<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 1999
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to____________________________
Commission File Number: 0-22399
HARRIS FINANCIAL, INC.
- ----------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2889833
- ------------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
235 North Second Street PO Box 1711, Harrisburg, Pennsylvania 17105
- ------------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) 717-236-4041
------------
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
Indicate the number of shares outstanding of each of the Bank's classes of
common stock, as of the latest practicable date 33,591,700 shares of stock, par
-------------------------------
value of $.01 per share, outstanding at July 30, 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)
[OBJECT OMITTED]
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
Assets --------------- ---------------
- --------------
<S> <C> <C>
Cash and cash equivalents $ 57,289 $ 56,741
Marketable securities available for sale (Note 2) 1,263,384 1,274,837
Loans receivable, net 1,263,055 1,051,642
Loans held for sale, net 2,028 14,418
Loan servicing rights 9,344 10,996
Real estate investments 6,473 7,262
Premises and equipment, net of accumulated
depreciation of $ 18,568 and $ 17,230 23,123 21,614
Accrued interest receivable 17,674 15,523
Income taxes receivable - 635
Intangible assets 18,978 16,909
Deferred tax asset 1,445 -
Other assets 2,189 26,892
--------------- ---------------
Total assets $ 2,664,982 $ 2,497,469
=============== ===============
Liabilities and Stockholders' Equity
- --------------------------------------
Deposits $ 1,276,734 $ 1,205,379
Escrow 17,647 7,906
Accrued interest payable 7,637 6,965
Postretirement benefit obligation 2,868 2,452
Other borrowings (Note 3) 1,138,000 1,069,254
Deferred tax liability - 5,472
Income taxes payable 1,329 -
Other liabilities 34,627 10,071
--------------- ---------------
Total Liabilities $ 2,478,842 $ 2,307,499
--------------- ---------------
Common stock, $ .01 par value, authorized 100,000,000 shares
34,005,000 shares issued and 33,585,700 outstanding at
June 30, 1999, 33,993,500 shares issued and 33,584,200
shares outstanding at December 31, 1998 (Note 6) $ 340 $ 340
Paid in capital 30,141 29,960
Retained earnings 167,100 158,386
Other comprehensive income (4,542) 8,106
Employee stock ownership plan (346) (396)
Recognition and retention plans (456) (456)
Treasury Stock 419,300 shares (Note 9) (6,097) (5,970)
--------------- ---------------
Total stockholders' equity 186,140 189,970
--------------- ---------------
Total liabilities and stockholders' equity $ 2,664,982 $ 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>
Six Months Ended June 30, Three Months Ended June 30,
-------------------------------- ----------------------------
Interest Income: 1999 1998 1999 1998
-------------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Loans receivable:
First mortgage loans $ 23,726 $ 24,385 $ 11,756 $ 12,045
Commercial 9,447 4,803 5,192 2,604
Consumer and other loans 12,057 9,768 6,377 5,061
Taxable investments 15,215 14,579 7,217 7,144
Taxfree investments 3,145 3,062 1,562 1,528
Dividends 4,273 4,551 2,047 2,306
Mortgage backed securities 16,214 19,318 8,235 9,390
Money market securities 59 43 42 24
-------------- -------------- ---------- --------------
Total interest income 84,136 80,509 42,428 40,102
-------------- -------------- ---------- --------------
Interest Expense:
Deposits 25,026 25,602 12,555 12,622
Borrowed funds (Note 3) 28,735 26,714 14,644 13,402
Escrow 53 35 28 18
-------------- -------------- ---------- --------------
Total interest expense 53,814 52,351 27,227 26,042
-------------- -------------- ---------- --------------
Net interest income 30,322 28,158 15,201 14,060
Provision for loan losses 1,590 1,400 795 570
-------------- -------------- ---------- --------------
Net int. inc. after provision for loan losses 28,732 26,758 14,406 13,490
-------------- -------------- ---------- --------------
Non-interest Income:
Service charges on deposits 2,740 1,973 1,507 1,037
Other svc. charges/commissions/fees 688 342 364 163
Net servicing income 120 180 120 234
Gain on sale of securities, net (Note 2) 1,365 2,970 12 586
Gain on sale of loans, net 1,914 2,068 742 994
Other 705 447 766 38
-------------- -------------- ---------- --------------
Total non-interest income 7,532 7,980 3,511 3,052
-------------- -------------- ---------- --------------
Non-interest Expense:
Salaries and benefits 10,921 10,696 5,149 5,361
Equipment expense 2,000 1,493 1,038 814
Occupancy expense 1,559 1,443 757 714
Advertising and public relations 868 1,077 385 585
FDIC insurance 346 357 177 178
Director fees 179 155 96 79
Income from real estate operations (347) (368) (131) (207)
Amortization of intangibles 1,200 1,233 600 628
Other 6,199 4,136 3,262 2,247
-------------- -------------- ---------- --------------
Total non-interest expense 22,925 20,222 11,333 10,399
-------------- -------------- ---------- --------------
Income before income taxes 13,339 14,516 6,584 6,143
Income tax expense 3,669 4,292 1,847 1,668
-------------- -------------- ---------- --------------
Net Income $ 9,670 $ 10,224 $ 4,737 $ 4,475
============== ============== ========== ==============
Basic earnings per share (Note 6) $ 0.29 $ 0.30 $ 0.14 $ 0.13
============== ============== ========== ==============
Diluted earnings per share (Note 6) $ 0.29 $ 0.30 $ 0.14 $ 0.13
============== ============== ========== ==============
</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 Compre-
Common Paid in Retained hensive Ownership Retention Treasury hensive
Stock Capital Earnings Income Plan Plan Stock Total Income
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ 338 $ 28,016 $ 141,043 $ 10,732 $ (529) $ (566) $ - $ 179,034
Net income 10,224 10,224 $ 10,224
Dividends paid at $.055 per
share (898) (898)
Exercised stock options 2 631 633
Unrealized losses on
securities (1) (1,039) (1,039) (1,039)
-----------
Comprehensive income $ 9,185
===========
ESOP stock committed for
release 83 83
Earned portion of RRP plan 60 60
Excess of fair value above
