<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 0R 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, P.O. 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 34,015,875 shares of stock, par
-------------------------------
value of $.01 per share, outstanding at October 19, 1999.
- ---------------------------------------------------------
Page 1
<PAGE>
Part I. Financial Information.
Part 1, Item 1 Financial Statements.
(Balance of this page is left intentionally blank.)
Page 2
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- ---------------
<S> <C> <C>
Assets
- ------
Cash and cash equivalents $ 56,834 $ 56,741
Marketable securities available-for-sale (Note 2) 1,249,016 1,274,837
Loans receivable, net 1,248,836 1,051,642
Loans held for sale, net 1,296 14,418
Loan servicing rights 7,854 10,996
Investments in real estate and other joint ventures 6,156 7,262
Premises and equipment, net of accumulated
depreciation of $14,943 and $17,230 23,856 21,614
Accrued interest receivable 16,835 15,523
Income taxes receivable - 635
Intangible assets 18,340 16,909
Deferred tax asset 9,104 -
Other assets 4,038 26,892
------------- ---------------
Total assets $ 2,642,165 $ 2,497,469
============= ===============
<CAPTION>
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits $ 1,296,151 $ 1,205,379
Escrow 2,084 7,906
Accrued interest payable 13,681 6,965
Postretirement benefit obligation 2,913 2,452
Other borrowings (Note 3) 1,136,000 1,069,254
Deferred tax liability - 5,472
Income taxes payable 2,092 -
Other liabilities 11,185 10,071
------------- ---------------
Total liabilities $ 2,464,106 $ 2,307,499
------------- ---------------
Common stock, $ .01 par value, authorized 100,000,000 shares,
34,015,875 shares issued and 33,566,575 outstanding
at September 30, 1999, 33,993,500 shares issued
and 33,584,200 shares outstanding at December 31, 1998 $ 340 $ 340
Paid in capital 30,237 29,960
Retained earnings 170,753 158,386
Other comprehensive income (16,096) 8,106
Employee stock ownership plan (321) (396)
Recognition and retention plans (456) (456)
Treasury stock 449,300 shares (Note 9) (6,398) (5,970)
------------- ---------------
Total stockholders' equity 178,059 189,970
------------- ---------------
Total liabilities and stockholders' equity $ 2,642,165 $ 2,497,469
============= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Income
(in thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
-------------------------------- ---------------------------------
Interest Income: 1999 1998 1999 1998
------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Loans receivable:
First mortgage loans $ 35,385 $ 36,165 $ 11,660 $ 11,780
Commercial 15,573 7,966 6,127 3,163
Consumer and other loans 19,343 14,867 7,284 5,099
Taxable investments 22,093 22,942 6,878 8,363
Taxfree investments 4,454 4,588 1,310 1,526
Dividends 6,093 6,839 1,819 2,288
Mortgage backed securities 26,108 28,488 9,894 9,170
Money market securities 76 56 17 13
------------- --------------- -------------- ---------------
Total interest income 129,125 121,911 44,989 41,402
------------- --------------- -------------- ---------------
Interest Expense:
Deposits 38,507 37,926 13,481 12,324
Borrowed funds (Note 3) 44,652 41,573 15,916 14,859
Escrow 76 72 24 37
------------- --------------- -------------- ---------------
Total interest expense 83,235 79,571 29,421 27,220
------------- --------------- -------------- ---------------
Net interest income 45,890 42,340 15,568 14,182
Provision for loan losses 2,385 1,970 795 570
------------- --------------- -------------- ---------------
Net int. inc. after provision for loan losses 43,505 40,370 14,773 13,612
------------- --------------- -------------- ---------------
Noninterest Income:
Service charges on deposits 4,272 3,055 1,532 1,082
Other svc. charges/commissions/fees 1,026 563 338 221
Net servicing income 430 195 310 15
Gain/(loss) on sale of securities, net (Note 2) 963 4,276 (402) 1,306
Gain on sale of loans, net 2,517 3,549 603 1,481
Other 801 540 96 93
------------- --------------- -------------- ---------------
Total noninterest income 10,009 12,178 2,477 4,198
------------- --------------- -------------- ---------------
Noninterest Expense:
Salaries and benefits 16,565 16,531 5,644 5,835
Equipment expense 2,992 2,331 992 838
Occupancy expense 2,369 2,201 810 758
Advertising and public relations 1,337 1,484 469 407
FDIC insurance 525 532 179 175
Director fees 222 234 43 79
Income from real estate operations (498) (498) (151) (130)
Amortization of intangibles 1,920 1,860 720 627
Consulting and other fees 1,777 1,163 757 412
Supplies, telephone and postage 2,620 2,078 876 775
Other 4,660 3,162 1,225 1,080
------------- --------------- -------------- ---------------
Total noninterest expense 34,489 31,078 11,564 10,856
------------- --------------- -------------- ---------------
Income before income taxes 19,025 21,470 5,686 6,954
Income tax expense 5,225 6,332 1,556 2,040
------------- --------------- -------------- ---------------
Net Income $ 13,800 $ 15,138 $ 4,130 $ 4,914
============= =============== ============== ===============
Basic earnings per share (Note 6) $ 0.41 $ 0.45 $ 0.12 $ 0.14
============= =============== ============== ===============
Diluted earnings per share (Note 6) $ 0.41 $ 0.44 $ 0.12 $ 0.14
============= =============== ============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Other Employee Recognition
Compre- Stock And
Common Paid in Retained hensive Ownership Retention
Stock Capital Earnings Income/(Loss) Plan Plan
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ 338 $ 28,016 $ 141,043 $ 10,732 $ (529) $ (566)
Net income 15,138
Dividends paid at $.055 per share (1,441)
Exercised stock options 2 727
Unrealized losses on securities (1) (1,543)
Comprehensive income/(loss)
ESOP stock committed for release 108
Earned portion of RRP plan 85
Excess of fair value above cost of
ESOP stock committed for release 559
Excess of fair value above cost of
earned portion of RRP stock 258
Treasury stock purchased - 60,300 shares
-------------------------------------------------------------------------------------------
Balance at September 30, 1998 $ 340 $ 29,560 $ 154,740 $ 9,189 $ (421) $ (481)
===========================================================================================
Balance at January 1, 1999 340 29,960 158,386 8,106 (396) (456)
Net income 13,800
Dividends paid at $.06 per share (1,433)
Exercised stock options 83
Unrealized losses on securities (1) (24,202)
Comprehensive income/(loss)
ESOP stock committed for release 75
Excess of fair value above cost of
ESOP stock committed for release 194
Treasury stock purchased - 40,000 shares
-------------------------------------------------------------------------------------------
Balance at September 30, 1999 $ 340 $ 30,237 $ 170,753 $ (16,096) $ (321) $ (456)
===========================================================================================
<CAPTION>
Compre-
Treasury hensive
Stock Total Income
--------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1998 $ - $ 179,034
Net income 15,138 $ 15,138
Dividends paid at $.055 per share (1,441)
Exercised stock options 729
Unrealized losses on securities (1) (1,543) (1,543)
----------
Comprehensive income/(loss) $ 13,595
==========
ESOP stock committed for release 108
Earned portion of RRP plan 85
Excess of fair value above cost of
ESOP stock committed for release 559
Excess of fair value above cost of
earned portion of RRP stock 258
Treasury stock purchased - 60,300 shares (1,003) (1,003)
------------------------
Balance at September 30, 1998 $ (1,003) $ 191,924
========================
Balance at January 1, 1999 (5,970) 189,970
Net income 13,800 $ 13,800
Dividends paid at $.06 per share (1,433)
Exercised stock options 83
Unrealized losses on securities (1) (24,202) (24,202)
----------
Comprehensive income/(loss) $ (10,402)
==========
ESOP stock committed for release 75
Excess of fair value above cost of
ESOP stock committed for release 194
Treasury stock purchased - 40,000 shares (428) (428)
------------------------
Balance at September 30, 1999 $ (6,398) $ 178,059
========================
</TABLE>
(1) Net of reclassification adjustment and net of tax effect of ($15,576) and
($1,077) for 1999 and 1998, respectively.
