2% of the common stock of HFI is owned by the MHC, and
the remainder is owned by the public. The deposits of the Bank are insured by
the Federal Deposit Insurance Corporation ("FDIC") under the Savings Association
Insurance Fund ("SAIF"). The Bank has been a member of the Federal Home Loan
Bank System since 1941. At December 31, 1997, HFI had total assets of $2.2
billion with deposits of $1.1 billion and stockholder's equity of $179 million.
The current corporate structure of the Bank, HFI and the MHC is as follows:
[graphic]
The Bank presently operates 33 full service offices, an operations
center and a business center. The Bank primarily serves depositors in the five
central Pennsylvania counties of Dauphin, Cumberland, York, Lancaster, and
Lebanon and in the northern Maryland county of Washington. It serves small
business lenders in the same area. The Bank offers residential mortgages in
Pennsylvania and four other states through it's mortgage banking subsidiary in
Blue Bell, Pennsylvania. Mobile home loans are originated throughout most of the
eastern United States.
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The Bank's primary lending activities continue to be the origination of loans
secured by first mortgages on owner-occupied one-to-four family residences. At
December 31, 1997, such loans totaled $539.2 million or 60.4% of total loans.
The Bank began originating commercial loans in 1996 and its portfolio totaled
$81.3 million at December 31, 1997.
The net income of the Bank depends primarily on its net interest
income, which is the difference between interest income on loans and investments
and interest expense on deposits and borrowings. Because of this reliance on net
interest income, the Bank's net income is affected by changes in market interest
rates and prevailing economic conditions. For example, assuming a liability
sensitive position, as interest rates rise, the Bank's net interest income will
tend to fall, and conversely when interest rates fall, the Bank's net interest
income will tend to rise. This condition is often referred to as "interest rate
risk". Financial institutions which accept and manage substantial degrees of
interest rate risk are generally susceptible to larger net interest income
fluctuations when compared to peer institutions which accept less interest rate
risk. Accordingly, managing interest rate risk successfully has a significant
impact on the Bank's return on equity.
During most of 1997, interest rates remained relatively stable due to
low inflation and a relatively stable economy. However, the Bank's net interest
margin, which is equal to net interest income divided by average interest
earning assets, decreased moderately. The Bank aggressively increased its
investment and borrowing activity in order to utilize its excess capital in
1997. This leveraging increased net interest income but had the effect of
reducing the Bank's net interest margin. The Bank's net interest margin
percentage decreased to 2.66% for the year ended December 31, 1997 from 2.87%
for the year ended December 31, 1996.
Another major risk normally undertaken by financial institutions is
"credit risk". This is the risk that a borrower will not repay a loan and that
the underlying collateral will be insufficient to prevent a loss. Credit losses
in 1997, 1996, and 1995 were considered to be immaterial and consistent with the
Bank's history of maintaining high asset quality. In 1996, the Bank began to
originate commercial loans on businesses and as such, it began to take on more
credit risk as it became more like a full service community bank. This is part
of a planned restructuring to reduce interest rate risk and to diversify the
assets of the Bank.
Historically, the Bank has closely monitored its level of non-interest
expense. As it continued the transition to a community bank, additional
expenditures were incurred during the year ended December 31, 1997 compared to
the year ended December 31, 1996. Increased expenditures were primarily due to
$5.0 million expense incurred to upgrade the information systems infrastructure
to accommodate the overall transition to a community bank.
Reorganization
In January 1994, the Bank formed the MHC as a Pennsylvania chartered
mutual holding company. Each deposit account of the Bank's mutual savings bank
predecessor at the time of the reorganization became a deposit account in the
Bank in the same amount and upon the same terms and conditions, except the
holder of each such deposit account received liquidation rights in the MHC
instead of the Bank.
The reorganization was approved by the FRB, the Pennsylvania Department
of Banking ("Department") and the FDIC. The plan of reorganization authorized
the Bank to offer stock in one or more stock offerings up to a maximum of 49% of
the issued and outstanding shares of its common stock. The Bank offered $25.0
million of common stock on a priority basis to: (i) eligible depositors as of
December 31, 1992; (ii) the employee stock ownership plan (ESOP); (iii)
officers, trustees and employees of the Bank, and the Bank's recognition and
retention plans (RRP); (iv) other depositors and borrowers as of October 29,
1993; and (v) the general public.
In September 1997, the Bank and the MHC were reorganized into its
current "two-tier" mutual holding company structure by establishing HFI as the
parent of the Bank. Under the terms of this reorganization, each share of Bank
common stock was exchanged for one share of HFI common stock. The "two-tier"
reorganization
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was approved by the FRB, the Department and the FDIC subject to several
conditions, including that: (i) the MHC may not transfer its shares of HFI and
HFI may not transfer its shares of the Bank without the prior approval of the
FRB; (ii) HFI may not issue any equity securities without prior approval of the
FRB; (iii) the MHC must obtain FRB approval of any conversion of the MHC from
mutual to stock form; and (iv) unless waived by the FRB, the Bank's depositiors
will be given priority rights in any sale of HFI stock to any person other than
the MHC. The two-tier reorganization was accounted for in a manner similar to a
pooling of interests. Accordingly, all prior period financial information of HFI
herein is identical to the prior period financial information of the Bank.