cost of ESOP stock committed
for release 453 453
Excess of fair value above
cost of earned portion of
RRP stock 278 278
--------------------------------------------------------------------------------------------
Balance at June 30, 1998 $ 340 $ 29,378 $ 150,369 $ 9,693 $ (446) $ (506) $ - $ 188,828
============================================================================================
Balance at January 1, 1999 340 29,960 158,386 8,106 (396) (456) (5,970) 189,970
Net income 9,670 9,670 $ 9,670
Dividends paid at $.06 per
share (956) (956)
Exercised stock options 43 43
Unrealized losses on
securities (1) (12,648) (12,648) (12,468)
-----------
Comprehensive income $ (2,798)
===========
ESOP stock committed for
release 50 50
Excess of fair value above
cost of ESOP stock committed
for release 138 138
Treasury stock purchased -
10,000 shares (127) (127)
--------------------------------------------------------------------------------------------
Balance at June 30, 1999 $ 340 $ 30,141 $ 167,100 $ (4,542) $ (346) $ (456) $ (6,097) $ 186,140
============================================================================================
</TABLE>
(1) Net of reclassification adjustment and net of tax effect of ($8,116) and
($716) 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>
Six Months Ended June 30,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 9,670 $ 10,224
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 1,590 1,400
Net depreciation, amortization, and accretion 2,767 3,839
Decrease (increase) in loans held for sale 13,656 (4,008)
Net gain on sales of interest earning assets (3,279) (5,038)
Gain on sale of foreclosed real estate (162) (49)
Equity losses/(income) from joint ventures 57 (21)
Increase in accrued interest receivable (2,151) (3,089)
Increase in accrued interest payable 672 2,322
Amortization and write-off of intangibles 1,200 1,232
Earned ESOP shares 188 536
Earned RRP shares - 338
Provision for deferred income taxes 981 (968)
Decrease in income taxes receivable 1,964 7,011
Other, net 26,315 (107)
------------ ------------
Net cash provided by operating activities 53,468 13,622
------------ ------------
Cash flows from investing activities:
Proceeds from maturities and principal reductions of marketable
securities:
Held to Maturity - 1,032
Available-for-sale 162,352 209,567
Proceeds from sales of marketable securities; available for sale 225,730 376,052
Purchase of marketable securities; available for sale (370,263) (634,943)
Loans Sold 57,249 72,759
Net increase in loan originations less principal payments on
loans (272,457) (108,465)
Acquisition of loan servicing rights 153 (2,564)
Investment in real estate held for investment (239) (210)
Proceeds from payments on real estate held for investment 419 40
Purchases of premises and equipment, net (2,946) (2,027)
Cash proceeds received from the sale of foreclosed real
estate 1,549 687
Branch purchase 34,004 -
------------ ------------
Net cash used in investing activities $ (164,449) $ (88,072)
------------ ------------
</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>
Six Months Ended June 30,
1999 1998
------------- ------------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $ 34,082 $ (20,088)
Net increase in other borrowings 68,746 107,310
Net increase in escrow 9,741 6,361
Payments to acquire treasury stock (127) -
Cash dividends (956) (898)
Proceeds from the exercise of stock options 43 633
------------- ------------
Net cash provided by financing operations 111,529 93,318
------------- ------------
Net increase in cash and cash equivalents 548 18,868
Cash and cash equivalents at beginning of period 56,741 24,466
------------- ------------
Cash and cash equivalents at end of period $ 57,289 $ 43,334
============= ============
Supplemental disclosures:
Cash paid during the periods for:
Interest on deposits, advances and other borrowings
(includes interest credited to deposit accounts) $ 53,218 $ 47,642
Income taxes 636 1,340
Cash received during the periods for:
Income tax refunds $ - $ 3,089
Non-cash investing activities:
Transfer from loans to foreclosed real estate $ 922 $ 1,027
Branch acquisition:
Fair value of assets acquired $ 34,004 $ -
Deposit premium paid 3,269 -
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. and its wholly-owned subsidiary Harris Savings Bank. In turn,
Harris Savings Bank is comprised of the following subsidiaries: AVSTAR Mortgage
Corporation, Harris Delaware Corporation, H. S. Service Corporation, First
Harrisburg Service Corporation and C.B.L. Service Corporation. All intercompany
balances have been eliminated in consolidation.
The accompanying interim financial statements have been prepared in
accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the results of interim periods
have been made. Operating results for the six month period ended June 30, 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:
June 30, December 31,
1999 1998
--------------- --------------
Available-for-sale, at amortized cost $ 1,271,007 $ 1,261,696
Available-for-sale, net unrealized gain (7,623) 13,141
--------------- --------------
Available-for-sale, at fair value 1,263,384 1,274,837
--------------- --------------
Total Marketable securities $ 1,263,384 $ 1,274,837
=============== ==============
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.
June 30, December 31,
1999 1998
--------------- --------------
FHLB advances $ 825,000 $ 746,581
Repurchase Agreements 313,000 322,673
--------------- --------------
Total other borrowings $ 1,138,000 $ 1,069,254
=============== ==============
(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 and Contingent Liabilities
--------------------------------------
In the ordinary course of business, the Registrant makes commitments to
extend letters of credit to its customers. At June 30, 1999 and December 31,
1998, standby letters of credit issued and outstanding amounted to $11,216,000
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 June 30, 1999, the Registrant has $148,933,000 in unused line of
credit commitments extended to its customers, $43,457,000 of undistributed funds
on construction loans and $42,447,000 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.