See accompanying notes to consolidated financial statements.
Page 5
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 13,800 $ 15,138
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 2,385 1,970
Net depreciation, amortization, and accretion 3,626 5,530
Decrease (increase) in loans held for sale 14,445 (5,741)
Net gain on sales of interest earning assets (3,480) (7,825)
Gain on sale of foreclosed real estate (174) (5)
Equity losses/(income) from joint ventures 8 (110)
Increase in accrued interest receivable (1,312) (3,257)
Increase in accrued interest payable 6,716 9,140
Amortization and write-off of intangibles 1,920 1,860
Earned ESOP shares 269 667
Earned RRP shares - 343
Provision for deferred income taxes 404 (1,786)
Decrease in income taxes receivable 2,727 8,910
Other, net 24,830 1,181
--------------- ---------------
Net cash provided by operating activities 66,164 26,015
--------------- ---------------
Cash flows from investing activities:
Proceeds from maturities and principal reductions of marketable
securities:
Held-to-maturity - 1,032
Available-for-sale 178,359 298,116
Proceeds from sales of marketable securities; available for sale 328,250 444,207
Purchase of marketable securities; available for sale (516,140) (846,570)
Loans sold 168,082 95,594
Net increase in loan originations less principal payments on loans (370,208) (187,319)
Loan servicing rights sold 2,119 -
Acquisition of loan servicing rights (847) (2,101)
Investments in real estate held for investment and other joint ventures (197) (169)
Proceeds from payments on real estate held for investment 504 235
Purchases of premises and equipment, net (4,420) (3,183)
Cash proceeds received from the sale of foreclosed real estate 1,860 905
Branch purchase 33,921 -
--------------- ---------------
Net cash used in investing activities $ (178,717) $ (199,253)
--------------- ---------------
</TABLE>
See accompanying notes to the consolidated financial statements.
(Continued)
Page 6
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $ 53,499 $ (32,763)
Net increase in other borrowings 66,746 225,318
Net decrease in escrow (5,822) (5,152)
Payments to acquire treasury stock (428) (1,003)
Cash dividends (1,433) (1,441)
Proceeds from the exercise of stock options 83 729
------------- --------------
Net cash provided by financing operations 112,645 185,688
------------- --------------
Net increase in cash and cash equivalents 92 12,450
Cash and cash equivalents at beginning of period 56,741 24,466
------------- --------------
Cash and cash equivalents at end of period $ 56,833 $ 36,916
============= ==============
Supplemental disclosures:
Cash paid during the periods for:
Interest on deposits, advances and other borrowings
(includes interest credited to deposit accounts) $ 76,600 $ 66,305
Income taxes 1,618 3,106
Cash received during the periods for:
Income tax refunds $ - $ 3,984
Non-cash investing activities:
Transfer from loans to foreclosed real estate $ 922 $ 1,316
Branch acquisition:
Fair value of assets acquired $ 33,921 $ -
Deposit premium paid 3,352 -
Fair value of liabilities assumed 37,273 -
</TABLE>
See accompanying notes to consolidated financial statements.
Page 7
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(Unaudited)
(1) Accounting 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 holds 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 nine month period ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999 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 46 through 50 of the 1998 Annual Report to Stockholders.
(2) Marketable Securities
---------------------
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. This decision resulted from analysis performed in January of 1998 which
indicated that the Bank was heavily invested in fixed rate assets, which
increased the risk of earnings compression in a rising rate environment. The
analysis showed that the Registrant could liquidate the majority of its issues
in the held-to-maturity portfolio and reinvest the majority of the proceeds in a
mix of fixed and floating rate assets that would maintain the Registrant's
earnings stream, while increasing the level of variable rate assets. This course
of action was approved by the Registrant's Board of Directors in January, 1998
and the sale was conducted in the same month. 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
at least two years.
Marketable Securities consist of the following as of the date indicated:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Available-for-sale, at amortized cost $ 1,275,653 $ 1,261,696
Available-for-sale, net unrealized gain/(loss) (26,637) 13,141
-------------- --------------
Available-for-sale, at fair value 1,249,016 1,274,837
-------------- --------------
Total marketable securities $ 1,249,016 $ 1,274,837
============== ==============
</TABLE>
Page 8
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(Unaudited)
(3) Other Borrowings
----------------
The following table presents the composition of the Registrant's other
borrowings as of the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ ------------------
<S> <C> <C>
$ $
FHLB advances 823,000 746,581
Repurchase agreements 313,000 322,673
------------------ ------------------
Total other borrowings $ 1,136,000 $ 1,069,254
================= ==================
</TABLE>
(4) New Accounting Standards
------------------------
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 on 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, 2000. 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.
Page 9
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(5) Commitments to Extend Credit
----------------------------
In the ordinary course of business, the Registrant makes commitments to extend
letters of credit to its customers. At September 30, 1999 and December 31, 1998,
standby letters of credit issued and outstanding amounted to $11,472,000 and
$4,703,000 respectively. These letters of credit are not reflected in the
accompanying financial statements. Management does not anticipate any
significant losses as a result of these transactions.
At September 30, 1999, the Registrant has $149,572,000 in unused line of credit
commitments extended to its customers, $39,206,000 of undistributed funds on
construction loans and $60,438,000 of loan origination commitments.
(6) Earnings per share
------------------
The following table shows the allocation of earnings per share to basic earnings
per share and diluted earnings per share.
<TABLE>
<CAPTION>
Per Share
For the nine months ended September 30, 1999 Income Shares Amount
------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share
Income available to common shareholders $ 13,800,000 33,600,827 $ 0.41
------------------------------------------------
Options held by management and directors 82,906
------------------------------------------------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions $ 13,800,000 33,683,733 $ 0.41
================================================
For the nine months ended September 30, 1998
Basic earnings per share
Income available to common shareholders $ 15,138,000 33,945,961 $ 0.45
------------------------------------------------
Options held by management and directors 300,360
------------------------------------------------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions $ 15,138,000 34,246,321 $ 0.44
================================================
</TABLE>
Page 10
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
(6) Earnings per share (continued)
------------------------------
<TABLE>
<CAPTION>
Per Share
For the three months ended September 30, 1999 Income Shares Amount
------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share
Income available to common shareholders $ 4,130,000 33,605,871 $ 0.12
------------------------------------------------
Options held by management and directors 75,495
------------------------------------------------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions $ 4,130,000 33,681,366 $ 0.12
================================================
For the three months ended September 30, 1998
Basic earnings per share
Income available to common shareholders $ 4,914,000 33,977,091 $ 0.14
------------------------------------------------
Options held by management and directors 286,782
------------------------------------------------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions $ 4,914,000 34,263,873 $ 0.14
================================================
</TABLE>
(7) Loan Servicing
--------------
During the quarter ended March 31, 1999, the Registrant sold the rights to
service loans totaling $79.4 million. Concurrent with this sale, the Registrant
also sold an interest rate floor that was purchased in 1998 to hedge against the
deterioration in the carrying value of the servicing rights related to these
loans. The floor was recorded at its fair market value on the balance sheet at
December 31, 1998, with an offsetting entry to the value of the mortgage
servicing rights. In addition, the Registrant paid a premium to enter into the
floor contract. As a result of the sale of the mortgage servicing rights and the
floor, and the write-off of unamortized premium, the Registrant recognized a net
loss of $194,000.