On October 21, 1997, the Board of Directors of HFI declared a 3 for 1
stock split to be effected in the form of dividend to stockholders of record as
of November 4, 1997, and payable on November 18, 1997. All share and per share
information herein has been restated to reflect the stock split as if it had
been in effect during all of the periods presented.
Treasury Stock Repurchase
On February 27, 1998, Harris Financial, Inc. received authorization
from the Department to repurchase 450,000 shares of its outstanding common
stock. The assumed price for the repurchase of the shares is $ 16 per share for
an aggregate cost of $7,200,000. The shares will be used to establish several
stock ownership and stock option plans. These plans, which are in the
developmental phase, will benefit directors, executive officers, non-executive
officers, and newly appointed executives or directors. The proposed repurchase
of shares must be completed one year from the approval date of February 28,
1998. The approval may be extended for one year if a written request is received
before the expiration date.
Limitations
The approval from the Department is subject to any limitations or
conditions that may be imposed by the Federal Reserve Bank in accordance with
the Federal Reserve Act. The authority to grant this approval is established
under the Department's letter of conditional approval (the "Conditional Approval
Letter"), dated August 28, 1997, issued to effect the establishment of a
"two-tier" mutual holding company by Harris Financial, MHC under the provisions
of Section 15.1 of the Banking Code of 1965 and related policy statements. This
letter states "the Stock Holding Company and the Savings Bank must obtain
written approval from the Department prior to issuing or buying back any
securities, or engaging in any other transaction involving securities of the
Savings Bank, the Stock Holding Company or any affiliate thereof, which may
include conditions deemed appropriate by the Department." This provision applies
both the repurchase of shares and the establishment of stock ownership and stock
option plans by the Holding Company.
In addition, the Department imposes the following conditions relative
to the proposed common stock repurchase: the Bank will maintain a minimum of the
6.5% Tier 1 capital ratio consistent with the Capital Maintenance Agreement
section of the Department's policy regarding Mutual Holding Companies; and the
Holding Company will follow all relevant rules of the Securities and Exchange
Commissions ("SEC") relating to the repurchase of the shares pursuant to this
approval including but not limited to Rule 10b-18 of the rules and regulations
under the Securities Exchange Act of 1934 .
Competition
The Bank competes with a significant number of financial institutions
in its market area, many of which are substantially larger and have greater
financial resources than the Bank, and all of which are competitors of the Bank
to varying degrees. The Bank's competition for loans comes principally from
savings banks, savings and loan associations, mortgage banking companies and
commercial banks. The Bank's most direct competition for deposits has
historically come from savings banks, savings and loan associations, commercial
banks, and credit unions. The Bank faces additional and increasing competition
for deposits from other financial intermediaries such as brokerage
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firms and insurance companies. Competition may also increase as a result of the
reduction of restrictions on interstate operations of financial institutions.
Employees
At December 31, 1997, HFI employed 550 persons, with full time
equivalent employees totaling 532 individuals at that date. None of the
employees are represented by a collective bargaining group and management
believes relations with its employees to be good.
Regulation and Supervision
Regulation
General
The Bank is a Pennsylvania-chartered savings bank and its deposit
accounts are insured up to applicable limits by the FDIC under the SAIF. The
Bank is subject to extensive regulation by the Department, as its chartering
agency, and by the FDIC, as the insurer of deposits. The Bank must file reports
with the Department and the FDIC concerning its activities and financial
condition, and must obtain regulatory approvals prior to entering into certain
transactions including, but not limited to, mergers and acquisition of other
financial institutions. The Department and the FDIC periodically examine the
Bank to test its compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the FDIC insurance fund and depositors. The regulatory structure also gives
the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and with their examination policies,
including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any change
in such regulation, whether by the Department or the FDIC could have a material
adverse impact on HFI, the Bank and their operations. HFI and the MHC; as mutual
savings bank holding companies; are required to file certain reports with, and
otherwise comply with the rules and regulations of the FRB. Certain of the
regulatory requirements applicable to the Bank, HFI and the MHC are referred to
below or elsewhere herein.
Pennsylvania Savings Bank Law
The Pennsylvania Banking Code of 1965, as amended (the "Banking Code")
contains detailed provisions governing the organization, location of offices,
rights and responsibilities of directors, officers, employees, and depositors,
as well as corporate powers, savings and investment operation and other aspects
of the Bank and its affairs. The Banking Code delegates extensive rulemaking
power and administrative discretion to the Department so that the supervision
and regulation of state-chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.