Weighted
Average
Shares Per Share
For the six months ended June 30, 1999 Income Outstanding Amount
-------------------------------------
Basic earnings per share
Income available to common shareholders $ 9,670,000 33,804,463 $ 0.29
-------------------------------------
Options held by management and directors 86,863
-------------------------------------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions $ 9,670,000 33,891,326 $ 0.29
=====================================
For the six months ended June 30, 1998
Basic earnings per share
Income available to common shareholders $ 10,224,000 33,917,123 $ 0.30
-------------------------------------
Options held by management and directors 303,703
-------------------------------------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions $ 10,224,000 34,220,826 $ 0.30
=====================================
Page 10
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
(6) Earnings per share (continued)
------------------
Weighted
Average
Shares Per Share
For the three months ended June 30, 1999 Income Outstanding Amount
-------------------------------------
Basic earnings per share
Income available to common shareholders $ 4,737,000 33,809,603 $ 0.14
-------------------------------------
Options held by management and directors 82,643
-------------------------------------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions $ 4,737,000 33,892,246 $ 0.14
=====================================
For the three months ended June 30, 1998
Basic earnings per share
Income available to common shareholders $ 4,475,000 33,953,331 $ 0.13
-------------------------------------
Options held by management and directors 307,121
-------------------------------------
Diluted earnings per share
Income available to common shareholders
plus assumed conversions $ 4,475,000 34,260,452 $ 0.13
=====================================
(7) Loan Servicing
On March 15, 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.
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
----------------------------------------------
The Mutual Company has generally waived the receipt of dividends
declared by the Bank, or, subsequent to the Two-Tier Reorganization, dividends
paid by the Registrant. The Mutual Company has not been required to obtain
approval of the Federal Reserve Bank (the "FRB" ) prior to any such waiver, and
through the date hereof has not sought or received FRB approval of any such
waiver. In connection with the FRB and Federal Deposit Insurance Corporation
(the "FDIC") approvals of the Bank's acquisition of First Harrisburg Bancor,
Inc. and its wholly owned subsidiary, First Federal Savings and Loan Association
of Harrisburg ("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 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 dividends waivers by mutual
holding companies, the Mutual Company will comply with the applicable
requirements of such regulations. After the completion of the two-tier
reorganization, the commitments became applicable to dividends paid by the
Registrant that are waived by the Mutual Company. If the Mutual Company decides
that it is in its best interest to waive the right to receive a particular
dividend to be paid by the Registrant, and, if necessary, the FRB approves such
waiver, then the Registrant pays such dividend only to Minority Stockholders,
and the amount of the dividend waived by the Mutual Company is treated in the
manner described above. The Mutual Company's decision as to whether or not to
waive a particular dividend depends on a number of factors, including the Mutual
Company's capital needs, the investment alternatives available to the Mutual
Company as compared to those available to the Registrant, and the receipt of
required regulatory approvals.
There can be no assurance that (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
June 30, 1999, had waived a total of $25.3 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. The assumed price for the repurchase of the shares was $16 per share for
an aggregate cost of $7,200,000. The proposed repurchase of shares were to be
completed one year from the approval date of February 28, 1998. 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.
During the third and fourth quarters of 1998 and the second quarter of
1999, the Registrant purchased 419,300 shares with a market value of $6,097,000.
The shares will be used to facilitate several stock ownership and stock option
plans. These plans will benefit directors, executive officers, non-executive
officers, and newly appointed executives or directors. 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
-----------------------------------------
On June 4, 1999, HFI entered into a total return swap. This swap is
intended to hedge market value fluctuations in HFI's retail construction loan
portfolio which are caused by changes in market levels of interest rates. The
swap has a notational amount of $5,000,000, a contract duration of 7 months and
consists of two components:
(a) HFI exchanges fixed rate interest payments on a 6.5 % FNMA 30 year mortgage
pool for a floating rate interest payment based on 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 a 6.5% FNMA
mortgage 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 FNMA pool declines. Conversely, HFI must pay the
counter party if the value of the FNMA pool increases.
The total return swap is 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 contract 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. The fair value of the contract at June 30, 1999, is $42,175. 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.
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 six month period ended June
30, 1999 was $9,670,000, representing a decrease of $554,000 or 5.4%
from the $10,224,000 net income figure reported during the comparable
six month period ending June 30, 1998. For the three month period
ending June 30, 1999, net income was $4,737,000 which was $262,000 or
5.9% higher than the net income figure of $4,475,000 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 $32,015,000 for
the six months ended June 30, 1999, which represents an increase of
$2,208,000, or 7.4%, from the $29,807,000 of net interest income
recorded in the six months ended June 30, 1998. This increase reflected
a favorable volume variance of $3,540,000 due to a $229.0 million
increase in total average earning assets to $2.429 billion during the
year to date period ended June 30, 1999 as compared to $2.200 billion
recorded during the same period ending June 30, 1998. At the same time,
general market interest rate trends created an unfavorable rate
variance of $1,332,000 for the six months ended June 30, 1999. The
interaction of positive volume variances and negative rate variances
generated the net positive change of $2,208,000 mentioned above.
Net interest income, on a tax equivalent basis, totaled $16,042,000 for
the three months ended June 30, 1999. This represents an increase of
$1,158,000 or 7.8% over the $14,884,000 reported for the comparable
three month period ended June 30, 1998. This increase reflects a
favorable volume variance of $1,931,000 that was partially offset by a
unfavorable rate variance of $773,000. The volume variance reflects a
$265.0 million increase in interest earning assets to $2.467 billion
during the three months ended June 30, 1999, from $2.202 billion in the
three months ending June 30, 1998. While market rates displayed
significant swings, the overall trend for the three month period ended
June 30, 1999 was still lower than for the comparable three month
period ended June 30, 1998. Consequently, the Registrant experienced an
unfavorable rate variance of $773,000.
For the six months ended June 30, 1999, the yield on interest earning
assets was 7.07%. This figure is 40 basis points lower than the 7.47%
yield reported for the six month period ended June 30, 1998.