During the quarter ended September 30, 1999, the Registrant sold the rights to
service loans totaling $136.4 million. Net proceeds from the sale approximated
the carrying value of the rights. Accordingly, neither a gain or loss was
recognized.
Page 11
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(unaudited)
(8) Dividend Waivers by the Mutual Holding Company
----------------------------------------------
Harris Financial, MHC, (the "Mutual Company"), a Pennsylvania mutual holding
company that owns approximately 75% of the outstanding shares of the
Registrant's common stock, has generally waived the receipt of dividends
declared by the Bank, or, subsequent to its formation in the two-tier
reorganization, dividends paid by the Registrant. The Mutual Company has not
been required to obtain approval of the Federal Reserve Board (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 ("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: (1)
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; (2) Dividends waived by the Mutual Company shall not be available
for payment to or the value thereof transferred to stockholders other than the
Mutual Company ("Minority Stockholders") by any means including through dividend
payments or at liquidation; (3) 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; (4) 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; (5) 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; (6) 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; (7) The
dividend rate will be reasonable and sustainable upon a full conversion to stock
form of the Mutual Company; (8) In the event that the FRB adopts regulations
regarding dividend 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 (a) the Mutual Company will waive dividends paid
by the Registrant, (b) the FRB will approve any dividend waivers by the Mutual
Company after April 2001, or (c) 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 September 30, 1999,
had waived a total of $26.9 million of dividends paid by the Bank and the
Registrant.
Page 12
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(unaudited)
(9) Treasury Stock Repurchase Program
---------------------------------
On February 28, 1998, HFI received authorization from the Pennsylvania
Department of Banking to repurchase 450,000 shares of its outstanding common
stock. On June 2, 1999, the Registrant received approval from the Department of
Banking to extend the period for repurchasing 450,000 shares of its outstanding
common stock until June 1, 2000.
In 1998, the Registrant purchased 409,300 shares with a market value of
$5,970,000. During the nine months ended September 30, 1999, the Registrant
purchased 40,000 shares with a market value of $428,125. The shares will be used
for several stock ownership and stock option plans. On April 20, 1999, the
shareholders ratified and approved the 1999 Stock Option Plan (For Employees)
and the 1999 Stock Option Plan for Outside Directors. These option plans
authorize a maximum of 1,125,000 shares in aggregate for awards in the form of
stock options.
(10) Financial Instruments and Risk Management
-----------------------------------------
As of September 30, 1999, HFI has entered into three total return swaps. The
swaps are intended to hedge market value fluctuations in HFI's retail
construction loan portfolio that are caused by changes in market levels of
interest rates. The swaps have contract durations of 6 to 8 months and consist
of two components:
(a) HFI exchanges fixed rate interest payments on a designated mortgage backed
security (MBS) pool for a floating rate interest payment indexed to the
London Interbank Offered Rate (LIBOR) minus 42 basis points. The settlement
is made on a monthly basis between HFI and the counter party.
(b) A lump sum payment which reflects the change in market value of the
designated MBS pool from the inception of the swap contract to the end of
the swap contract. This payment is made at the final date of the contract
between HFI and the counter party. HFI receives a payment if the market
value of the underlying MBS pool declines. Conversely, HFI must pay the
counter party if the value of the MBS pool increases.
The total return swaps are designed to hedge against the decline in the market
value of a specifically identified pool of fixed rate construction loans that
are to be sold upon their conversion to long term mortgage loans. HFI has
determined that there is a high degree of correlation between the changes in the
market value of the underlying MBS pool and the fair market value of the hedged
loans. Accordingly, HFI has recorded the change in market value of the contract
on the balance sheet, with an offsetting entry to the carrying value of the
hedged loans. Management has calculated the market value of the contract by
determining the change in the fair market value of the underlying MBS pool.
Management believes this amount is approximately equal to the fair market value
of the contract. The ultimate gain or loss incurred by HFI as a result of the
changes in the market value of the contract will be recognized upon the sale of
the construction loans. HFI has recorded the impact of the interest rate swap
portion of the contract using synthetic instrument accounting. Under this
method, gains or losses related to the interest rate swap are accrued as they
occur. The notional amount of the contracts and the fair value of the MBS pools
as of September 30, 1999, are shown in the following table:
<TABLE>
<CAPTION>
Swap Notional Market Value Market Value Gain/
Date Category Amount as of 9/30/99 as of Swap Date (loss)
- ------------ ------------------- --------------- ---------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
6/4/99 6.5% FNMA Pool $ 5,000,000 $ 4,784,400 $ 4,846,875 $ 62,475
7/26/99 7.0% FNMA Pool 5,000,000 4,904,700 4,891,405 (13,295)
8/19/99 7.0% FNMA Pool 7,500,000 7,357,050 7,350,000 (7,050)
--------------- ---------------- ----------------- -----------
Total $ 17,500,000 $ 17,046,150 $ 17,088,280 $ 42,130
=============== ================ ================= ===========
</TABLE>
Page 13
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is management's discussion and analysis of the significant changes
in the results of operations, capital resources and liquidity presented in its
accompanying interim consolidated financial statements for Harris Financial,
Inc. and subsidiaries. This discussion should be read in conjunction with the
1998 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 nine month period ended September 30,
1999 was $13,800,000, representing a decrease of $1,338,000 or 8.8% from the
$15,138,000 net income figure reported during the comparable nine month period
ending September 30, 1998. For the three month period ending September 30, 1999,
net income was $4,130,000 which was $784,000 or 16.0% lower than the net income
figure of $4,914,000 for the comparable period in 1998.
Net Interest Income HFI's principle source of revenue is net interest income,
which represents the difference between interest income generated by earning
assets and the interest expense of deposits and external sources of funds.
Furthermore, net interest income is significantly dependent on the volume and
composition of earning assets and interest-earning liabilities as well as the
yield/cost of interest-earning assets/liabilities.
Net interest income, on a tax equivalent basis, totaled $48,288,000 for the nine
months ended September 30, 1999, which represents an increase of $3,477,000, or
7.8%, from the $44,811,000 of net interest income recorded in the nine months
ended September 30, 1998. This increase reflected a favorable volume variance of
$5,072,000 due to a $243.9 million increase in total average earning assets to
$2.478 billion during the year to date period ended September 30, 1999 as
compared to $2.234 billion recorded during the same period ending September 30,
1998. Also reflected in this volume variance was a $256.4 million increase in
average interest-bearing liabilities. At the same time, general market interest
rate trends created an unfavorable rate variance of $1,595,000 for the nine
months ended September 30, 1999. The interaction of positive volume variances
and negative rate variances generated the net positive change of $3,477,000
mentioned above.