One of the purposes of the Banking Code is to provide savings banks
with the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws as well as other state,
federal and foreign laws. A Pennsylvania savings bank may locate or change the
location of its principal place of business and establish an office anywhere in
Pennsylvania, with the prior approval of the Department.
The Department generally examines each savings bank not less frequently
than once every two years. Although the Department may accept the examinations
and reports of the FDIC in lieu of the Department's examination, the current
practice is for the Department to conduct individual examinations. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney, or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department as to why such person should not be removed.
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Interstate Banking
Prior to 1994 a bank holding company located in one state was
prohibited from acquiring a bank or all of its assets located in another state
unless the acquisition was specifically authorized by a reciprocal interstate
banking statute, such as the statute adopted in Pennsylvania in 1990,
specifically permitting interstate acquisitions. Similarly, interstate branching
was prohibited for national banks and state-chartered member banks, although
some states, not including Pennsylvania, had passed laws permitting limited
interstate branching by non-Federal Reserve member state banks. The Interstate
Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits an
adequately capitalized, adequately managed bank holding company to acquire a
bank in another state, whether or not the state permits the acquisition, subject
to certain deposit concentration caps and the FRB's approval. A state may not
impose discriminatory requirements on acquisitions by out-of-state holding
companies. In addition, under the Riegle-Neal Act, a bank may expand interstate
by merging with a bank in another state and also may consolidate the acquired
bank into new branch offices of the acquiring bank, unless the other state
affirmatively opts out of the legislation before that date. The Riegle-Neal Act
also permits de novo interstate branching, but only if a state affirmatively
opted in by appropriate legislature. Once a state opted into interstate
branching, it could not opt out at a later date. The Riegle-Neal Act also allows
foreign banks to branch by merger or de novo branch to the same extent as banks
from the foreign bank's home state. In 1995, the Pennsylvania Legislature
amended the Banking Code to opt in to all of the provisions of the Riegle-Neal
Act, including interstate bank mergers and de novo interstate branching.
Insurance of Accounts and Regulation by the FDIC
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
As a result of the enactment of the Small Business Job Protection Act
of 1996, all savings banks and savings associations may convert to a commercial
bank charter, diversify their lending, or merge into a commercial bank without
having to recapture any of their pre-1998 tax bad debt reserve accumulations.
Any post-1987 reserves are subject to recapture, regardless of whether or not a
particular thrift intends to convert its charter, be acquired, or diversify its
activities. The recapture of post-1987 reserves is assessed in equal
installments over the six year period beginning in fiscal year 1997. At December
31, 1997, the Bank had a balance of approximately $5.3 million of bad debt
reserves in retained income that is subject to recapture under this legislation.
Capital Requirements
Any savings institution that fails any of its federal capital
requirements is subject to possible enforcement actions by the FDIC. Such
actions could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on an institution's operations,
termination of federal deposit insurance, and the appointment of a conservator
or receiver. Certain actions are required by law. The FDIC's capital regulation
provides that such actions, through enforcement proceedings or otherwise, could
require one or more of a variety of corrective actions.
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The Bank is also subject to more stringent Department capital
guidelines. Although not adopted in regulation form, the Department utilizes
capital standards requiring a minimum of 6% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially the
same as those defined by the FDIC. At December 31, 1997, the Bank exceeded the
Department's capital guidelines.
Loans-to-One Borrower Limitation
Under federal regulations, with certain limited exceptions, the Bank
may lend to a single or related group of borrowers on an "unsecured" basis an
amount up to 15% of its unimpaired capital and surplus. An additional amount may
be lent, up to 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain securities
and bullion, but generally does not include real estate. As of December 31,
1997, the Bank did not have any loans which exceeded this limitation.
Prompt Corrective Action
Under Section 38 of the Federal Deposit Insurance Act ("FDIA"), each
federal banking agency is required to implement a system of prompt corrective
action for the institutions which it regulates. The federal banking agencies
have promulgated substantially similar regulations to implement the system of
prompt corrective action. Under the regulations, a bank shall be deemed to be
(i) "well capitalized" if it has a total risk-based capital ratio of 10.0% or
more, has a Tier 1 risk-based capital ratio of 6.0% or more, has a Tier 1
leverage capital ratio of 5.0% or more and is not subject to any written capital
order or directive; (ii) "adequately capitalized" if it has total risk-based
capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or
more, and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized"; (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier 1
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances); (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal or less that 2.0%. Section 38 of the FDIA
and the related regulations also specify circumstances under which a federal
banking agency may reclassify a well capitalized institution as adequately
capitalized and may require an adequately capitalized institution to comply with
supervisory actions as if it were in the next lower category(except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). As of December 31, 1997, the Bank was a
"well-capitalized institution" for this purpose.