Page 14
<PAGE>
At same time, the cost of funds decreased 40 basis points to 4.66% for
the period ending June 30, 1999, versus 5.06% for the six months ended
June 30, 1998. As a result, the interest spread (the difference between
the yield on assets minus the cost of funds) remained unchanged at
2.41% for the six month period ending June 30, 1999, versus the
comparable period ending June 30, 1998. Yields on interest earning
assets fell uniformly from the comparable period ending June 30, 1999
with the exception of an 8 basis point increase (7.62% versus 7.54%) in
indirect consumer loans. HFI has increased its marketing efforts in
this area, and managed to generate modest increase rates, especially in
the mobile home segment of indirect loans.
The market rate trends detailed in the preceding paragraph also
generated the same results in the three month periods ended June 30,
1999 and June 30, 1998. The yield on interest earning assets declined
42 basis points from 7.44% for the three month period ended June 30,
1998, to 7.02% for the three month period ended June 30, 1999. At the
same time, the cost of funds declined 40 basis points from 5.05% for
the three month period ended June 30, 1998, to 4.65% for the three
months ended June 30, 1999. Consequently the net interest spread
declined two basis points from 2.39% for the three months ended June
30, 1998, to 2.37% for the comparable period in 1999.
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
six month period ending June 30, 1999, total deposits (net of escrow
deposits) increased $71.4 million or 5.9% while other borrowings
increased by $68.7 million or 6.4%. 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 the
absolute dollar amount of interest income and boost the Registrant's
return on equity. However, this strategy compresses the Registrant's
net interest margins. This is caused by the higher marginal cost of
funds associated with external borrowings over the cost of core
deposits. These factors are reflected in the net interest margin
decline of 7 basis points to the 2.64% yield for the six months ended
June 30, 1999, versus the yield of 2.71% for the comparable period
ending June 30, 1998. For the three month period ended June 30, 1999,
the net interest margin was 2.60% or 10 basis points lower than the
2.70% net interest margin recorded for the three months ended June 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 six month periods ended June 30, 1999, and June 30, 1998, and the
three month periods ended June 30, 1999 and June 30, 1998,
respectively.
Page 15
<PAGE>
<TABLE>
<CAPTION>
Comparison of Financial Performance with and without a Capital Leveraging Strategy
- ----------------------------------------------------------------------------------------
(All figures in 000's)
- --------------------------------
With Without Difference in
Six month period ended June 30, 1999 Leveraging Leveraging Basis Points
- -------------------------------------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
Return on Average Assets 0.77% 0.58% 19
Net Interest Margin 2.64% 3.45% (81)
Six month period ended June 30, 1998
- --------------------------------------------
Return on Average Assets 0.90% 0.82% 8
Net Interest Margin 2.71% 3.51% (80)
Three month period ended June 30, 1999
- --------------------------------------------
Return on Average Assets 0.74% 0.59% 15
Net Interest Margin 2.60% 3.42% (82)
Three month period ended June 30, 1998
- --------------------------------------------
Return on Average Assets 0.79% 0.67% 12
Net Interest Margin 2.70% 3.50% (80)
</TABLE>
Table 1 on the following pages presents the Registrant's average asset and
liability balances, interest rates, interest income, and interest expense for
each of the six month periods ended June 30, 1999 and June 30, 1998, as well as
the quarters ended June 30, 1999 and June 30, 1998, respectively. Table 2
presents a rate-volume analysis of changes in net interest income for the six
month periods ended June 30, 1999 and June 30, 1998, as well as the quarters
ended June 30, 1999 and June 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 in the
Registrant's market risk profile or the Registrant's risk management procedures,
in the current year.
Page 16
<PAGE>
Average Balance Sheets, Rate, and Interest Income and Expense Summary (All
figures in 000's)
<TABLE>
<CAPTION>
For the six months ended,
---------------------------------------------------------------------------------
June 30, 1999 June 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 $ 615,765 $ 23,726 7.71% $ 570,014 $ 24,385 8.56%
Commercial loans 249,803 9,447 7.56% 107,941 4,803 8.90%
Direct consumer loans 159,544 6,080 7.62% 155,365 5,861 7.54%
Indirect consumer loans 136,044 5,977 8.79% 87,447 3,906 8.93%
Marketable Securities - Taxable 1,121,005 35,092 6.26% 1,127,214 37,307 6.62%
Marketable Securities - Taxfree 117,907 4,838 8.21% 113,511 4,711 8.30%
Other interest earning assets 28,596 669 4.68% 38,365 1,185 6.18%
--------------------------- ---------------------------
Total interest-earning assets 2,428,664 85,829 7.07% 2,199,857 82,158 7.47%
------------ -------------
Noninterest-earning assets 98,121 77,837
--------------- --------------
Total assets $ 2,526,785 $ 2,277,694
=============== ==============
Liabilities and stockholders' equity:
Interest bearing liabilities:
Savings deposits $ 144,832 $ 1,408 1.94% $ 151,409 $ 1,881 2.48%
Time deposits 773,084 20,222 5.23% 731,777 20,184 5.52%
NOW and money market deposits 296,424 3,396 2.29% 245,139 3,537 2.89%
Escrow 13,078 53 0.81% 10,978 35 0.64%
Borrowed Funds 1,080,955 28,735 5.32% 930,639 26,714 5.74%
--------------------------- ---------------------------
Total interest bearing liabilities $ 2,308,373 53,814 4.66% $ 2,069,942 52,351 5.06%
------------ -------------
Non interest bearing liabilities 27,486 25,128
--------------- --------------
Total liabilities 2,335,859 2,095,070
Stockholders' equity 190,926 182,624
--------------- --------------
Total liabilities and stockholder
equity $ 2,526,785 $ 2,277,694
=============== ==============
Net interest income before
before provision for loan loss $ 32,015 $ 29,807