Net interest income, on a tax equivalent basis, totaled $16,273,000 for the
three months ended September 30, 1999. This represents an increase of $1,269,000
or 8.5% over the $15,004,000 reported for the comparable three month period
ended September 30, 1998. This increase reflects a favorable volume variance of
$1,791,000 that was partially offset by an unfavorable rate variance of
$522,000. The volume variance reflects a $273.7 million increase in interest-
earning assets to $2.575 billion during the three months ended September 30,
1999, from $2.301 billion in the three months ending September 30, 1998. Also
reflected in this volume variance was a $291.8 million increase in average
interest-bearing liabilities. While market rates displayed significant swings,
the overall trend for the three month period ended September 30, 1999 was still
lower than for the comparable three month period ended September 30, 1998.
For the nine months ended September 30, 1999, the yield on interest-earning
assets was 7.08%. This figure is 34 basis points lower than the 7.42% yield
reported for the nine month period ended September 30, 1998. At same time, the
cost of funds decreased 34 basis points to 4.70% for the period ending September
30, 1999, versus 5.04% for the nine months ended September 30, 1998. As a
result, the interest spread (the difference between the yield on assets minus
the cost of funds) remained unchanged at 2.38% for the nine month period ending
September 30, 1999, versus the comparable period ending September 30, 1998.
The market rate trends detailed in the preceding paragraph were also reflected
in the three month periods ended September 30, 1999 and September 30, 1998. The
yield on interest-earning assets declined 24 basis points from 7.34% for the
three month period ended September 30, 1998, to 7.10% for the three month period
ended September 30, 1999. At the same time, the cost of funds declined 24 basis
points from 5.02% for the three month period ended September 30, 1998, to 4.78%
for the three months ended September 30, 1999. As a result, the interest spread
(the difference between the yield on assets minus the cost of funds) remained
unchanged at 2.32% for the three month period ending September 30, 1999, versus
the comparable period ending September 30, 1998.
Page 14
<PAGE>
HFI continues to rely on wholesale funding sources to support an investment
leveraging strategy and uses external borrowings to supplement funding provided
by savings and time deposits. During the nine month period ending September 30,
1999, total deposits (net of escrow deposits) increased $90.8 million or 7.5%
while other borrowings increased by $66.7 million or 6.2%. The strategy relies
on wholesale funding to support a redeployment of capital generated from ongoing
operations (leveraging) into an interest-earning capacity, via the investment
portfolio. The objective of this strategy is to increase interest income and
boost the Registrant's return on equity. However, this strategy compresses the
Registrant's net interest margins due to the higher cost of non-deposit funds as
compared to core deposits. These factors are reflected in the net interest
margin decline of 7 basis points to the 2.60% for the nine months ended
September 30, 1999, versus 2.67% for the comparable period ended September 30,
1998. For the three month period ended September 30, 1999, the net interest
margin was 2.53% or 8 basis points lower than the 2.61% net interest margin
recorded for the three months ended September 30, 1998.
The following table summarizes the impact of the leveraging strategy on the
return on average assets (ROAA) and net interest margin (NIM) for the three and
nine month periods ended September 30, 1999, and September 30, 1998.
<TABLE>
<CAPTION>
Comparison of Financial Performance with and without a Capital Leveraging Strategy
- ----------------------------------------------------------------------------------
With Without Difference in
Nine month period ended September 30, 1999 Leveraging Leveraging Basis Points
- ------------------------------------------ ---------- ---------- -------------
<S> <C> <C> <C>
Return on Average Assets 0.72% 0.63% 9
Net Interest Margin 2.60% 3.37% (77)
Nine month period ended September 30, 1998
- ------------------------------------------
Return on Average Assets 0.87% 0.77% 10
Net Interest Margin 2.67% 3.46% (79)
Three month period ended September 30, 1999
- -------------------------------------------
Return on Average Assets 0.62% 0.54% 8
Net Interest Margin 2.53% 3.19% (66)
Three month period ended September 30, 1998
- -------------------------------------------
Return on Average Assets 0.82% 0.67% 15
Net Interest Margin 2.61% 3.37% (76)
</TABLE>
Table 1 presents the Registrant's average asset and liability balances, interest
rates, interest income, and interest expense for each of the nine month periods
ended September 30, 1999 and September 30, 1998, as well as the quarters ended
September 30, 1999 and September 30, 1998, respectively. Table 2 presents a
rate-volume analysis of changes in net interest income for the nine month
periods ended September 30, 1999 and September 30, 1998, as well as the quarters
ended September 30, 1999 and September 30, 1998, respectively.
For information on qualitative and quantitative disclosures regarding market
risk, refer to Management's Discussion and Analysis included in the 1998 Annual
Report to Stockholders. There have been no significant changes, except as noted
in note 10 of this report, in the Registrant's market risk profile or the
Registrant's risk management procedures, in the current year.
Page 15
<PAGE>
TABLE 1 - Average Balance Sheets, Rate, and Interest Income and Expense Summary
<TABLE>
<CAPTION>
For the nine months ended,
----------------------------------------------------------------------------
September 30, 1999 September 30, 1998
----------------------------------------------------------------------------
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 $ 622,463 $ 35,385 7.58% $ 572,775 $ 36,165 8.42%
Commercial loans 273,001 15,573 7.61% 123,113 7,966 8.63%
Direct consumer loans 147,298 9,579 8.67% 143,240 8,947 8.33%
Indirect consumer loans 169,209 9,764 7.69% 99,792 5,920 7.91%
Marketable securities - taxable 1,128,772 53,504 6.32% 1,148,568 56,833 6.60%
Marketable securities - taxfree 110,469 6,852 8.27% 113,860 7,058 8.27%
Other interest-earning assets 26,780 866 4.31% 32,703 1,493 6.09%
----------------------------------- ------------------------------------
Total interest-earning assets 2,477,992 131,523 7.08% 2,234,051 124,382 7.42%
--------------------- ---------------------
Noninterest-earning assets 93,541 80,057
----------- ------------
Total assets $ 2,571,533 $ 2,314,108
=========== ============
Liabilities and stockholders' equity:
Interest-bearing iabilities:
Savings deposits $ 145,569 $ 2,169 1.99% $ 149,931 $ 2,573 2.29%
Time deposits 792,858 31,109 5.23% 723,361 30,032 5.54%
NOW and money market deposits 308,275 5,229 2.26% 251,655 5,321 2.82%
Escrow 5,867 76 1.73% 10,266 72 0.94%
Borrowed funds 1,107,388 44,652 5.38% 968,342 41,573 5.72%
----------------------------------- ------------------------------------
Total interest-bearing liabilities $ 2,359,957 83,235 4.70% $ 2,103,555 79,571 5.04%
--------------------- ---------------------
Noninterest-bearing liabilities 23,023 25,504
----------- ------------
Total liabilities 2,382,980 2,129,059
Stockholders' equity 188,553 185,049
----------- ------------
Total liabilities and stockholder
equity $ 2,571,533 $ 2,314,108
=========== ============
Net interest income before
before provision for loan loss $ 48,288 $ 44,811
========= ========
Interest rate spread (3) 2.38% 2.38%
===== =====
Net interest-earning assets $ 118,035 $ 130,496
============ ============
Net interest margin (4) 2.60% 2.67%
===== =====
Ratio of interest-earning assets to
interest-bearing liabilities 1.05 1.06
============ ============
</TABLE>
(1) Includes income recognized on deferred loan fees of $1,385,000 and
$2,001,000 for the comparable 1999 and 1998 periods, respectively.
(2) Interest income and yields are shown on a tax equivalent basis.
(3) Represents the difference between the average yield on interest-earning
assets and the average cost on interest-bearing liabilities.