Activities and Investments of Insured State-Chartered Banks
Section 24 of the FDIA generally limits the activities and equity
investments of FDIC-insured, state chartered banks to those that are permissible
for national banks. Under regulations dealing with equity investments, an
insured state bank generally may not, directly or indirectly, acquire or retain
any equity investment of a type, or in an amount, that is not permissible for a
national bank. An insured state bank is not prohibited from, among other things:
(i) acquiring or retaining a majority interest in a subsidiary; (ii) investing
as a limited partner in a partnership the sole purpose of which is direct or
indirect investment in the acquisition, rehabilitation, or new construction of a
qualified housing project, provided that such limited partnership investments
many not exceed 2% of the bank's total assets; (iii) acquiring up to 10% of the
voting stock of a company that solely provides or reinsures directors',
trustees', and officers' liability insurance coverage or banker's blanket bond
group insurance coverage for insured depository institutions; and (iv) acquiring
or retaining the voting shares of a depository institution if certain
requirements are met.
Regulatory Enforcement Authority
The enforcement powers available to federal banking regulators have
been significantly increased since 1989. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue
cease-and-desist or removal orders, and to initiate injunctive actions against
banking organizations and institution-affiliated parties. In general, these
enforcement actions may be initiated for violations of laws and regulations and
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unsafe or unsound practices. Other action or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities.
Dividends
The Banking Code states, in part, that dividends may be declared and
paid only out of accumulated net earnings and many not be declared or paid
unless surplus (retained earnings) is at least equal to contributed capital. The
Bank has not declared or paid any dividends which cause the Bank's retained
earnings to be reduced below the amount required. Finally, dividends may not be
declared or paid if the Bank is in default in payment of any assessment due the
FDIC. At December 31, 1997, the Bank's retained earnings exceeded contributed
capital by $112 million and the Bank was not in default of any assessment due
the FDIC.
Holding Company Regulation
Under the Bank Holding Company Act of 1956 (the "BHCA"), a bank holding
company must obtain FRB approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after such acquisition, it would own or control more than 5% of such
shares (unless it already owns or controls the majority of such shares); (ii)
acquiring all or substantially all of the assets of another bank or bank holding
company; or (iii) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or FRB regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the FRB includes,
among other things, operating a savings association, mortgage company, finance
company, credit card company or factoring company; performing certain data
processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, traveler's checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers.
HFI and the MHC are also subject to capital adequacy guidelines for
bank holding companies (on a consolidated basis) which are substantially similar
to those of the FDIC for the Bank.
The FRB has issued a policy statement on the payment of cash dividends
by bank holding companies, which expresses the FRB's view that a bank holding
company should pay cash dividends only to the extent that the holding company's
net income for the past year is sufficient to cover both the cash dividends and
a rate of earnings retention that is consistent with the holding company's
capital needs, asset quality and overall financial condition. The FRB also
indicated that it would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, under the
prompt corrective action regulations adopted by the FRB, the FRB may prohibit a
bank holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized."
The activities of HFI and the MHC are also restricted pursuant the
conditions imposed by the FRB as part of its approval of the holding company
structure described earlier in the Reorganization section of this 10-K.
Such conditions include the following:
o The MHC may not transfer its shares of HFI, and HFI may
not transfer its shares of the Bank without the prior
approval of the FRB;
o The Bank, HFI or any subsidiary of the MHC may not issue
equity securities without the prior approval of the FRB;
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o The MHC must file an application to the FRB prior to any
conversion of the MHC from mutual to stock form;
o Unless waived by the FRB, the Bank's depositors will be
given priority rights in any sale of the Bank or HFI stock
to any person other than the MHC;
o Any purchase of Common Stock from the MHC by HFI must be
approved in advance by the FRB, and must be made at the
then-current market price;
o HFI and the MHC may not incur any debt without FRB
approval; and
o HFI and the MHC may not pledge HFI's Common Stock in
support of any borrowing without FRB approval.
Transactions with Affiliates
Under current federal law, transactions between depository institutions
and their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding
company of a savings bank and any companies which are controlled by such parent
holding company are affiliates of the savings bank. Generally, Section 23A
limits the extent to which the savings bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
savings bank's capital stock and surplus, and contains an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus. The term "covered transaction" includes the making of loans
or other extension of credit to an affiliate; the purchase of assets from an
affiliate, the purchase of, or an investment in, the securities of an affiliate;
the acceptance of securities of an affiliate as collateral for a loan or
extension of credit to any person; or issuance of a guarantee, acceptance, or
letter of credit on behalf of the affiliate. Section 23A also establishes
specific collateral requirements for loans or extension of credit to, or
guarantees, acceptances on letters of credit issued on behalf of an affiliate.
Section 23B requires that covered transactions, and a broad list of other
specified transactions, be on terms substantially the same , or no less
favorable, to the savings bank or its subsidiary as similar transactions with
nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings
bank with respect to loans to directors, executive offices, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of the a savings bank , and certain related interests of any of the
forgoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers, and stockholders who
control 10% or more of the voting securities of a stock savings bank, and their
respective related interests, unless such a loan is approved in advance by a
majority of the board of directors of the savings bank. Further, pursuant to
Section 22(h), loans to directors, executive officers and principal stockholders
must generally be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(g) of the Federal Reserve Act places
additional limitations on loans to executive officers.