============ =============
Interest rate spread (3) 2.41% 2.41%
============= ============
Net interest-earning assets $ 120,291 $ 129,915
=============== ==============
Net interest margin (4) 2.64% 2.71%
============= ============
Ratio of interest earning assets to
interest bearing liabilities 1.05 1.06
--------------- --------------
</TABLE>
(1) Includes income recognized on deferred loan fees of $972,000 and
$1,583,000 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 1 - Average Balance Sheets, Rate, and Interest Income and Expense Summary
(All figures in 000's)
<TABLE>
<CAPTION>
For the quarter ended,
---------------------------------------------------------------------------------
June 30, 1999 June 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 $ 622,250 $ 11,756 7.56% $ 573,031 $ 12,045 8.41%
Commercial loans 274,863 5,192 7.56% 117,384 2,604 8.87%
Direct consumer loans 160,320 3,140 7.83% 156,197 2,973 7.61%
Indirect consumer loans 153,145 3,237 8.45% 85,879 2,091 9.74%
Marketable Securities - Taxable 1,110,389 17,238 6.21% 1,119,841 18,154 6.48%
Marketable Securities - Taxfree 118,115 2,403 8.14% 112,905 2,349 8.32%
Other interest earning assets 28,120 303 4.31% 36,342 710 7.81%
--------------------------- ---------------------------
Total interest-earning assets 2,467,202 43,269 7.02% 2,201,579 40,926 7.44%
------------ -------------
Noninterest-earning assets 94,989 76,924
--------------- --------------
Total assets $2,562,191 $2,278,503
=============== ==============
Liabilities and stockholders' equity:
Interest bearing liabilities:
Savings deposits $ 145,782 $ 721 1.98% $ 154,201 $ 923 2.39%
Time deposits 777,289 10,128 5.21% 714,700 9,904 5.54%
NOW and money market deposits 300,709 1,706 2.27% 252,323 1,795 2.85%
Escrow 15,401 28 0.73% 11,852 18 0.61%
Borrowed Funds 1,101,372 14,644 5.32% 930,174 13,402 5.76%
--------------------------- ---------------------------
Total interest bearing liabilities $2,340,553 27,227 4.65% $2,063,250 26,042 5.05%
------------ -------------
Non interest bearing liabilities 30,179 31,039
--------------- --------------
Total liabilities 2,370,732 2,094,289
Stockholders' equity 191,459 184,214
--------------- --------------
Total liabilities and stockholder equity $2,562,191 $2,278,503
=============== ==============
Net interest income before
before provision for loan loss $ 16,042 $ 14,884
============ =============
Interest rate spread (3) 2.37% 2.39%
============= ============
Net interest-earning assets $ 126,649 $ 138,329
=============== ==============
Net interest margin (4) 2.60% 2.70%
============= ============
Ratio of interest earning assets to
interest bearing liabilities 1.05 1.07
=============== ==============
</TABLE>
(1) Includes income recognized on deferred loan fees of $528,000 and $634,000
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 18
<PAGE>
<TABLE>
<CAPTION>
TABLE 2 - Rate/Volume Analysis of Changes in Net Interest Income (All figures in 000's)
Six Months Ended June 30, 1999 Quarter Ended June 30, 1999
Compared to Compared to
Six Months Ended June 30, 1998 Quarter Ended June 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 $ 1,871 $ (2,530) $ (659) $ 986 $ (1,275) $ (289)
Commercial loans 5,464 (820) 4,644 3,024 (436) 2,588
Direct consumer loans 157 62 219 80 87 167
Indirect consumer loans 2,133 (62) 2,071 1,454 (308) 1,146
Marketable securities - Taxable (204) (2,011) (2,215) (154) (762) (916)
Marketable securities - Taxfree 179 (52) 127 106 (52) 54
Other interest earning assets (264) (252) (516) (137) (270) (407)
------------------------------------- -------------------------------------
Total interest earning assets 9,336 (5,665) 3,671 5,359 (3,016) 2,343
------------------------------------- -------------------------------------
Interest-bearing liabilities:
Savings Deposits (79) (394) (473) (49) (153) (202)
Time deposits 1,119 (1,081) 38 835 (611) 224
NOW and money market deposits 667 (808) (141) 312 (401) (89)
Escrow and stock subscriptions 8 10 18 6 4 10
Borrowed funds 4,081 (2,060) 2,021 2,324 (1,082) 1,242
------------------------------------- -------------------------------------
Total interest-bearing liabilities 5,796 (4,333) 1,463 3,428 (2,243) 1,185
------------------------------------- -------------------------------------
Net change in net interest income $ 3,540 $ (1,332) $ 2,208 $ 1,931 $ (773) $ 1,158
===================================== =====================================
</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 19
<PAGE>
Provision for Loan Losses The Registrant recognized a provision for loan
loss of $1,590,000 for the six months ended June 30, 1999. This represents
an increase of $190,000 from the $1,400,000 provision recorded for the six
months ended June 30, 1998. For the three months ended June 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 June
30, 1998. Refer to comments in the Asset Quality section which follows.
Noninterest Income Noninterest income totaled $7,532,000 for the six
months ended June 30, 1999. This represents a decrease of $448,000, or
5.6%, from the $7,980,000 recorded in the six months ended June 30, 1998.
This decrease can be attributed to several factors:
(1) The net gain on securities decreased $1,605,000 or 54.0% to $1,365,000
recognized in the six month period ended June 30, 1999, versus
$2,970,000 for the comparable period ended June 30, 1998.
(2) These decreases were offset by service charges on deposits generating
$2,740,000, or a $767,000 increase over the prior six month period
ended June 30, 1998, figure of $1,973,000. This trend reflects the
Registrant's increased emphasis on overdraft charges and income
generated by increased foreign ATM traffic which produced higher
transaction volumes subject to surcharging.
(3) Other service charges/commissions/fees increased $346,000 or 101.2% to
the $688,000 figure recognized in the six month period ended June 30,
1999, versus income of $342,000 for the comparable period ended June
30, 1998. $222,000 of this increase is attributable to commissions
earned by out sourcing corporate checks to a third party in the third
quarter of 1998.