(4) Represents the annualized net interest income before the provision for loan
losses divided by average interest-earning assets.
Page 16
<PAGE>
TABLE 1 - Average Balance Sheets, Rate, and Interest Income and Expense Summary
<TABLE>
<CAPTION>
For the quarter ended,
--------------------------------------------------------------------------------
September 30, 1999 September 30, 1998
--------------------------------------------------------------------------------
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 $ 635,639 $ 11,660 7.34% $ 578,206 $ 11,780 8.15%
Commercial loans 318,641 6,127 7.69% 152,961 3,163 8.27%
Direct consumer loans 156,257 3,498 8.95% 147,384 3,086 8.38%
Indirect consumer loans 201,408 3,786 7.52% 96,081 2,014 8.38%
Marketable securities - taxable 1,144,053 18,416 6.44% 1,190,582 19,526 6.56%
Marketable securities - taxfree 95,834 2,015 8.41% 114,548 2,347 8.20%
Other interest-earning assets 23,163 192 3.32% 21,562 308 5.71%
----------------------------------- ------------------------------------
Total interest-earning assets 2,574,995 45,694 7.10% 2,301,324 42,224 7.34%
Noninterest-earning assets 93,754 --------------------- 84,424 ----------------------
----------- -----------
Total assets $ 2,668,749 $ 2,385,748
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings deposits $ 147,019 $ 761 2.07% $ 147,024 $ 692 1.88%
Time deposits 831,760 10,887 5.24% 706,804 9,848 5.57%
NOW and money market deposits 318,839 1,833 2.30% 264,476 1,784 2.70%
Escrow 4,432 24 2.17% 8,865 37 1.67%
Borrowed funds 1,159,395 15,916 5.49% 1,042,519 14,859 5.70%
----------------------------------- ------------------------------------
Total interest-bearing liabilities $ 2,461,445 29,421 4.78% $ 2,169,688 27,220 5.02%
-------------------- ---------------------
Noninterest-bearing liabilities 23,468 26,239
----------- -----------
Total liabilities 2,484,913 2,195,927
Stockholders' equity 183,836 189,821
----------- ------------
Total liabilities and stockholder
equity $ 2,668,749 $ 2,385,748
=========== ===========
Net interest income before
before provision for loan loss $ 16,273 $ 15,004
======== ========
Interest rate spread (3) 2.32% 2.32%
===== =====
Net interest-earning assets $ 113,550 $ 131,636
=========== ===========
Net interest margin (4) 2.53% 2.61%
===== =====
Ratio of interest-earning assets to
interest-bearing liabilities 1.05 1.06
=========== ===========
</TABLE>
(1) Includes income recognized on deferred loan fees of $413,000 and $418,000
for the comparable 1999 and 1998 periods, respectively.
(2) Interest income and yields are shown on a tax equivalent basis.
(3) Represents the difference between the average yield on interest-earning
assets and the average cost on interest-bearing liabilities.
(4) Represents the annualized net interest income before the provision for loan
losses divided by average interest-earning assets.
Page 17
<PAGE>
TABLE 2 - Rate/Volume Analysis of Changes in Net Interest Income (All figures in
000's)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999 Quarter Ended September 30, 1999
Compared to Compared to
Nine Months Ended September 30, 1998 Quarter Ended September 30, 1998
Increase (Decrease) Increase (Decrease)
------------------------------------ ----------------------------------
Volume Rate Net Volume Rate Net
------------------------------------ ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans, net $ 2,994 $ (3,774) $ (780) $ 1,111 $ (1,231) $ (120)
Commercial loans 8,651 (1,044) 7,607 3,200 (236) 2,964
Direct consumer loans 259 373 632 193 219 412
Indirect consumer loans 4,013 (169) 3,844 1,998 (226) 1,772
Marketable securities - taxable (962) (2,367) (3,329) (756) (354) (1,110)
Marketable securities - taxfree (206) - (206) (391) 59 (332)
Other interest-earning assets (240) (387) (627) 21 (137) (116)
------------------------------------ ----------------------------------
Total interest-earning assets 14,509 (7,368) 7,141 5,376 (1,906) 3,470
------------------------------------ ----------------------------------
Interest-bearing liabilities:
Savings deposits (73) (331) (404) - 69 69
Time deposits 2,806 (1,729) 1,077 1,652 (613) 1,039
NOW and money market deposits 1,074 (1,166) (92) 336 (287) 49
Escrow and stock subscriptions (40) 44 4 (22) 9 (13)
Borrowed funds 5,670 (2,591) 3,079 1,619 (562) 1,057
----------------------------------- ---------------------------------
Total interest-bearing liabilities 9,437 (5,773) 3,664 3,585 (1,384) 2,201
----------------------------------- ---------------------------------
Net change in net interest income $ 5,072 $ (1,595) $ 3,477 $ 1,791 $ (522) $ 1,269
=================================== =================================
</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.
Page 18
<PAGE>
Provision for Loan Losses The Registrant recognized a provision for loan
loss of $2,385,000 for the nine months ended September 30, 1999. This
represents an increase of $415,000 from the $1,970,000 provision recorded
for the nine months ended September 30, 1998. For the three months ended
September 30, 1999, the Registrant recognized a provision expense of
$795,000. This is a $225,000 increase over the $570,000 expensed in the
three month period ended September 30, 1998. The changes in the
Registrant's provision are discussed in the Asset Quality section that
follows.
Noninterest Income Noninterest income for the nine months ended September
30, 1999 and 1998, and for the three months ended September 30, 1999 and
1998, was as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three months ended September 30,
---------------------------------- ---------------------------------
Noninterest Income: 1999 1998 % Change 1999 1998 % Change
--------- -------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposits 4,272 3,055 39.8% 1,532 1,082 41.6%
Other svc. charges/commissions/fees 1,026 563 82.2% 338 221 52.9%
Net servicing income 430 195 120.5% 310 151 966.7%
Gain/(loss) on sale of securities,
net (Note 2) 963 4,276 (77.5%) (402) 1,306 (130.8%)
Gain on sale of loans, net 2,517 3,549 (29.1%) 603 1,481 (59.3%)
Other 801 540 48.3% 96 93 3.2%
--------- -------- --------- -------
Total noninterest income 10,009 12,178 (17.8%) 2,477 4,198 (41.0%)
--------- -------- --------- -------
</TABLE>
Total noninterest income decreased 17.8% for the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998.
For the three months ended September 30, 1999, total noninterest income
decreased 41.0% compared to the three months ended September 30, 1998. The
decrease in noninterest income is the result of reduced reliance on gains
from sales in the securities portfolio partially offset by the effects of a
concentrated effort on growth in fee income on core banking products.
Noninterest Expense Noninterest expense for the nine months ended September
30, 1999 and 1998, and for the three months ended September 30, 1999 and
1998 was as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three months Ended September 30,
------------------------------------ ----------------------------------
1999 1998 % Change 1999 1998 % Change
-------- ------- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Noninterest Expense:
Salaries and benefits 16,565 16,531 0.2% 5,644 5,835 (3.3%)
Equipment expense 2,992 2,331 28.4% 992 838 18.4%
Occupancy expense 2,369 2,201 7.6% 810 758 6.9%
Advertising and public relations 1,337 1,484 (9.9%) 469 407 15.2%
FDIC insurance 525 532 (1.3%) 179 175 2.3%
Director fees 222 234 (5.1%) 43 79 (45.6%)
Income from real estate operations (498) (498) 0.0% (151) (130) 16.2%
Amortization of intangibles 1,920 1,860 3.2% 720 627 14.8%
Other 9,057 6,403 41.4% 2,858 2,267 26.1%
------- ------- ------- ------
Total noninterest expense 34,489 31,078 11.0% 11,564 10,856 6.5%
------- ------- ------- ------
</TABLE>
Total noninterest expense increased 11.0% for the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998.