Miscellaneous
In addition to requiring a new system of risk-based insurance
assessments and a system of prompt corrective action with respect to
undercapitalized banks, as discussed above, the FDIC requires federal banking
regulators to adopt regulations in a number of areas to ensure bank safety and
soundness, including internal controls, credit underwriting, asset growth,
management compensation, ratios of classified assets to capital, and earnings.
Federal law also contains provisions which are intended to enhance independent
auditing requirements, restrict the activities of state-chartered insured banks,
amend various consumer banking laws, limit the ability of "undercapitalized
banks" to borrow from the Federal Reserve's Discount Window, require regulators
to perform annual on-site bank examinations, and set standards for real estate
lending.
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Federal Securities Law
Shares of HFI's common stock are registered with the SEC under Section
12(g) of the Exchange Act. Information can be examined without charge at the
public reference facilities of the SEC located at 450 Fifth Street, NW,
Washington DC 20549, and copies of such material can be obtained from the SEC at
prescribed rates. The SEC maintains a web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants, including HFI, that file electronically.
The foregoing references to laws and regulations are brief summaries
thereof which do not purport to be complete and which are qualified in their
entirety by reference to such laws and regulations.
Monetary Policy
The earnings of HFI are affected by domestic economic conditions and
the monetary and fiscal policies of the United States government and its
agencies. An important function of the Federal Reserve System is to regulate the
money supply and interest rates. Among the instruments used to implement those
objectives are open market operations in United States government securities and
changes in reserve requirements against member bank deposits. These instruments
are used in varying combinations to influence overall growth and distribution of
bank loans, investments and deposits, and their use may also effect rates
charged on loans or paid for deposits.
HFI is a member of the Federal Reserve System, and therefore, FRB
policies and regulations have a significant impact on its deposits, loans and
investment growth, as well as the rate of interest earned and paid, and expected
to be paid, and are expected to affect HFI's operations in the future.
Management cannot predict the effect such policies and regulations will have on
the future business and earnings of HFI.
11
<PAGE>
ITEM 2. PROPERTIES
Year Leased Leased or
Location or Acquired Owned
- -------- ----------- ---------
Main Office
235 N. Second St.
Harrisburg, PA 17101 1935 Owned
Operations Center
635 North 12th St.
Lemoyne, PA 17043 1989 Owned
Business Center
234 N. Second St.
Harrisburg, PA 17101 1996 Owned
Branch Offices:
4075 Market Street
Camp Hill, PA 17011 1994 Leased
1832 Market Street
Camp Hill, PA 17011 1969 Owned
3555 Capital City Mall
Camp Hill, PA 17011 1974 Leased
3100 Market Street
Camp Hill, PA 17011 1996 Owned
300 Camp Hill Mall
Camp Hill, PA 17011 1996 Leased
17 West High Street
Carlisle, PA 17013 1987 Owned
Colonial Park Mall
Harrisburg, PA 17109 1976 Leased
9 South Market Street
Elizabethtown, PA 17022 1982 Leased
12
<PAGE>
Year Leased Leased or
Location or Acquired Owned
36 East Main Street
Ephrata, PA 17522 1989 Leased
100 East King Street
Lancaster, PA 17603 1982 Owned
1195 Quentin Road
Lebanon Plaza Mall
Lebanon, PA 17042 1980 Leased
33 Market Square
Manheim, PA 17545 1984 Leased
600 East Simpson Street
Mechanicsburg, PA 17055 1987 Owned
Silver Spring Commons
6520 Carlisle Pike
Mechanicsburg, PA 17055 1996 Leased
99 Old York Road
New Cumberland, PA 17070 1980 Leased
North Middleton
921 Cavalry Road
Carlisle, PA 17013 1987 Owned
1677 Oregon Pike
Lancaster, PA 17601 1991 Owned
Paxton Square
6075 Allentown Boulevard
Harrisburg, PA 17112 1990 Owned
355 Fifth Street
Quarryville, PA 17566 1987 Leased
Queensgate
2081 Springwood Road
York, PA 17403 1989 Leased
401 Enola Road
Enola, PA 17025 1979 Owned
13
<PAGE>
Year Leased Leased or
Location or Acquired Owned
- -------- ----------- ---------
Suite #3, Point Mall
Harrisburg, PA 17111 1975 Leased
320 Newberry Commons
Etters, PA 17319 1992 Leased
West Shore Plaza
1200 Market Street
Lemoyne, PA 17043 1982 Leased
2450 Eastern Boulevard
York, PA 17402 1979 Owned
100 West Washington Street
Hagerstown, MD 21740 1995 Leased
1591 Potomac Avenue
Hagerstown, MD 21742 1995 Leased
526 S. 29th Street
Harrisburg, PA 17104 1996 Owned
Beaufort Farms Plaza
2017 Linglestown Road
Harrisburg, PA 17110 1996 Leased
114 W. Chocolate Avenue
Hershey, PA 17033 1996 Owned
Hershey Square
1161 Mae Street
Hummelstown, PA 17036 1996 Owned
Mushroom Hill
6301 Grayson Road
Harrisburg, PA 17111 1997 Leased
14
<PAGE>
Year Leased Leased or
Location or Acquired Owned
- -------- ----------- ---------
Mortgage Lending Offices:
2500 Kingston Road
York, PA 17402 1987 Owned
Avstar Mortgage Corporation
1515 Dekalb Pike
Blue Bell, PA 19422 1997 Owned
Avstar Mortgage Corporation
d/b/a/ Realty Executives
4059 Skippack Pike
Skippack, PA 19474 1997 Leased
Avstar Mortgage Corporation
600 E. Eden Road
Lancaster, PA 17603 1997 Leased
Avstar Mortgage Corporation
333 Jimmie Leeds Rd.
Suite #7
Absecon, NJ 08201 1997 Leased
Avstar Mortgage Corporation
Marlton Crossing
Garden Office
Suite 102F Centre Boulevard
Marlton, NJ 08053 1997 Leased
Avstar Mortgage Corporation
2508 Schoenersville Road
Bethlehem, PA 18017 1997 Leased
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Management, after consulting with the Registrant's legal counsel, is
not aware of any litigation that would have a material adverse effect on the
consolidated financial position of the Registrant. There are no proceedings
pending other than ordinary routine litigation incident to the business of the
Registrant and of the Bank. In addition, management does not know of any
material proceedings contemplated by government authorities against the
Registrant or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by this Item, regarding market value, dividend
payment, and number of shareholders is set forth on page 57 of the Registrant's
Annual Report to Shareholders for the year ended December 31, 1997, which is
included at Exhibit 13 hereto, and incorporated herein by reference.
As of March 12, 1998, there were approximately 3,709 shareholders of
record of the Registrant's common stock.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item is set forth on page 1 of the
Registrant's Annual Report to Shareholders for the year ended December 31, 1997,
which is included at Exhibit 13 hereto, and incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this Item is set forth on pages 9 through
28 of the Registrant's Annual Report to Shareholders for the year ended December
31, 1997, which pages are included at Exhibit 13 hereto, and incorporated herein
by reference.
All statistical information presented in the above referenced document
which requires averages has been compiled using average monthly amounts.
16
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this Item is set forth on pages 14 through
15 of the Registrant's Annual Report to Shareholders for the year ended December
31, 1997, which pages are included at Exhibit 13 hereto, and incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item is set forth on pages 31 through
55 of the Registrant's Annual Report to Shareholders for the year ended December
31, 1997, which pages are included at Exhibit 13 hereto, and incorporated herein
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item, relating to directors, executive
officers, and controlling interests is set forth on pages 7 through 10 and page
12 of the Registrant's definitive Proxy Statement to be used in connection with
the 1998 Annual Meeting of Shareholders, which pages are incorporated herein by
reference.
Section 16(a) Beneficial Ownership Compliance. Section 16(a) of the
Securities Exchange Act of 1934, as amended, requires the Registrant's officers
and directors, and persons who own more that 10 percent of a registered class of
the Registrant's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Officers,
directors and greater than 10 percent shareholders are required by SEC
regulation to furnish the Registrant with copies of all Section 16(a) forms they
file.
Based solely upon its review of the copies of such forms received by it
or written representations from certain reporting persons that no Forms 5 were
required for those persons, the Registrant believes that during the period from
January 1, 1997 through December 31, 1997, its officers and directors were in
compliance with all filing requirements applicable to them.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item, relating to executive
compensation, is set forth in pages 11 through 13 of the Registrant's definitive
Proxy Statement to be used in connection with the 1998 Annual Meeting of
Shareholders, which pages are incorporated herein by reference.
17
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item, relating to beneficial ownership
of the Registrant's Common Stock, is set forth in pages 3 through 6 of the
Registrant's definitive Proxy Statement to be used in connection with the 1998
Annual Meeting of Shareholders, which pages are incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item, relating to transactions with
management and others, certain business relationships and indebtedness of
management, is set forth on pages 12 and 13 of the Registrant's definitive Proxy
Statement to be used in connection with the 1998 Annual Meeting of Shareholders,
which page is incorporated herein by reference.
18
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The following financial statements are included by reference
in Part II, Item 8 hereof: Report of Independent Certified
Public Accountants. Consolidated Balance Sheets: December 31,
1997 and 1996. Consolidated Statements of Income: Years ended
December 31, 1997, 1996 and 1995. Consolidated Statement of
Changes in Stockholders' Equity: Years ended December 31,
1997, 1996 and 1995. Consolidated Statement of Cash Flows:
Years ended December 31, 1997, 1996 and 1995. Notes to
Consolidated Financial Statements.