(4) Other non-interest income registered $705,000 for the six month period
ended June 30, 1999. This was a $258,000 or 57.7% increase over the
$447,000 reported in the six month period ended June 30, 1998. The
significant factor causing this increase was realization of a $700,000
fraud recovery in the three month period ending June 30, 1999.
However, the recognition of a $390,000 gain on the sale of AVSTAR's
mortgage servicing rights in the three months ended March 31, 1998
reduced the absolute dollar impact of the fraud recovery on the
comparison of results for the six months ended June 30, 1999, versus
the six months ended June 30, 1998.
Noninterest income equalled $3,511,000 for the three months ended June 30,
1999. This was a $459,000 or 15.1% increase over the $3,052,000 reported
for the three months ended June 30, 1998. The reasons for this performance
are:
(1) The net gain on securities decreased $574,000 or 98.0% to $12,000
recognized in the three month period ended June 30, 1999, versus
$586,000 for the comparable period ended June 30, 1998.
(2) Service charges on deposits increased $470,000 or 45.3% to the
$1,507,000 figure recognized in the three month period ended June
30, 1999, versus income of $1,037,000 for the comparable period
ended June 30, 1998. The performance of overdraft fees and ATM
charges described in the preceding paragraph were responsible for
this increase.
(3) Other service charges/commissions/fees rose $201,000 or 123.3% to
the $364,000 figure reported in the three month period ended June
30, 1999, versus income of $163,000 for the comparable period ended
June 30, 1998. $100,000 of this increase is attributable to a third
party check vendor program that was described in the preceding
paragraph. The remainder of the increase is split between Trust
Fees and credit life insurance commissions.
(4) Other non-interest income was $766,000 for the three month period
ended June 30, 1999. The fraud recovery described in the preceding
paragraph was the primary reason for the $728,000 increase over the
$38,000 reported in the three month period ended June 30, 1998.
Noninterest Expense Noninterest expense was $22,925,000 for the six months
ended June 30, 1999. This is an increase of $2,703,000, or 13.4%, from the
$20,222,000 reported for the six month period ended June 30, 1998. The
increase in noninterest expense was caused, primarily, by a $2,063,000
increase in other expense. During the six months ended June 30, 1999,
other expense equalled $6,199,000 versus the $4,136,000 recognized in the
comparable period ending June 30, 1998. $1,139,000 of the increase
represents costs associated with the restructuring of unprofitable
operations
Page 20
<PAGE>
and ongoing internal conversion projects. The remainder of the increase
represents ongoing support costs associated with higher business
volumes and ATM support activity. Another significant contributor to
the increase in noninterest expense was a $507,000 increase in
equipment expense to $2,000,000 for the six months ended June 30, 1999,
versus $1,493,000 for the six months ended June 30, 1998. The increase
represents higher depreciation expense and software maintenance support
costs associated with the installation of a proof of deposit settlement
area in the third quarter of 1998. This project supports the
infrastructure required by the Registrant's continuing strategic
transformation into a commercial bank.
Noninterest expense was $11,333,000 for the three months ended June 30,
1999. This equates to a $934,000 increase over the $10,399,000 reported
for the three month period ended June 30, 1998. The principle driver of
this trend was a $1,015,000 increase in other non-interest expense to
$3,262,000 for the three month period ended June 30, 1999, versus
$2,247,000 for the three month period ended June 30, 1998. The two
largest contributors to the increase were a $328,000 in costs
associated with the ongoing dissolution of the Registrant's mortgage
banking subsidiary and another $227,000 in costs related to conversion
projects undertaken in the three months ended June 30, 1999. In
addition, equipment expense increased $224,000 to $1,038,000 for the
three months ended June 30, 1999 versus $814,000 for the three months
ended June 30, 1998. These costs were incurred because of the proof of
deposit installation detailed in the preceding paragraph.
Provision for Income Taxes Corporate income tax expense totaled
$3,669,000 for the six month period ended June 30, 1999, which resulted
in an effective tax rate of 27.5% on pretax income of $13,339,000. This
represents a decrease of $623,000 from the $4,292,000 of corporate tax
expense, or an effective tax rate of 29.6% on pretax income of
$14,516,000, recorded during the six month period ended June 30, 1998.
The decrease in the effective tax rate is the result of the
Registrant's continued focus on increasing tax exempt sources of
income.
Income tax expense was $1,847,000 (an effective tax rate of 28.1%) for
the three months ended June 30, 1999. This is an $179,000 increase over
the tax expense of $1,668,000 (effective tax rate of 27.2%) recorded
for the three months ended June 30, 1998. The increase in the absolute
dollar amount of tax expense and the change in the effective tax rate
reflects higher levels of pre-tax income for the three months ended
June 30, 1999 versus the comparable three month period ended June 30,
1998.
Stockholders' Equity Stockholders' equity totaled $186.1 million and
$190.0 million at June 30, 1999 and December 31, 1998, respectively.
Stockholders' equity amounted to 7.0% of total assets equalling $2.665
billion as of June 30, 1999, compared to 7.6% of total assets of $2.497
billion at December 31, 1998.
The decrease in Stockholders' equity of $3.9 million or 2.1% for the
six months ended June 30, 1999 resulted mainly from a $12.5 million
decline in the market value, net of tax effect, of the available-for-
sale securities and $1.0 million in dividends paid. The drop in the
market value of the available-for-sale portfolio reflects the impact of
recent market rate increases on the market value of fixed rate issues
that reside in the Registrant's investment portfolio. Offsetting this
decrease is a $9.7 million increase attributable to income from ongoing
operations.