For the three months ended September 30, 1999, total noninterest expense
increased 6.5% compared to the three months ended September 30, 1998.
Increases in noninterest expense were commensurate with the expansion of
branch networks and the addition of traditional and non-traditional
business lines.
Provision for Income Taxes Corporate income tax expense totaled $5,225,000
for the nine month period ended September 30, 1999, which resulted in an
effective tax rate of 27.5% on pretax income of $19,025,000. This
represents a decrease of $1,107,000 from the $6,332,000 of corporate tax
expense, or an effective tax rate of 29.5% on pretax income of $21,470,000,
recorded during the nine month period ended September 30, 1998. The
decrease in the
Page 19
<PAGE>
effective tax rate is the result of the Registrant's continued focus on
increasing tax exempt sources of income.
Income tax expense was $1,556,000 (an effective tax rate of 27.4%) for the three
months ended September 30, 1999. This is a $484,000 decrease from the tax
expense of $2,040,000 (effective tax rate of 29.3%) recorded for the three
months ended September 30, 1998. The decrease in the dollar amount of tax
expense and the change in the effective tax rate reflects lower levels of
taxable income for the three months ended September 30, 1999 versus the
comparable three month period ended September 30, 1998.
Stockholders' Equity Stockholders' equity totaled $178.1 million and $190.0
million at September 30, 1999 and December 31, 1998, respectively. Stockholders'
equity amounted to 6.7% of total assets equalling $2.642 billion as of September
30, 1999, compared to 7.6% of total assets of $2.497 billion at December 31,
1998.
The decrease in Stockholders' equity of $11.9 million or 6.3% for the nine
months ended September 30, 1999 resulted mainly from a $24.2 million decline in
the market value, net of tax effect, of the available-for-sale securities and
$1.4 million in dividends paid. The drop in the market value of the available-
for-sale portfolio reflects the impact of recent market rate decreases on the
market value of fixed rate issues in the Registrant's investment portfolio.
Offsetting this decrease is a $13.8 million increase attributable to income from
ongoing operations.
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
loan losses. Furthermore, the banking regulators also issue leverage ratio
requirements. The leverage ratio equals 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>
HARRIS FINANCIAL, INC. Minimum Requirement for Minimum Requirement to be
Actual Capital Adequacy "Well Capitalized"
------ ---------------- ------------------
As of September 30, 1999 Amount Ratio Amount Ratio Amount Ratio
------------------------ -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $190,162 11.9% $127,663 8.0% $159,579 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 175,813 11.0% 63,832 4.0% 95,747 6.0%
Tier 1 Capital
(to Avg. Assets) 175,813 6.6% 106,311 4.0% 132,889 5.0%
As of December 31, 1998
-----------------------
Total Capital
(to Risk Weighted Assets) $179,157 12.0% $119,160 8.0% $148,949 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 164,955 11.1% 59,580 4.0% 89,370 6.0%
Tier 1 Capital
(to Avg. Assets) 164,955 6.8% 97,553 4.0% 121,941 5.0%
</TABLE>
Page 20
<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>
HARRIS SAVINGS BANK Minimum Requirement for Minimum Requirement to be
Actual Capital Adequacy "Well Capitalized"
------ ---------------- ------------------
As of September 30, 1999 Amount Ratio Amount Ratio Amount Ratio
------------------------ ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $185,154 11.6% $127,342 8.0% $159,178 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 170,737 10.7% 63,671 4.0% 95,507 6.0%
Tier 1 Capital
(to Avg. Assets) 170,737 6.4% 106,152 4.0% 132,690 5.0%
As of December 31, 1998
-----------------------
Total Capital
(to Risk Weighted Assets) $174,663 11.8% $118,879 8.0% $148,598 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 160,317 10.8% 59,439 4.0% 89,159 6.0%
Tier 1 Capital
(to Avg. Assets) 160,317 6.6% 97,395 4.0% 121,744 5.0%
</TABLE>
Page 21
<PAGE>
Marketable Securities Marketable securities, excluding the Federal Home Loan
Bank cash account, totaled $1,249.0 million, at September 30, 1999, and $1,274.8
million at December 31, 1998. Total marketable securities decreased $25.8
million, or 2.0%, during the nine months of 1999.
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 September
30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
--------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Government and agencies $ 354,439 $ 340,628 $ 298,247 $ 299,196
Corporate bonds 69,159 63,958 148,731 142,240
Municipal obligations 70,594 71,265 113,557 119,233
FHLB stock 44,000 44,000 37,579 37,579
Equities (Common and Preferred) 73,601 79,871 112,403 123,765
Asset Backed Securities - - 15,146 15,661
Mortgage-backed securities:
FHLMC PC's 1 1 1,421 1,494
FNMA CMO's 99,295 97,919 104,276 105,864
FHLMC CMO's 125,871 122,058 75,137 75,157
Private Issue CMO's 438,693 429,316 355,199 354,648
--------------------------------------------------------
Total mortgage-backed securities 663,860 649,294 536,033 537,163
--------------------------------------------------------
Total securities available-for-sale $1,275,653 $ 1,249,016 $ 1,261,696 $ 1,274,837
--------------------------------------------------------
Other interest-earning securities:
FHLB daily investment $ 30,327 $ 30,327 $ 22,423 $ 22,423
--------------------------------------------------------
Total marketable securities and
interest-bearing investments $1,305,980 $ 1,279,343 $ 1,284,119 $ 1,297,260
========================================================
</TABLE>
Loans Loans Receivable, excluding the reduction for the Allowance for Loan
Losses, totaled $1,260.4 million and $1,060.7 million at September 30, 1999, and
December 31, 1998. The increase of $199.6 million, or 18.8%, for the nine months
ended September 30, 1999, reflects growth in commercial loans of $131.5 million,
a $109.5 million increase in automobile, consumer and other loans, and first
mortgage loan decreases amounting to $41.4 million. The loan growth trends in
1999 reflect the Registrant's continued focus on expanding it's commercial and
consumer loan portfolios and its reduced reliance on investing in residential
mortgage loans.
Loan charge-offs, net of recoveries, for the nine month periods ended September
30, 1999 and September 30, 1998, totaled $562,000, and $929,000, respectively.
Based on management's continuing review of the loan portfolio, the Registrant
recorded provisions for loan losses of $2,385,000 and $1,970,000 for the nine
month periods ended September 30, 1999, and September 30, 1998, respectively.
Prior to the quarter ended March 31, 1999, the Registrant considered all loans
that were delinquent 90 days or more with respect to principal and interest
repayments to be in a non accrual status. During the quarter ended March 31,
1999, the Registrant adopted a policy that follows the Federal Financial
Institutions Examination Council ("FFIEC") uniform bank examination guidelines.
The major provisions of the policy are:
(1) Loans that are 90 days past due are still considered to be in an accrual
status.
(2) Any loan that is 90 days past due will be reviewed on a monthly basis to
determine its loss potential.
(3) Once the loan is 120 days past due, the Registrant will charge-off any
unsecured loan balance.