2. Financial Statement Schedules.
Financial Statement Schedules are omitted because the
required information is either not applicable, not required
or is shown in the respective financial statements or in the
notes thereto.
3. The following Exhibits are filed herewith or incorporated by
reference as a part of this annual report.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number
- --------------
<S> <C>
Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated
by Reference to Exhibit B of the Prospectus/Proxy
Statement No. 333-22415 on Form S-4, filed with the
Commission on February 26, 1997, and amended on March 17,
1997).
Exhibit 3(ii) Bylaws of Registrant (Incorporated by Reference to
Exhibit C of the Prospectus/Proxy Statement included in
Registrant's Registration Statement No. 333-22415 on Form
S-4, filed with the Commission on February 26, 1997, and
amended on March 17, 1997).
19
<PAGE>
Exhibit 10.1 Harris Savings Bank 1994 Stock Option Plan for Outside
Directors (Incorporated by Reference to Exhibit 4.1 to
Registrant's Registration Statement No. 333-36087 on
Form S-8, filed with the Commission on September 22,
1997).
Exhibit 10.2 Harris Savings Bank 1994 Incentive Stock Option Plan
(Incorporated by Reference to Exhibit 4.2 to Registrant's
Registration Statement No. 333-36087 on Form S-8, filed
with the Commission on September 22, 1997).
Exhibit 10.2 Harris Savings Bank 1996 Incentive Stock Option Plan
(Incorporated by Reference to Exhibit 4.3 to Registrant's
Registration Statement No. 333-36087 on Form S-8, filed
with the Commission on September 22, 1997).
Exhibit 10.3 Harris Savings Bank Recognition and Retention Plan for
Officers and Employees (Incorporated by Reference to
Exhibit 10.4 to Registrant's Registration Statement No.
333-22415 On Form S-4, filed with the Commission on
February 26, 1997, and amended on March 17, 1997).
Exhibit 10.4 Harris Savings Bank Recognition and Retention Plan for
Outside Directors (Incorporated by Reference to Exhibit
10.5 to Registrant's Registration Statement No. 333-22415
on Form S-4, filed with the Commission on February 26,
1997, and amended on March 17, 1997).
Exhibit 10.5 Form of Employment Contracts between the Bank and
Bernard H. Sarfert, Sr. and the Bank and Lyle B. Shughart,
each dated March 13, 1997 (Incorporated by Reference to
Exhibit 10.6 to Registrant's Registration Statement No.
333-22415 on Form S-4, filed with the Commission on
February 26, 1997, and amended on March 17, 1997).
Exhibit 10.6 Form of Change in Control Agreements between the Bank
and William J. McLaughlin, James L. Durrell, William M.
Long and Lyle B. Shughart, all dated January 25, 1994
(Incorporated by Reference to Exhibit 10.7 to Registrant's
Registration Statement No. 333-22415 on Form S-4, filed
with the Commission on February 26, 1997, and amended
on March 17, 1997).
Exhibit 10.7 Harris Savings Bank Supplemental Executive Retirement
Plan (Incorporated by Reference to Exhibit 10.8 to
Registrant's Registration Statement No. 333-22415 on
Form S-4, filed with the Commission on February 26,
1997, and amended on March 17, 1997).
Exhibit 10.8 Executive Employment Agreement between Harris Savings Bank and
Richard C. Ruben, dated August 11, 1997. Incorporated by Reference to
20
<PAGE>
Exhibit 10.1 on Form 8-K, File Number 000-22399, filed
with the Commission on March 13, 1998.
Exhibit 10.9 Executive Agreement between Harris Financial MHC and Charles C.
Pearson, Jr., dated December 19, 1997. Incorporated by Reference to
Exhibit 10.2 on Form 8-K, File Number 000-22399, filed with the
Commission on March 13, 1998.
Exhibit 11 Statement Re: Computation of Earnings Per Share.
Exhibit 13 1997 Annual Report to Shareholders
Exhibit 23.1 Consent of Independent Auditors - KPGM Peat Marwick LLP
Exhibit 23.2 Consent of Independent Auditors - Arthur Andersen LLP
Exhibit 27 Financial Data Schedule
</TABLE>
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, Harris Financial, Inc. has duly caused this report to be signed on
its behalf my the undersigned, thereunto duly authorized.
HARRIS FINANCIAL, INC.
March 17, 1997 By: /s/ Charles C. Pearson, Jr.