Page 21
<PAGE>
Regulatory Capital Compliance Risk-based capital standards are issued
by bank regulatory agencies in the United States. These capital
standards link a banking company's capital to the risk profile of its
assets and provide the basis by which all banking companies and banks
are evaluated in terms of capital adequacy. These risk-based capital
standards require all banks to have Tier 1 capital of at least 4.0 %
and total capital, including Tier 1 capital, equal to at least 8.0 % of
risk-adjusted assets. Tier 1 capital consists of common stockholders'
equity and qualifying perpetual preferred stock along with related
surpluses and retained earnings. Total capital is comprised of Tier 1
capital, limited life preferred stock, qualifying debt instruments, and
the reserves for 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 Harris Financial, Inc.'s risk-based capital
ratios and leverage ratio to the minimum regulatory requirements for
the period indicated.
<TABLE>
<CAPTION>
Minimum Minimum
Requirement Requirement
for Capital to be "Well Cap-
HARRIS FINANCIAL, INC. Actual Adequacy italized"
------ -------- --------
As of June 30, 1999 Amount Ratio Amount Ratio Amount Ratio
- -------------------- ------ ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $186,041 11.7% $126,824 8.0% $158,530 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 171,705 10.8% 63,412 4.0% 95,118 6.0%
Tier 1 Capital
(to Avg. Assets) 171,705 6.9% 100,160 4.0% 125,201 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 22
<PAGE>
The following table provides a comparison of Harris Savings Bank's
risk-based capital ratios and leverage ratio to the minimum regulatory
requirements for the period indicated.
<TABLE>
<CAPTION>
Minimum Minimum
Requirement Requirement
for Capital to be "Well Cap-
HARRIS SAVINGS BANK Actual Adequacy italized"
------ -------- --------
As of June 30, 1999 Amount Ratio Amount Ratio Amount Ratio
- -------------------- ------ ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $180,602 11.4% $126,527 8.0% $158,159 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 166,199 10.5% 63,263 4.0% 94,895 6.0%
Tier 1 Capital
(to Avg. Assets) 166,199 6.7% 99,694 4.0% 124,618 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>
During the six months ended June 30, 1999, the Registrant adhered to,
on an average asset basis, the 6.5% Tier 1 minimum stipulated by the
Pennsylvania Department of Banking ("Department"). This minimum threshold was a
condition required by the Department for the Treasury Stock Repurchase Program
that was approved on February 27, 1998.
Page 23
<PAGE>
Marketable Securities In January 1998, the Registrant sold securities from
the held-to-maturity (HTM) portfolio. The book value of these securities
totalled $63.0 million and a gain of $1.4 million was realized from the
transaction. 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 on any securities for a
period of two years. As a result, the remaining securities in the held-to-
maturity portfolio were transferred to the available-for-sale portfolio.
This transfer resulted in a $209,565 increase, net of taxes, to the net
unrealized gains on marketable securities.
Marketable securities, excluding the Federal Home Loan Bank cash account,
totaled $1,263.4 million, at June 30, 1999, and $1,274.8 million at
December 31, 1998. Total marketable securities decreased $11.4 million, or
.9%, during the six 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 June 30,
1999 and December 31, 1998.
<TABLE>
<CAPTION>
June 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 $ 342,772 $ 331,896 $ 298,247 $ 299,196
Corporate bonds 74,534 72,021 148,731 142,240
Municipal obligations 118,345 120,368 113,557 119,233
FHLB stock 41,250 41,250 37,579 37,579
Equities (Common and Preferred) 88,409 97,454 112,403 123,765
Asset Backed Securities - - 15,146 15,661
Mortgage-backed securities:
FHLMC PC's - - 1,421 1,494
FNMA CMO's 64,834 65,489 104,276 105,864
FHLMC CMO's 121,021 120,468 75,137 75,157
Private Issue CMO's 419,842 414,438 355,199 354,648
-------------------------------------------------------------
Total mortgage-backed securities 605,697 600,395 536,033 537,163
-------------------------------------------------------------
Total securities available-for-sale $ 1,271,007 $ 1,263,384 $ 1,261,696 $ 1,274,837
-------------------------------------------------------------
Other interest-earning securities:
FHLB daily investment $ 33,201 $ 33,201 $ 22,423 $ 22,423
-------------------------------------------------------------
Total marketable securities and
interest bearing investments $ 1,304,208 $ 1,296,585 $ 1,284,119 $ 1,297,260
=============================================================
</TABLE>
Page 24
<PAGE>
Loans Loans Receivable, excluding the reduction for the Allowance for Loan
Losses, totaled $1,273.3 million and $1,060.7 million at June 30, 1999,
and December 31, 1998. The increase of $212.6 million, or 20.0%, for the
six months ended June 30, 1999, reflects growth in commercial loans of
$95.0 million, a $75.5 million increase in automobile, consumer and other
loans, and first mortgage loan increases amounting to $42.1 million
Loan charge-offs, net of recoveries, totaled $412,000 for the six month
period ended June 30, 1999, and $1,141,000 for the twelve month period
ended December 31, 1998. Based on management's continuing review of the
loan portfolio the Registrant recorded provisions for loan losses of
$1,590,000 for the six months ending June 30, 1999, and $2,540,000 for the
twelve month period ending December 31, 1998.
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 periods 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 $1,512,000 and
$7,651,000 at June 30, 1999, and December 31, 1998, respectively. In
addition, loans 90 days past due, but still accruing were $5,331,000 at
June 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
.54% and .71% at June 30, 1999, and December 31, 1998, respectively.
The Registrant conducts a third party loan review to identify those loans
which are considered performing and current with respect to payments of
principal and interest but display an above normal risk of becoming non
performing or requiring restructuring in the future. This review is
conducted on a quarterly basis.
The allowance for loan losses totaled $10,266,000 and $9,088,000 at June
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 .81% and .85% at June 30, 1999 and December
31, 1998, respectively.
Table 4 on the following page depicts the trend of charge-offs,
recoveries, and provisions to the allowance for loan losses for the six
months ended June 30, 1999, and the year ended December 31, 1998,
respectively. In addition, Table 5 on the following page 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 six months ended June 30, 1999, and the year ended December 31, 1998,
respectively.