(4) Interest income recognized from the filing date of the most recent Federal
Deposit Insurance Corporation Report of Condition up to and including the
date of charge-off will be reversed against the current accounting period's
recognition of interest income. Any remaining accrued interest receivable
will be reversed and offset against the allowance for loan loss.
Using these new policy guidelines, non accrual loans were $3,176,000 and
$7,651,000 at September 30, 1999, and December 31, 1998, respectively. In
addition, loans 90 days past due, but still accruing were $5,961,000 at
September
Page 22
<PAGE>
30, 1999 and $0 at December 31, 1998, respectively. The combined total of non
accrual loans and loans 90 days past due, but still accruing interest as a
percentage of total loans receivable (including Loans held for sale, net),
before deducting the Allowance for Loan Loss, equalled .72% and .71% at
September 30, 1999, and December 31, 1998, respectively.
The allowance for loan losses totaled $11,528,000 and $9,088,000 at September
30, 1999 and December 31, 1998, respectively. Stated as a percentage of total
loans receivable (including loans held for sale, net), the allowance for loan
losses amounted to .91% and .85% at September 30, 1999 and December 31, 1998,
respectively.
Table 4 depicts the trend of charge-offs, recoveries, and provisions to the
allowance for loan losses for the nine months ended September 30, 1999, and the
year ended December 31, 1998, respectively. In addition, Table 5 highlights the
allowance for loan losses as a percent of non accrual loans, loans 90 days past
due, but still accruing and specifically designated problem loans for the nine
months ended September 30, 1999, and the year ended December 31, 1998,
respectively. Finally, Table 6 presents an allocation of the allowance for loan
losses by category of loans for the nine months ended September 30, 1999, and
the year ended December 31, 1998.
<TABLE>
<CAPTION>
Table 4 Analysis of Allowance for Loan Losses (all dollar figures in 000's)
As of or for the As of or for the
nine months ended twelve months ended
Allowance for Loan Loss September 30, 1999 December 31, 1998
- ------------------------------------------- ------------------ -------------------
<S> <C> <C>
Balance at beginning of the period $ 9,088 $ 8,192
Provision for loan losses 2,385 2,540
Provision component related to unfunded
commitments 617 (503)
Charge Offs:
Commercial (50) (591)
One-to-four family (197) (173)
Other mortgage loans - (83)
Consumer loans (501) (344)
------------------ -------------------
Total Charge Offs (748) (1,191)
------------------ -------------------
Recoveries:
Commercial 58 -
One-to-four family 46 -
Other mortgage loans - 2
Consumer loans 82 48
------------------ -------------------
Total Recoveries 186 50
------------------ -------------------
Net Charge Offs (562) (1,141)
------------------ -------------------
Balance at end of period $ 11,528 $ 9,088
================== ===================
Net Charge Offs to Average Loans Outstanding (1) 0.06% 0.12%
================== ===================
</TABLE>
(1) Year to date ratio is annualized
Page 23
<PAGE>
<TABLE>
<CAPTION>
Table 5 Allowance for Loan Losses Coverage Ratios (all dollar figures in 000's)
As of or for the As of or for the
nine months ended twelve months ended
September 30, 1999 December 31, 1998
------------------ -------------------
<S> <C> <C>
Allowance at the end of period $ 11,528 $ 9,088
Non accrual loans $ 3,176 $ 7,651
90 Days past due, but still accruing $ 5,961 $ -
Problem loans $ 17,522 $ 9,800
Allowance/non accrual loans 362.97% 118.78%
------------------ -------------------
Allowance/90 days past due, but still accruing 193.39% 0.00%
------------------ -------------------
Allowance/non accrual loans and 90 days past due,
but still accruing 126.17% 118.78%
------------------ -------------------
Allowance/problem loans 65.79% 92.73%
------------------ -------------------
</TABLE>
<TABLE>
<CAPTION>
Table 6 Allocation of the Allowance for Loan Losses (all dollar figures in 000's)
As of September 30, 1999 As of December 31, 1998
------------------------------ ------------------------------
% of Total % of Total
Amount Loans Amount Loans
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
One-to-four family mortgage loans $ 849 44.83% $ 969 53.65%
Commercial loans 5,826 26.84% 4,909 19.28%
Consumer and other loans 3,659 28.33% 2,358 27.07%
Unallocated 1,194 N/A 852 N/A
-------------- -------------- -------------- --------------
Total $ 11,528 100.00% $ 9,088 100.00%
============== ============== ============== ==============
Unfunded Commitments $ 308 $ 925
============== ==============
</TABLE>
Asset Quality Virtually all of HFI's credit risk lies with the Bank, which holds
all of HFI's loan assets. As part of conversion of its operations from those of
a traditional thrift institution, the Bank created a Business Banking Group to
offer commercial financial products and services to businesses in the Bank's
primary market area. This expansion beyond traditional thrift lending such as
residential mortgage lending and real estate secured consumer lending has had
the effect of increasing the Bank's credit risk exposure. To accommodate this
credit risk exposure, management has hired skilled and experienced commercial
lending professionals to manage its Business Banking Group. In addition, the
Bank has adopted commercial bank underwriting, credit management and loan loss
provisioning techniques under the direction of a senior level executive Chief
Credit Officer.
As part of its credit risk management activities, the Bank follows a policy of
continuous credit loss monitoring, including assessment of the adequacy of the
allowance for loan losses. The assessment of the adequacy of the allowance for
loan losses is based on internal and external factors. The external factors
include the general economic condition of the Bank's market area and those
factors described in regulatory guidelines. The internal factors include the
current composition of the portfolio, portfolio growth trends, concentrations of
credit risk, and the current emphasis on commercial lending.
Quarterly, the commercial loan portfolio is analyzed on an individual loan basis
and a specific reserve is developed for each known loss, using a risk rating
system. This review identified $2,778,000 in impaired loans for the nine month
period ending September 30, 1999. The September 30, 1999, allowance for loan
losses has an allocation equal to 15% of the impaired commercial loan balances
which are internally designated as substandard ($2,684,000)
Page 24
<PAGE>
and 100% of the internally designated doubtful balances ($94,000). The December
31, 1998, allowance for loan losses has an allocation equal to 15% of the
$2,538,000 in impaired loan balances which were classified as substandard. In
addition, the Bank assigns a reserve for existing losses on commercial loans
that are not specifically reviewed. This reserve is determined using factors
such as charge-off history, portfolio delinquencies and current economic
conditions. The mortgage and consumer portfolios are also analyzed in pools of
similar loans with similar risk characteristics. The reserve factor applied to
each pool is based on actual charge-off history, adjusted for other factors such
as credit concentrations and delinquency trends.
In addition to the allowance for loan loss, the Registrant maintains a reserve
for unfunded commitments. This reserve represents the Bank's estimation of loss
incurred relative to available funds committed to customers, but that have yet
to be disbursed. The reserve factor assigned to this pool is developed using
factors such as credit concentrations and economic conditions. The reserve
established for unfunded commitments is classified as a separate liability from
the allowance for loan losses, in accordance with generally accepted accounting
principles.
Other Borrowings During the nine month period ended September 30, 1999, the
Registrant maintained wholesale leveraging activities to deploy a portion of
it's capital. This strategy relies on using external sources of funds to invest
in interest-earning assets at a positive spread between the yield on interest-
earning asset and the cost of the supporting borrowing.