-------------------------------
Charles C. Pearson, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Harris
Financial, Inc. and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Charles C. Pearson, Jr. President and Chief Executive Officer March 17,1998
- ------------------------- Officer and Director
Charles C. Pearson, Jr. (Principal Executive Officer)
/s/ James L. Durrell Executive Vice President and March 17,1998
- ------------------------- Chief Financial Officer
James L. Durrell (Principal Accounting and Financial
Officer)
/s/ Robert E. Kessler Chairman of the Board and March 17,1998
- ------------------------- Director
Robert E. Kessler
/s/Samuel M. Altdoerffer, Sr. Director March 17,1998
- -------------------------
Samuel M. Altdoerffer, Sr.
/s/ Ernest P. Davis Director March 17,1998
- -------------------------
Ernest P. Davis
/s/ Jimmie C. George Director March 17,1998
- -------------------------
Jimmie C. George
/s/ Robert A. Houck Director March 17,1998
- -------------------------
Robert A. Houck
/s/ Bruce S. Isaacman Director March 17,1998
- -------------------------
Bruce S. Isaacman
/s/ William E. McClure, Jr. Director March 17,1998
- -------------------------
William E. McClure, Jr.
/s/ William A. Siverling Director March 17,1998
- -------------------------
William A. Siverling
/s/ Director March 17,1998
- -------------------------
Frank R. Sourbeer
/s/ Donald B. Springer Director March 17,1998
- -------------------------
Donald B. Springer
</TABLE>
Securities and Exchange Commission
Form 10-K
Exhibit 11
Statement Regarding the Computation of Earnings Per Share
Twelve Months Ended
December 31,
1997(1) 1996(1)
-------------------------------
Weighted average shares outstanding:
Total average shares outstanding 33,705,129 32,953,494
Average allocated ESOP shares 74,250 74,250
----------- -----------
Basic average shares 33,779,379 33,027,744
----------- -----------
Common stock equivalents
Option plans Mgt/Directors 271,228 196,260
RRP Management 25,454 44,634
----------- -----------
Total average allocated award shares 296,682 240,894
----------- -----------
Fully diluted average common shares
outstanding 34,076,061 33,268,638
----------- -----------
Net income for the period $17,771,000 $ 1,031,000
Basic earnings per share $ 0.53 $ 0.03
=========== ===========
Fully diluted earnings per share $ 0.52 $ 0.03
=========== ===========
(1) The 1997 and 1996 earnings per share calculations reflect the retroactive
effect of a 3 for 1 stock split effected in the form of a dividend that was
approved by the Board of Directors on October 22, 1997. The dividend was
declared to stockholders of record as of November 4, 1997 and was paid on
November 18, 1997.
KPMG Peat Marwick LLP
225 Market Street
Suite 300
P.O. Box 1190
Harrisburg, PA 17108-1190
The Board of Directors
Harris Financial, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-36087) on Form S-8 of Harris Financial, Inc. of our report dated January 21,
1997, relating to the consolidated statement of financial condition of Harris
Savings Bank and subsidiaries as of December 31, 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the two year period ended December 31, 1996, which report
appears in the December 31, 1997 annual report on Form 10-K of Harris Financial,
Inc. Harris Savings Bank changed its method of accounting for mortgage servicing
rights in 1996 to adopt the provisions of Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights."
KPMG Peat Marwick LLP
March 19, 1998
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 20, 1998, incorporated by reference in this Form 10-K, into
the Company's previously filed Form S-8 Registration Statement No. 333-36087.
/s/ Arthur Andersen LLP
-----------------------
Lancaster, Pa.,
March 19, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 0
<INT-BEARING-DEPOSITS> 12,626
<FED-FUNDS-SOLD> 11,840
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,102,782
<INVESTMENTS-CARRYING> 96,412
<INVESTMENTS-MARKET> 97,545
<LOANS> 913,984
<ALLOWANCE> 8,614
<TOTAL-ASSETS> 2,207,059
<DEPOSITS> 1,146,238
<SHORT-TERM> 351,838
<LIABILITIES-OTHER> 27,809
<LONG-TERM> 502,140
0
0
<COMMON> 338
<OTHER-SE> 178,696
<TOTAL-LIABILITIES-AND-EQUITY> 2,207,059
<INTEREST-LOAN> 70,138
<INTEREST-INVEST> 70,929
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 141,067
<INTEREST-DEPOSIT> 54,383
<INTEREST-EXPENSE> 93,085
<INTEREST-INCOME-NET> 47,982
<LOAN-LOSSES> 610
<SECURITIES-GAINS> 4,057
<EXPENSE-OTHER> 35,848
<INCOME-PRETAX> 26,083
<INCOME-PRE-EXTRAORDINARY> 26,083
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,771
<EPS-PRIMARY> .53
<EPS-DILUTED> .52
<YIELD-ACTUAL> 7.35
<LOANS-NON> 6,938
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 12,400
<ALLOWANCE-OPEN> 8,322
<CHARGE-OFFS> 368
<RECOVERIES> 50
<ALLOWANCE-CLOSE> 8,614
<ALLOWANCE-DOMESTIC> 8,614
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,889
</TABLE>