Page 25
<PAGE>
<TABLE>
<CAPTION>
Table 4 Analysis of Allowance for Loan Losses (all figures in 000's)
As of or for the As of or for the
Allowance for Loan Loss six months ended twelve months ended
(All Figures in 000's) June 30, 1999 December 31, 1998
- ------------------------------------------- ----------------------------- ------------------------------
<S> <C> <C>
Balance at beginning of the period $ 9,088 $ 8,192
Provision for loan losses 1,590 2,540
Provision component related to unfunded
commitments - (503)
Charge Offs:
Commercial (50) (591)
One-to-four family (349) (173)
Other mortgage loans - (83)
Consumer loans (115) (344)
----------------------------- ------------------------------
Total Charge Offs (514) (1,191)
----------------------------- ------------------------------
Recoveries:
Commercial 55 -
One-to-four family 5 -
Other mortgage loans - 2
Consumer loans 42 48
----------------------------- ------------------------------
Total Recoveries 102 50
----------------------------- ------------------------------
Net Charge Offs (412) (1,141)
----------------------------- ------------------------------
Balance at end of period $ 10,266 $ 9,088
============================= ==============================
Net Charge Offs to Average Loans Outstanding (1) 0.07% 0.12%
============================= ==============================
(1) Year to date ratio is annualized
Table 5-- Allowance for Loan Losses Coverage Ratios (all dollar figures in 000's)
As of or for the As of or for the
six months ended twelve months ended
June 30, 1999 December 31, 1998
---------------------- -------------------------
Allowance at the end of period $ 10,266 $ 9,088
Non accrual loans $ 1,512 $ 7,651
90 Days past due, but still accruing $ 5,331 $ -
Problem loans $ 16,052 $ 9,800
Allowance/non accrual loans 678.97% 118.78%
---------------------- -------------------------
Allowance/90 days past due, but still accruing 192.57% 0.00%
---------------------- -------------------------
Allowance/non accrual loans and 90 days past due,
but still accruing 150.02% 118.78%
---------------------- -------------------------
Allowance/problem loans 63.95% 92.73%
---------------------- -------------------------
</TABLE>
Page 26
<PAGE>
Asset Quality Virtually all of HFI's credit risk lies with the Bank, which
holds all of HFI's loan assets. As part of its conversion from a 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 Operating 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 $1,343,000 in impaired loans
for the six month period ending June 30, 1999. The June 30, 1999,
allowance for loan losses has an allocation equal to 15% of the impaired
commercial loan balances which are internally designated as substandard
($1,245,000) and 100% of the internally designated doubtful balances
($98,000). 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 six month period ended June 30, 1999, the
Registrant maintained wholesale leveraging activities to deploy its excess
capital. This strategy relies on using external sources of funds to invest
in interest earning assets at a positive spread between the yield on
interest earning asset and the cost of the supporting borrowing.
Other borrowings totaled $1,138.0 million and $1,069.3 million at June 30,
1999, and December 31, 1998, respectively. Borrowings from non-deposit
funding sources increased $68.7 million, or 6.4%, during the six months
ended June 30, 1999. Federal Home Loan Bank advances increased by $78.4
million or 10.5%, while repurchase agreements decreased by $9.7 million or
3.0% for the six month period ending June 30, 1999.
As of June 30, 1999, the Registrant had maximum available FHLB lines of
credit totalling $977.9
Page 27
<PAGE>
million versus $943.5 million in available FHLB credit at December 31,
1998. This increase of 3.6% or $34.4 million is based on increases in the
amount of securities that qualify as security for FHLB advances. HFI had
borrowings totaling $825.0 million and $746.6 million outstanding to the
FHLB as of June 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 June 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:
(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
Page 28
<PAGE>
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. Estimated costs
to complete the Year 2000 Compliance Effort are listed in the following
table.
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) 53,000
---------------
Total Costs $ 174,000
===============
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 six months ended June 30, 1999, HFI
restructured its mortgage banking operations, resulting in a net charge to
earnings of approximately $.6 million during this time period. On April
30, 1999, HFI consummated the sale of certain mortgage banking assets.
Page 29
<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 30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HARRIS FINANCIAL, INC.
(Registrant)
By /s/ Charles C. Pearson, Jr.
---------------------------
Charles C. Pearson, Jr., President
and Chief Executive Officer
By /s/ James L. Durrell
--------------------
James L. Durrell, Executive Vice President
and Chief Financial Officer
Dated: August 6, 1999
Page 31
<PAGE>
EXHIBIT INDEX
Exhibit Number
- --------------
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 24,088
<INT-BEARING-DEPOSITS> 33,201
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,263,384
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,275,349
<ALLOWANCE> 10,266
<TOTAL-ASSETS> 2,664,982
<DEPOSITS> 1,276,734
<SHORT-TERM> 205,000
<LIABILITIES-OTHER> 64,108
<LONG-TERM> 933,000
0
0
<COMMON> 340
<OTHER-SE> 185,800
<TOTAL-LIABILITIES-AND-EQUITY> 2,664,982
<INTEREST-LOAN> 45,230
<INTEREST-INVEST> 38,906
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 84,136
<INTEREST-DEPOSIT> 25,026
<INTEREST-EXPENSE> 53,814
<INTEREST-INCOME-NET> 30,322
<LOAN-LOSSES> 1,590
<SECURITIES-GAINS> 1,365
<EXPENSE-OTHER> 22,925
<INCOME-PRETAX> 13,339
<INCOME-PRE-EXTRAORDINARY> 13,339
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,670
<EPS-BASIC> .29
<EPS-DILUTED> .29
<YIELD-ACTUAL> 6.93
<LOANS-NON> 1,512
<LOANS-PAST> 5,331
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 16,052
<ALLOWANCE-OPEN> 9,088
<CHARGE-OFFS> 514
<RECOVERIES> 102
<ALLOWANCE-CLOSE> 10,266
<ALLOWANCE-DOMESTIC> 9,511
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 755
</TABLE>