Other borrowings totaled $1,136.0 million and $1,069.3 million at September 30,
1999, and December 31, 1998, respectively. Borrowings from non-deposit funding
sources increased $66.7 million, or 6.2%, during the nine months ended September
30, 1999. Federal Home Loan Bank advances increased by $76.4 million or 10.2%,
while repurchase agreements decreased by $9.7 million or 3.0% for the nine month
period ending September 30, 1999.
As of September 30, 1999, the Registrant had maximum available FHLB lines of
credit totaling $1,011.6 million versus $943.5 million in available FHLB credit
at December 31, 1998. This increase of 7.2% or $68.1 million is based on
increases in the amount of securities that qualify as security for FHLB
advances. HFI had borrowings totaling $823.0 million and $746.6 million
outstanding to the FHLB as of September 30, 1999, and December 31, 1998,
respectively.
Liquidity The Registrant's primary sources of funds are deposits and proceeds
from principal and interest payments on loans and mortgage-backed securities.
While maturities and scheduled amortization of loans and mortgage-backed
securities are a predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions, and competition. The Registrant anticipates that it will have
sufficient funds available to meet its current commitments.
The Registrant exceeded all regulatory standards for liquidity at September 30,
1999 and December 31, 1998.
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
Compliance Effort to identify all major compliance risks.
The Registrant's Year 2000 Compliance Effort ("Y2K Project") can be broken down
into several distinct stages or phases. The first stage ("Awareness Phase")
dates from October 1996, and marks the beginning of the Y2K Project initiative.
The senior staff of HFI created a Y2K task force that represented all the major
functional areas of the Registrant. The task force started monthly meetings
during October 1997, and in July 1998 accelerated to the current bi-weekly
meeting schedule to intensify the Registrant's focus on the issue. This task
force has the commitment of the Registrant's senior management team and monthly
updates are provided to the Registrant's board of directors.
The second stage is termed the ("Inventory Phase") and covers the time period
from October 1997 to December 1997. During this phase, the Registrant reviewed
all existing hardware, software and embedded technology to determine their Year
2000 Compliance profile. In December 1997, the Registrant created a pamphlet
that identified the existence of Year 2000 Compliance issues and provided a high
level review of the Registrant's efforts to ensure compliance. This pamphlet is
available in branch locations and the information is provided on our web site.
In addition, the Registrant developed a data base to track external vendors'
responses to the Registrant's questionnaire to determine the external vendors
state of Year 2000 Compliance. The results from the internal review and the
questionnaire surveys were used as inputs to the "Analysis Phase".
The third phase ("Analysis Phase") focused on the hardware and software
identified from the Inventory Phase that was crucial for the Registrant to
conduct its business operations. The systems were ranked "mission critical" or
"non mission critical". These two classifications were further segmented into
low, medium, or high risk ratings. Therefore, a "mission critical" system with a
high risk rating received the most testing focus. The following list details the
high priority "mission critical" systems:
Page 25
<PAGE>
(1) The AS400 mainframe hardware and operating system is certified Year 2000
Compliant by the vendor, IBM.
(2) All Alltel core systems (which include the general ledger, all major
lending and deposit applications and customer information databases), are
certified Year 2000 compliant.
(3) The Registrant purchased software to test the BIOS (Basic Input Output
Systems) of all personal computers (PCs) in the local area network (LAN)
and wide area network (WAN). This testing targeted non compliant PCs that
were later replaced by the Registrant during the fourth phase of the Y2K
Project.
The subsequent fourth stage dubbed ("Testing/Renovation") phase of the Y2K
Project started in March 1998 and was completed by June 30, 1999. During this
phase, the Registrant's goal was to test all mission critical systems, provide
the results of those tests to the Registrant's Internal Audit Department for
review/analysis and correct non compliant mission critical systems. At this
time, all mission critical systems have been renovated.
In addition, the Registrant has tested other stand alone PC software programs.
The Registrant has dedicated a separate PC, printer and accessory environment to
conduct tests in a controlled manner with the PC's internal clock set to five
specific, internally designated, Year 2000 dates. The testing procedure was
approved by the Registrant's Internal Audit Department and the results of the
tests were provided to the Registrant's Internal Audit Department for review and
analysis. At this point, the results of internal testing and the identification
and ensuing risk assessment of external vendors and significant customers have
been combined into an overall risk assessment for the Registrant's Year 2000
Compliance profile. The ensuing profile is the basis for a business resumption
contingency plan to address any unexpected Year 2000 events. The contingency
planning process includes four major steps: defining the planning strategy;
performing the business analysis; developing the plan; validating the plan. The
first two steps were completed by March 31, 1999, and the final two steps were
completed by June 30, 1999. Costs to complete the Year 2000 Compliance Effort
during the nine months ended September 30, 1999 were as follows:
Dollar
Tasks Amount
- ----- ---------
Loan support PCs $ 39,000
Mortgage origination PCs 12,000
Software upgrades 20,000
Operations Ctr. alternative power supply 50,000
Internal resources
(Testing and planning) 80,000
---------
Total Costs $ 201,000
=========
The Registrant anticipates its Year 2000 Compliance Effort will require only
minimal expenditures during the remainder of 1999.
Beyond the scope of the Y2K Project, the Registrant installed new mainframe
hardware, operating systems and application software that was described in the
preceding paragraphs. This conversion commenced in April 1997, and replaced a
prior system that was not capable of supporting the Registrant's strategic
transition to a commercial bank and was lacking Year 2000 Compliance
certification. The costs of that conversion consist of capitalized costs of
approximately $4,083,000 for hardware and software replacements and teller
platform upgrades. Furthermore, another $632,000 in operating expenses were
incurred for consulting fees, training, travel, communication and other
associated conversion costs.
Mortgage Banking Operations During the nine months ended September 30, 1999, HFI
restructured its mortgage banking operations, resulting in a net charge to
earnings of approximately $.9 million during this time period. This charge
includes the net costs of winding up certain mortgage banking operations and net
losses on the sale of certain mortgage banking assets.
Page 26
<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 27 Financial Data Schedule
Page 27
<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: November 10, 1999
Page 28
<PAGE>
EXHIBIT INDEX
Exhibit Number
- --------------
Exhibit 27 Financial Data Schedule
Page 29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 26,507
<INT-BEARING-DEPOSITS> 30,327
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,249,016
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,261,660
<ALLOWANCE> 11,528
<TOTAL-ASSETS> 2,642,165
<DEPOSITS> 1,296,151
<SHORT-TERM> 253,000
<LIABILITIES-OTHER> 31,955
<LONG-TERM> 883,000
0
0
<COMMON> 340
<OTHER-SE> 177,719
<TOTAL-LIABILITIES-AND-EQUITY> 2,642,165
<INTEREST-LOAN> 70,301
<INTEREST-INVEST> 58,824
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 129,125
<INTEREST-DEPOSIT> 38,507
<INTEREST-EXPENSE> 83,235
<INTEREST-INCOME-NET> 45,890
<LOAN-LOSSES> 2,385
<SECURITIES-GAINS> 963
<EXPENSE-OTHER> 34,489
<INCOME-PRETAX> 19,025
<INCOME-PRE-EXTRAORDINARY> 19,025
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,800
<EPS-BASIC> .41
<EPS-DILUTED> .41
<YIELD-ACTUAL> 6.95
<LOANS-NON> 3,176
<LOANS-PAST> 5,961
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 17,522
<ALLOWANCE-OPEN> 9,088
<CHARGE-OFFS> 748
<RECOVERIES> 186
<ALLOWANCE-CLOSE> 11,528
<ALLOWANCE-DOMESTIC> 10,334
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,194
</TABLE>
